                  T.C. Memo. 2003-90



                UNITED STATES TAX COURT



             JERRY S. PAYNE, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 12473-99.            Filed March 27, 2003.



     Prior to and during the audit years (1989 and
1990), P practiced law in Houston, Texas. He was
also involved in the real estate business through his
investment in P&P, Inc. Prior to 1989, P provided
legal services to X, Inc., which operated a topless
dance club in Houston, and to H, a 50-percent
shareholder of X, Inc., and manager of the club. In
payment of the overdue fees for those services, P
acquired most of the assets and all of the stock of X,
Inc., and he assumed management control of the club. P
leased the assets back to X, Inc., for use by the club.
In November 1990, after securing a permit to continue
to conduct a sexually oriented business at the club’s
premises and a mixed beverage permit (liquor license)
for Y, Inc. (also wholly owned by P), at such premises,
P caused the club’s operation and assets (including the
leased assets) to be transferred from X, Inc., to Y,
Inc. R determined that (1) “withdrawal authorizations”
signed by P, in 1989 and 1990, for various sums of
money were disguised dividends to P rather than
                               - 2 -

     authorizations for H to “tip” dancers in the amounts
     authorized, and (2) the 1990 transfer of the club’s
     operation from X, Inc. to Y, Inc., gave rise to a
     taxable liquidating dividend from X, Inc., to P. R
     also disallowed 1989 and 1990 Schedule C deductions
     claimed by P for parking fees and for bad debt
     deductions as guarantor of construction loans defaulted
     upon by P&P, Inc. R also determined that P was subject
     to the sec. 6662, I.R.C., accuracy-related penalty.

          1. Held: The amounts listed on the “withdrawal
     authorizations” constituted valid promotional expenses
     of X, Inc., in part, and disguised dividends taxable to
     P, in part.

          2. Held, further, the transfer of the club’s
     operation from X, Inc., to Y, Inc., constituted a tax-
     free reorganization under sec. 368(a)(1)(D), I.R.C.,
     that did not involve a distribution of “boot” taxable
     to P under sec. 356(a)(1)(B) and (2), I.R.C.

          3. Held, further, R’s disallowance of P’s
     Schedule C deductions for parking fees and for bad
     debts is sustained.

          4. Held, further, R’s penalty against P is
     sustained with respect to the deficiencies arising out
     of the disallowances of P’s Schedule C deductions.



     Jerry S. Payne, pro se.

     Kathryn Bellis, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     HALPERN, Judge:   By notice of deficiency dated April 15,

1999 (the notice), respondent determined deficiencies in and

additions to petitioner’s Federal income tax liabilities as

follows:
                                  - 3 -

Tax Year Ending                                Additions to Tax
  December 31        Deficiency           Sec. 6651(a)(1)   Sec. 6663*
     1989             $127,879                $31,970        $95,909
     1990              204,353                 51,088        153,265
     *
        In the event that petitioner is not held liable for the
sec. 6663 fraud penalty, respondent made the alternative
determination that the underpayments of tax for 1989 and 1990 are
subject to sec. 6662(a) accuracy-related penalties for negligence
or disregard of rules or regulations equal to 20 percent of such
underpayments.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years at issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.   All dollar amounts have been rounded to the nearest

dollar.

     The parties have resolved certain issues.         The issues

remaining for decision are (1) whether petitioner received

constructive dividends from his wholly owned corporation, 2618,

Inc. (2618), in the sums of $70,159 and $26,345 for 1989 and 1990

(sometimes, the audit years), respectively1 (the constructive

dividend issue), (2) whether petitioner’s 1990 gross income

includes a liquidating dividend from 2618 in the sum of $40,0112

(the liquidating dividend issue), (3) whether petitioner is

entitled to Schedule C, Profit or Loss From Business, deductions


     1
        In the notice, respondent determined that petitioner
received constructive dividends of $122,722 and $50,642 for 1989
and 1990, respectively. On brief, respondent concedes $52,563
for 1989 and $24,297 for 1990 of those proposed adjustments.
     2
        In the notice, respondent determined that the amount of
the 1990 liquidating dividend from 2618, Inc., was $535,000.
                               - 4 -

in excess of $207,295 and $133,264 for 1989 and 1990,

respectively,3 and, more specifically, whether petitioner is

entitled to deductions for parking expenses of $1,443 and $1,492

and business bad debts of $14,000 and $8,000 for 1989 and 1990,

respectively, and (4) whether petitioner is liable for the

accuracy-related penalty under section 6662(a) for each of the

audit years.4   A fifth issue, raised by petitioner for the first

time in his opening brief, is whether the notice of deficiency,

as it pertains to the constructive dividend and liquidating

dividend issues, is “arbitrary and excessive”, thereby shifting

to respondent the burden of proof as to the existence and amount

of any deficiency for the audit years.   In the absence of such a

finding, petitioner bears the burden of proof.   See Rule 142(a).5


     3
        In the notice, respondent determined that petitioner’s
allowable Schedule C expenses for 1989 and 1990, respectively,
were $163,461 and $111,294. The additional allowances resulted
from respondent’s examination of checks written by petitioner
during 1989 and 1990.
     4
        Petitioner concedes that he is liable for additions to
tax under sec. 6651(a)(1) in amounts to be determined for 1989
and 1990, and respondent concedes that petitioner is not liable
for the civil fraud penalty under sec. 6663 for such years.
     5
        Under certain circumstances, sec. 7491(a)(1) shifts the
burden of proof to respondent. Sec. 7491 applies to court
proceedings arising in connection with examinations commencing
after July 22, 1998, the date of enactment of the Internal
Revenue Service Restructuring and Reform Act of 1998 (RRA 1998),
Pub. L. 105-206, 112 Stat. 685. See RRA 1998 sec. 3001(c), 112
Stat 727. Respondent alleges that the examination in this case
                                                   (continued...)
                               - 5 -

                        FINDINGS OF FACT6

     Some facts are stipulated and are so found.   The stipulation

of facts, with accompanying exhibits, is incorporated herein by

this reference.   In addition, as they relate to this case and

were accepted by the Court of Appeals, we incorporate relevant

portions of our findings of fact in Payne v. Commissioner, T.C.

Memo. 1998-227, revd. 224 F.3d 415 (5th Cir. 2000), an earlier

case involving deficiency determinations against petitioner for

the 2 prior taxable years (1987 and 1988).7

     At the time the petition was filed, petitioner resided in

Houston, Texas.


     5
      (...continued)

commenced prior to July 22, 1998. Petitioner does not dispute
that contention. Accordingly, sec. 7491 is inapplicable to this
case.
     6
        Petitioner has failed to set forth objections to
respondent’s proposed findings of fact. Accordingly, we conclude
that petitioner concedes that respondent’s proposed findings of
fact are correct except to the extent that petitioner’s findings
of fact are clearly inconsistent therewith. See Jonson v.
Commissioner, 118 T.C. 106, 108 n.4 (2002).
     7
        We do not believe that the facts that we incorporate are
controversial. We incorporate them principally to provide
background material. Indeed, at the call of this case from the
calendar, petitioner stated that the prior case involves “exactly
the same facts” as this case. See Peninsula Props. Co. v.
Commissioner, 47 B.T.A. 84, 85 (1942), and Miller v.
Commissioner, 47 B.T.A. 68, 69 (1942), in each of which we
incorporated by reference all of our findings of fact in the
other and in a third related case involving individuals and
entities common to all three cases.
                               - 6 -

     During the audit years, petitioner owned and operated, in

Houston, Texas, a law firm under the name of Payne & Associates.

Petitioner’s law practice primarily involved civil litigation.

Through Payne & Associates, petitioner was self-employed as a

lawyer and in real estate development.   He reported his income

and expenses from those activities, on a cash basis, on Schedule

C attached to his individual returns.    Petitioner was also a 50-

percent shareholder in Payne & Potter, Inc., a real estate

development corporation that was insolvent by the end of 1986.

Petitioner’s Involvement With and Acquisition of the Stock of
2618, Inc.

     Prior to and during the audit years, 2618 owned and operated

a topless dance club in Houston, Texas, under the name of

Caligula XXI (the club).   From 1986 through 1988, petitioner

represented 2618 and the club in litigation against the city of

Houston and others arising out of the city’s denial of the club’s

application for a permit to conduct a sexually oriented business

(the SOB permit), and against the Texas Alcoholic Beverage

Commission (TABC) for its refusal to renew the club’s mixed

beverage permit permitting the sale of alcohol to patrons.

Petitioner also provided legal representation to Gerhard Helmle

(Helmle), one of the two 50-percent shareholders of the stock of

2618, in criminal proceedings against Helmle for the possession

of illegal drugs.   Prior to and during the audit years, Helmle

was involved in managing the operation of the club.
                               - 7 -

     Beginning in 1987, petitioner became gradually more involved

in the business operations and finances of 2618 and the club,

principally out of concern that Helmle might not be able to pay

legal fees owed to petitioner in excess of $500,000.    During

1987, petitioner entered into agreements with Helmle and others,

which, in consideration of a management fee, gave petitioner the

right “to control and manage the activities of the club CALIGULA

XXI”, and placed him “in total control of all financial and

managerial decisions at the club”.     The agreements also enabled

2618 to redeem the stock of the other 50-percent shareholder

(making Helmle the sole shareholder) with the proceeds of a

$275,000 bank loan to petitioner that, pursuant to the

agreements, was to be repaid (including interest) by means of

scheduled monthly payments from 2618 to petitioner.

     On February 15, 1988, ownership interests in the following

tangible and intangible personal property relating to the club

were transferred to petitioner in satisfaction of $35,000 in

legal fees owed to him:   (1) 2618's leasehold interest in the

building in which the club operated; (2) furniture, furnishings,

fixtures and leasehold improvements in the building; and (3) the

right to use the Caligula XXI name.    Petitioner then leased such

property back to 2618.

     On March 15, 1988, petitioner agreed to acquire Helmle’s

stock in 2618 and, thereby, become the sole shareholder in 2618.
                                - 8 -

The acquisition took the form of a stock purchase whereby

Helmle’s stock was transferred to petitioner in exchange for $10

in cash plus a $500,000 promissory note on which petitioner never

made any payments.    In the earlier case involving petitioner’s

1987 and 1988 taxable years, we found as a fact that the March

15, 1988, agreement was a sham and that petitioner received the

stock of 2618 not by purchase, but as payment in satisfaction of

the more than $500,000 in legal fees owed to him by 2618 and by

Helmle.8   The agreement was conditional, to become effective if

and when TABC granted 2618's application for a mixed beverage

permit.    That condition was satisfied when, in August 1988, a

settlement agreement was reached between TABC and the club

pursuant to which TABC agreed to and did issue the permit to the

club effective September 20, 1988.      Prior to that date,

petitioner had become president of 2618.

Transfer of the Club to JKP Enterprises, Inc. (JKP)

     On February 20, 1988, petitioner entered into an agreement

(the February 20 agreement) with the owners of the building in

which the club operated whereby it was agreed that (1) petitioner

had replaced 2618 as primary lessee by virtue of his February 15,

1988, acquisition of 2618's leasehold interest in the premises,


     8
        Petitioner did not contest our characterization of the
transaction as a payment in-kind for overdue legal fees. Rather,
he contended that the 2618 stock was worthless at the time he
received it. See Payne v. Commissioner, 224 F.3d 415, 419 (5th
Cir. 2000), revg. T.C. Memo. 1998-227.
                              - 9 -

(2) petitioner would remain the primary lessee in respect of all

future leases of the premises for use by new corporations formed

by petitioner, (3) petitioner intended for 2618 to remain as his

sublessee until an SOB permit and “liquor license” (both of which

were then the subject of litigation) were acquired for the

premises, and (4) at that time, petitioner would make JKP his

sublessee under a 10-year sublease.

     JKP was incorporated in Texas on February 22, 1990.

Petitioner was the sole shareholder of JKP.   The litigation

against the city of Houston resulted in the issuance, on March

14, 1990, of an SOB permit to Virginia Sanders, who resided with

petitioner, was his legal assistant, and was president of JKP.

The permit was issued for use at the club’s premises, whereupon

petitioner applied for a mixed beverage permit on behalf of JKP.

Shortly after the issuance of such permit on or about November 1,

1990, operation of the club was transferred from 2618 to JKP,

which became the sublessee of the club’s premises from petitioner

pursuant to the February 20 agreement and lessee, from

petitioner, of the tangible and intangible personal property

relating to the operation of the club that had been acquired by

petitioner from 2618 on February 15, 1988.    In January 1991, JKP

sold all of the assets needed to operate the club, including its

leasehold interest in the premises and in the other assets leased

from petitioner, for $1.1 million.
                                - 10 -

The Withdrawal Authorizations

     During the audit years, petitioner signed withdrawal

authorizations (for the most part, printed forms entitled “Tip

Authorization Voucher” or “Guest Check”) (the WAs) that

authorized the expenditure of amounts charged to 2618's general

ledger account entitled “Business Promotion/Travel”.   The WAs

totaled $70,159 for 1989, and $26,345 through November 1990, when

the operation of the club was taken over by JKP.

     Petitioner signed the WAs by writing either “PAYNE” or, in

some cases, “Jerry”, or “Jerry Payne”, or “JSP”.   The WAs also

set forth a specific date and dollar amount, and they contained

the notation “ProMo”, all in the same handwriting.   One of the

1990 WAs was prepared and signed by Virginia Sanders and

contained the words “Jerry S. Payne Promotional Expense” and

“paid out”.   On the forms entitled “Tip Authorization Voucher”,

petitioner’s initials appeared on a signature line directly above

the words “I hereby authorize the above tip.”9   Petitioner’s

initials also appeared at the bottom of the “Guest Check” forms.

A number of the WAs contained the words “paid out”, and on one


     9
        Petitioner testified that the tip authorization vouchers
were originally designed to enable customers to pay the dancers
by means of a credit card rather than in cash. The club’s
customers utilized the vouchers to specify the credit card tip
amount to be allocated to a particular dancer. Petitioner
adapted the vouchers to his own use as authorizations for payment
of the amounts specified thereon. Only the voucher amounts
authorized by petitioner were charged to 2618's general ledger
account entitled “Business Promotion/Travel”.
                              - 11 -

such WA is the notation “Paid Out to Jerry Payne”.   Another WA

contains the notation “Draw - Jerry’s Vitamins - Sugar”.    On some

of the WAs for 1989 (either guest check forms or blank pieces of

paper), petitioner noted that he “took” the stated amount of

money from a “safe” or a “bag” or “stack”, or that he just “took”

the stated amount.   On other of the 1989 WAs (guest check forms

only), the authorized amount was for specific items of food.

Some of the WAs refer to a particular server or other person.

Also, one WA, which is largely illegible, appears to be a note to

someone named Vikki that petitioner “spent” $350 for some

indecipherable purpose.

Schedule C Deductions

     Parking

     On line 28 of his Schedule Cs for the audit years (“Other

expenses”), petitioner listed “parking” expenses of $1,443 for

1989 and $1,492 for 1990.

     Bad Debts

     During 1989, petitioner paid $34,443 to Texas Commerce Bank

(TCB), of which $19,921, represented deductible interest.   During

1990, petitioner paid $13,644 to TCB.   On line 9 of his Schedule

Cs for the audit years (“Bad debts from sales or services”),

petitioner treated $14,000 (for 1989) and $8,000 (for 1990) of

such payments to TCB as giving rise to bad debt deductions.
                                - 12 -

                                OPINION

I.   Burden of Proof

      A.   Introduction

      Petitioner’s argument that respondent bears the burden of

proof with respect to the constructive dividend and liquidating

dividend issues ostensibly raises two additional issues:      (1)

whether such argument, initially set forth in petitioner’s post-

trial opening brief, is timely and (2), if timely, whether it is

sustainable on the ground that respondent’s determinations are

arbitrary and, therefore, invalid.       For the reasons set forth in

subsections B and C of this section I, we find it unnecessary to

resolve those issues or even to assign the burden of proof with

respect to the constructive dividend and liquidating dividend

issues.

      B.   The Constructive Dividend and Liquidating Dividend
           Issues Are Resolved on the Basis of Agreed Facts

      The facts upon which we base our decision with respect to

both the constructive dividend and liquidating dividend issues

are not in dispute.

            1.   Constructive Dividend Issue

      In the notice, respondent determined that petitioner

received constructive dividends equal to the entire amount

charged to 2618's general ledger account entitled “Business

Promotion/Travel”.     Respondent has conceded the deductibility of

the amounts charged to that account in excess of amounts
                                 - 13 -

reflected on the WAs.     The only evidence relating to the

characterization of the amounts reflected on the WAs as either

constructive dividends to petitioner or deductible promotional

expenses consists of the WAs themselves and petitioner’s oral

testimony.    As discussed, infra, in section II, our decision that

most of the WAs provided for and generated deductible promotional

expenses is based solely upon those WAs, which are stipulated

joint exhibits.     The issue, as framed by the parties, is the

extent to which the stipulated WAs either support or refute

petitioner’s oral testimony that all of the WAs authorized and

resulted in the expenditure of amounts deductible by 2618 as

promotional expenses, and we ultimately find that all but 12 WAs

for 1989 and 7 WAs for 1990 (out of a total of 280 for 1989 and

177 for 1990), are consistent with and, therefore, support

petitioner’s position.     On that basis, we sustain respondent’s

proposed adjustment only to the extent of the amounts reflected

in those 12 WAs for 1989 and 7 WAs for 1990.     With respect to

those 19 WAs, we find that the notations thereon are more

consistent with the conclusion that such amounts were distributed

to petitioner for his personal use rather than for any

deductible, business-related purpose.

             2.   Liquidating Dividend Issue

     After respondent’s concession as to the amount of any

liquidating dividend, there are two issues for decision:      an
                               - 14 -

issue of law and an issue of fact.      The issue of law is whether

2618's transfer of the club to JKP, in November 1990, constituted

a taxable liquidation of 2618, under section 331, or a tax-free

reorganization under section 368(a)(1)(D) and/or (F).     On that

issue, we hold that such transfer constituted a tax-free

reorganization under section 368(a)(1)(D).     See discussion, infra

section III.    The issue of fact is whether, in connection with

such transfer of assets from 2618 to JKP, we should accept

respondent’s argument that petitioner received $40,011 of assets

taxable to him as a long-term capital gain pursuant to section

356(a)(1)(B) and (2), or petitioner’s argument that he received

nothing.    The only evidence offered by respondent in support of

his position is the 1989 yearend balance sheet in Schedule L of

2618's 1989 return, which shows $40,011 of assets.     The 1989

return for 2618 is a joint, stipulated exhibit.     As discussed,

infra section III, we find such balance sheet to be supportive of

petitioner’s position (reflected in his oral testimony) that he

received nothing in connection with the November 1990, transfer

of the club from 2618 to JKP rather than of respondent’s

position.

     C.    Lack of Need To Assign Burden of Proof

     Because we are able to dispose of both issues on the basis

of undisputed or stipulated facts, we need not resolve the burden

of proof issue raised by petitioner.     See Deskins v.
                                - 15 -

Commissioner, 87 T.C. 305, 322-323 n.17 (1986); Hustead v.

Commissioner, T.C. Memo. 1997-205.       “[T]he placement of the

burden of proof * * * would be controlling only if, as a matter

of law, the evidence presented by the parties must be deemed of

equal weight.”     Brookfield Wire Co. v. Commissioner, 667 F.2d

551, 553 n.2 (1st Cir. 1981), affg. T.C. Memo. 1980-321.      As this

Court has stated:    “except for extraordinary burdens (e.g., in

fraud cases), the burden of proof is merely a ‘tie-breaker’ * * *

[it] is irrelevant unless the evidence is in equipoise.”       Steiner

v. Commissioner, T.C. Memo. 1995-122.       Although assignment of the

burden of proof is potentially relevant at the outset of any

case, where (as in this case) the Court finds that the undisputed

facts favor one of the parties, the case is not determined on the

basis of which party bore the burden of proof, and the assignment

of burden of proof becomes irrelevant.10

     Therefore, we have no need to assign the burden of proof

with respect to the constructive dividend and liquidating

dividend issues.




     10
        The same is true where there is conflicting evidence
with respect to a particular item of income or expense, but a
preponderance of the evidence favors one of the parties.   See
Kean v. Commissioner, 91 T.C. 575, 601 n.40 (1988) (“Our
determinations have been made on the basis of the preponderance
of the evidence; accordingly, it is immaterial * * * who bears
the burden of proof. Deskins v. Commissioner, 87 T.C. 305, 323
n.17 (1986).”).
                               - 16 -

II.   Constructive Dividend Issue

      Petitioner alleges that all of the WAs were authorizations

for Helmle to use the stated amounts, and no more than those

amounts, to tip the club’s dancers (as well as dancers at

competing clubs) in order to assure that the club would be able

to retain a sufficient number of “quality dancers”.     Respondent

counters that petitioner has not furnished credible evidence that

the cash distributed by means of the WAs was used by petitioner

for any business purpose.

      Petitioner testified that he was advised by Helmle, who,

according to petitioner, effectively ran the club on a day-to-day

basis for petitioner during the audit years, that it was

necessary to use club funds to tip the dancers and, in

particular, the “quality dancers”.      According to petitioner, the

need to tip the dancers had become urgent in light of the pending

litigation over the club’s right to an SOB permit and the

dancers’ concern that the club would go out of business if it

failed to secure the permit.   Petitioner testified that Helmle

would take money out of the cash register and use it to tip

dancers, both at Caligula XXI and at competing clubs (apparently

to attract dancers at those other clubs to come work at Caligula

XXI).   Petitioner contends that the sole purpose of the WAs was

to restrict the amounts of cash that Helmle would be permitted to

use for that purpose.
                              - 17 -

     Petitioner testified that he would leave a WA, filled out

and signed by him, in the cash register or with the bartender,

and that Helmle could only take from the register the authorized

amount.   Petitioner further testified that he never received or

took possession of any of the money shown on the WAs.

     Respondent argues that petitioner’s trial testimony was

“self serving, inconsistent, conflicting, and generally not

credible”, and that petitioner failed to produce credible

evidence that the cash and food distributed pursuant to the WAs

were used for any business purpose.    He suggests that

petitioner’s failure to call as witnesses any employees of the

club or any dancers suggest that their testimony would have been

negative.   He concludes that, because petitioner failed to prove

that the distributions reflected in the WAs were for any business

purpose, they must be considered taxable dividends to petitioner.

     The only portion of 2618's alleged expenditures for business

promotion/travel that respondent treats as constructive dividends

to petitioner is that reflected in the WAs.    However, the WAs

generally support and corroborate petitioner’s characterization

of the expenditures, not respondent’s.    The vast majority of the

WAs simply contain the notation “pro mo” in addition to the date,

the dollar amount, and petitioner’s signature.    There is no

indication that the specified dollar amounts were to be paid to

petitioner rather than to a third party pursuant to petitioner’s
                                - 18 -

authorization.   The same is true for those WAs that specifically

direct payments to or simply refer to a particular server or

other person, and those that list specific food items, which in

all cases, were for negligible amounts ($14 or less).    (On brief,

petitioner characterized the latter as providing free meals to

customers.)   Nor do we infer from petitioner’s failure to obtain

corroborating testimony from former club employees or dancers

that such testimony would have been negative.    The events in

question occurred some 12 to 13 years prior to the trial.

Presumably, the employees (e.g., bartenders and waiters) and the

dancers, most of whom petitioner may not have known by name,

would have been difficult or impossible to locate after so many

years.   Moreover, in light of the corroboration afforded by the

WAs themselves, we do not consider such testimony crucial to

petitioner’s case.   Cf. Pollack v. Commissioner, 47 T.C. 92, 108

(1966) (unexplained absence of crucial witness justified

inference that his testimony would have been unfavorable), affd.

392 F.2d 409 (5th Cir. 1968).

     Those WAs listing amounts as having been “paid out” or, in

one case, “paid out to [petitioner]” do not corroborate

petitioner’s oral testimony.    Although it is possible that the

notation “paid out” was written by an individual who had carried

out petitioner’s instruction to give the authorized amount to

Helmle or to some other person for distribution to dancers, we
                               - 19 -

will not make that assumption in the absence of confirmatory

evidence.    Similarly, the WAs and other documentation indicating

that the money was spent for petitioner’s benefit or that he

actually received the specified amounts (e.g., where petitioner

wrote that he “took” or “spent” the money) do not support his

oral testimony.    Rather, those WAs indicate that the listed

amounts were paid to or for the benefit of petitioner and not

merely authorized by him for payment to another.    In the absence

of evidence that such money was used for a bona fide promotional

purpose (e.g., as tips for dancers), we must assume that

petitioner retained it.    Therefore, we hold that the amounts in

question totaling $4,577 for 1989 and $1,100 for 1990,

constituted distributions to petitioner, taxable under section

301.

       Respondent concedes that 2618 had no earnings and profits as

of November 1990, and he does not challenge as inaccurate the

negative retained earnings reflected on 2618's 1989 Schedule L as

of both the beginning and end of 1989.    Petitioner neither paid

for his 2618 stock nor included any amount in income resulting

from his receipt of such stock.    Therefore, petitioner had a zero

basis in such stock.    Consequently, the 1989 distributions

evidenced by WAs dated on or before September 20, 1989 (1 year

after petitioner’s acquisition of his 2618 stock), constituted

short-term capital gain, and the balance of the 1989
                                 - 20 -

distributions and all of the 1990 distributions constituted long-

term capital gain.      Secs. 301(c)(3)(A), 1222(1), 1222(3); Gross

v. Commissioner, 23 T.C. 756, 768 (1955), affd. 236 F.2d 612 (2d

Cir. 1956); see also Bittker & Eustice, Federal Income Taxation

of Corporations and Shareholders, par. 8.02[5], at 8-16 n.53 (7th

ed. 2000).      Application of those rules to petitioner results in

his receipt of $4,217 of short-term capital gain for 1989, $360

of long-term capital gain for 1989, and $1,100 of long-term

capital gain for 1990.

III.    Liquidating Dividend Issue

       A.    Introduction

       Respondent views JKP’s November 1990 takeover of the

business operation of 2618 as necessarily involving a taxable

liquidation of 2618, which resulted in a deemed or actual capital

gain distribution to petitioner of 2618's net assets under

section 331(a)11 in the sum of $535,000.     Petitioner does not

challenge respondent’s characterization of the termination of

2618 as a taxable liquidation, but he argues that respondent

failed to prove that he received any money or other property of

value.      On brief, respondent concedes that his valuation of the


       11
            Sec. 331(a) provides that:

           SEC. 331(a). Distributions in Complete Liquidation
       Treated as Exchanges.--Amounts received by a shareholder in
       a distribution in complete liquidation of a corporation
       shall be treated as in full payment in exchange for the
       stock.
                              - 21 -

distributed assets of 2618 was incorrect, and he alleges that the

liquidation distribution to petitioner consisted of the $40,011

of assets shown on the yearend balance sheet in Schedule L of

2618's 1989 return.12

     On October 16, 2002, we issued an order directing the

parties to file supplemental briefs addressing the issue of

whether the cessation of business by 2618 and the assumption of

its business operation by JKP in November 1990 constituted, in

substance, a reorganization within the meaning of sections

368(a)(1)(D) (“D” reorganization) and/or 368(a)(1)(F)) (“F”

reorganization) rather than a taxable liquidation of 2618 subject

to section 331.   In response, petitioner submitted a two-page

statement in which he essentially reiterates his original

position that he did not receive anything of value from 2618 when

its business operation terminated in November 1990.   Respondent

filed a brief in which he states that, assuming the club’s assets

were either owned or leased (from petitioner) by 2618 and the

club was being operated by 2618 rather than by petitioner

“exclusively on his own behalf”, he will concede that the

transfer of the club’s operation from 2618 to JKP meets all of

the statutory requirements for a nondivisive “D” reorganization;

i.e., there was a transfer by a corporation of substantially all


     12
        A 1990 return was not filed by 2618, and the record is
devoid of any balance sheet or other financial record for 2618
subsequent to Dec. 31, 1989.
                              - 22 -

of its assets to another corporation controlled by the sole

shareholder of both corporations in exchange for stock of the

transferee corporation followed by a distribution of the

transferee stock to such shareholder, all pursuant to a plan of

reorganization.   Secs. 368(a)(1)(D), (c), 354(b)(1)(A) and (B).13

Respondent also appears to concede that the transfer of the

club’s operation from 2618 to JKP meets the statutory

requirements for an “F” reorganization:   “a mere change in

identity, form, or place of organization of one corporation,

however effected”, which respondent acknowledges may encompass a

new corporation’s mere acquisition of the assets of the old

corporation, H. Conf. Rept. 97-760, 1982-2 C.B. 600, 634-635.

Respondent argues, however, that, because JKP sold the club

within 3 months of taking over its operation, the transaction may

have failed to meet the nonstatutory requirement of continuity of

business enterprise (COBE), applicable to any reorganization

described in section 368(a) and firmly embedded in the

regulations under section 368.   See sec. 1.368-1(d), Income Tax



     13
         Because petitioner already owned the stock of JKP there
was no need for an actual exchange of 2618's assets for JKP stock
followed by a distribution of the stock to petitioner. As
respondent acknowledges, “[t]he law is well settled that where
shareholders of the transferor corporation already own all of the
stock of the transferee corporation, the issuance of further
stock for exchange and distribution is not required.” See
DeGroff v. Commissioner, 54 T.C. 59, 71 n.7 (1970), affd. per
curiam 444 F.2d 1385 (10th Cir. 1971), and the cases cited
therein.
                                  - 23 -

Regs.     Specifically, respondent suggests that JKP’s sale of the

club’s operation within 3 months of its acquisition “creates a

strong inference” that the sale occurred as part of an overall

plan commencing with the transfer of the operation from 2618 to

JKP and ending with the sale to outsiders.       See sec. 1.368-

1(d)(5), Example 5, Income Tax Regs.        Alternatively, respondent

argues that, even if we decide that the transfer of the club’s

operation from 2618 to JKP qualified as either a “D” or “F”

reorganization, petitioner must be deemed to be in receipt of the

$40,011 total assets listed on the yearend balance sheet in

Schedule L of 2618's 1989 return (the 1989 return balance sheet).

Therefore, he is required to recognize that amount of long-term

capital gain pursuant to section 356(a)(1)(B) and (2).

        B.   Status of JKP’s Acquisition of the Club as a “D”
             Reorganization

              1.   Statutory Requirements

        We find that the club was, in fact, owned and operated by

2618, not, as respondent suggests, by petitioner.       The parties

have stipulated that 2618 “is a corporation that owned and

operated a topless dance club under the name of Caligula XXI”.

They have further stipulated that petitioner’s management

services and involvement in the operation of the club were

pursuant to the March 16, 1987, agreement, which gave petitioner

the right to “control and manage” the club’s activities in

consideration of “a management fee for said service.”       That
                                - 24 -

agreement was signed by Helmle both individually and as an

officer of 2618.   Consistent with that arrangement, 2618 paid

petitioner $197,785 in 1989 and $90,630 in 1990.    The parties

stipulated that $84,689 for 1989, and $20,748 for 1990, was

includable in petitioner’s Schedule C income, and that the

balance constituted 2618's repayment of money petitioner advanced

to or paid on behalf of 2618.    Also, the mixed beverage permit

issued on September 20, 1988, and renewed on September 20, 1990,

was issued to “Caligula XXI, 2618 Inc.”    Moreover, respondent’s

suggestion that petitioner operated the club on his own behalf

rather than on behalf of 2618 is inconsistent with his position

that petitioner was in receipt of constructive dividends from

2618 during the audit years.    For all of the foregoing reasons,

we find that 2618, not petitioner, transferred, to JKP,

substantially all of the assets (either owned or leased from

petitioner) associated with the operation of the club.    On that

basis, respondent concedes (and we hold) that the transfer of the

club’s operation from 2618 to JKP met the statutory requirements

for a “D” reorganization.14




     14
        Because we hold that the transfer of the club’s
operation from 2618 to JKP satisfied the statutory requirements
for a “D” reorganization, we find it unnecessary to decide
whether such transfer also satisfied the statutory requirements
for an “F” reorganization.
                              - 25 -

          2.   Continuity of Business Enterprise

     We also reject respondent’s suggestion that JKP’s January

1991 sale of its assets, less than 3 months after it acquired

them, indicates that those assets were sold “as part of the

overall plan to transfer the assets from 2618 to JKP”.   We have

no doubt that petitioner’s efforts on behalf of the club and his

investment in 2618 were motivated principally, if not

exclusively, by his desire to receive, in cash, the overdue legal

fees from 2618 and Helmle.   His ongoing efforts to secure the

indispensable SOB and mixed beverage permits for the club were

doubtlessly motivated by a desire to make the club a readily

saleable property.   But, as respondent acknowledges, there is no

direct evidence that JKP’s actual sale of its assets was part of

an overall plan existing at the time of the transfer of the

club’s operation from 2618 to JKP; and we do not infer the

existence of such a plan by reason of the proximity in time of

the two transactions.   The mere fact that petitioner may have

contemplated selling the club at the time of its transfer from

2618 to JKP does not require a finding that such transfer lacked

COBE.   See Lewis v. Commissioner, 176 F.2d 646 (1st Cir. 1949),

affg. 10 T.C. 1080 (1948).   In that case, a corporation sold two

of its three lines of business and, because it was temporarily

unable to sell the third, it placed the assets of the remaining

business in a new corporation, pending a sale (which occurred
                              - 26 -

less than 3 years later), and then liquidated.   Because the

transferee corporation continued to conduct the old business, the

Court sustained our finding that the transaction had a valid

business purpose and that it qualified as a nondivisive “D”

reorganization under the 1939 Code predecessor of section

368(a)(1)(D).   The Court distinguished cases in which the intent

was that the transferee corporation immediately make a

liquidating distribution of the assets received from the

transferor corporation, stating as follows:

     But in the present case, petitioners’ plan contemplated
     that the new company would carry on the * * *
     business, and this was done. Although petitioners’
     intention was to dispose of the * * * [business]
     eventually, the fact that a going business was
     transferred and operated left the new company and
     petitioners, its shareholders, in a position where they
     stood to gain or lose from operations just as before
     the transfer; if business conditions warranted it, the
     business could have been continued indefinitely. [Id.
     at 649; emphasis added.]

     We hold that the reasoning of the First Circuit Court of

Appeals in Lewis v. Commissioner, supra, applies to this case and

that the transfer of the club from 2618 to JKP possessed COBE.

     C.   Existence of a Distribution Taxable Under Section 356(a)

     Respondent argues that, even if 2618's transfer of the club

to JKP constituted a “D” reorganization, petitioner was

nevertheless in receipt of $40,011 of “boot” taxable as long-term
                              - 27 -

capital gain under section 356(a)(1)(B) and (2).15   That argument

depends upon a finding that the $40,011 of assets listed on the

1989 return balance sheet continued to exist in November 1990,

and were, in fact, distributed to petitioner at that time.

Petitioner denies that he received any distribution from 2618 in

connection with its transfer of the club to JKP.

     Respondent simply states that the assets reflected on the

1989 return balance sheet “must have gone somewhere, and the only

logical recipient would be the petitioner as the sole owner of

the stock of * * * [2618].”   A more plausible argument (and a

reasonable inference) is that such assets (assuming they still

existed in November 1990) were transferred to JKP as part of

2618's transfer of the operation of the club.   That is certainly

true with respect to such business-related assets as

“inventories” (presumably consisting of food and liquor)

($4,175), current accounts receivable ($1,296), and “depreciable

assets less accumulated depreciation” ($8,647) (an asset the very


     15
        As we have previously noted in discussing the
constructive dividend issue (section II, supra), petitioner had a
zero basis for his 2618 stock, and respondent concedes that 2618
was without earnings and profits on the date of the alleged
distribution. Under such circumstances, sec. 356(a)(1)(B)
provides for gain recognition up to the “sum of * * * money and
the fair market value of * * * property” distributed, and sec.
356(a)(2) provides that “the gain recognized * * * shall be
treated as gain from the exchange of property.” Because
petitioner’s holding period for his 2618 stock exceeded 12 months
as of November 1990, such gain would be long-term capital gain.
See Gross v. Commissioner, 23 T.C. 756, 768 (1955), affd. 236
F.2d 612 (2d Cir. 1956).
                               - 28 -

existence of which is in doubt in light of 2618's lease of its

furniture, furnishings, fixtures and all leasehold improvements

from petitioner).    So-called “other assets”, described on a

schedule attached to the return as “FIT deposits” ($3,866) and

“Bond Sales Tax” ($675), appear to be prepayments of anticipated

liabilities that one would expect to continue for the benefit of

JKP.    Even if all or a portion of the $21,352 in cash listed on

the 1989 return balance sheet remained in November 1990, it is

more likely to have gone to JKP in order to satisfy its current

operating needs (the 1989 return balance sheet listed $17,490 in

accounts payable and $10,633 in other short-term obligations)

than to petitioner.

       We find that respondent’s speculation that the assets listed

on the 1989 return balance sheet remained in existence and were

distributed to petitioner some 10 months later is implausible,

and we find, based upon the evidence before us (including

petitioner’s uncontradicted testimony), that petitioner received

none of the assets listed on the 1989 return balance sheet in

connection with the November 1990 transfer of the club from 2618

to JKP.    Therefore, we reject respondent’s argument that

petitioner was in receipt of a distribution taxable under section

356(a)(1)(B) and (2).
                                 - 29 -

IV.   Schedule C Deductions

      A.   Parking Fees

      Petitioner’s alleged parking fees constituted cash payments

for daily parking in downtown Houston parking lots.      They were

incurred in connection with trips to court in pursuance of his

litigation practice.      Respondent has denied petitioner’s

deduction of those fees for lack of substantiation.

      Based upon petitioner’s testimony that, during the audit

years he “handled multiple cases * * * that required * * * [him]

to come to court most every day downtown”, we find that the

downtown Houston courthouses in which he litigated constituted

regular places of business.

      It is well settled that the cost of commuting between one’s

residence and a regular place of business or employment is a

nondeductible personal expense.      Commissioner v. Flowers, 326

U.S. 465, 473-474 (1946); sec. 1.162-2(e), Income Tax Regs.; sec.

1.262-1(b)(5), Income Tax Regs. Transportation expenses incurred

on trips between places of business, however, may be deductible.

Steinhort v. Commissioner, 335 F.2d 496, 503-504 (5th Cir. 1964),

affg. and remanding T.C. Memo. 1962-233.      Here, the record does

not indicate which, if any, of petitioner’s trips to court

represented travel between his office and the courthouse or

between courthouses, nor is any amount associated with such

travel.    Under such circumstances, none of petitioner’s trips to
                               - 30 -

court have been shown to be other than travel between his

residence and court.   Therefore, we hold that any parking fees

incurred in connection with such travel constitute nondeductible

commuting expenses.    See Anderson v. Commissioner, 60 T.C. 834,

836 (1973).

     Even if the parking fees were shown to be associated with

deductible business trips, we agree with respondent that the

deduction of such fees must be denied due to lack of

substantiation.   Petitioner failed to produce any receipts or

other evidence that might have corroborated his oral testimony.

Moreover, assuming arguendo that petitioner is not required to

satisfy the substantiation requirements of section 274(d)(1) with

respect to the parking fees, petitioner has failed to provide the

minimal substantiation that would permit us to estimate the

allowable deduction as permitted under Cohan v. Commissioner, 39

F.2d 540, 543-544 (2d Cir. 1930).    Even under Cohan, there must

be sufficient evidence in the record to provide a basis upon

which an estimate may be made.    Vanicek v. Commissioner, 85 T.C.

731, 742-743 (1985).    Here, there is none.   Petitioner’s failure

to offer any substantiation that would corroborate his oral

testimony provides an additional basis for sustaining

respondent’s denial of the deduction for the parking fees.    See

Allied Marine Sys., Inc. v. Commissioner, T.C. Memo. 1997-101,
                                   - 31 -

affd. sub nom. Gibbons v. Commissioner, 155 F.3d 558 (4th Cir.

1998).

       B.    Bad Debt Deductions

       Petitioner alleges that he made a portion of the payments to

TCB as guarantor of real estate construction loans to Payne &

Potter, Inc., which, because of its insolvent state, was in

default.      Petitioner alleges that the bad debt deductions

($14,000 for 1989 and $8,000 for 1990) arose out of the

worthlessness of his right of recoupment against Payne & Potter,

Inc.    Here again, respondent has denied the deductions for lack

of substantiation.

       The parties have stipulated that petitioner paid $34,443 in

1989 and $13,644 in 1990 to TCB.       Petitioner alleges that he paid

$14,000 in 1989 and $8,000 in 1990 to discharge his obligation as

the guarantor of construction loans by TCB to Payne & Potter,

Inc., which had become insolvent in 1986 and had defaulted on the

loans.      Because of his inability to recoup from Payne & Potter,

Inc., the amount of those payments to TCB, petitioner claims that

he is entitled to bad debt deductions of $14,000 and $8,000 for

1989 and 1990, respectively.

       Petitioner has failed to corroborate his oral testimony with

written evidence of any loan (or loans) by TCB to Payne & Potter,

Inc., or of any agreement whereby he became the guarantor of such
                                - 32 -

loans.   Although petitioner testified that there was supporting

documentation, he did not produce it.

     Here, again, petitioner has failed to provide the required

substantiation in support of his deductions.    Moreover, he has

not shown that he made any effort to collect even a portion of

the amount allegedly owed to him by Payne & Potter, Inc.      The

mere fact of the debtor’s insolvency does not prove that

petitioner, as creditor, had no reasonable prospect of recovery,

which is necessary to support a bad debt deduction.     See

Intergraph Corp. & Subs. v. Commissioner, 106 T.C. 312, 323

(1996), affd. per curiam without published opinion 121 F.3d 723

(11th Cir. 1997).

      For the foregoing reasons, we sustain respondent’s

determination disallowing petitioner’s bad debt deductions.

V.   Section 6662(a) Penalty

      Section 6662(a) provides for a penalty equal to 20 percent

of the underpayment in tax attributable to, among other things,

negligence or disregard of rules or regulations (without

distinction, negligence).   See sec. 6662(b)(1).   The penalty for

negligence will not apply to an underpayment in tax to the extent

that the taxpayer can show both reasonable cause and that the

taxpayer acted in good faith.    See sec. 6664(c)(1).   Negligence

“includes any failure by the taxpayer * * * to substantiate items

properly.”   Sec. 1.6662-3(b)(1), Income Tax Regs.   Because
                              - 33 -

petitioner failed to substantiate to any degree the Schedule C

deductions for parking fees and bad debts discussed in section

IV, supra, we sustain the negligence penalty with respect to the

underpayment attributable to respondent’s denial of those

deductions.   See Higbee v. Commissioner, 116 T.C. 438, 449

(2001); see also Perrah v. Commissioner, T.C. Memo. 2002-283.


                                         Decision will be entered

                                    under Rule 155.
