                        T.C. Memo. 1999-178



                      UNITED STATES TAX COURT



          TIMOTHY AND DEBORAH PROVOST, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5772-98.                        Filed May 28, 1999.



     Timothy Provost, pro se.

     Caroline Ades-Pierri, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   By notices dated December 31, 1997,

respondent determined the following deficiencies, additions to

tax, and penalty, relating to petitioners' Federal income taxes:
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                               Additions to Tax                Penalty
Year      Deficiency     Sec. 6651(a)(1)    Sec. 6654        Sec. 6662
1989        $45,048            $9,010            --          $11,143
1990         40,128            10,032         $2,642            --
1991         23,336             4,445           1,207           --
1992         35,613             8,361           1,448           --

       All section references are to the Internal Revenue Code in

effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

                          FINDINGS OF FACT

       Petitioners, husband and wife, resided in Perrineville, New

Jersey, at the time their petition was filed.    In 1985, Mr.

Provost and two other investors formed Sandew Homes, Inc.

(Sandew), an S corporation.    Mr. Provost guaranteed several

mortgage loans relating to properties owned by Sandew.       On their

1989 return, petitioners deducted a $159,565 ordinary loss, a

$58,863 net operating loss carryforward from 1988, and $29,086 of

mortgage interest payments, relating to Sandew.       Petitioners

filed their 1989 return on April 7, 1994.

       On July 12, 1993, petitioners filed a petition in the U.S.

Bankruptcy Court for the District of New Jersey under chapter 11

of the U.S. Bankruptcy Code.    Petitioners' bankruptcy action was

converted from a chapter 11 to a chapter 7 case on July 11, 1994.

On April 14, 1997, petitioners were discharged from bankruptcy.
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     On December 31, 1997, respondent mailed notices of

deficiency to petitioners relating to tax years 1989, 1990, and

1991.   Petitioners filed their 1990 and 1991 tax returns on April

14, 1998.   During 1990, petitioners sold BHC Securities, Inc.

stock but did not report the sale on their 1990 return.      During

1991, petitioners sold Bear Stearns Colonial State Bank stock.

On their 1991 return, petitioners reported a $5,505 capital loss

relating to this sale.

                               OPINION

     Petitioners contend that, pursuant to section 6503(h),

assessment of their 1989 tax is barred by the expiration of the

period of limitation.    Petitioners' contention is meritless.

Petitioners filed their bankruptcy petition on July 12, 1993,

filed their 1989 return on April 7, 1994, and were discharged

from bankruptcy on April 14, 1997.      Thus, pursuant to section

6501, the period of limitation for issuing a notice of deficiency

relating to petitioners' 1989 tax would not expire until June

2000 (i.e., 60 days after petitioners' discharge from bankruptcy

plus the 3-year limitation period on assessment).      See secs.

6501(a), 6503(h); 11 U.S.C. sec. 362(a), (c)(2) (1994).

Respondent issued the 1989 notice of deficiency on December 31,

1997.   Accordingly, assessment of petitioners' 1989 tax was not

barred by the expiration of the period of limitation.
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     Respondent determined that petitioners:   (1) Were not

entitled to deductions for a $159,565 ordinary loss and a $58,863

net operating loss carryforward, relating to 1989; (2) failed to

report $2,302 and $4,495 of capital gain income relating to stock

sales in 1990 and 1991, respectively; (3) failed to file timely

returns relating to 1989, 1990, and 1991 and are liable for

section 6651 additions to tax; (4) failed to pay estimated income

tax relating to 1990 and 1991 and are liable for section 6654

additions to tax; and (5) were negligent in determining their

1989 tax liability and are liable for a section 6662 penalty.

Petitioners bear the burden of proof, yet have failed to present

sufficient credible evidence to establish that respondent's

determinations are incorrect.   See Welch v. Helvering, 290 U.S.

111, 115 (1933).   Accordingly, we sustain respondent's

determinations.

     Respondent also determined that petitioners, in 1989, were

not entitled to deduct $29,086 of mortgage interest relating to

properties owned by Sandew.   Petitioners contend that Sandew was

bankrupt, and, as guarantors of Sandew's loans, petitioners were

obligated to pay Sandew's interest expenses and, therefore,

entitled to a deduction pursuant to section 163.   Generally, a

guarantor is not entitled to an interest expense deduction with

respect to payments made in fulfillment of a mere guaranty

obligation.   See Hynes v. Commissioner, 74 T.C. 1266, 1287-1288
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(1980).   The Court of Appeals for the Third Circuit, however, has

held that if, at the time the interest is paid, the taxpayer has

a fixed, noncontingent, legal obligation to pay the interest and

reimbursement is barred by bankruptcy, the taxpayer is entitled

to an interest expense deduction.   See Stratmore v. Commissioner,

785 F.2d 419, 423 (3d Cir. 1986), revg. T.C. Memo. 1984-547.

Under Golsen v. Commissioner, 54 T.C. 742, 756-757 (1970), affd.

445 F.2d 985 (10th Cir. 1971), we are obligated to follow the law

as stated by the Court of Appeals in the circuit to which this

case is appealable.   Petitioners have failed, however, to

establish that, at the time the interest was paid, they had a

primary legal obligation to pay the interest.     In addition, they

have failed to establish that Sandew was bankrupt and that

reimbursement of the interest payments was barred by Sandew's

bankruptcy.   Accordingly, we sustain respondent's determination.

     Contentions we have not addressed are irrelevant, moot or

meritless.

     To reflect the foregoing and concessions by the parties,



                                          Decision will be entered

                                       under Rule 155.
