                        T.C. Memo. 1997-61



                      UNITED STATES TAX COURT



           DAVID E. AND MARY R. PRICE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7902-95.            Filed February 3, 1997.




     David E. Price and Mary R. Price, for petitioners.

     Jennifer H. Decker, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   By notice of deficiency dated February 15,

1995, respondent determined deficiencies in and an addition to

petitioners' Federal income taxes as follows:

                                           Addition to Tax
          Year       Deficiency            Sec. 6651(a)(1)
                                 - 2 -

            1990        $8,085                     --
            1991        12,289                    $863
            1992        10,239                     --

     Respondent has conceded that petitioners are not liable for

the section 6651(a)(1) addition to tax.      In an amendment to her

answer, respondent asserted for the first time that petitioners,

pursuant to section 6662(a), are liable for negligence penalties

of $1,617, $2,458, and $2,048 for years 1990, 1991, and 1992,

respectively.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code for the years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

The issues for decision are as follows:

     1.   Whether petitioners are entitled to claimed bad debt

deductions.    We hold they are not.

     2.   Whether petitioners are entitled to claimed deductions

for unreimbursed partnership expenses.    We hold they are not.

     3.   Whether petitioners, pursuant to section 6662(a), are

liable for an accuracy-related penalty for negligence.     We hold

they are.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.      At

the time the petition was filed, petitioners resided in Santa

Claus, Indiana.

     David E. Price (petitioner) has been an attorney since 1970.

Between 1970 and 1977, he served as an attorney for the Internal
                               - 3 -

Revenue Service in District Counsel's offices in Virginia and

Indiana.   In 1978, he opened a private law practice in Dale,

Indiana.   Since 1978 and during all relevant years, petitioner's

practice was conducted as a partnership known as Price & Bradley,

in which petitioner held a 51-percent interest.

     In the early years of petitioner's practice, Walter Scott

Taylor, Sr., Walter Scott Taylor, Jr., and Brenda Fant Taylor

were petitioner's primary clients.     The Taylors were successful

Indiana coal mine owners, and petitioner handled all of their

legal affairs.

     In 1979, the Taylors acquired an interest in Speedmart, Inc.

(Speedmart), an Indiana corporation.    Speedmart operated a

convenience store located in Cannelton, Indiana.    The Cannelton

store had lost money every year since it opened.    The Taylors

owned a majority of Speedmart's outstanding shares.    Petitioner

owned 20 percent of Speedmart's shares, which he acquired as

compensation for legal services rendered.

     In 1982 or 1983, the Taylors moved their residence and coal

mining activities to Alabama, and petitioner took over the day-

to-day management of Speedmart.   Petitioner served as president

and a director of Speedmart.   In addition, he was the manager of

the Cannelton store.   Speedmart was authorized to pay petitioner

an annual salary of $18,000, but Speedmart never made any salary

payments to petitioner.
                                 - 4 -

     In an attempt to make Speedmart profitable, petitioner, in

1982 and 1983, expanded Speedmart's operations from one

convenience store to five, installed gas pumps and food

concessions at each location, opened the stores 24 hours a day, 7

days per week, and hired a general manager.      Even after these

changes, Speedmart continued to lose money.      On June 24, 1985,

Speedmart filed for protection from creditors under chapter 11 of

the United States Bankruptcy Code.       A plan of reorganization was

confirmed on June 8, 1988.    Petitioner closed and sold

Speedmart's four unprofitable stores and tried to make the

remaining store profitable.

     In 1990, 1991, and 1992, petitioner made several advances of

funds to Speedmart and creditors of Speedmart.      Petitioner was

advised by a bankruptcy attorney that his advances to Speedmart

must be in the form of a loan.    In December of 1991, petitioner

executed, on behalf of Speedmart, a one-page document entitled

"continuation of 1985 promissory note" (the 1991 Note).      In it,

Speedmart promised to repay "All sums advanced in cash and

inventory".    The terms called for 8-percent interest and

repayment of principal 30 days following demand.

     Petitioner's effort to revive Speedmart was unsuccessful,

and the remaining store continued to lose increasing amounts of

money.   In 1992, Speedmart sold the store to a competitor, and

the proceeds were used to partially repay Speedmart's priority

creditors.    Unsecured creditors received no repayments.
                                  - 5 -

      Petitioner claimed on his 1990, 1991, and 1992 returns

deductions relating to his 1990, 1991, and 1992 advances to

Speedmart.   He reported bad debt expenses of $24,000, $34,103,

and $28,000 on his Schedules C (Profit or Loss From Business

(Sole Proprietorship)) for 1990, 1991, and 1992, respectively.

Petitioner also claimed, for 1990, 1991, and 1992, unreimbursed

partnership expenses of $500, $500, and $1,000, respectively.

      On February 15, 1995, respondent issued a notice of

deficiency disallowing the claimed deductions.        By amendment to

her answer, respondent asserted a negligence penalty for each

year.

                                 OPINION

I.   Bad Debt Deductions

      Section 166(a) allows a deduction for debts that become

worthless during the taxable year.        By contrast, capital

contributions are not deductible under section 166(a).        See,

e.g., Calumet Indus., Inc. v. Commissioner, 95 T.C. 257, 284

(1990).   For purposes of section 166(a), the term "debt" includes

only bona fide debts.      Sec. 1.166-1(c), Income Tax Regs.

According to the regulation, "A bona fide debt is a debt which

arises from a debtor-creditor relationship based upon a valid and

enforceable obligation to pay a fixed or determinable sum of

money."   Id.   Consequently, we must determine whether

petitioner's advances to Speedmart were made in exchange for bona
                                - 6 -

fide debt or equity.    This is a factual determination, and

petitioner bears the burden of proof.    Rule 142(a).

     Petitioner has not established that the 1990, 1991, and 1992

advances were made in exchange for Speedmart's bona fide

indebtedness.    A bankruptcy attorney advised petitioner that

capital contributions would violate the Bankruptcy Court's

orders.    Petitioner contends that he followed this advice and

made the advances "in the form of unsecured notes".     We, of

course, are not bound by the form of petitioner's transaction.

See, e.g., Gregory v. Helvering, 293 U.S. 465, 469 (1935).

     Petitioner did not produce any notes or other documents

evidencing loans for which he claimed deductions in 1990, 1991,

and 1992.    He did introduce the 1991 Note, but it does not

specifically reference any particular advances.    Even if we were

to assume that the 1991 Note was meant to evidence transfers made

during the years in issue, petitioner did not establish, or even

assert, that he had demanded repayment and that Speedmart had

refused.    In addition, Speedmart did not make interest payments

in accordance with the terms of the 1991 Note.    Petitioner has

conceded that his advances were unsecured and that Speedmart was

inadequately capitalized.

     After considering the factors relevant to this case, see

Dixie Dairies Corp. v. Commissioner, 74 T.C. 476, 493 (1980), and

cases cited therein, we conclude that petitioner has failed to

carry his burden of proving that he advanced funds in exchange
                                - 7 -

for bona fide indebtedness from Speedmart.   Accordingly, we

sustain respondent's determination on this issue.

II.   Unreimbursed Partnership Expenses

      A partner generally cannot directly deduct on his income tax

return the expenses of the partnership.   See Cropland Chem. Corp.

v. Commissioner, 75 T.C. 288, 295 (1980).    The exception to this

rule is where there is an agreement among the partners that such

partnership expenses shall be borne by particular partners out of

their own funds.   Id.   Where the exception applies, the partner

is entitled to deduct the amount of the expense from his

individual gross income.

      Petitioner claimed on his individual income tax return

deductions for expenses incurred for entertainment and travel

related to partnership business.   Petitioner bears the burden of

proving that he is entitled to the claimed deductions.   Rule

142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).   In addition, entertainment and travel expenses are

subject to the substantiation requirements of section 274(d).

That section provides that no deduction shall be allowed for

travel and entertainment expenses unless the taxpayer provides

adequate records to corroborate his deductions.   Petitioner has

produced no records to substantiate his claimed deductions.

Therefore, we conclude that petitioner has not carried his burden

of proving that he is entitled to claimed deductions for travel

and entertainment expenses.
                                   - 8 -

III.    Negligence Penalty

       Section 6662 imposes an accuracy-related penalty equal to 20

percent of any underpayment attributable to negligence.      The term

"negligence" is defined as the failure to exercise the due care

that a reasonable and ordinarily prudent person would exercise

under the circumstances.     Zmuda v. Commissioner, 731 F.2d 1417,

1422 (9th Cir. 1984), affg. 79 T.C. 714 (1982); Neely v.

Commissioner, 85 T.C. 934, 947 (1985).      Where the taxpayer is a

tax attorney, he may be held to a higher standard of

reasonableness than a person lacking in tax expertise.       Tippin v.

Commissioner, 104 T.C. 518, 534 (1995).      Because respondent

initially raised the penalty in an amendment to her answer,

respondent bears the burden of proof.      Rule 142(a).

        Petitioner's deductions clearly were not allowable under

relevant statutes and case law.      As a result, we conclude that

petitioner, an experienced tax attorney, did not exercise the

care that an ordinarily prudent tax attorney would have exercised

under the circumstances.

       We have considered all other arguments made by the parties

and found them to be either irrelevant or without merit.

       To reflect the foregoing,



                                             Decision will be entered

                                        under Rule 155.
