                  T.C. Summary Opinion 2002-90



                     UNITED STATES TAX COURT



            JANE H. AND LEROY W. HESS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10117-99S.                Filed July 16, 2002.


     Jane H. Hess and Leroy W. Hess, pro sese.

     Kathryn K. Vetter, for respondent.



     PAJAK, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the years in issue.   All Rule references are to the

Tax Court Rules of Practice and Procedure.
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     Respondent determined deficiencies in petitioners’ Federal

income taxes and additions to tax as follows:

                                              Addition to tax
            Year             Deficiency       Sec. 6651(a)(1)

            1993               $4,421            $1,055.25
            1994               $5,269            $1,264.00
            1995               $8,643                -0-

     The Court must decide:     (1) Whether petitioners are entitled

to net operating loss (NOL) carryover deductions in the taxable

years 1993, 1994, and 1995; and (2) whether petitioners are

liable for additions to tax under section 6651(a)(1) for the

taxable years 1993 and 1994.

     Some of the facts in this case have been stipulated and are

so found.    Petitioners resided in Mokelumne Hill, California, at

the time they filed their petition.

     Petitioners organized Hess & Hess Construction, Inc. (Hess

Inc.) in October 1983.     Hess Inc. reported losses of $107,751 and

$337,587 on its Forms 1120, U.S. Corporation Income Tax Return,

for the taxable periods ending September 30, 1990 and 1991,

respectively.      No corporate income tax returns were filed by Hess

Inc. after the taxable year ending September 30, 1991.

     On February 6, 1992, petitioner Jane Hess (Mrs. Hess) wrote

a check to Hess Inc. in the rounded amount of $234,457.      No

promissory note was executed by Hess Inc. with respect to the

funds advanced by Mrs. Hess.

     On petitioners’ jointly filed 1992 Federal income tax
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return, they reported an “other” loss on line 15 in the amount of

$234,457.   Petitioners attached to their 1992 return Form 4797,

Sales of Business Property, which listed the $234,457 loss as a

business bad debt.   In notes attached to their 1992 return,

petitioners stated, in relevant part:

     THE FOLLOWING BUSINESS BAD DEBT HAS BEEN WRITTEN OFF IN
     THE CURRENT YEAR:

                                                         NOTE
                                         AMOUNT          DUE
     NOTE PAYABLE TO JANE HESS FROM
     HESS & HESS CONSTRUCTION, INC.     $234,457      ON DEMAND

     THE DEBTOR IS A CORPORATION WHOLLY-OWNED BY THE
     TAXPAYERS, WHICH IS NO LONGER SOLVENT. THE DEBT WAS
     DEEMED WORTHLESS WHEN THE CORPORATION NO LONGER COULD
     CONTINUE TO MEET ITS OBLIGATIONS AS THEY BECAME DUE.

     On or about April 15, 1996, petitioners jointly filed their

1995 Federal income tax return.   On April 17, 1996, petitioners

jointly filed their 1993 and 1994 Federal income tax returns.

Petitioners claimed NOL carryover deductions in the amounts of

$204,146, $167,526, and $127,943 in the taxable years 1993, 1994,

and 1995, respectively.

     We must decide whether petitioners are entitled to deduct

the NOL carryovers in the taxable years in issue.     Resolution of

this issue depends upon the validity of the bad debt deduction

claimed by petitioners in 1992.   See sec. 6214(b).

     Respondent argues that the money advanced by Mrs. Hess to

Hess Inc. in 1992 was not a loan and that petitioners were not

entitled to the NOL carryover deductions in the taxable years in
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issue.    Specifically, respondent’s position is that the amount

advanced to the corporation was a contribution to capital.

     Because the burden of proof does not affect the result with

respect to the NOL issue, we find that section 7491 has no

bearing on the determination of that issue.

     Section 166(a) generally allows a deduction for a debt which

becomes worthless during the taxable year.     Bad debts may be

characterized as either business bad debts or nonbusiness bad

debts.    Sec. 166(d).   To be entitled to the deduction, the

taxpayer must prove the existence of a bona fide debtor-creditor

relationship which obligates the debtor to pay the taxpayer a

fixed or determinable sum of money.      Burns v. Commissioner, T.C.

Memo. 1997-83.    A contribution to capital cannot be considered

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

(1990); sec. 1.166-1(c), Income Tax Regs.

     Petitioners apparently concede that the money provided by

Mrs. Hess to Hess Inc. was not a loan.     Mr. Hess testified that

“[Mrs. Hess] did not –- in terms of that bad debt, she did not –

there was no bad debt.”     Mr. Hess further testified that the

identification of the amount provided by Mrs. Hess as a bad debt

“was a misnomer”.

     Our review of the record leads us to conclude that the

advance by Mrs. Hess to Hess Inc. in 1992 was in fact a

contribution to capital, rather than a loan.     There was no
                              - 5 -

promissory note, there was no fixed schedule for repayment, and

there were no interest payments made.    As the Court stated in

Calumet Indus., Inc. v. Commissioner, supra at 287, “We find that

as an economic reality the advances in the instant case were

placed at the risk of the business of the company and that it is

unlikely that disinterested investors would have made loans * * *

on terms similar to those on which the advances were made.”

Furthermore, petitioners offered no evidence that the money

advanced by Mrs. Hess is otherwise deductible.    Accordingly, we

sustain respondent’s determination that the advance made by Mrs.

Hess to Hess Inc. was a capital contribution and that petitioners

are not entitled to the NOL carryover deductions in the taxable

years at issue.

     Respondent conceded at trial that the $234,457 transferred

to Hess Inc. was a contribution to capital and that petitioners

are entitled to a capital loss.   Sec. 165(g).   For open years,

this capital loss is deductible only to the extent of capital

gains plus, for married taxpayers like petitioners, the lower of

ordinary income up to $3,000 or the excess of such losses over

such gains.   Sec. 1211.

     We now decide whether petitioner is liable for the additions

to tax pursuant to section 6651(a)(1).    Section 6651(a)(1)

imposes an addition to tax for failure to file a Federal income

tax return by its due date, unless the taxpayer establishes that
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the failure was due to reasonable cause and not willful neglect.

“Reasonable cause” requires the taxpayer to demonstrate that he

exercised ordinary business care and prudence.    United States v.

Boyle, 469 U.S. 241, 246 (1985); sec. 301.6651-1(c)(1), Proced. &

Admin. Regs.   Willful neglect is defined as a “conscious,

intentional failure or reckless indifference.”    United States v.

Boyle, supra at 245.    Respondent has met the burden of production

under section 7491(c) with respect to petitioners’ liability for

the additions to tax for failure to timely file their 1993 and

1994 tax returns because respondent has shown that petitioners

filed these returns on April 17, 1996.    Thus, petitioners bear

the burden of proving that the failure is due to reasonable cause

and not due to willful neglect.   Rule 142(a); United States v.

Boyle, supra at 245; Crocker v. Commissioner, 92 T.C. 899, 912

(1989).

     Petitioners testified that their former accountant advised

them that the amount of the bad debt deduction could be used as a

deduction with respect to future taxes.    Because petitioners

concluded no taxes would be due, they decided filing the tax

returns for the taxable years at issue was not necessary.

     We have often found that a taxpayer’s mistaken belief that

he did not owe any tax is not reasonable cause for failure to

timely file a return.    Linseman v. Commissioner, 82 T.C. 514, 523

(1984); Bradley v. Commissioner, T.C. Memo. 1998-170.    We find
                              - 7 -

that petitioners’ mistaken belief that they did not owe any tax

is not reasonable cause for failure to timely file a return.

Accordingly, respondent’s determination with respect to the

additions to tax under section 6651(a)(1) is sustained.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                           Decision will be entered

                                      under Rule 155.
