                        T.C. Memo. 1999-244



                      UNITED STATES TAX COURT



         DANIEL F. NIX AND GAYLE H. NIX, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14447-96.                       Filed July 28, 1999.



     J. Winston Krause, for petitioners.

     Thomas F. Eagan, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined a deficiency of $14,036

in petitioners' Federal income tax for 1991 and an accuracy-

related penalty under section 6662(a) of $2,735.
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     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for 1991, and all Rule

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

     After settlement, the primary issue for decision is whether

petitioners are entitled to deductions for claimed losses

relating to a closely held corporation.    All references to

petitioner are to Daniel F. Nix.


                        FINDINGS OF FACT

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

     At the time the petition was filed, petitioners resided in

Austin, Texas.

     In 1986, petitioner was employed in the telecommunications

industry as a sales director.   While in this position, petitioner

identified what he regarded as a new market for single line

telephones to complement more expensive business telephone

systems that his employer sold.

     On April 17, 1987, after investigation and consultation with

others, petitioners, David Morales (Morales), and John Amos

(Amos) formed Telim Communications Corp. (Telim) as a California

corporation to manufacture and sell single line telephones.    The

board of directors of Telim consisted of Morales, Amos, and

Mrs. Nix.
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     Morales served as chief executive officer of Telim, Amos as

vice president of operations, petitioner as vice president, and

Mrs. Nix as the secretary and chief financial officer.    The Telim

stock was to be treated as section 1244 stock.   Upon

incorporation, petitioners were issued 3,000 shares of stock in

Telim, and Morales and Amos were issued 3,000 shares of stock

each.

     Telim arranged to have single line telephones manufactured

in Taiwan and imported to and sold in the United States.   The

telephones received from Taiwan were defective, and Telim was

required to rebuild the telephones before sale to customers.     Due

to delays and limited sales, Telim realized no profits.

     Prior to incorporation of Telim in April of 1987,

petitioners spent $39,651 of their funds in startup expenses

relating to Telim.

     From April to the end of September 1987, petitioners spent

an additional $25,046 of their funds to pay expenses of Telim,

and on September 29, 1987, an additional 25,000 shares of Telim

stock were issued to petitioners.

     In October and November of 1987, petitioners spent an

additional $30,000 of their funds to pay expenses of Telim, and

on November 4, 1987, an additional 16,000 shares of Telim stock

were issued to petitioners.
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     With regard to petitioners’ funds that were used to pay

expenses of Telim, no promissory notes were issued by Telim to

petitioners, and no repayments were made by Telim to petitioners.

     As of the end of 1987, as a result of the defective

telephones and lack of profits, Telim’s business operations were

effectively terminated.   On January 1, 1988, a Telim corporate

resolution authorized Amos to sell Telim's capital equipment in

Taiwan and to pay off Telim's debts in Taiwan.    Petitioners were

authorized to sell Telim's assets located in the United States in

order to pay off Telim's remaining debts.    The Telim shares of

stock owned by Morales and Amos were transferred to petitioners

in exchange for releases of Morales and Amos from any debt

obligations of Telim.

     On January 1, 1988, Morales and Amos resigned as officers of

Telim.

     On October 11, 1991, petitioners sold for a gain of $26,713

their personal residence in Novato, California, and petitioners

moved to Austin, Texas.   Petitioner's employer paid $18,419 of

petitioners' moving expenses to Texas.   Petitioners built a new

residence in Austin that was completed in March of 1994, at which

time petitioners moved into the new residence.

     Telim’s 1987 corporate Federal income tax return reflected a

total of $16,623 as loans to shareholders.
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     Telim’s 1988 corporate Federal income tax return reflected a

total of $15,603 as loans to shareholders.

     Telim’s 1989 corporate Federal income tax return reflected

no income, no tax liability, and no loans to shareholders.     This

was the final corporate Federal income tax return filed on behalf

of Telim.

     On their 1989 joint Federal income tax return, petitioners

claimed a section 1244 ordinary loss of $28,000 relating to their

Telim stock.

     On their 1990 joint Federal income tax return, petitioners

did not claim any losses relating to their investment in Telim.

     On their 1991 joint Federal income tax return, petitioners

deferred the $26,713 gain from sale of their California

residence, and they claimed a $21,368 moving expense deduction.

Petitioners did not claim thereon any losses relating to their

investment in Telim.

     On audit of petitioners' 1989 joint Federal income tax

return, respondent disallowed the $28,000 claimed section 1244

ordinary loss relating to petitioners’ Telim stock, and

petitioners filed with regard thereto a petition with this Court

in Nix v. Commissioner, docket No. 5120-93.   Respondent and

petitioners reached a settlement in that case in which $22,400 of

the claimed $28,000 section 1244 ordinary loss was allowed to

petitioners for 1989.
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     On audit of petitioners' 1990 joint Federal income tax

return as originally filed with respondent, respondent made no

adjustments to petitioners’ return.    Thereafter, on April 15,

1994, petitioners filed with respondent an amended 1990 joint

Federal income tax return on which petitioners claimed a refund

of $5,597, based upon a $51,643 claimed capital loss relating to

purported worthless loans made to Telim and an additional $22,000

claimed section 1244 ordinary loss relating to petitioners’

shares of stock in Telim.   On March 26, 1996, respondent

disallowed petitioners’ claim for refund for 1990.

     On audit of petitioners’ 1991 joint Federal income tax

return, respondent, among other things, determined that, due to

petitioners’ failure to purchase their replacement residence

within the 2-year rollover period, petitioners were taxable on

the $26,713 gain realized on sale of their personal residence in

California.

     In their petition filed herein with regard to 1991 and at

trial, petitioners argue that of the $51,643 capital loss claimed

on petitioners’ amended 1990 joint Federal income tax return,

$3,000 was claimed as a loss on the amended 1990 return and the

remaining $48,643 should be available as a capital loss carryover

to 1991 and should offset the $26,713 capital gain recognized on

sale of petitioners' residence.
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     Petitioners also argue that the $22,000 section 1244

ordinary loss claimed on their amended 1990 joint Federal income

tax return should be recharacterized and now also be treated as a

nonsection 1244 capital loss and be available as a capital loss

carryover to 1991.


                             OPINION

     In general, taxpayers bear the burden of proving that they

are entitled to claimed losses, and taxpayers are expected to

maintain adequate records to substantiate claimed losses.   See

sec. 6001; Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).

     Respondent argues, among other things, that due to lack of

substantiation, petitioners are not entitled to any of

petitioners’ claimed bad debt and stock losses relating to Telim.

Respondent also argues that none of the funds petitioners paid to

or on behalf of Telim should be treated as loans (but rather as

part of petitioners’ investment in the capital stock of Telim)

and that whatever stock related losses petitioners incurred in

connection with their investment in Telim should be treated as

section 1244 ordinary losses for 1989 and fully absorbed in 1989

and prior years.

     We agree with respondent’s argument.   Petitioners have not

substantiated or established the amount of losses they incurred
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with regard to Telim, that any such losses were incurred in 1990,

that funds they paid to or on behalf of Telim (and on which the

alleged bad debt losses are based) constituted loans, and that

whatever losses petitioners incurred with regard to Telim

constituted anything other than section 1244 losses.

     No credible evidence supports the existence of the alleged

loans from petitioners to Telim.   No promissory notes exist.   No

repayments were made to petitioners.    To the contrary, with

regard to funds petitioners paid to or on behalf of Telim

petitioners were issued additional stock in Telim.    Telim's

corporate Federal income tax returns for 1987 and 1988 showed

only small loans to shareholders, and Telim's corporate Federal

income tax return for 1989 did not reflect any loans to

shareholders.

     By the end of 1987, Telim had ceased operations.    In 1988,

Telim sold off its assets.   In 1989, Telim filed its final tax

return.   On petitioners’ 1990 and 1991 joint Federal income tax

returns as originally filed with respondent, petitioners did not

claim any losses relating to petitioners’ investment in Telim.

     No credible evidence supports petitioners’ claim that their

losses with regard to Telim should be treated as 1990 losses.

     In 1988, petitioners were authorized to sell off assets of

Telim.    The evidence does not establish what funds were realized

on such sales and what portion thereof was retained by
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petitioners, if any.   Telim’s books and records were not

produced.   The amount of petitioners’ losses with regard to their

investment in Telim is not established.

     Petitioners’ claim--that all funds they invested in Telim

should be treated as capital losses for 1990 relating to non-

section 1244 stock--is inconsistent with petitioners’ settlement

of their case in this Court involving 1989, pursuant to which

petitioners’ Telim stock was given section 1244 stock treatment.

Petitioners’ attempt to recast funds they invested in Telim as

representing either loans or as nonsection 1244 stock appears to

be nothing more than a belated attempt to manufacture capital

losses to offset capital gain income petitioners admit they

failed to report on their 1991 joint Federal income tax return.

     Under section 6662(a), a 20-percent accuracy-related penalty

applies to underpayments of tax attributable to negligence.

     Petitioners argue that unforeseen delays in construction of

their new residence caused them to miss the 2-year tax free roll-

over period relating to gain on sale of their California

residence and that they relied on their tax return preparer in

deducting moving expenses paid by their employer.

     The credible evidence does not support petitioners’

argument.   We sustain respondent’s determination of the accuracy-

related penalty.
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To reflect the foregoing,

                                 A decision will be entered

                            under Rule 155.
