                  T.C. Summary Opinion 2005-143



                     UNITED STATES TAX COURT



         KENNETH B. AND LINDA R. SATLIN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6633-04S.            Filed September 29, 2005.


     Kenneth B. and Linda R. Satlin, pro sese.

     Nancy C. Carver, for respondent.



     PANUTHOS, Chief Special Trial Judge:   This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect when 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, all subsequent section references are to the Internal

Revenue Code in effect at relevant times, and all Rule references

are to the Tax Court Rules of Practice and Procedure.
                                 - 2 -

     Respondent determined a deficiency in petitioners’ Federal

income tax of $2,182 for 1997.    After concessions by respondent,

the issues1 for decision are:    (1) Whether petitioners are

entitled to a business expense deduction under section 162(a) for

expenditures made on behalf of Intercontinental Trading Group,

Inc.; (2) in the alternative, whether petitioners are entitled to

a loss deduction under section 165 or bad debt deduction under

section 166 relating to those expenditures; and (3) whether



     1
        Petitioners claimed a deduction of $30,067.59 on a
Schedule C, Profit or Loss From Business, attached to their
jointly filed Form 1040, U.S. Individual Income Tax Return. The
Schedule C reflected a business name of “International Trading
Co.”. Petitioners identified the amount claimed on line 27 of
Schedule C as “Other expenses”--“Postal Service and Bad Debt”.
On page 2 of the Schedule C, Part V, “Other Expenses” petitioners
reflected an amount of $30,000. The item was further identified
as “Bankruptcy of David Sparks ($30,000 real estate note)”. No
amount is included on Schedule C, page 2, line 48 as a total.
The instruction on the Schedule C, page 2, line 48 requires a
taxpayer to enter the total claimed from line 48 on page 1, line
27.

     From the face of the 1997 return, it is unclear whether
petitioners intended to identify the $30,000 reflected on page 2
as part of the total of $30,067.59 claimed on line 27 or whether
petitioners failed to carry forward the $30,000 to page 1 of the
Schedule C. The notice of deficiency (explanation of
adjustments) disallowed the $30,067 (apparently rounded down by
respondent) as a bad debt deduction. The $30,000 identified at
part V of the Schedule C is not included as an adjustment in the
statutory notice. At trial, petitioners asserted that they are
entitled to a $30,000 bad debt deduction, separate from, and in
addition to, the $30,067.59 deduction claimed on line 27 of the
Schedule C.

     The parties agree that petitioners are entitled to a
Schedule C deduction for legal and professional fees of $4,229,
for the tax year in issue.
                                   - 3 -

petitioners are entitled to a loss under section 166(a) as

secured creditors on two residential properties upon the filing

of bankruptcy by the debtors.

                                Background

        Some of the facts have been stipulated, and they are so

found.       The first stipulation for trial, the stipulation of

settled issues, and the attached exhibits are incorporated by

this reference.       Petitioners resided in Alexandria, Virginia, at

the time the petition was filed.

Intercontinental Trading Group (ITG)

        In December 1992, Kenneth B. Satlin (hereinafter petitioner)

formed Intercontinental Trading Group, a Delaware corporation

(ITG).2       Petitioner was the senior corporate vice president of

ITG.3       Petitioner formed ITG for the purpose of purchasing used

automobiles in the United States with the intent of exporting

them to Venezuela.       Petitioner intended to sell the vehicles to

the Venezuelan National Taxicab Association (VNTA).

        Giancarlo Jasbon (Mr. Jasbon), petitioner’s business

associate in this venture, was ITG’s corporate president.       Mr.


        2
        The record does not include any information regarding
ITG’s shareholders. While it seems likely that petitioner was a
shareholder of ITG, we are uncertain and make no findings in this
regard.
        3
        The record does not indicate whether petitioner was an
employee of ITG, or whether he received a salary from ITG.
Petitioner described the startup phase of ITG as one where he
“[spent his] entire six months exclusively on * * * [ITG]”.
                               - 4 -

Jasbon was responsible for making arrangements with his

Government contacts in Venezuela so that ITG could enter into an

export/import contract with the VNTA.   The plan was that Mr.

Jasbon would use his contacts to obtain licenses to import the

automobiles into Venezuela.

     On January 15, 1993, petitioner sent Mr. Jasbon $32,408.98

by electronic transfer from Riggs Bank to Caracas, Venezuela.

Petitioner advanced the funds to Mr. Jasbon to pay business

expenses for the office that Mr. Jasbon established for ITG in

Caracas, Venezuela.   Petitioner obtained the funds through cash

advances using his personal credit cards.

     In March 1993, petitioner traveled to Venezuela to meet with

Mr. Jasbon to assist in the process of obtaining an import

license.   Sometime during 1993, and after petitioner transferred

funds to Mr. Jasbon, the President of Venezuela resigned after

being accused of corruption.   Mr. Jasbon lost his business

contacts with representatives of the Venezuelan Government

because of the political unrest.   Petitioner and Mr. Jasbon were

unable to obtain an import license.

     Neither petitioner nor Mr. Jasbon, as corporate officers of

ITG, ever obtained an import license from the Venezuelan

Government to transport automobiles from the United States to

Venezuela.   No automobiles were ever purchased or shipped to

Venezuela.   After 1993, neither petitioner, nor Mr. Jasbon, nor
                                 - 5 -

ITG attempted to export or ever exported any automobiles from the

United States to Venezuela.

     In September 1993 and again in March 1994, petitioner

traveled to Florida to speak with Mr. Jasbon about the

possibility of entering into a business opportunity in

Switzerland.   Petitioner returned to Florida sometime in June

1994 “to get some answers” from Mr. Jasbon regarding the funds

petitioner had sent him in January 1993.     Once in Florida,

petitioner learned that Mr. Jasbon had moved.     In 1996,

petitioner had a telephone conversation with Mr. Jasbon regarding

another business opportunity.    During this conversation Mr.

Jasbon promised to repay petitioner.     After this telephone

conversation, petitioner faxed a business proposal to Mr. Jasbon

for his review; however, Mr. Jasbon did not respond.     Petitioner

and Mr. Jasbon had no further communications after 1996.

     On April 1, 1994, ITG’s corporate charter was terminated for

failure to pay corporate dues.    After March 1994, petitioner did

not perform any duties as ITG’s senior corporate vice president.

Secured Creditor Status

     On July 7, 1983, petitioners sold two residential properties

to David P. Sparks and Wanda M. Sparks (hereinafter the debtors).

The properties were at 3513 and 3532 Buffalo Court in Woodbridge,

Virginia.   Petitioners received two notes secured by two deeds of
                                   - 6 -

trust on the 3513 property4 and three notes secured by three

deeds of trust on the 3532 property.5       Bank of America was also

a lienholder on the 3513 and the 3532 properties.       Bank of

America foreclosed on both properties sometime in 1996.

     The debtors stopped paying on the notes in either 1995 or

1996.       On May 21, 1997, the debtors filed for bankruptcy

protection under chapter 7.       Petitioners were secured creditors

in the debtors’ bankruptcy proceeding.       There were no

distributions to any creditors in the bankruptcy proceeding, and

the debtors received a discharge in bankruptcy.       At some point

the debtors filed for chapter 13 bankruptcy.       Petitioners were

not included as creditors in the debtors’ chapter 13 bankruptcy

proceeding; thus, petitioners were not entitled to any payments.6




        4
        Note 1, in the amount of $8,833.43, was secured by
property at 14470 Filarette Street, in Prince William County,
Va., and Note 2, in the amount of $34,000, was secured by
property at 1009 Monroe Street, in Anne Arundel County, Md.
        5
        Note 1, in the amount of $17,891.88, was secured by
property at 4413 Hemmingway, in Prince William County, Va.; Note
2, in the amount of $15,000, was secured by property at 1235
Hilltop Drive; and Note 3, in the amount of $10,000, was secured
by property at 14470 Filarette Street, in Prince William County,
Va.
        6
        The record is unclear regarding the commencement date of
the debtors’ ch. 13 bankruptcy. The deadline to file a Complaint
Objecting to Discharge of the Debtor or to Determine
Dischargeability of Certain Types of Debts was Aug. 23, 1997. It
appears that petitioners did not file a timely claim as secured
creditors in the ch. 13 proceeding. Other secured creditors were
included in the debtors’ ch. 13 bankruptcy proceeding.
                               - 7 -

Petitioners did not seek to enforce their security interests on

the 3513 and the 3532 properties.

                             Discussion

     Deductions are a matter of legislative grace, and a taxpayer

generally bears the burden of proving that he or she is entitled

to the deductions claimed.   See Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79 (1992); New Colonial Ice Co. v.

Helvering, 292 U.S. 435 (1934).   The taxpayer is required to

maintain records that are sufficient to enable the Commissioner

to determine his or her correct tax liability.     See sec. 6001;

sec. 1.6001-1(a), Income Tax Regs.     In addition, the taxpayer

bears the burden of substantiating the amount and purpose of the

claimed deduction.   See Hradesky v. Commissioner, 65 T.C. 87, 90

(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).

     Generally, the Commissioner’s determinations set forth in a

notice of deficiency are presumed correct, and the taxpayer bears

the burden of showing that the determinations are in error.     Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).     Pursuant

to section 7491,7 the burden of proof as to factual matters

shifts to the Commissioner under certain circumstances.



     7
        Sec. 7491 applies to court proceedings arising in
connection with examinations commencing after July 22, 1998.
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, sec. 3001(c), 112 Stat. 727. It appears that
the examination of petitioners’ 1997 tax return commenced after
the effective date of sec. 7491.
                               - 8 -

Petitioners have neither alleged that section 7491(a) applies nor

established their compliance with the requirements of section

7491(a)(2)(A) and (B) to substantiate items, maintain all

required records, and cooperate fully with respondent’s

reasonable requests.

I.   Expenditures on Behalf of ITG

      Section 162(a) allows a deduction for all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business, including a taxpayer’s trade

or business as an employee.   See Primuth v. Commissioner, 54 T.C.

374, 377-378 (1970).

      As a general rule, a taxpayer’s payment of another person’s

obligation is not an ordinary and necessary business expense.

Deputy v. du Pont, 308 U.S. 488 (1940).     For Federal income tax

purposes, a corporation’s business is separate from the business

of its shareholders, officers, and employees.    See Leamy v.

Commissioner, 85 T.C. 798 (1985) (shareholders, officers and

employees may not deduct as personal expenses those expenses that

further the business of the corporation).

      Because a corporation’s business is distinct from that of

its shareholders, officers, and employees, such persons may not

deduct expenses which promote the business of the corporation.

Leamy v. Commissioner, supra; Kahn v. Commissioner, 26 T.C. 273

(1956); Das v. Commissioner, T.C. Memo. 1998-353.      Payments by
                                 - 9 -

shareholders, officers, and employees constitute either capital

contributions or loans to the corporation and are deductible, if

at all, only by the corporation.     Deputy v. du Pont, supra at

393; Rink v. Commissioner, 51 T.C. 746, 751 (1969).

       The $32,408.98 petitioner sent to Mr. Jasbon was apparently

for the purpose of establishing an office in Venezuela for ITG

and for the payment of business expenses of ITG.    For the reasons

discussed above, petitioner, as an officer of ITG, cannot deduct,

on his individual return, expenditures made to promote the

corporation’s business.   Respondent is sustained on this issue.

II.   Loss or Bad Debt

      The record is not entirely clear as to the nature of the

arrangement among petitioner, ITG, and Mr. Jasbon.    We are

uncertain whether the funds transferred to Mr. Jasbon in January

1993 were an investment or a loan, and if a loan, whether the

loan was to ITG or Mr. Jasbon.    There are no documents in the

record indicating the nature of the advance.    We therefore

consider the loss provisions under section 165 and the bad debt

provisions under section 166 to see whether they provide any

relief for petitioners.

      Section 165(a) provides for the deduction of losses

sustained during the taxable year for which no compensation is

received.   In the case of individuals, section 165(c) limits the

deduction to losses incurred in a trade or business or in any
                               - 10 -

transaction entered into for profit.    In order to be deductible,

a loss must be evidenced by a closed and completed transaction,

fixed by identifiable events, and actually sustained during the

taxable year.    Boehm v. Commissioner, 326 U.S. 287, 291-292

(1945); sec. 1.165-1(b), Income Tax Regs.    A loss is deductible

only for the taxable year in which it is sustained.    Sec. 1.165-

1(d)(1), Income Tax Regs.    The determination of whether a loss

occurred during a particular taxable year is purely one of fact.

Korn v. Commissioner, 524 F.2d 888, 890 (9th Cir. 1975), affg.

T.C. Memo. 1973-258.    A critical inquiry is the year in which the

taxpayer loses control over and possession of the property at

issue.   United States v. S.S. White Dental Manufacturing Co., 274

U.S. 398 (1927).    Respondent suggests that to the extent

petitioners incurred a loss, the loss occurred before 1997.     To

the extent the advance of funds was an investment in ITG, it

would appear that the loss occurred when ITG became defunct in

1994.    ITG’s corporate charter was terminated in 1994, and no

business was ever conducted.

     No portion of the loss with respect to which reimbursement

may be received is sustained, for purposes of section 165, until

it can be ascertained with reasonable certainty whether such

reimbursement will be received.    Sec. 1.165-1(d)(2)(i), Income

Tax Regs.    Petitioner did not seriously pursue reimbursement of
                                - 11 -

the funds after 1993.    Petitioner continued to discuss business

opportunities with Mr. Jasbon in 1994 and 1996.

     We cannot conclude that there were any events which occurred

in 1997 that created some certainty as to lack of repayment or

reimbursement by Mr. Jasbon.     Petitioner has not presented

sufficient evidence that would cause us to conclude that it

became a reasonable certainty in 1997 that there was no prospect

of reimbursement.   See Halliburton Co. v. Commissioner, 93 T.C.

758, 770 (1989), affd. 946 F.2d 395 (5th Cir. 1991); Colish v.

Commissioner, 48 T.C. 711, 715 (1967); sec. 1.165-1(d)(2)(i),

Income Tax Regs. (whether a reasonable prospect of recovery

exists is a question of fact).

     We now consider whether petitioners are entitled to a bad

debt deduction, treating the advance as a loan to ITG or to Mr.

Jasbon.    Section 166(a) generally allows a deduction for any debt

that becomes worthless during the taxable year.     Bad debts may be

characterized as either business bad debts or nonbusiness bad

debts.    Sec. 166(d).   Section 166(d)(1)(B) provides that

nonbusiness bad debts are deductible as short-term capital

losses.    A bad debt is characterized as a business bad debt if it

is incurred in connection with a trade or business of the

taxpayer.    Sec. 166(d)(2).

     Petitioner did not provide evidence that he was in the

business of lending money to individuals or that there are any
                               - 12 -

other circumstances that would persuade us to characterize the

advance as a business bad debt.    Thus, petitioner’s claimed bad

debt deduction would be characterized as a nonbusiness bad debt

deduction.    To the extent that the advance of funds was a loan to

ITG, for the same reasons discussed above as to section 165 it

would appear that the debt became worthless when the corporation

became defunct.    Thus, petitioners would not be entitled to a bad

debt deduction in 1997.

       To the extent that the advance may have been a loan to Mr.

Jasbon, petitioner has failed to present sufficient evidence to

establish that he is entitled to a deduction for a nonbusiness

bad debt.    There is nothing in this record that establishes that

the debt became worthless in 1997.      In order to be entitled to a

bad debt deduction, petitioner must prove that the debt had value

at the beginning of 1997 and became worthless during that year.

See Milenbach v. Commissioner, 106 T.C. 184, 204 (1996), affd. in

part and revd. in part 318 F.3d 924 (9th Cir. 2003).

       In conclusion, there is no scenario that would permit

petitioners to claim a loss or a bad debt deduction in 1997.

III.    Bad Debt Deduction as Secured Creditor

       Section 166(a) generally allows a deduction for any bona

fide debt that becomes worthless during the taxable year.      To

establish entitlement to a bad debt deduction, a taxpayer must

prove that a bona fide debt existed and that the debt became
                               - 13 -

worthless in the year that the deduction is claimed.    Rule

142(a); Am. Offshore, Inc. v. Commissioner, 97 T.C. 579, 593

(1991); sec. 1.166-1(c), Income Tax Regs.    A bona fide debt is

defined as one which arises from a debtor-creditor relationship

and which is based upon a valid and enforceable obligation to pay

a fixed or determinable sum of money.    Sec. 1.166-1(c), Income

Tax Regs.

     The question of whether a debt has become worthless is one

of fact, to be determined by an examination of all surrounding

facts and circumstances.   Am. Offshore, Inc. v. Commissioner,

supra at 594.

     A taxpayer may establish the worthlessness of a debt by

offering proof of identifiable events which establish that the

debt will not be paid in the future.    Therefore, a taxpayer’s

subjective opinion that a debt is uncollectible, standing alone,

is not sufficient evidence that the debt is worthless.     Fox v.

Commissioner, 50 T.C. 813, 822 (1968), affd. per curiam per order

25 AFTR 2d 70-891, 70-1 USTC par. 9373 (9th Cir. 1970).

     Among the objective factors considered by courts to

determine worthlessness are:   The debtor’s earning capacity;

events of default, whether major or minor; insolvency of the

debtor; the debtor’s refusal to pay; actions of the creditor in

pursuing collection, i.e., whether the creditor failed to take

collection action before claiming the deduction; subsequent
                                 - 14 -

dealings between the parties; and lack of assets.      Am. Offshore,

Inc. v. Commissioner, supra at 594-595.     No single factor is

conclusive.   Id. at 595.

     Respondent argues that petitioners did not show that the

notes evidencing the debt owed them became worthless.     Respondent

further argues that petitioners’ respective security interests in

the 3513 property and the 3532 property survived the bankruptcy

and that petitioners failed to institute foreclosure proceedings.

     A debtor’s petition in bankruptcy is not conclusive of a

debt’s total worthlessness.      Estate of Mann v. United States, 731

F.2d 267, 276 (5th Cir. 1984); Dallmeyer v. Commissioner, 14 T.C.

1282, 1292-1293 (1950).     Ordinarily, liens and other secured

interests survive bankruptcy.      Farrey v. Sanderfoot, 500 U.S.

291, 297 (1991).     A lien on real property passes through

bankruptcy unaffected.      Dewsnup v. Timm, 502 U.S. 410, 418

(1992).   A bankruptcy discharge extinguishes only one mode of

enforcing a claim--namely, an action against the debtor in

personam--while leaving intact another--namely, an action against

the debtor in rem.     Johnson v. Home State Bank, 501 U.S. 78, 84

(1991).

     Petitioners established that a debtor-creditor relationship

existed, as evidenced, in part, by two settlement statements

dated July 7, 1983, which detailed the sale of the 3513 property

and the 3532 property to the debtors.     The record establishes
                               - 15 -

that petitioners held five notes that were secured by four

different properties.

     Petitioners, as secured creditors, could have instituted

foreclosure proceedings on the four properties securing the

debt.8   In June 2003, petitioners were informed by Thomas F.

DeCaro, the trustee in the bankruptcy matter, that they could

enforce their security interests in the respective properties.

Petitioners did not take any action to enforce their security

interests.

     According to the debtors’ bankruptcy records, petitioners

had an enforceable, secured claim against the debtors in 1997;

however, petitioners took no foreclosure action to collect the

debt.    A holder of a secured note and a deed of trust is not

entitled to a bad debt deduction where the note is a bona fide

debt that has become due and the noteholder has failed to

establish that the debt has become worthless.      Robertson v.

Commissioner, T.C. Memo. 2004-217.      By failing to exercise all

their rights with respect to the secured property, petitioners




     8
        Petitioners received approximately $34,000 from a senior
lienholder for one of the notes secured by the 3513 property.

     Three of the five notes were satisfied. The property
securing the note for 4413 Hemmingway was released on Mar. 25,
1997. The property securing the note for 1235 Hilltop Drive was
released on Nov. 23, 1990. The 3532 property was the security
for these notes. The property securing the note for 14470
Filarette Street was released on Nov. 23, 1990. The 3513
property was the security for this note.
                             - 16 -

have failed to establish that the notes were worthless in 1997.

Respondent is sustained on this issue.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing and the concessions of the parties,


                                   Decision will be entered

                              under Rule 155.
