                    T.C. Summary Opinion 2006-96



                       UNITED STATES TAX COURT



         WILLIAM KING ALT AND BARBARA G. ALT, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 19964-04S.               Filed June 27, 2006.


     William King and Barbara G. Alt, pro se.

     Alisha M. Harper, for respondent.



     COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463 in effect when the petition was filed.1

The decision to be entered is not reviewable by any other court,

and this opinion should not be cited as authority.




     1
      Unless otherwise indicated, section references hereafter
are to the Internal Revenue Code in effect for the year at issue.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
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     Respondent determined a deficiency of $970 in petitioners’

Federal income tax for 2000.

     The sole issue for decision is whether, under section

166(d), petitioners are entitled to a nonbusiness bad debt

deduction for loans or advances to their son.

     Some of the facts were stipulated.    Those facts and the

accompanying exhibits are so found and are incorporated herein by

reference.    Petitioners’ legal residence at the time the petition

was filed was Lexington, Kentucky.

     Petitioners’ son, Michael Alt (Michael), while a student at

the University of Kentucky at Lexington, Kentucky, was employed

part time at a pet store.    He continued to work in the business

and, at some point, became manager of the store.    The business

was locally owned.    Sometime in 1995, the owner decided to sell

the business.    Since Michael had worked in the business for

several years and was intimately acquainted with its customers

and its merchandise, he became interested in purchasing the

business.    With substantial financial assistance from

petitioners, Michael purchased the business.    The financial

assistance provided by petitioners was $97,000.    Of that amount,

$55,000 was for purchase of the business, and $42,000 was for

working capital.    Petitioners were both retired and, in order to

obtain the $55,000, borrowed $55,000 from a local bank and
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mortgaged their home as security for the loan.    The $42,000 came

from petitioners’ savings.

     Shortly after Michael purchased the business, serious

competition arose in the pet store business.    A new Wal-Mart

store opened in Lexington, Kentucky, and competed directly with

Michael’s business.   Then another large pet store opened.    By

1999 or 2000, Michael became insolvent, and it became clear that

Michael’s independently owned smaller store could not survive.

The store was closed, and Michael filed for bankruptcy under

Chapter 7 of the Bankruptcy Code.    Michael’s indebtedness to

petitioners was unpaid, except for a few monthly payments he made

to the bank in the earlier years prior to his insolvency.

Petitioners filed a proof of claim in the bankruptcy proceeding;

however, there were no assets that were available to unsecured

creditors (including petitioners).

     With respect to the $97,000 in financing that petitioners

provided to Michael, $55,000, as noted above, came from a loan

petitioners received from their local bank, which Michael agreed

to pay.   When Michael defaulted on the loan, petitioners were

required to pay.   The Court is satisfied from the record that, at

the time Michael purchased the store, petitioners fully expected

that the $55,000 of indebtedness to the bank was an indebtedness

that Michael was liable for.   At the time of the purchase,

petitioners consulted an attorney, and, based on that attorney’s
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advice, Michael executed in favor of petitioners an unsecured

promissory note in the amount of $55,000.

     As to the $42,000 petitioners provided Michael for working

capital, no such note was executed by Michael.   At trial,

petitioners explicitly testified that they really never expected

to collect the $42,000, which came from their savings, but that

they expected repayment of the $55,000.

     On their Federal income tax return for 2000, petitioners

claimed a business bad debt deduction of $55,000.   In 2003,

petitioners filed an amended income tax return to reflect the

$55,000 as a nonbusiness bad debt.2

     In the notice of deficiency, respondent disallowed the

nonbusiness bad debt deduction on the ground that there was no

valid debtor/creditor relationship between petitioners and

Michael.

     The Court disagrees with that determination.   Section

166(d)(1) provides, with respect to a taxpayer other than a

corporation, that, where a nonbusiness bad debt becomes wholly

worthless within the taxable year, the loss shall be considered a



     2
      Even though Michael made a few payments to the bank on the
$55,000 note, no evidence was offered at trial as to whether any
of those payments were applied to the principal of the note. The
Court assumes that the entire principal amount of $55,000 was
owing at the time petitioners filed their 2000 income tax return,
since the actual amount of the indebtedness was not made an
issue.
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loss from the sale or exchange of a capital asset held for not

more than one year.       Sec. 1.166-5(a)(2), Income Tax Regs.    To

qualify for a worthless debt deduction, the taxpayer must show

that a debtor-creditor relationship was intended between the

taxpayer and the debtor, that a genuine debt in fact existed, and

that the debt became worthless within the taxable year.          Andrew

v. Commissioner, 54 T.C. 239, 244-245 (1970); sec. 1.166-1(c),

Income Tax Regs.       Petitioners bear the burden of proof.     Rule

142(a).3

       Transactions among family members are subject to careful

scrutiny.       Caligiuri v. Commissioner, 549 F.2d 1155, 1157 (8th

Cir. l977), affg. T.C. Memo. 1975-319; Estate of Van Anda v.

Commissioner, 12 T.C. 1158, 1162 (1949), affd. per curiam 192

F.2d 391 (2d Cir. 1951).       The taxpayer must show that there

existed at the time of the transaction an intent to enforce

collection of the indebtedness.       Andrew v. Commissioner, supra at

245.       Additionally, the taxpayer must show that the loan was made

with a reasonable expectation of repayment.         Mercil v.

Commissioner, 24 T.C. 1150 (1955).         The execution of a note does

not necessarily establish the existence of a bona fide debt.

Estate of Van Anda v. Commissioner, supra at 1162.



       3
      Sec. 7491(a), which in some circumstances places the burden
of production on respondent, is not applicable here as the Court
decides the case without regard to the burden of proof.
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     The Court is satisfied that a genuine debtor/creditor

relationship existed in this case between petitioners and their

son, Michael.   That conclusion is fortified by petitioners’

concurrent advance to Michael of $42,000, and their candid

testimony at trial that they never expected repayment of that

amount but fully expected repayment of the $55,000.        They

followed the advice of their attorney to have the $55,000 advance

documented by execution of a promissory note by their son.        The

evidence does not support respondent’s contention that the

$55,000 note did not constitute a valid debt simply because the

note did not provide a repayment schedule, had no maturity date,

and no default provisions.    The Court construes the note as a

valid, legal, enforceable obligation that was due on demand.       The

Court further concludes that there was a debtor/creditor

relationship between petitioners and Michael.      Accordingly,

petitioners are entitled to a nonbusiness bad debt deduction

pursuant to section 166(d).

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                             Decision will be entered

                                        for petitioners.
