                          T.C. Memo. 2004-71



                        UNITED STATES TAX COURT



                      B. SURI, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11380-02.                  Filed March 18, 2004.



     B. Suri, pro se.

     Gerard Mackey, for respondent.



                          MEMORANDUM OPINION


     COHEN, Judge:   Respondent determined a deficiency of

$169,586 in petitioner’s Federal income taxes for 1999 and

additions to tax under sections 6651(a)(1), 6651(a)(2), and

6654(a).   After concessions, respondent now asserts that

petitioner has a deficiency in income tax for 1999 of $24,860 and

is liable for an addition to tax under section 6651(a)(1) of
                                 - 2 -

$6,215.   Respondent concedes that petitioner is not liable for

the addition to tax under section 6651(a)(2) or under section

6654.

     The issues for decision are whether petitioner is entitled

to a deduction under section 166 for a bad debt loss in 1999;

whether petitioner is entitled to an interest expense deduction

under section 163; whether petitioner is liable for the addition

to tax for failure to file under section 6651(a)(1); and whether

a penalty should be awarded to the United States under section

6673 by reason of petitioner’s failure to exhaust his

administrative remedies.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

                            Background

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Correspondence and communications between the parties are set

forth in respondent’s motion to compel production of documents

and motion under section 6673.    Petitioner resided in New York,

New York, at the time that he filed his petition.

     Petitioner was not in a trade or business during 1999 but

received income as a result of investments.   In 1999, petitioner
                                 - 3 -

received $160,321.90 in long-term capital gains, incurred

$1,747.11 in short-term capital losses, and received $1,744.71 in

ordinary dividends.   Petitioner incurred and paid $12,575.47 in

investment interest expenses in 1999.

     Petitioner’s 1999 income tax return was due, pursuant to an

extension, on August 15, 2000.    Petitioner did not file his 1999

income tax return by August 15, 2000, or at any time prior to

June 15, 2003, as set forth below.       The notice of deficiency in

this case was sent on April 9, 2002.      The notice was based on

total income reported to the Internal Revenue Service (IRS) by

financial institutions with which petitioner did business.      On

July 8, 2002, petitioner filed his petition, in which he claimed

that there was no tax due for 1999.

     On September 2, 2002, respondent’s Appeals officer wrote to

petitioner asking petitioner to set up a conference for possible

settlement of this case.   Petitioner did not respond to the

letter.   On January 7, 2003, the Appeals officer again wrote to

petitioner asking that petitioner call Appeals or send the

Appeals officer information that supported petitioner’s case.

     On January 14, 2003, this case was set for trial at the

trial session of the Court in New York, New York, beginning on

June 16, 2003.   Attached to the notice of trial was the Court’s

Standing Pre-Trial Order that provided, among other things:

          You are expected to begin discussions as soon as
     practicable for purposes of settlement and/or
                                - 4 -

       preparation of a stipulation of facts. Valuation cases
       and reasonable compensation cases are generally
       susceptible of settlement, and the Court expects the
       parties to negotiate in good faith with this objective
       in mind. All minor issues should be settled so that
       the Court can focus on the issue(s) needing a Court
       decision.

                  *    *    *    *      *   *   *

             ORDERED that all facts shall be stipulated to the
       maximum extent possible. All documentary and written
       evidence shall be marked and stipulated in accordance
       with Rule 91(b), unless the evidence is to be used to
       impeach the credibility of a witness. Objections may
       be preserved in the stipulation. If a complete
       stipulation of facts is not ready for submission at
       trial, and if the Court determines that this is the
       result of either party’s failure to fully cooperate in
       the preparation thereof, the Court may order sanctions
       against the uncooperative party. Any documents or
       materials which a party expects to utilize in the event
       of trial (except for impeachment), but which are not
       stipulated, shall be identified in writing and
       exchanged by the parties at least 15 days before the
       first day of the trial session. The Court may refuse
       to receive in evidence any document or material not so
       stipulated or exchanged, unless otherwise agreed by the
       parties or allowed by the Court for good cause shown.
       * * *

       On January 16, 2003, petitioner and the Appeals officer

assigned to the case discussed petitioner’s tax liability.

Petitioner indicated that he would provide information to the

Appeals officer to support his contention that he did not owe any

tax.    On January 17, 2003, pursuant to Branerton Corp. v.

Commissioner, 61 T.C. 691 (1974), respondent’s counsel invited

petitioner to a conference on February 13, 2003, at respondent’s

office and informally requested that petitioner produce certain

documents.
                               - 5 -

     On February 3, 2003, the Appeals officer again wrote to

petitioner to say that he had not received the information he

requested; the Appeals officer gave petitioner another 10 days to

supply the information.   Petitioner failed to respond to the

Appeals officer’s letter of February 3, 2003.   Petitioner failed

to attend the proposed “Branerton” conference scheduled by

respondent’s counsel for February 13, 2003, failed to furnish

respondent with the documents requested, and failed to contact

respondent for the purpose of rescheduling the conference.

     On March 24, 2003, pursuant to Rule 72, respondent served on

petitioner Respondent’s Request for Production of Documents.

None of the requested documents were provided to respondent in

response to this request.   On May 5, 2003, respondent filed a

motion to compel petitioner to produce the requested documents.

On May 6, 2003, the Court granted respondent’s motion to compel

the production of documents and ordered petitioner to produce

those documents by May 20, 2003.   To the extent that respondent’s

motion requested sanctions if petitioner failed to comply with

the Court’s order, the motion was set for hearing on June 16,

2003.   Petitioner did not produce the documents by May 20, 2003,

as ordered by the Court, or at any time prior to the trial date.

     On June 3, 2003, respondent’s counsel sent to petitioner a

proposed stipulation of facts and a letter requesting that

petitioner either sign the stipulation or call respondent’s
                                - 6 -

counsel immediately to discuss his concerns.   Petitioner did not

respond to this letter.

     On June 12, 2003, respondent’s counsel called petitioner and

left a message asking that petitioner telephone to discuss the

stipulation of facts.   On June 12, 2003, petitioner left

respondent’s counsel a message to the effect that he would not

sign the stipulation because he did not agree with it.   On

June 12, 2003, respondent’s counsel left petitioner a message

asking that petitioner meet at 10:00 a.m. on June 13, 2003, to

prepare a stipulation of facts that petitioner would be willing

to sign.   On June 13, 2003, petitioner telephoned respondent in

the afternoon and left a message that he was unable to meet that

morning because he had just received respondent’s message

requesting the meeting.

     On Sunday, June 15, 2003, petitioner submitted to respondent

a Form 1040, U.S. Individual Income Tax Return, for 1999.     In

addition to claiming basis in the stock that he had sold and that

had been determined in the notice of deficiency to result in

capital gains, petitioner claimed bad debt losses of $260,770.

     When the case was called for trial on June 16, 2003,

petitioner presented for the first time various documents that

had been requested by respondent and ordered produced by the

Court’s order of May 6, 2003.   He did not present any canceled

checks supporting the alleged bad debt losses.   He presented
                              - 7 -

purported third-party promissory notes dated December 28, 1998,

and January 7, 1999, referring to payment on December 31, 1999,

for “any and all” loans or moneys received during 1999, without

any specific amounts mentioned.   Respondent had no opportunity to

contact the alleged obligors on the notes.   The Court granted

respondent’s motion for sanctions and ordered that petitioner

would not be allowed to introduce into evidence documents that

had not been timely produced in accordance with the Standing

Pre-Trial Order or the order granting respondent’s motion to

compel production.

     The case was recalled for trial on June 19, 2003, at which

time the parties filed a Stipulation of Facts resolving all

issues other than those set forth above.   After several delays,

on December 15, 2003, petitioner filed an answering brief to

which he attached copies of canceled checks dated in 1999 that

purportedly support the bad debt expense claimed.

                           Discussion

Bad Debt Expense

     In order to be eligible for a bad debt deduction for debts

that became worthless, petitioner must prove that a bona fide

debt existed and that the debt became worthless in the year in

which he claimed the deduction.   Sec. 166(d); sec. 1.166-5(a)(2),

Income Tax Regs.
                               - 8 -

     The thrust of petitioner’s testimony is that he made loans

to virtual strangers over the course of 1999, through December

1999, pursuant to “promissory notes” that did not specify any

amounts due, in order to earn favorable interest.   Petitioner

testified as follows:

     in ‘97 and ‘98 and ‘99 I was actively involved in it
     and when I found the market was going down I started
     liquidating and fortunately I had the opportunity to
     meet this group and I thought that rather than putting
     my money in the bank making two percent or three
     percent I had an opportunity that they would give me
     six percent and I could therefore secure the fund for
     myself.

          Then later on if something panned out where they
     went IPO or something else I might be able to have some
     opportunity there. So I asked them to provide me a
     promissory note which they did for ‘99 on the basis
     that I would provide them the funds as they needed it
     and as I had the available when I had already cashed
     some of my stocks. * * *

Petitioner then claims that, in early 2000, he concluded that the

alleged “loans” were worthless.

     Whether a bona fide debtor-creditor relationship exists is a

question of fact to be determined upon consideration of all of

the facts and circumstances.   Fisher v. Commissioner, 54 T.C.

905, 909 (1970).   Among the factors that are commonly considered

in deciding whether there was a reasonable expectation, belief,

and intention of repayment are:   (1) Whether a note or other

evidence of indebtedness exists, Clark v. Commissioner, 18 T.C.

780, 783 (1952), affd. 205 F.2d 353 (2d Cir. 1953); (2) whether

interest is charged, id.; (3) whether there is a fixed schedule
                                 - 9 -

for repayments, id.; (4) whether any security or collateral is

requested, Zimmerman v. United States, 318 F.2d 611, 613 (9th

Cir. 1963); (5) whether a demand for repayment has been made,

Montgomery v. United States, 87 Ct. Cl. 218, 23 F. Supp. 130

(1938); (6) whether any repayments have been made, Estate of Ames

v. Commissioner, a Memorandum Opinion of this Court dated Feb. 7,

1946; and (7) whether the borrower was solvent at the time of the

loan, Jewell Ridge Coal Corp. v. Commissioner, 318 F.2d 695, 699

(4th Cir. 1963), affg. T.C. Memo. 1962-194.    For reasons set

forth above, the belatedly tendered notes were not reliable and

were not received in evidence.    There was no evidence offered

with respect to the other factors.

     Respondent argues, and we agree, that it appears from

petitioner’s testimony that the funds advanced as claimed by

petitioner were investments, not bona fide loans.    There was no

apparent investigation or evidence of the financial solvency of

the alleged borrowers or evidence that they intended to repay

petitioner for the advances.   In addition, petitioner presented

no objective evidence that the advances became worthless by the

end of 1999.   It is improbable that he would have continued to

lend money through December 1999 and that the advances

simultaneously became worthless.

     Petitioner did not disclose to respondent or present any

information concerning the purported loans until the day of
                               - 10 -

trial, thus precluding any reasonable investigation of events

that occurred 4 years earlier.    Petitioner’s testimony at trial

was vague and conclusory, and he attempted to add additional

details only in his answering brief, after respondent pointed out

the defects in his case.    Although he claimed at trial that he

had no money to employ counsel or a collection agency to pursue

collection, he asserted in his posttrial brief that he had

employed counsel and a collection agency.    There is no evidence

or even suggestion as to the dates on which collection efforts

were pursued.   The statements contained in petitioner’s answering

brief, of course, cannot be considered as evidence.    Rule 143(b).

His inconsistent assertions are, however, an indication of the

unreliability of his testimony at trial.    In any event, none of

the belated submissions would cure the gaps in petitioner’s

evidence with respect to the bona fides of the alleged loans, the

capacity and intent of the alleged debtors, or the worthlessness

of the alleged debts during the same year in which they were

allegedly created.    Petitioner’s claims are improbable, and we

cannot accept them.    Geiger v. Commissioner, 440 F.2d 688, 689

(9th Cir. 1971), affg. T.C. Memo. 1969-159.

Investment Interest Expense

     Section 163 allows a deduction for interest paid during the

taxable year.   Section 163(d), however, limits the amount of the

investment interest that is deductible by individual taxpayers to
                                - 11 -

net investment income.    Petitioner had net investment income of

$1,744 in 1999.

     Under section 163(d)(4)(B), a taxpayer may elect to increase

net investment income by net capital gain from property held for

investment.    The election, however, must be made on or before the

due date, including extensions, of the tax return for the year in

which the net capital gain is recognized.     Sec. 1.163(d)-1,

Income Tax Regs.    Because petitioner did not file a timely

return, he is not entitled to the election.

     Petitioner has offered no evidence or argument with respect

to respondent’s disallowance of his claimed investment interest

expense.    Respondent’s determination in this regard is sustained.

Section 6651(a)

     Petitioner contends that he was not required to file a tax

return for 1999 because no tax was due.     The stipulated amounts

of income that he received during that year, however, far exceed

the threshold requirements for individuals to file returns.

Respondent has carried the burden of production imposed by

section 7491(c).     See Higbee v. Commissioner, 116 T.C. 438, 447

(2001).     In order to avoid the penalty under section 6651(a),

petitioner must establish reasonable cause for his failure to

file.      His purported belief, clearly mistaken, is not reasonable

cause.     There is no indication that petitioner sought competent

professional advice with respect to his 1999 tax return.     Even if
                             - 12 -

he had, his delinquency would not necessarily be excused.    See,

e.g., United States v. Boyle, 469 U.S. 241, 251-252 (1985); see

also Adams v. Commissioner, T.C. Memo. 1982-223, affd. without

published opinion 732 F.2d 159 (7th Cir. 1984).   Petitioner did

not have reasonable cause for his failure to file his return on a

timely basis, and he is liable for the addition to tax under

section 6651(a)(1).

Failure To Exhaust Administrative Remedies

     Section 6673(a) provides for a penalty, in an amount not in

excess of $25,000, whenever it appears to the Tax Court that

proceedings before it have been instituted or maintained by the

taxpayer primarily for delay or “the taxpayer unreasonably failed

to pursue available administrative remedies”.   An award under

this section may be appropriate if a taxpayer fails to comply

with respondent’s request for records made prior to trial when,

had he produced those records when requested, there would have

been fewer disputed issues at the commencement of trial.    See

Edwards v. Commissioner, T.C. Memo. 2002-169; and Edwards v.

Commissioner, T.C. Memo. 2003-149 ($24,000 penalty imposed where

the taxpayer took frivolous and groundless positions and

unreasonably failed to pursue available administrative remedies).

A sanction is also appropriate under section 6673 where a

taxpayer’s procrastination has increased the cost of litigation.

See Griest v. Commissioner, T.C. Memo. 1995-165 ($1,000 penalty
                              - 13 -

awarded where a case was settled at the time of trial after the

taxpayer substantiated his basis to reduce sales proceeds

determined to be income).

     The record in this case establishes repeated failures of

petitioner to meet with the IRS or respondent’s counsel and to

provide the information that ultimately led to the stipulation

and settlement of various items of income in this case.   There

was no stipulation with respect to the claimed bad debt expenses

because petitioner did not raise them prior to trial, tendered

purported notes only the day of trial, and tendered copies of

canceled checks 6 months after trial as an attachment to his

answering brief.   Petitioner’s failure to produce the documentary

materials was a violation of the Court’s Standing Pre-Trial Order

and the specific order of May 6, 2003, granting respondent’s

motion to compel production of documents.   Petitioner’s only

explanation is that he was busy and that he did the same thing in

relation to a prior case that was settled with a determination

that he owed no additional taxes for 1994 and 1998.   Petitioner’s

violation of the Court’s orders and Rules on a prior occasion,

however, is not an excuse for his repeating that conduct.   The

record supports the inference that petitioner maintained this

action primarily for delay.   In any event, the record is clear

that he unreasonably failed to pursue available administrative

remedies.   The facts of this case are indistinguishable from
                             - 14 -

those in Griest v. Commissioner, supra.   Our decision will

require petitioner to pay to the United States a penalty of

$1,000.

     To reflect the concessions by respondent and the foregoing,


                                          An appropriate order and

                                   decision will be entered

                                   under Rule 155.
