                          T.C. Memo. 1999-20



                      UNITED STATES TAX COURT



   RICHARD T. STANLEY, SR. AND MIRIAM STANLEY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 987-97.                        Filed January 29, 1999.


          Held: P has failed to establish the existence,
     amount, or worthlessness in the years at issue of
     claimed nonbusiness and business bad debts. P has also
     failed to substantiate itemized deductions disallowed
     by R. P is liable for accuracy-related penalties for
     negligence under sec. 6662, I.R.C.




     Robert N. Bedford and Bruce G. Kaufmann, for petitioners.

     Charles A. Baer, for respondent.



                          MEMORANDUM OPINION


     LARO, Judge:   Richard T. and Miriam Stanley petitioned the

Court to redetermine 1992 through 1994 income tax deficiencies of

$97,474, $152,220, and $5,569, respectively, and accuracy-related
                                -2-

penalties for negligence under section 6662(a) for each of these

years.   Unless otherwise stated, section references are to the

Internal Revenue Code in effect for the years in issue.    Rule

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

Amounts are rounded to the nearest dollar.   Miriam Stanley is a

party to this action by reason of having filed income tax returns

jointly with petitioner Richard T. Stanley, Sr.    References

hereinafter to petitioner relate to Mr. Stanley.

     This case was submitted to the Court without trial pursuant

to Rule 122(a).   After moving jointly to submit this case for

trial on the basis of the pleadings and the facts recited and the

exhibits in the stipulation of facts, petitioners' attorney was

ordered to file a brief no later than November 13, 1998.    Despite

repeated admonitions that the brief was required and overdue,

petitioner's attorney has failed to file with the Court his brief

in this matter.   We must decide the case, therefore, on the

record before us, without benefit of petitioner's arguments.

     Following concessions by the parties, we must decide whether

petitioner is entitled to deduct nonbusiness bad debts of

$498,500 for 1993.   We must also decide whether petitioner is

entitled to deduct business bad debts of $2,041,409 for 1994.

Finally we must decide whether petitioner is subject to

accuracy-related penalties for negligence pursuant to section

6662(a) for the years 1992 through 1994.   We hold that petitioner

is not entitled to the contested deductions and that petitioners
                                -3-

are liable for the section 6662(a) accuracy-related penalty for

each of the years in issue.1

                            Background

     The following facts have been stipulated and are so found.

The stipulations of fact and the attached exhibits are

incorporated herein by this reference.   Petitioners filed joint

tax returns for the years in issue.   Petitioners resided in

Pickens, South Carolina, on the date they filed their petition.

     Petitioner is the founder of H. E. Stanley Pharmaceuticals

and Subsidiaries, hereinafter referred to as the company.    The

company was founded to carry on work begun by petitioner's father

who was a medical missionary in Haiti.   Its primary focus was the

manufacture and sale of preparations containing an ingredient

known as QRB-7 for the treatment of certain skin disorders.

Petitioner was the company's majority shareholder at least up to

a certain point in 1992.   He was its president, chief executive

officer, and motivating force through the end of 1993.   He was

the company's largest shareholder up to the time it ceased

operations.




     1
       Respondent also disallowed deductions of $32,121 for
unreimbursed employee business expenses in 1993 and legal fees of
$26,976 in 1994. Petitioners raised no issue as to these
disallowances in their petition and offered no evidence to
support them. We treat these disallowances as having been
conceded.
                                  -4-

     For the period 1987 through 1994, the company paid

petitioner the following salary:

            1987                        $76,327
            1988                         77,675
            1989                         75,000
            1990                         64,904
            1991                         82,500
            1992                          - 0 -
            1993                         31,731
            1994                          - 0 -

     Over the period 1991 through 1993, petitioner made a number

of cash advances to the company in the form of 90-day promissory

notes bearing 10 percent interest.      These advances, totaling

$1,994,518, were never repaid.    On December 16, 1993, the company

issued a note in favor of petitioner (the December 1993 note) in

the amount of $2,656,617.

     Petitioner filed suit against the company in August 1994 to

enforce the December 1993 note.    In January 1995, petitioner

filed a motion for summary judgment in this litigation.      When the

company sought to compel arbitration, petitioner successfully

resisted.    As recently as October 1995, petitioner was pursuing

this litigation.

                             Discussion

     In 1993, petitioner claimed a nonbusiness bad debt deduction

of $498,500.    In 1994, he deducted business bad debts of

$2,041,409.    Respondent argues that petitioner has failed to

establish the existence, nature, or worthlessness of the alleged

bad debts.    We agree that petitioner has failed to prove his

entitlement to any bad debt deductions.
                                 -5-

     Petitioner must prove that respondent's determinations set

forth in the notices of deficiency are incorrect.    Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).    Petitioner must

also prove his entitlement to any claimed deduction.    Deductions

are strictly a matter of legislative grace, and petitioner must

show that his claimed deductions are allowed by the Code.      New

Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934).

     Section 166(a)(1) allows a deduction for any debt that

becomes worthless "within the taxable year".    Although petitioner

advanced nearly $2 million to the company between 1991 and 1993,

he claimed worthlessness as to only about one-fourth of that

amount in 1993.   Petitioner classified these advances as

nonbusiness bad debts.    Nothing in the record serves to identify

which, if any, of petitioner's advances to the company became

unenforceable in 1993, nor is there any explanation as to why

some of the advances might have became uncollectible in that year

while others did not.    In effect, petitioner treated these

advances, which he classified as nonbusiness debts, as partially

worthless in 1993.   A nonbusiness bad debt is deductible only in

the year it becomes totally worthless.    No deduction for partial

worthlessness is allowed.    Black v. Commissioner, 52 T.C. 147,

151 (1969).   As an additional ground for denying this deduction,

we note that petitioner has alleged no specific fact or set of

facts which would establish that 1993 was the year in which his

advances to the company became worthless.    To qualify for a bad

debt deduction, a taxpayer must show that "some event occurred
                                 -6-

during the year in which the deduction is sought that rendered

the debt uncollectible."    Greenberg v. Commissioner, T.C. Memo.

1992-292.   Since petitioner is claiming a   deduction for partial

worthlessness, which is not allowable as to nonbusiness debts,

and since petitioner failed in any case to establish that any

portion of the debt became worthless during 1993, no bad debt

deduction is allowable as to 1993.

     In 1994, petitioner claimed a business bad debt deduction

for advances to the company amounting to $2,041,409.    We note

initially that the amount petitioner claimed exceeds the amount

he advanced to the company.   But the key weakness in petitioner's

position is that he once again fails to identify or demonstrate

any particular circumstance or set of circumstances that would

establish that his advances became worthless in 1994.      Greenberg

v. Commissioner, supra.    In fact, petitioner's actions are

inconsistent with the notion that the company became unable to

repay these advances in 1994.   As late as October 1995,

petitioner was actively litigating against the company to collect

the December 1993 note.    Since petitioner has failed to establish

that the debts became worthless in 1994, we need not decide

whether these advances constituted business as opposed to

nonbusiness debt.

     As to the accuracy-related penalty, section 6662(a) imposes

such a penalty equal to 20 percent of the portion of an

underpayment that is attributable to, among other things,

negligence.   In order to avoid this penalty, petitioner must
                                 -7-

prove that he was not negligent, i.e., that he made a reasonable

attempt to comply with the provisions of the Code, and that he

was not careless, reckless, or in intentional disregard of rules

or regulations.   Sec. 6662(c); see also Bixby v. Commissioner,

58 T.C. 757, 791-792 (1972).   Petitioner was negligent if he

displayed a lack of due care or failed to do what a reasonable

and prudent person would do under similar circumstances.      Allen

v. Commissioner, 925 F.2d 348, 353 (9th Cir. 1991), affg. 92 T.C.

1 (1989).    Since petitioner has offered no evidence to prove he

was not negligent, respondent's imposition of this penalty is

sustained.

     To reflect concessions of the parties,

                                            Decision will be entered

                                       under Rule 155.
