                        T.C. Memo. 2005-191



                      UNITED STATES TAX COURT



                  PETER R. GEDDIS, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 9626-04.            Filed August 4, 2005.



     Michael D. Handlos, for petitioner.

     Jeremy L. McPherson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     SWIFT, Judge:   Respondent determined a deficiency in

petitioner’s 2001 Federal income tax and an addition to tax as

follows:
                              - 2 -
                                  Addition to Tax
               Deficiency      Under Sec. 6651(a)(1)*
                $218,289             $30,739

             * Respondent’s notice of deficiency also
               determined additions to tax under secs.
               6651(a)(2) and 6654, which additions
               respondent conceded at trial.


     The issues for decision are:   (1) Whether petitioner for

2001 is entitled to a $192,046 long-term capital loss

carryforward from 2000; (2) whether petitioner is liable for an

addition to tax under section 6651(a)(1) for failure to timely

file his 2001 Federal income tax return.

     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.


                        FINDINGS OF FACT

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

the time the petition was filed, petitioner was a resident of

Danville, California.

     In 1997, petitioner, with Frank Garza, Jr. (Garza), an

accountant and aggressive investment adviser, began putting

together a proposal to develop in Trieste, Italy, “a fully

functioning digital city” (Trieste project).   Under the Trieste

project, there was to be developed and installed in Trieste,

Italy (where Garza’s brother-in-law played professional
                               - 3 -
basketball), a broadband fiber optic network that would provide

residents of Trieste with high speed Internet access to

financial, cultural, and community information and to other

telecommunications services.

     The proposed Trieste project involved development of an

infrastructure and the software applications necessary to qualify

Trieste as a “digital city”.

     Apparently, the proposed Trieste project was approved by

Italian government officials and organizations.   Telcom-Italia,

one of Italy’s major telecommunications corporations, and IBM-

Italy were to be involved in the Trieste project.

     In late 1997 and 1998, funds were raised, and various

aspects of the Trieste project were begun.   In 1998, meetings and

negotiations were held with government leaders and local

businessmen and with officials of Telecom-Italia and IBM-Italy.

Also, certain construction activities relating to the Trieste

project were undertaken.   For example, some of the streets in

Trieste, Italy, apparently were dug up in preparation for the

installation of fiber optic cable.

     Adrical, Inc. (Adrical), a Delaware corporation formed on

September 14, 1998, was involved in aspects of the management of

the Trieste project.   The record does not reflect who invested in

Adrical, who owned the stock of Adrical, who filed the
                                - 4 -
incorporation papers for Adrical, who the corporate officers of

Adrical were, or how much money was invested in Adrical.

     In 1998, on a monthly basis, in connection with the Trieste

project, petitioner, Garza, other consultants, and interpreters

began traveling to Trieste, Italy.      In 1999, petitioner made two

or three additional trips to Trieste.

     In July of 1999, the Trieste project began to collapse

apparently due to a lack of funds and to dissension between Garza

and other personnel.   By the end of July of 1999, petitioner had

terminated his involvement in the Trieste project and any further

association with Adrical.   By the end of 1999, the Trieste

project had fully collapsed, and Adrical’s involvement in the

project was terminated.

     In September of 1999, Adrical, for the first time, was

registered to conduct business in California.     The record herein

is unclear as to what California business activity, if any,

Adrical proposed to conduct.

     On January 7, 2000, Wells Fargo Bank (Wells Fargo) made a

$197,050 loan to Peter Geddis, Inc. (PGI), petitioner’s wholly-

owned corporation which petitioner had incorporated in 1989 in

California.   Under the terms of this loan, payments of principal

and interest were to be paid by PGI by way of monthly withdrawals

from PGI’s bank account.    Petitioner signed the loan agreement

between Wells Fargo and PGI as personal guarantor.
                                - 5 -
     In 2000 and 2001, respectively, Wells Fargo withdrew $54,736

and $71,157 from PGI’s bank account in repayment of principal due

on the $197,050 Wells Fargo loan.    The record herein does not

indicate whether PGI defaulted on this loan or whether Wells

Fargo called upon petitioner to make payments on the PGI loan

under his personal guarantee.

     On or about June 26, 2001, petitioner and his wife timely

filed their joint 2000 Federal income tax return.    On their 2000

joint Federal income tax return, petitioner and his wife did not

attach a Schedule D, Capital Gains and Losses, and no capital

loss for 2000 was claimed thereon.

     For 2001, petitioner and his wife did not file a timely

Federal income tax return.

     On March 5, 2004, respondent mailed a notice of deficiency

to petitioner with respect to petitioner’s 2001 Federal income

tax liability.

     On April 2, 2004, after receiving the above notice of

deficiency, petitioner and his wife untimely filed a 2001 joint

Federal income tax return, on which return petitioner and his

wife reported various items of income and claimed various

deductions, including the $192,046 long-term capital loss

carryover from 2000 at issue herein.

     On their 2001 Federal income tax return, petitioner and his

wife provided no explanation as to why the $192,046 long-term
                                - 6 -
capital loss carryover from 2000 was claimed thereon, inasmuch as

they had not reported a long-term capital loss on their 2000

joint Federal income tax return.    At trial, petitioner’s

accountant stated that the $192,046 amount of the claimed 2000

long-term capital loss carryover was not precise and was based on

an estimate.

     As of the date of the trial, petitioner and his wife have

not filed an amended Federal income tax return for 2000, and

petitioner and his wife have not otherwise claimed a long-term

capital loss for 2000.


                               OPINION

     Under section 165(g), securities which are capital assets

that become worthless during a taxable year are “treated as a

loss from the sale or exchange, on the last day of the taxable

year, of a capital asset.”    Sec. 165(g)(1).

     For purposes of section 165(g), a security is defined as

either a share of stock in a corporation, or a right to subscribe

for, or to receive, a share of stock in a corporation.    Sec.

165(g)(2).1

     To qualify for a capital loss deduction under section

165(g), a stock interest in a corporation must be wholly

worthless.    Sec. 1.165-5(c), Income Tax Regs.   Whether a stock

     1
      The definition of security under sec. 165(g)(2) also
includes certain debt instruments not relevant to this case.
                               - 7 -
interest in a corporation is worthless, and the taxable year in

which such worthlessness occurs, are questions of fact with

respect to which petitioners generally bear the burden of proof.

Rule 142(a); Boehm v. Commissioner, 326 U.S. 287, 294 (1945);

Welch v. Helvering, 290 U.S. 111, 115 (1933).2   Further,

taxpayers are expected to maintain adequate records to

substantiate claimed losses.   Sec. 6001.

     Generally, a stock interest in a corporation will be treated

as wholly worthless when the underlying corporation has no

liquidation value and no foreseeable value.   Delk v.

Commissioner, 113 F.3d 984, 986 (9th Cir. 1997), revg. T.C. Memo.

1995-265; Morton v. Commissioner, 38 B.T.A. 1270, 1278-1279

(1938), affd. 112 F.2d 320 (7th Cir. 1940).   The absence of any

foreseeable value ordinarily is established by some identifiable

event in the corporation’s life.   Delk v. Commissioner, supra at

986; Austin Co. v. Commissioner, 71 T.C. 955, 970 (1979); Morton

v. Commissioner, supra at 1279.

     Petitioner claims that in July of 1997 he received, through

PGI as his nominee, a $200,000 loan from Wells Fargo and that he

transferred this $200,000 in loan proceeds to Garza, who in turn

transferred the $200,000 to Adrical on petitioner’s behalf.




     2
       Petitioner does not assert that the burden of proof should
shift to respondent under sec. 7491.
                              - 8 -
Petitioner alleges that this transfer gave him a stock interest

in Adrical.

     Petitioner then claims that the $197,050 Wells Fargo loan

proceeds PGI received in 2000 were received by PGI only as his

nominee, and that the $197,050 was used by him to refinance, in

his own behalf, the previously mentioned 1997 $200,000 Wells

Fargo loan.

     Based on his alleged stock interest in Adrical and Adrical’s

alleged worthlessness by the end of 2000, under section 165(g)

petitioner claims that in 2000 he incurred an approximate

$195,000 long-term capital loss relating to his claimed stock

interest in Adrical, giving rise to the $192,046 estimated long-

term capital loss carryover claimed on his and his wife’s 2001

Federal income tax return.

     The evidence herein does not adequately substantiate that

petitioner made an investment of any kind in Adrical.

     Petitioner did not produce adequate documentation or

witnesses to verify what, if anything, he invested in Adrical.

Some of the records petitioner did produce are inconsistent with

petitioner’s explanation for the transactions before us.    Twice

in his testimony, petitioner acknowledged that he was unsure of

the accuracy of some of the records produced.

     Various bank records were introduced into evidence, but they

were incomplete, lacking proper identification, and missing
                               - 9 -
pages.   For example, a “Business Lending Agreement” relating to

the $197,050 Wells Fargo loan to PGI in 2000, presumably a three-

page document, is missing page two, the key page which would

appear to have detailed how the $197,050 loan proceeds were

disbursed.   Further, the bank records which were produced at

trial relate only to the existence and repayment of loans in

which petitioner allegedly participated but do not indicate that

a transfer was ever made by petitioner to Garza or by Garza to

Adrical on petitioner’s behalf.

     Even if originals of certain of the documents relating to

petitioner’s alleged stock investment in Adrical were lost, as

petitioner contends, we are not satisfied that copies or other

relevant documentation from either Wells Fargo, PGI, Garza, or

Adrical were unavailable.

     The credible evidence does not establish that Garza, on

petitioner’s behalf, ever contributed any funds to Adrical.     In

fact, Adrical was not incorporated until September of 1998, more

than a year after the time petitioner allegedly transferred funds

to Garza for Garza to invest in Adrical on petitioner’s behalf.

     Also, petitioner has not offered any corporate or public

records corroborating that he had an ownership interest in

Adrical.   Without such evidence, the record simply does not
                             - 10 -
support a finding that petitioner made any investment in

Adrical.3

     Even if petitioner had substantiated that he made an

investment in Adrical, in order to claim a worthless security

loss under section 165(g), petitioner also had to establish that

he received a stock interest in Adrical and that the stock became

worthless in 2000.

     Petitioner has not presented evidence that establishes that

he was a stockholder in Adrical.   At trial, in response to

questions from the Court, petitioner acknowledged that he did not

receive stock certificates in Adrical, that he did not know his

percentage ownership interest in Adrical, that he did not know

whether he was an officer of Adrical, and that in hindsight he

was not sure that he was a stockholder of Adrical.

     Further, petitioner repeatedly testified that Garza was

obligated to repay funds petitioner transferred to Garza,

suggesting that any such funds constituted a loan to Garza, not a

stock investment made by Garza on petitioner’s behalf.




     3
      Petitioner cites Jensen v. Commissioner, T.C. Memo. 1993-
393, affd. 72 F.3d 135 (9th Cir. 1995), for the proposition that
petitioner is not required to produce evidence that he owned
stock in Adrical, Inc. Petitioner fails to differentiate between
a theft loss under sec. 165(e), which was the case in Jensen, and
a worthless security loss under sec. 165(g), the latter of which
requires affirmative evidence that the loss resulted from a
security investment.
                                - 11 -
     Additionally, petitioner has not established that Adrical’s

stock became worthless in 2000.    Petitioner has not offered any

evidence of the financial condition of Adrical in 2000.    There

simply is no evidence before us to support a finding that Adrical

had no liquidation value as of the end of 2000.

     Petitioner argues that the collapse of the Trieste project

is an identifiable event establishing that his investment in

Adrical had become worthless.    Petitioner, however, has not

provided any evidence upon which we can determine that Adrical

was rendered worthless as a result of the failed Trieste project.

To the contrary, the registration of Adrical in 1999 to do

business in California, after termination of the Trieste project,

indicates that management of Adrical anticipated activities in

California, which might have created future value for Adrical.

     Based on petitioner’s testimony and the lack of evidence

herein, it has not been established that petitioner owned stock

in Adrical nor that Adrical stock became worthless in 2000.

     Petitioner has not established his entitlement to a section

165(g) capital loss in 2000 nor to the claimed capital loss

carryforward in 2001 relating to Adrical.

     Section 6651(a)(1) imposes an addition to tax for failure

to timely file a Federal income tax return, unless such failure

is due to reasonable cause and not to willful neglect.    Whether

reasonable cause exists to avoid imposition of the addition to
                                - 12 -
tax involves a question of fact.     United States v. Boyle, 469

U.S. 241, 249 n.8 (1985).     A pending criminal investigation does

not constitute reasonable cause for failing to file a tax return

when due.    Cooper v. United States, 834 F. Supp. 669, 673 (D.

N.J. 1993), affd. 9 F.3d 1539 (3d Cir. 1993).

       Under section 7491(c), respondent has the burden of

production with respect to the section 6651(a)(1) addition to

tax.    Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).    To

meet his burden of production, respondent must come forward with

sufficient evidence indicating that it is appropriate to impose

the addition to tax.    Id.   Once respondent meets that burden of

production, however, the taxpayer continues to have the burden of

proof with regard to whether respondent’s determination of the

penalty is correct.    Rule 142(a); Higbee v. Commissioner, supra.

       Respondent has satisfied his burden of production by

establishing that petitioner was required to file a tax return

for 2001 and that petitioner did not file that return until June

of 2004.

       Petitioner, at trial acknowledged that he knew that he was

required to file his 2001 Federal income tax return despite his

involvement in a criminal tax investigation.     Petitioner is

liable for the section 6651(a)(1) addition to tax.
                             - 13 -
     We have considered all arguments made herein, and, to the

extent not addressed, we conclude that they are without merit or

are irrelevant.

     To reflect the foregoing,



                                        Decision will be entered

                                 for respondent.
