                       T.C. Memo. 2001-63



                     UNITED STATES TAX COURT



 ANDREW E. BLANCHE, JR., AND CYNTHIA D. BLANCHE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 5304-96.                    Filed March 15, 2001.


     Cynthia D. Blanche, pro se.

     Candace M. Williams, for respondent.



                       MEMORANDUM OPINION


     COUVILLION, Special Trial Judge: Respondent determined

deficiencies of $3,851 and $2,058, respectively, in petitioners’

1991 and 1992 Federal income taxes.

     The issues for decision are: (1) Whether, for 1991 and 1992,

petitioners are entitled to deductions for qualified residence

interest under section 163(a) and real property taxes under

section 164(a) in connection with certain residential real
                               - 2 -


property, referred to hereafter as the Foxbriar property; (2)

whether petitioners are entitled to a casualty loss deduction

under section 165(a) for the year 1991 with respect to the

Foxbriar property; and (3) whether, for 1991, petitioners are

entitled to a nonbusiness bad debt deduction under section 166(a)

in connection with the Foxbriar property.1

     Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference.   At the time the petition was filed, petitioners'

legal residence was Cibolo, Texas.

     Prior to the years at issue, William S. Hewitt and his wife,

Peggy L. Hewitt (the Hewitts), were owners of residential real

property known as the Foxbriar property, which was located at

Cibolo, Texas.   On May 20, 1990, petitioners entered into an

earnest money contract with the Hewitts for the purchase of the

Foxbriar property.   The earnest money contract contained a lease

option addendum (the lease option), pursuant to which petitioners

began occupying the Foxbriar property on June 25, 1990, as

lessees.

     Under the lease option, petitioners were to pay to the

Hewitts $1,000 per month for 1 year, commencing July 1, 1990, and

ending June 30, 1991.   Of each $1,000 monthly payment, $250 would


     1
          Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the years at issue.
                               - 3 -


be credited to petitioners at the end of the option period, to be

applied toward the purchase price of the property.   The purchase

price for the property was to be $139,500 with a credit of $3,000

based on the $250 monthly payments by petitioners for 1 year.

The closing date for the property was August 31, 1991.

Additionally, under the earnest money contract, petitioners were

required to pay earnest money of $100 initially, $2,500 on July

1, 1990, and $1,500 on January 1, 1991.   Petitioners were also

required to obtain outside financing for the purchase of the

Foxbriar property.

     On June 19, 1990, a standard inspection report was completed

on the Foxbriar property, which listed several necessary

repairs.2   Despite repeated requests by petitioners to the

Hewitts, no repairs were made to the Foxbriar property during the

contract period, except for the roof, which an insurance company

replaced in May 1991.   Petitioners also expended approximately

$969 for plumbing repairs during the contract period.

     Petitioners made all payments required under the earnest

money contract; however, petitioners failed to purchase the

Foxbriar property on August 31, 1991, the closing date.



     2
          The items found to not be in satisfactory condition
ranged from minor problems such as a wobbly ceiling fan and a
missing filter in an air return grille to more serious problems
such as “bowed” roof structural supports and a broken diagonal
roof support.
                               - 4 -


Petitioners did not complete the purchase because they believed

that the Hewitts were required to repair the property in order to

meet city inspection codes.3   Petitioners investigated outside

financing and were advised informally by two or three mortgage

companies that financing would not be approved if the Foxbriar

property failed to meet city inspection codes.   To avoid what

they believed would be a futile gesture, petitioners never

formally applied for financing and, thus, were never approved or

denied financing.4

     The closing did not take place; consequently, the earnest

money contract expired on June 30, 1991.   Petitioners, however,

continued in possession of the Foxbriar property and continued

making the $1,000 monthly lease payments to the Hewitts.5

Petitioners made their final lease payment to Mrs. Hewitt on

April 10, 1992.   During the period from September 1991 to April



     3
          Under the earnest money contract, the Hewitts were not
responsible for any repairs exceeding $1,500 in the aggregate.
     4
          The earnest money contract stated that "On Seller’s
receipt of all loan approvals and inspection reports, Seller
shall commence repairs". Petitioners never presented the Hewitts
with any loan approval.
     5
          The lease signed pursuant to the lease option stated
that, after June 30, 1991, the lease would automatically continue
on a month-to-month basis absent written notification of
termination by either party. As of Sept. 1991, the payments were
made out to Mrs. Hewitt only, at her instruction. Mrs. Hewitt
informed petitioners that Mr. Hewitt had left her, and she had no
knowledge of his whereabouts.
                               - 5 -


1992, petitioners discussed with Mrs. Hewitt the possibility of

purchasing the Foxbriar property in its current condition by

assuming the mortgage on the property and giving Mrs. Hewitt a

$20,000 note in addition to the earnest money previously paid

under the contract.   That arrangement was never carried out.

     Sometime during May 1992, Mrs. Hewitt informed petitioners

that she had ceased making the mortgage payments on the Foxbriar

property and that the mortgage creditor, Lomas Mortgage U.S.A.

(Lomas Mortgage), would initiate foreclosure proceedings if the

delinquencies on the mortgage were not paid by June 12, 1992.

Shortly thereafter, petitioners and Mrs. Hewitt reached an

agreement for purchase of the Foxbriar property.   The terms of

the agreement were: (1) Petitioners would purchase the property

“as is”; (2) petitioners would assume the unpaid mortgage balance

of $59,703.43; (3) petitioners would assume any other

encumbrances on the property; (4) petitioners would pay the

delinquencies on the mortgage in the amount of $7,269.73; and (5)

the earnest money previously paid by petitioners would constitute

additional consideration for the property.

     An assumption agreement and deed (assumption documents) were

drafted and forwarded to Mrs. Hewitt for her signature and for

that of Mr. Hewitt.   The assumption documents were returned to

petitioners via facsimile containing only the signature of Mrs.

Hewitt, with a notarized signature date of July 2, 1992.   The
                                - 6 -


assumption documents were never signed by Mr. Hewitt, despite

petitioners’ efforts to obtain his signature.    On August 24,

1992, petitioners recorded the original of the assumption deed,

signed only by Mrs. Hewitt, with the County Clerk of Guadalupe

County, Texas.    Subsequently, petitioners began to make

substantial repairs and improvements to the Foxbriar property.

     Prior to the aforesaid events, on May 27, 1991, respondent

assessed a Federal income tax liability against Mr. Hewitt for

the 1990 tax year, which, as of March 1, 1996, totaled $25,276.20

plus the continuing accrual of interest.    On January 18, 1994,

respondent recorded a tax lien against the Foxbriar property in

Guadalupe County, Texas.

     Subsequently, respondent filed suit in the U.S. District

Court for the Western District of Texas (District Court case) to

reduce to judgment the aforementioned assessed tax liability

against Mr. Hewitt, to foreclose on the tax lien encumbering the

Foxbriar property, and to recover a judgment for any unpaid tax

on the assessment/judgment not satisfied by the sale of the

Foxbriar property.6   Defendants in the District Court case were

petitioners, Mr. Hewitt, Hank Wilson, and the mortgage creditor,

Lomas Mortgage.   Petitioners filed a counterclaim against Mr.


     6
          United States v. Blanche, 79 AFTR 2d 97-1557, 97-1 USTC
par. 50,448 (W.D. Tex. 1997), appeal dismissed as moot 169 F.3d
956 (5th Cir. 1999), rehearing en banc denied 184 F.3d 820 (5th
Cir. 1999), cert. denied 528 U.S. 986 (1999).
                                - 7 -


Hewitt for specific performance under the earnest money contract.

Mr. Hewitt filed a cross-claim against Lomas Mortgage and

petitioners, alleging a conspiracy to deprive him of the Foxbriar

property and seeking back rental payments for petitioners’

occupancy thereof.

     The District Court heard the case and later issued an

opinion and judgment in which the District Court held that "Under

Texas law, * * * [petitioners had] no valid interest in the

[Foxbriar] property which would have attached before the tax lien

was filed."7    United States v. Blanche, supra.   In other words,

the District Court held that petitioners had no legal or

equitable title to the Foxbriar property during 1991 and 1992.

Respondent contends that this holding by the District Court

precludes petitioners from asserting deductions in this case that

would depend upon petitioners' having an ownership interest in

the property.

     On their 1991 Federal income tax return, petitioners claimed

on Schedule A, Itemized Deductions (Schedule A), deductions of

$2,370 for real property taxes and $5,372 for mortgage interest

in connection with the Foxbriar property.    Additionally, on Form


     7
          The District Court did, however, award petitioners
$29,935.31 as restitution for improvements and repairs made to
the Foxbriar property as well as for amounts paid to cure the
mortgage default in 1992. That award, however, was based on
unjust enrichment and was not based on petitioners' having an
ownership interest in the property.
                                - 8 -


4797, Sales of Business Property, petitioners claimed a deduction

of $9,719 for "Loss on Real Estate Investment (Northcliffe

Subdivision)", in connection with the Foxbriar property.     On

Schedule A of their 1992 Federal income tax return, petitioners

claimed itemized deductions of $2,839 for real property taxes and

$9,102 for mortgage interest also related to the Foxbriar

property.

     In the notice of deficiency, respondent disallowed

petitioners’ 1991 itemized deductions for mortgage interest and

real property taxes in their entirety but allowed petitioners

other unrelated itemized deductions that did not exceed the

standard deduction for that year.    Consequently, petitioners were

allowed the standard deduction.    Additionally, for 1991,

respondent disallowed the capital loss of $9,719 claimed by

petitioners on Form 4797.

     For 1992, respondent disallowed $6,351 of the claimed $9,102

mortgage interest deduction and $1,469 of the claimed $2,839 real

property tax deduction.8    Respondent allowed petitioners an

additional unrelated itemized deduction; however, the allowed

itemized deductions did not exceed the standard deduction for




     8
          Respondent allowed deductions for mortgage interest and
property taxes paid in connection with the Foxbriar property for
August through December 1992 on the premise that petitioners
became personally liable to Lomas Mortgage in August 1992.
                               - 9 -


that year.   Consequently, petitioners were allowed the standard

deduction for 1992.

     Petitioners did not claim a casualty loss deduction on their

1991 Federal income tax return.   However, in their petition,

petitioners alleged they were entitled to a casualty loss for

1991 of "$19,000, subject to limitations" in connection with the

Foxbriar property.

     In an amended answer, respondent affirmatively alleged that

petitioners were collaterally estopped from claiming deductions

relating to or attributable to the Foxbriar property because the

District Court ruled that petitioners had neither legal nor

equitable ownership of the Foxbriar property during the years at

issue.   However, petitioners were effectively denied review of

the District Court's judgment because it became moot on appeal,

and their appeal was dismissed for that reason.   See supra note

6.   This Court, therefore, believes it more prudent to resolve

the issues in this case on their merits rather than on the basis

of collateral estoppel.

     The first issue for decision is whether, for the years at

issue, petitioners are entitled to deductions for qualified

residence interest and real property taxes, in connection with

the Foxbriar property, in excess of that allowed by respondent.

Section 163(a) provides that there shall be allowed as a

deduction all interest paid or accrued within the taxable year on
                                - 10 -


indebtedness.    Section 163(h)(1), however, provides that, in the

case of a taxpayer other than a corporation, no deduction shall

be allowed for personal interest paid or accrued during the

taxable year.    Section 163(h)(2) defines "personal interest" to

mean any interest allowable as a deduction other than, inter

alia, "any qualified residence interest".    Sec. 163(h)(2)(D).

Thus, qualified residence interest is deductible under section

163(a).   The term "qualified residence interest" is defined, in

pertinent part, in section 163(h)(3)(A)(i), as any interest paid

or accrued during the taxable year on "acquisition indebtedness

with respect to any qualified residence of the taxpayer".

     The "indebtedness" for purposes of section 163 must, in

general, be an obligation of the taxpayer and not an obligation

of another.     Golder v. Commissioner, 604 F.2d 34, 35 (9th Cir.

1979), affg. T.C. Memo. 1976-150; Smith v. Commissioner, 84 T.C.

889, 897 (1985), affd. without published opinion 805 F.2d 1073

(D.C. Cir. 1986); Hynes v. Commissioner, 74 T.C. 1266, 1287

(1980).   However, section 1.163-1(b), Income Tax Regs., provides,

in pertinent part:


     Interest paid by the taxpayer on a mortgage upon real estate
     of which he is the legal or equitable owner, even though the
     taxpayer is not directly liable upon the bond or note
     secured by such mortgage, may be deducted as interest on his
     indebtedness. * * *
                               - 11 -


In Golder v. Commissioner, supra, the Court of Appeals for the

Ninth Circuit, in affirming the Tax Court, stated that section

1.163-1(b), Income Tax Regs., does not create an exception to the

rule of section 163(a) that interest is deductible only with

respect to the indebtedness of the taxpayer but, rather, simply

recognizes the economic substance of nonrecourse borrowing.

     Additionally, as required by section 1.163-1(b), Income Tax

Regs., the taxpayer must be the "legal or equitable owner" of the

property.   Where the taxpayer has not established legal,

equitable, or beneficial ownership of mortgaged property, the

courts generally have disallowed the taxpayer a deduction for the

mortgage interest.   See Bonkowski v. Commissioner, T.C. Memo.

1970-340, affd. 458 F.2d 709 (7th Cir. 1972); Song v.

Commissioner, T.C. Memo. 1995-446; Estate of Broadhead v.

Commissioner, T.C. Memo. 1966-26, affd. 391 F.2d 841, 848 (5th

Cir. 1968).

     This record reflects that petitioners had no legal

obligation to Lomas Mortgage with respect to the Foxbriar

property until August 1992.9   Until such time, only the Hewitts



     9
          In the notice of deficiency, respondent allowed
petitioners a deduction for qualified residence interest paid by
petitioners in connection with the Foxbriar property from August
through December 1992. However, since the amount of such allowed
interest deduction, coupled with the other allowed itemized
deductions for 1992, failed to exceed the standard deduction,
petitioners were allowed the standard deduction for that year.
                                - 12 -


were liable to Lomas Mortgage for payment of the mortgage on the

Foxbriar property.     Moreover, at least through May 1992,

petitioners paid no amounts to Lomas Mortgage; rather, from July

1990 through April 1992, petitioners were making lease payments

of $1,000 per month directly to the Hewitts.     Thus, it cannot be

said that petitioners paid any interest on the Foxbriar property

at least through May 1992.

     Petitioners contend that the $5,372 deducted on their 1991

return for mortgage interest represents one-half of the total

interest paid on the Foxbriar property for 1991.     The record in

this case is unclear as to how petitioners determined the amount

of interest paid on the Foxbriar property for that year, and the

manner in which petitioners calculated that they were entitled to

a deduction for one-half of that amount.     The record is explicit,

however, that petitioners paid no interest on the Foxbriar

property during 1991.     The record shows that, during 1991,

petitioners paid nothing more than lease payments (and earnest

money payments) directly to the Hewitts in connection with the

Foxbriar property.10    Whether or not the Hewitts used the monthly

lease payments from petitioners to make mortgage payments on the

Foxbriar property is of no consequence in this case.     The Federal


     10
          It is notable that, on Schedule A of their 1991 return,
petitioners reported that the $5,372 in mortgage interest for
which they claimed a deduction was paid to Peggy L. Hewitt of
Tacoma, Washington.
                                - 13 -


income tax benefits of mortgage interest payments do not flow

through to petitioners from the Hewitts.      The only taxpayer

entitled to a mortgage interest deduction on the Foxbriar

property for 1991 is the taxpayer who actually paid the interest

as the debtor to Lomas Mortgage.     Petitioners were not the

debtors during 1991 and did not pay the interest during that

year.    A similar analysis applies to the deduction of real estate

taxes for 1991.     See discussion, infra.

        For 1992, petitioners claimed a deduction for all of the

mortgage interest paid on the Foxbriar property during that year.

However, through at least April 1992, petitioners paid only

$1,000 in monthly rent to Mrs. Hewitt.       As discussed previously,

petitioners are not entitled to mortgage interest deductions (or

real property tax deductions) in connection with these lease

payments because they did not actually pay any mortgage interest

(or real property taxes) through at least May 1992.

        Sometime after May 1992, petitioners paid $7,269.73 to Lomas

Mortgage to cure the mortgage default.       However, if a taxpayer

pays mortgage interest that accrued prior to the date upon which

the taxpayer becomes the legal or equitable owner of the subject

property, that amount is not currently deductible.      See Koehler

v. Commissioner, T.C. Memo. 1978-381.     Moreover, it is notable

that the District Court awarded petitioners restitution for

amounts paid to cure the mortgage default in 1992.
                               - 14 -


     Not until August 1992 did petitioners begin making regular

mortgage payments directly to Lomas Mortgage in connection with

the Foxbriar property.   From August through December 1992,

petitioners actually paid mortgage interest and real property

taxes on the Foxbriar property.    Respondent allowed petitioners

the corresponding deductions for these payments.

     The Court deems it prudent to also examine petitioners'

ownership interest, if any, in the Foxbriar property during the

years at issue.    State law determines the nature of property

rights, and Federal law determines the appropriate tax treatment

of those rights.   See United States v. National Bank of Commerce,
472 U.S. 713, 722 (1985); United States v. Rodgers, 461 U.S. 677,

683 (1983); Aquilino v. United States, 363 U.S. 509, 513 (1960).

Thus, whatever rights or interests, if any, petitioners held in

the Foxbriar property during the years at issue must be

determined by applying applicable Texas law.    It is well settled

under Texas law that legal title to real property does not pass

to a purchaser under a contract of sale until the deed to the

property is delivered.    Leeson v. City of Houston, 243 S.W. 485,

488 (Tex. Commn. App. 1922, judgment adopted).    The record

reflects that no deed to the Foxbriar property was delivered to

petitioners prior to August 1992.    Thus, the Court finds that

petitioners had no legal title to the Foxbriar property prior to

August 1992.
                              - 15 -


     However, a taxpayer becomes the equitable owner of property

when he assumes the benefits and burdens of ownership.   See Baird
v. Commissioner, 68 T.C. 115, 124 (1977).    The time at which a

taxpayer has assumed the benefits and burdens of ownership is a

question of fact in each case.   See Koehler v. Commissioner,

supra.

     Petitioners contend that they were equitable owners of the

Foxbriar property during both of the years at issue.   Petitioners

argue that they had an option contract with the Hewitts for the

purchase of the Foxbriar property, which became an executory

contract for sale/purchase upon petitioners’ exercise of their

option.   At that time, petitioners argue, they became equitable

owners of the Foxbriar property.   Petitioners contend they became

equitable owners of the property no later than June 30, 1991, by

their acts of "signing the earnest money contract and paying the

$100 and $2,500, setting the closing date, and subsequent acts of

making all monthly payments and paying the additional $1,500".

Petitioners contend that this argument is fortified by the fact

that they took possession of the property in June 1990 and

maintained possession through 1997.    In support of their claim to

equitable title, petitioners rely on the Texas Supreme Court case

of Sinclair Ref. Co. v. Allbritton, 218 S.W.2d 185 (Tex. 1949).

     Petitioners’ reliance on the Sinclair Ref. Co. case is

misplaced.   The contract at issue in Sinclair Ref. Co. was a

lease contract containing a purchase option clause, which gave
                              - 16 -

the lessee a right to purchase the leased property under certain

conditions and within a certain time limitation.   The lease

contract also contained a purchase refusal clause, which gave the

lessor the right to notify the lessee of a third-party offer to

purchase the property.   The lessee then had a certain time period

in which to purchase the property on the same terms offered by

the third party.   If the lessee failed to purchase, the lessor

then had a right to sell the property to the third party, subject

to the leasehold interest of the lessee.   During the term of the

lease (which had been properly extended under the terms of the

contract), the lessee mailed a proper notification form stating

that it exercised its purchase option.   Four days later, the

lessor notified the lessee of a bona fide purchase offer from a

third party, which was $5,500 higher than the purchase option

price.   The issue before the court was whether the delivery of

the lessee’s notice formed a vendor/purchaser relationship

between the parties and thus nullified the provisions of the

purchase refusal clause.   The Supreme Court of Texas held that,

under the terms of that particular lease contract, the act of the

lessee’s giving proper and valid notice to the lessor did create

a valid and enforceable contract for a sale between the lessor

and the lessee, and, thus, the lessee, upon tender of the

purchase price, was entitled to specific performance under the

terms of the purchase option clause.

     In the instant case, petitioners and the Hewitts entered

into a contract for the sale of the Foxbriar property, with an
                                - 17 -

option for petitioners to lease the property prior to the closing

date, rather than an option to purchase.     The language of the

earnest money contract bound petitioners to purchase and the

Hewitts to sell the Foxbriar property on or before the closing

date.    This is evidenced by the terms of the contract requiring

that, in the event of default on the part of the purchaser, the

seller could either sue for specific performance or retain the

earnest money as liquidated damages.     It is well settled under

Texas law that a contract for sale exists when the seller has

both of these remedies.    See Gala Homes, Inc. v Fritz, 393 S.W.2d
409, 411 (Tex. Civ. App. 1965)(citing Paramount Fire Ins. Co. v.

Aetna Cas. & Surety Co., 353 S.W.2d 841, 843 (Tex. 1962) and Moss

v. Wren, 113 S.W. 739 (Tex. 1908)); Tabor v. Ragle, 526 S.W.2d

670, 675 (Tex. Civ. App. 1975); Broady v. Mitchell, 572 S.W.2d

36, 40 (Tex. Civ. App. 1978).

        The holding in Sinclair Ref. Co. v. Allbritton, supra, with
respect to a purchase option in a lease contract is inapplicable
to the contract for sale in the instant case.     Sinclair Ref. Co.

addresses the conditions under which a lease contract with an

option to purchase becomes a contract for sale.     In the instant

case, the issue is not whether petitioners entered into a valid

contract for purchase of the Foxbriar property.     Clearly, they

did so.     Rather, the question is whether petitioners obtained

equitable title to the Foxbriar property.     Sinclair Ref. Co. does

not address that question.     Moreover, the holding in Sinclair
                              - 18 -

Ref. Co. was made specific to the terms of the contract at issue
therein and would not apply generally to all contracts,

particularly not to a contract for sale as existed in this case.

     Petitioners also rely on the case of Boykin v. Commissioner,

344 F.2d 889 (5th Cir. 1965), for the proposition that, although

legal title to real property does not pass to a purchaser under a

contract of sale until actual delivery of a deed to the property,

a purchaser is vested with equitable title from the date of the

contract for sale or from the date the purchaser takes

possession.   Petitioners’ reliance on Boykin is misplaced.    In

Boykin, the Court of Appeals for the Fifth Circuit (Fifth

Circuit), to which an appeal in this case would lie, stated:


     under Texas law, a purchaser of realty ordinarily gets
     equitable title with the execution of a binding
     contract of sale. [Footnote omitted.] Of course it is
     often said that equitable title does not pass where the
     contract is by its terms expressly conditional. North
     Texas Realty & Construction Co. v. Lary, Tex. Civ.
     App., writ refused, 1911, 136 S.W. 843; 52 Tex. Jur. 2d
     Specific Performance § 48. And pointing out that "A
     contract may be conditional in its inception as to one
     party and unconditional as to the other," that text
     speaks in terms of the right to specific performance
     not being available prior to the time the equitable
     title passes. Ibid. In other words, the right to
     specific performance resting on an equitable right
     frequently measures the time the equitable right comes
     into being. [Emphasis added.]


Boykin v. Commissioner, supra at 892.   Under Texas law, a party

to a contract is not entitled to specific performance where that

party materially breaches the contract by failing to meet a
                               - 19 -

contract requirement.   See Cowman v. Allen Monuments, Inc., 500

S.W.2d 223, 226 (Tex. Civ. App. 1973); Hudson v. Wakefield, 645

S.W.2d 427, 430 (Tex. 1983).   In the case here, petitioners

materially breached the earnest money contract by failing even to

attempt to obtain outside financing, and, thus, they were not

entitled to specific performance.11     Since, under Texas law, the

right to specific performance resting on an equitable right

measures the time the equitable right comes into being, it is

clear that equitable title to the Foxbriar property did not pass

to petitioners prior to August 1992.

     Moreover, the facts and circumstances surrounding the

contract in Boykin v. Commissioner, supra, are clearly

distinguishable from those in the instant case.     Under the

contract at issue in the Boykin case, the “taxes for the current

year, current rents, insurance, interest (if any), and delay

rentals on oil and/or gas leases” were to be prorated as of the


     11
          Petitioners assert that their failure to formally apply
for financing resulted from the Hewitt’s failure to make repairs
that petitioners believed were necessary to comply with city
inspection codes. As stated previously, supra note 4, the
earnest money contract provided that "On Seller’s receipt of all
loan approvals and inspection reports, Seller shall commence
repairs". Petitioners never presented the Hewitts with any loan
approval (or any loan refusal) because they never formally
applied for financing. The Hewitts were required to do nothing
further under the contract until petitioners applied for
financing and were either approved or denied the same.
Petitioners’ failure to apply for outside financing and to tender
the purchase price constituted a breach of the earnest money
contract, regardless of their reasons therefor and, thus,
deprived them of the right to specific performance by that
contract.
                                - 20 -

date of the contract, rather than the closing date.      The

purchaser agreed to lease back the property to the seller, for

agricultural purposes, for an annual cash rent of $2,500, which

was accomplished.    At closing, the purchaser was credited an

amount of rent for the farm for the precise number of days from

execution of the contract to the closing date.    Additionally, the

purchaser paid interest on his note to seller from the date of

the contract.    Considering all the aforementioned facts, the

Fifth Circuit stated that the contract with the addendum and the

"conduct of the parties reveal that for all practical purposes *

* * [the purchaser] was possessed of the benefits and burdens of

ownership at the critical time [i.e., execution of the

contract]."     Boykin v. Commissioner, supra, at 894.

     In sharp contrast, the earnest money contract in the instant

case expressly provided:


     taxes, flood and hazard insurance * * * , rents,
     maintenance fees, interest on any assumed loan and any
     prepaid unearned mortgage insurance premium which has
     not been financed as part of any assumed loan * * *
     shall be prorated through the Closing Date. If Buyer
     elects to continue Seller’s insurance policy, it shall
     be transferred at closing. [Emphasis added.]


Additionally, the contract provided that, if the Foxbriar

property was damaged or destroyed by fire or other casualty, the

Hewitts were to restore the property to its previous condition no

later than the closing date.    In other words, until the time of
                              - 21 -

closing, the Hewitts bore the risk of loss with respect to the

property.

     Although petitioners had possession of the property as

tenants or lessees, they were not entitled to possession as

owners until the closing date.   Under the residential lease

signed by the parties, petitioners were prohibited from: (1)

Subleasing or assigning the Foxbriar property; (2) making any

improvements to the property without written permission; (3)

repairing a vehicle on the property without written permission;

(4) conducting any business on the property, including child

care; (5) permitting more than four vehicles on the property

without written permission; and (6) storing a nonoperative

vehicle on the property.   Moreover, the terms and conditions

under which petitioners eventually purchased (or attempted to

purchase) the property from Mrs. Hewitt differed from those

originally set out in the earnest money contract.   Analyzing the

facts of the instant case under Texas law and the Fifth Circuit’s

reasoning in Boykin v. Commissioner, 344 F.2d 889 (5th Cir.
1965), the conduct of the parties fails to suggest that

petitioners, for practical purposes, were possessed of the

benefits and burdens of ownership prior to August 1992.

     In determining whether the benefits and burdens of ownership

have passed to a purchaser, this Court has often considered

whether the purchasers: (1) Had the right to possess the property

and to enjoy the use, rents, and profits thereof; (2) had the
                               - 22 -

duty to maintain the property; (3) were responsible for insuring

the property; (4) bore the risk of loss of the property; (5) were

obligated to pay taxes, assessments, and charges against the

property; (6) had the right to improve the property without the

seller’s consent; and (7) had the right to obtain legal title at

any time by paying the balance of the purchase price.     See Derr
v. Commissioner, 77 T.C. 708, 724-725 (1981); Ryan v.

Commissioner, T.C. Memo. 1995-579.      Petitioners had the right to

possess the property but were prohibited from renting out or

subleasing the property.   Petitioners had a duty, as lessees, to

maintain the property in a reasonable condition and to repair

certain damage caused by them; however, petitioners were not

required to insure the property or bear the risk of loss.

Petitioners were not obligated to pay taxes, assessments, or

charges against the property, nor did they have the right to

improve the property without written consent.     Analyzing these

factors, petitioners did not possess the benefits and burdens of

ownership prior to August 1992.   See also Koehler v.

Commissioner, T.C. Memo. 1978-381.

     On this record, the Court finds that petitioners were mere

lessees of the Foxbriar property and did not have the benefits

and burdens of ownership so as to make them equitable owners of

the property until August 1992, the time at which they assumed

liability to Lomas Mortgage.   Thus, on this record, the Court
                               - 23 -

holds that petitioners held no legal or equitable title to the

Foxbriar property prior to August 1992.

     Petitioners’ lack of any legal or equitable ownership

interest in the Foxbriar property prior to August 1992 precludes

their entitlement to a deduction for qualified residence interest

under section 163(a) during this time.    As stated previously,

section 1.163-1(b), Income Tax Regs., requires that the taxpayer

be the "legal or equitable owner" of the property.

     That same rationale applies to the real estate property

taxes.    Real property taxes are generally deductible in the

taxable year within which they are paid or accrued.    See sec.

164(a)(1).    However, no deduction is allowed to the extent that

real property taxes are treated as imposed on another taxpayer.

See sec. 164(c)(2); sec. 1.164-1(a), Income Tax Regs.; Loria v.

Commissioner, T.C. Memo. 1995-420.

     As stated earlier, petitioners held no legal or equitable

title to the Foxbriar property prior to August 1992.    Moreover,

there is no evidence in the record to suggest that the real

property taxes at issue were paid by or imposed on anyone other

than the Hewitts through August 1992.12



     12
          In the notice of deficiency, respondent allowed
petitioners a deduction for real property taxes paid by
petitioners in connection with the Foxbriar property from Aug.
through Dec. 1992. However, since the amount of such allowed
property tax deduction, coupled with the other allowed itemized
deductions for 1992, failed to exceed the standard deduction,
petitioners were allowed the standard deduction for that year.
                                - 24 -

     Consequently, the Court holds that, for the years at issue,

petitioners are not entitled to deductions for qualified

residence interest or real estate taxes in connection with the

Foxbriar property in excess of that allowed by respondent for

1992.     Respondent is sustained on this issue.

     The second issue for decision is whether petitioners are

entitled to a casualty loss deduction for 1991 in connection with

the Foxbriar property.     In December 1991, the swimming pool

located on the Foxbriar property was damaged due to excessive

rains and flooding.     This damage was not repaired until 1994,

when petitioners expended $15,650 to repair the damage and make

further improvements to the pool.13      As a part of its judgment,

the District Court ordered that petitioners be reimbursed from

the foreclosure proceeds of the Foxbriar property $29,935.31,

which would prime the Federal tax lien.      That award included the

following amounts relating to petitioners’ claimed casualty loss:


        Pool improvements/repair                 $15,650.00
        Fence repair/replacement                     637.00
        Yard clearing/cleaning                       293.50
          Total                                  $16,580.50




     13
          The invoice from the pool company states that
petitioners paid $15,650 for repairs and improvements to the
pool. Petitioners also submitted invoices for $637 for fence
installation, $250 for yard cleaning around yard and pool, and
$43.50 for trash hauling. The Court does not consider these
expenses as repairs to the pool, particularly since “clean site”
was a task included in the contract with the pool company.
                               - 25 -

     For the year 1991, petitioners did not claim a casualty loss

on their return; however, in their petition they alleged

entitlement to a casualty loss deduction of $19,000, subject to

limitations.   On brief, petitioners claimed this item to be

$16,580.50 as allowed by the District Court.    The record contains

assertions by petitioners that the District Court award was

discharged in bankruptcy by Mr. Hewitt; however, no evidence was

presented to show any such bankruptcy discharge of this debt or

the timing thereof.    Moreover, no evidence was presented to show

whether the proceeds from the foreclosure sale satisfied this

claim that primed the Federal tax lien.

     Section 165(a) provides that there shall be allowed as a

deduction any loss sustained during the taxable year and not

compensated for by insurance or otherwise.    In particular,

section 165(c)(3) allows a deduction to an individual for loss of

property not connected with a trade or business or a transaction

entered into for profit, if such loss arises from fire, storm,

shipwreck, or other casualty, or from theft.    Personal casualty

or theft losses are deductible only to the extent that the loss

exceeds $100 and 10 percent of adjusted gross income.    See sec.

165(h)(1) and (2).    Such losses, moreover, are deductible as

itemized deductions on Schedule A of the taxpayer's return.      In

this case, petitioners do not contend that the subject property

was ever used in a trade or business or a transaction entered

into for profit.
                               - 26 -

      A loss may be deducted only by the taxpayer who sustained

it.   If the taxpayer is not the owner of the property, the

taxpayer generally cannot claim a deduction for a casualty loss

relating to that property.   See Wayno v. Commissioner, T.C. Memo.
1992-53, affd. without published opinion 12 F.3d 1111 (9th Cir.

1993).   This Court has held that petitioners held no legal or

equitable title to the Foxbriar property during either of the

years at issue.   This includes the swimming pool located on the

Foxbriar property.

      Moreover, the measure of a casualty loss, as provided by

section 1.165-7(b)(1), Income Tax Regs., is generally the lesser

of (1) the fair market value of the property immediately before

the casualty reduced by the fair market value of the property

immediately after the casualty, or (2) the amount of the adjusted

basis prescribed in section 1.1011-1, Income Tax Regs., for

determining loss from the sale or other disposition of the

property.    The taxpayer bears the burden of proving the amount of
his basis.    See Millsap v. Commissioner, 46 T.C. 751, 760 (1966),

affd. on other issues 387 F.2d 420 (8th Cir. 1968).    A loss

cannot be computed where the taxpayer’s basis in the property is

not proven.   See id.; Fisher v. Commissioner, T.C. Memo. 1986-

141; sec. 1.165-1(c), Income Tax Regs.    Petitioners held no basis

in the Foxbriar property during 1991, the year in which the

damage to the swimming pool occurred.    Moreover, the record is

devoid of any evidence that would tend to indicate petitioners
                               - 27 -

made any capital expenditure in connection with the Foxbriar

swimming pool prior to 1994.

     Petitioners rely on Rev. Rul. 73-41, 1973-1 C.B. 74, for the

proposition that casualty loss deductions can be allowed to mere

lessees.   Petitioners’ reliance on this revenue ruling is

misplaced.   The taxpayer in the cited revenue ruling was a lessee

of residential property who, under the terms of the lease, was

required to surrender the property in good condition at the

termination of the lease.   A fire severely damaged much of the

property just prior to the lease expiration, and the taxpayer

failed to surrender the property in good condition.        The taxpayer

denied liability for the damage, and the lessor sued.       A judgment

was rendered against the taxpayer.      The ruling held that the

"loss sustained upon payment of the judgment was directly

attributable to the fire", and, thus, the taxpayer was entitled

to a casualty loss deduction with respect thereto.

     Petitioners in the instant case were not required, under

their contract with the Hewitts, to repair the damage to the

swimming pool and had no judgment rendered against them with

respect to the swimming pool damage, an element which appears to

have been essential in the revenue ruling.      Moreover, it is well

established that "the authoritative sources of Federal tax law

are in the statutes, regulations, and judicial decisions and not

in * * * informal [IRS] publications."      Zimmerman v.
Commissioner, 71 T.C. 367, 371 (1978), affd. without published
                                - 28 -

opinion 614 F.2d 1294 (2d Cir. 1979); accord Adler v.
Commissioner, 330 F.2d 91, 93 (9th Cir. 1964); Green v.

Commissioner, 59 T.C. 456, 458 (1972); Aldridge v. Commissioner,

51 T.C. 475, 482 (1968).

     Finally, this Court has previously stated that "damage to

property which one is leasing entitles one to a deduction for the

loss sustained to the leasehold interest."    Fryer v.

Commissioner, T.C. Memo. 1974-77.    However, petitioners had no

basis in their leasehold interest on the Foxbriar property.     See

Fryer v. Commissioner, supra.    Thus, the Court is unable to

compute or allow petitioners a deduction for any loss to a

leasehold interest.   See Millsap v. Commissioner, supra; Fisher

v. Commissioner, supra; sec. 1.165-1(c), Income Tax Regs.

     On this record, the Court holds that petitioners are not

entitled to deduct a casualty loss for 1991 in connection with

the Foxbriar property.

     The final issue for decision is whether petitioners are

entitled to a deduction for a nonbusiness bad debt loss in

connection with the Foxbriar property for 1991.   Petitioners

claimed on their 1991 Federal income tax return, on Form 4797,

Sales of Business Property, a loss of $9,719 in connection with

the Foxbriar property.   That amount consisted of the following

items:
                                  - 29 -

    Earnest money payments made on 7/1/90 and l/1/91        $4,000
    The $250 portion of the lease payments each month
     that were to be applied to the purchase price           4,750
    Plumbing repairs made during contract period              969
     Total                                                  $9,719



On brief, petitioners increased the amount claimed to $9,819 to

include the $100 amount paid when the earnest money contract was

entered into.   Although the amount claimed on their 1991 return

was based on a loss from the sale or exchange of a capital asset,

petitioners on brief contend that the $9,819 was a nonbusiness

bad debt under section 166 instead of a loss from the sale or

exchange of a capital asset.

     In general, section 166(a) allows a deduction for any debt

that becomes worthless during the taxable year.         However, section

166 distinguishes between business bad debts and nonbusiness bad

debts.   See sec. 166(d); sec. 1.166-5(b), Income Tax Regs.

Business bad debts may be deducted against ordinary income to the

extent that such debts become wholly or partially worthless

during the year.    In contrast, nonbusiness bad debts may be

deducted, but only as short-term capital losses, and only if the

debts are wholly worthless in the year claimed.         Petitioners

acknowledge that the claimed debt would be characterized as a

nonbusiness bad debt.

     A deduction for a bad debt is limited to a bona fide debt.

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

defined as one that arises from a debtor-creditor relationship
                               - 30 -

based upon a valid and enforceable obligation to pay a fixed or

determinable sum of money.   See sec. 1.166-1(c), Income Tax Regs.

A taxpayer must establish the validity of a debt before any

portion of it may be deducted under section 166.   See American
Offshore, Inc. v. Commissioner, 97 T.C. 579, 602 (1991); sec.

1.166-1(c), Income Tax Regs.

     With respect to the money paid to the Hewitts under the

earnest money contract,14 petitioners breached the earnest money

contract with the Hewitts, and petitioners were, therefore, not

entitled to a recovery of those moneys under the terms of the

contract.   Those moneys were forfeited as liquidated damages to

the Hewitts when petitioners breached the contract.   Moreover,

the Hewitts were not unjustly enriched by the payments under the

contract because petitioners had a contractual duty to pay those

amounts, and there was a possibility those moneys would be

forfeited if petitioners breached the contract.    Therefore, the

Court finds that those moneys clearly did not constitute a bona

fide debt owed by the Hewitts to petitioners.

     With respect to the monthly payments made by petitioners to

Mrs. Hewitt and Lomas Mortgage after the expiration of the

earnest money contract, petitioners have not shown that they

constituted more than fair rental value payments for petitioners’



     14
          This includes the $4,100 in earnest money payments as
well as the $250 portions of the $1,000 monthly payments made
prior to the expiration of the earnest money contract, which were
to have been applied toward the purchase price.
                              - 31 -

occupancy of the Foxbriar property after the expiration of the

earnest money contract and also during the time they believed

they were assuming the property.   Thus, the Court finds that

these moneys did not constitute a bona fide debt owed by the

Hewitts to petitioners.

     With respect to the $969 in plumbing repairs, petitioners

had a potential claim for reimbursement of these moneys in 1991.

This amount was included as a part of the $29,935.31 awarded to

petitioners in the 1997 District Court decision as restitution

for improvements and repairs made to the Foxbriar property.

Thus, the $969, among other amounts, gave rise to a bona fide

debt owed to petitioners by the Hewitts (that was reduced to

judgment) in 1997 rather than in 1991.   There is insufficient

evidence in the record to determine whether or not this debt

became worthless and, if so, in what year.15   Also, as noted

earlier, the proceeds from the foreclosure sale were supposed to

have covered this item.   This Court is certain, however, that the

$969 was not a worthless debt in 1991 or 1992, and this Court’s

review of petitioners’ tax liability is limited to the years at

issue in this case.




     15
          Vague assertions were made by petitioners that Mr.
Hewitt discharged this debt in bankruptcy; however, no indication
was given as to the year in which the debt was discharged, and no
documentary evidence was offered to prove the discharge.
                             - 32 -

     On this record, the Court holds that petitioners are not

entitled to the claimed nonbusiness bad debt deduction for 1991.




                                        Decision will be entered

                                   for respondent.
