                            T.C. Memo. 1998-182



                          UNITED STATES TAX COURT



             CARL W. AND BARBARA H. PATTERSON, Petitioners v.
               COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 10583-96.                Filed May 18, 1998.



        Carl W. Patterson and Barbara H. Patterson, pro sese.1

        Gregory M. Hahn, for respondent.

               MEMORANDUM FINDINGS OF FACT AND OPINION

        ARMEN, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.2


        1
       At the trial of this case, petitioners were represented by
Robert E. Kovacevich, an attorney admitted to practice before
this Court. After trial, however, Mr. Kovacevich was granted
leave to withdraw as counsel, and petitioners filed their brief
on a pro se basis.
        2
            Unless otherwise indicated, all section references are to
                                                        (continued...)
                                - 2 -

     Respondent determined a deficiency in petitioners' Federal

income tax for the taxable year 1992 in the amount of $4,339.

     The issue for decision is whether a certain loss, which

respondent concedes is deductible, was incurred in 1992 as

petitioners contend.

     The amount of miscellaneous itemized deductions to which

petitioners are entitled is a mechanical matter, the resolution

of which is solely dependent on our disposition of the disputed

issue.   See sec. 67(a).

                           FINDINGS OF FACT

     Some of the facts have been stipulated, and they are so

found.   Petitioners resided in Lynnwood, Washington, at the time

when their petition was filed with the Court.

     Carl Patterson (petitioner) has been actively engaged in the

commercial real estate market for approximately 40 years.

     In 1990, petitioner began to consider the possibility of

acquiring commercial real estate in Houston, Texas.     As part of

his investigation of such property, petitioner learned that

Skylane Apartment Projects (Skylane Apartments) was for sale by

its owner, Darby Suiter (Mr. Suiter).

     Petitioner requested and received from Mr. Suiter a picture

and outline of Skylane Apartments.      Thereupon, petitioner began



     2
      (...continued)
the Internal Revenue Code in effect for 1992, the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 3 -

evaluating the investment potential of Skylane Apartments.      At

the same time, petitioner also considered different options for

obtaining real estate financing in Texas.    Shortly thereafter,

petitioner traveled to Houston to visit Skylane Apartments.

     On June 9, 1990, petitioner signed an "Earnest Money

Contract" (the Earnest Money Contract) to purchase Skylane

Apartments for $10,200,000.    Petitioner did not pay any money to

Mr. Suiter upon execution of the Earnest Money Contract.

     The Earnest Money Contract provided that the closing for the

sale of Skylane Apartments was to occur on or before August 8,

1990, 60 days after the Earnest Money Contract was signed.       If

the closing for the sale did not occur by that time, then the

Earnest Money Contract provided that the parties would be

released from the agreement.    In addition, the Earnest Money

Contract was subject to the purchaser obtaining financing.

     At the time that the Earnest Money Contract was signed,

petitioner knew that real estate market conditions in Texas were

poor and that it would be difficult to obtain financing for the

purchase of Skylane Apartments.    Although petitioner pursued

several different financing options, petitioner was unsuccessful

in obtaining financing by August 8, 1990, and the sale of Skylane

Apartments did not close.    Thus, the Earnest Money Contract

expired on August 8, 1990.

     Shortly after its expiration, petitioner requested that the

Earnest Money Contract be reinstated without changes and the
                                - 4 -

closing date extended.   Mr. Suiter agreed to extend the deadline

for the closing if petitioner signed an addendum to the Earnest

Money Contract (First Addendum).   On August 30, 1990, petitioner

signed the First Addendum, and the deadline for the closing was

extended to October 19, 1990.

     Pursuant to the First Addendum, the Earnest Money Contract

was not subject to petitioner's obtaining financing.   Indeed,

petitioner represented therein that financing had already been

obtained.

     The First Addendum required petitioner to tender $30,000 to

the Stewart Title Co. to be deposited in escrow.   In the event of

default by petitioner, the First Addendum provided that Mr.

Suiter's sole remedy would be the receipt of the $30,000 deposit.

     The First Addendum also contained certain disclaimers.    The

First Addendum warned:

     SELLER IS CONVEYING THE PREMISES AS IS WHERE IS. ALL
     WARRANTIES OF EVERY KIND WITH RESPECT TO THE PREMISES
     ARE HEREBY DISCLAIMED INCLUDING BUT WITHOUT LIMITING
     THE WARRANTY OF MERCHANTABILITY AND HABITABILITY.
     BUYER ACKNOWLEDGES THAT INFORMATION, FINANCIAL AND
     BUSINESS OPERATION RECORDS FURNISHED TO BUYER BY SELLER
     REGARDING SELLER'S BUSINESS OPERATIONS ARE WITHOUT
     WARRANTIES EXPRESS OR IMPLIED ALL OF WHICH IS
     DISCLAIMED.

The First Addendum also stated:

          Seller disclaims all representations and warranties
     of every kind regarding the premises, Seller's records,
     and/or Seller's business operations for the premises
     except those specifically stated in this Addendum.
                                - 5 -

     Pursuant to the First Addendum, petitioner paid $30,000 to

Stewart Title Co.    Petitioner then continued to seek financing

for the purchase of Skylane Apartments.

     By October 19, 1990, petitioner was unable to obtain

financing for the purchase of Skylane Apartments, and the Earnest

Money Contract expired once again.      At this time, petitioner

thought that he still could obtain financing for the purchase of

Skylane Apartments.    Petitioner again convinced Mr. Suiter to

extend the closing date of the Earnest Money Contract, this time

from October 19, 1990 to November 19, 1990.      As consideration for

extending the closing date, petitioner agreed to tender to Mr.

Suiter the $30,000 previously deposited in escrow with Stewart

Title Co.   By letter dated October 22, 1990, petitioner

authorized Stewart Title Co. to disburse $30,000 to Mr. Suiter as

consideration for extending the closing date of the Earnest Money

Contract from October 19, 1990 to November 19, 1990.

     Although petitioner continued to seek financing for the

purchase of Skylane Apartments, petitioner was once again

unsuccessful.   The sale of Skylane Apartments did not close by

November 19, 1990.    Once again, petitioner requested that Mr.

Suiter extend the closing date.

     Mr. Suiter ultimately agreed to extend the closing date for

an additional 30 days.    However, Mr. Suiter required petitioner

to sign a new addendum to the Earnest Money Contract (Second

Addendum) and pay a $25,000 fee.    In a letter dated November 20,
                                 - 6 -

1990, Mr. Suiter, through his attorney William Boyd (Mr. Boyd),

expressed some reluctance about agreeing to another extension of

the closing date.   Mr. Boyd stated in his letter:

          Carl, Darby would prefer to terminate the
     Contract. He is concerned that you will not be
     able to raise the down payment and thus lose the
     $25,000.00 extension payment. You have insisted
     that you can close by December 19th. Darby has
     reluctantly agreed to this extension but will not
     be inclined to grant further extensions. Please
     consider all of this carefully before spending
     your $25,000.

In the same letter, Mr. Boyd indicated that Skylane Apartments

were averaging 82-85 percent occupancy.    However, Mr. Boyd

warned:

     You are required not to rely on this information but
     to conduct your own independent analysis of these
     matters.

     Petitioner signed the Second Addendum and paid the $25,000

extension fee by money order dated November 26, 1990.    According

to the Second Addendum, the sale price of Skylane Apartments

remained at $10,200,000.   However, a cash downpayment in the

amount of $2,550,000 was required, and the remaining portion of

the purchase price was to be financed by Mr. Suiter.    Pursuant to

the Second Addendum, the sale of Skylane Apartments was required

to close by December 19, 1990.    In the event of default by

petitioner, the seller's only remedy would be termination of the

contract or specific performance.    In addition, the Second

Addendum stated:

     Buyer has had ample opportunity to inspect the books
     and records of Seller and the premises and have
                                - 7 -

     experts selected by Buyer to inspect the books,
     records and premises. SELLER IS CONVEYING THE
     PREMISES AS IS WHERE IS. ALL WARRANTIES OF EVERY
     KIND WITH RESPECT TO THE PREMISES, THE FINANCIAL
     CONDITION OF THE PREMISES, THE BOOKS AND RECORDS
     OF SELLER, PROFIT AND LOSS STATEMENTS, BALANCE
     SHEETS, ARE HEREBY DISCLAIMED INCLUDING BUT
     WITHOUT LIMITING THE WARRANTY OF MERCHANTABILITY
     AND HABITABILITY AND FITNESS FOR PURPOSE INTENDED.
     BUYER ACKNOWLEDGES THAT THE INFORMATION REGARDING
     SELLER'S BUSINESS WHICH HAS PREVIOUSLY BEEN
     FURNISHED BY SELLER TO BUYER DOES NOT CONSTITUTE
     A REPRESENTATION FOR ANY PURPOSE. THE FINANCIAL
     BUSINESS OPERATION RECORDS OF THE SELLER ARE
     FURNISHED TO THE BUYER FOR INFORMATIONAL PURPOSES
     ONLY. BUYER AGREES THAT BUYER WILL HAVE ITS OWN
     INDEPENDENT AUDITORS, FINANCIAL EXPERTS, TAX
     ADVISORS, ATTORNEYS, ACCOUNTANTS TO REVIEW THE
     BUSINESS OPERATIONS AND BUYER WILL SATISFY BUYER'S
     SELF, WITHOUT RELIANCE UPON ANY INFORMATION BY
     SELLER, AS TO WHETHER BUYER INTENDS TO PURCHASE
     THE PROPERTIES OR NOT.

     Shortly after signing the Second Addendum, petitioner and

petitioner Barbara H. Patterson, together with their accountant,

traveled to Houston to examine the financial records of Skylane

Apartments.   Upon arriving there, petitioners were given access

to Mr. Suiter's records regarding Skylane Apartments, including

rent receipts and bank deposits.

     By December 19, 1990, petitioner was unable to make the

downpayment of $2,550,000, and the sale of Skylane Apartments did

not close.    The Earnest Money Contract expired, and no additional

extensions were granted.

     On or before December 20, 1990, petitioner retained an

attorney, John Trueheart (Mr. Trueheart), to seek recovery of the

amounts paid to Mr. Suiter.
                               - 8 -

     In a letter dated December 20, 1990, Mr. Trueheart demanded

from Mr. Suiter a refund of $55,000 for the amounts paid (i.e.,

$30,000 + $25,000) for the extensions of the Earnest Money

Contract.   In his letter, Mr. Trueheart alleged that "we have

discovered significant discrepancies between income and expenses

information you have provided Mr. Patterson and the actual

operation and [sic] of the projects."    In addition, Mr. Trueheart

alleged that the square footage attributable to Skylane

Apartments differed substantially from the description of the

property in the Harris County records.

     Mr. Boyd responded to petitioner's allegations in a letter

dated December 28, 1990.   Mr. Boyd recounted that Mr. Suiter had

not been anxious to extend the deadline for the closing of the

sale of Skylane Apartments but that petitioner had been

"insistent".   Mr. Boyd observed that petitioner "was always

optimistic that financing would be obtained".   Mr. Boyd also

observed that both addenda to the Earnest Money Contract

contained specific disclaimers concerning the accuracy of the

financial data that was made available by Mr. Suiter.    Finally,

Mr. Boyd stated that Mr. Suiter refused to refund the $55,000.

     After Mr. Trueheart's letter dated December 20, 1990, there

were no further oral or written demands made by petitioner or Mr.

Trueheart on Mr. Suiter for the refund of the $55,000.    Further,

petitioner had no communication with Mr. Trueheart after 1990,
                                - 9 -

and Mr. Trueheart did not render any services for petitioner

after 1990.

     Petitioner paid Mr. Trueheart $1,000 in December 1990 for

Mr. Trueheart's services.   Petitioner did not pay Mr. Trueheart

any further amount.

     Petitioner continued to engage in the commercial real estate

market in 1991 and 1992.    Petitioner reported income and expense

from his commercial real estate activities for those years on

Schedules C (Profit or Loss from Business).   On his Schedule C

for 1991, petitioner deducted travel expense in the amount of

$9,509.

      In mid-1992, approximately 1-1/2 years after Mr.

Trueheart's letter dated December 20, 1990, petitioner flew to

Texas and met with Mr. Trueheart's associate Dan Bendinger (Mr.

Bendinger) ostensibly to discuss options for recovering the

$55,000.   Mr. Bendinger reported to petitioner that no work had

been performed on petitioner's case since 1990 and that the

prospects of recovering $55,000 from Mr. Suiter were poor.

     Petitioner never filed a lawsuit to recover any amount from

Mr. Suiter.

     On his Schedule C for 1992, petitioner deducted a loss in

the amount of $30,000 for "exten[s]ion consideration fee to Darby

Suiter of Houston, Texas for investment purchase".   Petitioner

did not deduct on his 1992 Schedule C the additional $25,000 fee

paid to Mr. Suiter in 1990.
                               - 10 -

     Petitioners reported zero taxable income on their income tax

return for 1992, and they paid no income tax for that year.

     In the notice of deficiency, respondent determined that

petitioner's transaction with Mr. Suiter "closed" in 1990 and

that the $30,000 loss was therefore not deductible in 1992.

     In their petition, petitioners alleged that they were

entitled to deduct a $30,000 loss in 1992.    Petitioners also

alleged that "The additional $25,000 was not included but is

alleged as an additional loss in 1992 for abandonment" and that

"an additional abandonment loss in the amount of $25,000 has also

occurred in 1992 resulting in a refund and carryback and

carryforward loss."3

                               OPINION

     As a general rule, the Commissioner's determinations are

presumed correct, and the taxpayer bears the burden of proving

that those determinations are erroneous.    Rule 142(a); INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering,

290 U.S. 111, 115 (1933).

     Section 165(a) permits a taxpayer to deduct "any loss

sustained during the taxable year and not compensated for by

insurance or otherwise."    Only a loss "sustained during the

taxable year" may be deducted under section 165(a).    Petitioners



     3
        We find that the $25,000 loss was sufficiently alleged in
the petition to give respondent fair notice of the total amount
of loss claimed by petitioners in this case for the taxable year
in issue.
                               - 11 -

contend that a loss in the amount of $55,000 was "sustained" in

1992.   Respondent contends to the contrary.   We agree with

respondent for the following reasons.

     In order to be deductible under section 165, "a loss must be

evidenced by closed and completed transactions, fixed by

identifiable events, and * * * actually sustained during the

taxable year."    Sec. 1.165-1(b), Income Tax Regs; see also sec.

1.165-1(d)(1), Income Tax Regs.    A loss is not sustained during

the taxable year if "there exists a claim for reimbursement with

respect to which there is a reasonable prospect of recovery".

Sec. 1.165-1(d)(2)(i) and (3), Income Tax Regs.    In this event,

the deductibility of a loss is postponed until the taxable year

in which "it can be ascertained with reasonable certainty whether

or not such reimbursement will be received."    Sec. 1.165-

1(d)(2)(i), Income Tax Regs; see sec. 1.165-1(d)(3), Income Tax

Regs.   "Whether a reasonable prospect of recovery exists with

respect to a claim for reimbursement of a loss is a question of

fact to be determined upon an examination of all facts and

circumstances."   Sec. 1.165-1(d)(2)(i), Income Tax Regs.

Petitioners bear the burden of proof on this question of fact.

Rule 142(a); INDOPCO, Inc. v. Commissioner, supra at 84; Welch v.

Helvering, supra at 115.

     We hold that petitioner failed to prove that he had a

reasonable prospect of recovering any part of the $55,000 from

Mr. Suiter after 1990.
                              - 12 -

     At trial, petitioner alleged that Mr. Suiter should have

known that petitioner would be unable to obtain financing for the

purchase of Skylane Apartments.    Thus, petitioner alleged as a

basis for the recovery of the $55,000 amount that he was misled

by Mr. Suiter.

     We are not persuaded by petitioner's allegations regarding

being misled by Mr. Suiter.   First, an individual with 40 years

of experience in the commercial real estate market should be

familiar with the problems of obtaining real estate financing.

Moreover, petitioner testified at trial that he was aware of the

difficulties in obtaining financing specific to the real estate

market in Texas at the time that he signed the Earnest Money

Contract.

     There is no persuasive evidence in the record that supports

petitioner's allegation that he was misled by Mr. Suiter.    To the

contrary, the record contains direct evidence that petitioner was

motivated by his own sense of optimism to extend the Earnest

Money Contract.   Thus, when petitioner was unable to meet the

original closing date deadline of August 8, 1990, it was

petitioner who requested an extension.    Also, in signing the

First Addendum, petitioner falsely represented that financing had

already been obtained.   When petitioner was unable to close the

transaction by October 19, 1990, petitioner again requested an

extension of the closing date.    At trial, petitioner testified

that he was motivated to extend the closing date deadline from
                               - 13 -

October 19, 1990 to November 19, 1990, because he thought he had

some potential financing options.    Subsequently, when petitioner

was unable to meet the November 19, 1990 deadline, and after he

requested another extension, petitioner was cautioned by Mr.

Boyd.    Mr. Boyd advised petitioner that Mr. Suiter was reluctant

to extend the Earnest Money Contract because he was unsure that

petitioner would be able to finance the purchase.    Mr. Boyd

observed that Mr. Suiter only agreed to extend the closing date

because petitioner "insisted" that he could close by December 19,

1990.    Thus, we are not convinced that it was Mr. Suiter who

misled petitioner into thinking that financing was obtainable for

the purchase of Skylane Apartments.

        We also find that petitioner had no reasonable prospect of

recovering the $55,000 based on the allegations set forth in Mr.

Trueheart's letter dated December 20, 1990.    In his letter, Mr.

Trueheart alleged that Mr. Suiter provided petitioner with

inaccurate information concerning Skylane Apartments.

     The record clearly demonstrates that Mr. Suiter specifically

disclaimed warranties with respect to his records.    Both addenda

to the Earnest Money Contract advised petitioner that he should

not rely on the seller's records but should perform his own

independent analysis of Skylane Apartments.    For example, the

Second Addendum stated:

     SELLER IS CONVEYING THE PREMISES AS IS WHERE IS.
     ALL WARRANTIES OF EVERY KIND WITH RESPECT TO THE
     PREMISES, THE FINANCIAL CONDITION OF THE PREMISES,
     THE BOOKS AND RECORDS OF THE SELLER, PROFIT AND LOSS
                              - 14 -

     STATEMENTS, BALANCE SHEETS, ARE HEREBY DISCLAIMED * * *
     BUYER AGREES THAT BUYER WILL HAVE ITS OWN INDEPENDENT
     AUDITORS, FINANCIAL EXPERTS, TAX ADVISORS, ATTORNEYS,
     ACCOUNTANTS TO REVIEW THE BUSINESS OPERATIONS AND BUYER
     WILL SATISFY BUYER'S SELF, WITHOUT RELIANCE UPON ANY
     INFORMATION BY SELLER, AS TO WHETHER BUYER INTENDS TO
     PURCHASE THE PROPERTIES OR NOT.

     Petitioner was also cautioned by Mr. Boyd about relying on

Mr. Suiter's records.   Although Mr. Boyd's letter dated November

20, 1990, contained information about the occupancy of Skylane

Apartments, Mr. Boyd's letter specifically warned petitioner not

to rely on the information presented but rather to perform his

own "independent analysis".   Certainly with his many years of

commercial real estate experience, petitioner had reason to heed

the disclosures in the addenda and the warnings in Mr. Boyd's

letter.   Therefore, we cannot find that petitioner reasonably

relied on the information provided by Mr. Suiter or that

petitioner had a reasonable prospect of recovering the $55,000

based on a theory that he was provided with inaccurate

information.

     Finally, petitioner alleged at trial that he continued to

pursue the recovery of $55,000 from Mr. Suiter until 1992.   To

the contrary, we find that petitioner failed to pursue seriously

the recovery of such amount after December 1990.   Indeed, after

Mr. Trueheart's letter dated December 20, 1990, there were no

further demands made for the refund of the $55,000 (much less the

commencement of any litigation).
                              - 15 -

     At trial, petitioner alleged that he made some telephone

calls to Mr. Trueheart concerning his claims.   However,

petitioner admitted that his telephone calls were unanswered, and

he did not persist in making contact with Mr. Trueheart.

     At trial, petitioner also alleged that he had health

problems that prevented him from actively pursuing his claim

against Mr. Suiter until 1992.   Despite these allegations,

petitioner was actively involved in the commercial real estate

market in 1991.   Indeed, on his Schedule C for that year,

petitioner deducted travel expense in the amount of $9,509.

Thus, we cannot credit petitioner's allegation that health

problems prevented him from pursuing his claims against Mr.

Suiter in 1991.

     Based on the foregoing, we find that petitioner had no

reasonable prospect of recovering the $55,000 from Mr. Suiter

after 1990.   We uphold respondent's determination that

petitioner's loss from the transaction with Mr. Suiter was not

sustained in 1992.   Petitioner's loss is therefore not deductible

in 1992.

     To reflect our disposition of the disputed issue,



                                         Decision will be entered

                                    for respondent.
