                               T.C. Memo. 2013-98




                         UNITED STATES TAX COURT




                    MARK A. BISHOP, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent




      Docket No. 20810-10.                          Filed April 10, 2013.




      Robert P. Lowell, for petitioner.

      Monica D. Gingras for respondent.




            MEMORANDUM FINDINGS OF FACT AND OPINION


      LARO, Judge: The instant petition involving petitioner’s 2006 Federal

income tax return seeks a redetermination of respondent’s determination of a
                                          -2-

[*2] deficiency of $88,769, an addition to tax under section 6651(a)(1)1 of

$21,335.50, and a penalty under section 6662(a) of $17,753.80. We decide the

following issues: (1) whether petitioner is entitled to a bad debt deduction under

section 166 for 2006. We hold that he is not; (2) whether petitioner is liable for the

addition to tax under section 6651(a)(1). We hold that he is; and (3) whether

petitioner is liable for the accuracy-related penalty imposed under section 6662(a).

We hold that he is.

                                FINDINGS OF FACT

       The parties filed with the Court a stipulation of facts and related exhibits. The

stipulated facts and the accompanying exhibits are incorporated herein by this

reference. We find the facts accordingly. Petitioner resided in California when he

filed the petition.

       From 2001 until June 2006 petitioner was the president of IMPAC

Mortgage Holdings, Inc. (IMPAC), where he worked as a whole-loan trader who

bought and sold pools of loans. During the same period petitioner was also the

president of Novelle Financial (Novelle)--a company IMPAC acquired in

September 2001 and wholly owned at least until June 2006--where petitioner

       1
       Unless otherwise indicated, section references are to the Internal Revenue
Code (Code) in effect for the year at issue, and Rule references are to the Tax Court
Rules of Practice and Procedure.
                                           -3-

[*3] worked as a mortgage lender.2 Between IMPAC and Novelle, petitioner

worked approximately 60 hours a week. From June 2006 through the rest of the

year petitioner worked for Quick Loan Funding (Quick Loan) as its president whose

duties were mainly focused on the pooling of mortgages originated at Quick Loan

and their sales to investment banks. While at Quick Loan, petitioner worked about

60 hours a week.

      Around 2004 and 2005, IMPAC was seeking local appraisers to provide

appraisal services in connection with its purchases of mortgage loans. Landmark

Equities Group (Landmark), which was a real estate appraisal firm that provided

appraisal services to many local lenders from whom IMPAC purchased its mortgage

loans, would occasionally provide such services to IMPAC. Through this

relationship, petitioner became acquainted with James Eaton, who was Landmark’s

principal shareholder and president.

      In early 2006 petitioner met with Mr. Eaton several times and learned that

Landmark had begun to develop a new product called the Automated Valuation

Model (AVM product), which Landmark intended to market to investment banks

that purchased and securitized mortgage loans. The AVM product would enable its

users to quickly and efficiently obtain accurate valuations by aggregating title

      2
          Petitioner terminated his services at Novelle shortly before he left IMPAC.
                                          -4-

[*4] insurance information from numerous providers that could be translated into

real estate values. On the basis of these meetings, petitioner understood that

Landmark would have to raise close to $20 million to fund the development and

marketing of the product; in petitioner’s view, shared with Landmark, this capital

requirement could be met only by either equity syndication or a public offering.

      Landmark’s need to raise the necessary capital through a possible public

offering sparked petitioner’s interest in getting involved, as he thought he could

capitalize on his prior success in staging an initial public offering (IPO) by advising

Landmark on a similar offering in exchange for a substantial fee. In 2003 while

working at IMPAC and Novelle, petitioner had successfully advised GVC Holdings

on its IPO on the Alternative Investment Market (AIM) of the London Stock

Exchange (LSE). Through that transaction, petitioner had acquired a few contacts,

including investment bankers and attorneys in London, who petitioner thought might

help Landmark stage a similar offering on the AIM market. It appears the 2003 IPO

was petitioner’s only experience in the area.

      With respect to Landmark, petitioner believed he was uniquely positioned to

prepare Landmark for a successful IPO, ostensibly because he understood

Landmark’s business model and the inner workings of the LSE and the AIM

market. He thought the AIM was a good fit for Landmark because it was a “small
                                           -5-

[*5] cap” market that had simpler disclosure requirements and shorter time-to-IPO.

In exchange for the provision of his services, petitioner expected to earn a large fee

that could range from three to five points on the capital raised in the IPO.

      To lay the groundwork for a possible IPO, petitioner and Landmark worked

together and purportedly developed a business plan, marketing materials, and a pro

forma for an $80 million public offering.3 Petitioner then contacted Collins-Stewart

in London who would represent Landmark on the investment banking side and

Hunton & Williams, also in London, who would be Landmark’s legal

representation. After some conference calls and exchanges of documents, petitioner

traveled to London with Mr. Eaton, Brian Eaton, and Landmark’s chief financial

officer (CFO), George Shamchula, purportedly to meet with the London-based

investment bankers and attorneys.4

      But before Landmark could raise any capital through an IPO, it had

immediate cash needs that had to be met in order to pay its current operational

costs, such as payroll and accounts payable. Landmark tried to borrow $300,000

from Pacific Mercantile Bank (PMB), but PMB declined to extend such a loan



      3
          Petitioner did not endeavor to submit any of these documents into evidence.
      4
       The only documentary evidence relating to these meetings is a one-page
meeting schedule petitioner prepared.
                                          -6-

[*6] because it thought Landmark and Mr. Eaton were already overleveraged.

Undeterred and determined to earn his fee one day from putting together a

successful IPO deal, petitioner advanced $300,000 to Landmark to help it meet its

immediate cashflow requirements so that the business could stay afloat and continue

to grow while the company was preparing for an IPO on the LSE. While petitioner

believed that the loan was crucial to Landmark’s growth and a successful IPO,

petitioner testified that he would probably have made the loan even without the

prospect of the IPO because, on the basis of Landmark’s financial health at the time,

the loan itself appeared to be secure. Notably, petitioner did not require as a

condition to the extension of the loan that Landmark pay petitioner a percentage-

point fee based on any capital raised through a subsequent IPO.

      To finance the loan to Landmark, petitioner decided to borrow from PMB,

and on April 19, 2006, he entered into a promissory note with PMB (PMB note) in

the amount of $300,000. Under the PMB note, petitioner was required to make a

balloon payment plus all accrued but unpaid interest upon maturity on April 19,

2007. In addition, petitioner was required to make regular interest payments of all

accrued interest due as of each payment date beginning May 19, 2006.
                                           -7-

[*7]   Petitioner transferred the $300,000 in proceeds of the PMB loan to

Landmark in exchange for an unsecured promissory note that Landmark executed

(Landmark note) on the same date he signed his promissory note to PMB. The

Landmark note contained an acceleration clause by which in the event of default,

which encompassed nonpayment of principal or interest, petitioner could by

written notice declare all unpaid balance of the note and accrued interest

immediately due and payable.5 The terms of the Landmark note--i.e., the

calculation of interest and the terms of monthly payment--tracked the terms

provided in the PMB note. Further, the Landmark note was set to mature on the

same date as the PMB note upon which the Landmark note would become due and

payable in full. In other words, other than the prospect of earning a large fee for

       5
        Petitioner testified that the note contained an acceleration clause. But on
brief petitioner, along with respondent, contend that the note did not give petitioner
the right to accelerate repayment of the principal balance of the note upon default.
But this contention is not supported by the terms of the Landmark note. The fifth
paragraph of the note states: “If any of the following events (each, an “Event of
Default”) shall occur, * * * then, the holder of this Note may at any time by written
notice * * * declare the entire unpaid principal of and the interest accrued on this
Note * * * due and payable”. The entire fifth paragraph is one conditional sentence,
in which the conditional clause, or the “if” clause, lists a number of alternative
grounds for default and the main clause that starts with “then” describes the
particular result, i.e., acceleration of the payment of principal, that would happen if
any one of the alternative conditions were met. Because “default in the payment of
any part of the principal or interest on this Note” is one of the alternative conditions,
petitioner had the right to exercise the acceleration clause when Landmark failed to
make its interest payments.
                                        -8-

[*8] staging an IPO for Landmark, petitioner would not make any money on the

loan to Landmark under the loan’s terms.6

      In addition to making the short-term loan to Landmark, petitioner also worked

between 20 and 30 hours per week for Landmark for three months from March

through May 2006 to help the company prepare for an IPO. In connection with his

employment at Landmark, petitioner earned wage income from Landmark of

$20,000 that was reported on Form W-2, Wage and Tax Statement.7




      6
        Petitioner undertook a similar financing arrangement with Daniel Sadek, who
was the principal shareholder of Quick Loan. In 2006 petitioner lent $5 million to
Mr. Sadek, financed by advances petitioner drew on a home equity line of credit
with VirtualBank. In exchange petitioner received a secured promissory note from
Mr. Sadek dated June 19, 2006 (Sadek note). According to its terms, the interest
and monthly payment calculations under the Sadek note reflected the terms of the
VirtualBank Home Equity Line of Credit Agreement (VirtualBank HELOC
agreement) that petitioner entered into with VirtualBank on June 13, 2006. Similar
to the financing arrangement with Landmark, petitioner would not make any profit
on the Sadek note because the Sadek note and the VirtualBank HELOC agreement
had the same terms. Petitioner claimed that the main reason he extended the loan to
Mr. Sadek was to help with Quick Loan’s short-term financial needs so that he
could capture a large fee for staging a potential IPO for Quick Loan in the future.
      7
       The parties stipulated that petitioner received Form W-2 wage income for
2006 from the following sources:




                                                                      (continued...)
                                        -9-

[*9]   Soon after the execution of the Landmark note, the real estate market showed

signs of trouble and Landmark’s financial condition began to deteriorate. After

Landmark failed to make its first payment under the note, due May 19, 2006,

petitioner made several written demands for payment, including letters dated July

26, September 20, and November 19, 2006, requesting payment, to which

Landmark did not make any specific responses. In addition to the written demands,

petitioner purportedly made other oral demands for repayment as well as personal

visits to Landmark’s office.

       From these personal visits that took place every month throughout 2006,

according to petitioner, he was able to gain access to Landmark’s books and

records, providing him an insider’s look at Landmark’s financial health.8 Because

the note would not become due until April 2007, petitioner was interested only in


       7
           (...continued)


                       Employer                         Wages
                       Landmark                       $20,000.00
                       IMPAC                           288,454.90
                        Novelle                        141,998.49
                       Quick Loan                      288,000.00


       8
        Petitioner did not offer into evidence any of the Landmark books and records
that he claimed to have reviewed.
                                         -10-

[*10] getting Landmark to meet its obligation to make interest-only payments.

Indeed, petitioner conceded during trial that the three separate letters that he wrote

to Landmark were demands for interest payments and not principal. And on the

basis of his review of Landmark’s books, petitioner believed Landmark would be

able to meet its interest payment obligation and expected payments to be

forthcoming. Landmark never made a payment under its note.

      Despite Landmark’s being in default on the note for nonpayment, petitioner

did not exercise the acceleration clause and demand immediate payment of the

loan’s principal plus accrued and unpaid interest. While petitioner continued to

think Landmark was in a position to make interest payments, on the basis of his

review of the company’s books he understood that Landmark would not be able to

pay the entire principal sum of the Landmark note if he invoked the acceleration

clause. By continuing to work with Landmark, petitioner hoped to keep Landmark

on its feet so that it could make interest payments, especially if Landmark would

undergo significant cuts in staff and expenses.

      In any event, while petitioner’s testimony shows Landmark was

experiencing serious financial difficulties, nothing in the record shows one could

conclude in 2006 that Landmark would never be able to repay any portion of the

principal. Moreover, petitioner could not conclude whether Landmark was
                                         -11-

[*11] insolvent by the end of 2006, and it appears to us that Landmark continued to

be a going concern into 2007. Petitioner did not provide any testimony from a

disinterested party or any documentary evidence other than the three written

payment demands to corroborate his worthlessness claim.

      John Epperson, a certified public accountant for over 40 years and

petitioner’s accountant for over 20 years, prepared petitioner’s 2006 return.

Petitioner filed a Form 4868, Application for Automatic Extension of Time to File

U.S. Individual Income Tax Return, which extended the time to file the 2006 return

to October 15, 2007. Despite the extension the 2006 return was not filed until May

12, 2008. It was filed late ostensibly because petitioner’s extensive business travel

abroad combined with Mr. Epperson’s living in another State rendered it difficult for

petitioner to meet with Mr. Epperson timely to discuss and prepare the filing of the

2006 return.

      When petitioner was eventually able to meet with Mr. Epperson, he

provided Mr. Epperson the Landmark note as well as the PMB note for review.

Petitioner also told Mr. Epperson about his efforts to collect on the Landmark note

but did not otherwise give Mr. Epperson any of the financial documents from

Landmark that formed the basis of petitioner’s determination that the Landmark
                                          -12-

[*12] note was not collectible. Mr. Epperson never personally reviewed the

financial documents in question.

      On the basis of the Landmark note and the PMB note and after having

reviewed certain professional publications and legal research materials, including

unspecified IRS publications and court cases, Mr. Epperson determined petitioner

would be entitled to claim a bad debt deduction for 2006. Correspondingly, the

Schedule C, Profit or Loss From Business, attached to petitioner’s 2006 return

claimed an “Outside Services” deduction of $301,000.9 According to Mr.

Epperson, the deduction for “Outside Services” was a clerical mistake, and he

intended to identify the deduction as a bad debt expense.

                                       OPINION

      The primary issue of this case is whether petitioner is entitled to a business

bad debt deduction for 2006 under section 166(a). To be able to claim the

deduction for 2006, petitioner must show (1) the Landmark note was a bona fide

debt that became wholly worthless in 2006,10 see Kean v. Commissioner, 91 T.C.


      9
        Mr. Epperson explained at trial “to the best of * * * [his] recollection” that
the $1,000 in addition to the loan principal was a transaction fee paid to PMB.
Petitioner has not produced any evidence to substantiate this claim.
      10
       Petitioner has not argued that the note became partially worthless, and the
evidence does not show any portion of the Landmark note was charged off in 2006.
                                                                       (continued...)
                                        -13-

[*13] 575, 594 (1988), and (2) the debt was not a nonbusiness debt under section

166(d). While we find the Landmark note to be a bona fide debt, we conclude

petitioner has failed to meet his burden to show the note became worthless in 2006.

Because petitioner cannot show the worthlessness of the Landmark note, we need

not decide whether it was a nonbusiness debt as defined in section 166(d)(2).

I.    Burden of proof

      The Commissioner’s determinations in a notice of deficiency are generally

presumed correct, and a taxpayer bears the burden of proving those determinations

are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

Similarly, a taxpayer bears the burden to show he is entitled to claim any deductions

allowed under the Code and to substantiate the amount of any claimed deductions.11

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); sec. 1.6001-1(a),

Income Tax Regs. But with respect to liability for additions to tax under section

6651 and any accuracy-related penalty under section 6662, the Commissioner bears

the burden of production under section 7491(c).




      10
        (...continued)
See sec. 166(a)(2); sec. 1.166-3(a), Income Tax Regs.
      11
        Petitioner does not contend, nor does the record suggest, that the burden of
proof should be shifted to respondent under sec. 7491(a).
                                         -14-

[*14] II.    Section 166 bad debt deductions

       A.    Bona fide debt

       A section 166 bad debt can arise only if the purported debt is a bona fide

debt. Conversely, an advance that is a capital contribution or a gift is not a debt for

purposes of section 166. Kean v. Commissioner, 91 T.C. at 594; sec. 1.166-1(c),

Income Tax Regs. A bona fide debt can arise only from a debtor-creditor

relationship based on a valid and enforceable obligation to pay a fixed or

determinable sum of money. Kean v. Commissioner, 91 T.C. at 594; sec. 1.166-

1(c), Income Tax Regs. We determine whether a purported debt is a bona fide debt

for tax purposes from the facts and circumstances of each case. See Lundgren v.

Commissioner, 376 F.2d 623, 626 (9th Cir. 1967), rev’g on other ground T.C.

Memo. 1965-314; Dixie Dairies Corp. v. Commissioner, 74 T.C. 476, 493 (1980).

       The Court of Appeals for the Ninth Circuit, to which this case is appealable

absent any stipulation by the parties, see sec. 7482(b)(1)(A), has identified 11

factors with varying degrees of influence in a debt-equity analysis:

       “(1) the names given to the certificates evidencing the indebtedness;
       (2) the presence or absence of a maturity date; (3) the source of the
       payments; (4) the right to enforce the payment of principal and
       interest; (5) participation and management; (6) a status equal to or
       inferior to that of regular corporate creditors; (7) the intent of the
                                         -15-

      [*15] parties; (8) ‘thin’ or adequate capitalization; (9) identity of
      interest between creditor and stock holder; (10) payment of interest
      only out of ‘dividend’ money; (11) the ability of the corporation to
      obtain loans from outside lending institutions.” * * *

A. R. Lantz Co. v. United States, 424 F.2d 1330, 1333 (9th Cir. 1970) (quoting

O.H. Kruse Grain & Milling v. Commissioner, 279 F.2d 123, 125-126 (9th Cir.

1960)). The Court of Appeals has also cautioned not to place a disproportionate

emphasis on any single factor. Id.

      Here, Landmark’s indebtedness was evidenced by its promissory note to

petitioner showing the parties’ intent to structure the advance as a genuine debt.

The note obligated Landmark to pay monthly interest and to make a balloon

payment of the principal and any unpaid but accrued interest upon maturity, which

was set at one year after the execution of the note. The note provided an

acceleration clause by which petitioner could declare the entire balance of the note

due in the event of default. It also appears to place petitioner on equal footing with

other unsecured creditors since there is no evidence of subordination.

      Further, petitioner was not an investor in Landmark and did not otherwise

participate in its growth or management. The Landmark note did not make the

interest-only payments contingent on corporate earnings. Quite the opposite,

Landmark’s obligation to repay the debt principal and interest was fixed and
                                         -16-

[*16] determinable under the valid and enforceable promissory note. See sec.

1.166-1(c), Income Tax Regs.

      Respondent maintains that the $300,000 advance was not a bona fide debt

because (1) the note was unsecured, (2) Landmark was unable to borrow from PMB

because it thought Landmark was already overleveraged, and (3) petitioner did not

demand payment in full when Landmark defaulted and made only minimal effort to

demand interest payments.

      While the existence of collateral would tend to support genuine indebtedness,

its absence alone is not determinative. Similarly, the fact that Landmark could not

obtain a similar loan from a commercial bank because the company was already

overextended is not controlling. See Lundgren v. Commissioner, 376 F.2d at 626;

Taft v. Commissioner, 314 F.2d 620, 622 (9th Cir. 1963), aff’g in part, rev’g in part

T.C. Memo. 1961-230. While extending a $300,000 loan to Landmark without

collateral at a time when a commercial bank would not provide the same loan might

sound like a risky proposition, “it is not our province to inquire into the wisdom of

the loan” so long as petitioner could show genuine indebtedness. Brenhouse v.

Commissioner, 37 T.C. 326, 329 (1961).
                                          -17-

[*17] It is true that petitioner did not exercise the acceleration clause under the note

as it was his right to do. But he did repeatedly make written and oral demands for

interest payments. His reluctance to push Landmark too hard for payments can be

explained by his credible testimony that he wanted to work with his debtor until it

could improve its financial condition and recover from the real estate market crisis

existing at the time so that it might resume making payments.

      Ultimately, petitioner had no financial interest in Landmark and was not its

shareholder before or after he provided the $300,000 loan. There was also an

absence of any personal relationship between petitioner and Landmark or Mr. Eaton

that would suggest the advance was a gift. Because Landmark’s repayment

obligation under the note was absolute, there is nothing in evidence that could

explain the advance as something other than genuine indebtedness. See id. at 330.

Accordingly, we find the Landmark note to be a bona fide debt.

      B.     Worthlessness in 2006

      Our determination of whether a debt is wholly or partially worthless is

based on all facts and circumstances, including the financial condition of the debtor.

Sec. 1.166-2(a), Income Tax Regs. Legal action is not required to show

worthlessness if surrounding circumstances indicate that a debt is worthless and

uncollectible and that any legal action in all likelihood would be futile because the
                                          -18-

[*18] debtor would not be able to satisfy a favorable judgment. Sec. 1.166-2(b),

Income Tax Regs. Petitioner bears the burden to show the Landmark note became

worthless in 2006, the year for which petitioner claimed the bad debt deduction

under section 166. See Rule 142(a); Crown v. Commissioner, 77 T.C. 582, 598

(1981).

      There is no standard test or formula for determining worthlessness, and the

determination depends on the particular facts and circumstances of the case. Lucas

v. Am. Code Co., 280 U.S. 445, 449 (1930); Crown v. Commissioner, 77 T.C. at

598. The fact that the debt has not matured or that no payment under the debt is due

when a taxpayer claims a bad debt deduction does not of itself prevent its allowance

under section 166. Sec. 1.166-1(c), Income Tax Regs. But a taxpayer usually must

show identifiable events to prove worthlessness in the year claimed. Am. Offshore,

Inc. v. Commissioner, 97 T.C. 579, 593 (1991). Some objective factors include a

decline in the debtor’s business; a decline in the value of the debtor’s assets, if any;

the overall business climate; the debtor’s serious financial reverses; the debtor’s

earning capacity; events of default; insolvency of the debtor; the debtor’s refusal to

pay; actions the creditor took to pursue collection; subsequent dealings between the

creditor and the debtor. Id. at 594.
                                            -19-

[*19] No single factor listed above is conclusive. Id. at 595. Moreover, the mere

fact that a business is on the decline, that it has failed to turn a profit, or that its debt

obligation may be difficult to collect does not necessarily justify treating the debt

obligation as worthless. Intergraph Corp. & Subs. v. Commissioner, 106 T.C. 312,

323 (1996), aff’d without published opinion, 121 F.3d 723 (11th Cir. 1997). This is

especially true where the debtor continues to be a going concern with the potential

to earn a future profit. See Rendall v. Commissioner, 535 F.3d 1221, 1228 (10th

Cir. 2008) (citing Roth Steel Tube Co. v. Commissioner, 620 F.2d 1176, 1182 (6th

Cir. 1980), aff’g 68 T.C. 213 (1977)), aff’g T.C. Memo. 2006-174; ABC Beverage

Corp. v. Commissioner, T.C. Memo. 2006-195, 92 T.C.M. (CCH) 268, 271 (2006).

       While petitioner’s testimony suggests that the Landmark note might have

become worthless in 2006, it is insufficient to carry his burden to show

worthlessness without testimony from a disinterested party or some documentary

evidence to corroborate the claim. Petitioner’s testimony as to the overall business

climate in the real estate market at the time intimates that Landmark indeed

experienced decline in its business, but we do not know by how much. Landmark’s

failure to make interest payments may reflect its inability to repay some portion of

its debt to petitioner, but that failure alone is not conclusive.
                                          -20-

[*20] Petitioner claimed he examined Landmark’s financial records every month

before he concluded the Landmark note was worthless, but none of the books

petitioner purportedly examined is in the record for us to make an independent

determination of Landmark’s net worth and ability to pay in 2006. There is no

evidence showing Landmark’s cashflow and earnings. We do not have Landmark’s

balance sheet to help us determine whether its aggregate liabilities exceeded the

value of its assets. Because Landmark remained a going concern into 2007,

producing some evidence demonstrating its ability or inability to turn the business

around and to generate enough income to pay the debt is crucial. In sum, “[t]he

unsupported opinion of the taxpayer alone that the debt is worthless will not usually

be accepted as proof of worthlessness.” Dustin v. Commissioner, 53 T.C. 491, 502

(1969), aff’d, 467 F.2d 47 (9th Cir. 1972).

      Even if we credit petitioner’s testimony on its face, which we do not, it does

not support a finding of worthlessness in 2006. While a determination of

worthlessness does not hinge on whether any portion of the debt has become due,

Landmark’s nonpayment of principal could be explained by the fact that the

Landmark note’s principal was not due until April 2007. Indeed, petitioner never

exercised the note’s acceleration clause by sending the required written demand; on

the contrary, petitioner stated during trial that the written demands that he did
                                          -21-

[*21] send to Landmark were only demands for interest payments. Thus, there is

nothing in the record that could even suggest that petitioner actually made an

attempt in 2006 to collect on the note’s principal.12

      Even petitioner’s testimony itself allows a strong inference that Landmark

would be able to repay its debt under the note at some point in the future. Petitioner

claimed that he reviewed Landmark’s financial records. On the basis of his

understanding of Landmark’s financial condition, he could not determine whether

Landmark was insolvent but still believed that Landmark could make interest

payments, just not payments on the principal. He also believed Landmark’s

financial health could improve if it was willing to go through significant cuts in staff

and expenses. Petitioner did not want to push Landmark into a corner by

accelerating the note because if Landmark were required to repay the whole debt, as

petitioner’s testimony suggests, it might not be able to pay it at that moment.

      But petitioner’s testimony says very little about whether Landmark would

be able to pay the principal in the foreseeable future, especially when petitioner

was willing to provide Landmark some flexibility in meeting its payment




      12
        The three demand letters referenced “Landmark’s $300,000 note” or “the
$300K note”. But these are only references made to identify the note, and we do
not understand them to be demands for payment of the entire principal balance.
                                          -22-

[*22] obligation. Indeed, it appears from petitioner’s testimony that there was a

glimpse of hope that Landmark could get back on its feet and meet its debt

obligation to him. While petitioner need not be an “incorrigible optimist”, see

United States v. S.S. White Dental Mfg. Co., 274 U.S. 398, 403 (1927), he needs to

persuade us that there was an objective and substantial reason for abandoning any

hope of repayment in the future, see Dallmeyer v. Commissioner, 14 T.C. 1282,

1291-1292 (1950). Because petitioner never exercised the acceleration clause and

demanded payment of the principal, petitioner has failed to persuade us that there

could not be a reasonable expectation of repayment and Landmark could not have

recovered from its financial woes to satisfy the note by the date of maturity. Thus,

petitioner’s testimony at most can only suggest that Landmark’s finances in 2006

would have prevented it from satisfying the debt in full in that year if petitioner had

required it; but he never did. That is insufficient to support a finding of

worthlessness.

      Because we find petitioner has failed to meet his evidentiary burden to show

the Landmark note became worthless in 2006, we conclude he is not entitled to the

bad debt deduction under section 166(a) for 2006. Correspondingly, our conclusion

renders it unnecessary to determine whether the debt was a business debt or a

nonbusiness debt under section 166(d).
                                           -23-

[*23] III.   Addition to tax and penalty

       A.    Addition to tax under section 6651(a)(1)

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

Federal income tax return unless the taxpayer can show that the failure was due to

reasonable cause and not willful neglect. It is undisputed that petitioner did not

timely file his tax return. On brief, petitioner did not make any arguments to

establish that he may avail himself of the affirmative defense. Thus, we deem the

defense waived.13 See Zapara v. Commissioner, 124 T.C. 223, 233 (2005), aff’d,

652 F.3d 1042 (9th Cir. 2011); see also Higbee v. Commissioner, 116 T.C. 438,

446-447 (2001).

       B.    Penalty under section 6662(a)

       Respondent determined that petitioner is liable for an accuracy-related

penalty for 2006 because petitioner substantially understated his income tax or,

alternatively, because he was negligent or disregarded rules or regulations. See sec.

6662(a) and (b)(1) and (2). There is a substantial understatement of income tax if

the amount of the understatement for the taxable year exceeds the greater of

       13
         At trial, Mr. Epperson explained the 2006 return was filed late because
petitioner’s extensive travel abroad made it difficult for them to meet to prepare the
return timely. Even if we were to conclude that petitioner did not abandon the
reasonable cause defense, we would still find Mr. Epperson’s explanation
inadequate to show reasonable cause.
                                         -24-

[*24] 10% of the tax required to be shown on a return for a taxable year or $5,000.

Sec. 6662(d)(1)(A). Alternatively, we will sustain respondent’s determination to

impose an accuracy-related penalty if we determine petitioner failed to make a

reasonable attempt to comply with provisions of the internal revenue laws or

disregarded rules or regulations by acting carelessly, recklessly, or with intentional

disregard. Sec. 6662(c); sec. 1.6662-3(b)(1) and (2), Income Tax Regs. Only one

accuracy-related penalty may be imposed for a given portion of an underpayment

even though that portion implicates more than one form of misconduct described in

section 6662. Sec. 1.6662-2(c), Income Tax Regs. Because respondent has carried

his burden under section 7491(c) to show that the inappropriately claimed bad debt

deduction resulted in a substantial understatement of petitioner’s income tax,14 we

need not decide whether petitioner would also be liable for the penalty by reason of

negligence or reckless disregard of rules and regulations.

      Once respondent has proved his prima facie case for imposing the penalty

under section 6662(a), petitioner bears the burden of proving that the penalty is

unwarranted by establishing an affirmative defense such as reasonable cause or



      14
        The correct tax required to be shown on petitioner’s return was $174,880.
The understatement of tax due from petitioner for 2006 is $88,769. Ten percent of
the correct tax liability for 2006 is $17,488. Thus, petitioner substantially
understated his 2006 income tax liability.
                                         -25-

[*25] substantial authority. See sec. 6664(c)(1); sec. 6662(d)(2)(B). Again,

petitioner did not make any arguments on brief to establish that his claim of the bad

debt deduction was based on reasonable cause or substantial authority. Thus, we

conclude that petitioner has abandoned the argument. See Zapara v. Commissioner,

124 T.C. at 233; see also Higbee v. Commissioner, 116 T.C. at 446-447.

      In any event, the record does not show the substantial authority defense

is available to petitioner, who has not otherwise cited any authority, not to

mention substantial authority, to support his worthlessness claim. Reasonable

cause requires that the taxpayer have exercised ordinary business care and

prudence as to the challenged item. See United States v. Boyle, 469 U.S. 241

(1985). A taxpayer’s reliance on the advice of a professional, such as a certified

public accountant, may constitute reasonable cause and good faith if the taxpayer

could prove by a preponderance of the evidence that: (1) the taxpayer reasonably

believed the professional was a competent tax adviser with sufficient expertise to

justify reliance; (2) the taxpayer provided necessary and accurate information to

the advising professional; (3) the taxpayer actually relied in good faith on the

professional’s advice. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C.
                                          -26-

[*26] 43, 98-99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002); see also sec. 1.6664-

4(c)(1), Income Tax Regs.

       It is apparent from the record that petitioner did not provide all the necessary

and accurate information to Mr. Epperson for him to determine whether the

Landmark note was worthless in 2006. Mr. Epperson only reviewed the Landmark

note and the PMB note in addition to IRS publications and some unnamed court

cases. Petitioner did not provide Mr. Epperson the Landmark financial records that

formed the basis of his worthlessness claim. Nor did petitioner take Mr. Epperson

with him to Landmark’s office to review the company’s financial records. Thus,

even if petitioner had relied in good faith on Mr. Epperson’s advice, Mr. Epperson’s

determination that the Landmark note was worthless rings hollow and cannot form

the predicate for the reasonable cause defense.

       We have considered all of petitioner’s arguments for a contrary holding, and

to the extent not discussed herein we conclude they are irrelevant, moot, or lacking

in merit.

       To reflect the foregoing,

                                                     Decision will be entered for

                                                 respondent.
