                         T.C. Memo. 2000-240



                       UNITED STATES TAX COURT



                  VERNON MILLER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No.   9118-98.                     Filed August 4, 2000.



     Helen Jennings, for petitioner.

     Peter C. Rock, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined a deficiency of

$42,924 in petitioner’s Federal income tax for 1993.

     We must decide whether petitioner is entitled for 1993 to a

business bad debt deduction.1   We hold that he is not.


     1
     Although there are certain other issues in this case, their
                                                   (continued...)
                                - 2 -

                          FINDINGS OF FACT

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

Certain other facts were deemed admitted pursuant to either Rule

37(c)2 or Rule 90(c).3

     Petitioner resided in Reno, Nevada, at the time the petition

was filed.

     On or about March 6, 1986, petitioner lent $75,000 to 551

Lytton Avenue Associates, a California limited partnership

(Partnership).    (We shall refer to that $75,000 loan as the

Miller loan.)    At all relevant times, Philip Wire (Mr. Wire) and

Barbara J. Turner (Ms. Turner) were general partners of Partner-

ship.    At no time was petitioner a partner of Partnership.

     Partnership was obligated to pay petitioner a total of

$82,500 on the due date of the Miller loan consisting of $75,000

in principal and $7,500 in points.      In addition, the Miller loan


     1
      (...continued)
resolution flows automatically from our resolution of the bad
debt issue.
     2
      All Rule references are to the Tax Court Rules of Practice
and Procedure. All section references are to the Internal
Revenue Code (Code) in effect for the year at issue.
     3
      Pursuant to Rule 90(c), petitioner is deemed to have admit-
ted, inter alia, that he made the loan involved here on or about
Mar. 6, 1988. However, the stipulation of facts filed in this
case establishes that petitioner made that loan on or about Mar.
6, 1986, and not on or about Mar. 6, 1988. We therefore modify
the deemed admission relating to the date on which petitioner
made the loan in question to reflect the correct date. See Rule
90(f).
                                  - 3 -

was to bear interest at 16 percent.        However, the interest rate

on the Miller loan was deemed to be usurious under California

law.

       The note evidencing the Miller loan stated in pertinent

part:      “Should suit be commenced to collect this note or any

portion thereof, such sum as the Court may deem reasonable shall

be added hereto as attorney’s fees.”

       The Miller loan was not paid when due.      On February 20,

1987, petitioner filed a complaint in the Superior Court of

California for Santa Clara county against, inter alia, Partner-

ship, Mr. Wire, and Ms. Turner for, inter alia, the amount due to

him on default of the Miller loan.        (We shall refer to that

lawsuit as the Miller loan litigation.)        After a trial, it was

determined that petitioner was entitled to recover $75,000 of the

Miller loan, with offsets of $72,358.88 attributable to the

amount of principal that he had recovered from Ms. Turner.          As of

1991, petitioner had recovered $72,358.88 of the $75,000 Miller

loan.

       The Miller loan litigation continued after 1993.      Petitioner

incurred substantial legal expenses through 1993 (i.e., at least

$90,9994) as well as after 1993 (i.e., at least $69,693) with

respect to his claims regarding the Miller loan.        With respect to

       4
      For convenience, we have rounded to the nearest dollar the
respective amounts of legal fees that petitioner incurred and/or
paid.
                                - 4 -

such legal expenses incurred through 1993, petitioner had paid at

least $46,593 as of the end of that year.    With respect to such

legal expenses incurred after 1993, petitioner had paid at least

$64,142 after that year.    As a result of the Miller loan litiga-

tion, on or about March 3, 1998, petitioner was awarded from Ms.

Turner $208,206 in attorney’s fees incurred in connection with

that litigation.

       Sometime during or shortly after 1986, petitioner met Rick

Patterson (Mr. Patterson), a real estate broker.    Throughout Mr.

Patterson’s relationship with petitioner, petitioner was inter-

ested in acquiring and selling real property and in financing

purchases of real property made by other clients of Mr.

Patterson.    As of the time of the trial in this case, petitioner

had participated, directly or indirectly, in at least six real

estate transactions in which he acquired interests, and at least

three transactions in which he sold interests, in various real

properties.    One of the real estate transactions in which peti-

tioner acquired an interest in real property involved peti-

tioner’s purchase of a mobile home that he used as his residence

for a period of time not disclosed by the record.    As of the time

of the trial in this case, petitioner had lent money to at least

seven individuals who were referred to him by Mr. Patterson,

having made more than one loan to at least two of those individu-

als.    As of the time of the trial in this case, petitioner had
                               - 5 -

also used the services of Mr. Patterson in selling petitioner’s

direct or indirect interests in four radio stations.   Petitioner

financed one of those sales, having received six notes from the

purchaser in connection with that financing.

     Petitioner filed Form 1040, U.S. Individual Income Tax

Return (return), for 1993, the year at issue, in which he re-

ported, inter alia, taxable interest income of $47,211 and

dividend income of $23.   Petitioner’s 1993 return included:

(1) Schedule C, Profit or Loss From Business (Schedule C), which

showed a $3,810 loss from an appliance repair business;

(2) Schedule D, Capital Gains and Losses (Schedule D), which

showed total short-term capital losses of $28,039 and total long-

term capital losses of $70,000; (3) Schedule E, Supplemental

Income and Loss (Schedule E), which showed total rental real

estate income of $113,103 and total partnership losses of $295;

and (4) Form 4797, Sales of Business Property (Form 4797), in

which petitioner claimed a loss of $109,482 from the sale or

exchange of property used in a trade or business.   The $109,482

loss claimed in Form 4797 related to the Miller loan and included

expenditures that he made in connection with recovering that

loan.   The basis of the property for which petitioner claimed a

loss in Form 4797 was listed in that form as $212,029.    Peti-

tioner also reflected the $109,482 loss that he claimed in that

form as “Other gains or (losses)” on page 1, line 15, of his 1993
                               - 6 -

return.

     Petitioner’s returns for 1979, 1987 through 1989, and 1991

through 1993 included Schedules B, Interest and Dividend Income,

showing taxable interest income and, for certain of those years,

dividend income.   Petitioner’s returns for 1979 and 1991 through

1993 included Schedules C, each of which showed net profit or a

loss from a business other than a business of making loans or any

other type of investment business.5    Petitioner’s returns for

1979, 1987, 1988, and 1991 through 1993 included Schedules D,

certain of which showed a net capital gain and others of which

showed a net capital loss.6   Petitioner’s returns for 1979, 1987,

1989, and 1991 through 1993 included Schedules E which showed

(1) income or a loss from two or more rental properties,7 (2) for




     5
      Petitioner’s 1979 return included four Schedules C, each of
which showed net profit or a loss from a business. Petitioner’s
1991 return included two Schedules C, each of which showed a loss
from a business. Each of petitioner’s returns for 1992 and 1993
included one Schedule C, each of which showed a loss from a
business.
     6
      In Schedule D of each of petitioner’s returns for 1991 and
1992, petitioner reported a net capital loss which was attribut-
able to a claimed nonbusiness bad debt.
     7
      The following chart shows the number of rental properties
from which petitioner reported rents received in Schedule E of
each of his returns for 1979, 1987, 1989, and 1991 through 1993:

                                                     (continued...)
                               - 7 -

certain of those years, a loss attributable to petitioner’s

interest in a partnership, and (3) for one of those years, income

from an S corporation.   Each of petitioner’s 1988, 1989, and 1992

returns included a schedule which showed an exchange of proper-

ties from which petitioner realized capital gain.

     In the notice of deficiency issued to petitioner for 1993

(notice), respondent determined, inter alia, to disallow the

$109,482 that petitioner claimed in his 1993 return as “Other

* * * losses”.

                              OPINION

     Petitioner bears the burden of proving that the determina-

tions in the notice are erroneous.     See Rule 142(a); Welch v.

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

     In his 1993 return, petitioner claimed with respect to the

Miller loan that he had a loss of $109,482 from the sale or

exchange of property used in a trade or business.    Petitioner

changed his return position at trial and on brief.    Petitioner


     7
     (...continued)

                    Year           Number of
                 of Return        Properties
                    1979               5
                    1987               5
                    1989               2
                    1991               3
                    1992               3
                    1993               4
                               - 8 -

now contends with respect to that loan that he is entitled to a

business bad debt deduction under section 166(a) of $112,123.

Respondent counters that petitioner is not entitled to a business

bad debt deduction, or to any other deduction, for 1993 with

respect to the Miller loan.

     In support of his position that he is entitled to a business

bad debt deduction under section 166(a), petitioner contends that

the Miller loan constituted a business debt for purposes of

section 166, that $2,6418 of that loan became worthless during

1993 within the meaning of that section, and that the amount of

the deduction under section 166(a) for 1993 attributable to that

worthless debt is $112,123, consisting of $2,641 of unrecovered

principal of the Miller loan and $109,482 of attorney’s fees

which he claims he incurred as of the end of 1993 in recovering

that loan.9   Respondent disputes petitioner’s contentions.

     Section 166 allows a taxpayer to deduct any business debt

which becomes wholly or partially worthless during the taxable

year.10   See sec. 166(a), (d)(1)(A).   The basis for determining

     8
      For convenience, we have rounded to the nearest dollar the
amount of the unrecovered portion of the Miller loan as of the
end of 1993.
     9
      We have considered all of the contentions and arguments of
petitioner that are not discussed herein, and we find them to be
without merit and/or irrelevant.
     10
      In the case of a taxpayer other than a corporation, where
a nonbusiness debt becomes worthless during the taxable year, the
                                                   (continued...)
                                - 9 -

the amount of the deduction under section 166(a) for any business

bad debt is the adjusted basis provided in section 1011 for

determining the loss from the sale or other disposition of

property.   See sec. 166(b).   As pertinent here, section 1011(a)

provides that the adjusted basis for determining the gain or loss

from the sale or other disposition of property is the basis

determined under section 1012, adjusted as provided in section

1016, and section 1012 provides that the basis of property is its

cost.

     We turn first to a determination of whether the Miller loan

constitutes a business debt for purposes of section 166.   That

determination requires a factual inquiry.   See sec. 1.166-5(b),

Income Tax Regs.   As we understand his position, petitioner

contends that the Miller loan constitutes a business debt for

purposes of section 166 because he made that loan during 1986

(1) generally as part of his investment business and/or

(2) specifically as part of his investment business of making

loans.

     Based on our examination of the entire record before us, we


     10
      (...continued)
loss resulting therefrom is to be considered a loss from the sale
or exchange during the taxable year of a capital asset held for
not more than one year. See sec. 166(d)(1)(B). Sec. 166(d)(2)
defines a nonbusiness debt to mean a debt other than (1) a debt
created or acquired (as the case may be) in connection with a
trade or business of the taxpayer or (2) a debt, the loss from
the worthlessness of which is incurred in the taxpayer’s trade or
business.
                                - 10 -

find that petitioner has failed to establish that, when he made

the Miller loan in 1986, he was in the trade or business of

either investing generally or making loans specifically.11    See,

e.g., Rollins v. Commissioner, 32 T.C. 604, 612-615 (1959), affd.

276 F.2d 368 (4th Cir. 1960).     We further find on the instant

record that petitioner has failed to establish that the Miller

loan constitutes a business debt for purposes of section 166.

Accordingly, on the record before us, we hold that petitioner is

not entitled to a business bad debt deduction under section

166(a) with respect to that loan.

     We consider now whether petitioner is entitled to nonbusi-

ness bad debt treatment under section 166(d) with respect to the

Miller loan.   To resolve that question, we shall determine

whether the $2,641 of unrecovered principal of the Miller loan

became worthless during 1993.12    That determination also requires

a factual inquiry.   See Aston v. Commissioner, 109 T.C. 400, 415

(1997).

     Generally, a loan is considered worthless during the taxable


     11
       We further find on the record in this case that petitioner
has failed to show that during 1993, the year in which petitioner
claims the Miller loan became worthless, he was in the trade or
business of either investing generally or making loans specifi-
cally.
     12
      We note that a loss on a nonbusiness debt is to be treated
as sustained only if and when the debt has become totally worth-
less, and no deduction is to be allowed for a nonbusiness debt
which is recoverable in part during the taxable year. See sec.
1.166-5(a)(2), Income Tax Regs.
                                - 11 -

year in which there is no reasonable prospect of recovering the

loan.     See Aston v. Commissioner, supra; Crown v. Commissioner,

77 T.C. 582, 598 (1981).     The determination of worthlessness must

be fixed by identifiable events which form the basis of reason-

able grounds for abandoning any hope of recovery.    See Aston v.

Commissioner, supra; Crown v. Commissioner, supra.

        Based on our examination of the entire record before us, we

find that petitioner has failed to establish that the $2,641 of

unrecovered principal of the Miller loan became worthless during

1993.     We find on that record that petitioner has failed to show

any identifiable events which could have formed the basis of

reasonable grounds for abandoning any hope of recovering that

amount.     In fact, the record establishes that petitioner contin-

ued to prosecute the Miller loan lawsuit after 1993 in order to

recover the balance due on the Miller loan and the legal expendi-

tures that he had incurred in connection with recovering the

Miller loan.     As a result of that lawsuit, petitioner was enti-

tled to recover the entire $75,000 principal of the Miller loan

(with offsets of $72,358.88 attributable to the amount of that

principal that he recovered as of 1991), and on or about March 3,

1998, he was awarded $208,206 in attorney’s fees incurred in

connection with his litigation relating to that loan.    On the

record before us, we hold that petitioner is not entitled to

nonbusiness bad debt treatment under section 166(d) with respect
                             - 12 -

to the Miller loan.13

     Based on our examination of the entire record in this case,

we find that petitioner has failed to establish that he is

entitled to any deduction under section 166 with respect to the

Miller loan.

     We address now whether petitioner is entitled to a deduction

under any other provision of the Code with respect to the Miller



     13
      Assuming arguendo that we had found that petitioner estab-
lished that the Miller loan was a business debt for purposes of
sec. 166 and that the $2,641 of unrecovered principal of that
loan became worthless during 1993, we nonetheless find on the
instant record that petitioner has failed to show that the amount
of the deduction under sec. 166(a) with respect to that loan, as
determined under sec. 166(b), includes $109,482 of legal expendi-
tures that he claims he incurred in pursuing the Miller loan
litigation. As we understand it, petitioner bases his contention
that such alleged expenditures are to be included as part of the
adjusted basis of the Miller loan as determined under sec. 166(b)
because the note evidencing that loan contained the following
provision: “Should suit be commenced to collect this note or any
portion thereof, such sum as the Court may deem reasonable shall
be added hereto as attorney’s fees.” We note first that peti-
tioner has failed to establish on the record in this case that he
paid $109,482 of legal expenses as of the end of 1993. The
record establishes that as of the end of that year petitioner had
incurred only $90,999 of legal expenses, of which only $46,593
had been paid. Moreover, on the record in this case, we find no
evidence that any court directed in the year at issue or in any
year prior to or after that year that any amount, let alone a
reasonable amount, be added to the principal of the Miller loan
as attorney’s fees. Assuming arguendo that we had found that
petitioner established that the Miller loan was a business debt
for purposes of sec. 166 and that the $2,641 of unrecovered
principal of that loan became worthless during 1993, on the
record before us, we find that petitioner has failed to persuade
us that $109,482 of legal expenditures are includible under sec.
166(b) in determining the amount of deduction allowable for a
business bad debt under sec. 166(a).
                              - 13 -

loan.   As pertinent here, section 162(a) allows a deduction for

ordinary and necessary expenses paid during the taxable year in

carrying on any trade or business.     We have found that petitioner

has failed to establish that he was in the trade or business of

either investing generally or making loans specifically in 1986,

when he made the Miller loan, or in 1993, the year in which he

claims that that loan became worthless.    We find on the instant

record that petitioner has failed to show that the $2,641 of

unrecovered principal of the Miller loan and the legal expendi-

tures that he had paid as of the end of 1993 in connection with

the recovery of that loan constitute under section 162(a) ordi-

nary and necessary business expenses that he paid during 1993 in

carrying on a trade or business.

     As pertinent here, section 212(1) and (2) allows a deduction

for ordinary and necessary expenses paid during the taxable year

for the production or collection of income or for the management,

conservation, or maintenance of property held for the production

of income.   We have found that, because the interest rate called

for by the Miller loan was deemed to be usurious under California

law, petitioner was entitled to recover only the principal of

that loan, and the legal expenditures that petitioner had paid as

of the end of 1993 were for the recovery of the principal of the

Miller loan, and not for the recovery of interest thereunder.    On

the instant record, we find that petitioner has failed to show
                                - 14 -

that the unrecovered portion of the Miller loan and the legal

expenditures that he had paid as of the end of 1993 in connection

with the recovery of that loan principal constitute under section

212(1) and (2) ordinary and necessary expenses paid during 1993

for the production or collection of income or for the management,

conservation, or maintenance of property held for the production

of income.

       Section 165 allows a deduction in the case of an individual

for (1) a loss incurred in a trade or business, (2) a loss

incurred in any transaction entered into for profit, even though

not connected with a trade or business, and (3) a loss of prop-

erty 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.   See sec. 165(a),

(c).    We have found that petitioner has failed to establish that

he was in the trade or business of either investing generally or

making loans specifically in 1986, when he made the Miller loan,

or in 1993, the year in which he claims that that loan became

worthless.    We have also found that petitioner has failed to show

that the $2,641 of unrecovered principal of the Miller loan

became worthless during 1993.    In addition, we have found that,

because the interest rate called for by the Miller loan was

deemed to be usurious under California law, petitioner was

entitled to recover only the principal of that loan, and the
                             - 15 -

legal expenditures that petitioner had paid as of the end of 1993

were for the recovery of the principal of the Miller loan, and

not for the recovery of interest thereunder.       On the record

before us, we find that petitioner has failed to establish that

the unrecovered portion of the Miller loan and the legal expendi-

tures that he had paid as of the end of 1993 in connection with

the recovery of that loan constitute under section 165(c) a loss

that he incurred during 1993 (1) in a trade or business, (2) in a

transaction entered into for profit, even though not connected

with a trade or business, or (3) from fire, storm, shipwreck, or

other casualty, or from theft.

     To reflect the foregoing and the concession of petitioner,



                                      Decision will be entered

                                 for respondent.
