T.C. Memo. 1996-125

UNITED STATES TAX COURT

STEPHEN D. RUDDEL, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21262-94. Filed March 13, 1996.

Michael R. Fabrikant, for petitioner.

Bruce G. Warner, for respondent. 

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Stephen D. Ruddel petitioned the Court to

redetermine respondent's determination of a $130,764 deficiency

in his 1987 Federal income tax and a $32,691 addition thereto

under section 6651(a)(1). Respondent reflected this

determination in a notice of deficiency issued to petitioner on

August 22, 1994.
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Following concessions, we must decide:

1. Whether petitioner may deduct certain payments that he

made to the Hollywood, Florida, police department as a charitable

contribution. We hold he may not.

2. Whether petitioner may deduct those payments as an

expense under section 212 or a portion of these payments as a

casualty loss under section 165. We hold he may not.

3. Whether petitioner is entitled to a bad debt deduction

with respect to two "loans". We hold he is not.

4. Whether petitioner is liable for an addition to his 1987

tax under section 6651(a)(1). We hold he is.

Unless otherwise stated, section references are to the

Internal Revenue Code in effect for the year in issue. Rule

references are to the Tax Court Rules of Practice and Procedure. 

Dollar amounts are rounded to the nearest dollar.

FINDINGS OF FACT 

Some facts have been stipulated and are found accordingly. 

The stipulated facts and exhibits are incorporated herein by this

reference. Petitioner resided in Hollywood, Florida, when he

filed his petition.

On August 28, 1986, the Hollywood, Florida, police

department (Police Department), with the assistance of the United

States Marshals (collectively referred to as Officers), searched

petitioner's home pursuant to a valid search warrant. The

Officers found 334 grams of cocaine, $7,362 in United States
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currency, various gold and silver coins, and jewelry in a safe.

They also uncovered drug paraphernalia, weapons, ammunition, and

other miscellaneous items. These items were seized and

inventoried by the Police Department.

Petitioner was arrested for cocaine trafficking. In

addition to a fine of at least $100,000, the minimum mandatory

period of incarceration for this offense was 5-years

imprisonment. See Fla. Stat. Ann. sec. 893.135(b)2 (West 1985). 

Petitioner negotiated a plea agreement whereby he agreed to plead

nolo contendere in exchange for a lighter sentence. In order to

secure a recommendation for this lighter sentence, petitioner

rendered "substantial assistance" which, among other things,

required petitioner to participate in an undercover sting

operation and to remit $80,000 to the Police Department, which

would be used for their undercover work.

Petitioner remitted the $80,000 payment at the time of his

sentencing hearing. In light of this payment, petitioner's plea,

and his assistance to the authorities, the judge waived the

minimum mandatory confinement and fine and sentenced petitioner

to a lighter sentence of 3-1/2 years of probation.

Meanwhile, the property seized by the police was the subject

of a civil forfeiture action filed in Florida State court. At a

probable cause hearing that was held in this action, the

presiding judge found that the police had probable cause to seize

petitioner's personal property, and that the requirements had
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1 Petitioner originally reported that he transferred

$152,297 of Chrysler Corp. stock to the Police Department, as a

charitable contribution. Petitioner, however, never transferred

any shares of Chrysler Corp. stock to the Police Department.

Instead, the Chrysler Corp. stock was sold, and the proceeds were

used to repurchase petitioner's personal property from the Police

Department for $90,900.

been satisified under Florida law for the Police Department to

remain in possession of those items and to continue the

forfeiture proceeding. See Fla. Stat. Ann. sec. 932.703(1) (West

1985). A final order of forfeiture was never entered in this

case because petitioner, through his attorney, negotiated an

agreement with the police enabling him to repurchase his property

for a price of $90,900. After he repurchased the property,

petitioner and the Police Department settled and dismissed the

matter.

On November 4, 1992, petitioner filed his 1987 Federal

income tax return. On his Schedule A, Itemized Deductions,

petitioner claimed a charitable contribution deduction with

respect to the amounts he paid to the Police Department.1

Petitioner also claimed a $161,100 casualty loss for the items of

personal property seized by the police. Petitioner also claimed,

a bad debt deduction of $176,500, which was based on alleged

loans to two individuals, Ashley Dunn (Mr. Dunn) and William

Crowl (Mr. Crowl).

OPINION
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The determinations reflected in respondent's notice of

deficiency are presumed correct, and the burden is on petitioner

to disprove these determinations. Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933); Blohm v. Commissioner,

994 F.2d 1542, 1548-1549 (11th Cir. 1993), affg. T.C. Memo.

1991-636.

1. Charitable Contribution Deduction

Section 170(a) allows a deduction for charitable

contributions, as defined in section 170(c). The phrase

"charitable contribution" is generally understood to be

synonymous with the term "gift." Elrod v. Commissioner, 87 T.C.

1046, 1075 (1986); Sutton v. Commissioner, 57 T.C. 239, 242

(1971). “A gift is generally defined on a voluntary transfer of

property by the owner to another without consideration therefor.” 

Osborne v. Commissioner, 87 T.C. 575, 581 (1986). The term

“gift” does not include payments that proceed primarily from a

legal duty or moral obligation imposed on the donor, or from the

inducement of some anticipated benefit (beyond the incidental

enjoyment which flows from performing a generous act). 

Commissioner v. Duberstein, 363 U.S. 278, 284-286 (1960);

Burwell v. Commissioner, 89 T.C. 580, 589-590 (1987); DeJong v.

Commissioner, 36 T.C. 896, 899 (1961), affd. 309 F.2d 373 (9th

Cir. 1962). Furthermore, if the “contribution” is in fact an

exchange in the form of a substantial quid pro quo, it is not a

contribution to which section 170 applies. Hernandez v.
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Commissioner, 490 U.S. 680 (1989); United States v. American Bar

Endowment, 477 U.S. 105, 117-118 (1986); Osborne v. Commissioner,

supra.

In the instant case, petitioner was charged with trafficking

in cocaine. Under applicable State law, this offense carried a

mandatory 5-year prison term, and at least $100,000 in fines. 

See Fla. Stat. Ann. sec. 893.135(b)2 (West 1985). In exchange

for a lighter sentence of probation, petitioner agreed to: 

(1) Plead nolo contendre, (2) agreed to cooperate with the

police, and (3) remit $80,000 to the Police Department. Under

these circumstances, petitioner's $80,000 payment, which was made

under the compulsion of his plea agreement, can hardly qualify as

a charitable deduction under section 170. Instead of proceeding

merely from petitioner's generous impulse, his $80,000

"contribution" was nothing more than part of the consideration

given by him to avoid incarceration. See South End Italian

Indep. Club v. Commissioner, 87 T.C. 168, 176 (1986); Perlmutter

v. Commissioner, 45 T.C. 311 (1965); Lombardo v. Commissioner,

T.C. Memo. 1985-552; cf. Commissioner v. Duberstein, supra at

285. The same is true with respect to petitioner's $90,900

payment to the Police Department also claimed as a charitable

contribution. This payment was not a contribution. To the

contrary, the $90,900 payment was simply the quid pro quo that

petitioner paid for the return of his property lawfully seized by

the Police Department. We hold for respondent on this issue. 
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2. Property Held for the Production of Income/Casualty Loss

Petitioner argues that he may nevertheless deduct the

$90,000 payment under section 165(c)(3) or section 212. Section

165(a) allows taxpayers to deduct losses sustained during the

taxable year which are not compensated or reimbursed by insurance

or otherwise. There are limits on the deductibility of losses

incurred by individuals. Under section 165(a)(3) such losses are

allowable only if they are incurred in profit-seeking activity or

arise from casualty or theft. Section 212 permits an individual

to deduct all ordinary and necessary expenses paid or incurred

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

conservation, or maintenance of income-producing property, or for

the determination, collection, or refund of any tax.

We are unpersuaded by petitioner's arguments. Simply put,

petitioner repurchased certain personal property from the Police

Department, in lieu of its forfeiture, and a deduction is not

allowable for property forfeited in connection with illegal

narcotics activity. See, e.g., Schad v. Commissioner, 87 T.C.

609, 623 n.4 (1986), affd. without published opinion 827 F.2d

774 (11th Cir. 1987); Holmes Enters., Inc. v. Commissioner,

69 T.C. 114, 116-117 (1977); Holt v. Commissioner, 69 T.C. 75,

79 (1977), affd. per curiam 611 F.2d 1160 (5th Cir. 1980);

Fuller v. Commissioner, 20 T.C. 308 (1953), affd. 213 F.2d 102

(10th Cir. 1954); Vasta v. Commissioner, T.C. Memo. 1989-531;

Mack v. Commissioner, T.C. Memo. 1989-490; Farris v.
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Commissioner, T.C. Memo. 1985-346, affd. without published

opinion 823 F.2d 1552 (9th Cir. 1987); see also sec. 280E (under

which no deduction is allowed for any amount paid or incurred in

the business of drug trafficking); secs. 1.162-1(a), and 1.212-

1(p), Income Tax Regs. The fact that petitioner settled the

matter before a final order of forfeiture was entered does not

change this result. We hold for respondent on this issue. 

3. Bad Debt Deduction

Respondent disallowed all of the bad debt deduction reported

on petitioner's 1987 return. Respondent determined that

petitioner did not prove that any of the amounts advanced to

Messrs. Dunn or Crowl created a bona fide loan.

Section 166(d)(1)(B) provides that "where any nonbusiness

debt becomes worthless within the taxable year, the loss

resulting therefrom shall be considered a loss from the sale or

exchange, during the taxable year, of a capital asset held for

not more than 1 year." Only a bona fide debt qualifies for

purposes of section 166. A bona fide debt "arises from a

debtor-creditor relationship based upon a valid and enforceable

obligation to pay a fixed or determinable sum of money." 

Sec. 1.166-1(c), Income Tax Regs. Whether the parties actually

intended the transactions to be loans depends on whether the

advances were made “with a reasonable expectation, belief and

intention that they would be repaid". Zimmerman v. United

States, 318 F.2d 611 (9th Cir. 1963). Intent can be established
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from an examination of the facts surrounding the advances. See

Goldstein v. Commissioner, T.C. Memo. 1980-273.

Petitioner has produced no meaningful evidence rebutting

respondent's determination. First, there is no evidence that

Mr. Dunn or petitioner ever contemplated that petitioner would

loan Mr. Dunn money. Rather, in 1987, Mr. Dunn forged

petitioner's signature on checks drawn upon petitioner’s bank

account, and Mr. Dunn embezzled funds from petitioner's Charles

Schwab brokerage account. Petitioner sued his bank and Charles

Schwab in 1988, settling the matter about a year later for

$40,000. Petitioner also sued Mr. Dunn to recover the embezzled

amounts. Petitioner received monthly restitution payments from

Mr. Dunn until 1989.

Second, petitioner advanced Mr. Crowl $120,000 by checks

dated January 17, 1980. Petitioner argues this advance was a

loan as evidenced by the fact that he wrote the word "loan" on

the memo line of the checks. We are unpersuaded. Petitioner's

writing the word "loan" on each check does not, in itself,

establish that the advance was in fact a loan. We find relevant

the fact that petitioner did not enter a written loan agreement

with Mr. Crowl, nor did he execute any promissory notes, maintain

a repayment schedule for the advances, or charge interest. We

also find relevant that petitioner did not take other meaningful

steps to enforce this purported loan. The record shows that

Mr. Crowl, at petitioner's direction, was to invest the $120,000
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in the silver market. The record also shows that Mr. Crowl would

share the profits in the event that the investment proved

profitable. Thus, it appears to us that petitioner and Mr. Crowl

transacted business for the purposes of investing in the silver

market and that no debtor-creditor relationship existed between

them. Nor has petitioner established that any debt owed him by

Mr. Crowl became worthless during the year in issue. We find for

respondent on this issue.

4. Delinquency Penalty

Respondent determined that petitioner is liable for an

addition to tax under section 6651(a)(1). Respondent determined

that petitioner failed to file timely his 1987 Federal income tax

return, and that he failed to show that his delinquency was due

to reasonable cause.

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

file a tax return on time. The addition to tax imposed under

section 6651(a)(1) does not apply if petitioner can prove that

his failure to file was: (1) Due to reasonable cause, and

(2) not due to willful neglect. Sec. 6651(a); United States v.

Boyle, 469 U.S. 241, 245 (1985); In re Stanford, 979 F.2d 1511,

1512 (11th Cir. 1992). A failure to file timely a Federal income

tax return is due to reasonable cause if the taxpayer exercised

ordinary business care and prudence, and nevertheless, was unable

to file the return within the prescribed time. In re Stanford,

supra at 1514; sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
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Willful neglect means a conscious, intentional failure or

reckless indifference. United States v. Boyle, supra at 245.

In the instant case, petitioner's 1987 income tax return was

due, considering extensions, on October 15, 1988. Petitioner

filed his return on November 4, 1992, well after the due date. 

Petitioner alleges that his return was untimely due to his

inability to obtain access to his residence after his arrest in

order to retrieve records necessary to prepare his return. 

Petitioner also maintains that certain records were thrown out by

the U.S. Marshals before the forfeiture sale of his building. We

are not impressed with petitioner's arguments. The

unavailability of records does not necessarily establish

reasonable cause for failure to file timely. See Electric &

Neon, Inc. v. Commissioner, 56 T.C. 1324, 1342-1344 (1971), affd.

without published opinion 496 F.2d 876 (5th Cir. 1974). An

individual must file a timely return based on the best

information available, and he or she may then file an amended

return, if necessary. Estate of Vriniotis v. Commissioner,

79 T.C. 298, 311 (1982). Petitioner was allowed access to his

building in January 1988 to remove any records or other items

left after the search. Petitioner failed to establish that

specific records needed to prepare his 1987 return were

unavailable, and the record herein does not indicate that he

tried to obtain information from other sources. See Crocker v.

Commissioner, 92 T.C. 899, 913 (1989) (delinquency penalty upheld
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where the taxpayer did not show what documents were still needed

or what actions were taken to obtain such documents).

Petitioner attempts to shift the responsibility for the

untimeliness of his return to his accountant. Again, we are not

persuaded. First, reliance on one's accountant to file a timely

return is not “reasonable cause” for a late filing under section

6651(a)(1). United States v. Boyle, supra at 252. Second,

petitioner's accountant fully explained the delinquency penalty

to petitioner before the due date of the 1987 return in an effort

to obtain timely information from petitioner to prepare the

return. Petitioner has failed to prove that his untimely filing

was due to reasonable cause and not due to willful neglect. 

Thus, we sustain respondent's determination that petitioner is

subject to the addition to tax under section 6651(a)(1). See

Waitzkin v. Commissioner, T.C. Memo. 1992-216.

To reflect the foregoing,

Decision will be

entered for respondent.