T.C. Memo. 1998-393

UNITED STATES TAX COURT

ANTONINO AND FRANCESCA PECORA, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15779-97. Filed November 6, 1998.

Antonino Pecora, pro se.

Thomas J. Kerrigan, for respondent.

MEMORANDUM OPINION

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

section 7443A(b)(3) and Rules 180, 181, and 182. All section

references are to the Internal Revenue Code in effect for the

year in issue. All Rule references are to the Tax Court Rules of

Practice and Procedure.
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Respondent determined a deficiency in petitioners' 1993

Federal income tax in the amount of $8,645 and an accuracyrelated penalty under section 6662(a) in the amount of $1,729.

The issues for decision are: (1) Whether petitioners must

report interest income; (2) whether petitioners are entitled to

an ordinary loss deduction of $32,500 under section 1244; and

(3) whether petitioners are liable for an accuracy-related

penalty under section 6662(a). 

Petitioners resided in Bayside, New York, at the time their

petition was filed.

Petitioners reported $3,143 as interest income. Petitioners

did not report an additional $752 of interest income on their

1993 return.

In 1993, petitioner Antonino Pecora (petitioner) and others

were about to enter into the restaurant business. Petitioner

hired an attorney to incorporate the restaurant and to negotiate

a lease for restaurant space with the Warwick Hotel. 

Petitioner's attorney incorporated the restaurant under the name

of Bis Restaurant, Ltd. (Bis). The Certificate of Incorporation

of Bis was filed with the State of New York Department of State

on August 18, 1993. The Certificate of Incorporation authorized

Bis to issue 200 shares of no par value stock.

On Form 4797, Sales of Business Property, attached to their

1993 return, petitioners reported an ordinary loss on section
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1244 stock in the amount of $32,500. Petitioners reported Bis as

the name of the corporation that issued the section 1244 stock. 

Although petitioners reported that the stock was purchased with

cash, the number of shares issued to petitioners and the par

value per each share were not listed. 

Section 61 provides that gross income means all income from

whatever source derived, including interest income. Sec.

61(a)(4). Petitioner contends that although the bank accounts

listed the names of both petitioners and their Social Security

numbers, they were held by petitioners for the benefit of their

children. 

The record does not show that petitioners were not the

beneficial, as well as the legal, owners of these accounts. Thus

any interest earned from these accounts belongs to petitioners

and must be reported as interest income by petitioners. Sec.

61(a)(4).

Section 165(g)(1) and (2)(A) generally provides that a

taxpayer realizes a capital loss when stock that is a capital

asset becomes worthless. Section 1244(a) provides a limited

exception to this general rule in that it allows an individual

taxpayer to treat a loss on "section 1244 stock" as an ordinary

loss where it would otherwise be treated as a loss from the sale

or exchange of a capital asset. The aggregate amount of the loss

that may be treated as an ordinary loss under section 1244 cannot
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exceed $100,000 in the case of a husband and wife filing a joint

return. Sec. 1244(b)(2). 

The term "section 1244 stock" generally means stock of a

qualifying domestic small business corporation that was issued

for money or other property (other than stock or securities). 

Sec. 1244(c). The Commissioner is empowered to prescribe

regulations necessary to carry out the purposes of section 1244. 

Sec. 1244(e). Pursuant to that authority, the Commissioner

issued regulations requiring a taxpayer to have records

sufficient to establish that the taxpayer satisfies the

requirements of section 1244 and is entitled to the loss claimed. 

Sec. 1.1244(e)-1(b), Income Tax Regs. 

In order to substantiate an ordinary loss deduction claimed

by its shareholders, a corporation should maintain records that

show the persons to whom the stock was issued, the date of

issuance to these persons, and a description of the amount and

type of consideration received from each person. Sec. 1.1244(e)-

1(a)(2), Income Tax Regs. There are other requirements that we

need not detail here. We have held that strict compliance with

the requirements of section 1244 and the regulations thereunder

is necessary to obtain the benefits of the section. Mogab v.

Commissioner, 70 T.C. 208, 212 (1978); Gubbini v. Commissioner,

T.C. Memo. 1996-221.
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After a review of the record, we conclude that petitioners

are not entitled to an ordinary loss deduction under section 1244 

in the amount of $32,500 for their purported Bis stock. Aside

from petitioner's self-serving testimony, petitioners offered no

documentary evidence to establish that the purported Bis stock

qualifies as section 1244 stock, and that petitioners ever paid

for or received any Bis stock. Petitioner admitted that they

have no records in their possession, i.e., stock certificates or

canceled checks, to establish their ownership and basis in Bis.

In their 1993 return, petitioners stated that the Bis stock

was purchased with cash. At trial, when asked whether petitioner

invested by check or by cash, he could not recall exactly but

stated that some payments were by checks and that he did not

"think" any cash was involved. At trial, petitioner stated that

he had one partner. The correspondence from his attorney at the

time of the formation of Bis indicated that there were four

investors. 

Moreover, even if petitioners had established that they

owned section 1244 stock, there is no evidence in the record to

establish when such stock became worthless or that it was

worthless in 1993. Petitioner contends that Bis incurred the

loss when it forfeited a $60,000 security deposit given to the

Warwick Hotel to secure the lease. However, petitioner
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introduced no evidence of a security deposit or of a loss of a

security deposit or a loss of any kind.

We have stated on many occasions that this Court is not

bound to accept petitioner's self-serving, unverified, and

undocumented testimony. Tokarski v. Commissioner, 87 T.C. 74, 77

(1986); Hradesky v. Commissioner, 65 T.C. 87 (1975), affd. per

curiam 540 F.2d 821 (5th Cir. 1976). Petitioners have failed to

establish that they sustained a $32,500 loss that may be treated

as an ordinary loss under section 1244 for 1993. Thus,

respondent is sustained on this issue.

Finally, we must decide whether petitioners are liable for

an accuracy-related penalty in the amount of $1,729. Section

6662(a) imposes an accuracy-related penalty in the amount of 20

percent of the portion of an underpayment of tax attributable to

negligence or disregard of rules or regulations. Sec. 6662(a)

and (b)(1). Negligence is any failure to make a reasonable

attempt to comply with the provisions of the Internal Revenue

laws. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. 

Moreover, negligence is the failure to exercise due care or the

failure to do what a reasonable and prudent person would do under

the circumstances. Neely v. Commissioner, 85 T.C. 934, 947

(1985). Disregard includes any careless, reckless, or

intentional disregard of rules or regulations. Sec. 6662(c);

sec. 1.6662-3(b)(2), Income Tax Regs. No penalty will be imposed
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with respect to any portion of any underpayment if it is shown

that there was a reasonable cause for such portion and that the

taxpayer acted in good faith with respect to such portion. Sec.

6664(c).

On the basis of this record, we conclude that petitioners

are liable for an accuracy-related penalty under section 6662(a). 

Petitioners failed to report interest income in the amount of

$752 as required. Further, petitioners failed to establish with

adequate records the claimed $32,500 ordinary loss deduction. In

fact, petitioners failed to provide any reasonable explanation or

documentary evidence to support their entitlement to the

deduction. In this regard, we find that petitioners' actions

were not those of a reasonable and prudent person under the

circumstances. Accordingly, we sustain respondent's

determination on this issue.

Decision will be entered

for respondent.