TAX COURT OPINION

Case: DFSystems, Inc.,
Docket Number: 17261-11
Judge: Foley
Opinion Type: bench
Filed: 03/29/2013
Pages: 7

CZ UNITED STATES TAX COURT WASHINGTON, DC 20217 DFSYSTEMS, INC.,, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 17261-11. ) ) ) ) OR D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Maurice B. Foley at Houston, Texas, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Maurice B. Foley Judge Dated: Washington, D.C. March 29, 2013 SERVED Mar 29 2013 Capital Reporting Company 3 1 Bench Opinion by Judge Maurice B. Foley 2 March 20, 2013 3 4 5 6 7 8 9 10 11 12 13 14 15 DFSystems, Inc. Docket No. 17261-11 The Court has decided to render oral findings of fact and opinion and the following represents the Court.'s oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This bench opinion is made pursuant to the authority granted by Section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure . All section references are to the Internal Revenue Code in effect for the year in is,sue, and all Rule references are to the Tax Court Rules of 16 Practice and Procedure. 17 18 The facts are as follows: On Februany 28, 1986, petitioner, an 19 electrical consulting business, was incorporated in 20 21 22 23 24 25 Texas as a subchapter C corporation. During the years in issue, Larry Dorman was petitioner's president and registered agent; Gladys Dorman was petitioner's secretary and treasurer; and both were directors. In 1993, petitioner hi ed Jose Padilla. During 2005, petitioner transferred funds to Mr. Padilla, a 866.488.DEPO www.Capi alReportingCompany.com Capital Reporting Company 1 2 3 trusted employee. M-. Padilla retired on July 16, 2005, because of a erminal illness and died in 2006. In 1999, E.L. Construction, Inc. (E.L. 4 Construction) was incorporated and Lorie Dorman 5 Schroder, Larry and Gladys Dorman's daughter, was the 6 majority shareholder. On June 1, 1999, petitioner 7 8 convened a special meeting, during which petitioner's officers decided to transfer funds to E.L. 9 Construction. Petitioner subsequently transferredÅto 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 E.L. Construction;?$6, 65' which is reflected in petitioner's journalf as unreimbursed receivables. MSF M&F E.L. Construction ceased operations in 2006, and, on Augus 9, 2007, filed its final 2006 Form 1120, U.S. Corporation Income Tax Return. On its return, E.L. Construction reported $56,656 of forgiveness of indebtedness income, a $56,177 loss, and $479 of taxable income. On August 17, 2007, petitioner filed its 2006 Form 1120, U.S. Corporation Income Tax Return. On the return, petitioner claimed an $81,977 bad debt deduction. This amount is comprised of two purported debts: (1) $56,657 transferred to E.L. Construction and (2) $25,320 transferred to Mr. Fadilla. Respondent subsequently conducted an audit of petitioner's 2006 return. During the audit, 866.488.DEPO www.Capi alReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 petitioner sent respondent a letter asserting that the transfers to E.L. Construction and Mr. Padilla were loans. On Apri 25, 2011, respondent sent a notice of deficiency relating to 2006 to petitioner. Respondent disallowed petitioner's claimed bad debt deduction. In the notice, respondent determined that "it has not been es ablished that these amounts were bad debts arising f om true debtor-creditor relationships, based upon valid and legally 10 enforceable obligations, that these amounts became 11 worthless during th taxable year, or that you took 12 all reasonable steps to collect the debts, no bad 13 14 15 16 17 18 19 20 21 22 23 24 25 debt deduction is allowed. " On July 25, 2011, petitioner, whose p incipal place of business was Texas, timely filed its petition with the Court. . Discussiorg of legal authorities: Bona fide business bad debts may be deducted during the taxable year in which they ecome worthles s . Sec . 166 (a) (1) , (d) (1). These debts must arise from debtor-creditor relationships that are based upon valid and enforceable obligations to pay fixed wr+ determinable oc amounts of money. Sec. 1.166-1(c), Income Tax Regs. Petitione contends that the transfers at issue constitute bona fide loans. Pursuant to section 7491(a), petitioner has the burden of proof unless it 866.488.DEPO www.CapilalReportingCompany.com Capital Reporting Company introduces credible evidence relating to the issue that would shift the burden to respondent. See Rule MSF 6 142(a). Our conclusions, however, are based on a preponderance of the evidence, and thus the allocation of the b rden of proof is immaterial. See Martin Ice Cream Co v. Commissioner, 110 T.C. 189, 210 n.16 (1998) . Th critical inquiry is "whether there was a genuine intention to create a debt, 1 2 3 5 6 7 8 9 which, in turn, depends upon weighing such objective 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 factors as reasonab e expectation of repayment and the economic reality of the claimed debtor-creditor relationship." Gilb rt v. Commissioner, 74 T.C. 60, 65 (1980) ; see also Litton Business Systems, Inc. v. fqF Commissioner, 61 T. . 367, 377 (1974) (stating that the ultimate question is whether "there [was] a genuine intention to create a debt, with a reasonable expectation of repayment, and did that intention comport with the ec nomic reality of creating a debtor-creditor relationship") . Consistent bookkeeping and financial reporting on balance sheets "must be viewed wit some diffidence unless supported by objective factors demonstrating economic reality. " See Gilbert v. Commissioner, 74 T.C. at 65. Furthermore, the Court of Appeals for the Fifth 25 Circuit (i.e., the Court to which this case is 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 5 6 7 appealable) has stated that "allegedly objective economic indicia of debt such as consistent bookkeeping and consistent financial reporting on balance sheets are 1n our opinion little more than additional declarations of intent, without any accompanying economic indicia of debt . " Alterman Foods, Inc. v. Unit d States, 505 F.2d 873, 879 (5th 8 Cir. 1974); see Golsen v. Commissioner, 54 T.C. 742, 9 10 11 12 757 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971), Simply put, the transfers to E.L. Construction and Mr. Padilla were not loans. The evidence in support of petitioner's contention (i.e., 13 minutes from the June 1, 1999, special meeting; 14 15 16 17 18 bookkeeping records; tax returns; certain checks; and ·t-e. a letter a revenu agent) is woefully insufficient. See Gi. bert v. Commissioner, 74 T.C. at 65; Alterman Foods, Inc. v. United States, 505 F.2d at 879. There is no oan agreement or other document 19 which sets forth the amount of any purported loan, 20 21 22 23 24 25 the interest rate, the maturity date, collateral, or an obligation to repay; no indication that E.L. Construction or Mr. Padilla evidenced an intent, willingness, or ability to repay any funds received; and no evidence that petitioner attempted to collect any funds transferred. Furthermore, the testimony of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 Gladys Do'rman and Lorie Dorman Schroder was 8 unconvincing. Indeed, petitioner did not intend to create a debtor-creditor relationship with either E.L. Construction o Mr. Padilla. See Gilbert v. Commissioner, 74 T.C. at 65; Litton Business Systems, Inc. v. Commissione , 61 T.C. at 377 Accordingly, we sustain respondent's determination. Contentions we have not addressed are irrelevant, moot, o meritless. This conc udes the Court's oral findings of fact and opinion in this case. (Whereupon, at 2:08 p.m., the above- entitled inatter was concluded. ) 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 366.488.DEPO www.CapittlReportingCompany.com