TAX COURT OPINION

Case: Randy M. & Carmene M. Javorski
Docket Number: 2107-09S
Judge: Vasquez
Opinion Type: summary
Filed: 09/13/2010
Pages: 21

T .C . Summary Opinion 2010-136- UNITED STATES TAX COURT DY M . AND CARMENE M . JAVORSKI, Petitioners v . 6OMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 2107-09S . Filed September 13, 2010 . Gary C1 . Randall and James J . Workland ,. for petitioners . Robert V . Boeshaar , for respondent . VASQUE Judge : This case was heard pursuant to th e provisions f section 7463 of the Internal Revenue Code (Code) in effect when the petition was filed .' Pursuant to sectio n 7463 (b), th~ decision to be entered . is not reviewable by an y ' Unless otherwise indicated, all section references are to the Code in effect for the year in issue , and all Rule references .are to the ax Court Rules of Practice and Procedure . SERVED 0 1 2O1. 2 - .other court, and this opinion shall not be treated as preceden t for any other case . Respondent determined a $27,228 deficiency2 in petitioners ' 2005 Federal income tax and a $5,445 .60 accuracy-related penalt y under section 6662(a) . After concessions,3 the issues fo r decision are whether petitioners are, entitled to : (1) A bad debt deduction under section 166 of $382,000 ; (2) a capital los s deduction for a worthless . security under section 165(g) ; (3) a deduction of $10,000 as an ordinary and necessary business expense under section 162 ; and (4). a deduction for interes t 2 The deficiency includes self-employment tax of $10,592 . Respondent also allowed petitioners a deduction for . self-' employment tax of $5,296 . These issues involve computational matters to be resolved in the parties' Rule 155 computations consistent with the Court's opinion . See secs . 164(f), 1401, 1402 . Respondent made adjustments to petitioners" deductions for medical/dental expenses and miscellaneous itemized deductions, because after adjustments to petitioners' gross income, the amounts did not exceed the 7 .5- and 2-percent floors of .secs . 213 (a) and 67(a), respectively . Respondent also disallowed petitioners' claimed net operating loss . These issues involv e computational matters to be resolved in the parties' Rule 155 computations consistent with the Court's opinion-, See secs . 67 (a) , 172 (c) and (d) , 213 (a) . 1 3 Respondent concedes that petitioners are not liable fo r the accuracy-related penalty under sec . 6662(a) . 'Petitioners concede that the initial $150,000 equity investment in Lucc a Interiors ., Inc ., discussed infra , for which a stock certificate was issued does not give rise to a bad debt deduction . Finally , the parties agree that petitioners are entitled to the followin g expenses : -(1) $1,692 for supplies ;(2) $3,773 for meals an d entertainment ; (3) $5,018 for travel ; (4) $965 for gifts ; ,and (5 ) $2,657 for telephone/pager . Y 4 - 3 - payments t taling $31,709 under section 163 as either interest accrued in connection with a trade or business or as qualified residence nterest . Background Some of the facts have been stipulated and are so found . The stipulations of fact and the attached exhibits are incorporated herein by this reference . Petitioners resided in Washington State when the petition was filed . In 2005 and for the past 20 years Randy Javorski (petitionei) has worked as an independent manufacturers sale s representa ive foril0 to 12 furniture . and lighting manufacturers, including- D esign Institute of America (DIA) . In this capacity petitioner received commissions when he arranged sales between furniture tores and manufacturers he represented . Petit ' oner had long considered opening a furniture store, and, in 200 2, petitioner met with Stephan Eberle (Mr . Eberle) to discuss th' s possibility . Together, petitioner and Mr . Eberle drafted a asic business plan for what became Lucca Interiors , Inc . (Lucc Lucca was organized as a Canadian corporation tha t owned and erated a furniture store in Vancouver, Britis h Columbia . Petiti ner had dual motives for establishing Lucca . One reason was to fill a niche in the Vancouver furniture market . The second reason was to establish a client (i .e ., Lucca) that - 4 _ would purchase furniture from manufacturers petitioner represented . .-Petitioner earned a .commission whenever he arrange d transactions between Lucca and manufacturers he represented .; Petitioner anticipated earning,steady commissions with the creation of Lucca because he believed Lucca would consistently purchase goods through him .,,Lucca purchased much of its merchandise, including goods from DIA, through .petitione .r .,.- Petitioner contributed $150,0004 to Lucca in exchange for .a 49-percent ownership, interest . ,He obtained the funds to incorporate Lucca by opening a line of credi t5 (LOC 5278) with Washington Mutual that had a maximum credit line of $280,000 .,', Mr . Eberle did not contribute any capital to the .venture at .thi's time or any other, but he received the remaining,51 percent of . the stock for his role as Lucca's manager . In 2003 Lucca opened its doors for business . 6 4 All of petitioner's transfers to Lucca we're drawn from . .one of three lines . of credit that he opened . s Every line of credit petitioner used to transfer funds to Lucca was issued to both petitioner and Mrs . Javorski . However, the lines of credit were used only by petitioner in connection with Lucca . Thus, we will refer only to petitioner, opening lines of credit . 6 Petitioner continued to transact business with other furniture stores after Lucca was formed and never considered himself an employee of Lucca . During the first year Lucca conducted business approximately 5 to 10 percent of petitioner's sales as a representative were to Lucca . 1 - 5 - To melt Lucca's operating costs and obligations to creditors, petitioner continued to draw money on LOC 5278 . On July 8, 28 and 30, 2003, petitioner transferred $50,000, $10,000, a d $40,000, respectively, to Lucca . On September 5, 2003, peti inner transferred another $30,000 to Lucca . Petitioner needed additional funds to meet Lucca's financial demands . in September 2003 petitioner opened a second line of credit (LO~, 7826) secured by petitioners' rental property . On or about Sept mber 15, 2003, petitioner transferred .$120,300 .87 to Lucca . Lucca's financial prospects quickly diminished in 2004 . By that time customers had stopped visiting the store, and Lucca needed to ind new clientele . Lucca had incurred many debts and needed mor money to meet its obligations . To further finance Lucca's op rations, petitioner transferred $28,890 .25 to Lucca on or about M rch 19, 2004, and $40,000 on or about June 10, 2004 . By Se tember 2004 petitioner had almost exceeded his LOC 5278 credi limit, so petitioner replaced,LOC 5278 with LOC 3789, which was secured by petitioners' principal residence, on or about Sept mber 27, 2004 . Petitioner used LOC 3789 to satisfy the balance of LOC 5278 and transferred $40,000 to Lucca on-or about September 27, 2004 . Lucca accumulated a $30,000 debtfor goods purchased from, DIA in 2004 . DIA knew of petitioner's relationship to Lucca and 6 - encouraged petitioner to sell DIA's products to Lucca . However, as"Lucca's debt climbed, DIA withheld special orders-from Lucca until DIA received payment for its goods' . In order to'release the special orders petitioner made two'payments :tbtalin g $2,249 .10 to DIA in November 2004 . While the $2,249 .10 payment was .enough .to release the special orders, DIA sought more money=from Lucca to reduce Lucca's debt ., Lucca's indebtedness to . DIA in 2004 promptedDIA's president to call petitioner and threaten him . with the, . possibility of losing his position as DIA's representative if Lucca did'not satisfy its debt . In response, petitioner paid DIA $10,000 on-January-20, 2005, . to further reduce the amount of Lucca's debt to DIA and to maintain-his position as DIA's representative . Unfortunately for petitioner,Lucca was not successful .-and .filed for bankruptcy on March 15, 2005 . °Lucca's assets were assigned to the bankruptcy trustee, MacKay & Company, Ltd . (MacKay), on March 15, 2005 .- MacKay prepared a ; preliminary report on March .15,,2005,,' regarding the administration of Lucca's estate . The report stated : "It-appears that there will be no distribution to unsecured creditors" . Petitioner never pursued .a claim against Lucca during'the bankruptcy proceedings to recover any of his - 7 - payments, ut, as MacKay's preliminary report suggests, recovery for unsecu~ed creditors appeared unlikely . On Ap~il 28, 2006, MacKay prepared the Notice of Final Dividend a~d Application for Discharge of Trustee for Lucca . MacKay fou d that there were no funds available for distribution . Lucca wa s issolved on July 31, 2006 . In 20 5 petitioners paid mortgage interest of $14,444 for funds borr wed from LOC 7826 and $17,264 for funds borrowed fro m LOC 3789 . With he exception of petitioner's $150,000 initial contribut i n to Lucca, for which Lucca issued stock t o petitioner , petitioners did not provide any documentation that explaine d ow petitioner or Lucca treated the remaining $382,000 petitioner transferred to Lucca (i .e ., as a loan or a contributi n) . Lucca recorded the transfers by writing down in . its record that it received cash from petitioner . However, we do not kn o anything more about . the records because they wer e unavailable' Furthermore, petitioner expected to recover his transfers d my in the event that Lucca became profitable . Discussion ions are a matter of legislative grace, and taxpayers den of proving entitlement to the deductions claimed . Welch v . Helvering , 290 U .S . 111, 115 (1933) . Petitioners do not-allege, nor do .we find, that :. section 7491(a) 8 - applies . I . Section 166 Business Bad Debt Deductio n ,Section 166(a) provides as a general rule .that a deduction shall be-allowed for any debt which becomes worthless within the .taxable year . Only a bona fide debt can be deducted, however . .1 bona fide debt arises when a debtor-creditor relationship i s :formed because of an unconditional, valid, and enforceabl e obligation to pay a fixed or determinable sum of money . Boatner v . Commissioner ,'.T .C . Memo . 1997-379, affd . without published opinion 164 F .3d 629 (9th Cir . 1998) ; sec . 1 .166-1 .(c), income Tax Regs . A gift or contribution to capital shall not be considered a debt for purposes of section 166 . Kean v . Commissioner , 91 T .C . 575, 594 (1988) ; sec . 1 .166-1(c),° Income Tax Regs . Petitioners argue that the transfers totaling*$3 8.2,000', including' amounts paid directly to Lucca or on its behalf- ;'were loans and not equity investments' The question of whether transfers of funds to closely held corporations constitute debt or equity'must'be decided on the basis of all the relevant facts' and circumstances . Dixie Dairies Corp . v . Commissioner , 74 T .'C . 476,,4 ..93 (1980) . Taxpayers generally bear the burden , ofproving that the transfers constituted loans and not equity investments . Rule 142(a) . V 9 - Cour s look to the following nonexclusive factors to evaluate the nature of transfers of funds to closely held corporatio s : (1) The names given to the certificates evidencing the indebt dness ; (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 in management (6) a status equal to or . inferior to that of regular corporate reditors ; (7) the intent of the parties ; (8),"thin" or adequate c pitalization ; (9) identity of interest between creditor aid stockholder ; .(10) payment of interest only out o f "dividend" money ; and .(11) the ability of the corporation t o obtain loari.s from outside lending institutions . Bauer v . Commission r, 748 F .2d 1365, 1368 (9th Cir . 1984) (citing A .R . Lantz Co . i . United States, 424 F .2d 1330, 1333 (9th Cir . 1970)), revg . T .C . Memo . 1983-120 . These factors serve only as aids in evaluating whether transfers f funds to closely held corporations should be regarded as capital contributions or as bona fide loans . Fin Hay Realty Co . v . United States, 398 F .2d 694, 697 (3d Cir . 1968) . No single factor is controlling . Dixie Dairies Corp . v . Commissioner, supra at 493 . However, the ultimate question is whether there was a genuine intention to create a debt, with a reasonable xpectation of repayment, and whether that intention comported with the economic reality of creating (cid:127)a debtor-creditor - 10 - relationship . Litton Bus . Sys ., Inc . v . Commissioner, .-61 T .C . 367, 377 (1973) . Transfers to closely held corporations by controlling shareholders are subject to heightened scrutiny,=and labels attached to such transfers by the . controlling shareholders through bookkeeping entries or testimony have limite d significance unless these labels are supported by objective evidence .'- Fin Hay Realty Co . v . . United States , supra at 697 ;- Dixie Dairies Corp . v . Commissioner , supra at 495 ; see also Bauer v . Commissioner , supra at 1367-1368 ; A .R . Lantz Co . v . United States , supra . Rather than analyze in this opinion the facts here involved in light of every factor on the debt-equity .checklists, we confine our discussion to those points we find most . pertinent . First, petitioners' posttransaction characterization of the transfers totaling $382,000 as loans is undermined by the, lack of any formal indicia .of bona fide debt . For example, petitioner's transfers to Lucca were not accompanied by a note specifying a . .maturity date, an interest rate, or a.repayment schedule . second factor that weighs against a debtor-creditor relationship , ' While petitioner was not the controlling shareholder on, account of his minority ownership interest, he effectively controlled Lucca . Mr . Eberle was the active manager, but his decisions were subject to petitioner's approval ; and petitioner had contributed all of the operating capital . Consequently, we will closely scrutinize petitioner's characterization of his transfers . e - 11 - is petitioner's continued investment in a struggling company without re~eiving any security interest in the company . "It is unreasonable to conclude that * * * a prudent creditor woul d continu e make unsecured loans to a debtor with expectation of repayment . Dodd'v . Commissioner , 298 F .2d 570, 578 (4th Cir . 1962), aff T .C . Memo . 1961-8 . Third, petitioner's expectatio n of recoupi g his transfers only in the event that Lucca became successfu l undermines the "valid and enforceable obligation " element . ee sec . 1 .166 - 1(c), Income Tax Regs . Finally , petitioner provided no documentary evidence that Lucca treated the transf rs as loans on its books . ' Despi e the absence of formal aspects that typically denote a bona fide debt, petitioners contend that this case is analogous to Johnson v . Commissioner , T .C . Memo . 1977 - 436, and , consequent y, their transfers should be characterized as bona fide debt . We disagree . First, in Johnson , the taxpayer provided the Court with minutes fr m two board of directors meetings that not only discussed t he need to repay but later ratified the corporation's obligation to repay any advances . Second, the taxpayer in that case demons trated that the corporation that made the transfers recorded th m as accounts receivable and the corporatio n 8 We note as an additional factor that petitioner did not file a claim in Lucca's bankruptcy proceeding . 12 - receiving the . transfers recorded them,as accounts payable . Third, the payments were characterized by the Court as bona fide debt only so long as a reasonable expectation of :repayment existed . Once the taxpayer's expectation of repayment became unreasonable because of . the corporation's unlikely chance of recovery, the Court characterized the transfers as equity investments . Id . It is true that this case resembles Johnson in the sense .that no note was executed, no repayment schedule, was . set, and, no interest rate was attached to . the transfers . However, other factors in Johnson , which are not present-in petitioners' case, clearly denoted the parties' intent to create a"bona fide deb t and an,enforceable obligation to repay the transfers . Id . Here, the only evidence of bona fide debt was petitioner's self-serving testimony that he expected to be repaid for, his transfers and that Lucca was obligated to repay them . . Lucca did not register the transfers as accounts payable . Lucca's°business had already withered by 2004, yet petitioner continued to make transfers to Lucca throughout the year . With little to,no business in 2004, it was unreasonable for petitioner to,expect, .repayment of .his transfers . Petitioners-did not provide business records or corroborating testimony that would objectively reveal petitioner's or Lucca's intent ., Applying heightened scrutiny t o R - 13 - this case because petitioner is so closely connected to Lucca, we find that petitioner's testimony alone is insufficient to characteri ;e the transfers as loans . Therefore, without forma l elements t pically evincing a debt instrument and objective evidence st pporting petitioners' characterization of th e transfers, we find that petitioner's transfers to Lucca were not bona fide c ebt . Consequently, petitioners are not entitled to a bad debt dE duction under section 166 . II . Section 165(g ) Worthless Security Deductio n As w e found above, petitioner' s transfers constitute d equity, no debt . Petitioners argue that they are entitled t o deduct as a capital loss for a worthless security in 2005 the amount of petitioner's basis in his Lucca stock . Responden t argues tha to the extent petitioner's Lucca stock became worthless , it did not do so until 2006 . Unde r section 165(g), securities which are capital asset s that become worthless during a taxable year are "treated as a loss from t e sale or exchange, on the last day of the taxabl e 'year, of a capital asset ." Sec . 165(g)(1) .9 For purposes o f section 165 a corporati 1244 does not apply to petitioners' stock because a domestic corporation . 14 - For a taxpayer to qualify for a capital loss deduction unde r section 165(g), a stock interest in a corporation must be wholl y worthless . Sec . 1 .165-5(c), :.Income Tax Regs . Whether the .stoc k interest in the corporation is-worthless and the taxable year i n which such worthlessness occurred are questions of fact-wit h respect to which petitioners generally .bear the burden of-proof . ,See Rule 142(a) ; Boehm v . Commissioner, 326 U .S . 287,, 294 . (1945) ; Welch v . Helvering , 290 U .S . at°115 .° Stock is worthless if i t has neither liquidating value nor potential value . Austin Co . V . Commissioner , 71 T .C . 955, 970 (1979) . A corporation's stock ha s liquidating value if its assets exceed its liabilities . Id . corporation's stock has potential value if there is a reasonabl e expectation that it will become valuable in the .. future . Morton v . Commissioner , ° 38 B .T .A . 1270„ 1278 (1938), affd . 112 F, .2d .-32 0 (7th Cir . 1940) . A corporation's stock may be worthless if th e corporation declares bankruptcy, ceases,to operate, liquidates , or has a receiver appointed ; because-these events can destroy th e stock's potential value . Id . Petitioner's stock in Lucca became worthless in'2005 because . Lucca lacked liquidating and potential value . Lucca filed :for bankruptcy on March 15, 2005 . On the,same day MacKay was _ . appointed as Lucca's bankruptcy trustee . MacKay found that Lucca's liabilities exceeded its assets . Thus, there was n o liquidating value . Moreover, Lucca had no . prospects . of - 15 - recovering from its financial problems and had decided to dissolve . Consequently, petitioner could not reasonably expect the stock o gain any future value . Therefore,petitioners ar e entitled to a deduction for worthless securities equal to petitioner s adjusted basis in his Lucca stock . " III . Section 162(a) Deduction for $10,00 0 Taxpa~ ers are allowed a deduction for ordinary and necessary expenses ps id or incurred in carrying on a trade or business . Sec . 162(a) Whether an expenditure is ordinary and necessary is generally question of fact . Commissioner v . Heininger , 32 0 U .S . 467, 475 (1943) . Generally, for an expenditure to be a n ordinary ari d necessary business expense, the taxpayer must show a bona fide . usiness purpose for the expenditure ; there must be a proximate elationship between the expenditure and the business of the tax ayer . Challenge Manufacturing Co .(cid:127)v . Commissioner , 37 T .C . 650 ( 1 962) ; Henry v . Commissioner , 36 T .C . 879 (1961) . To be "necessary" within the meaning of section 162, a n expense ne e ds to be "appropriate and helpful" to the taxpayer' s 10 The for any los for determi property . stock, pres described a sec . 1016(a shareholder the amount if the othe basis for determining the amount of the deduction shall be the adjusted basis provided in sec . 1011 ing the loss from the sale or other disposition of ec . 165(b) . Petitioner's cost basis in his Lucca mably $150,000, was increased by the amount s ove that he subsequently contributed to Lucca . See ; Commissioner v . Fink , 483 U .S . 89, 94 (1987) (a is entitled to increase the basis of his shares b y f cash contributed to the corporation's capital, even shareholders make no contribution at all) . - 16 - business . Welch v . Helvering , supra at 113 . ; The . requirement that an .expense 'be "ordinary " connotes that "the, transaction ' . which gives rise to it must be of common or frequent occurrence in the type of business involved ." Deputy v . du Pont , 308 U .S . 488, 495 ( 1940 ) ( citing Welch v . Helvering , sura,at 114) . . Petitioners argue that the $10,000 , payment to DIA on behal f of,Lucca was an ordinary and necessary business expense . taxpayer generally may not deduct the payment of another person's .expense . See Deputy v'. du Pont , supra ; Dietrick v .-Commissioner , 881 F .2d_336 (6th Cir : 1989),,affg . T .C . Memo . 1988-180 ; Betson v .' Commissioner , 802 .F .2d 365, 368 (9th Cir . 1986) (shareholder' .s payment of corporate obligation is . not ordinary and necessary under section 162(a)), affg . in part and .revg . in part T :C .. Memo . 1984-264 ; Lohrke v . Commissioner , 48 T .C . 679 (196:7) . However ;' where a taxpayer can show that the payment of another's expense protected or promoted'the taxpayer's own business, then such' payment may be deductible . Square D Co . v . Commissioner , 121 . T .C . 168,,200 (2003) ; Hood v . Commissioner , 115 T .C . 172, 180-181 . (2000) ; Lohrke v . Commissioner , supra at 688 . Typically in these circumstances, the original obligor is unable to make payment, and the taxpayer satisfies the obligation to protect or promote his interests . See Hood v . Commissioner , supra at 181 . ._ Petitioner's payment to DIA .was made expressly for the, preservation of his own business . Petitioner earned commissions 17 - enever a furniture store bought DIA's products through 05 Lucca owed approximately $ 30,000 for goods rom DIA through petitioner . Despite petitioner's and s best efforts , Lucca did not recover from its roblems and , as a result , Lucca could not pay it s A . To re over a portion of Lucca's debts to DIA, DIA's' president hreatened petitioner with the possibility of losing his positi n as DIA's representative . In order to avoid losing his positi n with DIA, a manufacturer that was important to him, he paid D I $10,000 . Moreo er, Lucca had little prospect of recovery because it could not ttract business . The $10,000 payment on Lucca' s behalf wou d have little impact on Lucca's debts to its creditors . Hence, the $10,000 payment was primarily for the preservat i n of petitioner's business as a representative . Had p titioner lost DIA's business, he would have lost a significant portion of his income . Therefore, petitioner pai d DIA to protect his business as a representative . Consequently, petitioners are entitled to deduct the $10,000 payment under section 162 (a ) IV . Section 163 Deduction of $31,709 of Interest Payment s Sectio 163.(a) allows a deduction for all interest paid or accrued wit in the taxable year on indebtedness . However, - 18 - section 163(h) , disallows deductions of personal interest accrued during the taxable year in the case of .a taxpayer other than a corporation . Personal interest .is .any interest-allowable as'a deduction other than interest listed in-section 163(h)(2) . ° Petitioners argue that their interest is either interest paid~or accrued on indebtedness that is properly allocable to a trade or business or qualified residence interest, and therefore it is not personal interest . See sec, . 163(h) (2) (A) , (D) . .A . Deduction of Interest Properly Allocable to a Trade or Busines s For petitioners to deduct interest under section 163(h)(2)(A), the interest expense must be "properly allocable to a trade or business" . Section 1 .163-8T,'Temporary Income Tax Regs ., 52 Fed . Reg . 24999 (July 2, 1987), provides the rules for the allocation of interest expense for purposes of section 163(h) .11 Robinson v . Commissioner , 119 T .C . 44, 70 (2002) . Debt is allocated to expenditures in accordance with the use of the debt proceeds . Sec . 1 .163-8T(c)(1), Temporary Income Tax Regs ., 52 Fed . Reg . 25000 (July 2, 1987) . In general, interest expense accruing on a debt during any period is allocated to expenditures in the same manner as the debt is allocated . 11 Temporary regulations are"entitled to the same weight as final regulations . See Peterson Marital Trust v . Commissioner , 102 T .C . 790, 797 (1994), affil . 78 F .3d 795 (2d Cir . 1996) ; Truck & Equip . Corp . v . Commissioner , 98 T .C . 141, 149 (1992) . 19 - As we found above, the circumstances surrounding the $10,000 payment th at petitioner made directly to DIA was for the purpose of protect ng and promoting his business as a representative . Thus, the interest paid or accrued on $10,000 of indebtedness i s properly a locable to petitioner's business as a representative . Consequent y, petitioner is entitled to . deduct the amount of interest a tributable to $10,000 of indebtedness . . .The r maining interest paid or accrued on petitioners' indebtedne s may not be deducted as interest accrued in connection with petitioner's business as a representative . Petitioner contributed the-remaining funds to Lucca to meet it s operating costs . Thus, the remaining interest that he paid o n the indebtedness is properly allocable to Lucca's business, not to his business as a representative . That being the case, petitioner are not entitled to deduct the remaining interest under section 163(h)(2)(A ) B . Deduction of Interest as Qualified Residence Interest Petiti ners' alternative argument is that the interest paid on the loans is qualified residence interest . To be deductible as .qualifie residence interest, petitioners' indebtedness must be either i terest paid or accrued on acquisition indebtedness or interest paid or accrued on home equity indebtedness during the taxable yea , year . See sec . 163(h) (3) (A) . - .20 - 1 . Acquisition Indebtednes s "Acquisition indebtedness" .means any indebtedness which, is incurred in acquiring, constructing, orsubstantially improving any qualified residence of the .taxpayer,' and is secured by such residence . Sec . 163 (h) (3) (B) . The funds petitioner borrowed were either contributed to Lucca or were used .to pay Lucca's debts to DIA . Consequently, -petitioners' interest was not paid . or accrued on indebtedness used to acquire, construct, or substantially improve a qualified residence . 2 . Home Equity Indebtednes s "Home equity indebtedness" means any indebtedness (other than acquisition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not exceed the fair market value of such qualified residence . reduced by the amount of acquisition indebtedness with respect to such residence . . ._ Sec . 163(h) (3), (C) . 4 Petitioners have not provided any information regarding the fair market value of either the principal residence or .the rental property, .. nor have'they(cid:127)provided any documents illustrating the amount of acquisition indebtedness, if any, attached to either of the two properties .' . Consequently, without values to calculate whether the indebtedness exceeded the fair market value minus acquisition indebtedness, petitioners may not deduct their - 2 1 interest p yments as home equity indebtedness . See sec . 6001 ; sec . 1 .600 -1(a), (e), Income Tax Regs . In re ching our holdings herein, we have considered al l arguments ade by the parties, and to the extent not mentione d above, w e ~ind.them to be irrelevant or without merit . To re lect the foregoing, Decision will be entere d under .Rule 155 .