internal_revenue_service number release date index number ------------------------------------------------------------ -------------------------------------- ---------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number ---------------------- refer reply to cc ita b02 plr-111988-14 date date ty --------- legend --------------------------------------------------- -------------------- -------------------- --------------- ---------------------------------------------------------- ---------------------------- ---------- ------------------------------------------------------------------------ taxpayer a b c d e f g ----------------------------------------------------------------------------------------------------------------- -------------- h ----- i ----------------------------------------------------------- j --------- k l ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- date date date date date date date date date date date ------- ------- ------- -------------------------- ------- --------------------------- -------------- --------------------- ------------------- ------------------- ------------------- plr-111988-14 date date date date date date date a b c dear ------ -------------- ------------------ -------------------- ------------------- ------------------- ---------------------- -------------------- ----------------- ------------------- --------------- this is in response to the letter dated date submitted on your behalf by your authorized representative in the letter you request two rulings first a ruling that the taxpayer abandoned a and b in date within the meaning of sec_165 of the internal_revenue_code but that it is not entitled to claim the loss until its claims against c and d are resolved second a ruling that it is entitled to claim its ordinary and necessary business_expenses under sec_162 regardless of the contingent possibility of recovery_of these expenses from c facts - abandonment_loss taxpayer represents the facts and information related to its request for rulings as follows taxpayer a corporation is a wholly-owned subsidiary of e e and its affiliated_group_of_corporations including taxpayer electronically file a consolidated federal_income_tax return on a calendar_year basis using the accrual_method of accounting taxpayer is a regulated_public_utility it owns a f percent interest in a and b the g comprised three large pressurized water nuclear generating facilities h was abandoned and decommissioned commencing in date a was placed_in_service in date and its operating license was scheduled to expire on date b was placed_in_service in date and its operating license was scheduled to expire on date two replacement steam generators were installed and placed_in_service in each of a and b in date and in date respectively c designed and manufactured the replacement steam generators in date a steam leak occurred in one of the heat transfer tubes in one of the b steam generators and b was safely taken off-line all four steam generators were inspected and areas of significant unexpected and excessive wear were found throughout as a result since date a and b have remained offline through the announced retirement of g on date plr-111988-14 taxpayer undertook an analysis of possible causes of the extraordinary wear and explored potential remedial actions in date after months of analysis and tests taxpayer submitted a restart plan to the nuclear regulatory commission nrc the nrc conducted public hearings and studied the merits of the restart application in date the nrc ruled that restart would require amendments to the operating license of a faced with mounting costs and uncertainties taxpayer determined that continued efforts to repair or restart a and b were not feasible on date taxpayer filed a form i with the securities_and_exchange_commission announcing that it was going to issue a press release on date announcing that it was going to permanently retire g on date the taxpayer formally notified the nrc that it had permanently ceased operation of a and b effective date the defueling of a was completed on date and the taxpayer sent a letter to the nrc on date certifying that the fuel had been removed from a the defueling of b was completed on date and a letter certifying the nuclear fuel removal for b was sent to the nrc on date it is anticipated that the decommissioning process will take several decades taxpayer severed a substantial number of operational employees who will not be engaged in the decommissioning of g it sought and received a reduction in its state property_tax base to reflect the impairment the taxpayer wrote down its investment in g for financial purposes in the second quarter of date not all of the assets at g will be abandoned in connection with the permanent retirement of g the taxpayer set up the j to recover a portion of its investment in assets and inventory as a result of the decommissioning of g the taxpayer has represented that none of the property included in the j will be treated as abandoned property subject_to this ruling_request on date the taxpayer submitted a notice of dispute to c for all damages caused by c’s failed design and manufacture of the replacement steam generators that led to the shutdown and permanent retirement of a and b the dispute resolution process initiated by the notice of dispute was unsuccessful so the taxpayer initiated binding arbitration proceedings against c to recover damages the arbitration proceedings were ongoing at the time the ruling_request was filed g carries accidental property damage and carried accidental outage insurance issued by d the accidental outage insurance was cancelled due to the permanent retirement of g d has been placed on notice of potential claims for loss recovery under both policies there are also pending proceedings before the k to determine how otherwise unrecovered costs are addressed in the ratemaking process law and analysis - abandonment_loss plr-111988-14 sec_165 of the internal_revenue_code provides that there shall be allowed as a deduction any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise sec_1_165-1 of the income_tax regulations provides that if a casualty or other event occurs which may result in a loss and in the year of such casualty or event there exists a claim for reimbursement with respect to which there is a reasonable_prospect_of_recovery no portion of the loss with respect to such reimbursement may be received is sustained for purposes of sec_165 until it can be ascertained with reasonable certainty whether or not such reimbursement will be received whether or not such reimbursement will be received may be ascertained with reasonable certainty for example by a settlement of the claim by an adjudication of the claim or by an abandonment of the claim a reasonable_prospect_of_recovery exists when a taxpayer has bona_fide claims for recoupment from third parties and when there is a substantial possibility that such claims will be decided in his favor 266_f2d_154 6th cir if a taxpayer’s claim is not speculative or wholly without merit and if the taxpayer believes that the chance of recovering the loss is sufficiently probable to warrant bringing a lawsuit and prosecuting it with reasonable diligence to a conclusion the deduction should be deferred until the conclusion of the lawsuit 128_f3d_1410 10th cir sec_1_165-2 provides that for the allowance under sec_165 of losses arising from the permanent withdrawal of depreciable_property from use in the trade_or_business or in the production_of_income see sec_1_167_a_-8 sec_1_167_a_-8 provides that in order to qualify for the recognition of loss from physical abandonment the intent of the taxpayer must be irrevocably to discard the asset so that it will neither be used again by him nor retrieved by him for sale exchange or other_disposition revrul_87_117 1987_2_cb_61 holds that for purposes of sec_165 the fact that a public_utility company that has abandoned a partially constructed nuclear power plant obtains a rate increase that is based in part on the costs of the abandoned plant does not cause it to have been compensated for by insurance or otherwise as that phrase is used in sec_165 the abandonment of real_property interests where ownership has not been transferred has been addressed in a variety of circumstances an abandonment was found where the taxpayer filled and sealed a water well excavation in revrul_56_599 1956_2_cb_122 dismantled an asphalt plant moved it to another location and did not reassemble it 19_tc_259 acq 1953_1_cb_6 stopped working on a mine reduced the work force and budget to maintain it sold the mine equipment for salvage decided to abandon the mine by vote of board_of directors and wrote the mine off the company books a j industries inc v plr-111988-14 united st503_f2d_660 9th cir and locked and boarded hotel placed barricades around it cut off utilities terminated insurance discontinued maintenance and made no efforts to sell or lease it hanover v commissioner tcmemo_1979_332 legal restrictions upon the physical disposition of property such as a nuclear plant will not in themselves preclude a finding of abandonment if all other facts and circumstances demonstrate an intention to irrevocably retire property from use and the requisite overt acts related to abandonment have occurred the acts necessary to evidence the intent to abandon property need only be appropriate to the particular circumstances a nuclear power plant is a heavily regulated asset and one which taxpayer cannot simply walk away from board up or dismantle in the present case taxpayer has indicated that it intended to abandon a and b it has taken steps to abandon the units by removing the nuclear fuel from the units it has submitted documents to the nrc that prevent it from operating g it altered its insurance for the unit to a level indicative of its nonoperational status finally it issued press releases concerning the abandonment of the plant wrote-off the assets on its books and included statements about the abandonment in its financial statements the taxpayer has taken actions to render a and b nonoperational it has announced its intention to permanently shut down g the nuclear generators have been shut down since the leak at b was discovered it has commenced the initial activity phase of radiological decommissioning with the appropriate filing with the nrc taxpayer severed a substantial number of operational employees who will not be engaged in the decommissioning of g it sought and received a reduction in its state property_tax base to reflect the impairment based on the above it is held that taxpayer sustained an abandonment_loss within the meaning of sec_165 of the internal_revenue_code with respect to a and b exclusive of the assets in the j in date it demonstrated the requisite intent to abandon a and b it effectuated that intent through numerous acts of abandonment and it has placed both units in a state of disability this holding is limited to the issue of whether an abandonment of a and b occurred and does not consider which specific assets are abandoned or the amount properly allocated thereto however pursuant to sec_165 even though taxpayer abandoned a and b it will not be entitled to claim a deduction for the loss incurred if the loss is compensated for by insurance or otherwise see also sec_1_165-1 the taxpayer is pursuing its claims against c in an arbitration proceeding it has represented that it has a valid claim against c and a reasonable_prospect_of_recovery against c the taxpayer has filed separate proof of loss claims under the d outage policy and may pursue claims under the property accident policy it has represented that it has a reasonable prospect of recovering damages from d plr-111988-14 the taxpayer is also seeking recovery_of costs that might not be recoverable from c or d in rate proceedings before k given that the taxpayer has a reasonable prospect of recovering damages from both c and d the deduction of the abandonment_loss should be deferred until the arbitration proceeding is concluded and the d insurance claims are resolved any recovery in rates before the k does not constitute a reasonable_prospect_of_recovery by insurance or otherwise sufficient to require deferral of the abandonment_loss deduction under sec_165 revrul_87_117 1987_2_cb_61 facts - ordinary and necessary business_expenses in addition to the facts set forth above taxpayer represented the following taxpayer has incurred and will continue to incur a variety of expenses associated with the decontamination dismantlement removal disposal of the structures systems and components and the decommissioning of a and b the contamination being remediated all occurred while taxpayer owned and operated a and b the vast majority of the expenses will merely restore the facility to its pre-contaminated state and will not adapt the property to a new or different use increase its value beyond its pre- contaminated state or prolong its useful_life taxpayer is the majority owner and operator of g but is a minority owner of l and is the only common owner of l and g each nuclear generating station is separately licensed by the nrc and the decommissioning of each unit is separately regulated by the nrc there is no commingling of operations or decommissioning between the two stations each joint_venture has the power to select its own unicap method law and analysis - ordinary and necessary business_expenses sec_162 generally allows a deduction for the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business in revrul_94_38 1994_1_cb_55 the service ruled that costs incurred to clean up land and treat groundwater that the taxpayer had contaminated with hazardous waste from its business were deductible under sec_162 and not required to be capitalized under sec_263 except for the cost of constructing groundwater treatment facilities the service explained that the appropriate test under sec_263 for determining whether the expenditures increased the value of property is to compare the status of the asset after the expenditure is made with the status of the asset before the condition arose that necessitated the expenditure the environmental remediation costs did not materially add to the value of the land appreciably prolong its life or adapt it to a new or different use in revrul_2004_18 2004_1_cb_509 the service clarified revrul_94_38 explaining that otherwise deductible amounts may be subject_to inventory capitalization under sec_263a in revrul_98_25 1998_1_cb_998 the service ruled that costs incurred to replace underground storage tanks containing waste by-products including the costs of plr-111988-14 removing cleaning and disposing of the old tanks and the costs of acquiring installing and filling the new tanks were deductible as ordinary and necessary business_expenses under sec_162 in revrul_2005_42 2005_2_cb_67 the service addressed five situations involving environmental remediation costs of taxpayers that manufactured inventory and concluded in each situation that remediation costs otherwise deductible under sec_162 were nevertheless properly capitalizable as inventory costs under sec_263a in situation a stove manufacturer that ceased operations at one site continued to produce stoves at another site the service concluded that the taxpayer’s remediation costs at the first site were incurred by reason of its production activities within the meaning of sec_1 263a- e i and thus were properly allocable to the inventory produced_by_the_taxpayer at site two in 107_fsupp2d_937 s d ohio aff’d 267_f3d_510 6th cir the court held that ta taxpayer’s expenses for remediation of contaminated soil must be capitalized under sec_263 because the remediation permanently enhanced the properties’ value the taxpayer had purchased two convenience stores each of which unknown to the taxpayer contained leaking underground storage tanks that had contaminated the soil the deduction was rejected because the taxpayer had purchased the stores in a contaminated condition and was not merely restoring them to their condition at the time of purchase expenses for which there is a fixed_right of reimbursement are not deductible under sec_162 356_f2d_755 5th cir a taxpayer has a fixed_right to reimbursement where a right has matured without further substantial contingency 68_tc_620 nonacq 1978_2_cb_3 there must be a fixed_right to reimbursement so that the taxpayer’s payment are in the nature of an advance to or payment on behalf of another if there is no agreement but only a contingency that at some future the claim for reimbursement will be allowed in whole or in part the taxpayer is entitled to deduct its expenditure 37_tc_158 acq 1962_2_cb_4 31_f3d_651 8th cir taxpayer has represented that it has incurred and will continue to incur a variety of expenses associated with the decontamination dismantlement removal disposal of the structures systems and components and the decommissioning of a and b the contamination being remediated all occurred while taxpayer owned and operated a and b the vast majority of the expenses will merely restore the facility to its pre- contaminated state and will not adapt the property to a new or different use increase its value beyond its pre-contaminated state or prolong its useful_life it has further represented that to the extent it incurs expenditures to purchase equipment used in the decommissioning process or to erect temporary facilities those costs would be capitalized under sec_263 similarly it has represented that to the extent it incurs costs to construct an independent fuel storage installation for g nuclear waste such costs plr-111988-14 would be capitalized under sec_263 in light of these representations the expenses that merely restore the facility to its pre-contaminated state and that do not adapt the property to a new or different use or increase its value beyond its pre-contaminated state or prolong its useful_life are deductible pursuant to sec_162 and are not subject_to capitalization under sec_263 taxpayer has represented that it is possible that a part of any recovery against c may represent compensation_for ordinary and necessary business_expenses it incurred following the abandonment of a and b taxpayer does not have a fixed_right to reimbursement from c taxpayer has contingent claims against c that are being contested this contested liability does not preclude the claiming of the sec_162 expenses in the year they are incurred electric tachometer varied investments inc taxpayer has represented that any recoveries will be included in its income in accordance with sec_451 no opinion is expressed about the tax treatment of the transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically addressed by the above ruling consequently no opinion is expressed regarding the applicability of sec_263a to the decommissioning expenses at g the rulings contained in this letter are based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by appropriate parties while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to taxpayer’s federal_income_tax return for the taxable_year in which the transaction covered by this ruling took place in accordance with the power_of_attorney we are sending copies of this letter to taxpayer’s authorized representatives we are also sending a copy of this letter to the appropriate operating division director sincerely _______________________________ thomas d moffitt branch chief branch office of the associate chief_counsel income_tax accounting


internal_revenue_service number release date legend a b nu date uil num a b ----------------------- contact numbers telephone --------------------- fax tax_year s ended form person to contact id number taxpayer_identification_number dear ------------------ this is a final_determination regarding your exempt status under sec_501 of the internal_revenue_code because you have not established that you are observing the conditions required to continue exempt status recognition of your exemption from federal_income_tax as an organization described in sec_501 is retroactively revoked to date you have indicated that you accept our determination to revoke your organization’s tax exempt status by signing form 6018-a consent to proposed action you have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling or writing to internal_revenue_service office_of_the_taxpayer_advocate you are required to file form_1120 u s_corporation income_tax return form_1120 must be filed by the 15th day of the third month after the end of your annual_accounting_period a penalty of dollar_figure a day is charged when a return is filed late unless there is reasonable_cause for the delay however the maximum penalty charged cannot exceed dollar_figure or percent of your gross_receipts for the year whichever is less this penalty may also be charged if a return is not complete so please be sure your return is complete before you file it if you have any questions please call the contact person at the telephone number shown in the heading of this letter thank you for your cooperation sincerely r c johnson director eo examinations


t c memo united_states tax_court dale h and edith littlefield sundby petitioners v commissioner of internal revenue respondent docket no filed date dale h and edith littlefield sundby pro sese michael s hensley kevin m brown james a nelson and jeffrey a schlei for respondent memorandum opinion wells chief_judge respondent determined a deficiency in petitioners’ federal_income_tax of dollar_figure the issue to be decided is whether petitioners are entitled to a bad_debt deduction of dollar_figure which they claimed on schedule c of their federal_income_tax return all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure background the parties submitted the instant case fully stipulated without trial pursuant to rule the parties’ stipulations of fact and the accompanying exhibits are hereby incorporated by this reference and are found as facts in the instant case petitioners resided in san diego california when their petition was filed on date access anytime anywhere inc access was incorporated in the state of california petitioners were the sole shareholders of access on date access was renamed navis communications navis petitioners were the sole shareholders of navis navis was assigned a federal employer_identification_number on date navis’s corporate status was suspended by the california franchise tax board on date search2000 was incorporated in the state of california petitioner dale h sundby mr sundby was the president of search2000 on date search2000 was renamed poweragent inc mr sundby was the president of poweragent inc the california franchise tax board suspended poweragent inc ’s corporate status on date navi sec_1petitioners failed to file a brief addressing this issue and search2000 were corporations during navis held itself out as a corporation navis was engaged in limited business activity during as reflected in a bill from a law firm a long-distance phone bill and several shipping receipts navis remained a california corporation until its corporate status was suspended on date search2000 held a board_of directors meeting and the minutes of that meeting state in part whereas the corporation desires to accept the offer of navis communications a california sole_proprietorship to sell all of its ownership rights to business plans and intellectual_property defined as workworld and poweragent resolved that the corporation purchase all rights to business plans and intellectual_property defined as workworld and poweragent for a consideration of dollar_figure on date search2000 created the following instrument in connection with the alleged purchase by search2000 of business plans and intellectual_property defined as workworld and poweragent which were owned by navis 2the bill indicated that the law firm higgs fletcher mack of san diego california performed services related to the incorporation of navis communication 3we note that petitioners stipulated that access was incorporated under the laws of the state of california and that it later changed its name to navis petitioners stipulated that navis was a corporation in we shall treat navis as a corporation petitioners have not provided this court with evidence that navis elected to be treated as a subchapter_s_corporation under sec_1362 promissory note dollar_figure date for value received search2000 inc a california corporation the maker promises to pay navis communication the holder at the offices of the holder of this note or at such other place as the holder of this note may designate the principal sum of dollar_figure together with interest on the unpaid principal balance of this note from time to time outstanding at the rate of per year until paid in full the principal sum of this note and all accrued interest thereon shall be payable on demand interest on this note shall be computed on the basis of a year of days for the actual number of days elapsed all payments by the maker under this note shall be in immediately available funds in no event shall any interest charged collected or reserved under this note exceed the maximum rate then permitted by applicable law and if any such payment is paid_by the maker then such sum shall be credited by the holder as a payment of principal all payments by the maker under this note shall be made without set-off or counterclaim and be free and clear and without any deduction or withholding for any taxes or fees of any nature whatsoever unless the obligation to make such deduction or withholding is imposed by law the maker shall pay and save the holder harmless from all liabilities with respect to or resulting from any delay or omission to make any such deduction or withholding required_by_law whenever any amount is paid under this note all or part of the amount_paid may be applied to principal premium or interest in such order and manner as shall be determined by the holder in its discretion in the event of any actual or deemed entry or any order for relief with respect to the maker under the federal bankruptcy code this note all interest thereon and all other_amounts payable hereunder shall automatically become and be due and payable without presentation demand protest or any notice of any kind all of which are hereby expressly waived by the maker the maker agrees to pay on demand all costs of collection including reasonable attorneys’ fees incurred by the holder in enforcing the obligations of the maker under this note no delay or omission on the part of the holder in exercising any right under this note shall operate as a waiver of such right or of any other right of such holder nor shall any delay omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion none of the terms or provisions of this note may be excluded modified or amended except by a written instrument duly executed on behalf of the holder expressly referring to this note and setting forth the provision so excluded modified or amended all rights and obligations hereunder shall be governed by the laws of the sate of california search2000 inc by signed dale sundby name dale sundby title chairman and ceo neither petitioners nor navis reported on any federal_income_tax return the sale of a business plan or intellectual_property rights neither petitioners nor navis reported on any federal_income_tax return the sale of poweragent or workworld moreover navis did not file a federal_income_tax return for additionally there is no evidence suggesting that workworld had any value moreover there is no evidence to suggest that the promissory note was ever sold transferred or otherwise conveyed to petitioners by navis neither petitioners nor navis reported on any federal_income_tax return interest_income arising from the sale of a business plan or intellectual_property neither petitioners nor navis reported on any federal_income_tax return interest_income arising from the sale of poweragent or workworld petitioners claimed a bad_debt deduction on schedule c of their federal_income_tax return on schedule c mr sundby indicated that his principal business was that of a lender reporting income on the cash_basis mr sundby also indicated that he did not materially participate in the operation of this business_discussion petitioners bear the burden of proving that they are entitled to their claimed bad_debt deduction rule a 503_us_79 to avail themselves of a bad_debt deduction pursuant to sec_166 sec_7491 does not apply in the instant case to shift the burden_of_proof to respondent because petitioners neither alleged that sec_7491 was applicable nor established that they fully complied with the requirements of sec_7491 sec_166 bad_debts a general_rule -- wholly worthless debts --there shall be allowed as a deduction any debt which becomes worthless within the taxable_year partially worthless debts --when satisfied that a debt is recoverable only in part the secretary may allow such debt in an amount not in excess of the continued petitioners must prove a bona_fide debt existed between them and search2000 and the debt became worthless in the year in which they claimed the deduction see also 74_tc_476 kim v commissioner tcmemo_1995_598 hotel continental inc v continued part charged off within the taxable_year as a deduction b amount of deduction --for purposes of subsection a the basis for determining the amount of the deduction for any bad_debt shall be the adjusted_basis provided in sec_1011 for determining the loss from the sale_or_other_disposition of property d nonbusiness debts -- general_rule --in the case of a taxpayer other than a corporation-- a subsection a shall not apply to any nonbusiness_debt and b 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 year nonbusiness_debt defined --for purposes of paragraph the term nonbusiness_debt means a debt other than- a a debt created or acquired as the case may be in connection with a trade_or_business of the taxpayer or b a debt the loss from the worthlessness of which is incurred in the taxpayer’s trade_or_business commissioner tcmemo_1995_364 affd without published opinion 113_f3d_1241 9th cir a bona_fide debt is a debt which 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 income_tax regs see dixie dairies corp v commissioner supra pincite the existence of a bona_fide debtor- creditor relationship may be determined by examination of all relevant facts 54_tc_905 in deciding whether a bona_fide debt existed we may consider a number of factors including whether evidence_of_indebtedness exists such as a note whether any collateral or security is requested whether a demand for repayment has been made whether the parties’ records reflect the transaction as a loan whether any repayments have been made and whether any interest was charged see kim v commissioner supra see also dixie dairies corp v commissioner supra 48_tc_374 affd 415_f2d_519 9th cir bragg v commissioner tcmemo_1993_479 however formal indicia of debt are not in themselves sufficient to establish a bona_fide indebtedness hotel continental inc v commissioner supra the alleged debt transaction requires close scrutiny to determine whether the parties were engaged in an arm’s-length transaction because petitioners controlled both corporations see baldwin v commissioner tcmemo_1993_433 see also ludwig baumann co v commissioner tcmemo_1961_271 affd 312_f2d_557 2d cir in the instant case petitioners have failed to prove their entitlement to the bad_debt deduction claimed on their return petitioners have failed to prove that search2000 and navis were engaged in an arm’s-length transaction or that navis and search2000 ever entered into a valid debtor-creditor relationship see rule a while the record contains a promissory note and the minutes of the date search2000 board_of directors meeting authorizing search2000 to purchase the alleged workworld and poweragent business plans and intellectual_property from navis the record contains no evidence other than the promissory note that the alleged transaction actually took place moreover there is no evidence that the note was acquired transferred or otherwise conveyed by navis to petitioners who are claiming the bad_debt deduction on schedule c of their personal return 6mr sundby was the president of both search2000 and navis in the minutes of the date search2000 board_of directors meeting indicate that petitioners and mr j tim konold were on the search2000 board_of directors moreover the promissory note indicates that mr sundby was the chairman and ceo chief_executive_officer of search2000 the california franchise tax board’s records list mr sundby as the only officer or director of both search2000 later poweragent inc and navis neither navis nor petitioners reported the sale of the alleged business plan and intellectual_property on its or their federal_income_tax return there is no indication that navis even filed a federal_income_tax return for petitioners have not shown that the alleged business plan and intellectual_property poweragent and workworld had any value petitioners have not presented this court with any evidence that the alleged business plan and intellectual_property even existed the promissory note a demand note lacks a date of maturity and does not require regular_interest and principal payments to be made there is no evidence that search2000 made any interest or principal payments on the promissory note moreover there is no evidence that either navis or petitioners demanded payment from search2000 there is no evidence that either navis or petitioners required search2000 to provide collateral for the promissory note petitioners have failed to show that when the promissory note was created there was a genuine intention to create a bona_fide debt 7petitioners alleged on their federal_income_tax return that mr sundby was a lender petitioners must prove that mr sundby was in a trade_or_business and that the alleged debt was connected to that trade_or_business in order to take their claimed deduction sec_166 see 480_us_23 the taxpayer must be involved in the activity with continuity and regularity and the taxpayer’s primary purpose for engaging in the activity must be for income or profit moreover on schedule c of their federal_income_tax return petitioners indicated that mr sundby did not continued assuming arguendo that petitioners were able to prove that a bona_fide debt was created with respect to the date transaction petitioners still would not be entitled to the bad_debt deduction petitioners have failed to show that they are entitled to deductions that on their face would be allowable to navis if at all the promissory note was made between search2000 and navis because navis was incorporated under the laws of the state of california and there are other indicia of its separate status we shall treat it as a separate_entity see 319_us_436 since the promissory note was made payable to navis it is navis that would be entitled to the bad_debt deduction if any were to be allowed and petitioners have not shown that the note was transferred to them personally moreover petitioners have not shown that any s_corporation_election was in effect for navis for the year in issue on the basis of the foregoing we hold that petitioners may continued materially participate in the business of lending petitioners have not provided this court with any evidence which supports their contention that mr sundby was in the trade_or_business of being a lender during or petitioners have failed to show that mr sundby continually or regularly engaged in lending for income or profit even though mr sundby was president of both search2000 and navis full-time service to a corporation does not necessarily amount to engaging in a trade_or_business other than the trade_or_business of being an employee see 373_us_193 not claim a deduction for a bad_debt pursuant to sec_166 we have considered all of the contentions and arguments of the parties that are not discussed herein and we find them to be without merit irrelevant or moot to reflect the foregoing decision will be entered for respondent 8having held that petitioners have failed to show that a bona_fide debt exists we need not decide whether the claimed debt became worthless in