1998 Tax Ct. Memo LEXIS 266">*266 Decisions will be entered under Rule 155.
MEMORANDUM OPINION
WELLS, JUDGE: In the instant consolidated cases, hereinafter referred to collectively as case, respondent determined deficiencies in petitioners' 1980 and 1981 Federal income taxes in the amounts of $ 10,497 and1998 Tax Ct. Memo LEXIS 266">*267 $ 42,343, respectively. Respondent also determined that part of the underpayment of Federal income tax for petitioners' 1981 taxable year was substantial and attributable to tax-motivated transactions within the meaning of
After concessions, 21998 Tax Ct. Memo LEXIS 266">*268 the issues for decision are: 3 (1) Whether petitioners have previously "resolved" and "settled" all issues in the instant case; (2) whether a bad debt deduction in the amount of $ 15,064 claimed by petitioners on their 1981 return should be treated as a business bad debt or a nonbusiness bad debt; and (3) whether petitioners are entitled to deduct losses from an activity entitled "Computer Books + Tapes" claimed on Schedule C of their 1980 and 1981 returns.
Some of the facts have been stipulated and are so found. The stipulation of facts is incorporated herein by reference, and they are found accordingly. Petitioners resided in Briarcliff Manor, New York, at the time they filed their petitions.
1. WHETHER ALL ISSUES HAVE BEEN "RESOLVED" AND "SETTLED"
Preliminarily, we address petitioners' contention that they have "settled" and "resolved" all issues in the instant case. Petitioners argue that they previously reached agreement1998 Tax Ct. Memo LEXIS 266">*269 with respondent concerning all issues in the instant case and that they previously submitted checks to respondent in full satisfaction of all taxes and interest owed for the years in issue. Petitioners point to certain payments they allege to have been made to the Internal Revenue Service which, petitioners allege, "totally resolved" all issues in the instant case. Respondent argues that although petitioners may have made payments, such payments were applied to taxable years other than those at issue in the instant case, and, in any event, that payments made by petitioners after the notice of deficiency is mailed do not affect our jurisdiction to decide the correctness of the asserted deficiencies and income tax overpayments.
We agree with respondent. Petitioners misunderstand the purpose of the instant proceedings. Respondent determined deficiencies in petitioners' 1980 and 1981 Federal income taxes. A deficiency is generally defined as an amount by which the income, gift, or estate tax due under the law exceeds the amount of such tax shown on the return.
Accordingly, the function of this Court is to decide the correctness of the deficiency determined by respondent and the amount thereof, if any, or that there is an overpayment of tax. See
2. BAD DEBT DEDUCTION FOR 1981
From January 1, 1979 through June 23, 1981, petitioner John J. Kaiser (petitioner) was the 100-percent shareholder of MACS Corp. (MACS), an S corporation in the business of buying and selling cleaning supplies in the Bridgeport, Connecticut, area. During 1979 and subsequent years through 1981, petitioner advanced a total of $ 111,725 to MACS. On its 1981 Form 1120S (U.S. Small Business Corporation Income Tax Return) MACS reported paid-in or1998 Tax Ct. Memo LEXIS 266">*272 capital surplus in the amount of $ 1,000 and loans from shareholders in the amount of $ 110,725.
On their 1979, 1980, and 1981 Federal income tax returns, petitioners claimed losses from MACS in the total amount of $ 95,661 and reduced petitioner's basis in the shareholder loans to $ 15,064. MACS filed a final Form 1120S for its short taxable year ending June 23, 1981. On their 1981 Federal income tax return, petitioners claimed a deduction for a business bad debt in the amount of $ 15,064. In the notice of deficiency, respondent determined that petitioners are not entitled to a bad debt deduction for the 1981 taxable year. On brief, however, respondent concedes that petitioners are entitled to a deduction for a bad debt of $ 15,064 for their 1981 taxable year, but characterizes the deduction as a nonbusiness bad debt.
A taxpayer who claims a deduction bears the burden of substantiating the amount and purpose of the item claimed.
Nonbusiness bad debts, on the other hand, may be deducted, but only if they become entirely worthless during the year claimed; they are, moreover, to be treated as short-term capital losses.
Whether1998 Tax Ct. Memo LEXIS 266">*274 a debt is characterized as business or nonbusiness is a question of fact.
Being an employee may constitute a trade or business.
Even if petitioner were an employee of MACS, he has not shown that the loans were "necessary to keep his job or were otherwise proximately related to maintaining his trade or business as an employee."
On the record before us, we hold that petitioners have failed to present sufficient evidence to establish that they are entitled to a deduction for a business bad debt. Consequently, we sustain respondent's determination that the loss in question constituted a nonbusiness bad debt.
3. SCHEDULE C LOSSES
Petitioners filed Schedules C with their 1980 and 1981 Federal income tax returns reporting net losses from an activity entitled "Computer Books + Tapes" in the respective amounts of $ 6,880 and $ 1,162. Respondent determined, inter alia, that such activity was not entered into for profit, and, consequently, disallowed the claimed losses pursuant to
To prove that an activity is engaged in for profit, the taxpayer must show that the activity was engaged in with an actual and honest objective of making a profit. E.g.,
Petitioners offered no evidence that they pursued the "Computer Books + Tapes" activity with the requisite1998 Tax Ct. Memo LEXIS 266">*278 profit objective, and, accordingly, we sustain respondent's disallowance of the losses claimed from such activity.
To reflect the foregoing,
Decisions will be entered under Rule 155.
1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Respondent concedes that petitioners are entitled to an investment tax credit for the 1981 taxable year in the amount of $ 713 and that no portion of any deficiency determined for the 1981 taxable year is attributable to a tax-motivated transaction within the meaning of
In the notices of deficiency, respondent disallowed losses claimed by petitioners on Schedule E of their 1980 and 1981 Federal income tax returns in the amounts of $ 14,033 and $ 67,033, respectively, which losses related to certain equipment leasing activities. Petitioners and respondent agree that petitioners are entitled to losses from those activities for petitioners' 1980 and 1981 taxable years in the amounts of $ 20,232 and $ 55,037, respectively.↩
3. Respondent served petitioners with a request for admissions pursuant to Rule 90(a) and filed the same with the Court pursuant to Rule 90(b). Petitioners failed to respond to respondent's request for admissions. Consequently, each matter set forth therein is deemed admitted pursuant to Rule 90(c).
4. Petitioners have not presented us with any argument that the alleged payments were improperly applied by respondent or that they were deposits against the deficiencies determined by respondent. See
5. Petitioner did not show what the rent was, or that he was in the business of leasing the warehouse to MACS, much less that the dominant reason for the loan was to protect any such business. Cf.