Wisconsin Tax Appeals Commission Docket No. 01-I-75

STATE OF WISCONSIN

TAX APPEALS COMMISSION

KEVIN J. AND JENNIFER T. AMYS

7540 Douglas Avenue

Racine, WI 53402-9542,

Petitioners,

vs.

WISCONSIN DEPARTMENT OF REVENUE

P.O. Box 8907

Madison, WI 53708-8907,

Respondent.

DOCKET NO. 01-I-75

DECISION AND ORDER

DON M. MILLIS, COMMISSION CHAIRPERSON:

This matter came before the Commission for trial on July 16, 2002, in Eau Claire, Wisconsin. Petitioners were represented by Larry J. Coleman, CPA. Respondent was represented by Attorney Neal E. Schmidt. The parties presented oral arguments and did not submit post-hearing briefs.

FINDINGS OF FACT

The Commission makes the following Findings of Fact based on the testimony and evidence received at trial and the record in this matter:

Whei Gen Construction Company

1. On or about August 10, 1993, petitioner Jennifer T. Amys ("Mrs. Amys") advanced $78,170 to Whei Gen Construction Company ("Whei Gen"), a Taiwanese construction concern formed to build a commercial office building in Taichung, Taiwan.

2. Other than a receipt from the Hsin Chu Branch of The International Commercial Bank of China evidencing the transfer of funds, there was no contemporaneous documentation of the advance. Rather, the advance was a "handshake" deal and the terms of the arrangement were oral, which is not unusual with respect to small companies in Taiwan.

3. Under the terms of the arrangement, Whei Gen was to have use of the funds to leverage conventional financing for the project. The debt would accrue 10% interest on the balance of the debt until repaid.

4. The construction project was mired with excessive rains and flooding from the start and did not get off the ground until 1996. In addition, the cost of construction had inflated considerably by 1996.

5. In order to proceed with the project, Whei Gen needed additional funding. As part of an effort to convince local lenders to refinance the project, investors were coerced into writing off a portion of the amounts owed them by Whei Gen. In 1996, Mrs. Amys was required to write off $13,000 of the amount she originally advanced in 1993.

6. The construction project continued to be plagued by problems. In 1997, Whei Gen again needed to refinance the project. People who had advanced funds were initially told that the remainder of the amounts they were owed would have to be written off. Mrs. Amys intervened and negotiated an agreement in which an additional $51,000 of the amount owed to her would be written off, leaving only $14,170 to be repaid out of the amount she initially advanced in 1993.

7. At some time after 1997, the construction project failed; Whei Gen became insolvent and went out of business, leaving no assets against which Mrs. Amys could use to recoup the amounts she had advanced. Mrs. Amys traveled to Taiwan in an effort to recoup some of the money she advanced. These attempts failed.

Procedural Facts

8. On their 1996 and 1997 Wisconsin income tax returns, petitioners claimed capital losses associated with the partial write-offs of $13,000 in 1996 and $51,000 in 1997.

9. Under the date of March 1, 1999, respondent issued an income tax assessment against petitioners in the principal amount of $3,824.69, plus $938.73 in interest. The years at issue in the assessment were 1994 through 1997. As part of the assessment, respondent denied the capital losses associated with the partial write-offs in 1996 and 1997.

10. Petitioners filed a petition for redetermination objecting only to the denial by respondent of the capital losses claimed by petitioners in 1996 and 1997. Respondent denied the petition for redetermination and petitioners filed a timely petition for review with the Commission.

Substantiation

11. Whei Gen provided Mrs. Amys with a statement with respect to each of the partial write-offs at issue. Each statement was written in Mandarin Chinese and was translated by Mrs. Amys. Each statement recited the cause of the loss and the amount apportioned to Mrs. Amys as her share of the loss.

12. In an effort to obtain documentation substantiating her advance, Mrs. Amys traveled to Taiwan and met with the general manager of Whei Gen. The general manager provided a summary of the transaction between Mrs. Amys and Whei Gen in Mandarin Chinese. This summary was translated by Mrs. Amys and stated, in part:

This agreement did not specifically mandate this transaction be a loan versus an investment.

13. Mrs. Amys has served as vice-president and chief information officer for two Fortune 500 companies, C.H. Robinson Worldwide, Inc., and Rockwell International Corp., now known as Rockwell Automation, Inc.

14. Mrs. Amys' payment to Whei Gen was her first direct transaction with a foreign business.

15. At the time of her transaction with Whei Gen, Mrs. Amys was single and willing to take on riskier investments. The amount advanced to Whei Gen represented approximately 13 to 15 percent of her net worth in 1993.

16. Mrs. Amys was born in Taiwan and emigrated to the United States in 1974 upon graduating from college.

CONCLUSIONS OF LAW

1. Petitioners have adequately substantiated the terms of Mrs. Amys' advance to Whei Gen Construction Company and subsequent losses resulting from partial write-offs in 1996 and 1997.

2. Petitioners are not entitled to deduct these losses on their 1996 or 1997 returns because the losses did not become worthless until after 1997.

OPINION

Petitioners' appeal presents two issues: (1) whether petitioners have substantiated the terms of Mrs. Amys' advance to Whei Gen and the subsequent losses that she has incurred, and, if so, (2) whether petitioners must wait to claim the losses until the tax year when the debt became totally worthless.

Substantiation

The record contains sufficient facts to substantiate Mrs. Amys' advance to Whei Gen and subsequent losses. Petitioners provided documentation of the transfer of $78,170 to The International Commercial Bank of China and Chinese-language documentation with respect to the amounts written off in 1996 and 1997. Moreover, petitioners have provided a non-contemporaneous, Chinese-language document from Whei Gen that summarized the terms of Mrs. Amys' advance to Whei Gen. Mrs. Amys, a Taiwan native who has substantial investment and business experience, also testified that handshake deals of this magnitude are commonplace in Taiwan. Finally, the Commission finds Mrs. Amys to be a very credible witness. This credibility is enhanced by the degree to which Mrs. Amys has gone to document and defend, as a matter of principle, the integrity of petitioners' actions even though the principal amount of tax at issue is substantially less than $5,000.

Respondent correctly points out the obvious paucity of documentation and challenges Mrs. Amys' "self-serving" testimony, citing the recent Commission decision in Dvorak v. Dep't of Revenue, Wis. Tax Rptr. (CCH) ¶400-600 (2002). In Dvorak, the Commission held that "a taxpayer's self-serving testimony must generally be substantiated by other proof." Id. In this case, petitioners did substantiate Mrs. Amys' advance and subsequent losses with other documentation. Could this transaction have been better documented? Absolutely. Despite the obvious shortcomings, however, petitioners' documentation, combined with Mrs. Amys' credible testimony, is sufficient for the Commission.

We take note that respondent made no effort to challenge Mrs. Amys' translation of the Chinese-language documents or her testimony as to standard business practices in Taiwan. In Dye v. Dep't of Revenue, Wis. Tax Rptr. (CCH) ¶400-597 (2002), the Commission rejected respondent's challenge to cash purchases and hand-written receipts in horseracing transactions in part because respondent offered no testimony to disprove the uncontradicted, credible testimony of horseracing industry standards offered by the taxpayer. In cases such as these, it is not sufficient for respondent to simply rely on its own skepticism.

Worthless Debt

Section 166(d)(1) of the Internal Revenue Code provides that a non-business bad debt may be deducted as a short-term capital loss only when it has become worthless. Were this transaction not in the form of a loan, arguably the amounts partially written off in 1996 and 1997 could be claimed in these years as losses resulting from a transaction entered into for profit under section 165(c)(2) of the I.R.C. See, Meyer v. Commissioner, 547 F.2d 943, 77-1 U.S.T.C.¶9252 at 86,490 (5^th Cir. 1977). However, the documents provided by petitioners specifically indicate that the amounts paid by Mrs. Amys were not designated as either investment or loan. There is no evidence that Mrs. Amys received anything in return for advancing the funds, other than the expectation that she would be paid her money back plus 10 percent per annum. She received no right to a dividend, no control over the affairs of Whei Gen, or no other benefit that might suggest that her advance was an investment. Lacking any such documentation or testimony, we must conclude that the amount advanced was a loan and that section 166(d) controls.

Petitioners' representative argues that we should construe each partial write-off as a total write-off of the prior amount due and a replacement of an obligation for a lesser amount. The Commission may not adopt such a fiction, which is not supported by Mrs. Amys' testimony or any documentation in the record to circumvent section 166(d).

ORDER

Respondent's action on the petition for redetermination is affirmed.

Dated at Madison, Wisconsin, this 1st day of November, 2002.

WISCONSIN TAX APPEALS COMMISSION

Don M. Millis, Commission Chairperson

Thomas M. Boykoff, Commissioner

Richard F. Raemisch, Commissioner

ATTACHMENT: "NOTICE OF APPEAL INFORMATION"