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determination of whether a taxpayer acted in good faith is made
on a case-by-case basis, taking into account all the pertinent
facts and circumstances. See Compaq Computer Corp. v.
Commissioner, 113 T.C. 214, 226 (1999); sec. 1.6664-4(b)(1),
Income Tax Regs. Petitioners have the burden of proof on this
issue. See Rule 142(a); Allen v. Commissioner, supra.
Petitioners argue that they acted in good faith in
determining the correct tax treatment of the $200,000 advance.
Petitioners’ argument is that the Internal Revenue Service
audited their 1991 joint Federal income tax return, upon which
they had claimed a similar business bad debt deduction that was
ultimately allowed, and that they are entitled to rely on the
result in the prior audit. Respondent argues that petitioners
acted negligently or with disregard of the rules or regulations
because petitioner manipulated the form of the transaction in
order to obtain an ordinary loss deduction in the event the
Corbin project did not succeed. Respondent further argues
petitioners have not shown reasonable cause or that they acted in
good faith. We agree with respondent that petitioners have not
shown reasonable cause or that they acted in good faith as
required by section 6664(c).
Petitioner testified that in 1991 he was consulting for
O’Neill & Associates, which went into bankruptcy, that he claimed
a business bad debt deduction for an advance made in connection
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