                       T.C. Memo. 1999-36



                     UNITED STATES TAX COURT



       PEOPLEFEEDERS, INC. AND SUBSIDIARIES, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 10864-96.                Filed February 4, 1999.


               Held: Under the facts of this case, the fact that
          respondent’s notice of deficiency indicated that
          petitioner’s taxable years ended on June 30 of each
          year rather than on the actual last day of petitioner’s
          taxable years does not invalidate respondent’s notice
          of deficiency and does not deprive the Court of subject
          matter jurisdiction.

               Held, further, Petitioner’s claimed $3,751,930 bad
          debt deduction for petitioner's 1992 taxable year and
          net operating loss carrybacks and carryforwards
          relating thereto are denied.


     Charles O. Cobb, Thomas M. Cryan, and Mark A. Krasner, for

petitioner.

     Robert J. Burbank and Thomas C. Pliske, for respondent.
                               - 2 -


             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined deficiencies in

petitioner’s consolidated Federal income taxes in the respective

amounts of $28,415, $22,495, $465,115, $24,108, and $45,837

allegedly for petitioner's 1990, 1991, 1992, 1993, and 1994

taxable years.

     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.

     The issues for decision are:   (1) Whether deficiency

determinations for petitioner's taxable years 1990 through 1994

were made in respondent’s notice of deficiency, as respondent

contends, or whether deficiency determinations against petitioner

for nonexistent years were made in respondent’s notice of

deficiency, as petitioner contends, making respondent’s

deficiency determinations defective and depriving the Court of

subject matter jurisdiction over petitioner's tax liabilities;

and (2) if the above issue is resolved in favor of respondent,

whether petitioner is entitled to a $3,751,930 claimed bad debt

deduction for petitioner's 1992 taxable year and net operating

loss (NOL) carrybacks and carryforwards relating thereto.


                         FINDINGS OF FACT

     Some of the facts are stipulated and are so found.
                              - 3 -


     At the time the petition was filed, petitioner's principal

place of business was located in San Diego, California.

     Prior to July 1, 1987, Karl Motsenbocker (Motsenbocker)

owned 82.5 percent of the shares of stock in Peoplefeeders, Inc.,

a closely held California corporation that was the parent

corporation of a group of affiliated corporations that owned and

operated a chain of pizza restaurants under the name of Square

Pan Pizza.

     In the summer of 1987, Jeffrey Partrick (Partrick) and three

other individuals formed HPPW Restaurants, Inc. (HPPW), and on

July 1, 1987, HPPW acquired for $3,317,560 all of Motsenbocker's

shares of stock in Peoplefeeders and Motsenbocker's ownership

interest in a related partnership.

     The $3,317,560 purchase price for the stock in

Peoplefeeders and for the related partnership interest was

reflected by and was to be paid as follows:


              Form of Payment                     Amount
          Cash at closing                     $    167,560
          Promissory notes* due:
               Sept. 1, 1987                     150,000
               Mar. 31, 1988                   1,500,000
               June 30, 1992                   1,500,000
                                      Total   $3,317,560

          * Interest accrued on the promissory notes at
            an annual rate of 3-1/4 percent over the
            prime rate.1

1
     After July 1, 1990, the interest rate on the June 30, 1992,
promissory note increased to 3-3/4 percent over the prime rate
and after July 1, 1991, the interest rate on the third promissory
                                                   (continued...)
                               - 4 -



     Upon HPPW’s acquisition of the stock in Peoplefeeders, HPPW

became the parent corporation of Peoplefeeders, and HPPW changed

its name to Peoplefeeders.   The former Peoplefeeders corporate

entity changed its name to Square Pan Pizza Co. of California,

Inc. (Square Pan), and remained parent to other subsidiary

corporations that owned and operated restaurants.   Hereinafter,

references to Peoplefeeders and to Square Pan are to those parent

and subsidiary corporate entities as they existed and operated

after the July 1987 acquisition and name change of the

corporations.

     On August 11, 1987, Peoplefeeders obtained a $1.7 million

loan from California Commerce Bank (Commerce Bank), reflected by

a promissory note in favor of Commerce Bank payable in 53 monthly

installments of $32,075 with interest at 2-1/2 percent over prime

and due in full on June 5, 1992.

     On March 31, 1988, using proceeds from the $1.7 million

Commerce Bank loan, Peoplefeeders paid Motsenbocker the $1.5

million due on that date relating to HPPW's acquisition of

Motsenbocker's stock interest in Peoplefeeders.

     With regard both to the $1.5 million debt obligation owed to

Motsenbocker and the $1.7 million loan obtained from Commerce

Bank, the board of directors of Peoplefeeders formally acted on

and approved such debt obligations.    Promissory notes were issued


(...continued)
note increased to 4-1/4 percent over the prime rate.
                               - 5 -

by Peoplefeeders in favor of Motsenbocker and Commerce Bank

relating thereto, and the debt obligations were secured by

personal guarantees of Partrick, by corporate guarantees of

Square Pan and the other subsidiaries, and by collateralization

of the operating assets of Square Pan and the other subsidiaries.

     As of early fall of 1987, Square Pan and the other

subsidiaries owned and operated 25 restaurants and other

businesses (namely, a wholesale food supplier and a food

concession).   At that time, Peoplefeeders did not separately own

or operate any restaurants, and Peoplefeeders had no source of

income from any business other than Square Pan.

     In the fall of 1987, Peoplefeeders purchased and began

operating one Arby's restaurant.   In 1988, Peoplefeeders opened a

pizza restaurant, but it was unsuccessful and closed within

a year.   In 1990, Peoplefeeders opened another pizza restaurant,

but this restaurant also was unsuccessful and closed within

a year.


Intercompany Bank Account

     Each of the restaurants owned and operated by Peoplefeeders,

by Square Pan, and by the other related subsidiaries maintained

separate bank accounts at different banks, and cash receipts from

operations of each restaurant were deposited daily into the

separate bank accounts maintained by each restaurant.   Three

times a week, the total cash receipts from all of the restaurants
                               - 6 -

for the prior few days were withdrawn from the separate bank

accounts maintained by each restaurant and were transferred into

a single bank account maintained at Commerce Bank under the name

of Square Pan.   This bank account will be referred to hereinafter

as the Intercompany bank account.

     All of the business expenses relating to Peoplefeeders, to

Square Pan, to the related subsidiaries, as well as all of the

business expenses relating to the restaurants owned and operated

by the various related corporate entities, were paid by checks

drawn not on the separate bank accounts maintained by each

restaurant, but by checks drawn on the Intercompany bank account.

Payments made to Motsenbocker and to Commerce Bank with regard to

Peoplefeeders' loan and debt obligations described above also

were made by checks drawn on the Intercompany bank account.

     For the years in issue, total cash receipts that

Peoplefeeders received and transferred into the Intercompany bank

account were sufficient in amount to cover Peoplefeeders' total

operating expenses, but they were not sufficient to cover the

loan payments Peoplefeeders owed to Motsenbocker and to Commerce

Bank.   Accordingly, the difference between the total cash

receipts transferred by Peoplefeeders into the Intercompany bank

account and the total of Peoplefeeders’ expenses and loan

payments that were paid out of the Intercompany bank account

increased each year from 1987 until May 1992, as follows:
                                       - 7 -

                                               Peoplefeeders' Expenses
             Peoplefeeders' Cash Receipts      And Loan Payments Paid
Taxable      Transferred Into Intercompany      Out Of Intercompany
 Year                 Bank Account                  Bank Account         Difference

 1988              $  782,266                        $1,449,289          $  667,023
 1989                 690,964                         1,454,344             763,380
 1990                 902,115                         1,530,067             627,952
 1991               1,053,523                         1,490,889             437,366
 1992                 927,586                         2,183,805           1,256,219

  Total            $4,356,454                        $8,108,394          $3,751,940



Books and Records

        The record herein does not adequately reflect how, at the

time cash sales receipts were received by the various

restaurants, the cash receipts were recorded, if at all, on the

books and records of Peoplefeeders, of Square Pan, and of the

other related corporate entities.            The evidence does not indicate

that, at the time cash receipts were received by the restaurants,

debit entries were made to a cash bookkeeping account, nor that

credit entries were made to a sales account.

        The record, however, does establish that when cash receipts

were transferred from the separate bank accounts of the

restaurants into the Intercompany bank account, entries were

made, apparently for the first time, in the books and records of

Peoplefeeders, of Square Pan, and of the other corporate

subsidiaries.      Again, however, the parties’ briefs and the

limited portions of petitioner's books and records that were

introduced into evidence herein are confusing, incomplete, and

unclear as to specifically how the transfers of cash into, and

the payment of expenses out of, the Intercompany bank account
                              - 8 -

were reflected on the books and records of Peoplefeeders, of

Square Pan, and of the other related entities.

     We describe below our understanding and findings, based on

incomplete and confusing evidence, of the bookkeeping entries of

Peoplefeeders and Square Pan relating to the transfer of cash

receipts into and the payment of expenses and loan payments out

of the Intercompany bank account.

     Cash receipts transferred from Peoplefeeders into the

Intercompany bank account were recorded as debits (or as

increases in cash) in favor of Peoplefeeders in what was referred

to as Peoplefeeders’ Intercompany general ledger bookkeeping

account No. 1457000 (Peoplefeeders’ Intercompany general ledger

account) and as credits to what was referred to as Square Pan’s

Intercompany general ledger account No. 1457000 (Square Pan’s

Intercompany general ledger account).

     Payments out of the Intercompany bank account of

Peoplefeeders’ business expenses and of Peoplefeeders’ loan

payments to Motsenbocker and to Commerce Bank were recorded as

credits to Peoplefeeders’ Intercompany general ledger account and

apparently as debits to Square Pan’s Intercompany general ledger

account.

     Payments out of the Intercompany bank account of

Peoplefeeders’ expenses and loan payments were never treated or

specifically labeled in Peoplefeeders’ or in Square Pan’s books

and records as a loan from Square Pan, and the cash receipts
                               - 9 -

transferred into the Intercompany bank account from Peoplefeeders

were never treated or specifically labeled in Peoplefeeders’ or

in Square Pan’s books and records as repayments of a loan from

Square Pan.

     Also, as discussed further below, not until 1992 was the

difference between the total of the cash receipts transferred by

Peoplefeeders into the Intercompany bank account and the total of

the expenses and loan payments paid on behalf of Peoplefeeders

out of the Intercompany bank account treated in the minutes of

Peoplefeeders’ board of directors meetings as a loan to

Peoplefeeders.   That difference was never reflected by a written

promissory note from Peoplefeeders in favor of Square Pan.     No

interest was ever charged to Peoplefeeders with regard to that

difference.   That difference was never treated or specifically

labeled in Peoplefeeders’ or in Square Pan’s Intercompany general

ledger accounts as a loan or as a discrete credit balance.


Private Placement Memorandum, 1991 Sale of Restaurants, and
1992 Board of Directors' Meeting

     In 1988, Partrick attempted unsuccessfully to sell the stock

in Peoplefeeders through a private placement.   In the related

private placement memorandum, no indication or disclosure was

made of any debt or loan obligation owed by Peoplefeeders to

Square Pan or to the other related entities.

     Over the course of 1987 through 1991, the majority of the

Square Pan Pizza restaurants was either sold or closed.   In
                             - 10 -

November of 1991, the remaining Square Pan Pizza restaurants were

sold to Sbarro, Inc. (Sbarro), an unrelated entity.    The sale of

these restaurants to Sbarro resulted in a taxable gain to Square

Pan of $1,417,271.

     At the time of the sale to Sbarro, Partrick discussed the

$1,417,271 taxable gain with representatives of Arthur Andersen &

Co., who informed Partrick that deductions could be generated

that would offset the $1,417,271 taxable gain.

     On May 4, 1992, at a special meeting of the board of

directors of Square Pan, the directors adopted a resolution that

purported to treat the $3,751,940 difference between

Peoplefeeders’ total cash receipts and Peoplefeeders’ expenses

and loan payments that had been paid out of the Intercompany bank

account as a $3,751,930 debt obligation of Peoplefeeders to

Square Pan and that purported to cancel that debt obligation as

uncollectible.2

     In the resolution adopted by the board of directors, the

stated reason for the cancellation of the purported $3,751,930

debt obligation was that no repayments had ever been made by

Peoplefeeders on the purported debt obligation and that due to

the financial condition of Peoplefeeders there existed no

prospect of collecting any part of the debt obligation.



2
     The $10 discrepancy between the $3,751,940 difference and
the $3,751,930 purported bad debt obligation is not explained in
the record. Hereinafter, we refer only to $3,751,930.
                              - 11 -

     In December of 1992, Partrick made a loan to Peoplefeeders

of approximately $600,000 with an interest rate of 4 percent over

prime.   The principal amount of this loan was payable on demand.

This loan from Partrick to Peoplefeeders was approved in advance

by a resolution of Peoplefeeders' board of directors, evidenced

by a promissory note, and secured by Peoplefeeders' assets.


Petitioner's Income Tax Returns and Respondent's Audit

     For each of its taxable years, Peoplefeeders, Square Pan,

and Square Pan’s subsidiaries filed consolidated corporate

Federal income tax returns.   On petitioner’s 1992 consolidated

corporate Federal income tax return, the $3,751,930 difference

between Peoplefeeders’ total cash receipts and the total expenses

and loan payments paid out of the Intercompany bank account on

behalf of Peoplefeeders was reflected on the balance sheet

attached to the 1992 tax return as an intercompany receivable but

also as an adjustment or a reduction to Peoplefeeders' equity

investment in its subsidiaries.

     On petitioner's 1992 consolidated corporate Federal income

tax return, Square Pan claimed a $3,751,930 bad debt deduction

relating to the alleged cancellation of the purported $3,751,930

debt obligation owed by Peoplefeeders to Square Pan.3    On its


3
     For 1992, under sec. 1.1502-14(d), Income Tax Regs., bad
debt deductions were allowed upon cancellation of worthless debt
obligations between affiliated corporate entities even though
such entities filed consolidated Federal corporate income tax
returns. This regulation was generally effective for bad debt
                                                   (continued...)
                              - 12 -

1990 and 1991 consolidated corporate Federal income tax returns,

petitioner claimed NOL carrybacks, and on its 1993 and 1994

consolidated corporate Federal income tax returns petitioner

claimed NOL carryforwards relating to the $3,751,930 bad debt

deduction claimed on the 1992 consolidated corporate Federal

income tax return.

     Also, on the 1992 consolidated corporate Federal income tax

return, relying on the insolvency exception of

section 108(a)(1)(B) and Peoplefeeders’ alleged insolvency,

Peoplefeeders did not recognize any income relating to the

cancellation of the purported $3,751,930 debt obligation to

Square Pan.   Further, on the 1992 consolidated corporate Federal

income tax return, Peoplefeeders took the position that, under

section 108(b), no reduction in any tax attributes (specifically

no reduction in the amount of the NOL that was claimed on the tax

return relating to the claimed $3,751,930 bad debt deduction) was

required on petitioner's tax return because the claimed bad debt

deduction and the related NOL did not “belong to” Peoplefeeders

(i.e., on the ground that the claimed bad debt deduction and the

related NOL constituted tax attributes not of Peoplefeeders, but

only of Square Pan).




3
 (...continued)
deductions claimed prior to July 12, 1995, and was removed for
later years by amendments to the regulations as reflected in T.D.
8597, 1995-2 C.B. 147.
                                            - 13 -

          Because petitioner under section 441 elected a "52-53 week"

taxable year, petitioner's consolidated corporate Federal income

tax returns for each of 1990 through 1994 accurately reflected

petitioner's taxable years beginning and ending on different

dates in late June and July (i.e., on the Sunday nearest the last

day of June of each year).

          However, as set forth below, on the protest letter that

petitioner mailed to respondent, on the petition that petitioner

mailed to the Court, and on the 30-day letters and on the notice

of deficiency that respondent mailed to petitioner, the dates for

the ending of petitioner's 1990 through 1994 taxable years were

indicated as June 30 of each year.                     The actual last day of each

of petitioner's taxable years as reflected on petitioner's tax

returns for each year is also set forth in the schedule below:


               Yearend Date Indicated On Petitioner's                     Respondent's
Taxable         Tax           Protest                           30-Day           Notice Of
 Year          Return         Letter          Petition          Letter           Deficiency

1990           July 1        June 30         June 30            June 30           June 30

1991           June 30       June 30         June 30            June 30           June 30

1992           June 28       June 30         June 30            June 30           June 30

1993           June 27       June 30         June 30            June 30           June 30

1994           July 3        June 30         June 30            June 30           June 30



          On audit of petitioner's 1992 taxable year, respondent

disallowed petitioner's $3,751,930 claimed bad debt deduction and

the related claimed NOL carryback and carryforwards to 1990,

1991, 1993, and 1994.             On September 12, 1997, with the trial

herein scheduled for October 27, 1997, petitioner, in a motion to
                                - 14 -

dismiss for lack of jurisdiction, raised the issue that

respondent’s notice of deficiency incorrectly indicated ending

dates for petitioner’s taxable years, that the notice of

deficiency therefore was invalid, and that the Court lacks

jurisdiction over petitioner’s actual 1990 through 1994 taxable

years.

     In making the above adjustments to petitioner’s consolidated

income and expenses for each year, respondent did not make any

adjustment, and respondent did not charge petitioner with any

item of income or adjust any expense item relating to the 2 or 4

days that were reflected in the notice of deficiency and that

were not part of petitioner’s 1990 through 1994 taxable years.

     During respondent's audit of petitioner's 1990 through 1994

consolidated corporate Federal income tax returns, the accounting

firm of Arthur Andersen represented petitioner.   Petitioner's

representatives from Arthur Andersen met with respondent,

discussed legal and factual issues, and later prepared and filed

the protest and the petition.


                                OPINION

Validity of Notice of Deficiency

     Litigation in this Court requires as a jurisdictional

prerequisite a valid notice of deficiency.   Sec. 6213(a).   The

notice must indicate the taxable period involved or provide

sufficient information that the taxpayer reasonably could not be

misled as to the taxable period involved.    Commissioner v. Forest
                               - 15 -

Glen Creamery Co., 98 F.2d 968, 971 (7th Cir. 1938), revg. and

remanding 33 B.T.A. 564 (1935); Smith v. Commissioner, T.C. Memo.

1979-16.

     Petitioner argues that because respondent's notice of

deficiency indicates that tax deficiencies were determined

against petitioner for taxable years ending on June 30 of each

year, when in fact petitioner's taxable years ended on dates

other than June 30, respondent's deficiency determinations should

be regarded as invalid.   Further, petitioner argues that because

respondent never determined tax deficiencies for petitioner's

correct 1990 through 1994 taxable years, the Court has no

jurisdiction over any of such taxable years.4

     Respondent argues that the notice of deficiency at issue in

this case was sufficiently accurate, did not mislead petitioner,

and adequately informed petitioner that the tax deficiencies

reflected therein related to petitioner's 1990 through 1994

taxable years.

     We agree with respondent.

     The June 30 date indicated in respondent's notice of

deficiency for the end of each of petitioner's 1990 through 1994

taxable years was an innocuous error and did not mislead

petitioner in any way.    Petitioner’s representatives understood


4
     For petitioner’s 1991 taxable year, which ended on June 30,
petitioner's jurisdictional argument is based on the allegation
that respondent's notice of deficiency for petitioner's 1991
taxable year implicitly treated petitioner's taxable year as
beginning on July 1, 1990, when in fact it began on July 2, 1990.
                             - 16 -

that the references in the notice of deficiency to petitioner's

taxable years ending June 30 were to petitioner's actual taxable

years based on 52-to-53 week years that ended on the Sunday

nearest the last day of June of each year.

     On petitioner's written protest letter and petition,

petitioner's representatives themselves indicated that

petitioner's taxable years ended on June 30.    No evidence

indicates that petitioner's representatives were at any time

confused or misled over what taxable years were covered by

respondent's notice of deficiency.    The record is clear that

petitioner's representatives were not misled as to whose and

which taxable years were in issue.

     Not until just prior to the trial of this case in 1997 did

petitioner’s representatives allege that respondent's notice of

deficiency did not relate to petitioner's taxable years.      Any

genuine lack of knowledge as to whose and which taxable years

were covered by respondent's notice of deficiency would have been

raised long before September 12, 1997.    If petitioner’s

representatives genuinely believe respondent's notice of

deficiency did not determine tax deficiencies for any of

petitioner's taxable years, why were written protests filed on

behalf of petitioner in which the only challenges raised related

to the substance of the adjustments reflected in the notice of

deficiency?
                              - 17 -

     We also note that in making adjustments to petitioner’s

consolidated income and expenses, respondent, in the notice of

deficiency, did not make any income, expense, or other adjustment

relating to the 2 to 4 days that were reflected in respondent's

notice of deficiency but that technically were not part of

petitioner’s taxable years.

     We conclude that respondent's notice of deficiency is valid

and determined deficiencies for petitioner's taxable years ending

on July 1, 1990, June 30, 1991, June 28, 1992, June 27, 1993, and

July 3, 1994, and that petitioner's tax liabilities for those

years are properly before the Court.


Bad Debt Deduction

     Under section 166(a)(1), bad debt deductions are allowed for

loans that become worthless within the year.   Under

section 1.166-1(c), Income Tax Regs., bad debt deductions are

limited to loans that arise from genuine debtor-creditor

relationships and that are based on valid and enforceable

obligations to pay fixed or determinable sums of money.

     Generally a transfer of funds by a corporation to its

shareholders may be treated as a loan if, at the time of the

transfer, the parties intended that the shareholders repay the

corporation the amount of funds transferred.   Crowley v.

Commissioner, 962 F.2d 1077, 1079 (1st Cir. 1992), affg. T.C.

Memo. 1990-636; Wiese v. Commissioner, 93 F.2d 921 (8th Cir.

1938), affg. 35 B.T.A. 701 (1937); Miele v. Commissioner, 56 T.C.
                              - 18 -

556, 567 (1971), affd. without published opinion 474 F.2d 1338

(3d Cir. 1973).

     Petitioner bears the burden of proving that the amounts in

question constitute loans.   Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933).

     Courts typically determine whether the requisite intent to

repay was present by examining objective evidence of the parties'

intentions.   See, e.g., Busch v. Commissioner, 728 F.2d 945, 948

(7th Cir. 1984), affg. T.C. Memo. 1983-98; Alterman Foods, Inc.

v. United States, 505 F.2d 873, 877 n.7 (5th Cir. 1974).

     The following list of factors is often set forth in

analyzing whether transfers of funds between related corporations

should be treated as loans, as equity, or as dividends:

(1) Whether the transfers of funds are evidenced by written

promissory notes and are otherwise reflected on the taxpayer’s

books and records as loans; (2) the presence or absence of stated

maturity dates; (3) the source of payments; (4) the right to

enforce payments of principal and interest; (5) participation in

management; (6) a status equal to or inferior to that of regular

corporate creditors; (7) the intent of the parties; (8) "thin" or

adequate capitalization; (9) the identity of interest between

shareholders and creditors; (10) repayments on the purported

loans only out of profits; and (11) the ability of the purported

debtor to obtain loans from outside lending institutions.

Hardman v. United States, 827 F.2d 1409, 1411-1412 (9th Cir.
                              - 19 -

1987); Bauer v. Commissioner, 748 F.2d 1365, 1368 (9th Cir.

1984), revg. T.C. Memo. 1983-120; A.R. Lantz Co. v. United

States, 424 F.2d 1330, 1333 (9th Cir. 1970); O.H. Kruse Grain &

Milling v. Commissioner, 279 F.2d 123, 125-126 (9th Cir. 1960),

affg. T.C. Memo. 1959-110.

     Because the control element suggests the opportunity to

contrive a fictional debt, transfers of funds between related

corporations are subject to particular scrutiny.   In re Uneco,

Inc., 532 F.2d 1204, 1207 (8th Cir. 1976).   Transfers of funds

between closely held corporations and shareholders are often

characterized by informality, but in order to qualify for loan

treatment in such situations the transfer of large amounts of

funds generally should have some formal indicia of a loan.     Lewis

v. Commissioner, T.C. Memo. 1985-563.

     Where transfers of funds were made from a subsidiary

corporation to a parent corporation through a centralized

accounting system and where customary indicia of loans were not

present, the transfers were treated as constructive dividends and

not as loans.   Alterman Foods, Inc. v. United States, supra.

     Petitioner argues that the shareholders of Peoplefeeders

intended for Peoplefeeders to repay Square Pan the $3,751,930

difference between Peoplefeeders’ total cash receipts transferred

into the Intercompany bank account and the total expenses and

loan payments paid on behalf of Peoplefeeders out of the

Intercompany bank account and that the use of funds in the
                              - 20 -

Intercompany bank account to pay Peoplefeeders' expenses and loan

payments should give rise to bona fide debt treatment of the

claimed $3,751,930.

     Petitioner further argues that during its 1992 taxable year,

the purported $3,751,930 debt obligation owed by Peoplefeeders to

Square Pan became worthless, that for the year in issue bad debts

between members of consolidated groups of taxpayers were

deductible, and that petitioner is entitled to a bad debt

deduction of $3,751,930 for its 1992 taxable year.

     Respondent argues that the payments out of the Intercompany

bank account of Peoplefeeders’ expenses and loan payments did not

have associated with them typical indicia of loans, and that the

evidence does not establish that it was intended for

Peoplefeeders to repay Square Pan any difference between cash

receipts transferred into the Intercompany bank account on behalf

of Peoplefeeders and expenses and loan payments paid out of the

Intercompany bank account on behalf of Peoplefeeders.

Respondent would treat that difference not as a genuine debt

obligation of Peoplefeeders to Square Pan but as a constructive

dividend from Square Pan to Peoplefeeders.

     The purported $3,751,930 debt obligation of Peoplefeeders to

Square Pan was not evidenced by promissory notes or security

agreements.   No maturity dates, interest, repayment terms, or

repayment amounts were agreed to.   The transfers of cash receipts

from Peoplefeeders to the Intercompany bank account were not
                               - 21 -

regarded or treated as “repayments” of any debt obligation, but

rather simply as a process of placing all of the cash receipts of

each of petitioner's related restaurants and corporate entities

into a single cash pot for purposes of cash management, credit

enhancement, and payment of bills.      Such transfers into the

account were contingent on the amount of cash receipts received

from sales, a feature not typically associated with the payment

of genuine debt obligations.

     In its brief, petitioner refers to the "ebb and flow" of

funds into and out of the Intercompany bank account.      Such "ebb

and flow" in the transfer of cash between petitioner's related

entities reflected the mere management of funds and cash-flow and

an apparently efficient way for Peoplefeeders to move funds

between itself and related entities, not the establishment of

genuine debt obligations.

     Because of the absence of fixed maturity dates and repayment

terms associated with the payment out of the Intercompany bank

account of Peoplefeeders’ expenses and loan payments, Square Pan

had no means of establishing Peoplefeeders' default and no basis

for seeking to enforce repayment of alleged debt principal or

payment of interest.

     The evidence does not indicate that Square Pan ever

requested repayment from Peoplefeeders of the purported

$3,751,930 debt obligation, and in the minutes of Square Pan's
                             - 22 -

May 4, 1992, board of directors' meeting, it is represented that

no repayment was ever made on this purported debt obligation.

     The lack of a written promissory note, of collateral, of

security, of repayment terms, and of interest, among other

things, indicates that Peoplefeeders and its officers and

shareholders never intended for Peoplefeeders to have a fixed

repayment obligation to Square Pan or to the other related

subsidiaries of the $3,751,930 difference between cash receipts

transferred into the Intercompany bank account on behalf of

Peoplefeeders and expenses and loan payments paid out of the

Intercompany bank account on behalf of Peoplefeeders.

     Square Pan's identity as a wholly owned subsidiary of

Peoplefeeders indicates that the relationship between the two

entities with regard to the $3,751,930 difference did not

constitute that of a creditor/debtor, but rather that it

constituted that of a subsidiary/parent, and that the $3,751,930

should not be treated as a bona fide debt obligation.

     Between 1987 and 1992, with the operating assets of Square

Pan already secured in favor of the Motsenbocker and Commerce

Bank loans and with the failure in 1988 to raise funds through a

private placement memorandum, Peoplefeeders was not in a position

to repay the difference in funds paid out on its behalf from the

Intercompany bank account.

     The significant relevant factors indicate that the

$3,751,930 in question should not be treated as a genuine debt
                                - 23 -

obligation of Peoplefeeders.    Petitioner is not entitled to the

claimed $3,751,930 bad debt deduction and the related NOL

carrybacks and carryforwards.

     We note that respondent makes two alternative arguments --

one factual and the other legal.    Respondent’s alternative

factual argument is that if the $3,751,930 is to be regarded as a

genuine debt obligation of Peoplefeeders to Square Pan, as

petitioner contends, in May of 1992 the full $3,751,930 principal

amount of that debt obligation would constitute a loan receivable

on the books of Square Pan and the value of the stock in Square

Pan that Peoplefeeders owned would reflect that $3,751,930

receivable, making Peoplefeeders no longer insolvent, and

requiring Peoplefeeders, under sections 61(a)(12) and 108(a), to

recognize $3,751,930 in discharge of indebtedness income.

     Respondent’s alternative legal argument is that if the

$3,751,930 is to be regarded as a genuine debt obligation of

Peoplefeeders to Square Pan, if Peoplefeeders is to be regarded

as insolvent, and if, under the insolvency exception of

section 108(a)(1)(B), Peoplefeeders is to be allowed to exclude

from income the $3,751,930 discharge of indebtedness income,

petitioner’s consolidated group of taxpayers filing the 1992

corporate Federal income tax return would be required under

section 108(b) to reduce appropriate tax attributes (specifically

the amount of the NOL produced by the $3,751,930 bad debt

deduction) by the $3,751,930 amount of the excluded discharge of
                              - 24 -

indebtedness income.   Because of our holding on the threshold

issue, we need not decide respondent’s alternative arguments.

     To reflect the foregoing,

                                         An appropriate order will

                                    be issued, and decision will

                                    be entered under Rule 155.
