                        T.C. Memo. 2011-174



                      UNITED STATES TAX COURT



               THOMAS JAMES KAIDER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24621-08.             Filed July 20, 2011.



     Jonathan P. Decatorsmith and Kristen Smith (student), for

petitioner.

     J. Spencer Hitt and Mayer Y. Silber, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     MORRISON, Judge:   Respondent (the IRS) issued a notice of

deficiency for the tax year 2006 to Thomas James Kaider

determining an income-tax deficiency of $16,529 and a section
                                - 2 -

6662(a)1 accuracy-related penalty of $3,306.     The IRS now

concedes that Kaider’s income-tax deficiency for 2006 should be

reduced to $3,676 and that Kaider is not liable for the section

6662(a) penalty.   The IRS’s initial determination was based on a

Form 1099-MISC, Miscellaneous Income, reporting that Kaider

received $58,500 of nonemployee compensation in 2006.      The

parties now stipulate that Kaider received only $21,500 of the

$58,500 in 2006.   The $21,500 came in the form of four personal

checks from his uncle, Edward Quinn (Quinn).      At issue is whether

the four checks were loans or compensation for services.       We find

that they were loans.

                          FINDINGS OF FACT

     We adopt the stipulation of facts.      Kaider resided in

Illinois when he filed the petition.

1.   Before Kaider’s Move to Florida

     Kaider suffered a stroke in college, leaving him paralyzed

from the chest down.    After college, he started Pride Pavement

Striping, Inc.   Quinn lent him $10,000 for Pride Pavement

Striping in 2003, which he repaid with interest.




     1
      All section references are to the Internal Revenue Code as
in effect for the year in issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
                                - 3 -

2.   Kaider’s Move to Florida and His June 27, 2005 Agreement
     With Quinn

     In June 2005, Kaider went to Florida for vacation and stayed

with Quinn.   The two eventually discussed business, and Kaider’s

computer knowledge impressed Quinn,2 who thought those skills

could help him with a personal issue and with litigation

involving a corporation he co-owned (Mill-It Corp.).    Quinn asked

Kaider to stay in Florida and work with him.   Kaider wrote the

following letter in response:

     Uncle Ed,

     This is as concise as I can make it:

     Offered Services:
       • Me

     Desired Compensation:
       • Adventure
       • Belonging
       • Responsibility for important affairs
       • Approval of frequent visitation from my loved ones
       • To learn everything you know about business

     -Tommy

Afterward, Quinn offered Kaider an “internship” (i.e., a business

mentoring opportunity).   A modified, signed version of Kaider’s

letter (the June 27, 2005 agreement) formalized their




     2
      Kaider had only conventional computer skills, but Quinn was
not technologically savvy.
                                - 4 -

arrangement.3    Kaider decided to stay in Florida permanently.   He

lived at Quinn’s house until he bought a home in early 2006.

3.   Kaider’s Activities in Florida

     From June 2005 to June 2006, Kaider (a) socialized with

family and friends; (b) assisted Quinn with his personal affairs;

(c) assisted Quinn with Mill-It By Quinn, Inc., which was largely

dormant in 2006; (d) assisted Quinn with Mill-It By Kaider-Quinn,

Inc., which was largely dormant in 2006; and (e) assisted Quinn

with Gym World, Inc.    During this time, Quinn paid Kaider’s

personal expenses, and Kaider received the following payments:

(1) $200 from Mill-It By Quinn in 2005, (2) $37,000 from Quinn in

2005, (3) $6,000 from Gym World in 2006, and (4) $21,500 from

Quinn in 2006.    At issue is the character of the $21,500 from

Quinn in 2006.

     a.   Social Activities

     Kaider spent much of his time in Florida socializing with

family and friends.    Quinn paid most of Kaider’s living expenses

and let Kaider stay at his house.    Although Kaider moved out of

Quinn’s house in February 2006, Quinn continued paying Kaider’s

living expenses until May or June 2006.




     3
      Quinn had typed up the letter, dated it June 27, 2005, and
added two signature lines with his and Kaider’s names underneath
and bearing the heading “approved and agreed upon”.
                               - 5 -

     b.   Assistance With Quinn’s Personal Affairs

     Kaider characterized much of his initial activity in Florida

as trying to “wrangle in Charlene”.    Charlene, Quinn’s girlfriend

and future wife, was apparently traveling the country using his

credit cards.   Kaider acted as a “private investigator”, checking

Quinn’s credit card statements and tracking Charlene with a

global positioning system device.   This activity continued until

Charlene’s return in July 2005.

     Kaider later helped Quinn streamline his personal finances.

He balanced Quinn’s checkbook, converted Quinn’s financial

statements to electronic form, and printed financial reports with

QuickBooks, a type of accounting software.   Kaider testified that

he usually printed the QuickBooks reports once a month and added

a simple coversheet with “some clip art”.    Over 6 to 8 months, he

spent 1 hour and 15 minutes compiling the reports.4   It seems

Quinn was extremely pleased:   he testified that the reports were

“very nicely done graphs, charts” showing “good workmanship” and

“splitting out different things”.   But after examining the

reports, we do not believe they required much skill or effort.

     Kaider also helped Quinn manage daily household expenses.

For example, he ensured that checks reached their intended


     4
      The first report took about 1 hour because Kaider had to
enter in the baseline data, which he did while watching TV.
Later it took “literally 60 seconds each” to produce new reports:
he merely entered updated numbers and printed the report.
                               - 6 -

recipients and were properly recorded, and he supervised workers

renovating or repairing the house.     Kaider estimated that he

spent “45 minutes every other day” assisting Quinn with various

tasks.5   We believe this assistance extended into 2006.

     c.    Mill-It Corp. and Mill-It By Quinn, Inc.

     Several decades ago, Quinn started Mill-It Corp., which

recycled roads and runways.6   He later brought in two partners,

Guzman and Bortells, to help run the company.

     In May 2005, Quinn started Mill-It By Quinn, Inc., with his

children--Eddie Quinn (Eddie) and Kacey Quinn (Kacey).     He

envisioned it as a business similar to Mill-It Corp.     But Mill-It

By Quinn did not engage in significant operations in 2005 and

2006; much of its work consisted of conversations between Quinn,

Eddie, and Kacey.   Around October 2005, Eddie and Kacey had a

falling out with Quinn and left the company.

     In 2005, Quinn’s Mill-It Corp. partners (Guzman and

Bortells) sued over Quinn’s right to use the name “Mill-It By

Quinn” (among other issues).   Quinn testified that the litigation

severely hindered Mill-It By Quinn’s operations because a court

order prevented him from using the name “Mill-It By Quinn”.

     5
      If Quinn paid Kaider’s living expenses in exchange for his
assistance, Kaider may have had additional unreported income.
The IRS did not raise this issue, so we do not address it.
     6
      The company ground road materials into small nuggets--a
process called milling--then melted and reprocessed the nuggets
before laying the recycled materials in roads.
                                - 7 -

Quinn finally prevailed in late 2007, and Mill-It By Quinn was

operating at the time of trial.

     To help with the lawsuit, Kaider prepared a three-page

graphical representation using Mill-It Corp.’s tax returns from

1988 to 2003.   The compilation showed the company’s income during

that period and detailed the three partners’ earnings.    Its

purpose was to show that Quinn had been fair and had given his

partners a “very healthy salary”.    The document was ultimately

used in the litigation.    It took Kaider, Eddie, and Kacey 10

hours to make the compilation on one day in June 2005.

     Kaider also assisted with Mill-It By Quinn’s startup

activities.   He helped design a logo, a business card, and a

T-shirt.   He taught Eddie and Kacey how to use QuickBooks.     And

he attended a function at the Roadbuilders Association, which he

described as “a volleyball, eating, drinking sort of event”.

     The parties stipulated that Mill-It By Quinn paid Kaider

$200 in wages in 2005.    This payment was recorded on a paystub.7

There were no paystubs for 2006.




     7
      Another paystub reflects a second $200 wage payment to
Kaider, but other evidence suggests that he did not receive the
second $200. Thus we do not disturb the stipulation that Kaider
received only $200 in wages from Mill-It By Quinn in 2005.
                                 - 8 -

     d.   Mill-It By Kaider-Quinn, Inc.

     In July 2005, Kaider, Quinn, Eddie, and Kacey started

Mill-It By Kaider-Quinn, Inc.8    Quinn anticipated that the

company would secure disadvantaged-business-enterprise status on

the basis of Kaider’s disability, procure contracts from the

State of Florida, and subcontract work to Mill-It By Quinn.

However, the company never began operations.    As Kaider

testified, the business idea was the product of “a one-day

conversation”, and the company “never did anything”.9    When

Quinn, Eddie, and Kacey had their falling out, Quinn asked Kaider

to continue Mill-It By Kaider-Quinn with him.    Kaider refused.

He was not interested in milling and did not want his cousins to

hate him.10

     e.   Gym World, Inc.

     For 14 years, Quinn exercised at a gym operated by Turner

Health & Fitness, Inc.   Quinn had lent the company over $700,000

and had developed some sort of partnership arrangement with it by

     8
      The stipulation of facts incorrectly states that the
articles of incorporation for Mill-It By Kaider-Quinn were filed
on July 25, 2009. The articles were actually filed on July 25,
2005.
     9
      On Sept. 15, 2005, Kaider amended Mill-It By Kaider-Quinn’s
articles of incorporation to remove Quinn, Eddie, and Kacey as
officers. The record does not explain the reason for or
significance of doing so.
     10
      The timeline of events for Mill-It By Kaider-Quinn is
unclear. Quinn’s involvement with the company may have ended
when Kaider removed him as an officer, see supra note 9, or when
his falling out with Eddie and Kacey occurred.
                                  - 9 -

2006.     In May 2006, Quinn and Kaider ousted Mike Turner, the

president of Turner Health & Fitness, from gym operations.      Quinn

gave Turner’s responsibilities to Kaider, who worked at the gym

for 35 to 40 days.      Quinn formed Gym World, Inc., to take over

the gym, and it paid Kaider $6,000 in wages in 2006, which it

reported on a Form W-2, Wage and Tax Statement.

     Despite the successful removal of Mike Turner, Gym World

faced insurmountable problems.      It had trouble succeeding to

leases, membership agreements, and rights to membership fees.

The gym rapidly lost money.      Quinn paid its operating expenses

for a while but eventually abandoned the venture.      Quinn was

deeply dissatisfied with Kaider over the episode.

     f.      The Alleged Loans From Quinn

             i.    The Checks

     From 2005 to 2006, Kaider received 10 checks from Quinn

totaling $58,500:

                     Date       Check No.   Amount
                   7/22/2005       5308     $5,000
                   8/30/2005       5313     12,000
                   9/29/2005       5346      5,000
                  11/04/2005      10031      5,000
                  11/30/2005      10062      5,000
                  12/21/2005      10079      5,000
                   1/17/2006      10123      5,000
                   2/27/2006      10116      5,000
                               - 10 -

                 3/28/20061    10158       5,000
                 4/26/2006     10182       6,500
                   Total                  58,500

           1
           The stipulation of facts incorrectly lists Mar.
     20, 2006 as the date of this check.

All 10 checks were signed by Quinn and drawn from Quinn’s

personal checking account.    The first three checks (July 22,

August 30, and September 29, 2005) were handwritten.11    The other

seven checks were computer-generated (except for Quinn’s

signature) using a template that Kaider designed.    The word

“loan” was in the memo line of all 10 checks.12    Kaider deposited

each check into his personal bank account.

           ii.   The Loan Agreements

     The record contains 10 loan agreements between Kaider and

Quinn.    The dates and amounts on the loan agreements correspond

to the 10 checks that Quinn gave Kaider from 2005 to 2006.13

Each loan agreement provided that Quinn would lend Kaider the

amount stated on the corresponding check at 6 percent annual

interest, and that the full amount plus interest would be due


     11
      A “handwritten” check refers to a standard preprinted
check that was filled in by hand.
     12
      “Loan” was handwritten on the handwritten checks and
typewritten on the computer-generated checks.
     13
      The loan agreements were sometimes dated the same day as
the corresponding check, sometimes before, and sometimes after.
Each loan agreement was typically dated within a few days of the
corresponding check, with the largest gap being 8 days.
                              - 11 -

five years from the date of the agreement.14   Each loan agreement

also provided that the debt could be paid partially or fully at

any time without penalty, and that the agreement could be renewed

at the discretion of Quinn and Kaider.   All loan agreements in

the record bear Kaider’s signature, but only the July 22, 2005

agreement contains both men’s signatures.15

     g.   The Rift With Quinn and the June 29, 2006 Fax

     Around June 2006, family members held an “intervention” to

break Quinn’s drug habit.   Kaider’s refusal to participate in the

intervention upset Quinn.   On June 29, 2006, Quinn sent the

following fax to Kaider:

     Tommy,

     This can be subjective but in reality you’re fired.
     But I am your uncle and I love you. Please release all
     my data passwords and information computers copiers
     files etc in tact [sic]. Do not lose any information
     during transition or transport. If needed, I can
     supply an enclosed environmentally friendly trailer




     14
      There is one exception. The loan agreement dated Feb. 28,
2006 uses the date of the check, not the date of the agreement,
to determine the due date for repayment. Thus the agreement
states that repayment is due on Feb. 27, 2011--five years from
the date of the check.
     15
      The IRS disputes that Quinn signed the July 22, 2005 loan
agreement. We find that he did. First, the signature on the
agreement is similar to Quinn’s signature on other documents.
Second, Kaider testified that the signature was Quinn’s; he
recognized the signature because he had seen Quinn’s checks when
he helped manage Quinn’s household expenses. See supra pt. 3.b.
Quinn testified that he did not sign the July 22, 2005 loan
agreement, but we do not believe him.
                                  - 12 -

       with generator and backup power support to prevent any
       loss of data and information.

       Edward T. Quinn [signed]

Kaider interpreted the fax to mean he was relieved of his duties

at the gym.      He stopped working there and ceased contact with

Quinn.      For the rest of his time in Florida, Kaider paid his

living expenses with a combination of leftover money from Quinn

and income from various side jobs.16       He moved back to Illinois

in late 2006.

4.     The Form 1099-MISC

       In 2007, Mill-It By Quinn filed a Form 1099-MISC with the

IRS.     The form reported that Mill-It By Quinn paid Kaider

$58,500--the sum of the “loan” checks--in nonemployee

compensation in 2006.       It is unclear how the Form 1099-MISC came

to be filed.      Quinn testified that he did not know who had filed

the form.      Kaider testified that he was not aware of the form

until the IRS audited his return.

5.     Mill-It By Quinn’s 2006 Tax Return

       Mill-It By Quinn filed a Form 1120S, U.S. Income Tax Return

for an S Corporation, for 2006.      It did not claim deductions for

wages, officer compensation, or nonemployee compensation.       It did

not deduct (or otherwise report) the $58,500 of nonemployee

compensation reported on Kaider’s Form 1099-MISC.



       16
      Kaider did not report the income from his side jobs on his
2006 tax return. The IRS does not assert that Kaider is taxable
on this income.
                                - 13 -

     Quinn expressed dissatisfaction with Kaider over Mill-It By

Quinn’s 2006 tax return, even though Kaider no longer worked for

Quinn when the return was filed.     Quinn testified that he paid

Kaider, Eddie, and Kacey for services rendered to Mill-It By

Quinn.    He declared that Kaider’s Form 1099-MISC was “not a

proper 1099”17 and that he was working on filing proper Form

1099s and amended tax returns for 2005 and 2006 that would

reflect the payments to Kaider, Eddie, and Kacey.

6.   Kaider’s 2006 Tax Return

     Kaider filed a Form 1040, U.S. Individual Income Tax Return,

for 2006.    He reported $6,000 in wages from Gym World.   He did

not report any income from Quinn, Mill-It By Quinn, or Mill-It By

Kaider-Quinn.    He did not report the $21,500 in checks he

received from Quinn in 2006.

                                OPINION

I.   The Parties’ Positions

     From 2005 to 2006, Kaider received 10 checks from Quinn

totaling $58,500.     Four of the checks--totaling $21,500--were

received in 2006.18    None of the four checks were reported on

Kaider’s 2006 tax return.     The IRS claims that the four checks

were compensation for services to Mill-It By Quinn and should



     17
      Quinn testified that the Form 1099-MISC was improper
because it was unauthorized and because Mill-It By Quinn never
claimed a deduction for the $58,500 reported on the form.
     18
      The IRS concedes that the other six checks--totaling
$37,000--were received in 2005, a year not in issue.
                                 - 14 -

have been included in income.     Kaider asserts that the checks

were loans from Quinn and thus not includable in income.

II.   Burden of Proof

      Generally, the taxpayer has the burden of proving the IRS’s

determination of deficiencies incorrect.      Rule 142(a)(1); Welch

v. Helvering, 290 U.S. 111, 115 (1933).       In some instances,

section 7491(a) imposes the burden of proof on the IRS.19      Kaider

argues that the IRS has the burden of proving the checks were not

loans because, he claims, he introduced credible evidence that

the checks were loans.   We do not address the allocation of the

burden of proof because, as we explain, we find that Kaider has

shown by a preponderance of the evidence that the four checks

totaling $21,500 were loans.20

III. Whether the Four Checks Totaling $21,500 Were Loans or
     Compensation for Services

      The taxability of the checks depends on whether they were

loans or compensation for services.       Compensation for services is

included in gross income.   Sec. 61(a)(1).     Money received under a

loan, however, is not included in gross income because it is



      19
      Sec. 7491(a) imposes the burden of proof on the IRS for a
factual issue affecting tax liability if the taxpayer introduces
credible evidence regarding the issue, meets substantiation and
recordkeeping requirements, and cooperates with “reasonable
requests” from the IRS. See Higbee v. Commissioner, 116 T.C.
438, 440-441 (2001).
      20
      The IRS has conceded that it has the burden of production.
See sec. 6201(d). We need not determine whether the IRS has
satisfied its burden.
                              - 15 -

offset by an obligation to repay.   Commissioner v. Tufts, 461

U.S. 300, 307 (1983).   A bona fide loan exists only if both

parties have an actual, good faith intent to establish a

debtor-creditor relationship when the funds are advanced.      Fisher

v. Commissioner, 54 T.C. 905, 909-910 (1970); Beaver v.

Commissioner, 55 T.C. 85, 91 (1970).   An intent to establish a

debtor-creditor relationship exists if the debtor intends to

repay the loan and the creditor intends to enforce repayment.

Fisher v. Commissioner, supra at 909-910; Beaver v. Commissioner,

supra at 91.

     Courts consider various factors to determine whether parties

intended a bona fide loan; no single factor is dispositive.     See,

e.g., Welch v. Commissioner, 204 F.3d 1228, 1230 (9th Cir. 2000),

affg. T.C. Memo. 1998-121; Frierdich v. Commissioner, 925 F.2d

180, 182 (7th Cir. 1991), affg. T.C. Memo. 1989-393.   In

determining whether the checks were loans, we examine the

following factors as evidence of Quinn and Kaider’s intent:

     (1) the ability of the borrower (Kaider) to repay;

     (2) the existence or nonexistence of a debt instrument;

     (3) security, interest, a fixed repayment date, and a
     repayment schedule;

     (4) how the parties’ records and conduct reflect the
     transaction;

     (5) whether the borrower has made repayments;

     (6) whether the lender (Quinn) has demanded repayment;
                                - 16 -

     (7) the likelihood that the loans were disguised
     compensation for services; and

     (8) the testimony of the purported borrower and lender.

See Welch v. Commissioner, supra at 1230-1231 (ability to repay,

existence of instrument, security, interest, repayment schedule,

actual repayments, demands for repayment, parties’ records and

conduct, and testimony of purported borrower considered in

determining whether unexplained bank deposits were loans or

taxable income); Frierdich v. Commissioner, supra at 182-185

(ability to repay, existence of instrument, security, interest,

repayment date, repayment schedule, actual repayments, likelihood

that loans were disguised compensation, and testimony of

purported borrower considered in determining whether a lump-sum

payment was a loan or an advance of attorney’s fees); Mann

Constr. Co. v. Commissioner, T.C. Memo. 1999-183 (listing factors

considered, including demands for repayment and parties’ records,

in determining whether advances made to the son of a close

corporation’s president were bona fide debt for purposes of a

section 166 bad debt deduction).

     A.     The Ability of the Borrower To Repay

     If the borrower was unable to repay when the funds were

advanced, it suggests that the parties did not intend a bona fide

loan.     See, e.g., Commissioner v. Makransky, 321 F.2d 598, 600

(3d Cir. 1963), affg. 36 T.C. 446 (1961).    Courts assess the

borrower’s ability to repay by evaluating whether there was “a
                                 - 17 -

reasonable expectation of repayment in light of the economic

realities of the situation.”      Fisher v. Commissioner, supra at

910.    The IRS analogizes Kaider’s situation to that of the

taxpayer in Fisher, who was insolvent when the funds were

advanced.      The taxpayer in Fisher owed another private creditor

nearly $27,000; he had federal tax liens of $76,340 outstanding

against him; the mortgage on his home had been foreclosed; and

his only assets consisted of furniture valued at $2,000 and an

insubstantial amount of cash.      Id. at 910-911.    The Court found

there was no reasonable expectation of repayment.        Id. at 911.

       In 2006, Kaider had few assets.      And he had substantial

debts:      a $200,000 home mortgage (by his estimate), a $37,000

previous debt to Quinn (assuming the six checks in 2005 were

loans), and a $300 overdraft protection line of credit on which

he owed varying amounts each month.       He also had no reliable

source of future earnings.      However, Kaider and Quinn reasonably

expected that some of Quinn’s startup enterprises would become

profitable and enable Kaider to repay his loans within a five-

year period.21     Quinn had told Kaider:    “We’re going to get

something going down here and you’re going to have all the money

       21
      Kaider’s obligation to repay was not contingent on the
success of a startup enterprise. In Mann Constr. Co. v.
Commissioner, T.C. Memo. 1999-183, we held that a son had valid
and enforceable debt when he borrowed money from his father’s
company, which had claimed a sec. 166 bad debt deduction. Even
though the son expected to repay primarily through future
employment with the company, his obligation to repay was not
limited to his future earnings from the company. Id.
                              - 18 -

in the world and you can pay me back.”   The delays in starting

Mill-It By Quinn and the failure of Mill-It By Kaider-Quinn did

not render the expectation unreasonable:   Quinn, a self-made

millionaire, had already proven himself a successful

entrepreneur.22

     B.   The Existence or Nonexistence of a Debt Instrument

     The existence of a debt instrument suggests that the parties

intended a bona fide loan.   See, e.g., Frierdich v. Commissioner,

supra at 182-184; Haber v. Commissioner, 52 T.C. 255, 266 (1969),

affd. 422 F.2d 198 (5th Cir. 1970).    The record contains copies

of the 10 loan agreements between Kaider and Quinn.    Copies of

nine agreements are signed by Kaider but not by Quinn.    A copy of

the 10th agreement, dated July 22, 2005, is signed by both Kaider

and Quinn.

     The IRS contends that the loan agreements do not show an

intent to establish bona fide loans because:   (1) they were not

signed by Quinn, making them unenforceable under Florida law; (2)

they were not notarized and recorded; and (3) they were not

negotiated.   The IRS’s arguments present factual questions about

whether Quinn signed the agreements and whether negotiations




     22
      The failure of Gym World is irrelevant because Kaider did
not work at the gym until after he received the checks. See
Fisher v. Commissioner, 54 T.C. 905, 910 (1970) (borrower’s
ability to repay evaluated on basis of circumstances when funds
were advanced); supra pts. 3.e and 3.f.i.
                                 - 19 -

occurred.     To resolve these issues, we must resolve the

conflicting testimonies of Kaider and Quinn.

             1.   Kaider’s Testimony

     Kaider testified that the 10 loan agreements arose from

periodic discussions in which he told Quinn that he hoped to buy

out his partner in Pride Pavement Striping, buy a new house, or

pay his home mortgage.     During those discussions, Quinn would

offer to lend Kaider money, pull up a template loan agreement23 on

the computer, and fill in the blanks.       The amount of each loan

was determined by Kaider’s needs.24       Kaider said he did not

negotiate the terms of the loan agreements besides the amount.

After he and Quinn agreed on an amount, they would print two

copies of the agreement and sign it.25       But Kaider was confused

why nine agreements in evidence lacked Quinn’s signature.

             2.   Quinn’s Testimony

     Quinn testified that the checks were payments for Kaider’s

services.     Although he was aware of the 10 loan agreements, he

testified that he did not draft or sign these loan agreements or



     23
      Quinn’s template loan agreement was family “folklore”.
Kaider testified that Quinn always used the same loan agreement
regardless of the situation. The template loan agreement
provided for a five-year loan at 6 percent annual interest.
     24
          The default amount in the template was $5,000.
     25
      The signing of the agreements was memorable because Quinn
insisted that they both sign in blue ink. It was “another one of
Uncle Ed’s legends that black ink is not legal and you have to
sign in blue.”
                               - 20 -

any other loan agreements with Kaider from 2005 to 2006.    Quinn

declared that he would not have lent money for a five-year term.

If he had lent money to Kaider, the term of the loan “would have

been less than a year” because it was “improper for a small

company to lend that kind of money, especially to family.”26

Quinn’s five-year loan agreement with Turner Health & Fitness,

however, contradicts his testimony that he did not lend money for

terms over a year.27   In fact, Quinn’s later testimony revealed

that he had signed “15 or 20” loan agreements with Turner Health &

Fitness that involved terms exceeding one year.   When asked

whether he had executed loan agreements with other organizations

involving terms longer than a year, Quinn became evasive.

          3.   Resolution

     We find that Kaider and Quinn entered into written loan

agreements corresponding to each of the 10 checks Kaider received.

Of the 10 loan agreements, the July 22, 2005 agreement is the only


     26
      Quinn believed only banks and mortgage companies should
provide long-term loans.
     27
      On Mar. 8, 2004, Quinn entered into a written agreement
with Turner Health & Fitness, Inc., to lend the company $10,000
at 5 percent annual interest, with the full amount plus interest
due five years from the date of the agreement (the Turner Health
& Fitness agreement). The Turner Health & Fitness agreement is
nearly identical in language and in format to the loan agreements
with Kaider. The only significant differences are the amount
lent and the slightly lower interest rate (5 percent instead of 6
percent). The Turner Health & Fitness agreement was signed by
Quinn as “President” (no entity stated) and Mike Turner as
President of Turner Health & Fitness, Inc. It was notarized and
recorded at the Circuit Court of Seminole County, Florida.
                                    - 21 -

agreement in evidence that has Quinn’s signature.       See supra note

15 and accompanying text.       However, Kaider testified credibly that

he and Quinn had signed all the agreements.       Quinn testified that

he did not sign the agreements and would not have lent money for

terms over a year, but we do not believe him.       First, Quinn was

not a credible witness.28       Second, his testimony that he did not

sign any agreements was not believable given that the July 22,

2005 agreement had his signature.       Third, the five-year loan to

Turner Health & Fitness and “15 or 20” similar loans indicates

that he did lend money for terms longer than a year.

     The lack of notarization and recording does not detract from

the loan agreements’ evidentiary weight.       As we stated in Zohoury

v. Commissioner, T.C. Memo. 1983-597:        “Intra-family loans are

many times informal arrangements which may not comply with all of

the customary legal formalities that would surround a commercial

loan.”       See also Barton v. Commissioner, T.C. Memo. 1979-234;

Dorzback v. Collison, 93 F. Supp. 935 (D. Del. 1950).

     We reject the IRS’s contention that the loan agreements were

not negotiated.        Kaider and Quinn negotiated the amount of each

loan.        And although the agreements followed Quinn’s template, we




        28
      Quinn’s testimony was generally inconsistent. For
example, Quinn testified that Kaider drafted the Turner Health &
Fitness agreement and that the terms were “totally
inappropriate”. The bottom of the agreement, however, states:
“This document was prepared by: Edward T. Quinn”.
                                 - 22 -

believe Kaider agreed with the terms.     Thus the agreements were

the product of bargaining.

     We conclude that the loan agreements show an intent to create

a debtor-creditor relationship.

     C.   Security, Interest, a Fixed Repayment Date, and a
          Repayment Schedule

     Security, interest, a fixed repayment date, and a repayment

schedule suggest that the parties intended a bona fide loan.       See,

e.g., Welch v. Commissioner, 204 F.3d at 1230-1231; Frierdich v.

Commissioner, 925 F.2d at 183-184.     A lack of security, a low

interest rate, and an open-ended repayment date suggest otherwise.

Frierdich v. Commissioner, supra at 183-184.

     The agreement provisions show an intent to establish bona

fide loans.   For each loan, Kaider agreed to pay 6 percent annual

interest and adhere to a fixed repayment date.     Given the

intrafamily context, we find the low interest rate and the lack of

security insignificant.   See Zohoury v. Commissioner, supra;

Barton v. Commissioner, supra.

     D.   How the Parties’ Records and Conduct Reflect the
          Transaction

     If the parties treated the transaction as a loan, it suggests

that they intended a bona fide loan.      See, e.g., Spheeris v.

Commissioner, 284 F.2d 928, 930-931 (7th Cir. 1960), affg. T.C.

Memo. 1959-225; Mann Constr. Co. v. Commissioner, T.C. Memo.

1999-183; Schiffgens v. Commissioner, T.C. Memo. 1984-137.     The 10

checks each had “loan” in the memo line.     Kaider testified that
                                - 23 -

Quinn wrote “loan” on the handwritten checks and approved the

addition of “loan” to the computer-generated checks before signing

them.   Quinn testified that Kaider added “loan” to each check

after Quinn had signed them.   We believe Kaider.   Quinn was aware

that Kaider was depositing the checks and that Kaider thought they

were loans.   Yet he did not explain why, if he thought the checks

were not loans, he failed to correct Kaider’s impression that they

were loans.   We also do not find Quinn a credible witness

generally.    See supra note 28 and accompanying text.

     The fact that the checks were drawn from Quinn’s personal

bank account further confirms that they were personal loans and

not compensation from Mill-It By Quinn.    Quinn testified that a

court order prevented him from opening a bank account in Mill-It

By Quinn’s name and that for this reason he paid the company’s

expenses from his personal bank account.   But bank records reveal

that Quinn opened a bank account in Mill-It By Quinn’s name and

used it to pay the company’s expenses.    Two bank statements show

payments for roughly $26,000 in expenses from July 18 to August

31, 2005.

     Also, Mill-It By Quinn did not deduct the checks as

compensation on its 2006 tax return, which is consistent with the

checks being loans.    In sum, Kaider and Quinn treated the checks

as loans.
                                  - 24 -

       E.   Whether the Borrower Has Made Repayments

       If the borrower has made repayments, it suggests that the

parties intended a bona fide loan.     See, e.g., Welch v.

Commissioner, supra at 1231; Frierdich v. Commissioner, supra at

184.    This factor is neutral.   By the time of trial, Kaider had

not made repayments; but none of the loans were due.

       F.   Whether the Lender Has Demanded Repayment

       A demand for repayment suggests that the parties intended a

bona fide loan.    See, e.g., Estate of Rosen v. Commissioner, T.C.

Memo. 2006-115; Mann Constr. Co. v. Commissioner, supra.       This

factor is neutral.    By the time of trial, Quinn had not demanded

repayment; but no payments were due.       Quinn testified that when he

advanced the funds, he did not intend to enforce repayment.29         But

we do not believe him.

       G.   The Likelihood That the Loans Were Disguised
            Compensation for Services

       There is no evidence that the checks were disguised

compensation for services.    See Frierdich v. Commissioner, supra

at 184-185 (finding that purported loan was disguised advance

payment of attorney’s fees).      Any uncompensated services that

Kaider rendered to Quinn, Mill-It Corp., or Mill-It By Quinn were

insignificant compared to the amount of money he received from the




       29
      Quinn testified that he never intended to demand repayment
of the amounts because they were “payroll”.
                               - 25 -

10 “loan” checks.30   Characterizing the checks as compensation for

services would mean that Kaider received $58,500 for 1 hour and 15

minutes of making QuickBooks reports, 10 hours of preparing the

Mill-It Corp. compilation, 1 day of discussing Mill-It By

Kaider-Quinn, and “45 minutes every other day” of assisting Quinn

with miscellaneous tasks.31   Kaider already received $200 in wages

from Mill-It By Quinn, an amount which (at least partially)

covered his assistance with the company’s startup activities--

designing a logo, a business card, and a T-shirt; showing Eddie

and Kacey how to use QuickBooks; and attending the event at the

Roadbuilders Association.32   Two other facts make it more likely

that the checks were loans:   (1) Quinn lent Kaider $10,000 in

2003, which Kaider repaid; and (2) Quinn paid most of Kaider’s

living expenses in Florida.




     30
      In Fisher v. Commissioner, 54 T.C. at 912, we concluded
that the taxpayer’s services were worth more than his stated
salary. We held that the purported loans from his employer were
compensation for services.
     31
      Kaider testified that he and Quinn agreed to no
compensation when signing the June 27, 2005 agreement (the
“internship” offer). When the loan agreements arose, Kaider did
not ask to be paid for the miscellaneous tasks because he was
just “eating [Quinn’s] food and * * * going through the DVD’s”.
The work “maybe amounted to * * * 45 minutes every other day of
him [i.e., Quinn] just saying, well, can you help me with this
aspect of something to do with his e-mail account.”
     32
      Kaider’s $6,000 in wages from Gym World sufficiently
compensated him for his 35 to 40 days at the gym. We thus ignore
this work in evaluating what services the $58,500 may have
covered.
                                 - 26 -

     H.     The Testimony of the Purported Borrower and Lender

     Courts consider the testimony of the parties to a transaction

in determining whether they intended a bona fide loan.    See

Frierdich v. Commissioner, 925 F.2d at 185.     Kaider testified that

he and Quinn intended the checks to be loans.    He said that he

intended to repay Quinn and that when Quinn gave him the checks,

Quinn said:    “you bet * * * you’re going to pay it back.”   Quinn,

on the other hand, testified that the checks were compensation for

the various services that Kaider rendered to him personally, to

Mill-It Corp., and to Mill-It By Quinn.33   According to Quinn,

Kaider proposed that Quinn pay him $5,000 a month, and Quinn

agreed.34

     Kaider’s testimony that the checks were loans is supported by

objective evidence:    the ability to repay, the checks with “loan”

in the memo line, the loan agreements corresponding to the checks,

the fixed interest rate, the fixed repayment dates, and the

improbability that the checks were disguised compensation for

services.    To the extent Quinn’s testimony contradicts Kaider’s,

we do not find Quinn credible.




      33
      Quinn did not distinguish among his companies in his mind.
He viewed Kaider’s employer as Edward Quinn, Mill-It Corp., and
Mill-It By Quinn in the aggregate.
      34
      Quinn testified that the $12,000 check, dated Aug. 30,
2005, consisted of Kaider’s monthly compensation plus moving
expenses. Quinn did not testify about the $6,500 check dated
Apr. 26, 2006.
                                 - 27 -

     We conclude that Kaider received $21,500 in bona fide loans

in 2006, the year in issue.   Kaider and Quinn had an actual, good

faith intent to establish a debtor-creditor relationship when

Kaider received the checks.   Therefore, the $21,500 is not

includable in Kaider’s 2006 income.

     To reflect the foregoing,


                                          Decision will be entered

                                      under Rule 155.
