                       T.C. Memo. 1998-152



                     UNITED STATES TAX COURT



    GREG R. VINIKOOR AND MELISSA D. VINIKOOR, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15567-94.                    Filed April 27, 1998.



     Scott M. Baker, for petitioners.

     Andrew J. Horning, for respondent.



                       MEMORANDUM OPINION


     PARR, Judge:   Respondent determined a deficiency in, and

addition to, the income taxes of petitioners as follows:

                                               Addition to Tax
     Year                   Deficiency         Sec. 6651(a)(1)
     1990                    $109,302              $38,126
                               - 2 -


     All section references are to the Internal Revenue Code in

effect for the taxable year in issue, and all Rule references are

to the Tax Court Rules of Practice and Procedure, unless

otherwise indicated.   All dollar amounts are rounded to the

nearest dollar, unless otherwise indicated.

     After concessions, the issues for decision are:    (1) Whether

the basis of certain shares of stock petitioners received from

their grandfather in 1987 was the fair market value on the dates

the transfers occurred.   This turns on whether the transfers were

gifts.   We hold petitioners' basis is not the fair market value

of the shares but the transferred basis of the grandfather. (2)

Whether for 1990 petitioners are entitled to claimed deductions

for investment interest relating to certain shares of stock

received from their grandfather in 1987.    We hold they are not.

(3) Whether for 1990 petitioners are liable for an addition to

tax pursuant to section 6651(a)(1).    We hold they are.

     Some of the facts have been stipulated and are so found.

The stipulated facts and the accompanying exhibits are

incorporated herein by this reference.    Petitioners resided in

Tucson, Arizona, at the time the petition was filed.

General Background

     Greg R. Vinikoor (petitioner) married Melissa Vinikoor (Mrs.

Vinikoor) on March 21, 1987.   Roy Drachman (Drachman) is Mrs.
                                - 3 -


Vinikoor's grandfather.    Mrs. Vinikoor received certain shares of

stock as gifts from Drachman prior to her marriage to petitioner.

     Prior to May 1, 1987, Drachman transferred 359 shares of

Hubbell, Inc. (Hubbell stock), 50 shares of K-Mart Corp. (K-Mart

stock), and 12,200 shares of Price Company (Price Co. stock) to

petitioners which were placed in their stock account #853-15016

at Merrill Lynch, Pierce, Fenner & Smith, Inc. (the account).

The account allowed petitioners to use credit cards and checks to

draw against the stock portfolio as collateral.

     Petitioner graduated1 from college in the spring of 1987 and

began a 12-month internship with Tucson Realty and Trust that

paid $1,000 per month.    Petitioners lived on the money in the

account.   At that time, petitioner had outstanding student loans

which Mrs. Vinikoor agreed to help pay off from the account.

     The May 1987 account statement showed that petitioners'

12,200 shares of Price Co. stock had a price per share of $43.25

for a total fair market value of $527,650.    In addition, the May

1987 account statement showed petitioners had equity of $558,232,

expenses drawn against the account of $240,046, with a resulting

net equity of $318,186 in the account.

     As of September 26, 1987, petitioners had 12,400 shares of

Price Co. stock in the account.    On October 29, 1987, 2,000


     1
          The record does not indicate from which educational
institution petitioner graduated.
                               - 4 -


shares of petitioners' Price Co. stock were sold and on October

30, 1987, petitioners received 4,500 additional shares of Price

Co. stock from Drachman.   These 4,500 shares were endorsed and

signed over by Drachman and went directly into petitioners'

account.

     The October 1987 account statement showed that petitioners

had 14,900 shares of Price Co. stock in the account with a price

per share of $31, for a total fair market value of $461,900.    In

addition, the October 1987 account statement showed petitioners

had equity of $471,296, expenses drawn against the account of

$272,016, with a resulting net equity of $199,280 in the account.

     On December 10, 1987, petitioners received 2,000 additional

shares of Price Co. stock from Drachman.   These 2,000 shares were

endorsed and signed over by Drachman and went directly into the

account.   The December 1987 account statement showed petitioners

had equity of $563,705, expenses drawn against the account of

$286,493, with a resulting net equity of $277,212 in the account.

     On May 27, 1989, petitioners opened stock account #410-78048

(the second account) and transferred everything from the original

account to the second account on May 30, 1989.   The original

account was closed on August 25, 1989.   As with the first

account, through 1990 petitioners used the second stock account

as a personal checking account, and withdrew money from it based

on borrowing power achieved by the equity in their stock.
                               - 5 -


     During 1990, petitioners sold 13,1502 shares of Price Co.

stock for $482,903, triggering recognition of capital gain.

Petitioners claimed a total basis of $197,455 for those shares on

Schedule D of their 1990 Federal income tax return.   Petitioners

claimed a stepped-up fair market value basis in only the shares

transferred to them by Drachman on October 30 and December 10,

1987, and acknowledged that the preceding shares of Price Co.

stock were acquired by gift.   Additionally, petitioners claimed

$37,545 in deductible investment interest on Schedule A and Form

4952 of their 1990 Federal income tax return.   Of this $37,545,

petitioners claimed $22,800 as investment interest paid to

Drachman for the Price Co. stock transferred to petitioners on

October 30 and December 10, 1987.

     On April 15, 1991, petitioners filed a Form 4868 Application

for Automatic Extension of Time to File U.S. Individual Income

Tax Return for their 1990 Federal income tax return, on which

they claimed their tax liability to be zero.    On August 13, 1991,

petitioners filed a Form 2688 Application for Additional

Extension of Time to File U.S. Individual Income Tax Return for

their 1990 Federal income tax return, requesting an extension of




     2
          The parties stipulated that petitioners sold 13,350
shares of Price Co. stock during 1990. We note, however, that
the Form 1099 for petitioners' account indicates, and respondent
argued on brief that, 13,150 shares of Price Co. stock were sold.
                                - 6 -


time until October 15, 1991.   Petitioners did not list any tax

due on the additional extension of time request.

     Petitioners mailed their 1990 Federal income tax return on

October 15, 1991, listing their amount owed as $20,306 (after

prepaid withholding amounts of $3,941) but did not pay any amount

of money with the return.   On April 20, 1992, petitioners filed

an amended 1990 return listing an increase in their total tax

liability of $24,124, for a total amount owed of $43,203 after

withholding.    Petitioners filed a second amended 1990 return on

October 30, 1992, listing their amount owed as $19,848.       A

statutory notice of deficiency was mailed to petitioners on June

16, 1994, and addressed petitioners' original and first amended

1990 returns.

Issue 1.   Transfer of Shares of Price Co. Stock

     Respondent determined that the October 30, 1987, and

December 10, 1987, transfers of 4,5003 and 2,000 shares of Price

Co. stock, respectively, were gifts, with a basis of 10 cents per

share, Drachman's basis.    Petitioners assert that these transfers

of stock were valid loans, and that they are therefore entitled




     3
          Petitioners repeatedly argue at trial and on brief that
Drachman transferred 5,000 shares of Price Co. stock on Oct. 30,
1987; however, their account statement from the period of Sept.
26, 1987, through Oct. 30, 1987, indicates that only 4,500 shares
were transferred on that date.
                               - 7 -


to a stepped-up basis equal to the fair market value of the

shares when they disposed of the stock.4

     Petitioners assert that if the transfers of stock are bona

fide loans, their basis is calculated as the fair market value of

the shares.   If the transfers are gifts, as respondent argues,

petitioners' basis is the transferred basis of the donor.     Sec.

1015(a).

     We agree with respondent and hold that the shares of Price

Co. stock transferred to petitioners in October and December 1987

were gifts and not loans.   As gifts, petitioners are not entitled

to a stepped-up basis in 7,000 shares, as they claim.    Therefore,

petitioners' basis in these shares is the same as their basis in

other shares of Price Co. stock which they acknowledge were

received as gifts.   Since we find that all of petitioners' Price

Co. shares were acquired by gift, petitioners' adjusted basis in

the shares is the same as that of the donor, Drachman.   Sec.

1015(a).   Petitioner testified, and the account statements

indicate that, Drachman's basis in the Price Co. stock was 10

cents per share.   Accordingly, petitioners' carryover basis in


     4
          The purported loan documents indicate that one of the
conditions of the transfers was "That the stock will be returned
to [Drachman] upon request." This raises the questions of
whether petitioners were required to report income from discharge
of indebtedness when they sold the stock, or whether they had the
right to sell the stock at all. Since we hold that all of
petitioners' Price Co. stock was acquired by gift, we need not
decide these questions.
                               - 8 -


all of their shares of Price Co. stock is 10 cents per share.

Sec. 1015(a).

     The burden of proof is on petitioners to show that the

shares of stock at issue were bona fide loans and not gifts.

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).        We

always examine intrafamily transactions with special scrutiny.

Caligiuri v. Commissioner, 549 F.2d 1155, 1157 (8th Cir. 1977),

affg. T.C. Memo. 1975-319; Perry v. Commissioner, 92 T.C. 470,

481 (1989), affd. without published opinion 912 F.2d 1466 (5th

Cir. 1990); Bragg v. Commissioner, T.C. Memo. 1993-479.     The

presumption is that a transfer between family members is a gift.

Perry v. Commissioner, supra at 481; Estate of Reynolds v.

Commissioner, 55 T.C. 172, 201 (1970).     This presumption may be

rebutted by an affirmative showing that there existed a real

expectation of repayment and intent to enforce the collection of

the indebtedness.   Estate of Van Anda v. Commissioner, 12 T.C.

1158, 1162 (1949), affd. per curiam 192 F.2d 391 (2d Cir. 1951).

     The transfers are loans for Federal income tax purposes if,

at the time the stock was transferred, the transferee

unconditionally intended to repay the stock, and the transferor

unconditionally intended to secure repayment.    See Zimmerman v.

United States, 318 F.2d 611 (9th Cir. 1963); Jones v.

Commissioner, T.C. Memo. 1997-400.     Thus, for petitioners to

treat the shares received from Drachman as loans, petitioners
                              - 9 -


must prove that at the time of each transfer, they

unconditionally intended to repay the amounts received and

Drachman unconditionally intended to require payment.   Rule

142(a); Welch v. Helvering, supra.

     Although petitioners assert that the shares of stock were

loans, a mere declaration by them that they intended the stock to

constitute a loan is insufficient if the transaction fails to

exhibit more reliable indicia of debt.   See Williams v.

Commissioner, 627 F.2d 1032, 1034 (10th Cir. 1980), affg. T.C.

Memo. 1978-306; Alterman Foods, Inc. v. United States, 505 F.2d

873, 877 (5th Cir. 1974).

     The determination of whether a transfer was made with a real

expectation of repayment and an intention to enforce the debt

depends on all the facts and circumstances including whether: (1)

There was a promissory note or other evidence of indebtedness,

(2) interest was charged, (3) there was security or collateral,

(4) there was a fixed maturity date, (5) a demand for repayment

was made, (6) any actual repayment was made, (7) the transferee

had the ability to repay, (8) any records maintained by the

transferor and/or the transferee reflected the transaction as a

loan, and (9) the manner in which the transaction was reported

for Federal tax purposes is consistent with a loan.   See

Zimmerman v. United States, supra at 613; Estate of Maxwell v.

Commissioner, 98 T.C. 594, 604 (1992), affd. 3 F.3d 591 (2d Cir.
                                - 10 -


1993); Estate of Kelley v. Commissioner, 63 T.C. 321, 323-324

(1974); Rude v. Commissioner, 48 T.C. 165, 173 (1967); Clark v.

Commissioner, 18 T.C. 780, 783 (1952), affd. per curiam 205 F.2d

353 (2d Cir. 1953); Bragg v. Commissioner, supra.     The factors

are not exclusive, and no one factor controls.     Rather, our

evaluation of the various factors provides us with an evidential

basis upon which we make our ultimate factual determination of

whether a bona fide indebtedness existed.     See Litton Bus. Sys.,

Inc. v. Commissioner, 61 T.C. 367, 377 (1973).

       With those factors in mind, we turn to the facts and

circumstances surrounding the transfers of Price Co. stock at

issue to determine whether at the time of the alleged loans

petitioners entered into a bona fide debtor-creditor relationship

with Drachman.

       1.   Promissory Note or Other Evidence of Indebtedness

       Petitioners introduced what appear to be, in form, two valid

loan documents signed by petitioner and Drachman.     We must,

however, look to the substance of the transaction rather than

merely its form.     Estate of Maxwell v. Commissioner, supra at

601.    Petitioner testified that these notes had no amortization

schedule, no minimum payment, and were due "only when I call it"

(emphasis added).     Accordingly, petitioners had no set schedule

of regular payments and no minimum payments.     These are not

standard conditions for loan documents.
                                 - 11 -


     2.   Interest

     The notes executed by petitioner and Drachman stated that

one of the two conditions of the purported loan was that

"[petitioner] pay interest at the rate of six percent (6%) per

annum on the current value of the stock as interest during the

period of the loan."   Petitioners paid no interest.

     3.   Security or Collateral for the Transfers

     There is no evidence that petitioners provided, or were even

requested to provide, any security or collateral for the loans.

     4.   Fixed Maturity Date for Repayment

     There was no fixed date for repayment of the loans.

     5.   Demand for Repayment

     Although the record indicates that petitioners' alleged

indebtedness to Drachman was substantial, Drachman made no demand

on petitioners for payment.

     6.   Actual Repayments

     Petitioner testified that he had written small checks to

Drachman, but offered no evidence, e.g., canceled checks, bank

statements, etc., of actual repayment.

     Petitioner testified that the only repayment of the supposed

loans from Drachman was in the form of debt; i.e., shares,

forgiven.   At Christmas time, Drachman would give equal shares of

stock to his grandchildren.   Petitioners introduced letters

prepared by Drachman from Christmas 1987 and 1989 where Drachman
                               - 12 -


gave his grandchildren 600 and 400 shares of Price Co. stock,

respectively.   The letters also stated that those grandchildren

who had borrowed stock would have their loan decreased by those

amounts.   In addition, petitioners introduced a letter prepared

by Drachman from Christmas 1991 indicating that their loan would

be forgiven in the amount of 300 shares of Price Co. stock.

     Petitioner testified that Drachman treated all of his

grandchildren equally.   Since petitioners, however, received far

more shares of stock, and at a different time than provided in

the Christmas letters, they argue, the additional stock must have

been a loan.

      Petitioner testified that:

     [Mrs. Vinikoor's] father and mother were married and
     divorced twice and [Mrs. Vinikoor] was the youngest of
     the [children] and so she incurred a lot of emotional
     animosity towards her father and so she was
     independent, * * * she was supporting herself and
     paying for her college and wedding and all that stuff,
     where I don't think that the others were.

Contrary to petitioners' position, this information makes the

additional shares transferred to petitioners from Drachman appear

more gift-like in nature.   Drachman had a propensity for giving

stock, and we presume he loved his granddaughter.   Mrs. Vinikoor

was estranged from her father and incurred greater expenses than

the other grandchildren.    We infer from this that the additional

shares represented a wedding gift, a gift of college tuition

payments, a graduation gift, or simply a gift to a grandchild who
                                  - 13 -


needed money from a concerned grandfather who wanted to help out.

     7.    Ability to Repay

     The record establishes that petitioners' annual income was

not sufficient to allow them to maintain their lifestyle and

repay their obligations to Drachman.       Therefore, petitioners have

not shown that there was a reasonable expectation that they could

have repaid the loans from their annual income.

     8.    Records of the Loans

     The only records relating to the purported loans are the

notes signed by petitioner and Drachman, and the Christmas

letters forgiving the shares.

     9.    Reporting the Loans for Federal Tax Purposes

     Petitioner testified that he thought he recognized income

from discharge of indebtedness in the years when shares of the

loans were forgiven, but did not introduce income tax returns

from those years indicating that he had reported the forgiven

amounts.

     Although not dispositive, we examine the purpose of the

transfers of stock.    Petitioners and respondent dispute the

underlying cause of the transactions.      Petitioners assert that

shares of Price Co. stock were lent to them in October and

December 1987 as collateral for threatened margin calls on their

account.    These margin calls, petitioners claim, were the result

of the stock market crash of October 1987 and a corresponding
                               - 14 -


decline in value of their Price Co. stock.     Respondent argues

that any margin calls were due to petitioners' spending habits

and not from a drop in the price of their stock.

     We accept that there were margin calls.     We are not

persuaded, as petitioner testified, that the margin calls were

due solely to market fluctuations.      The margin calls were due, at

least in equal part, to petitioners' undisciplined spending.

     Petitioner testified that during this time period he and

Mrs. Vinikoor were experiencing financial difficulties and living

"hand to mouth".    An examination of petitioners' account

statements, however, quickly indicates that they were not living

the lifestyle of a recent graduate earning $12,000 per year.

Instead, petitioners were incurring substantial amounts of

personal debt.

     As of October 30, 1987, petitioners had accumulated $272,016

of debt against their account.    After taking into account the

2,000 shares of Price Co. stock which were sold on October 29,

1987, and used to reduce the amount of their debt, petitioners

spent $93,779 in the 5-month period between May 29, 1987, and

October 30, 1987.

     In January 1988, 1 month after a margin call, Mrs. Vinikoor

wrote herself $7,000 worth of checks from the account.        In

February 1988, she wrote herself $6,300 worth of checks from the

account.   This was not atypical of petitioners' spending habits,
                                  - 15 -


as shown by their account statements during this time period.5

Petitioners spent substantial amounts of money on airline tickets

and travel, including hotels in Hawaii, San Diego, San Francisco,

and Scottsdale.    Petitioners continually shopped at department

stores such as Saks Fifth Avenue, Neiman Marcus, Nordstrom, and

Bloomingdale's.    Petitioners' account statements indicate charges

and checks written to numerous restaurants and upscale specialty

stores.    In addition, the account statements listed frequent

expenses at the Tucson Country Club.

     As petitioners were spending these substantial amounts

against the equity in their stock, they never once made any type

of payment to Drachman.       In addition, we note that the value of

the Price Co. stock per share increased following the stock

market crash in October 1987, when petitioners' margin calls

began.    In October 1987, the Price Co. stock was valued at $31

per share.    In October 1988 and November 1989, the Price Co.

stock had increased to $40.5 and $48.25 per share, respectively.

The stock was supposedly lent to petitioners merely to cover


     5
          For example, petitioners' account statements for the
following 5-month period indicate that Mrs. Vinikoor wrote checks
to herself for the following amounts:

                    Date                 Amount
                  Mar. 1990             $12,250
                  Apr. 1990               7,600
                  May 1990                6,500
                  June 1990               7,800
                  July 1990              15,000
                              - 16 -


threatened margin calls, but even after the value of the stock

increased substantially, it was not returned to Drachman.

     As previously stated, petitioner testified that the sole

reason shares of Price Co. stock were transferred to him in

October and December 1987 was to cover threatened margin calls.

The acquisition of these additional shares, petitioner testified,

would allow him to meet the margin calls without forcing him to

sell shares of Price Co. stock already in his account.

Petitioner's purported goal, therefore, was to save, and not sell

off, the Price Co. stock.   Based on petitioners' spending habits,

as described above, we are persuaded that petitioners had little

concern about maintaining their Price Co. stock, as they

methodically depleted the equity in their account each month with

extravagant purchases.

     After the stock rose, Drachman, the supposed creditor in

these transactions, never made any demand on petitioners for

repayment, even though the value of the stock had increased

substantially and petitioners were diminishing the stock with

spendthrift habits.   Petitioner testified that no demand was

made, and no amount repaid, because "[Drachman] would prefer for

[petitioners] to put a little bit away for [their] * * * children

and their education than pay him back right now."   This would not

be the standard posture of a creditor in a bona fide loan.    We

believe Drachman did not expect to be repaid.
                               - 17 -


     Petitioners rely on a Memorandum Opinion of this Court, Hunt

v. Commissioner, T.C. Memo. 1989-335, contending that the facts

in the Hunt case are very similar to the facts in the instant

case.   We disagree.   The taxpayers in Hunt lent their children

substantial funds to enable them to make margin calls in the

silver and gold commodities markets.    The Hunt case can be

distinguished in several respects from this case.   In Hunt we

found that a bona fide debtor-creditor relationship existed.

First, in Hunt, a demand for repayment was made although the

taxpayers knew that the amounts could not be repaid.   Second, the

notes in Hunt bore interest at the prime rate.   Third, some of

the notes in Hunt had fixed maturity dates.   Fourth, repayments

were made by two of the taxpayers' children and one child repaid

in full the sums she borrowed.   Fifth, in Hunt, there was a bona

fide business purpose for the transactions and no spendthrift

behavior.    Finally, in Hunt, we found that there was a gift at

the point when the parents continued to lend, knowing that

repayment was impossible.   Thus, petitioners' reliance on Hunt is

misplaced.

     In consideration of all the facts and circumstances, we find

that petitioners have failed to meet their burden of proving that

any of the Price Co. shares transferred in October and December

1987 created bona fide debts which arose from a debtor-creditor

relationship, and not gifts.
                                 - 18 -


Issue 2.   Investment Interest

     Respondent determined that petitioners were not entitled to

deductions for investment interest claimed to have been paid to

Drachman for the shares of Price Co. stock transferred to

petitioners on October 30 and December 10, 1987.    Petitioners

stipulated that they would not be entitled to claim these

deductions if we found the shares of stock were not bona fide

loans.   We have so found.6

     In addition, there is no evidence to support that any of the

claimed interest was ever paid.     Respondent is sustained on this

issue.

Issue 3.   Addition to Tax Under Section 6651(a)

     Respondent determined an addition to tax under section

6651(a) for delinquent filing of a return.

     Section 6651(a) provides that if a taxpayer fails to file a

return by its due date, including extensions of time for filing,

there shall be an addition to tax equal to 5 percent of the tax

required to be shown on the return for each month the failure to

file continues, not to exceed 25 percent.    The addition to tax

under section 6651(a) shall not apply, however, if the taxpayer


     6
          The parties stipulated that for 1990 petitioners
claimed $22,800 as investment interest paid to Drachman for the
transferred shares of Price Co. stock. On brief, respondent
argues that petitioners are not entitled to claim $20,754 as
investment interest paid to Drachman in 1990. We hold this
$2,046 difference to be a concession by respondent.
                                - 19 -


can show that the failure to timely file the return was due to

reasonable cause and not willful neglect.     Sec. 6651(a).

     Petitioners were required to file a 1990 Federal income tax

return by April 15, 1991.     Secs. 6012, 6072.   Taxpayers, however,

may be granted reasonable extensions of time to file their

returns.   Sec. 6081.    An automatic extension of time to file a

return extends the time to file 4 months from the date the return

was originally due.     Sec. 1.6081-4, Income Tax Regs.

     On April 15, 1991, petitioners filed a Form 4868 Application

for Automatic Extension of Time to File U.S. Individual Income

Tax Return for their 1990 Federal income tax return, on which

they claimed their tax liability to be zero. On August 13, 1991,

petitioners filed a Form 2688 Application for Additional

Extension of Time to File U.S. Individual Income Tax Return for

their 1990 Federal income tax return, requesting an extension of

time until October 15, 1991.     Petitioners did not list any tax

due on the additional extension of time request.

     Petitioners did not file their 1990 Federal income tax

return until October 18, 1991, listing an amount owed of $20,306.

On April 20, 1992, petitioners filed an amended 1990 return

listing an increase in their total tax liability of $24,124, for

a total amount owed of $43,203 after withholding.

     Petitioners stipulated that they are liable for an addition

to tax pursuant to section 6651(a)(1) for 1990 insofar as it
                              - 20 -


relates to the $20,306 listed as owed on their original return.

Petitioners further stipulated that they are liable for an

addition to tax pursuant to section 6651(a)(1) for 1990 insofar

as it relates to their basis in their Price Co. stock if we found

that the shares transferred to petitioners by Drachman on October

30 and December 10, 1987, were not bona fide loans.   We have so

found.   Petitioners did not stipulate their liability for an

addition to tax pursuant to section 6651(a)(1) insofar as it

relates to the additional tax liability acknowledged on their

amended return filed April 20, 1992.

     The Commissioner's determinations are presumed correct, and

the taxpayer bears the burden of proving otherwise.   Rule 142(a);

Welch v. Helvering, 290 U.S. at 115.   Some of petitioners'

liability for additions to tax pursuant to section 6651(a)(1) for

1990 has been stipulated, and petitioners have failed to meet

their burden as to the other liability.

     Accordingly, respondent's addition to tax pursuant to

section 6651(a)(1) is sustained.

     For the foregoing reasons,

                                          Decision will be entered

                                    under Rule 155.
