                        T.C. Memo. 1998-67



                      UNITED STATES TAX COURT



    CHRISTOPHER A. BOYKO AND ROBERTA A. BOYKO, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15347-96.              Filed February 18, 1998.



     Christopher A. Boyko, pro se.

     Christopher A. Fisher, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:   Respondent, by means of a statutory notice

of deficiency, determined an income tax deficiency of $27,061, a

section 6651(a)(1)1 addition to tax of $953, and a section


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year under
consideration, and all Rule references are to this Court's Rules
of Practice and Procedure.
                                - 2 -


6662(a) penalty of $2,661, for petitioners' 1991 taxable year.

Respondent has conceded that petitioners are not liable for the

section 6651(a)(1) addition to tax.     After further concessions,

the following issues remain for our consideration:    (1) Whether

petitioners are entitled to an ordinary or a capital loss

deduction for funds expended in a business venture; (2) whether

petitioners are liable for an accuracy-related penalty under

section 6662 in the amount of $2,661.

                          FINDINGS OF FACT2

     Petitioners, Christopher A. Boyko and Roberta A. Boyko, are

husband and wife and resided in Parma, Ohio, at the time their

petition was filed in this case.    Petitioners filed a joint

return for the 1991 taxable year.    Roberta Boyko is a party to

this proceeding solely because she signed the joint return for

1991; consequently, Christopher Boyko is referred to herein as

petitioner.

     Petitioner is a lawyer and has practiced law in Ohio since

1979.    Until June 1987, petitioner practiced in the law practice

of his father, Andrew Boyko.   Petitioner practiced in a variety

of areas, including personal injury, probate, and business law.

In June 1987, petitioner acquired his father's law practice, and

was subsequently elected to the office of Law Director for the


     2
      The stipulation of facts and the attached exhibits are
incorporated by this reference.
                                 - 3 -


City of Parma, Ohio.    As Law Director, he was the chief attorney

for the City of Parma, responsible for the supervision of the

city's civil and criminal legal functions, advising elected

officials and drafting proposed legislation for city council.

     Sometime during 1987, petitioner was introduced to Raymond

Kelley (Mr. Kelley) by Leonard Bergenstein (Mr. Bergenstein),

known to petitioner as knowledgeable in the field of computers

and software.    Messrs. Kelley and Bergenstein represented to

petitioner that Mr. Kelley was developing computer software which

could someday be of significant commercial value.    This software

purportedly would increase computer speed and storage capacity,

and would also be virus-proof.    Petitioner, who was not in the

business of lending money, invested in Mr. Kelley's computer

software project.

     From March 1988 through August 1991, petitioner advanced

over $100,000 to Mr. Kelley's program.    The format for

petitioner's advances varied.    He wrote 65 checks totaling

$65,066 made payable to Mr. Kelley, between August 18, 1988, and

June 14, 1990.    Between August 18, 1988, and June 21, 1989, Mr.

Kelley executed 25 notes in favor of petitioner evidencing 25 of

the 65 checks.    The notes called for 10-percent interest, but no

principal or interest was paid on the notes.

     On March 21, 1988, petitioner's law firm, Boyko & Boyko,

entered into a 60-month lease agreement with Bison Leasing Co.
                                - 4 -


for the lease from Bison Leasing Co. of certain computer

hardware.   This lease was eventually assigned to the Fleet Credit

Corp./Denrich Leasing Group.    The computer hardware was leased

for the sole benefit of and use by Mr. Kelley.    From March 21,

1988, through January 31, 1991, petitioner paid $9,565 under this

lease.

     On September 14, 1989, petitioner executed a lease with

Active Leasing, Inc., for a 1990 Plymouth Acclaim automobile for

Mr. Kelley's use.    This lease was eventually assigned to Bank One

of Akron.   During Mr. Kelley's use of the vehicle, petitioner

paid $7,787 in connection with this lease.

     On April 5, 1990, petitioner entered into a 3-year lease

agreement with James-McGuire Associates for the lease of certain

computer hardware.   This lease was eventually assigned to Orix

Credit Alliance.    This computer hardware was also leased for Mr.

Kelley's use.   From April 5, 1990, through January 31, 1991,

petitioner paid $13,873 under this lease.

     The initial entity formed for the development and production

of the computer program was Transnational Information Controls,

Inc. (TIC).   TIC was incorporated under the laws of the State of

Ohio on January 26, 1989.    Petitioner owned 50 of the 764

outstanding shares of TIC.    Petitioner provided legal services to

TIC in exchange for his TIC stock.
                               - 5 -


     Petitioner was vice president and general counsel of TIC.

In the offering circular describing the corporation and the new

computer program, petitioner's law firm, Boyko & Boyko, was

listed as general counsel for the corporation.   The circular

provided that Boyko & Boyko would be on a yearly retainer for the

corporation and paid $50,000 per year for services.    Petitioner

was not paid for any legal services provided to TIC, apart from

his receipt of stock in TIC.   Petitioner also spent time trying

to market the computer software.

     TIC was eventually replaced by Multilogic Corp.

(Multilogic).   Multilogic was incorporated under the laws of the

State of Ohio on February 11, 1991.    Multilogic's sole asset was

the rights to the computer software being developed by Mr.

Kelley.   Petitioner's TIC shares were replaced with an equal

percentage of Multilogic Shares.   In addition, Multilogic

executed a demand note in favor of petitioner in the amount of

$74,749 for payments made by petitioner to Mr. Kelley.

     Sometime during late 1990, petitioner and Walter Bubna (Mr.

Bubna), another shareholder of TIC, became concerned about their

advances to Mr. Kelley's computer program.   Petitioner, Mr.

Bubna, and Mr. Bergenstein decided to hire Mickey Miller (Mr.

Miller) to investigate Mr. Kelley and the software being

developed by him.   Based on Mr. Miller's report, petitioner
                               - 6 -


concluded that the computer program was worthless.    Petitioner

paid Mr. Miller $17,715 for his services.

     Following the investigation, petitioner decided to obtain a

full release from the computer leases.   On July 25, 1991,

petitioner paid $26,750 to Orix Credit Alliance to obtain a full

release from all further obligations owed by him under the

computer lease agreement assigned to Orix.    On July 30, 1991,

petitioner paid $3,800 to Fleet Credit Corp. to be released from

all further obligations owed by him under the computer lease

agreement with Fleet.   In April 1991, petitioner regained

possession of the automobile that he had leased for the benefit

and use of Mr. Kelley, and paid Americana Leasing (successor to

Active Leasing) $10,155 for the purchase of the automobile.

     On November 5, 1992, petitioner obtained a judgment against

Multilogic for enforcement of the demand note.    Petitioner has

not received any payment on the judgment.    No criminal charges

were ever filed against Mr. Kelley.

     On his 1991 return petitioner claimed a section 1244 stock

loss in the amount of $83,989 for funds invested in

TIC/Multilogic, a $9,899 section 162 expense for amounts paid

under the computer leases, and a $17,715 legal and professional

fees expense for the payments to Mr. Miller.    Respondent

determined that the losses were not allowable.
                                 - 7 -


                                OPINION

     The primary issue in this case is whether petitioner is

entitled to an ordinary loss deduction versus a capital loss

deduction for the advances lost in the business venture with Mr.

Kelley and TIC/Multilogic.    Respondent challenges only the

character of the losses.    Petitioner argues that the losses are

ordinary under several alternative theories.    Respondent asserts

that the losses are capital and, therefore, subject to the

capital loss limitation rules of section 1211.

I.   Section 1244--Losses on Small Business Stock

     Petitioner's first argument is that he is entitled to a

section 1244 stock loss in the amount of $83,9893 as originally

claimed on his return.     Respondent disallowed petitioner's

section 1244 worthless stock loss, determining that the stock

issued did not satisfy all of the requirements for qualification

of section 1244 stock.     Section 1244 provides that any loss

resulting from the sale of section 1244 stock shall be treated as

an ordinary loss.   Sec. 1244(a).    To qualify as section 1244

stock, the stock must be common stock issued by a domestic "small

business corporation", as defined in section 1244(c)(3), and the


     3
      Petitioner offered no evidence indicating how this figure
was arrived at. We assume that the $83,989 is composed of the
$65,066 in checks and a portion of the lease payments made by
petitioner. Respondent does not challenge the amount of the
deduction.
                               - 8 -


consideration paid by the shareholder on the issuance of the

stock must be money or other property.    Sec. 1244(c)(1).

Respondent does not challenge whether TIC was a "small business

corporation" for purposes of section 1244, but instead focuses on

the consideration petitioner provided for the TIC shares.

     Petitioner stipulates that he did not contribute money or

other property to TIC in exchange for his shares of TIC stock.

Therefore, petitioner is not entitled to section 1244 treatment

for his original basis in the TIC stock.    Petitioner did,

however, transfer thousands of dollars to Mr. Kelley, the

President of TIC, for the benefit of TIC.    Although petitioner

did not receive any additional shares for his transfers to Mr.

Kelley, he argues that these transfers could be considered

capital contributions which would increase his basis in his

TIC/Multilogic stock.   Petitioner's section 1244 stock loss

claimed on his return apparently included these transfers.

     Section 1244 provides that the increase in basis resulting

from a contribution to capital "shall be treated as allocable to

stock which is not section 1244 stock."    Sec. 1244(d)(1)(B).

This statutory rule applies to any increase in basis, however

effected.   Bledsoe v. Commissioner, T.C. Memo. 1995-521.

Accordingly, petitioner is not entitled to section 1244 loss
                                - 9 -


treatment for any portion of his basis in TIC/Multilogic stock

that may have been increased by capital contributions.

II.   Section 166--Bad Debts

      Petitioner next argues, in the alternative, that the

expenses originally deducted as a section 1244 worthless stock

loss are deductible as a business bad debt under section 166.     In

addition, petitioner argues that the $30,550 paid for the release

of the two computer leases, which was originally deducted as a

long-term capital loss on petitioner's 1991 return, should also

be deductible as a business bad debt under section 166.4

Respondent contends that petitioner is not entitled to business

bad debt treatment because:    (1) The payments to or for the

benefit of Mr. Kelley do not represent a bona fide debt; and (2)

assuming that the payments did result in a bona fide debt, the

debt owed to petitioner was a nonbusiness bad debt.    We agree

with respondent's first argument and do not consider the question

of whether the payments to or for the benefit of Mr. Kelley

represent a business versus a nonbusiness bad debt.

      Generally, taxpayers may deduct the value of bona fide debts

owed to them that become worthless during the year.    Sec. 166(a).


      4
      Respondent contends that petitioner's claim with respect to
the release of the computer leases should be denied as untimely
and not properly raised. Because we find no merit to
petitioner's position it is unnecessary to address the merits of
respondent's argument.
                               - 10 -


Bona fide debts generally arise from valid debtor-creditor

relationships reflecting enforceable and unconditional

obligations to repay fixed sums of money.    Sec. 1.166-1(c),

Income Tax Regs.   For purposes of section 166, contributions to

capital do not constitute bona fide debts.    Kean v. Commissioner,

91 T.C. 575, 594 (1988).

     The question of whether any of the payments or transfers of

funds to or on behalf of closely held corporations constitute

debt or equity must be considered on the basis of all the

relevant facts and circumstances.    Dixie Dairies Corp. v.

Commissioner, 74 T.C. 476, 493 (1980).    Taxpayers generally bear

the burden of proving that the transfers constituted loans and

not equity investments.    Rule 142(a).

     Courts look to the following nonexclusive factors to

evaluate the nature of transfers of funds to closely held

corporations:   (1) The names given to the documents evidencing

the purported loans; (2) the presence or absence of fixed

maturity dates with regard to the purported loans; (3) the likely

source of any repayments; (4) whether the taxpayers could or

would enforce repayment of the transfers; (5) whether the

taxpayers participated in the management of the corporations as a

result of the transfers; (6) whether the taxpayers subordinated

their purported loans to the loans of the corporations's
                               - 11 -


creditors; (7) the intent of the taxpayers and the corporations;

(8) whether the taxpayers who are claiming creditor status were

also shareholders of the corporations; (9) the capitalization of

the corporations; (10) the ability of the corporations to obtain

financing from outside sources at the time of the transfers; (11)

how the funds transferred were used by the corporations; (12) the

failure of the corporations to repay; and (13) the risk involved

in making the transfers.   Dixie Dairies Corp. v. Commissioner,

supra at 493.

     These factors serve only as aids in evaluating whether

transfers of funds to closely held corporations should be

regarded as capital contributions or as bona fide loans.      Boatner

v. Commissioner, T.C. Memo. 1997-379.   No single factor is

controlling.    Dixie Dairies Corp. v. Commissioner, supra at 493.

Utilizing some of the factors noted above, we come to the

conclusion that no debtor-creditor relationship was created.

     First, we observe that although some of petitioner's,

advances to Mr. Kelley, or payments made on his behalf, were

evidenced by notes, no payments of interest or principal were

ever made on any of the notes.   In addition, petitioner continued

making these alleged "loans" despite the fact that both Mr.

Kelley and TIC/Multilogic repeatedly failed to repay the notes

when they became due.   Petitioner's failure to demand repayment
                               - 12 -


and continued lending of additional funds tends to refute the

existence of a valid debtor-creditor relationship.    Boatner v.

Commissioner, supra.

       Further, petitioner made these substantial advances without

obtaining any collateral or third-party guarantees.    The

repayment of the notes was completely dependent on whether or not

Mr. Kelley would be able to develop and market the computer

software.    This factor indicates that the advances were equity

and not debt.    Stinnett's Pontiac Serv., Inc. v. Commissioner,

730 F.2d 634, 639 (11th Cir. 1984), affg. T.C. Memo. 1982-314.

Based on the record as a whole, we conclude that there was no

expectation of repayment, and that the advances did not

constitute bona fide loans.

III.    Section 165--Theft Losses

       Petitioner next argues, in the alternative, that the

expenses originally deducted as a section 1244 stock loss and the

$30,550 paid for the release of the computer leases are

deductible as a theft loss under section 165.    Respondent

disagrees, contending that petitioners have failed to show that

Mr. Kelley committed any of the acts that would constitute the

crime of theft by deception under Ohio law.

       Section 165 provides a deduction for any loss arising from

theft sustained in the year the taxpayer discovers the loss.    A
                                - 13 -


theft loss within the meaning of section 165 requires a "theft"

under applicable State law. See Viehweg v. Commissioner, 90 T.C.

1248, 1253 (1988).    Under Ohio law, to be guilty of theft by

deception, it must be shown that the accused obtained money or

property of the alleged victim by knowingly deceiving him by a

false or misleading representation, by withholding information,

by preventing the alleged victim from acquiring information, or

by any other conduct, act, or omission which created, confirmed,

or perpetuated a false impression as to law, value, state of mind

or other objective or subjective fact.    Ohio Rev. Code Ann. sec.

2913.01(A) (Anderson 1996).    Petitioner has the burden of proving

theft under Ohio law.    Rule 142(a).

     Petitioner has failed to prove under Ohio law that a theft

has occurred.   There is no evidence establishing that any

statements or representations made by Mr. Kelley that petitioner

may have relied on were false; there is no evidence that any

false statements were made with the intent of criminally

appropriating petitioner's money; and there is no evidence

establishing that petitioner's loss was related to any false

representations.     Viehweg v. Commissioner, supra at 1254.

Petitioner testified that Mr. Kelley had pirated some portion of

the software and had deceived petitioner as to his rights to the

software being developed.    Petitioner offered no evidence, other
                              - 14 -


than his own testimony, in support of these allegations.

Petitioner's own assertions are simply insufficient to establish

that he is entitled to claim a theft loss for the amounts paid to

Mr. Kelley.

      Petitioner also asserts that because the computer program is

now worthless, Mr. Kelley has committed theft by deception.     We

disagree.   A loss resulting from investments in questionable

enterprises does not, per se, amount to theft.    See Hartwick v.

Commissioner, T.C. Memo. 1988-424; Ennis v. Commissioner, T.C.

Memo. 1986-178.   There is no persuasive evidence of any

misrepresentations by Mr. Kelley in the record.   In essence, the

record here reflects that petitioner invested in an idea of Mr.

Kelley's that never materialized.   Accordingly, petitioner is not

entitled to a theft loss deduction for amounts paid to Mr.

Kelley.

IV.   Section 162--Trade or Business Expenses

      Petitioner's final argument is that the $30,550 paid for the

release of the computer leases, the $9,899 paid under the

computer leases, and the $17,715 paid to Mr. Miller for

investigating the computer program are deductible as an ordinary

and necessary business expense under section 162.   Petitioner

asserts that the payments were ordinary and necessary business

expense under two alternative theories.   First, petitioner
                                - 15 -


asserts that the payments are deductible as an ordinary and

necessary business expense in petitioner's separate business of

developing computer software.    Second, petitioner contends that

the payments are deductible as an ordinary and necessary expense

of petitioner's law practice because they were incurred to

protect petitioner's professional reputation as an attorney.

Respondent contends that the payments were not ordinary and

necessary expense of petitioner's law practice and that

petitioner's only trade or business was the practice of law.

Respondent argues that the payments are allowable as a capital

loss deduction to petitioner, subject to the capital loss

deduction limitation rules of section 1211.   We address each

argument separately.

     Section 162(a) provides for a deduction for "ordinary and

necessary" expenses paid or incurred during the taxable year in

carrying on a trade or business.    Sanford v. Commissioner, 50

T.C. 823, 826 (1968), affd. per curiam 412 F.2d 201 (2d Cir.

1969).   An ordinary and necessary expense is one that is

appropriate and helpful to the taxpayer's business and that

results from an activity which is a common and accepted practice.

Boser v. Commissioner, 77 T.C. 1124, 1132 (1981), affd. by order

(9th Cir., Dec. 22, 1983).   Deductions are a matter of

legislative grace, and petitioner bears the burden of proving
                              - 16 -


that he is entitled to the deductions claimed.   Rule 142(a);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

     Petitioner's first argument is that the above listed amounts

are deductible as an ordinary and necessary business of

petitioner's separate business of developing computer software.

Although petitioner did spend time trying to develop a market for

the computer software, petitioner's activity with respect to the

computer software did not rise to the level of a separate trade

or business.   With the exception of petitioner's involvement with

TIC/Multilogic, petitioner has never engaged in the trade or

business of investing in, organizing, or financing business

enterprises.   A shareholder of a corporation is not engaged in

the trade or business in which the corporation is engaged unless

the shareholder engages in such trade or business apart from his

affiliation with the corporation as an investor.   Smith v.

Commissioner, T.C. Memo. 1994-640; Jerich v. Commissioner, T.C.

Memo. 1992-136.

     Furthermore, the computer leases were expenses of

TIC/Multilogic, not petitioner.   Likewise, since the payment to

Mr. Miller was incurred investigating the business of the

corporation and not petitioner's legal business, that amount is

also a corporate expense.   Schrott v. Commissioner, T.C. Memo.

1989-346.   The rule is well established that a shareholder is not
                                - 17 -


entitled to a deduction from his personal income for his payment

of the expenses of his corporation; such amounts constitute

either a loan or a contribution to the capital of the corporation

and are deductible, if at all, by the corporation.    Deputy v. du

Pont, 308 U.S. 488, 494 (1940); Rink v. Commissioner, 51 T.C.

746, 751 (1969).

     Petitioner argues, in the alternative, that the payments are

deductible as an ordinary and necessary expense of petitioner's

law practice because they were incurred to protect petitioner's

professional reputation as an attorney.   Petitioner cites two

cases in support of his position.

     Petitioner cites Jenkins v. Commissioner, T.C. Memo. 1983-

667, which involved a country music singer who repaid certain

corporate debts to investors of a restaurant business that he had

promoted.   The Court allowed the taxpayer to deduct the payments

as a section 162 expense of his business as a country singer,

even though the taxpayer had no obligation to repay the loans.

The Court reasoned that the payments were necessary to protect

the taxpayer's personal business reputation, noting that many of

the investors were connected with the country music industry.

Similarly, in Lutz v. Commissioner, 282 F.2d 614 (5th Cir. 1960),

a shareholder of a corporation was allowed to deduct expenses

that he paid on behalf of three corporations, even though he had

no legal obligation to do so.    The Court of Appeals held that the

failure to make these payments might have jeopardized the

taxpayer's licenses in his principal business as a produce buyer
                               - 18 -


and shipper.    Both of these cases represent exceptions to the

general rule that payments made by a shareholder on behalf of a

corporation are capital contributions by the shareholder, and not

deductible expenses.    Deputy v. du Pont, supra.

     Petitioner fails to qualify for the exception discussed in

Jenkins and Lutz for two reasons.    First, unlike Jenkins and

Lutz, petitioner's obligation to make these payments arose

primarily because of his desire to protect his investment in

TIC/Multilogic, not to protect his business reputation as an

attorney.   In addition, petitioner has presented no evidence that

his business reputation as an attorney would have been adversely

affected by his failure to hire Mr. Miller to investigate the

computer program, or by his failure to obtain releases from the

various leases.    Accordingly, petitioner is not entitled to

deduct these payments as a section 162 expense.

     In conclusion, petitioner is not entitled to claim as an

ordinary loss the advances lost in the business venture with Mr.

Kelley and TIC/Multilogic.

V.   Section 6662--Imposition of Accuracy-Related Penalty

     Respondent determined that petitioner's underpayment of tax

was due to negligence or disregard of rules or regulations under

section 6662.    Section 6662(a) and (b)(1) imposes an accuracy-

related penalty equal to 20 percent of the portion of the

underpayment that is attributable to negligence or disregard of

rules or regulations.
                                - 19 -


     Negligence has been defined as a "lack of due care or a

failure to do what a reasonable person would do under the

circumstances."    Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th

Cir. 1992), affg. T.C. Memo. 1991-179.    Respondent's

determination of negligence is presumed to be correct, and the

taxpayer has the burden of proving that the determination is

erroneous.    Rule 142(a).   Therefore, petitioner must prove that

he was not negligent; i.e., that he made a reasonable attempt to

comply with the provisions of the Internal Revenue Code, and that

he was not careless, reckless, or in intentional disregard of

rules or regulations.    Sec. 6662(b) and (c).

     We sustain respondent's determination.      In determining

whether petitioner was negligent in the preparation of his

return, we take into account petitioner's years of legal

experience.    Glenn v. Commissioner, T.C. Memo. 1995-399, affd.

without published opinion 103 F.3d 129 (6th Cir. 1996).      Beyond

his own assertions, petitioner has offered no evidence to showing

that respondent's negligence determination was in error.

Accordingly, petitioners are liable for the section 6662(a)

penalty.

     To reflect the foregoing,

                                      Decision will be entered

                                 under Rule 155.
