                        T.C. Memo. 1995-490



                      UNITED STATES TAX COURT



                  SYLVIA OSTERBAUER AND ESTATE OF
                JOSEPH OSTERBAUER, DECEASED, SYLVIA
       OSTERBAUER, PERSONAL REPRESENTATIVE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10926-93.                 Filed October 10, 1995.


     Don C. St. Peter, for petitioners.

     Thomas E. Ritter, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION

     FAY, Judge:   By statutory notice of deficiency, respondent

determined a deficiency of $12,280 in the 1985 Federal income tax

of Joseph Osterbauer, now deceased (decedent), and Sylvia

Osterbauer (petitioner).
                                - 2 -

     The issue for decision1 is whether petitioners are entitled

to deduct in 1985 a worthless debt as a business bad debt under

section 166(a)(1)2 or are limited to a deduction for a nonbusi-

ness bad debt under section 166(d)(1).   We hold that the debt is

a nonbusiness bad debt, and, therefore, petitioners are limited

to a short-term capital loss.

                         FINDINGS OF FACT

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

incorporate by this reference the stipulation of facts and

attached exhibits.

     Petitioner resided in Hamilton, Montana, on the date the

petition was filed.   Decedent passed away on September 12, 1990,

prior to the date on which the petition was filed.   Petitioner

filed the petition on her own behalf and as personal representa-

tive for the estate of her husband, Joseph Osterbauer.   Peti-

tioner and decedent filed a joint Federal tax return for the 1985

tax year.




     1
      There is an issue raised by the pleadings of whether
petitioners realized a $619 gain on the repossession of certain
property during 1985. Petitioners have offered no evidence on
this issue and have not raised it on brief, so we conclude they
have abandoned it.
     2
      All section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
                                - 3 -

     Decedent, during his lifetime, worked primarily in the real

estate business.   Decedent was involved in subdividing and

developing real estate, as well as building and purchasing

residential rental property.    Petitioner testified that

decedent's interests were broad based, and, at various times in

his life, he was also a farmer and held an interest in an oil

well and a gold mining claim.    Petitioner presented no evidence,

except for her own self-serving testimony, that would indicate

the exact breadth of decedent's various interests outside the

scope of his general real estate business.

       Petitioner spent much of her time at home with her four

children; however, she had some limited involvement in the family

real estate business.   Petitioner assisted decedent in book-

keeping chores and showed rental properties to prospective

tenants as vacancies arose.

     In 1984, decedent became involved in a gold mining venture,

International Mining Research and Development, Inc. (Interna-

tional Mining).    International Mining was a Montana corporation

whose purpose was to engage in mining activities.    Petitioner and

decedent were among five investors in International Mining.

Petitioner and decedent contributed four subdivided residential

lots for a 20-percent stake in International Mining.    Some of the

other investors contributed some money to the project; however,

others contributed instead their expertise.    International Mining
                                - 4 -

was supposed to use the funds contributed by its investors to buy

and develop gold mining property.3

     Because decedent had a good reputation in Missoula, Montana,

he was asked by the other investors to serve as president of

International Mining.   He accepted the post.   Despite being

president, decedent had no daily involvement in the business of

International Mining, nor did he have operating control over the

business of International Mining.

     International Mining needed additional capital shortly after

it was formed in order to continue operations.    International

Mining attempted to secure a loan from the First State Bank of

Stevensville, Montana (the Bank); however, the Bank was unwilling

to make such a loan.    The Bank did lend $40,000, on March 23,

1984, to decedent and Warren E. Meader, another International

Mining investor.   To secure the loan, the Bank required that

decedent pledge his personally owned Cessna airplane as

collateral.   Mr. Meader put up stock as collateral.   The loan

proceeds were contributed to International Mining.     International

Mining entered into a resolution on March 23, 1984, pledging

proceeds from sales "for repayment of the $40,000.00 promissory

note drawn by Joseph D. Osterbauer and Warren E. Meader in favor

of First State of Stevensville Bank.    Said promissory note in



     3
      It is unclear from the record whether any gold mining
properties were ever bought by International Mining.
                                - 5 -

lieu of pledge has been secured by personal assets of Joseph D.

Osterbauer."

     By July 1984 International Mining had ceased operations.

All of the other investors disappeared, and decedent was left to

wind up the affairs of International Mining.       In order to pay off

the $40,000 loan to the Bank, petitioner and decedent rolled over

the $40,000 loan with other personal loans and refinanced the

loans by the rollover.    In other words, they consolidated the

loan with other personal loans and refinanced the loans by

consolidation.    Petitioner testified at trial that upon investi-

gation, it was found that the stock put up by Mr. Meader as

collateral had no value.    The consolidated loan was eventually

paid off by the sale of decedent's Cessna aircraft.

                               OPINION

     We must decide whether petitioner's and decedent's payments

of International Mining's debts are deductible as business or

nonbusiness bad debts under section 166.        It is undisputed that

petitioner and decedent suffered a loss on the worthlessness of

the debt due them from International Mining.

     Section 166 provides in relevant part as follows:

          SEC. 166(a).    General Rule.--

               (1) Wholly worthless debts.--There shall be
          allowed as a deduction any debt which becomes
          worthless within the taxable year.

          *        *       *      *         *        *       *

          (d)    Nonbusiness Debts.--
                               - 6 -

               (1) General rule.--In the case of a taxpayer
          other than a corporation--

                    (A) subsections (a) and (c) shall not
               apply to any nonbusiness debt; and

                    (B) where any nonbusiness debt becomes
               worthless within the taxable year, the loss
               resulting therefrom shall be considered a
               loss from the sale or exchange, during the
               taxable year, of a capital asset held for not
               more than 6 months.

               (2) Nonbusiness debt defined.--For purposes
          of paragraph (1), the term "nonbusiness debt"
          means a debt other than--

                    (A) a debt created or acquired (as the
               case may be) in connection with a trade or
               business of the taxpayer; or

                    (B) a debt the loss from the worthless-
               ness of which is incurred in the taxpayer's
               trade or business.

     Under section 166(a)(1), if a debt arose in the course of

the taxpayer's trade or business, a loss is deductible against

ordinary income in the year in which the debt becomes worthless.

Sec. 1.166-9(a), Income Tax Regs.   However, under section

166(d)(1)(B), where a debt is a nonbusiness bad debt, a loss must

be treated as a short-term capital loss subject to the limita-

tions of section 1211.   Under section 1.166-9, Income Tax Regs.,

a payment by a taxpayer in discharge of his or her obligations as

a guarantor is treated as a business bad debt if the guaranty is

entered into in the course of the taxpayer's trade or business.

If, however, the guaranty is entered into as a transaction for

profit, but not in the course of the taxpayer's trade or busi-
                               - 7 -

ness, the regulation provides that the discharging payment is a

nonbusiness bad debt.   Sec. 1.166-9(b), Income Tax Regs.

     The question of whether a debt is a business or nonbusiness

bad debt is essentially a question of fact, the resolution of

which depends upon whether the debt is "proximately" related to

the trade or business of the taxpayer.   Sec. 1.166-5(b)(2),

Income Tax Regs.   In determining whether a bad debt had a

"proximate" relation to the taxpayer's trade or business, the

Supreme Court has stated that the proper measure is the dominant

motivation of the taxpayer in making the loan.    United States v.

Generes, 405 U.S. 93, 103 (1972).   The taxpayer's motive is

assessed at the time the guaranty was made.    Harsha v. United

States, 590 F.2d 884 (10th Cir. 1979).

     Petitioner first argues that, had decedent not agreed to

secure a loan for International Mining, the corporation would

have failed, negatively affecting petitioner's and decedent's

business dealings in the community.    Petitioner argues that the

dominant motivation in making the loan was to protect the real

estate business.   Petitioner offers only her own testimony to

support this argument and offers no facts that suggest that, when

International Mining did fail, any of the real estate business

interests were negatively affected.    Petitioner and decedent next

contend that their dominant motivation in lending the money to

International Mining was to protect their "good name" in the

community where they lived.   Petitioner and decedent argue that
                                - 8 -

failing to pay off the debt would have soured their relationship

with the Bank which held the mortgage on some of their real

estate projects.    Petitioner and decedent presented no evidence

to support this claim other than petitioner's testimony to that

effect.    Moreover, while petitioner and decedent contend that

forcing the bank to foreclose on its collateral, the Cessna

airplane, would have soured their relationship with the Bank, the

parties have stipulated that the debt was in fact fully paid with

the proceeds of the sale of the Cessna plane.    Petitioner and

decedent presented no evidence that, had the Bank been forced to

foreclose on this debt, their real estate business would have

been adversely affected.    There is no evidence to support

petitioner's and decedent's contention that the Bank would have

called all of petitioner's and decedent's outstanding loans if

the Bank had foreclosed on this loan.

       Petitioners contend on brief that the size of their invest-

ment in International Mining is a factor tending to show that

their dominant motive in guaranteeing the debt was a business

one.    Petitioners' reliance on Litwin v. United States, 983 F.2d

997 (10th Cir. 1993), and Kelson v. United States, 503 F.2d 1291

(10th Cir. 1974), to support their contention that the size of

petitioner's and decedent's investment is persuasive evidence of

petitioners' motive is misplaced.    Petitioners assert that, where

the investment is relatively small, a dominant business motive is

more likely.    Petitioners appear to arrive at this conclusion
                               - 9 -

from language in Litwin stating that a court is more likely to

find a nonbusiness loan where the taxpayer's investment is

relatively large, the taxpayer's salary is relatively small, and

the taxpayer's other sources of income are relatively large.

Litwin v. United States, supra at 1000.   It does not follow that

a small investment is more likely to be made in a taxpayer's

trade or business.   The court in Litwin, referring to a situation

where three factors existed, (1) a large investment, (2) a small

salary, and (3) large alternative sources of income, concluded

that, in that instance, a nonbusiness motive is more likely.     The

court did not say that, independent of all other factors, size of

investment alone will be determinative.   Furthermore, even should

we accept petitioners' statement as true, petitioners have put

forth no evidence as to the value of the four parcels of land

that petitioner and decedent contributed to International, and,

thus, we do not know the size of their investment.

     In order to determine a taxpayer's dominant motivation, it

is often helpful to determine how the taxpayer would have

benefited if the loan had not gone bad.   When the creditor or

guarantor of a corporate debt is a shareholder/investor and also

an employee, mixed motives for the loan or guaranty are often

present, and the critical issue becomes which motive is dominant.

Id. at 1000.   In the case at bar, petitioners would have bene-

fited in that the value of their stock in International Mining

would have gone up or dividends could have been paid to them.
                              - 10 -

The increase in value of stock is the type of capital increase

that suggests a nonbusiness motive.      See Whipple v. Commissioner,

373 U.S. 193 (1963).

     Petitioner and decedent argue further that their investment

in International Mining, a gold mining venture, is proximately

related to their business of subdividing and developing rental

real estate.   We find that it is not.    Petitioner and decedent

were merely investors in this corporation.     Gold mining was not a

real estate venture of the type that would be considered to be

part of petitioners' trade or business.     Mining is quite

different from general real estate ventures, and petitioners have

failed to put forth sufficient evidence such that we could

conclude that they engaged in a trade or business so broad as to

encompass mining.

     "[I]nvesting is not a trade or business".      Id. at 202.   This

venture was an investment unrelated to petitioner's and dece-

dent's trade or business.   Therefore, we hold that petitioner's

and decedent's loans to International Mining, which became

worthless, are nonbusiness bad debts within the meaning of

section 166(a).

                                            Decision will be entered

                                      under Rule 155.
