                          T.C. Memo. 1998-334



                      UNITED STATES TAX COURT



 RICHARD L. MATZ AND LINDA A. MATZ, DECEASED, RICHARD LEE MATZ,
            JR., INDEPENDENT EXECUTOR, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17820-95.                 Filed September 22, 1998.



     Michael L. Cook, Patrick L. O'Daniel, Bryan W. Lee, and

William R. Leighton, for petitioners.

     Elizabeth A. Owen, and T. Richard Sealy III, for respondent.



                          MEMORANDUM OPINION


     PARR, Judge:   Respondent determined deficiencies in

petitioners' Federal income tax for taxable years 1983, 1984,

1985, and 1986 in the amounts of $3,124, $258,369, $11,537, and

$653,673, respectively.
                                - 2 -


     All section references are to the Internal Revenue Code in

effect for the taxable years in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure, unless

otherwise indicated.    References to petitioner are to Richard L.

Matz.

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

Whether for 1985 a $325,000 loss petitioners sustained relating

to Southern Express, a failed startup airline, is ordinary or

capital.    This turns on whether petitioner was engaged in a trade

or business.   We hold petitioner was not engaged in a trade or

business, and that the loss is a capital loss.   (2) Whether for

1986 a $703,659 loss petitioners sustained relating to the

Bridgepoint project (Bridgepoint) is ordinary or capital, and

whether petitioners' interest expense incurred in 1986 in the

amount of $285,142 relating to Bridgepoint is investment

interest.   This turns on whether petitioner was engaged in a

trade or business.   We hold petitioner was not engaged in a trade

or business, that the loss is a capital loss, and that the

interest is investment interest.   (3) Whether for 1987 losses

petitioners sustained relating to parcels of real property known



     1
          Both parties made concessions subsequent to the
issuance of the notice of deficiency. We note that petitioners
argue on brief that their alternative minimum tax net operating
loss carryback from 1987 to 1984, 1985, and 1986 should be
increased by passive activity losses. Respondent conceded this
before trial.
                               - 3 -


as McCandless, Killingsworth, Webb, and Bordelon (sometimes

collectively referred to as the 1987 properties) in the amounts

of $90,626, $179,765, $72,069 and $689,703, respectively, are

ordinary or capital.   This turns on whether petitioner was

engaged in a trade or business.   We hold petitioner was not

engaged in a trade or business and that the losses are capital.

(4) Whether for 1987 a $59,492 loss petitioners sustained

relating to the Saddle Mountain mineral interest (Saddle

Mountain) is ordinary or capital.   We hold it is ordinary.    (5)

Whether for 1989 a $1,643,900 loss petitioners sustained relating

to a parcel of real property known as Hidden Valley is ordinary

or capital.   This turns on whether petitioner was engaged in a

trade or business.   We hold petitioner was not engaged in a trade

or business and that the loss is capital.

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

The stipulated facts and the accompanying exhibits are

incorporated herein by this reference.   At the time the petition

in this case was filed, petitioners resided in Austin, Texas.

     For convenience, we combine our findings of fact with our

opinion under each separate issue heading.2



     2
          We have considered each of the parties' arguments and,
to the extent that they are not discussed herein, find them to be
unconvincing.
                                 - 4 -


Issue 1.   Southern Express

     Respondent determined that the $325,000 loss petitioners

sustained with respect to Southern Express in 1985 is from the

worthlessness of a nonbusiness debt, producing a short-term

capital loss. Petitioners assert that it is an ordinary loss.

     Southern Express was incorporated on May 8, 1984, for the

purpose of operating a commuter airline within Texas.    Scot

Spencer (Spencer) was the registered agent for Southern Express.

Spencer was well versed in airline terminology and encouraged

petitioner's involvement with Southern Express.    Petitioner had

no previous experience in the airline business but agreed to fund

some of the startup expenses and to locate other investors.

     After a short time, petitioner realized that Spencer had

made inaccurate and possibly even fraudulent representations

regarding Southern Express.   Upon this realization, petitioner

requested that Spencer return the money he had invested.    On

November 7, 1984, Spencer, on behalf of Southern Express,

executed a note to petitioner promising to pay petitioner

$325,000 over a 2-year period.    Spencer failed to make any

payments on the note.   Consequently, petitioners sustained a loss

of $325,000.

     On their 1985 Federal income tax return, petitioners

reported the $325,000 loss as ordinary.    Respondent determined

that the loss is a capital loss and is therefore limited under
                                 - 5 -


sections 165(c) and (f) and 166(d)(1) and (2).     Petitioners

assert that the loss related to Southern Express was incurred and

proximately related to petitioner's trade or business of

promoting, developing, organizing, and financing startup

businesses, and is thus ordinary under section 165(a) and (c)(1)

or, in the alternative, a business bad debt under section 166(a).

     Section 165(a) provides, "There shall be allowed as a

deduction any loss sustained during the taxable year and not

compensated for by insurance or otherwise."     In the case of an

individual, the deduction under section 165(a) is limited to

certain circumstances, including losses incurred in a trade or

business.    Sec. 165(c)(1).   Petitioner asserts that he is engaged

in a trade or business of promoting, developing, organizing, and

financing startup businesses.    We disagree.

     To be engaged in a trade or business, an individual must be

involved in an activity with continuity and regularity, and the

primary purpose for engaging in the activity must be for income

or profit.    Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).

A sporadic activity, a hobby, or an amusement diversion does not

qualify.    Id.   Whether an individual is carrying on a trade or

business requires an examination of the facts involved in each

case.   Higgins v. Commissioner, 312 U.S. 212, 217 (1941).

Petitioner bears the burden of proving that he was engaged in a
                               - 6 -


trade or business regarding Southern Express.    Rule 142(a); Welch

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

     The separate trade or business of promoting, developing,

organizing, and financing startup businesses does exist for

purposes of sections 165 and 166.    See Deely v. Commissioner, 73

T.C. 1081, 1092-1093 (1980), supplemented by T.C. Memo. 1981-229;

Newman v. Commissioner, T.C. Memo. 1989-63; Farrar v.

Commissioner, T.C. Memo. 1988-385.     The difficulty lies in

differentiating between investment activity and the trade or

business of promoting.   Newman v. Commissioner, supra.

     On the basis of all the facts and circumstances, we hold

that petitioner did not pursue promoting, developing, organizing,

and financing startup businesses with the continuity and

regularity to qualify as being engaged in a trade or business.

Cf. Newman v. Commissioner, supra; Farrar v. Commissioner, supra.

Petitioner's primary trade or business was as a real estate

broker.   There is nothing, however, which prohibits a taxpayer

from pursuing more than one trade or business.    See Commissioner

v. Groetzinger, supra at 35; Curphey v. Commissioner, 73 T.C.

766, 775-776 (1980).   In addition to his real estate activities,

petitioner was involved in 6 startup businesses, including

Southern Express, from the 1960's through the late 1980's.      This

sporadic activity cannot qualify as being engaged in a trade or

business.
                               - 7 -


     Accordingly, petitioners' loss is not allowed pursuant to

section 165(c)(1).   In the alternative, since petitioner was not

engaged in a trade or business, the loss is not allowed as a bad

debt pursuant to section 166(a).   The loss is, however, a

nonbusiness bad debt pursuant to section 166(d).   As such, it is

treated as a short-term capital loss.   Secs. 166(d), 1222.

Issue 2.   Bridgepoint

     Respondent determined that the $703,659 loss petitioners

sustained with respect to Bridgepoint in 1986 is a capital loss

and that $285,142 of interest petitioner paid in 1986 relating to

Bridgepoint is investment interest.    Petitioners assert that the

loss is ordinary and that the interest is business interest.

     On October 29, 1984, petitioner and Wayne H. Lott, Sr.

(Lott) each acquired a 50-percent interest in Bridgepoint,3

taking title in the name of Wayne H. Lott, Sr., Trustee.     On July

10, 1985, petitioner sold his interest to Lott for $1,250,000 on

an installment basis.

     Lott thereafter entered into an agreement with an unrelated

partnership (the partnership), whereby the partnership would

purchase Bridgepoint and hire Lott to construct an office

building on the property.   The partnership attempted, but was



     3
          The parcel of land was officially known as "Lot 2,
Hidden Valley, Phase B, Tract 4"; however, the parties refer to
the land and a corresponding plan to construct an office building
there as the Bridgepoint Project or Bridgepoint Venture.
                                - 8 -


unable to obtain, a loan from CreditBanc for the purchase of

Bridgepoint and to construct the office building.    In order to

facilitate the sale of Bridgepoint and the construction of the

office building, petitioner borrowed $1,500,000 from Continental

Savings Association (Continental Savings), invested the money in

certificates of deposit issued by CreditBanc, and pledged the

certificates of deposit to CreditBanc to secure the partnership's

loan.

     The partnership agreed to reimburse petitioner for the

certificates of deposit within 14 months, plus the difference

between the interest expense petitioner incurred at Continental

Savings and the interest income petitioner received on the

certificates of deposit.    In addition, the partnership agreed

that petitioner would have a net profits interest in the

Bridgepoint project, and that petitioner was not a partner or

joint venturer with the partnership.

     The partnership failed to perform pursuant to this agreement

and, in 1986, CreditBanc foreclosed on Bridgepoint and the office

building.   As a result, petitioner sustained a $703,659 loss.

During 1986, petitioner paid $285,142 in interest on his loan

from Continental Savings.

     On their 1986 Federal income tax return, petitioners

reported the $703,659 as an ordinary loss.    Petitioners also

reported the interest as a deductible mortgage interest expense.
                               - 9 -


Respondent determined that the loss is a long-term capital loss

and that the interest paid is investment interest.   We agree with

respondent.

     Petitioners assert that they are entitled to ordinary loss

treatment because petitioner was a coventurer in the Bridgepoint

project, and that petitioner was in the trade or business of

developing and promoting businesses.   Petitioners argue that

petitioner's involvement in the Bridgepoint project was pursuant

to this trade or business.   We have already rejected this

argument in our discussion of petitioners' loss regarding

Southern Express, and we incorporate our analysis on that issue

here.4

     Accordingly, we find that the $703,659 loss petitioners

sustained with respect to Bridgepoint in 1986 is a capital loss

and that $285,142 of interest petitioner paid in 1986 relating to

Bridgepoint is investment interest.



     4
          Although petitioners state on brief that "The
Bridgeport [sic] Building transaction was not a direct investment
in real property but a specially designed structure of financing
for a build to suit office building" and "[Petitioner] entered
into the Bridgepoint venture as part of his trade or business of
developing and promoting businesses", petitioners also analogize
the instant facts to S & H, Inc. v. Commissioner, 78 T.C. 234
(1982). In S & H, Inc. v. Commissioner, supra, the Court held
that a transaction was a sale of property in the ordinary course
of a taxpayer's trade or business and the gain thereon was
taxable as ordinary income rather than capital gain. Petitioner
did not own, and therefore did not sell, Bridgepoint. We fail to
see any reasonable analogy between the Bridgepoint facts and the
facts and holding of S & H, Inc. v. Commissioner, supra.
                               - 10 -


Issue 3.    1987 Properties

     Respondent determined that the losses petitioners sustained

in 1987 for the McCandless, Killingsworth, Webb, and Bordelon

properties in the amounts of $90,626, $179,765, $72,069 and

$689,703, respectively, were long-term capital losses.

Petitioners assert that these amounts are ordinary losses.5

     During 1984, petitioner acquired his interest in each of the

1987 properties.    Each of these properties was located in the

area surrounding Austin, Texas.    Each of these properties was

foreclosed in 1987.

     Petitioners reported the losses sustained on each of the

1987 properties as ordinary on their 1987 Federal income tax

return.    Respondent determined that these losses were capital

losses because the 1987 properties were not held by petitioner

for sale to customers in the ordinary course of a trade or

business.    Petitioners assert that petitioner was in the trade or

business of acquiring, developing, and selling real estate for

profit, and that each of these properties was held by petitioner

for sale to customers in the ordinary course of this trade or

business.    We agree with respondent.




     5
          In addition, petitioners sustained a loss of $36,274 in
1987 on a parcel of real property known as 3-Corners Ranch.
Petitioners concede that the loss incurred on 3-Corners Ranch is
a capital loss.
                                - 11 -


     There is no dispute that petitioner was actively involved in

a trade or business as a real estate broker.    Petitioner has

worked as a real estate broker since approximately 1960.    It is

possible for a taxpayer to be a real estate broker and operate a

second business involving buying and selling real estate for his

own account.   See Tomlinson v. Dwelle, 318 F.2d 60, 61-62 (5th

Cir. 1963).    For the reasons discussed below, we find that

petitioner was not engaged in a second trade or business of

acquiring, developing, and selling real estate for profit.

     The Court of Appeals for the Fifth Circuit, to which this

case is appealable, "has developed a framework to be used in

determining whether sales of land are considered sales of a

capital asset or sales of property held primarily for sale to

customers in the ordinary course of a taxpayer's business."

Bramblett v. Commissioner, 960 F.2d 526, 530 (5th Cir. 1992),

revg. T.C. Memo. 1990-296; Suburban Realty Co. v. United States,

615 F.2d 171 (5th Cir. 1980); Biedenharn Realty Co. v. United

States, 526 F.2d 409 (5th Cir. 1976); United States v. Winthrop,

417 F.2d 905 (5th Cir. 1969).    The Court of Appeals has directed

that three principal questions must be considered:

     (1) Was the taxpayer engaged in a trade or business,
     and if so, what business?
     (2) Was the taxpayer holding the property primarily for
     sale in that business?
     (3) Were the sales contemplated by the taxpayer
     "ordinary" in the course of that business? [Bramblett
     v. Commissioner, supra at 530.]
                               - 12 -


See also Suburban Realty Co. v. United States, supra at 178.

     In answering these questions, the Court of Appeals has

instructed that seven factors should be considered: (1) the

nature and purpose of the acquisition of the property and the

duration of the ownership; (2) the extent and nature of the

taxpayer's efforts to sell the property; (3) the number, extent,

continuity and substantiality of the sales; (4) the extent of

subdividing, developing, and advertising to increase sales; (5)

the use of a business office for the sale of the property; (6)

the character and degree of supervision or control exercised by

the taxpayer over any representative selling the property; and

(7) the time and effort the taxpayer habitually devoted to the

sales.    Bramblett v. Commissioner, supra at 530-531; Suburban

Realty Co. v. United States, supra at 178; Biedenharn Realty Co.

v. United States, supra at 415; United States v. Winthrop, supra

at 910.    The frequency and substantiality of sales is the most

important factor.    Bramblett v. Commissioner, supra at 531;

Suburban Realty Co. v. United States, supra at 178; Biedenharn

Realty Co. v. United States, supra at 416.    This is so because

     A taxpayer who engages in frequent and substantial
     sales is almost inevitably engaged in the real estate
     business. The frequency and substantiality of sales
     are highly probative on the issue of holding purpose
     because the presence of frequent sales ordinarily
     belies the contention that property is being held "for
     investment" rather than "for sale." And the frequency
     of sales may often be a key factor in determining the
     "ordinariness" question. [Suburban Realty Co. v.
     United States, supra at 178.]
                              - 13 -


     Each of the remaining factors have varying degrees of

relevancy depending on the particular factual situation, and all

may not be applicable to any given case.     Suburban Realty Co. v.

United States, supra at 178-180; Morley v. Commissioner, 87 T.C.

1206, 1213 (1986); S & H, Inc. v. Commissioner, 78 T.C. 234, 243-

244 (1982).

     We must now apply the analysis set forth above to the facts

and circumstances of the instant case.   We must decide whether

petitioner was engaged in a trade or business and, if necessary,

whether petitioner was holding the properties at issue primarily

for sale in that trade or business and whether petitioner's

contemplated sales were "ordinary" in the course of that trade or

business.

     Petitioner must engage in a sufficient amount of activity to

be considered engaged in a trade or business; however, "The

precise quantum necessary will be difficult to establish, and

cases close to the line on this issue will arise."     Suburban

Realty Co. v. United States, supra at 181.    We are mindful that

the most important factor to consider regarding this issue, as

stated by the Court of Appeals, is the frequency and

substantiality of sales.   Bramblett v. Commissioner, supra at

531; Suburban Realty Co. v. United States, supra at 178;

Biedenharn Realty Co. v. United States, supra at 416.    On the

basis of all the facts and circumstances, we find that
                              - 14 -


petitioner's ventures did not reach the requisite level of

activity, as interpreted by the Court of Appeals for the Fifth

Circuit, to be considered engaged in a trade or business.     Cf.

Suburban Realty Co. v. United States, supra at 174 (taxpayer made

244 sales over a 32-year period); Biedenharn Realty Co. v. United

States, supra at 411-412 (taxpayer sold 208 lots and 12

individual parcels from subdivision in question over 31-year

period); United States v. Winthrop, supra at 907 (taxpayer sold

456 lots over a 19-year period).

     Petitioner testified that since he went into real estate, in

approximately 1960, he had bought and sold approximately 45

unimproved properties and 186 improved properties.    Petitioners

assert that this supports the proposition that petitioner had

frequent and substantial sales of real property over his entire

business career.   We disagree.

     Petitioners attached to their brief three appendices listing

the above referenced unimproved and improved properties.

Respondent attached to the reply brief petitioners' answers to

respondent's interrogatories in order to refute the appendices.

Statements in briefs, however, do not constitute evidence and

cannot be used as such to supplement the record.     Rule 143(b);

Niedringhaus v. Commissioner, 99 T.C. 202, 214 n.7 (1992).     After


     6
          We note that two of these 18, about which petitioner
testified, are not improved properties, but failed startup
businesses.
                               - 15 -


examining several of petitioners' returns, however, which were

admitted in evidence, we find that many of the parcels of real

property which petitioners owned were reported as capital gains

upon their disposition.   Therefore, although petitioners have

bought and sold various parcels of real property over the years,

many parcels were treated as investment properties.   Furthermore,

petitioner was involved in an investment called the MMJ Ventures,

which also held certain properties for investment.    This does not

support the proposition that petitioners were engaged in a trade

or business.   Cf. Legg v. Commissioner, 57 T.C. 164, 169 (1971),

affd. per curiam 496 F.2d 1179 (9th Cir. 1974).

     Petitioners rely on Morley v. Commissioner, supra, where the

Court held that a single transaction for the sale of a piece of

real property qualified as a trade or business.   See also S & H,

Inc. v. Commissioner, supra.   The Court stated that in certain

situations this rationale may apply if "at the time the property

was acquired by the taxpayer, he intended promptly to resell the

property and the objective facts show that he proceeded to

attempt to implement that intent--in short, that the taxpayer's

purpose was bona fide."   Morley v. Commissioner, supra at 1211.

     Petitioner testified that the real estate market in the

Austin, Texas, area during the early 1980s was very active and

that "'investors' * * * plus the local types, were all looking

for land that could be a quick profit or a quick development".
                               - 16 -


Petitioner further testified that he attempted to quickly resell

certain properties by, on the day of closing, putting up a sign

and contacting other people to buy it.    We accept that the

Austin, Texas, real estate market was very active at that time,

and that petitioner purchased certain properties with the intent

to resell them immediately.    We further accept that petitioner's

intention to resell was thwarted by a sudden and dramatic

downward turn in the real estate market.    This, however, does not

change our analysis, in light of the guidance provided by the

Court of Appeals for the Fifth Circuit, that this record of

frequency and substantiality does not rise to the necessary level

to reach the conclusion that petitioner was engaged in a trade or

business.   See Bramblett v. Commissioner, 960 F.2d at 531.

     On the basis of our reasoning above, we need not reach the

remaining two questions which the Court of Appeals directs us to

consider.    Accordingly, since petitioners were not engaged in a

trade or business, the losses sustained on the 1987 properties

were long-term capital losses.

Issue 4.    Saddle Mountain Mineral Interest

     Respondent determined that the $59,492 loss petitioners

sustained with respect to Saddle Mountain in 1987 is a long-term

capital loss.    Petitioners assert that it is an ordinary loss.

     On July 3, 1984, petitioner acquired Saddle Mountain, which

was located in Grant County, Washington.    At that time, the Shell
                              - 17 -


Oil Company (Shell) was drilling an oil well in the area.

Petitioner purchased Saddle Mountain on speculation related to

the drilling of the Shell oil well.

     After the oil well was drilled and tested, Shell plugged and

abandoned it as a dry hole.   In 1987, petitioner abandoned Saddle

Mountain as worthless but did not dispose of title to the mineral

interest.

     Losses from sales or exchanges of capital assets are allowed

only to the extent allowed in sections 1211 and 1212.    Sec.

165(f).   A "capital asset" is defined as property held by the

taxpayer (whether or not connected with his trade or business),

subject to certain enumerated exceptions.   Sec. 1221.

     There must be a "sale or exchange" of a capital asset in

order for the transaction to be taxed as a capital gain or loss.

Sec. 165(f).   Our analysis, therefore, is not directed at whether

petitioner was in a trade or business with respect to Saddle

Mountain, but whether there was a "sale or exchange".

     As the Court stated in La Rue v. Commissioner, 90 T.C. 465,

483 (1988), "The touchstone for sale or exchange treatment is

consideration."   Therefore, if property merely becomes worthless,

the loss does not arise from a sale or exchange within the

meaning of section 1211, and is thus ordinary in character.

Furthermore, if a taxpayer abandons worthless property, the

abandonment does not constitute a sale or exchange within the
                              - 18 -


meaning of section 1211, and the loss is ordinary.7   See Citron

v. Commissioner, 97 T.C. 200, 213-217 (1991).

     Petitioners merely abandoned a worthless mineral interest.

The loss, therefore, did not arise from a "sale or exchange"

within the meaning of section 1211.    Accordingly, petitioners are

entitled to ordinary loss treatment with respect to the

abandonment of Saddle Mountain during 1987.

Issue 5.   Hidden Valley

     Respondent determined that the $1,643,900 loss petitioners

sustained in 1989 relating to Hidden Valley is a long-term

capital loss.   Petitioners assert that it is an ordinary loss.

     In October 1984, petitioner purchased Hidden Valley.

Petitioner testified that he intended to construct an office

building on this property.   On January 3, 1989, petitioner

surrendered, disposed of, or lost his interest in Hidden Valley

through foreclosure.

     In support of their argument that the loss sustained on

Hidden Valley in 1989 is ordinary, petitioners again assert that

petitioner was engaged in a trade or business of acquiring,

developing, and selling real property and that Hidden Valley was



     7
          We recognize that, under certain circumstances, the
abandonment of mortgaged property can qualify as a "sale or
exchange". See, e.g., Yarbro v. Commissioner, 737 F.2d 479 (5th
Cir. 1984), affg. T.C. Memo. 1982-675; Middleton v. Commissioner,
77 T.C. 310 (1981), affd. per curiam 693 F.2d 124 (11th Cir.
1982). These conditions do not exist in the instant case.
                             - 19 -


held for sale in the ordinary course of that trade or business,

or that petitioner was engaged in a trade or business of

developing and promoting businesses and that Hidden Valley was

held pursuant to that trade or business.    We have already

rejected these arguments and do not need to address them again in

detail.

     Accordingly, the $1,643,900 loss petitioners sustained in

1989 relating to Hidden Valley is a long-term capital loss.8

     For the foregoing reasons,

                                           Decision will be entered

                                   under Rule 155.




     8
          Furthermore, in claiming the Hidden Valley loss as
ordinary on their 1989 Federal income tax return, petitioners
assert that there is a resulting net operating loss. Petitioners
assert that this net operating loss should be carried back to
1986, 1987, and 1988, and applied against the deficiencies
determined by respondent. Since we have held that the Hidden
Valley loss is capital, we do not reach this issue.
