                          T.C. Memo. 1999-427



                        UNITED STATES TAX COURT



WILLIAM J. FLEISCHAKER AND DONNI L. FLEISCHAKER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6668-97.                   Filed December 30, 1999.



     Joseph W. Martin and Frank H. McGregor III, for

 petitioners.

     C. Glenn McLoughlin, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:      Respondent determined deficiencies in

petitioners' Federal income tax of $101,342 for 1991 and $22,513
                                 - 2 -


for 1992 and accuracy-related penalties under section 6662(a)1 of

$20,268 for 1991 and $4,503 for 1992.

       After concessions by the parties,2 the issues for decision

are:

       1.   Whether petitioners may deduct: (a) Loan guaranty

payments of $18,329 paid in 1991 and $98,000 paid in 1992 as

business bad debts under section 166, and (b) legal fees

(incurred in defending against enforcement of the loan

guaranties) of $213,239 paid in 1991 and $45,636 paid in 1992 as

ordinary and necessary business expenses under section 162;3 and

       2.   whether petitioners are liable for the accuracy-related

penalties under section 6662 for 1991 and 1992.


       1
      Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years in issue and Rule
references are to the Tax Court Rules of Practice and Procedure.
       2
      Petitioners concede that they had unreported interest
income of $947 for 1991 and $1,337 for 1992. Petitioners further
concede that they are not entitled to Schedule C deductions (1)
in 1991 of $9,171 for travel, $1,598 for meals, $2,619 for
supplies, $4,228 for double deductions, and $2,976 for interest,
and (2) in 1992 of $4,675 for interest. With respect to
disallowed travel and entertainment expenses reported by
petitioners on Schedule C for 1991, respondent concedes that
petitioners are entitled to deduct $2,002 as employee expenses
and $579 as sec. 212 expenses on Schedule A for 1991. Respondent
also agrees that $11,149 of the legal and professional expenses
for 1992 are deductible under sec. 162 on petitioners' Schedule C
- Medical.
       3
      Petitioners concede that none of the legal fees paid prior
to 1991 are deductible in 1991 or 1992. Respondent concedes that
the legal fees and related expenses paid in 1991 and 1992 are
deductible in those years but only as miscellaneous itemized
deductions under sec. 165(c)(2) or 212.
                               - 3 -


                          FINDINGS OF FACT

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

The stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.

     Petitioners resided in Phoenix, Arizona, when they filed

their petition.   Hereinafter, references to petitioner are to

William J. Fleischaker.

Petitioner’s Medical Education and Training

     Petitioner attended the University of Oklahoma College of

Medicine (the medical school), located in Oklahoma City,

Oklahoma.   He graduated as a doctor of medicine in June 1979 and

was licensed to practice medicine by the Oklahoma Board of

Medical Licensure on July 1, 1980.

     After graduating from medical school, petitioner began a 3-

year family practice internship/residency program at the medical

school.   He worked 80 to 120 hours per week as an intern in the

program from July 1, 1979, to June 30, 1980, at which time he

took a 2-year leave of absence.   From June 1980 to July 1982,

petitioner was employed by a group of physicians that staffed two

emergency clinics in Tulsa, Oklahoma.    He worked approximately 20

hours per week at the two clinics and occasionally worked

weekends at two other emergency rooms.

     Petitioner resumed his participation in the medical school's

family practice residency program on July 1, 1982, and completed
                                 - 4 -


the program on June 30, 1984.    During the residency, he worked 40

to 80 hours per week.

     In July 1984, after completing his residency, petitioner

worked 40 hours per week at the Eastern Oklahoma Sports Medicine

Center in Tulsa.    Petitioner became board certified in family

practice in 1985.    After leaving the Eastern Oklahoma Sports

Medicine Center in 1985, petitioner worked 40 hours per week at

the Glass-Nelson Occupational Clinic in Tulsa until he moved to

Phoenix, Arizona, in May 1987.

Adult Living Centers, Inc.

     During his second year of medical school, petitioner had

learned that, by the time he became 50 years old, 50 percent of

the population of the United States would be 50 years of age or

older.   Petitioner decided to specialize in family medicine

because he recognized an opportunity to develop an administrative

type of medical practice and to promote new concepts in care for

the elderly.

     While working as an emergency room physician during his 2-

year leave of absence from the residency program, petitioner

began developing his concept for an integrated nursing care

facility and looking for investors.      Petitioner and three other

individuals, Charles Wetz, John Wetz, and Jerry Colclazier

(hereinafter collectively referred to as petitioner's

associates), were interested in the nursing home business.     By
                               - 5 -


1980, petitioner and his associates formed Adult Living Centers,

Inc. (Adult Living Centers), to own and operate a proposed new

facility in Muskogee, Oklahoma, known as the Van Orden Memorial

Adult Living Center (the Van Orden project).   Petitioner invested

approximately $25,000 in the stock of Adult Living Centers and

was a member of the board of directors and vice president of the

corporation.   None of the individuals, however, had experience in

constructing or operating a nursing home facility.    Charles Wetz

had a degree in hospital administration.   Mr. Colclazier was to

manage the construction of the Van Orden project.

     Petitioner and his associates did not intend the Van Orden

project to be a typical nursing home facility.    Instead, they

envisioned a multifunctional comprehensive facility that would

provide traditional long-term care, integrate intermediate care

with day care for the elderly, integrate day-care service for

children with day care for older individuals, and provide

residences for seniors.   Petitioner had the idea of integrating

adult day care with intermediate care because it would be more

beneficial to the patients and more economical.    Petitioner also

thought that integrating child care with senior care would

provide a nurturing interaction for the children with grandparent

type figures during the day and would stimulate the elderly

(because of the interaction with the children).
                               - 6 -


     Petitioner viewed the Van Orden facility as a prototype for

developing other multifunctional care facilities in the United

States.   His goal was to own similar facilities throughout the

country, possibly through a nationwide chain.     Petitioner

intended to establish similar facilities in other States using

different corporations that would be kept under his control.

     While working as an emergency room physician during his 2-

year leave of absence from the residency program, petitioner

worked with architects, visited other senior service facilities,

and participated in applying for the certificate of need.

Petitioner also located land for the site of the proposed

facility, negotiated the purchase, and financed the purchase of

the land.4

     Oklahoma required a proposed operator of a new nursing home

facility to obtain a certificate of need from the Oklahoma Health

Planning Authority (the planning authority).     A certificate of

need was required to ensure that there was a need for the

facility in the local service area and to ensure that the

proposed owner had adequate financial backing and experience to

operate the facility successfully.     Upon completion of the

facility, the operator also needed to obtain a license from the

Oklahoma State Department of Health.




     4
      Petitioner was later repaid the purchase price of the land.
                               - 7 -


     If the planning authority issued a certificate of need, the

proponent had 6 months to submit a construction plan for the

facility.   Once the planning authority reviewed and approved the

plan, construction was required to commence within 2 months after

the approval of the plan and had to be completed within 1 year

after the approval of the plan.   Failure to meet these deadlines

would result in forfeiture of the certificate of need.

     In 1980, Adult Living Centers submitted an application to

the planning authority for a certificate of need for the Van

Orden project.   The application requested approval for

construction of a new 90-bed multifunctional facility in Muskogee

with an estimated construction cost of $1,092,455.   Petitioner

was listed on the application (and introduced at the planning

authority's hearing on the certificate of need) as the proposed

medical director for the facility.

     The project did not have any commitments from lenders at the

time the application was submitted, but the application indicated

that petitioner's family members were the principal interested

investors in the project.   The application included a letter from

petitioner stating that his family had reviewed the Van Orden

proposal and was interested in the investment opportunity.   The

application also included a letter from Liberty National Bank and

Trust Co. of Oklahoma City verifying that petitioner's family had

financial resources available for an investment in the Van Orden
                               - 8 -


project and vouching for the family's business and personal

reputation.

     The planning authority issued a certificate of need for the

Van Orden project on December 17, 1980.   After several plan

submissions, the planning authority approved the construction

plan on March 15, 1982.   The certificate of need required

construction on the Van Orden project to commence by May 15,

1982, and to be completed by March 15, 1983.   Adult Living

Centers had difficulty obtaining financing for the Van Orden

project and obtained a 6-month extension to September 15, 1983,

for the construction completion date.

     As of February 1983, the Van Orden project still had no

construction or permanent financing for the project.   A planning

authority inspection report, dated February 18, 1983, stated that

no foundations had been poured for the project, and only

preliminary site work had been performed for the project.

     In the spring of 1983, Adult Living Centers’ shareholders,

with the assistance of Phoenix Federal Savings & Loan Association

(Phoenix Federal), arranged a financing package for the Van Orden

project.   Under the financing package, Phoenix Federal's

subsidiary, Eastern Oklahoma Service Corp. (Eastern Oklahoma),

acquired 51 percent of Adult Living Centers’ stock.    Petitioner's

stock interest was reduced from 48 percent to less than 20
                               - 9 -


percent.   As a result, Eastern Oklahoma had voting control of

Adult Living Centers.

     Phoenix Federal arranged for a $3,150,000 loan from State

Federal Savings & Loan Association (State Federal) to finance the

construction of the Van Orden project.    A tax-exempt bond

facility provided funding for the loan.    Phoenix Federal also

arranged for a takeout commitment from State Federal.    The

takeout commitment provided that, subject to certain conditions,

State Federal would provide funding to pay off the tax-exempt

bond facility in the event of a mandatory bond redemption or upon

final maturity of the bond issue.

     At the March 17, 1983, closing of the State Federal loan, a

dispute arose as to whether Adult Living Centers' shareholders,

including petitioner, were required to guarantee the loans made

to Adult Living Centers.   Although petitioner stated his

objections, he did sign a guaranty of collection for a

proportionate amount of the $3,150,000 State Federal loan (State

Federal loan guaranty) and a guaranty of payment for a

proportionate amount of the commitment fee required by the State

Federal takeout commitment (State Federal takeout guaranty).      The

amounts petitioner guaranteed were based on his proportionate

stock ownership in Adult Living Centers.

     Several competing nursing home operators objected to the Van

Orden project and closely monitored the project.    In May 1983,
                              - 10 -


the competitors sought to have the planning authority revoke the

certificate of need because Adult Living Centers failed to begin

construction within 2 months of the construction plan approval.

The planning authority initially revoked the certificate of need

but reinstated the certificate on June 23, 1983.   The competing

operators immediately challenged the planning authority's

reinstatement of the certificate.   Although Adult Living Centers

ultimately prevailed in the litigation, the lawsuit absorbed some

of the resources available for the Van Orden project and created

uncertainty as to the project's eventual completion.

     The State Federal loan enabled Adult Living Centers to

complete construction of the Van Orden project by September 15,

1983.   Adult Living Centers filed an Application for License to

Conduct a Skilled Nursing Home Intermediate Care Facility or Rest

Home/Personal Care Facility (license application), dated

September 12, 1983, with the Oklahoma State Department of Health.

The Oklahoma State Department of Health issued Adult Living

Centers a 4-month probationary license to operate the Van Orden

facility effective September 15, 1983.   Charles Wetz was named as

the administrator on the license application.   Attached to the

application was a certificate (licensed physician certificate)

signed by petitioner that stated:

     I, William J. Fleischaker, MD, a duly licensed
     physician in the State of Oklahoma, agree to be called
                               - 11 -


     for medical care emergencies and to act in an advisory
     capacity for the Van Orden Adult Living Center.

     Although petitioner signed the physician certificate

attached to the Van Orden facility's initial license application,

he never provided and never intended to provide patient care at

the facility.    Petitioner never received any compensation from

Adult Living Centers as an officer, director, employee, or

independent contractor.

     After the probationary period, the Oklahoma State Department

of Health issued Adult Living Centers annual licenses to operate

the Van Orden facility beginning in January 1984.    The copy of

the application for the license effective January 14, 1984, to

January 13, 1985, does not have a    licensed physician certificate

attached.

     The license applications dated October 3, 1984, October 1,

1985, and October 3, 1986, filed with the Oklahoma State

Department of Health to operate the Van Orden facility from

January 14, 1985, to January 31, 1988, listed Charles Wetz as the

administrator.   Petitioner was not the physician who signed the

licensed physician certificates attached to the applications.

     In addition to the nursing care facility, Adult Living

Centers was building a child care center as part of the Van Orden

project.    The Van Orden project continued to have construction

cost overruns and operating deficits.   By the summer of 1984, the
                              - 12 -


directors of Adult Living Centers had become dissatisfied with

Mr. Colclazier's management of the construction projects.     Mr.

Colclazier wanted to leave the project and sell his Adult Living

Centers stock.   He also wanted to be released from his loan

guaranty obligations to State Federal, which required State

Federal's approval.

     The directors of Adult Living Centers arranged for the

corporation to purchase Mr. Colclazier's stock.    State Federal

agreed to release Mr. Colclazier from the guaranty obligations

provided the remaining shareholders executed a substitute

guaranty agreement.   On July 25, 1984, State Federal, Eastern

Oklahoma, petitioner, and Charles Wetz executed a release of

guaranty extinguishing Mr. Colclazier's obligations to State

Federal.   On July 27, 1984, Eastern Oklahoma, petitioner, and

Charles Wetz executed a substitute guaranty with respect to the

State Federal loan and the takeout commitment (State Federal

substitute guaranty).

     During this time, in an attempt to meet the additional cost

overrun and operating deficit, Adult Living Centers obtained a

$600,000 loan commitment from Phoenix Federal in the summer of

1984.   Adult Living Centers, however, was unable to meet all the

requirements of the written loan commitment, and, on July 11,

1984, Phoenix Federal notified Adult Living Centers that it would

not advance any funds under the loan commitment.
                              - 13 -


     On July 31, 1984, petitioner borrowed $206,040 from Phoenix

Federal and then lent the money to Adult Living Centers to help

meet the cash requirements.   The promissory note evidencing

Phoenix Federal's loan to petitioner was secured by petitioner's

stock in Adult Living Centers.   The note was due on December 31,

1984.

     On October 15, 1984, Phoenix Federal provided a $700,000

line of credit to Adult Living Centers to help cover cost

overruns and operating deficits.   Petitioner executed a limited

guaranty of collection on a portion of the line of credit

(Phoenix Federal line of credit guaranty) based on his

proportionate stock ownership interest in Adult Living Centers.

Adult Living Centers used funds borrowed on the line of credit to

repay petitioner the $206,040 he had lent to the corporation.

Petitioner then repaid his $206,040 loan from Phoenix Federal.

     In 1985, Phoenix Federal sold its controlling interest in

Adult Living Centers to William Ricketts, a Muskogee businessman.

Mr. Ricketts and the other principals in Adult Living Centers

determined they needed additional cash-flow in order to salvage

the Van Orden project.   Mr. Ricketts thought an additional

nursing home facility would provide enough excess cash-flow to

service the Van Orden project debts and provide administrative

cost savings.
                              - 14 -


     Adult Living Centers negotiated to purchase Muskogee

Convalescent, an existing licensed nursing home facility located

in Muskogee, Oklahoma.   To finance the purchase, Adult Living

Centers obtained an $855,000 loan from Phoenix Federal on

September 11, 1985.   Petitioner signed a limited guaranty of

payment for a portion of the new $855,000 Phoenix Federal loan

(Phoenix Federal loan guaranty) based on his proportionate stock

ownership in Adult Living Centers.

     Despite the acquisition of Muskogee Convalescent, however,

Adult Living Centers continued to have financial difficulties and

defaulted on its various obligations to State Federal and Phoenix

Federal.   The lending institutions, or their respective

successors in interest,5 commenced collection actions and

foreclosure proceedings against Adult Living Centers to collect

the outstanding debts and against petitioner to enforce his

obligations under the various guaranty agreements.6   Between 1988

and 1992, petitioner was a party to five separate lawsuits

pertaining to the Phoenix Federal and State Federal loans and

commitments to Adult Living Centers.


     5
      Cimarron Federal Savings & Loan Association (Cimarron
Federal) was a successor in interest to Phoenix Federal. The
Resolution Trust Corporation (RTC) was a successor in interest to
Cimarron Federal and to State Federal.
     6
      In certain instances, the Federal Deposit Insurance
Corporation (FDIC) supervised the collection of loans owned by
RTC.
                               - 15 -


     The first action, Fleischaker v. State Fed. Sav. & Loan

Association, Case No. 88-C-1230-E (the Fleischaker/State Federal

case), was a declaratory judgment action filed by petitioner in

the U.S. District Court for the Northern District of Oklahoma on

September 12, 1988.   The   Fleischaker/State Federal case

pertained to petitioner's State Federal loan guaranty, State

Federal takeout guaranty, and State Federal substitute guaranty.

     By order dated October 11, 1990, the Federal District Court

determined that the State Federal loan guaranty required the bank

to proceed first against Adult Living Centers before proceeding

against petitioner.   The court further found that the bank's

failure to do so was a material breach of the agreement, thereby

releasing petitioner from his obligations under the State Federal

loan and substitute guaranties.    The court, however, found that

petitioner was liable for his share of commitment fees under the

State Federal takeout guaranty.    On November 19, 1990, a judgment

in the amount of $18,329.06 was entered against petitioner in the

Fleischaker/State Federal case.    On February 5, 1991, the parties

in the Fleischaker/State Federal case filed a mutual release and

satisfaction of judgment, reflecting that petitioner had fully

satisfied the $18,329.06 judgment.

     From 1987 to 1991, petitioner paid the following legal fees

in the Fleischaker/State Federal case:
                               - 16 -




                Year                Attorney’s fees

                1987                    $2,735
                1988                    16,227
                1989                    67,754
                1990                    17,643
                1991                    23,581

     The second action, State Fed. Sav. & Loan Association v.

Adult Living Ctrs., Case No. CJ-88-6322 (the State Federal/Adult

Living Centers case), also pertained to petitioner's State

Federal loan guaranty, State Federal takeout guaranty, and State

Federal substitute guaranty.   The State Federal/Adult Living

Centers case was a collection action filed by State Federal in

the District Court of Tulsa County, Oklahoma, on October 21,

1988.   On February 5, 1991, the claims against petitioner in the

State Federal/Adult Living Centers case were dismissed with

prejudice.

     From 1989 to 1991, petitioner paid the following legal fees

in the State Federal/Adult Living Centers case:

                Year                Attorney’s fees

                1989                    $8,963
                1990                    29,932
                1991                     3,128

     The third action was brought in 1989 by Cimarron Federal

pertaining to petitioner's obligations under the Phoenix Federal

line of credit guaranty.   That case, Cimarron Fed. Sav. & Loan

Association v. Adult Living Ctrs., Case No. C-89-1402 (the 1989
                              - 17 -


Cimarron Federal/Adult Living Centers case), was a collection and

foreclosure action filed by Cimarron Federal on September 11,

1989, in the District Court of Muskogee County, Oklahoma.

     From 1989 to 1992, petitioner paid the following legal fees

in the 1989 Cimarron Federal/Adult Living Centers case:

               Year                 Attorney’s fees

               1989                     $2,770
               1990                      5,144
               1991                     17,561
               1992                     31,449

     The fourth and fifth actions were brought by Cimarron

Federal pertaining to petitioner's obligations under the Phoenix

Federal loan guaranty.   The fourth action, Cimarron Fed. Sav. &

Loan Association v. Adult Living Ctrs., Case No. C-90-62 (the

1990 Cimarron Federal/Adult Living Centers case), was filed by

Cimarron Federal on January 23, 1990, in the District Court of

Muskogee County, Oklahoma.   The fifth action, Cimarron Fed. Sav.

& Loan Association v. Fleischaker, Case No. CIV 90-522-S (the

Cimarron Federal/Fleischaker case), was filed on October 16,

1990, in the U.S. District Court for the Eastern District of

Oklahoma.

     On December 18, 1991, petitioner paid $98,000 to RTC to

settle the Cimarron Federal/Fleischaker case.    Under the

settlement document, petitioner was released from claims raised

against him in the Cimarron Federal/Fleischaker case and the 1990
                               - 18 -


Cimarron Federal/Adult Living Centers case.   The settlement,

however, did not release petitioner from claims raised in the

1989 Cimarron Federal/Adult Living Centers case.   The record in

this case does not disclose the resolution of the 1989 Cimarron

Federal/Adult Living Centers case.

     From 1990 to 1992, petitioner paid the following legal fees

in the 1990 Cimarron Federal/Adult Living Centers case:

               Year                  Attorney’s fees

               1990                      $19,114
               1991                        1,131
               1992                           98

     From 1990 to 1992, petitioner paid the following legal fees

in the Cimarron Federal/Fleischaker case:

               Year                  Attorney’s fees

               1990                       $4,069
               1991                      167,838
               1992                       14,089

     In 1991, Petitioner also incurred and paid $3,293 in travel

expenses associated with his attempts to settle the Cimarron

Federal/Fleischaker case.

Petitioners’ 1991 and 1992 Federal Income Tax Returns

     Petitioners timely filed joint individual Federal income tax

returns for 1991 and 1992, reporting no tax for 1991 and total

tax of $53,464 for 1992.    The return for each year contained two

Schedules C, Profit or Loss From Business, for which petitioner

was identified as the sole proprietor.   One business was
                              - 19 -


identified as "William J. Fleischaker, M.D." for which the

principal business was the provision of medical services.    The

other business was identified as "Deborah Fleischaker, et. al"

for which the principal business was oil and gas production.     On

the Schedules C for oil and gas production activity, petitioners

claimed legal and professional expenses of $439,871 for 1991 and

$51,950 for 1992.   None of the claimed legal and professional

expenses were related to the oil and gas production activity.

Except for $11,149 of the fees claimed in 1992, the fees claimed

as legal and professional fees from oil and gas production were

for payments made by petitioner under his guaranty obligations

for Adult Living Center debts and legal fees incurred in

defending against those obligations.   The remaining $11,149

claimed in 1992 was related to petitioner's medical services

activity.

     In the notice of deficiency, respondent disallowed a

deduction for all $439,871 of legal fees claimed on the 1991

return and $40,801 of the fees claimed in 1992.   Respondent did

not disallow the $11,149 of fees claimed as a deduction related

to gas and oil production in 1992 that were related to

petitioner's medical services activity.
                              - 20 -


                              OPINION

Issue 1. Whether petitioners may deduct loan guaranty payments
and related legal fees under sections 166 and 162

     Respondent contends that petitioner's payments in settlement

of his obligations under the various guaranties are deductible as

nonbusiness bad debts, and the attorney’s fees paid by petitioner

in defending against actions to enforce the guaranties are

deductible as miscellaneous expenses under section 212 or 165

(c)(2) rather than as ordinary and necessary business expenses.

Petitioners contend the guaranty payments are deductible as

business bad debts under section 166, and the attorney’s fees are

deductible as ordinary and necessary business expenses under

section 162.

     A taxpayer may deduct debts that become worthless in the

taxable year.   See sec. 166(a)(1).    Section 166 distinguishes

between business and nonbusiness bad debts.     Nonbusiness bad

debts of taxpayers other than corporations are short-term capital

losses.   See sec. 166(d)(1)(B).    A nonbusiness debt is 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 worthlessness of which is incurred in the

taxpayer's trade or business."     Sec. 166(d)(2).   "The crucial

part in the definition of nonbusiness bad debts are the words,

'trade or business.'"   Deely v. Commissioner, 73 T.C. 1081, 1092
                              - 21 -


(1980).   To qualify as a business bad debt, the debt must bear a

proximate relation to the taxpayer’s trade or business.   See sec.

1.166-5(b), Income Tax Regs.; see also United States v. Generes,

405 U.S. 93, 103 (1972); Deely v. Commissioner, supra at 1092.

     Payments made to discharge an obligation as a guarantor

generally are deductible under section 166 as business bad debts

if (a) the taxpayer was engaged in a trade or business when he

made the guaranty, and (b) the guaranty was proximately related

to the conduct of that trade or business.   See Scofield v.

Commissioner, T.C. Memo. 1997-547; Jones v. Commissioner, T.C.

Memo. 1997-368; Weber v. Commissioner, T.C. Memo. 1994-341; sec.

1.166-9, Income Tax Regs.

     A taxpayer may deduct ordinary and necessary expenses paid

or incurred in carrying on a trade or business.   See sec. 162(a).

A taxpayer may deduct legal expenses under section 162 if the

origin of the claims with respect to which the expenses were

incurred relates to the trade or business of the taxpayer.    See

Woodward v. Commissioner, 397 U.S. 572, 577-578 (1970);

Commissioner v. Tellier, 383 U.S. 687, 689 (1966); United States

v. Gilmore, 372 U.S. 39 (1963).

     Although the standards for deductibility under sections 166

and 162 are articulated differently, they share at least one

common feature.   Under both sections, a taxpayer must establish

that he had a trade or business to which the payment in question
                               - 22 -


related.    We turn, therefore, to an examination of whether

petitioner’s involvement with Adult Living Centers qualified as a

trade or business within the meaning of either section 166 or

162.

       In Whipple v. Commissioner, 373 U.S. 193 (1963), the Supreme

Court held that the taxpayer's advances to one of a number of

corporations he owned did not result in business bad debts,

because the advances were not sufficiently related to the

taxpayer's trade or business (as opposed to the trade or business

of the taxpayer's corporation).    In Whipple v. Commissioner,

supra at 202, the Supreme Court stated:

            Devoting one's time and energies to the affairs of
       a corporation is not of itself, and without more, a
       trade or business of the person so engaged. Though
       such activities may produce income, profit or gain in
       the form of dividends or enhancement in the value of an
       investment, this return is distinctive to the process
       of investing and is generated by the successful
       operation of the corporation’s business as
       distinguished from the trade or business of the
       taxpayer himself. When the only return is that of an
       investor, the taxpayer has not satisfied his burden of
       demonstrating that he is engaged in a trade or business
       since investing is not a trade or business and the
       return to the taxpayer, though substantially the
       product of his services, legally arises not from his
       own trade or business but from that of the corporation.
       Even if the taxpayer demonstrates an independent trade
       or business of his own, care must be taken to
       distinguish bad debt losses arising from his own
       business and those actually arising from activities
       peculiar to an investor concerned with, and
       participating in, the conduct of the corporate
       business.
                              - 23 -


     In this case, although petitioner devoted time and energy to

the affairs of Adult Living Centers, Whipple confirms that such

efforts of the taxpayer do not constitute a trade or business of

the taxpayer when there is no intention of developing the

corporation as a going business for sale in the ordinary course.

Although a taxpayer’s activities on behalf of the corporation in

which he owns stock may create income or gain, the income or gain

is more closely related to the successful operation of the

corporation’s business than that of the taxpayer.   See id.   A

taxpayer who actively engages in serving his own corporation for

the purpose of creating future income through the corporation is

not in a trade or business.   See id. at 202.

     Petitioner’s activities in this case are qualitatively

different from those of a taxpayer who develops and sells

businesses for profit.   Developing and selling businesses for

profit is a trade or business.   However, the separate trade or

business of promoting businesses “must be conducted for a fee or

commission or with the immediate purpose of selling the

corporations at a profit in the ordinary course of that

business.”   Deely v. Commissioner, 73 T.C. 1081, 1093 (1980).

Buying and selling businesses for profit may constitute a trade

or business even though a promoter does not receive a fee,

commission, or other “noninvestor” compensation.    The promoter,

however, “must show that the entities were organized with a view
                              - 24 -


to a quick and profitable sale after each business had become

established, rather than with a view to long-range investment

gains.”   Id. at 1093 (citing Giblin v. Commissioner, 227 F.2d 692

(5th Cir. 1955)).

     In Deely, we found that the taxpayer was not in the trade or

business of developing and promoting businesses.   In Deely, the

taxpayer quickly abandoned or sold 11 unprofitable companies.     Of

16 profitable companies, he held 7 for more than 13 years, and an

additional 6 entities sold for profit were held from 17 to 39

years.    See id. at 1094.

     In Farrar v. Commissioner, T.C. Memo. 1988-385, we found

that the taxpayer was in the trade or business of developing and

promoting businesses.   In the Farrar case, the taxpayer bought

and sold at least 31 banks and insurance companies, as well as

other businesses and income-producing real estate.   He trained

local managers and contemplated selling the businesses to the

local managers as the businesses became viable.    For each of the

three businesses involved in the Farrar case, the taxpayer had a

plan aimed at earning a profit through the sale of the business;

he did not acquire or hold the businesses as long-term

investments.

     In this case, petitioner was not working for a fee or

commission and did not organize Adult Living Centers with a view

to a quick and profitable sale after the business of the
                              - 25 -


corporation had become established.    Petitioner guaranteed Adult

Living Centers' loans so that the corporation could build its

facilities and cover operating expenses.   He intended to profit

from his long-term stock ownership in the corporation.

Petitioner hoped to profit from owning multiple nursing home

facilities throughout the country using different corporations

under his control.   Petitioner intended to keep control of the

corporations.   He did not organize Adult Living Centers or intend

to organize other future corporations with a view to a quick and

profitable sale after each business had become established.    See

Millsap v. Commissioner, 46 T.C. 751 (1966), affd. 387 F.2d 420

(8th Cir. 1968); see also Smith v. Commissioner, 62 T.C. 263

(1974); Schwartz v. Commissioner, T.C. Memo. 1964-247; cf. Farrar

v. Commissioner, supra.

     We find that petitioner was not in the trade or business of

developing, promoting, and selling businesses.   Thus, petitioner

may not deduct as a business bad debt the payments attributable

to the discharge of his guaranties and may not deduct as ordinary

and necessary business expenses the legal fees incurred in

defending against enforcement of those guaranties.

Issue 2. Whether petitioners are liable for the accuracy-related
penalties under section 6662 for 1991 and 1992

     Respondent determined that petitioners are liable for

accuracy-related penalties under section 6662(a) and (b)(2) for
                              - 26 -


1991 and 1992.   Section 6662(a) and (b)(2) imposes a penalty

equal to 20 percent of the portion of an underpayment of income

tax attributable to any substantial understatement of tax.       A

substantial understatement occurs when the amount of the

understatement exceeds the greater of 10 percent of the amount of

tax required to be shown on the return or $5,000 ($10,000 for

corporations).   See sec. 6662(d)(1).   The amount of an

understatement against which the penalty is imposed will be

reduced by the portion of the understatement that is attributable

to the tax treatment of an item (1) that was supported by

"substantial authority" or (2) for which the relevant facts were

"adequately disclosed in the return or in a statement attached to

the return."   Sec. 6662(d)(2)(B).   Additionally, no penalty will

be imposed with respect to any portion of an underpayment if it

is shown that there was a reasonable cause for such portion and

the taxpayer acted in good faith with respect to such portion.

See   sec. 6664(c)(1).

      Substantial authority exists when the weight of authority

supporting the treatment of an item is substantial as compared to

the weight of authority for the contrary treatment.    See sec.

1.6662-4(d)(3)(i), Income Tax Regs.     In determining whether there

is substantial authority, all authorities relevant to the tax

treatment of an item, including those authorities pointing to a

contrary result, are taken into account.    See id.   For this
                              - 27 -


purpose, authorities include statutory and regulatory provisions,

legislative history, administrative interpretations of the

Commissioner, and court decisions, but not conclusions reached in

treatises or legal periodicals.   See Booth v. Commissioner, 108

T.C. 524, 578 (1997); sec. 1.6662-4(d)(3)(iii), Income Tax Regs.

     Petitioners' position is not supported by any well-reasoned

construction of the relevant statutory provisions.   The cases

petitioners have cited on brief are readily distinguishable and,

to the extent they are pertinent, undermine their position.

Cases that are factually distinguishable are not substantial

authority.   See Antonides v. Commissioner, 91 T.C. 686, 702-703

(1988), affd. 893 F.2d 656 (4th Cir. 1990); see also Estate of

Reinke v. Commissioner, 46 F.3d 760, 765 (8th Cir. 1995), affg.

T.C. Memo. 1993-197.   We have rejected the factual basis of

petitioners' claim, and, thus, the authority they cite is not

relevant to the facts of this case and cannot constitute

substantial authority.

     Petitioners assert that they adequately disclosed the tax

treatment of the attorney’s fees and guaranties.   The adequate

disclosure requirement can be satisfied by providing information

that "reasonably may be expected to apprise the Internal Revenue

Service of the identity of the item, its amount, and the nature

of the potential controversy".    Sec. 1.6661-4(b)(3), Income Tax

Regs.; see also Cramer v. Commissioner, 101 T.C. 225, 255 (1993),
                              - 28 -


affd. 64 F.3d 1406 (9th Cir. 1995).    The regulations authorize

two types of disclosure under section 6662(b)(2): (1) Disclosure

in attachments to the return, see sec. 1.6662- 4(f)(1), Income

Tax Regs., and (2) disclosure on the return, see sec. 1.6662-

4(f)(2), Income Tax Regs.   Petitioners did not file any separate

disclosure statement; therefore, they must demonstrate that they

adequately disclosed all relevant information on their tax

returns.

     Petitioners assert that they adequately disclosed the items

at issue on their 1991 and 1992 returns.   The return for each

year contained two Schedules C for businesses for which

petitioner was identified as the sole proprietor, one for

"William J. Fleischaker, M.D." for which the principal business

was the provision of medical services and another for "Deborah

Fleischaker, et al." for which the principal business was oil and

gas production.   On the Schedules C for petitioner's oil and gas

production for 1991 and 1992, petitioner claimed legal and

professional expenses of $439,871 for 1991 and $51,950 for 1992.

None of the claimed legal and professional expenses were related

to petitioner’s oil and gas production activity.   Except for

$11,149 of the fees claimed in 1992, the fees claimed as legal

and professional fees from oil and gas production were for

payments made by petitioner under his guaranty obligations for
                             - 29 -


Adult Living Centers’ debts and legal fees incurred in defending

against those obligations.

     The Commissioner, by annual revenue procedure (or

otherwise), may prescribe the circumstances under which

disclosure of information on a return in accordance with

applicable forms and instructions is adequate.   See sec. 1.6662-

4(f)(2), (5), Income Tax Regs.   The Commissioner issued Rev.

Proc. 92-23, 1992-1 C.B. 737, applicable to 1991 returns, and

Rev. Proc. 93-33, 1993-2 C.B. 470, which extended the application

of Rev. Proc. 92-23, 1992-1 C.B. 737, to 1992 returns.    The

revenue procedures identify circumstances under which the

disclosure on a taxpayer's return of a position with respect to

an item is adequate disclosure for purposes of reducing the

understatement of income tax under section 6662.7


     7
      Rev. Proc. 92-23, 1992-1 C.B. 737, 738, provides in part:

          Additional disclosure of facts relevant to, or
     positions taken with respect to, issues involving any
     of the items set forth below is unnecessary for
     purposes of reducing any understatement of income tax
     under section 6662(d) of the Code provided that the
     forms and attachments are completed in a clear manner
     and in accordance with their instructions. The money
     amounts entered on the forms must be verifiable, and
     the information on the return must be disclosed in the
     manner described below. For purposes of this revenue
     procedure, a number is verifiable if, on audit, the
     taxpayer can demonstrate the origin of the number (even
     if that number is not ultimately accepted by the
     Internal Revenue Service) and the taxpayer can show
     good faith in entering that number on the applicable
                                                   (continued...)
                               - 30 -

The procedures require the taxpayer to complete the forms and

attachments in a clear manner and in accordance with their

instructions.    See Rev. Proc. 92-23, 1992-1 C.B. 738.   The

instructions for the Schedules C require a taxpayer to complete

separate schedules for each business of the taxpayer.     See

Instructions for Schedule C, Profit or Loss from Business, for

1991 and 1992.

     Petitioners filed two Schedules C for each of the years at

issue, one for petitioner's oil and gas production activity and

another for petitioner's medical services practice.    Petitioner

does not contend that either activity included petitioner's

activity with regard to Adult Living Centers or the development

of facilities for the elderly.    Petitioners did not complete a

     7
      (...continued)
     form.

          *        *      *      *      *      *      *

      (b) Certain Trade or Business Expenses (which, for
     purposes of this revenue procedure, include the
     following six expenses as they relate to the rental of
     property):

          *        *      *      *      *      *      *

          (2) Legal Expenses: The amount claimed must be
     stated. This revenue procedure does not apply,
     however, to amounts properly characterized as capital
     expenditures or personal expenses, including amounts
     that are required to be (or that are) amortized over a
     period of years.

          (3) Specific Bad Debt Charge-off:     The amount
     written off must be stated.
                                - 31 -

Schedule C for petitioner's activity related to Adult Living

Centers.    Instead, petitioners claimed the deductions at issue on

Schedules C for the oil and gas production activity.    Petitioners

deducted the payments of petitioner's guaranties as legal and

professional fees.    It is clear that petitioner did not make a

good-faith effort in entering the amounts of the claimed expenses

on the Schedules C.    Petitioners did not comply with the revenue

procedures, and, therefore, the safe harbor provided by the

revenue procedures does not apply.

     A taxpayer may also satisfy the requirements for adequate

disclosure by providing sufficient information on the face of the

return that enables the Commissioner to identify the potential

controversy.    See Schirmer v. Commissioner, 89 T.C. 277, 285-286

(1987); Hernandez v. Commissioner, T.C. Memo. 1998-46; Elliott v.

Commissioner, T.C. Memo. 1997-294, affd. without published

opinion 149 F.3d 1187 (8th Cir. 1998); Horwich v. Commissioner,

T.C. Memo. 1991-465.    This method of disclosure requires more

than a production of a "clue" with respect to the nature of the

controversy.    See Horwich v. Commissioner, supra.

     Petitioners' disclosure was unquestionably inadequate given

the disparity between the claim they were asserting and the

facts.     Their method of reporting the expenses disguised rather

than disclosed the true substance of the payments.    The mere

declaration of a deduction does not entitle a taxpayer to a
                             - 32 -

reduced penalty for understatement of tax.   See Accardo v.

Commissioner, 942 F.2d 444, 453 (7th Cir. 1991), affg. 94 T.C. 96

(1990) (taxpayer's statement that his deduction of $207,000 was

for "Legal fees re conservation of property held for production

of income" falls short of the exposition of relevant facts

required under section 6661(b)(2)(B)(ii)); Schirmer v.

Commissioner, supra at 285-286 (mere listing of income, expenses

and claimed depreciation did not constitute disclosure of

relevant facts); see also Zdun v. Commissioner, T.C. Memo. 1998-

296 (“Reporting income actually earned as a dentist as income

earned from an apple orchard is misrepresentation, not

disclosure."); Lester v. Commissioner, T.C. Memo. 1995-317

(Taxpayers' use of the term "Financial Trading" in the title

portion of their Schedule C was not sufficient to frame the

controversy or to adequately disclose their position.); Myers v.

Commissioner, T.C. Memo. 1994-529 (Even if "COMMODITIES" was

adequate disclosure for deductions on Schedule C, the commodity

contract losses were deducted on Schedule F, which is completely

unrelated to petitioners' "disclosure" on Schedule C.)

     Petitioners did not attach any disclosure statement to their

return, and they did not provide sufficient information for

respondent to identify the potential controversy on their return.

To the extent the Rule 155 computation indicates a substantial

understatement of petitioners' income tax within the meaning of
                             - 33 -

section 6662(d) for 1991 or 1992, respondent's determination

under section 6662(a) will be sustained.

     To reflect the foregoing and concessions by the parties,


                                           Decision will be entered

                                   under Rule 155.
