                         T.C. Memo. 1997-379



                       UNITED STATES TAX COURT



                  NATHAN BOATNER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15742-95.                      Filed August 20, 1997.



     Nathan Boatner, pro se.

     Jason M. Silver, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined a $14,625 deficiency

in petitioner's 1992 Federal income tax.   After concessions,1 the

issues for decision are:    (1) Whether petitioner was entitled to

a business bad debt deduction in 1992 for amounts he advanced to

     1
        The parties stipulated that if the Court determines that
petitioner is entitled to a bad debt expense or ordinary loss for
1992, the maximum amount allowable is $42,436.88.
                                - 2 -


his wholly owned corporation, James Trading Co., Inc. (James

Trading), during 1991 and 1992; (2) whether petitioner was a

"dealer", "trader", or "investor" with respect to net losses he

sustained from trading securities and/or commodities (securities

transactions) on behalf of James Trading during 1992;2 and (3)

whether respondent is estopped from reclassifying petitioner's

net losses from securities transactions on behalf of James

Trading in 1992 as capital losses.

     All section references are to the Internal Revenue Code in

effect for the year at issue.   All Rule references are to the Tax

Court Rules of Practice and Procedure.

                        FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   Petitioner resided in Los

Angeles, California, at the time he filed his petition.

Petitioner has practiced law in California since 1985.

     On August 16, 1990, petitioner filed his 1989 individual

Federal income tax return without attaching a Schedule C for his

     2
        Respondent contends that petitioner was an investor as
opposed to a dealer, and therefore petitioner's net losses were
capital instead of ordinary. Petitioner deducted expenses from
his securities transactions on his Schedule C. In support
thereof, petitioner argues that he was in a trade or business.
Although petitioner fails to address directly the dealer/trader
distinction, we assume that his trade or business argument was
intended to encompass an argument for trader classification if we
conclude that he was not a dealer.
                               - 3 -


law practice.   On September 19, 1990, respondent requested a

completed Schedule C from petitioner.    Petitioner sent respondent

the requested Schedule C.   No audit occurred with respect to

petitioner for the 1989 tax year.

     Petitioner engaged in securities transactions, in his own

name, from 1987 until approximately 1991.    In May of 1991,

petitioner incorporated James Trading as an S corporation.

Petitioner was the sole officer and shareholder of James Trading

throughout its existence.   After May of 1991, petitioner, on

behalf of James Trading, engaged in securities transactions with

Lind-Waldock & Co. (Lind-Waldock), Kemper Securities (Kemper),

and Dean Witter Reynolds, Inc. (Dean Witter).    Petitioner was not

a member of any exchange or market dealing in securities or

commodities, nor was petitioner a licensed broker of securities

or commodities in 1992.   Petitioner executed approximately 75

securities transactions during 1992.3

     James Trading reported net losses from securities

transactions of $12,686.54 and $47,129.24 for 1991 and 1992,

respectively, on Form 1120S.   Petitioner advanced $12,686.54 and

$47,129.24 (the advances) in 1991 and 1992, respectively, to

James Trading to cover these losses.    James Trading gave no

collateral for the advances.   Petitioner drafted loan agreements


     3
         Petitioner's trading refers to the securities and/or
commodities trades made on behalf of James Trading.
                                - 4 -


(the notes) purporting to document the advances as loans from

petitioner to James Trading.    The notes had no fixed maturity

dates or schedules of payments.    James Trading made no payments

on the notes.   James Trading became insolvent and ceased doing

business on or about September 15, 1992.    Petitioner claimed a

bad debt deduction, based on the alleged worthlessness of the

notes, in the amount of $57,666 for the 1992 taxable year.

Respondent determined that the notes did not constitute a bona

fide debt and thus denied petitioner's bad debt deduction.

                               OPINION

     Petitioner claims that the notes became worthless in 1992

when James Trading became insolvent, and therefore he is entitled

to a business bad debt deduction in that year.    In addition,

petitioner claims that the pass-through net losses from James

Trading are ordinary losses because petitioner was a "dealer" in

securities.   Furthermore, petitioner maintains that respondent is

estopped from reclassifying his net losses for the year in

question as capital losses.    Respondent contends that the

advances were not bona fide debts and therefore not deductible.

Respondent also claims that petitioner was an "investor" during

1992; thus, all losses from securities transactions in that year

were capital losses.   Finally, respondent contends that

respondent is not estopped from reclassifying petitioner's net

losses.
                               - 5 -


Bad Debt Deduction

     Generally, taxpayers may deduct the value of bona fide debts

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

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 transfers of funds to closely held

corporations constitute debt or equity must be decided 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
                               - 6 -


their purported loans to the loans of the corporations'

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.   Calumet Indus. Inc. v. Commissioner, 95

T.C. 257, 285 (1990); 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.     Fin Hay

Realty Co. v. United States, 398 F.2d 694, 697 (3d Cir. 1968).

No single factor is controlling.    Dixie Dairies Corp. v.

Commissioner, supra at 493.   The taxpayer must reasonably expect

that the money he advances will be repaid.    Arrigoni v.

Commissioner, 73 T.C. 792, 799 (1980).   Consequently, gifts and

capital contributions to a corporation are not bona fide debts.

Sec. 1.166-1(c), Income Tax Regs.

     Transfers to closely held corporations by controlling

shareholders are subject to heightened scrutiny, and labels

attached to such transfers by the controlling shareholders
                                - 7 -


through bookkeeping entries or testimony have limited

significance unless these labels are supported by objective

evidence.   Fin Hay Realty Co. v. United States, supra at 697;

Dixie Dairies Corp. v. Commissioner, supra at 495.

     Petitioner argues that the advances constituted bona fide

business loans that became worthless in 1992.    Petitioner claims

he is therefore entitled to a business bad debt deduction in

1992.   Respondent argues primarily that the advances did not

constitute a bona fide loan to James Trading and, therefore, that

petitioner should not be allowed a business bad debt deduction

under section 166.   Alternatively, respondent argues that if any

portion of the advances constituted bona fide loans, that portion

should be treated as a nonbusiness debt that did not become

completely worthless in 1992.    We agree with respondent's primary

argument.

     The fact that repayment of the advances depended upon James

Trading's financial success indicates that the advances did not

constitute bona fide loans.     See Stinnett's Pontiac Serv., Inc.

v. Commissioner, 730 F.2d 634, 639 (11th Cir. 1984), affg. T.C.

Memo. 1982-314; Estate of Mixon v. United States, 464 F.2d 394,

405 (5th Cir. 1972).   Petitioner never demanded repayment of the

purported loans.   We also find it significant that, in the

instant case, there was no repayment schedule or interest rate

stated on the face of the notes.    Petitioner's failure to demand
                               - 8 -


repayment (as well as the absence of any form of security) tends

to refute the existence of a valid debtor-creditor relationship.

Petitioner's testimony regarding the notes was not consistent

with the weight of the objective evidence in this case.    Based on

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

of repayment, and that the advances do not constitute bona fide

loans.4

Securities Transactions

     Respondent also determined that petitioner was not a

"dealer" regarding securities transactions because he had no

customers, and therefore the net losses James Trading realized in

1992 were subject to the capital loss limitations of sections

165(f) and 1211(b).   Petitioner claims that he was engaged in a

trade or business because he had a reasonable expectation of

earning a profit.   Petitioner further contends that he was either

a "dealer" or "trader" regarding securities transactions in 1992

and thus seeks ordinary loss treatment for the net losses

incurred during 1992.

     Section 165(a) generally provides a deduction for any loss

sustained during the taxable year and not compensated by

insurance or otherwise.   Section 165(f), however, provides that

losses from the sale of capital assets shall be allowed only to


     4
        Consequently, we need not decide whether any debt would
have been a business or nonbusiness debt.
                               - 9 -


the extent allowed under sections 1211 and 1212.    A capital asset

is property held by the taxpayer whether or not it is connected

with his trade or business.   Sec. 1221.   Section 1221(1),

however, creates an exception to the definition of a capital

asset for "stock in trade of the taxpayer or other property of a

kind which would properly be included in the inventory of the

taxpayer if on hand at the close of the taxable year, or property

held by the taxpayer primarily for sale to customers in the

ordinary course of his trade or business".

     In determining whether a taxpayer who is purchasing and

selling securities is engaged in a trade or business, courts have

distinguished between "dealers", "traders", and "investors".

King v. Commissioner, 89 T.C. 445, 457 (1987).     A dealer falls

within the section 1221(1) exception to capital asset treatment

because he deals in property held primarily for sale to customers

in the ordinary course of his trade or business.    A trader, on

the other hand, holds securities as capital assets whether or not

such assets are held in connection with his trade or business.

This is so because a trader does not have customers and therefore

does not fall within the section 1221(1) exception to capital

asset treatment.   King v. Commissioner, supra at 458; Kemon v.

Commissioner, 16 T.C. 1026, 1032-1034 (1951).    Consequently,

taxpayers, unless they are dealers, generally recognize a capital

gain or loss upon the sale or exchange of stock.
                               - 10 -


     For the purposes of section 1221, dealers must have

customers.    United States v. Diamond, 788 F.2d 1025, 1029 (4th

Cir. 1986).   Petitioner argues that Lind-Waldock, Kemper, and

Dean Witter were his customers.   Petitioner, however, offers no

proof for this contention.   We find that Lind-Waldock, Kemper,

and Dean Witter were not petitioner's customers and that in fact

petitioner had no customers.   We hold, therefore, that petitioner

was not a dealer.   Thus, the stocks and commodities petitioner

purchased and sold were capital assets in his hands, and the net

losses from securities transactions were capital losses.

     Having determined that petitioner was not a dealer, we must

now turn to the question of whether petitioner was engaged in the

trade or business of buying or selling stocks.   If so, petitioner

was a "trader" as opposed to an "investor".   Unlike an investor,

a trader's expenses are deducted in determining adjusted gross

income rather than as itemized expenses.   To determine whether a

taxpayer who manages his own investments is a trader, we

consider, inter alia, the frequency, extent, and regularity of

the taxpayer's securities transactions.    Moller v. United States,

721 F.2d 810, 813 (Fed. Cir. 1983); Mayer v. Commissioner, T.C.

Memo. 1994-209.   A taxpayer is a trader engaged in carrying on a

trade or business of selling securities only if both of the

following are true:   (1) The taxpayer's trading activity is

substantial, and (2) the taxpayer seeks to catch the swings in
                                - 11 -


the daily market movements and to profit from these short-term

changes rather than to profit from the long-term holding of

investments.    See Estate of Yaeger v. Commissioner, 889 F.2d 29,

33 (2d Cir. 1989), revg. on another issue, affg. in part and

remanding T.C. Memo. 1988-264; Moller v. United States, supra at

813; Purvis v. Commissioner, 530 F.2d 1332, 1334 (9th Cir. 1976),

affg. T.C. Memo. 1974-164; King v. Commissioner, supra at 458-

459; Liang v. Commissioner, 23 T.C. 1040, 1043 (1955); Mayer v.

Commissioner, supra.     The taxpayer's trading activity must be

frequent, regular, and continuous to be considered part of a

trade or business.     See Commissioner v. Groetzinger, 480 U.S. 23,

35 (1987).     Sporadic trading does not constitute a trade or

business.    Id.   Furthermore, courts look at whether the

taxpayer's securities income is principally derived from frequent

and substantial sale of securities rather than from dividends,

interest, or long-term appreciation.       Moller v. United States,

supra at 813; King v. Commissioner, supra at 458-459; Liang v.

Commissioner, supra at 1043.

     Petitioner executed approximately 75 securities transactions

during 1992.     This level of trading activity falls short of being

frequent, regular, and continuous.       See, e.g., Purvis v.

Commissioner, supra at 1334 (taxpayer was merely an investor

where, among other things, his sales of stock were not regular or

continuous).     Petitioner has failed to meet his burden of proof
                               - 12 -


regarding his level of trading activity.    Rule 142(a).   We

conclude, therefore, that petitioner is an investor regarding his

securities transactions and not a trader.    As such, petitioner

was not conducting a trade or business.

Equitable Estoppel

     Petitioner argues that correspondence from respondent

requesting further information regarding petitioner's Schedule C

expenses constitutes an audit of petitioner's 1989 Federal income

tax return.   Petitioner contends that respondent is estopped from

reclassifying petitioner's net losses for 1992 from securities

transactions as ordinary losses because petitioner's securities

transactions during 1989 through 1992 were consummated in a

similar manner, and respondent accepted petitioner's

representation that the securities transactions in 1989 gave rise

to ordinary gains.

     It is well established that the estoppel doctrine should be

applied against the Commissioner with the utmost caution and

restraint.    Schuster v. Commissioner, 312 F.2d 311, 317 (9th Cir.

1962), affg. in part and revg. in part 32 T.C. 998 (1959), affg.

in part and revg. in part First Western Bank & Trust Co. v.

Commissioner, 32 T.C. 1017 (1959); Boulez v. Commissioner, 76

T.C. 209, 214-215 (1981), affd. 810 F.2d 209 (D.C. Cir. 1987);

Estate of Emerson v. Commissioner, 67 T.C. 612, 617 (1977).

Taxpayers must prove at least the following elements before
                              - 13 -


courts will apply equitable estoppel against the Government:     (1)

A false representation or wrongful, misleading silence by the

party against whom the estoppel is claimed; (2) an error in a

statement of fact and not in an opinion or statement of law; (3)

the taxpayer's ignorance of the true facts; (4) the taxpayer's

reasonable reliance on the acts or statements of the one against

whom estoppel is claimed; and (5) adverse effects suffered by the

taxpayer from the acts or statement of the one against whom

estoppel is being claimed.   Norfolk S. Corp. v. Commissioner, 104

T.C. 13, 60, supplemented 104 T.C. 417 (1995); see also Lignos v.

United States, 439 F.2d 1365, 1368 (2d Cir. 1971); Hudock v.

Commissioner, 65 T.C. 351, 363 (1975).    The burden of proof is on

the party claiming estoppel against the Government.    Rule 142(a);

Hofstetter v. Commissioner, 98 T.C. 695, 701 (1992).

     Petitioner has failed to carry his burden of proof.   The

correspondence which petitioner cites to support his contention

that respondent audited petitioner's 1989 return consists merely

of a request for more information and subsequent confirmation

that petitioner complied appropriately.   Moreover, respondent

sent a letter to petitioner stating that the examination branch

took "no action".   Petitioner has provided no evidence to support

a claim for equitable estoppel.   Each taxable year stands alone,

and the Commissioner may challenge in a succeeding year what was

condoned or agreed to in a former year.    Automobile Club of Mich.
                             - 14 -


v. Commissioner, 353 U.S. 180 (1957); Harrah's Club v. United

States, 228 Ct. Cl. 650, 661 F.2d 203, 205 (1981).   We conclude,

therefore, that the Government is not estopped from treating

petitioner's 1992 net losses from securities transactions as

capital losses.

     We have considered all arguments made by petitioner and, to

the extent not addressed above, find them to be without merit.

     To reflect the foregoing,

                                                Decision will be

                                          entered for respondent.
