                         T.C. Memo. 1998-136



                       UNITED STATES TAX COURT



                  MELVYN L. BELL, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

   DARLENE K. CARVIN, FORMERLY DARLENE C. BELL, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 21039-93, 21040-93.             Filed April 6, 1998.



     D. Derrell Davis, for petitioner in docket No. 21039-93.

     Stephen P. Hale and James R. Hall, Jr., for petitioner in

docket No. 21040-93.

     Edsel Ford Holman, Jr., for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:    Respondent determined deficiencies in

petitioners' Federal income tax of $384,753 and $251,411, for

taxable years 1985 and 1986, respectively, and a deficiency of

$309,459 for taxable year 1988.
                               - 2 -


     After concessions, the issues for our consideration are:

(1) Whether petitioners are entitled to a business bad debt

deduction in 1988 under section 1661 and to the carryback of the

resulting 1988 net operating loss to the 1985 and 1986 taxable

years, and (2) whether petitioner Darlene K. Carvin is entitled

to relief as an innocent spouse under section 6013(e).

                         FINDINGS OF FACT2

     At the time the petitions in these consolidated cases were

filed, petitioner Melvyn L. Bell and petitioner Darlene K.

Carvin, formerly Darlene C. Bell, resided in Little Rock,

Arkansas.   During the years in issue, petitioners were married

and filed joint Federal income tax returns.   Petitioners divorced

in 1991.

     Melvyn L. Bell (petitioner) received a bachelor's degree in

electrical engineering in 1960.   He had started working for an

engineering firm in 1959 and later became a partner in the firm.

Throughout his engineering career, petitioner was involved in a

number of business ventures.   In the latter part of 1959,

petitioner had cofounded Data Testing, Inc., a company that

tested soils, asphalts, and concrete.   The company later merged

with the engineering firm.   A couple of years after he began



     1
       Unless otherwise stated, all section references are to the
Internal Revenue Code in effect for the years in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
     2
       The stipulation of facts and attached exhibits are
incorporated herein by this reference.
                               - 3 -


working at the engineering firm, petitioner took a leave of

absence to manage a blueprinting company, Southern Blueprint Co.

He acquired that company while it was in bankruptcy by borrowing

money to pay some of the company's creditors.   Petitioner

operated the company for less than a year and then sold the

company for a profit.

     Petitioner had also been involved in a number of other

residential and commercial real estate development projects.     One

of the real estate ventures was Fairfield Communities, Inc., in

which petitioner became involved in 1966.   Petitioner provided

engineering and planning services to the business, dividing his

time equally between it and the engineering firm.   Petitioner

retained an interest in Fairfield Communities until at least

1985.   On their 1985 tax return, petitioners reported gain from

the sale of stock in Fairfield Communities as long-term capital

gain.   In 1968, petitioner sold his partnership interest in the

engineering firm where he had worked since college.    He founded

his own engineering firm and held an interest in that second firm

until 1973.

     In the mid-1970's, petitioner lent about $200,000 to Nygem

Corp., which had manufactured snowmobile gas gauges.   Nygem was

in bankruptcy at the time of the loan.   After petitioner became

involved in the company, it began to manufacture printed circuit

boards and became a profitable business.    Although petitioner did

not own any capital in the company, he received $1 million and

stock in a hazardous waste disposal company, discussed below, for
                                - 4 -


his interest.    Petitioner also lent money to another company that

was near bankruptcy, Consumat Systems, Inc., a solid waste

incineration business.   With petitioner's funding, Consumat

Systems became profitable.

     From 1973 until 1986, petitioner's primary business activity

was serving as the chairman and chief executive officer of

Environmental Systems Co., Inc. (ENSCO), a hazardous waste

disposal company.   In 1972, petitioner had advanced a substantial

amount of money to ENSCO to develop a hazardous waste

incinerator.    Shortly after petitioner provided the financing, it

became clear that ENSCO would be unable to repay him.     Petitioner

decided to become more involved in the management and operation

of the struggling company with the goal of making it profitable.

He also took shares in the company based on his previous

advances.   In 1986, petitioner decided to decrease his

involvement in the day-to-day operations of ENSCO and remain

involved only in the company's long-term planning.   At that time,

petitioner had been selling some of his ENSCO stock.    From 1985

through 1988, petitioner sold ENSCO stock for total sales

proceeds of approximately $31 million and capital gain of

approximately $30.9 million.   In September 1988, petitioner owned

over 2.3 million shares of ENSCO stock with an estimated value of

$38.4 million.

     When petitioner began to withdraw from the management of

ENSCO, he decided to become more active in other business

ventures.   In particular, he intended to acquire financially
                                   - 5 -


distressed companies and turn them into profitable businesses.

Petitioner believed that he could make the companies successful

because of his past business success.         In August 1986, petitioner

formed Bell Equities, Inc. (BEI), a holding company, for this

purpose.   From 1986 to 1988, petitioner was the sole shareholder.

During this period, he made capital contributions to the company

of over $424,963.     Petitioner made all decisions regarding which

businesses BEI would acquire.        During 1986 through 1987, BEI

acquired a number of subsidiaries that were insolvent or

operating at a loss.      Petitioner was unable to turn any of the

subsidiaries into profitable businesses.          BEI had also acquired

one subsidiary, Kaufman Lumber Co., that was profitable at the

time of acquisition.      None of the subsidiaries were sold or even

offered or advertised for sale.

     BEI's subsidiaries engaged in a variety of business

activities, including manufacturing, lumber, radio and television

broadcasting, advertising, and theme parks.           BEI acquired

majority interests in the following entities:

Subsidiary                      Date of Acquisition      Percentage Ownership
Kaufman Lumber Co.                    12/86                       50
                                       3/89                       50
Monarch Mill and Lumber Co.            8/86                       90
                                         *                        10
Reelcraft, Inc.                       12/86                       80
Ainsley Communications, Inc.           4/87                      100
The Entertainment and Leisure Corp.   12/86                       90
Shotts-Vines, Inc.                     6/87                       80
PPD&G, Inc.                            5/87                      100

     * Date of acquisition is not available in record.

The Entertainment and Leisure Corp. (TELCOR), a 90-percent

subsidiary of BEI, was also a holding company.            TELCOR wholly
                                   - 6 -


owned the following four entities, each of which operated a theme

park:

                                    Date or Year
Subsidiary                         of Acquisition     Percentage Ownership
Ozarks Entertainment, Inc.             12/86                   92.5
                                       1987                     7.5
Deer Forest, Inc.                      1/87                   100
The Nygem Co.                          1/87                   100
Rapids, Inc.                           2/88                   100

Petitioner did not directly own stock in any of the subsidiaries.

Petitioner served as the Chairman of BEI's four-member board of

directors.    During 1986 to 1988, petitioner did not receive wages

from BEI, TELCOR, or any of their subsidiaries.        Nor did

petitioner receive dividends from BEI during these years.

     BEI usually purchased the subsidiaries through debt

assumption.    The subsidiaries needed capital to cover their

operating expenses and to stay in business.         The majority, if not

all, of the subsidiaries' assets had been encumbered by third-

party lenders before BEI or TELCOR acquired the subsidiaries.

Because of their poor financial positions, the subsidiaries could

not obtain bank loans.       Petitioner used his own assets to obtain

financing for the subsidiaries.       He borrowed approximately $14

million from banks at about 10-percent interest and pledged his

ENSCO stock as collateral.      Petitioner transferred the borrowed

funds to BEI and TELCOR, which, in turn, transferred the money to

their respective subsidiaries.       BEI also lent money to other

businesses that petitioner owned that were not subsidiaries.           BEI

and TELCOR each recorded the advances as "Notes Receivable-Melvyn

Bell" on a general ledger account.         Petitioner decided the amount
                                 - 7 -


to advance to BEI and TELCOR after consulting with officers of

the companies about the subsidiaries' financial needs.     At times,

petitioner also sold ENSCO stock and transferred some of the sale

proceeds to BEI to cover operating expenses of the subsidiaries.

Petitioner also personally guaranteed loans from third-party

lenders to BEI, TELCOR, and the subsidiaries.

     Officers of BEI and its subsidiaries met with petitioner's

lending banks to discuss his personal banking and credit

positions to ensure that BEI and TELCOR would continue to receive

financing through petitioner.    Petitioner's personal banking

relationships were also discussed at BEI's board of directors

meetings.

     Petitioner did not receive collateral for the advances that

he made to BEI or TELCOR.   Almost 1 year after petitioner

provided the first advance, he received a series of notes,

payable on demand, from BEI, TELCOR, and TELCOR's subsidiaries

reflecting the prior advances.    He did not receive any notes

directly from any of BEI's other subsidiaries.    On October 31,

1987, petitioner received a promissory note from BEI for

approximately $6.4 million.   Petitioner also received a note from

TELCOR for $250,000 on October 31, 1987, and three notes directly

from subsidiaries of TELCOR for a total of approximately $1.3

million; two notes were dated October 31, 1987, and one was dated

February 20, 1987.   The notes were for the amounts that

petitioner had previously advanced to the companies.    The notes
                                - 8 -


accrued interest of 10 percent but did not require regular

interest or principal payments.

      In January 1988, petitioner conveyed a line of credit to BEI

in the amount of $15 million.   BEI issued to petitioner, in

exchange for the line of credit, a promissory note that provided

for interest to accrue at 10 percent and for payment of the

principal and interest on January 1, 1994.      In October 1988,

petitioner also conveyed a line of credit to TELCOR in the amount

of $1.75 million that was evidenced in a note with the same terms

as the BEI note.   Regular payments of principal or interest were

not required under the notes.   Petitioner's prior advances to BEI

and TELCOR were accumulated into the two line-of-credit notes,

and BEI and TELCOR could draw against the line of credit for

additional advances up to the maximum stated in the notes less

the amount of the prior advances.   The first set of notes that

had been executed on behalf of BEI, TELCOR, and the TELCOR

subsidiaries (described above) were treated by the companies and

petitioner as consolidated into the two line-of-credit notes.

      Both BEI and TELCOR had negative shareholder's equity

accounts and deficits in their retained earnings accounts as

follows for fiscal years ending October 31:

BEI
      Year      Retained Deficit        Shareholder's Equity
      1987        ($2,427,382)             ($2,002,419)
      1988         (7,384,635)              (6,959,672)
      1989        (10,775,987)              (9,671,195)
                               - 9 -


TELCOR
     Year       Retained Deficit       Shareholder's Equity
     1987           ($598,622)              ($137,551)
     1988          (1,644,738)             (1,183,667)

Petitioner was aware that repayment of the advances depended on

the subsidiaries' becoming profitable.     During 1986 through 1988,

BEI made payments on petitioner's behalf; for example, BEI made

loan payments on the loans that petitioner originated to provide

funding to BEI and TELCOR.   However, BEI and TELCOR did not make

regular repayments of the advances.     On their original and

amended 1987 tax return, petitioners reported interest income

from BEI in the amount of $338,264.

     During 1986 through 1988, petitioner also held ownership

interests in a number of other business enterprises, including,

among others:   Muskogee Mall Ltd.; The Gary Cos.; Magnolia Capri

Associates Ltd.; Mediaplex, Inc.; Soneric, Inc.; Darbe

Development Co.; Pier West Partnership; Ice House Center;

Univest, Inc.; Belvedere Enterprises, Inc.; Fountainhead Resort

Hotel, Inc.; Shrimp, Oyster & Beer Haus, Inc.; Urban Enterprises,

Inc.; BRC Oil & Gas; Red Apple Enterprises, Ltd.; East Main

Ventures, Inc.; Creative Culinary Systems, Inc.; Original City

Associates, Ltd.; and Architectural Antiques, Inc.     In general,

these businesses were organized as partnerships or S

corporations.

     Petitioner also advanced money to his other businesses.

Although petitioner's other business interests were separate from

BEI, financing and operation of these businesses were discussed
                                - 10 -


at BEI's board of director meetings.       Petitioner also lent money

to other individuals and entities at an interest rate generally

of 10 percent.   For the most part, the loans originated from

petitioner's acting as a seller-financier of property or

advancing money to purchase a business or real property.       In

addition, petitioner occasionally lent money to an employee or

relative.

     Prior to 1987, petitioner’s net worth was in excess of $60

million.    In 1986, petitioner sold ENSCO stock for an average

price of about $24 per share.    At times during 1986, the sale

price received was over $33 per share.       The precipitous drop in

the stock market on October 19, 1987, known as "Black Monday",

and management problems at ENSCO caused the ENSCO stock value to

decrease to as low as $6.00 per share.       The decreased value of

the ENSCO stock affected petitioner's ability to obtain financing

for BEI because he had used the stock as collateral.       As a result

of the stock market crash and management problems, it was

necessary for petitioner to become more involved with ENSCO, and

he had less time to devote to BEI.       In 1988, petitioner was

serving as the chairman of ENSCO's board of directors and

received over $300,000 in wages.

     From 1986 to 1988, none of the subsidiaries earned a profit,

except for Kaufman Lumber, which was profitable when it was

acquired.   In 1988, one of BEI's subsidiaries, PPD&G, filed a

petition for voluntary reorganization under chapter 11 of the

Federal bankruptcy laws.    At the time of the bankruptcy petition,
                               - 11 -


PPD&G had total assets on its books and records of approximately

$1.8 million and total liabilities of approximately $3.3 million,

including $1.3 million in notes payable to BEI.    In 1988, two

other BEI subsidiaries, Reelcraft and Ainsley Communications,

ceased operations.    At the time of cessation of business,

Reelcraft's total assets and total liabilities were approximately

$1 million and $1.7 million, respectively.   The liabilities

included approximately $1.4 million owed to BEI.    Petitioner did

not make any efforts to collect money from these companies for

repayment of the advances.

     For the 1988 taxable year, petitioners claimed a business

bad debt deduction of $5,360,636, consisting of $1,156,684 in

advances to TELCOR and $4,203,952 in advances to BEI.    The

claimed deduction was the excess of the respective total

liabilities of BEI and TELCOR, including the advances from

petitioner, over the total assets of the entities.    Neither BEI

nor TELCOR recognized cancellation of indebtedness income in the

amount of the bad debt deduction or reduced the amount of

liabilities owed to petitioner on their books and records.

     The bad debt deduction resulted in a net operating loss

(NOL) in 1988 of $3,057,871.    On May 3, 1989, petitioners filed a

Form 1045, Application for Tentative Refund, seeking refunds of

$384,753 and $162,519 for Federal income tax paid in 1985 and

1986, respectively.   The claimed refunds are based on the

carryback of the 1988 NOL.    In a statement attached to the refund

application, petitioners requested expedited processing of the
                              - 12 -


refund application so that they could use the refunds to pay bank

obligations that were 90 to 180 days overdue.    The Internal

Revenue Service made tentative refunds to petitioners in the

amounts shown on the Form 1045.   The checks were endorsed by both

petitioners.   Petitioner used the tax refunds to make payments on

his overdue loans.

     After claiming the bad debt deduction for 1988, petitioner

continued to make advances to BEI and TELCOR.    During calendar

years 1989 and 1990, he advanced $2,665,795.75 and $868,270.41,

respectively, to BEI, and during calendar years 1989 and 1990, he

advanced a total $438,117.62 to TELCOR.   In 1990, petitioner made

a capital contribution of over $15 million to BEI that consisted

of ENSCO stock.

     In the notice of deficiency, respondent disallowed the

business bad debt deduction for taxable year 1988.    Disallowance

of the 1988 deduction eliminated the NOL in 1988 and resulted in

the disallowance of the carryback losses to petitioners' 1985 and

1986 taxable years, creating deficiencies for those years.

     Petitioners' Federal income tax return for 1988 and the

refund application for 1985 and 1986 were prepared by Donald V.

Moore, Jr., a certified public accountant.    Mr. Moore also

prepared the corporate tax returns for BEI.    The 1988 return and

the refund application were signed by petitioners.    Ms. Carvin

did not look at the 1988 return before signing it and was not

aware of the $5 million bad debt deduction claimed on the return.

Neither petitioner nor Mr. Moore explained the bad debt deduction
                               - 13 -


to Ms. Carvin.    At the time Mr. Moore prepared petitioners' tax

return, he believed that the bad debt deduction was valid.

However, he did advise petitioner about certain tax risks

associated with the deduction.

     Ms. Carvin is a high school graduate and has no special

training in business, accounting, or finance.     She met petitioner

while working as a receptionist for Fairfield Communities in the

early 1970's.    They married in 1974.   Sometimes Ms. Carvin worked

outside the home in various jobs.    She was the president of

Architectural Antiques, Inc., a company wholly owned by

petitioners.    She did not run the day-to-day operations or make

financial decisions for the company.     After the birth of

petitioners' daughter in 1985, Ms. Carvin became even less

involved in the antique business and rarely, if ever, went to its

place of business.   Ms. Carvin attended antique shows and

auctions with petitioner, but petitioner purchased most of the

antiques.   Architectural Antiques ceased business in 1989, and

the antique inventory was sold to pay petitioner's bank

obligations.

     Ms. Carvin was not involved in the operation or management

of BEI, TELCOR, or their subsidiaries.     Petitioner did not

discuss his business dealings with Ms. Carvin or answer questions

that Ms. Carvin asked about the business.     Ms. Carvin was not

aware of the amount of petitioner's advances to BEI and TELCOR or

that the ENSCO stock was used as collateral to obtain loans for

BEI and TELCOR.   Ms. Carvin did not know the number of businesses
                               - 14 -


owned by petitioner or the couple's net worth.     She was aware of

the financial difficulties in petitioner's business affairs, in

particular the drop in value of the ENSCO stock, because the

business problems decreased petitioners' standard of living and

impacted petitioners' household budget, which Ms. Carvin managed.

As part of the property settlement in petitioners' divorce, Ms.

Carvin received BEI, whose only remaining subsidiary was Kaufman

Lumber.   Mr. Bell received TELCOR and its four subsidiaries.

                               OPINION

     Petitioners seek to deduct advances to corporations from

their reported ordinary income, claiming that the advances are

partially worthless bad debts.    Section 166 entitles a taxpayer

to a deduction for a bad debt that becomes worthless during the

taxable year.    A business bad debt can be deducted from ordinary

income if it is either partially or totally worthless.     Sec.

166(a).   A nonbusiness bad debt is deductible only as a short-

term capital loss and only if the debt becomes totally worthless

during the taxable year.    Sec. 166(d)(1)(B).   Only a bona fide

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

Petitioner bears the burden of proving that a bona fide business

debt exists and that the debt became worthless during the taxable

year in issue.    Rule 142(a); Crown v. Commissioner, 77 T.C. 582,

598 (1981); Rude v. Commissioner, 48 T.C. 165, 172 (1967).

     Petitioner contends that the advances to BEI and TELCOR

constitute a bona fide business debt and that the debt became

partially worthless in 1988.     Respondent argues that the advances
                                - 15 -


were capital contributions, and, therefore, no genuine debt

existed to which section 166 could apply.     Alternatively,

respondent contends that, assuming that the advances were valid

loans, the loans were nonbusiness bad debt, and petitioners are

not entitled to deduct partially worthless nonbusiness debt under

section 166(d).    As a second alternative argument, respondent

maintains that the purported debt did not become partially

worthless in 1988.    Petitioner Darlene Carvin concedes that the

bad debt deduction is not allowable and seeks relief under the

innocent spouse provisions of section 6013(e).

     Because petitioner claims partial worthlessness for the

taxable period under consideration, the only relief available to

him would be through a finding that the advances constituted

business debt within the meaning of section 166(a).     Accordingly,

we focus on that aspect of the case.     To qualify as a business

bad debt, petitioner must show that he was engaged in a trade or

business and that the bad debt was proximately related to that

trade or business.     Putoma Corp. v. Commissioner, 66 T.C. 652,

673 (1976), affd. 601 F.2d 734 (5th Cir. 1979); sec. 1.166-5(b),

Income Tax Regs.     Promoting, organizing, financing, and selling

corporations may constitute a trade or business for purposes of

section 166.   Deely v. Commissioner, 73 T.C. 1081, 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.       On

the other hand, the management of one's investment, regardless of

how extensive, is not a trade or business, and a loan from a
                              - 16 -


shareholder to a corporation for the purpose of protecting or

enhancing the shareholder’s investment in the corporation is a

nonbusiness debt.   Deely v. Commissioner, supra at 1092.    An

intention to sell stock of a company for profit is consistent

with the goals of an investor, and a taxpayer with such an

intention is not in the trade or business of dealing in

corporations unless his activities are so extensive and

continuous as to constitute a separate trade or business.    See

Imel v. Commissioner, 61 T.C. 318, 323 (1973).

     In Whipple v. Commissioner, 373 U.S. 193, 202 (1963), 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 * * *

     To be engaged in a trade or business of promoting business

entities, a taxpayer must seek compensation "other than the

normal investor’s return" and must conduct the activity for a fee

or commission or with the immediate purpose of selling of the

companies at a profit in the ordinary course of that business.

Deely v. Commissioner, supra at 1093.   A taxpayer who seeks a

return from long-term investments rather than a quick sale after

the corporation becomes established is more likely to be viewed

as an investor rather than a business promoter.   Id. at 1093-
                                - 17 -


1095.     When engaged in business promotion, the taxpayer receives

income directly for the services provided to the corporation

rather than indirectly through the corporation’s success.

Whipple v. Commissioner, supra at 203.     Whether the taxpayer is

engaged in a trade or business is a question of fact.     United

States v. Generes, 405 U.S. 93, 103 (1972).

        Petitioner contends that he was in the trade or business of

buying and rehabilitating financially troubled business entities

and then selling them for profit and that he made the advances to

BEI and TELCOR in the ordinary course of that trade or business.

Petitioner testified that his intention was to sell the BEI

subsidiaries once they became profitable.     However, petitioner

was contradicted by BEI's officers who testified at trial.     Two

officers identified resale of the subsidiaries as only one

possible option and did not view the quick sale of the

subsidiaries as BEI's purpose.     The officers also considered it

to be desirable for BEI to operate the subsidiaries after they

became successful.     The bylaws of BEI did not specify that the

corporate purpose was to acquire struggling companies and

rehabilitate them for a quick sale at a profit.

        The BEI subsidiaries do not themselves provide tangible

evidence that petitioner indirectly held the subsidiaries as his

inventory rather than as investments.     None of those unprofitable

subsidiary companies improved, and there is no evidence that

petitioner intended and/or attempted to sell them.     BEI's actions

with regard to Kaufman Lumber are inconsistent with the professed
                              - 18 -


purpose for BEI.   Kaufman Lumber was profitable when BEI acquired

a 50-percent interest in December 1986.   Neither BEI nor

petitioner made an effort to resell Kaufman Lumber at a profit.

Instead, BEI acquired the remaining 50 percent of the company in

1989 and continued to hold it at the time of petitioners' divorce

in 1991.

     Petitioner argues that he has a history of rehabilitating

and selling businesses for a period of nearly 30 years.     There is

some evidence in the record that petitioner had a reputation in

his community as a business entrepreneur.   Petitioner had

interests in about 20 businesses in addition to the BEI

subsidiaries.   Petitioner contends that he also held these

entities as part of his business of promoting and developing

businesses.   However, there is no credible evidence that the

other business enterprises were held as inventory for resale.    We

cannot determine from the record the length of time that

petitioner held the businesses, and it appears that petitioner

held them for considerable periods of time without any intention

of selling them.   Only a few of these businesses were marginally

profitable, and petitioner did not take any affirmative steps to

advertise or sell them.   Evidence offered by petitioner at trial

shows that he successfully turned around and sold only three

companies (Southern Blueprint, Nygem, Consumat) over a period of

30 years.   Petitioner's accountant was not aware of a single

instance where petitioner successfully rehabilitated a struggling

company apart from ENSCO.   Petitioner's prior business activity
                              - 19 -


does not establish an extensive or continuous activity of

promoting corporations for sale as to constitute a separate trade

or business.

     Petitioner has not established that he provided promotional

services to the companies he owned.    Except for the blueprinting

company in the early 1960's, there is no evidence that petitioner

provided anything but financing to the companies.    Petitioner did

not actively seek out companies to promote and did not advertise

the companies he had.   On tax returns for 1985 through 1988,

petitioner reported income and loss from business enterprises

separate from BEI as passive income and loss.    Petitioner's

primary activity with regard to BEI was to attend board of

directors' meetings where he discussed financing for the BEI

subsidiaries and acquiring additional businesses.    These

activities do not differ from those an investor would take to

protect and expand his investments.    Petitioner has not

identified promotional services that he provided to the BEI

subsidiaries for which he would have been compensated upon the

resale of one of the BEI subsidiaries.

     The record in this case does not reflect the amount of time

that petitioner spent involved in managing or operating the BEI

subsidiaries.   We note that petitioner indicated that he devoted

a significant amount of time to ENSCO during 1986 to 1988 and

received a salary exceeding $300,000.    Petitioner attributed his

inability to successfully rehabilitate the BEI subsidiaries to

the time demands of ENSCO.   There was no showing by petitioner
                              - 20 -


whether the gain from sale of three companies over the years was

reported as capital gain or as ordinary income.

     On their 1988 financial statement, petitioners listed their

interest in BEI as an investment and not as inventory.   In

addition, on BEI's tax return it was reported that the

corporation was engaged in the management of investments.

Petitioner did not hold himself out and/or view himself as a

dealer in corporations.3

     Accordingly, petitioner was not in the business or lending

money or buying and selling corporations.   Ultimately, we must

conclude that if the advances constitute debt, rather than

equity, that it was non-business debt and would not qualify for a

deduction under section 166(d) because it was not wholly

worthless at the end of 1988, a fact that petitioner does not

dispute.   Due to our holding, it is unnecessary to consider

whether the advances constituted debt or equity.




     3
        There was discussion in the briefs of the parties,
primarily respondent and Ms. Carvin, as to whether petitioner was
engaged in the business of lending money. At trial, petitioner
maintained that in addition to the purported loans he provided to
BEI, he also lent money to his other businesses and to unrelated
individuals and entities. In his reply brief, petitioner stated,
"Petitioner's business, as regarding the deductions at issue, was
the business of buying, rehabilitating and selling companies, not
the business of lending money." Petitioner only half-heartedly
argued that he was in the trade or business of lending money.
Petitioner did not make the advances to BEI in the course of a
money lending business, and he was not in the business of lending
money.
                              - 21 -


Innocent Spouse Relief

     When a husband and wife file a joint Federal income tax

return, liability for the tax due is joint and several on their

aggregate income; thus, either spouse may be required to pay the

entire amount.   Sec. 6013(d)(3); Pesch v. Commissioner, 78 T.C.

100, 129 (1982).   Under section 6013(e), however, one spouse may

be relieved of the liability as an innocent spouse.   To be

entitled to innocent spouse relief, the spouse seeking relief

must satisfy each of the following requirements:   (1) A joint

return was filed; (2) there is a substantial understatement of

tax on the return; (3) the understatement is attributable to a

grossly erroneous item of the other spouse; (4) the spouse

seeking relief did not know, or have reason to know, of the

substantial understatement when signing the return; and (5) upon

consideration of all the facts and circumstances, it would be

inequitable to hold the spouse seeking relief liable for the

income tax deficiency attributable to the understatement.     Sec.

6013(e)(1); Purcell v. Commissioner, 86 T.C. 228, 235 (1986),

affd. 826 F.2d 470 (6th Cir. 1987).    The requirements of section

6013(e)(1) are conjunctive, rather than alternative, and all of

the statutory requirements must be met for the taxpayer to be

afforded relief.   Estate of Jackson v. Commissioner, 72 T.C. 356,

360 (1979).   Ms. Carvin has the burden to prove that she is

entitled to relief as an innocent spouse under section 6013(e).

Rule 142(a); Bokum v. Commissioner, 94 T.C. 126, 138 (1990),

affd. 992 F.2d 1132 (11th Cir. 1993).
                                - 22 -


     The parties have stipulated that petitioners filed joint

returns for the years at issue, and respondent and Ms. Carvin

agree that the bad debt deduction is attributable to petitioner

Mr. Bell and that the understatement was substantial.      The

remaining issues are:    (1) Whether the bad debt deduction is

grossly erroneous; (2) whether petitioner Darlene Carvin knew, or

had reason to know, of the substantial understatement of tax when

she signed the return; and (3) whether it would be inequitable to

hold Ms. Carvin liable for the income tax deficiency.      If we

determine that one of the requirements for innocent spouse relief

has not been met, the other factors do not need to be considered.

Bokum v. Commissioner, 992 F.2d at 1134.

     For purposes of section 6013(e), a deduction is "grossly

erroneous" if there is no basis in fact or law for the deduction.

Sec. 6013(e)(2)(B).    A deduction has no basis in fact when the

expense for which it is claimed was never, in fact, made.

Douglas v. Commissioner, 86 T.C. 758, 762 (1986).      A deduction

has no basis in law when the expense, even if made, does not

qualify as a deductible expense under well-settled legal

principles or when no substantial legal argument can be made in

support of its deductibility.     Id.    A deduction that is without

basis in fact or law is one that is frivolous, fraudulent, or

phony.   Id. at 763.    The fact that a deduction has been

disallowed does not, per se, prove that the deduction is grossly

erroneous.   Ness v. Commissioner, 954 F.2d 1495, 1498 (9th Cir.

1992), revg. 94 T.C. 784 (1990); Russo v. Commissioner, 98 T.C.
                              - 23 -


28, 32 (1992).   We evaluate whether a claimed deduction is

grossly erroneous as of the time of filing of the tax return.

Bokum v. Commissioner, 992 F.2d at 1142.

     Ms. Carvin argues that the bad debt deduction was grossly

erroneous because the debt was not a business debt that arose out

of a trade or business of petitioner’s.    In particular, Ms.

Carvin argues that neither petitioner nor BEI was engaged in the

trade or business of buying and selling companies.

Alternatively, Ms. Carvin maintains that if such a business

existed, it was the trade or business of BEI, and the activities

of BEI cannot be attributed to petitioner as the sole

shareholder.   Ms. Carvin does not argue that petitioner's

positions that the advances were bona fide debt or that the

advances became partially worthless in 1988 were grossly

erroneous.   Respondent argues that although petitioner's argument

that he was engaged in the business of rehabilitating distressed

companies for resale is incorrect, that argument is reasonable,

and therefore the section 166 deduction was not grossly

erroneous.

     Petitioner maintains that he organized BEI as a conduit

through which he could purchase, promote, finance, manage, and

sell corporations.   Petitioner has been involved in numerous

business enterprises since 1960.   In taxable year 1988, he had

direct or indirect interests in over 35 businesses.    Petitioner

testified that he formed BEI with the intention of acquiring

financially troubled companies, turning them into profitable
                                - 24 -


businesses, and reselling the businesses for a quick profit.

Although petitioner's experience with turning around troubled

companies is not so extensive and continuous as to establish that

he was engaged in a trade or business, he does have some history

of rehabilitating financially troubled businesses beginning in

1960.

Accordingly, we find that there is a reasonable basis for

petitioner to have claimed that he acquired his interests in the

BEI subsidiaries as inventory and not merely as investments.

     Ms. Carvin argues that even if a trade or business of buying

and selling business enterprises did exist, the activity is that

of BEI and not petitioner individually.    The bad debt deduction

was based on advances made to BEI, a corporation that petitioner

wholly owned, and TELCOR, a 90-percent subsidiary of BEI.    In

general, a taxpayer cannot treat the business activity of a

wholly owned corporation as his own trade or business for

purposes of section 166.     Vreeland v. Commissioner, 31 T.C. 78

(1958).     A shareholder is not engaged in the trade or business in

which the corporation is engaged unless the shareholder engages

in such trade or business apart from affiliation with the

corporation.     See Smith v Commissioner, T.C. Memo. 1994-640.

        Petitioner organized BEI to conduct his business ventures in

corporate form.     Petitioner was the sole shareholder of BEI and

the chairman of BEI's four-member board of directors.    For the

advances to be deductible by petitioners as business bad debt, we

would need to ignore BEI's corporate form and attribute the
                               - 25 -


activities of BEI to petitioner.   We have looked through the

corporate form of a holding company and attributed the business

activity of promoting to the shareholder.     Whether we ignore the

holding company would depend on the shareholder's personal

involvement in the corporation and the shareholder's business

activity separate from the corporation.     See Farrar v.

Commissioner, T.C. Memo. 1988-385.      Petitioner made all

significant decisions regarding the amount of financing the

company would receive and which business enterprises to acquire.

Also, there is some evidence of petitioner's independent

involvement in rehabilitating financially troubled businesses.

Accordingly, the fact that petitioner did not directly own the

BEI and TELCOR subsidiaries or directly hold them for sale does

not render petitioner's argument that the advances were business

debt groundless.

     While petitioner's involvement with the various businesses

was insufficient to establish that he was in the business of

promoting and selling businesses, there was some basis for

believing that the advances were made for business purposes and

not for investment purposes.   We find that the characterization

of the advances as a business debt is not frivolous, fraudulent,

or phony and that the bad debt deduction has some basis in fact

or law within the meaning of section 6013(e)(2)(B).     Accordingly,

we find that the bad debt deduction was not grossly erroneous.

We need not address the other conjunctive requirements of section

6013(e)(1) that are in issue in this case.     Petitioner Darlene
                             - 26 -


Carvin remains jointly and severally liable for the income tax

deficiency for taxable years 1985, 1986, and 1988 as determined

above.   Sec. 6013(d)(3).


                                        Decisions will be entered

                                   under Rule 155.
