                        T.C. Memo. 2001-158



                      UNITED STATES TAX COURT



            THOMAS AND LINDA O’CONNELL, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16647-98.                       Filed June 29, 2001.


     Thomas and Linda O’Connell, pro se.

     Christine V. Olsen, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined deficiencies in,

additions to, and penalties on petitioners’ Federal income tax as

follows:
                                - 2 -

                                  Additions to Tax/Penalties
     Year      Deficiency         Sec. 6661(a)     Sec. 6662

     1987       $611,053           $152,763           -
     1988        672,765            168,191           -
     1989        113,278               -           $22,656
     1990         52,462               -            10,492

Unless otherwise indicated, 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.

     The issues for decision are:    (1) Whether amounts

petitioners received from two insurance businesses were loans or

were taxable distributions; (2) whether petitioners are entitled

to deduct losses from fishing activities engaged in by Thomas

O’Connell (petitioner) through two S corporations; and

(3) whether petitioners are entitled to a business bad debt or a

nonbusiness bad debt deduction.

                           FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioners resided in Chula Vista, California, at the time that

they filed their petition in this case.

     During the years in issue, petitioner owned 75 percent of a

corporation named Mayflower Insurance Agency, Inc. (Mayflower).

Petitioner was president of Mayflower and in charge of its
                               - 3 -

operations.   Mayflower owned 100 percent of Sabinas Claims

Service, Inc., and 100 percent of Texas Premium Finance.

     During the years in issue, petitioner owned 100 percent of

Jordan General Insurance Agency, Inc. (Jordan), an S corporation,

and was involved in a number of other insurance-related

enterprises in which he held ownership interests.    During the

years in issue, each of petitioners received wages from one or

more of the insurance-related enterprises.

Advances to Petitioner

     During 1986 and 1987, petitioner received advances of

$1,175,044 and $1,469,974.40 from Mayflower.   During 1988,

petitioner received advances of $329,266.66 from Jordan.

Petitioner executed promissory notes in the amount of the

advances.   None of the amounts advanced were ever repaid.    The

advances were shown on Mayflower’s 1987 U.S. Corporation Income

Tax Return, Form 1120, as “loans to stockholders”.    The amounts

were not reflected as outstanding at the end of 1988 on

Mayflower’s corporate tax return for that year, and no loans to

stockholders were shown on Jordan’s corporate tax return for

1988.

     In December 1989, Mayflower and Jordan each filed petitions

in bankruptcy.   The amounts that were advanced to petitioner were

not shown as property of Mayflower or Jordan in the schedules

filed in the bankruptcy proceeding.
                                - 4 -

Fishing Activities

     In 1982, petitioner incorporated Billfish, Inc. (Billfish).

Billfish elected S corporation status.      Billfish purchased an

ocean-going yacht, Renegade, for $600,000.

     Petitioner is an avid ocean fisherman.     He particularly

enjoys billfish tournaments.    Billfish are large ocean fish with

large bills, such as blue marlin, black marlin, and sailfish.

During 1983, Billfish advertised Renegade’s availability for

charter in the New York Times, The San Francisco Examiner, The

Chicago Tribune, and the Miami Herald.      During 1983, various

employees of the entities that were controlled by petitioner were

permitted to use the Renegade for one day each.      The employees

were responsible for their own round trip airfare, food, and

miscellaneous items during the trip, although the entity provided

lodging.

     By the years in issue in this case, Renegade was no longer

advertised for charter.    As of 1986, when petitioner gave an

interview to Marlin magazine, Renegade was not often chartered.

During that interview, petitioner stated:

          You have to be in competitive offshore fishing for
     the sport * * * not the money. What you win could
     never cover the expenses. That’s just a drop in the
     bucket!

          * * * If you’re in tournament fishing for the
     money, you’ll go broke.

           *     *        *      *      *        *      *
                                - 5 -

          In my mind, it is inconceivable to make any money
     at tournament fishing * * *. This is strictly a sport.
     If a guy only fished one or two tournaments in a year
     and he won one of them, then he might end up in the
     black for that year * * *. If you fish them a lot,
     though, it is really tough.

From 1983 through 1989, Renegade was used primarily for sport

fishing.    The yacht spent several months each year in and around

Cozumel, Mexico; several months each year in and around Cape Cod,

Massachusetts; and several months in and around The Bahamas.

     Billfish received what was denominated as “management fees”

from various entities in which petitioner held an ownership

interest.   During 1988, those entities made payments to Billfish

totaling $220,000.   Billfish, however, did not perform any

management services for the entities controlled by petitioner,

and the fees were mischaracterized on the tax returns filed by

those entities.   Billfish reported the following gross income,

expenses, and income or loss on its Federal income tax returns

for the years indicated:

     Year       Gross Income      Expenses     Income(Loss)

     1982         $79,500         $140,892       ($61,391)
     1983         327,808          573,754       (245,946)
     1984         619,504          552,010         67,494
     1985         519,137          658,274       (139,137)
     1986         370,385          774,665       (404,280)
     1987         427,750          623,940       (196,190)
     1988         338,103          547,405       (209,302)

     In 1984, petitioner incorporated Texas Terrors Fishing Team,

Inc. (Texas Terrors), which was owned 100 percent by petitioner

and had elected S corporation status.    Petitioner and Texas
                                - 6 -

Terrors entered many tournaments during the years in issue.     The

fishing tournaments were funded by moneys advanced to Billfish by

petitioner.   Billfish made interest-free loans to Texas Terrors,

which were the sole source of funds for Texas Terrors.

Petitioner did not charge Billfish interest on the loans.    If

Texas Terrors won prizes in fishing tournaments, the money was

given to the team members.    The prize money was not reported as

taxable income to Texas Terrors.   Texas Terrors reported the

following gross income, expenses, and income or loss on its

Federal income tax returns for the years indicated:

     Year      Gross Income      Expenses     Income(Loss)

     1984         $25,568       $154,296      ($127,728)
     1985          53,565        221,061       (167,496)
     1986          49,195         81,710        (32,515)
     1987            -            40,681        (40,681)
     1988            -            59,432        (59,432)

     Billfish did not file timely Federal income tax returns for

1989 or 1990, and Texas Terrors did not file a timely return for

1989.   Billfish did not maintain records sufficient to

substantiate the travel expenses, meals and entertainment

expenses, and other expenses of operating Renegade during the

years in issue.

     Losses incurred by Billfish and by Texas Terrors were

deducted against other income of petitioners on their Federal

income tax returns for the years in issue.
                                - 7 -

     On February 8, 1989, petitioner sold Renegade for a net

price of $472,000.    Renegade had been fully depreciated, so the

entire net sales proceeds were taxable to petitioners as capital

gain.   The capital gain on the net sales proceeds was not

reported on the returns that were filed by petitioner or by

Billfish for 1989.

Loan Guaranty

     Petitioner received wages of $121,000 and $142,500 from

Mayflower during 1987 and 1988, respectively.   Linda O’Connell

received annual wages of $30,000 from Mayflower during 1987 and

1988.   Petitioner received wages from other entities of $180,000

in 1988 and $470,000 in 1989, and Linda O’Connell received wages

from Jordan in the amount of $30,000 in 1989.

     On November 7, 1988, Mayflower borrowed $950,000 from Bent

Tree National Bank.   The loan was guaranteed by petitioner.   The

note became due on February 6, 1989, but Mayflower defaulted.

The lender seized $7,600.97 from petitioner’s bank account and a

$100,000 certificate of deposit in partial satisfaction of the

guaranty.   Petitioners deducted $100,000 as a bad debt on a

Schedule C, Profit or Loss From Business, attached to a second

amended tax return filed for 1990.
                                 - 8 -

Miscellaneous Schedules A and C Deductions

     On Schedule A, Itemized Deductions, for 1987, petitioners

claimed legal and accounting expenses totaling $160,503 and

subscription expenses of $182.

     On Schedule C for 1988, petitioners claimed deductions,

including the following:

           Dues and publications            $125
           Freight                            74
           Rent                           42,185
           Travel                         49,737
           Meals & entertainment          17,962
           Utilities & telephone           1,695

Petitioners did not maintain books or records to substantiate the

foregoing expenses.

                              OPINION

     Respondent treated the advances that petitioner received

from the insurance-related entities as income, rather than as

loans.   Respondent contends that the fishing activities of

petitioner were disguised as businesses in order to allow

petitioner to deduct for tax purposes his very expensive hobby.

Alternatively, respondent argues that petitioners did not

substantiate the expenses of those activities, particularly the

travel and entertainment and “facility” expenses that were

subject to section 274(d).   Respondent contends that the amounts

paid by petitioners in relation to the loan guaranty have not

been substantiated beyond the $7,600 amount supported by

documentation and that, in any event, the amount would be a
                                - 9 -

nonbusiness bad debt.   Respondent further contends that the

additional expenses in dispute were not substantiated as to

amount or business purpose and that petitioners’ negligence in

reporting items on their returns and in understating their tax

liabilities supports the additions to tax and penalties

determined by respondent.

     Petitioner contends that the advances from his insurance-

related entities were bona fide loans; that the fishing

activities were a charter business; and that the loan guaranty

was intended to protect petitioners’ salaries from Mayflower.

Petitioners presented neither evidence nor argument relating to

the remaining deductions or the additions to tax and penalties.

Thus, petitioners are deemed to have abandoned those issues.    In

any event, deductions cannot be allowed in the absence of

evidence that shows the expenses were incurred and the purpose

for which they were incurred.   The concessions by petitioners as

to mischaracterized and improper deductions support the additions

to tax and penalties in each year.

     With respect to the other issues, petitioner testified at

trial.   His testimony was not corroborated by any other witnesses

and was, to some extent, contradicted by the documentary

evidence.   We need not accept uncontroverted testimony at face

value if it is improbable, unreasonable, or questionable, see,

e.g., Lovell & Hart, Inc. v. Commissioner, 456 F.2d 145, 148 (6th
                               - 10 -

Cir. 1972), affg. T.C. Memo. 1970-335, or, if the totality of the

evidence conveys a different impression, see Diamond Bros. Co. v.

Commissioner, 322 F.2d 725, 731 (3d Cir. 1963), affg. T.C. Memo.

1962-132; Gerald D. Roberts Consultants, Inc. v. Commissioner,

T.C. Memo. 1991-490, affd. without published opinion 981 F.2d

1251 (4th Cir. 1992); Houston v. Commissioner, T.C. Memo. 1983-

635.

Advances to Petitioner

       Whether the advances from Mayflower and Jordan to

petitioners were taxable distributions, as respondent contends,

or loans, as petitioners contend, depends on whether repayment of

the amounts was intended by petitioners and Mayflower and Jordan

at the time that the amounts were advanced.    Notwithstanding the

formality of executing notes from petitioners to the

corporations, the other facts and circumstances surrounding the

advances may negate the intent to create a bona fide debt.     See

Estate of Chism v. Commissioner, 322 F.2d 956 (9th Cir. 1963),

affg. T.C. Memo. 1962-6; Diamond Bros. Co. v. Commissioner, supra

at 731; Clark v. Commissioner, 266 F.2d 698, 710-711 (9th Cir.

1959), affg. in part and remanding on another issue T.C. Memo.

1957-129.    In view of petitioner’s unfettered control over

Mayflower and Jordan, special scrutiny of the circumstances is

required.    Electric & Neon, Inc. v. Commissioner, 56 T.C. 1324,

1338-1339 (1971), affd. without published opinion 496 F.2d 876
                               - 11 -

(5th Cir. 1974); Haber v. Commissioner, 52 T.C. 255, 266 (1969),

affd. 422 F.2d 198 (5th Cir. 1970).

     The unexplained inconsistencies in not reporting the

outstanding loans as due from petitioners on the corporate tax

returns and on the bankruptcy schedules filed by Mayflower and by

Jordan contradict the formality of the notes.     There is no

evidence that there was ever any effort to repay the advances,

and no payments in fact were made.      There is no indication that

petitioners had the ability to repay the advances, and the

evidence and petitioners’ arguments suggest that in fact they did

not have the ability to repay the advances.     We conclude on the

evidence presented that the advances were taxable distributions

to petitioners rather than bona fide loans.

Fishing Activities

     The first of respondent’s alternative grounds for

disallowing deductions claimed in relation to the fishing

activities operated through the S corporations Billfish and Texas

Terrors is the absence of the requisite profit objective within

the meaning of section 183.    A determination of whether the

requisite profit objective exists is made on the basis of all of

the surrounding facts and circumstances.     See sec. 1.183-2(b),

Income Tax Regs.   Greater weight is given to the objective facts

than to the taxpayer’s mere statement of his intent.     See sec.

1.183-2(a), Income Tax Regs.
                              - 12 -

     Section 1.183-2(b), Income Tax Regs., lists some of the

factors to be considered in determining whether an activity is

engaged in for profit.   The factors listed in the regulation are

as follows:

          (1) Manner in which the taxpayer carries on the
     activity.

          (2) The expertise of the taxpayer or his advisors.

          (3) The time and effort expended by the taxpayer
     in carrying on the activity.

          (4) Expectation that assets used in activity may
     appreciate in value.

          (5) The success of the taxpayer in carrying on
     other similar or dissimilar activities.

          (6) The taxpayer’s history of income or losses
     with respect to the activity.

          (7) The amount of occasional profits, if any,
     which are earned.

          (8) The financial status of the taxpayer.

          (9) Elements of personal pleasure or recreation.

     These factors are not intended to be exclusive, and no one

factor or majority of the factors need be considered

determinative.   See Golanty v. Commissioner, 72 T.C. 411, 426-427

(1979), affd. without published opinion 647 F.2d 170 (9th Cir.

1981).

     Petitioner, during his testimony, repeatedly claimed that

the Billfish activity was a business.   He claimed that certain

identified employees of the insurance entities used the yacht.
                             - 13 -

There was no evidence, however, as to the dates on which any of

the individuals were on the yacht, and there was no corroboration

of petitioner’s broad assertions.   Although the record supports a

finding that petitioner spent a great deal of time and effort in

the activity, none of the other factors listed above favors

petitioners.

     In this case, the most persuasive evidence is the history of

income or losses incurred with respect to the activities and the

absence of any profit, i.e., factors (6) and (7) above.

Petitioner’s own words, quoted in the interview published in

1986, indicate that profits would be unusual and unexpected.    The

evidence of actual losses claimed, without any indication of a

means of recouping any of them, compels the conclusion that the

activity was not engaged in for profit.   We conclude that

petitioner lacked the requisite profit objective and that

respondent correctly characterized the activity as a personal

hobby of petitioner.

     In view of our conclusion as to the lack of the requisite

profit objective, it is not necessary to address respondent’s

alternative contention that the expenses were not properly

substantiated.

Bad Debt Expense

     In the statutory notice of deficiency, respondent determined

that the $100,000 amount claimed by petitioners for 1990 as a
                                - 14 -

business bad debt should be reclassified as a nonbusiness bad

debt and included as a short-term capital loss.      In requests for

admissions served on petitioners, respondent asked petitioners to

admit:

          51. On their 1990 income tax return, petitioners
     deducted $100,000, the amount of the seized certificate
     of deposit, as an expense; this amount should have been
     claimed as a “non-business bad debt” rather than as an
     expense.

Respondent now contends that petitioners have not substantiated

that a total of $100,000 was seized by Bent Tree National Bank.

Petitioner, at trial, was under the impression that respondent

had previously conceded substantiation of the $100,000 amount,

and petitioner only belatedly and ineffectively attempted to

subpoena the records of Bent Tree National Bank.

     Under the circumstances, we believe that substantiation of

the $100,000 amount is new matter as to which respondent has the

burden of proof.    See Rule 142(a).     Petitioner testified that he

had a certificate of deposit with the bank that was seized in

satisfaction of his guaranty.    Respondent has given us no reason

to reject petitioner’s testimony as to this item.

     With respect to the characterization of the amount

petitioner paid as a result of his guaranty, petitioner

testified:

     there’s   so much law on this, and I’ve read it, but the
     primary   and dominant reason that this loan was made was
     to save   my salary, which I think was a hundred and--a
     hundred   and sixty or seventy thousand one year, and the
                               - 15 -

     year before it was a hundred and forty thousand. And
     that was the reason for this loan. And I should be
     allowed an ordinary loss on this.

Petitioner relies on Lundgren v. Commissioner, 376 F.2d 623 (9th

Cir. 1967), revg. T.C. Memo. 1965-314.     In that case, however,

the taxpayer was independently in the business of selling timber.

Here, it was Mayflower, not petitioner, that was in the business

of selling insurance.   The taxpayer in Lundgren did not claim

that the purpose of the loan was to protect his salary from a

corporation.   See Dallas v. Commissioner, T.C. Memo. 1971-248;

cf. Jerich v. Commissioner, T.C. Memo. 1992-136; Brooks v.

Commissioner, T.C. Memo. 1990-259.      Petitioner’s conclusory

testimony is not supported by objective facts.

     Whether a debt is a business or nonbusiness debt depends on

whether it is “proximately related” to a trade or business of the

taxpayer, as determined based on the dominant motivation of the

taxpayer in incurring the debt.    United States v. Generes, 405

U.S. 93, 104 (1972).    In determining the dominant motivation of a

taxpayer who is both employee and shareholder, objective factors

to be considered are the size of the taxpayer’s investment in the

corporation; the size of the salary received from the

corporation; other sources of gross income available to the

taxpayer; the ability of the corporation to remain in business

absent the taxpayer’s guaranty; and the degree to which the

taxpayer’s employment is protected by his or her equity position
                                - 16 -

in the corporation.    See id.; Benak v. Commissioner, 77 T.C.

1213, 1218 (1981).     Considering these factors in the present

case, it is more probable that petitioner’s guaranty was intended

to protect his investment in Mayflower than it was to protect his

salary from a corporation that he wholly controlled.        The amount

of the loan guaranty was disproportionate to petitioner’s salary

from Mayflower and is more likely related to his investment in

Mayflower.    Petitioner even asserts in his brief:

          As a result of an adverse loss ratio in 1988, it
     was required that Mayflower/Jordan pay back a large
     amount of money to Constitution Reinsurance.
     Mayflower/Jordan did not have the funds at the time, so
     the petitioner secured a loan that was passed on to the
     corporation. If the monies had not been paid to
     Constitution, they would have withdrawn their
     reinsurance support. This action would have put
     Mayflower/Jordan out of business immediately.

          *        *       *      *      *       *      *

          The loan was essential if the company was to
     continue to operate.

We conclude that the bad debt deduction must be treated as a

nonbusiness bad debt.

     We have considered the other arguments of the parties.       They

are either unnecessary to our decision or lacking in merit.

                                             Decision will be entered

                                      under Rule 155.
