                         T.C. Memo. 2002-119



                       UNITED STATES TAX COURT



         GERALD L. AND ERMA L. DUNNEGAN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8072-00.              Filed May 14, 2002.



     David K. Holmes, for petitioners.

     Elizabeth Downs, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:    Respondent determined deficiencies in

petitioners’ Federal income tax and penalties under section

6662(a) as follows:
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                                   Penalty, I.R.C.
     Year          Deficiency        Sec. 6662(a)

     1993           $135,811            $2,815.80
     1994              3,628               725.60
     1995             16,088             2,042.20


     After concessions by the parties, the issues remaining for

decision are:    (1) Whether the monetary transfers that

petitioners made to a corporation are capital contributions or

are bona fide debts that are deductible as business bad debts

under section 166 when they became worthless; (2) whether the net

profits and losses of petitioners’ fireworks businesses are

attributable to Mr. Dunnegan or Mrs. Dunnegan for purposes of

self-employment tax; and (3) whether payments made to a

charitable organization are business expenses or charitable

contributions.

     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.

                          FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

     Gerald L. and Erma L. Dunnegan (petitioners) resided in

Wichita, Kansas, when their petition was filed.      Petitioners

filed joint Federal income tax returns for the years in issue.
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     Petitioners and their son, Gregory Dunnegan, owned all of

the stock of Auto Plaza East, Inc. (Auto Plaza), which was

incorporated in April 1991.    Petitioners were the majority

shareholders in Auto Plaza.    Mr. Dunnegan was the president and

Mrs. Dunnegan was the secretary of Auto Plaza.    The primary

business activity of Auto Plaza was the purchase and resale of

used cars.

     Beginning in 1991, petitioners transferred funds to Auto

Plaza to cover operating expenses and to purchase vehicle

inventory.   The funds were transferred to Auto Plaza in

increments and on an “as needed” basis, depending on the vehicles

purchased and the vehicles still in inventory.    The funds

received by Auto Plaza from petitioners were recorded as “loans

from shareholders” in the bookkeeping records.

     There were no notes reflecting the transfers from

petitioners to Auto Plaza.    No collateral was provided by Auto

Plaza to petitioners with respect to the transfers.    There was no

fixed repayment schedule between petitioners and Auto Plaza with

respect to the transfers.    Petitioners received payments from

Auto Plaza only when funds were available, but they advanced more

than was repaid.   No record of repayments was maintained.

     Auto Plaza attempted to obtain financing from several banks

for its inventory but was not able to obtain traditional bank

financing without a personal guaranty from petitioners.    Auto
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Plaza could not obtain loans from banks on the same terms as the

funds provided by petitioners.

     In 1993, Mr. Dunnegan forgave, or permitted Auto Plaza to

write off, $700,000 of the accumulated transfers that were

recorded as shareholder loans, in an effort to improve the

corporation’s debt equity ratio and to make the corporation

viable.   Auto Plaza discontinued its business activities in 1994.

     Petitioners deducted the bad debt expense on Schedule C for

a “loans and collections” business.      Petitioners filed two

separate returns for 1993 claiming $700,000 in bad debt expense

on the return filed on July 3, 1995, and $370,000 in bad debt

expense on the return filed on September 28, 1995.      (The Court

requested that petitioners provide an explanation for the filing

of the two different tax returns in their brief, but no

explanation was provided.)   Petitioners also claimed bad debt

expense of $246,175 in 1994.

     Petitioners are in the business of selling fireworks, both

wholesale and retail.   The retail stores are located in Dennings

and Moriarty, New Mexico; in Wyoming; and in Wichita and Kansas

City, Kansas.

     Mr. Dunnegan worked 60 or more hours per week for Auto

Plaza, except during fireworks season when he spent half his time

performing activities related to the fireworks businesses.       His
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activities included processing the orders of other wholesalers or

retailers.

     Mrs. Dunnegan worked 30 to 45 hours per week for Auto Plaza

performing accounting, preparing title work, and preparing sales

tax reports.   She also spent about 25 to 40 hours per week on

activities related to the fireworks businesses, except between

May and July when she worked 50 hours or more per week in the

fireworks businesses.   Mrs. Dunnegan’s duties that were related

to the fireworks activities were conducted in her home and

consisted of accounting and bookkeeping services, determining the

orders for the following year, placing the overseas orders,

helping to pack the orders, and monitoring shipments.

Mrs. Dunnegan performed 100 percent of the bookkeeping for the

Moriarty store.

     The fireworks businesses are operated as sole

proprietorships, and the income and expense for each location is

reported on a Schedule C, Profit or Loss From Business.   On

petitioners’ Schedules C for 1993, both Mr. and Mrs. Dunnegan are

listed as the proprietors of the Moriarty, Dennings, and Kansas

City fireworks businesses.   Petitioners attributed 50 percent of

the net profit and loss from these fireworks businesses to

Mrs. Dunnegan.

     J&G Enterprise is a sole proprietorship of Mr. Dunnegan that

engages in the sale of fireworks.   The income and expenses of the
                                - 6 -

activities of J&G Enterprise are reported on a separate

Schedule C.   Two checks in the amount of $2,500 each were written

to Big Brothers/Big Sisters.   The checks bore notations that they

were for “donations”.   Big Brothers/Big Sisters is a charitable

organization.   Big Brothers/Big Sisters assisted J&G Enterprise

in finding a place for people to use the fireworks products,

provided the labor to help with parking and traffic, and provided

labor to meet the customers who came into the retail store.

Petitioners deducted the $5,000 that was paid to Big Brothers/Big

Sisters as promotions expense on their Schedule C for J&G

Enterprise in 1993.

     Among the adjustments determined in the notice of

deficiency, respondent disallowed deductions for bad debts of

$370,000 and $246,175 for 1993 and 1994, respectively, on the

Schedule C for the “loans and collections” business.   Respondent

determined that the net income or loss from the Schedule C

businesses was solely attributable to Mr. Dunnegan for self-

employment tax.   Respondent disallowed $5,000 of the promotions

expense that related to J&G Enterprise in 1993.

                               OPINION

     Petitioners expressly conceded some of the adjustments that

were determined by respondent in the notice of deficiency.    Those

adjustments support the penalties imposed under section 6662(a).

All of the other adjustments that were not addressed by
                               - 7 -

petitioners at trial or on brief are deemed conceded.     The issues

that petitioners addressed at trial or in their brief are

considered below.   Petitioners failed to file a reply brief

ordered by the Court.

I.   Business Bad Debt

     The first issue is whether the monetary transfers that

petitioners made to Auto Plaza are capital contributions or are

bona fide debts that are deductible as business bad debts under

section 166 when they became worthless.

     Generally, taxpayers are allowed deductions for bona fide

debts owed to them that become worthless during a 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 and equity investments in corporations

do not constitute or qualify as 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 in the hands of the

recipient corporations must be decided on the basis of all of the

relevant facts and circumstances.      Dixie Dairies Corp. v.

Commissioner, 74 T.C. 476, 493 (1980).     Courts have established a

list of nonexclusive factors to consider when evaluating the
                               - 8 -

nature of transfers of funds to closely held corporations, as

follows:   (1) The names given to the documents that would be

evidence of 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

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.

     The above factors serve only as aids in evaluating whether

taxpayers’ transfers of funds to a closely held corporation

should be regarded as risk capital subject to the financial

success of the corporation or as bona fide loans made to the

corporation.   Fin Hay Realty Co. v. United States, 398 F.2d 694,
                               - 9 -

697 (3d Cir. 1968).   No single factor is controlling.   Dixie

Dairies Corp. v. Commissioner, supra at 493.

     Petitioners argue that all of the funds that petitioners

transferred to Auto Plaza constituted bona fide business loans

that became worthless and therefore the bad debts qualify for a

business bad debt deduction under section 166.   Respondent argues

that petitioners’ transfers of funds to Auto Plaza should be

treated as capital contributions and, thus, petitioners should

not be allowed to claim a bad debt deduction under section 166.

     When petitioners made the transfers to Auto Plaza, no loan

agreements or promissory notes were drafted or executed.      The

absence of notes or other instruments favors respondent.      See

Calumet Indus., Inc. v. Commissioner, supra at 286.

     Petitioners argue that the transfers were recorded as “loans

from shareholders” on the corporation’s books and records.

Transfers to closely held corporations by controlling

shareholders are subject to heightened scrutiny, and labels

attached to such transfers by the controlling shareholders

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.    Here,

petitioners were the majority shareholders of the corporation
                               - 10 -

and, thus, the recordation of the loan was merely a bookkeeping

entry that is of little significance.

     There was no fixed repayment schedule, and petitioners did

not produce a record of the repayments.   Additionally, the

repayment of petitioners’ transfers depended upon Auto Plaza’s

financial success, and the lack of repayment indicates that the

transfers 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.   “If the expectation of

repayment depends solely on the success of the borrower’s

business, the transaction has the appearance of a capital

contribution.”    Roth Steel Tube Co. v. Commissioner, 800 F.2d

625, 631 (6th Cir. 1986), affg. T.C. Memo. 1985-58.

     Petitioners never demanded repayment of the transfers, and

their continued lending of additional funds tends to refute the

existence of a valid debtor-creditor relationship between Auto

Plaza and petitioners with regard to the funds transferred to

Auto Plaza.    See, e.g., Boatner v. Commissioner, T.C. Memo. 1997-

379, affd. without published opinion 164 F.3d 629 (9th Cir.

1998).

     Auto Plaza tried to obtain financing from banks but could

not obtain financing on the same terms as the funds provided by

petitioners.   Where the banks would have required a personal

guaranty from petitioners, Auto Plaza did not give any security
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or execute any security agreements to collateralize the monetary

transfers.

      Petitioners rely on Litwin v. United States, 983 F.2d 997

(10th Cir. 1993); however, Litwin decided whether a bona fide

debt was business or nonbusiness, not a question of whether a

bona fide debt existed.     Our conclusion is consistent with the

analysis and holding in Jensen v. Commissioner, T.C. Memo. 1997-

491, affd. without published opinion 208 F.3d 226 (10th Cir.

2000).    In Jensen, the Court held that the funds transferred by

the taxpayers to a closely held corporation were not bona fide

debts and not deductible as business bad debts under section

166(a).   The Court of Appeals affirmed this Court’s holding in

Jensen, which applied the relevant factors to the facts of that

case as set forth in Calumet Indus., Inc. v. Commissioner, supra

at 285.

      Based on the evidence, we conclude that petitioners’

monetary transfers to Auto Plaza did not constitute bona fide

loans, and, therefore, the transfers should be treated as capital

contributions.   Petitioners may not take a deduction for bad debt

under section 166.

II.   Self-Employment Tax

      The next issue is whether the net profits and losses of

petitioners’ Schedule C businesses are attributable to
                               - 12 -

Mr. Dunnegan or Mrs. Dunnegan for purposes of self-employment tax

under section 1401.

     Petitioners attributed 50 percent of the profit and loss

from the Schedules C for the fireworks businesses located in

Moriarty, Dennings, and Kansas City to Mrs. Dunnegan in 1993.

Respondent determined that 100 percent of the net profits and

losses from the Schedules C for the fireworks businesses was

attributable to Mr. Dunnegan for self-employment tax purposes.

Respondent argues that there is no evidence that Mrs. Dunnegan

was involved in the management of the businesses or had any

significant responsibility for the income-generating activities

of the businesses.

     Section 1401(a) imposes a tax on an individual’s self-

employment income.    See also sec. 1402(b).   Net earnings from

self-employment is the gross income derived by an individual from

a trade or business carried on by that individual, less certain

deductions.   See O’Rourke v. Commissioner, T.C. Memo. 1993-603,

affd. without published opinion 60 F.3d 834 (9th Cir. 1995).       We

have previously stated:

     With respect to individuals who are married, only the
     spouse carrying on the trade or business will be
     subject to the self-employment taxes. The question of
     which spouse carries on the trade or business is a
     question of fact to be determined on a case-by-case
     basis. * * *
                               - 13 -

Jones v. Commissioner, T.C. Memo. 1994-230, affd. without

published opinion 68 F.3d 460 (4th Cir. 1995); see O’Rourke v.

Commissioner, supra.

       Mrs. Dunnegan testified that she was intensely involved in

the operation and management of the fireworks businesses.     She

spent approximately 25 to 40 hours per week performing services

for the Schedule C businesses, such as bookkeeping, placing

orders to suppliers, and packing and shipping orders.

Petitioners listed both Mr. Dunnegan and Mrs. Dunnegan as the

proprietors of the fireworks businesses on their Schedules C for

1993.    We conclude that both spouses were carrying on the

fireworks business and 50 percent of the net profits and losses

from the fireworks businesses should be attributable to

Mrs. Dunnegan for purposes of self-employment tax under section

1401.

III.    Business Expenses

       The last issue is whether the $5,000 paid by petitioners to

Big Brothers/Big Sisters is deductible as a business expense

under section 162 or as a charitable contribution under section

170.    Petitioners claim that they are entitled to the deduction

for business expense under section 162 for the payments because

they were made in exchange for promotional services and labor

rendered to J&G Enterprise.
                              - 14 -

     The term “charitable contribution” as used in section 170

has been generally held synonymous with the term “gift”.

Considine v. Commissioner, 74 T.C. 955, 967 (1980).   A gift is

generally defined as a voluntary transfer of property by the

owner to another without consideration therefor.   If a payment

proceeds primarily from the incentive of anticipated benefit to

the payor beyond the satisfaction that flows from the performance

of a generous act, it is not a gift.   If the transfer is impelled

primarily by the anticipation of some economic benefit or is in

fact an exchange in the form of a substantial quid pro quo, it is

not a contribution.   Id.

     In determining whether a statutory contribution or gift was

made, the primary factor is the transferor’s dominant motive or

intention in making the transfer.   Commissioner v. Duberstein,

363 U.S. 278, 286 (1960).   Identification of the dominant motive

for the transfer must be made on the basis of all of the facts.

United States v. Am. Bar Endowment, 477 U.S. 105, 116-118 (1986);

Commissioner v. Duberstein, supra at 289.

     We are persuaded that the payments to the charitable

organization were not charitable contributions under section 170,

because petitioners’ business expected to receive certain

services in return.   The understanding between Mr. Dunnegan and

Big Brothers/Big Sisters was that Big Brothers/Big Sisters would

provide promotional services and labor to J&G Enterprise, and
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such services were actually received.   In addition, the services

rendered by the charitable organization were ordinary and

necessary to the operation of J&G Enterprise.   We conclude that

the payments are deductible as a business expense under section

162.

       To reflect the foregoing and the concessions of the parties,

                                          Decision will be entered

                                     under Rule 155.
