                        T.C. Memo. 2000-179



                      UNITED STATES TAX COURT



       JAMES P. SHEA AND PATRICIA H. SHEA, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

         CHRISTOPHER M. AND KIM A. SHEA, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 2860-96, 2861-96.              Filed May 30, 2000.



     Joseph Falcone, for petitioners.

     Timothy S. Murphy, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GALE, Judge:   Respondent determined deficiencies in

petitioners’ Federal income taxes and penalties as follows:
                                 - 2 -


       James P. Shea and Patricia H. Shea, docket No. 2860-96

                                                   Penalty
             Year           Deficiency            Sec. 66621

             1992            $244,224              $48,485


           Christopher M. and Kim A. Shea, docket No. 2861-96

                                                   Penalty
             Year           Deficiency            Sec. 6662

             1992             $47,945               $9,589

Because these cases present common questions of fact and law,

they were consolidated for purposes of trial, briefing, and

opinion and hereinafter will be referred to in the singular.

       The issues for decision are as follows:

       (1)   Whether certain expenditures deducted by petitioners on

Schedules C of their 1992 Federal income tax returns were

incurred in a trade or business within the meaning of section

162;

       (2)   alternatively, whether petitioners are entitled to

deduct all or any part of the losses claimed--

             (a) as theft losses arising from a transaction entered

       into for profit under section 165(c)(2),

             (b) as theft losses under section 165(c)(3),


       1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. For convenience, all monetary amounts are rounded to
the nearest dollar.
                                - 3 -


            (c) as capital losses under section 165(f), or

            (d) as business bad debts within the meaning of section

     166;2 and

     (3)    whether petitioners are liable for accuracy-related

penalties authorized by section 6662?

                          FINDINGS OF FACT

Background

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

incorporate by this reference the stipulation of facts and

attached exhibits.

     Petitioners James P. Shea and Patricia H. Shea were married

and filed a joint Federal income tax return for the taxable year

1992.3    At the time their petition was filed, petitioner James P.

Shea resided in Troy, Michigan, and petitioner Patricia H. Shea

resided in Ludington, Michigan.

     Petitioners Christopher M. Shea and Kim A. Shea were married

and filed a joint Federal income tax return for the taxable year



     2
       In their petitions, petitioners asserted an additional
ground for deducting the losses claimed, contending that the
losses qualified as small business losses under sec. 1244.
However, petitioners did not include the sec. 1244 issue in
either their trial memorandum or their posttrial briefs and
presented no evidence at trial in support of their position.
Consequently, the petitioners are deemed to have abandoned the
sec. 1244 issue. See Bernstein v. Commissioner, 22 T.C. 1146,
1152 (1954), affd. per curiam 230 F.2d 603 (2d Cir. 1956).
     3
         James P. Shea and Patricia H. Shea subsequently divorced.
                                - 4 -


1992.    At the time their petition was filed, petitioners

Christopher M. Shea and Kim A. Shea resided in Rochester,

Michigan.

     Petitioners James P. Shea (James) and Christopher M. Shea

(Christopher) are brothers who, during 1992, worked at a company

called PK Contracting.    PK Contracting (the company) was in the

business of painting lines on roads.     James, a vice president of

the company, has worked for the company for more than 20 years

and is a part owner of the company.     As of the trial date,

Christopher was the president of the company and ran the

company’s day-to-day operations.    In 1992, Christopher was the

general manager, with similar operational responsibility.4

     None of the petitioners were in the trade or business of

lending money.

The Russian Airplane Deal

     Sometime prior to January 19, 1992, James was introduced to

Michael Donnelly by a friend.    Donnelly, who claimed to be a

retired U.S. Army major general, described a plan in which he and

some others would buy Russian airplanes (Ilyushin-72s) for

substantially less than their purported fair market value and

resell them in the West for $5 to $8 million per airplane or use



     4
       Petitioners Patricia H. Shea and Kim A. Shea are involved
in these consolidated cases only because they filed joint Federal
income tax returns with their husbands for 1992.
                               - 5 -


them in an overnight air freight and mail business serving

Eastern and Central Europe and the Commonwealth of Independent

States (the plan).   Others allegedly involved in the plan

included E. B. Leedy, who claimed to be a retired U.S. Army major

general, and Brian Wilcox, a principal in a company called Wilcox

Engineering with offices in Great Britain, who was described in

promotional materials as the owner of a large joint venture

timber operation in Russia (the promoters).   The plan, which was

supposed to turn a quick and substantial profit, intrigued James.

     Sometime prior to January 19, 1992, James went to England

and met with the promoters of the plan.   Either prior to or

during his trip, James agreed to provide the initial financing

for the plan and subsequently did so, transferring $650,0005 by

cable transfer to a bank account of Quotum International Trading,

Inc. (Quotum) at Nordbanken on or about January 22, 1992.

     In consideration for the transfer of funds, James received

the following:




     5
       The total amount provided by James is unclear. The
amounts allegedly provided varied from $611,750, the amount
reflected in a promissory note, to $900,000, a figure that
appeared in at least one document admitted solely to establish
James’ “state of mind”. On cross-examination, James was unable
to reconcile or explain the conflicting amounts. He was also
unable to explain how he handled Christopher’s investment of
$150,000, which was made by check dated January 30, 1992, after
the initial cable transfer of $650,000 was made.
                               - 6 -


     (1)   A promissory note dated January 19, 1992, in the

principal amount of $611,750 which was executed in favor of

James, ostensibly by Brian Wilcox and Michael Donnelly; and

     (2)   stock certificate No. 1, dated January 19, 1992,

representing 125 shares of stock in Quotum which was issued to

Candid, Inc. (Candid), an S corporation in which James was a

shareholder.6

The note was unsecured, bore no interest, and required payment in

full “upon demand” on February 20, 1992.

     James understood that the money he had transferred to Quotum

would be used to purchase Russian airplanes, that the money would

not be withdrawn from the bank account without his express

authorization, and that he would own a specified percentage of

Quotum’s stock7 and serve as Quotum’s president in consideration

for initially financing Quotum’s operations.




     6
       Conflicting testimony was given concerning James’ stock
ownership in Candid, Inc. James testified that he was the sole
shareholder of Candid. James’ accountant, Jeffrey J. Groen,
testified that James was the majority shareholder and that
several professors owned stock in Candid as well.
     7
       In a letter dated April 1, 1992, to Michael Donnelly,
James stated that he was supposed to receive a 25-percent
ownership interest in Quotum and refers to a $700,000 investment.
At trial, however, James testified that he was supposed to
receive a 51-percent ownership interest.
                                 - 7 -


     At some point during his review of the plan, James acquired

additional documents regarding the plan participants and how they

proposed to operate.   These documents showed the following:

     (1)   The promoters intended to do business through Quotum, a

Liberian corporation that was formed on August 1, 1991;

     (2)   on November 8, 1991, a first meeting of incorporators

and subscribers was held at the offices of Wilcox Engineering

Ltd. located in Hereford, U.K.    At the first meeting, a “Transfer

Subscription of the Capital Stock of the Corporation” for one

share of “Bearer” stock was approved, Brian Wilcox was elected

board chairman, and he and Michael Donnelly were elected

directors;

     (3)   at a meeting of the board of directors of Quotum held

on January 19, 1992 at Wilcox Engineering, Brian Wilcox was

elected president and board chairman, Michael Donnelly was

elected vice president, and Ian Yemm was elected

secretary/treasurer;

     (4)   at another meeting of the board of directors of Quotum

held later in the day on January 19, 1992, James was elected

president, E. B. Leedy was elected chairman of the board, Ian

Yemm was elected secretary/treasurer, and Michael Donnelly, Brian

Wilcox, Bjourn Andersson, and Mladen Kovatchev were elected

directors.   A resolution giving James the right, in his sole

discretion, to disburse the “initial funding of $611,750" and to
                                 - 8 -


be repaid immediately “as soon as the lease back funds has been

released to the corporation” was unanimously approved;8 and

     (5)   Quotum planned to acquire the Russian airplanes through

a Swedish company called Truemax.    By contract with Truemax dated

January 21, 1992, Quotum agreed to acquire “four units IL76

aircraft FOB Western Hemisphere Airport” and to deposit $360,000

“in blocked funds to [an] account on Nordbanken as guarantee and

handling fee.”   James signed the contract as Quotum’s president.

     Although James received repeated assurances that delivery of

the airplanes was imminent, the airplanes were not delivered as

promised in January 1992.   In early February 1992, James was

advised that cash had to be delivered to the seller in Russia.

In order to facilitate delivery, James agreed to permit the

withdrawal of $280,000 from the Nordbanken account so that the

funds could be carried into Russia.

     In addition to the above, James was advised and understood

that Quotum had deposited $250,000 toward the cost of insurance

with respect to the airplanes.    The insurance was to be placed


     8
       The planned business activity seemed to change on a
regular basis. One of the proposals was to acquire Russian
airplanes, immediately sell them at a substantial profit, and
lease them back for use in an air freight and mail service
business. Other business activities mentioned were the purchase
and sale of diamonds, gold, and a limited amount of sable, the
purchase of materials from military stores using an existing
offshore company named “Cougar”, and the transport of relief
goods and food. The record suggests that more than one company
was involved.
                                  - 9 -


through an insurance broker, M. B. Quin-Harkin of Houlder

Insurance Services (Aviation) Limited.

     By the end of February 1992, the airplanes still had not

been delivered to Quotum.   In a letter dated February 28, 1992,

James’ secretary wrote to Ian Yemm requesting, among other

things, “a complete accounting to date of * * * [James’] original

$650,000 investment.”   By telefax dated March 4, 1992, Yemm

provided the following accounting:

           Deposited                      $650,000.00
           Less:
            Bank charges                        69.71
            Houlder insurance              250,000.00
            Truemax Sweden                  72,000.00
            Michael E. Donnelly
              airplane deposit             281,000.00

           Balance                        $ 46,930.29

     James continued to send and receive various correspondence

regarding the status of the venture throughout March and April

1992.   By letter dated April 1, 1992, on Quotum stationery, James

replied to a communication from Michael Donnelly as follows:

          Surprised, but glad, to hear from you. $100,000
     is a lot of money to waste. $700,000 is a fortune.
     The $700,000 from me was for a three day guaranteed
     purchase of existing planes per your representation and
     a 25% ownership in the company purchasing the planes.
     Legally, this money was not to fund your personal
     schemes. * * * None of my money was ever to be at
     risk and for a two year period every, repeat, every
     transaction was to be approved by me. Can I go to the
     bank and get my funds?

          I want the written proof from Lloyds that the
     $250,000 deposit is refundable. I also want a
                             - 10 -


     guarantee and statement from them assuring me that it
     can only be exposed or converted at my written
     approval. If this is not possible, have funds returned
     to me immediately. Remember, I was supposed to be the
     president of the company.

By telefax dated April 14, 1992, from Brian Wilcox, James was

informed of the following:

     As you are aware Jim, the whole operation was based on
     the ability of the Swedish Group who consistently told
     us that they had in their control a number of IL 76
     aircraft. The money you were so kind as to invest in
     Quotum International was, as I understood it, to secure
     these planes once and for all through the Swedish
     Group.

     After a number of weeks with Mike out of circulation in
     Russia it became apparent that Jens and his partners
     had as much control over the IL 76 planes as Tom and
     Jerry have over the world economy. Unfortunately a
     great deal of money was spent chasing non existent
     aircraft.

     I would like to remind you that we do indeed have a
     contract between the Swedish Group and Quotum
     International and as far as I can see, they have not
     contributed in any way to the current planes for which
     we are negotiating. I think a serious discussion will
     need to take place in due course. I do not like to see
     people’s money being thrown away and as you know Jim it
     has been extremely difficult for us to hold a deal
     together with no financial resources.

     The status on your funds is as follows:

     USD250,00[0] was put on insurance and was energised on
     the 4th January after we received two serial numbers
     from Jens. At this time the Swedish group said that
     they were in possession of two IL 76 aircraft and that
     we would have to insure them to fly them out of Russia
     into Sweden. It also meant that we could move forward
     with the re-finance funding.
                               - 11 -


     We expect Michael to come out of Russia this weekend
     and should then be able to get an up date on these
     funds.

     We believe that the prospects are still favourable and
     have every confidence in our part of the operation even
     though we are working with only half truths.

     At some point during 1992, James was repaid $42,000 out of

the funds that he had transferred to Quotum.    James asked Brian

Wilcox to take steps to obtain a refund of the $250,000 insurance

deposit paid by Quotum.    He also attempted to obtain information

regarding the deposit himself, but the insurance company refused

to provide any information.

     By letter dated August 14, 1992, Thomas Ziegler, James’

lawyer, wrote to Sarah L. Argyle, a British barrister, setting

forth some of the background information regarding James’ claim

for return of his funds.    Although Ms. Argyle wrote back,

outlining her fee arrangements and enclosing a list of questions,

the record does not indicate whether any legal action was taken

to recover additional amounts from Brian Wilcox, Wilcox

Engineering, or Houlder Insurance Services (Aviation) Limited.

     On September 4, 1992, Donnelly filed a chapter 7 bankruptcy

petition which listed an unsecured claim by James in the amount

of $650,000.   On December 10, 1993, the bankruptcy proceeding was

closed.
                              - 12 -


Christopher’s Investment in the Russian Airplane Deal

     The funds transferred on or about January 22, 1992, to

Nordbanken by James for the benefit of Quotum can be traced, in

part, to $500,000 contributed by James after he cashed

certificates of deposit held by the James P. Shea Living Trust.

The source of the additional $150,000 transferred to Nordbanken

does not appear in the record.     On a date which also does not

appear in the record, Christopher gave James a check dated

January 30, 1992, for $150,000.9    Christopher gave the money to

James because James “had an opportunity to do some overseas

business that could possibly be profitable” and Christopher

wanted to invest in it.   Christopher did not know much about the

venture or how his investment was to be used, but he understood

that, if the venture was successful and he was needed, he could

get involved in the day-to-day operations.     The record does not

show what James did with Christopher’s $150,000.

Petitioners’ 1992 Returns and the Notices of Deficiency

     Petitioners James and Patricia Shea filed a joint Federal

income tax return for 1992.   On a Schedule C to that return,

James reported no gross income and a net operating loss of




     9
       Christopher’s check was dated 8 days after James
transferred the initial $650,000 to Quotum’s account at
Nordbanken.
                             - 13 -


$743,561 from a business described as “international

transportation - aircraft” composed of the following:

          Advertising                              $106
          Legal and professional service         11,662
          Office expense                            112
          Travel                                 80,883
          Meals and entertainment (less 20
                percent)                            436
          Other direct cost of sales            650,000
          Investment research                       320
          Misc.                                      27
          Bank charges                               15

          Net loss                             $743,561

     Petitioners Christopher and Kim Shea also filed a joint

Federal income tax return for 1992.    On a Schedule C to that

return, Christopher reported negative gross income of $150,000

from a business described as “international transportation”,

consisting solely of cost of goods sold in that amount.

     In notices of deficiency, respondent determined that

petitioners had not shown that their Schedule C activity was a

trade or business and disallowed their respective losses.

Petitioners filed timely petitions contesting respondent’s

determination and alleging, in the alternative, that the Schedule

C losses were deductible under section 165, 166, or 1244.

                             OPINION

     Petitioners contend that they are entitled to deduct the

losses claimed on their respective Schedules C because they were

engaged in the trade or business of “international
                                - 14 -


transportation”.   Alternatively, petitioners contend that the

amounts claimed on their Schedules C qualify as either a theft

loss under section 165(c)(2) or (3), a business bad debt under

section 166, or, at a minimum, a capital loss under section

165(f).   Respondent rejects the proposition that petitioners were

actively engaged in a trade or business reportable on Schedule C

with respect to buying and selling Russian airplanes in 1992,

claiming instead that the business activity was conducted by a

corporation, Quotum, and that James participated in that activity

as Quotum’s president.    Respondent also contests the alternative

grounds for deducting the amounts at issue, arguing that

petitioners have failed to satisfy their burden of proof.     We

consider each of petitioners’ arguments below.

Did Petitioners Incur Deductible Losses in a Trade or Business?

     As a general rule, ordinary and necessary expenses paid or

incurred during a taxable year in carrying on a trade or business

are deductible.    See sec. 162(a).   A taxpayer is engaged in a

trade or business if the taxpayer is involved in the activity (1)

with continuity and regularity, and (2) with the primary purpose

of making income or a profit.    See Commissioner v. Groetzinger,

480 U.S. 23, 35 (1987).    Petitioners have the burden of proving

that they were involved in a trade or business with respect to

the purchase and sale of Russian airplanes.     See Rule 142(a);

Welch v. Helvering, 290 U.S. 111 (1933).
                               - 15 -


     In this case, even if the activities in which James was

involved qualified as a trade or business,10 the trade or

business was not his.   The trade or business was that of Quotum,

a corporation of which James was the president.    The record in

this case, while extremely sparse, contradictory, and confusing,

demonstrates that James’ attempts to facilitate the purchase and

delivery of Russian airplanes were on behalf of Quotum.     He

corresponded using Quotum’s stationery.    He executed documents in

his capacity as Quotum’s president.     Although he incurred travel

expenses during 1992, the expenses were incurred in connection

with Quotum’s business, and James requested reimbursement for

those expenses from Quotum.

     A corporation may not be disregarded for tax purposes if the

corporation has a substantial business purpose or it actually

engages in business.    See Moline Properties, Inc. v.

Commissioner, 319 U.S. 436, 438-439 (1943); Jackson v.

Commissioner, 233 F.2d 289, 290 (2d Cir. 1956).     In this case,

Quotum had a substantial business purpose--the purchase, sale,




     10
       Whether the alleged trade or business had actually
commenced is debatable. Ordinarily, expenses paid after a
decision has been made to start a business but before the
business commences are not deductible. Such preopening expenses
are capital in nature. See sec. 195; Madison Gas & Elec. Co. v.
Commissioner, 72 T.C. 521 (1979), affd. 633 F.2d 512 (7th Cir.
1980); Frank v. Commissioner, 20 T.C. 511 (1953).
                                - 16 -


and use of Russian airplanes.    In addition, no party has

contended that Quotum’s corporate existence must be disregarded.

     Although we have found that James transferred substantial

funds to or on behalf of Quotum and paid some corporate expenses

personally, the fact that James supplied funds to pay Quotum’s

expenses and finance its operations does not make his investment

or the expenses that he paid deductible by him.    See Whipple v.

Commissioner, 373 U.S. 193 (1963); Weigman v. Commissioner, 47

T.C. 596, 606 (1967), affd. per curiam 400 F.2d 584 (9th Cir.

1968).

     In Whipple v. Commissioner, supra, the Supreme Court held

that a taxpayer’s advances to one of a number of corporations he

owned did not result in a deductible business bad debt under

section 166 because the advances were not related to the

taxpayer’s trade or business (in contrast to the trade or

business of the taxpayer’s corporation).    The Supreme Court’s

reasoning in Whipple is instructive:

          Devoting one’s time and energies to the affairs of
     a corporation is not of itself, and without more, a
     trade or business of the person so engaged. Though
     such activities may produce income, profit or gain in
     the form of dividends or enhancement in the value of an
     investment, this return is distinctive to the process
     of investing and is generated by the successful
     operation of the corporation’s business as
     distinguished from the trade or business of the
     taxpayer himself. When the only return is that of an
     investor, the taxpayer has not satisfied his burden of
     demonstrating that he is engaged in a trade or business
     since investing is not a trade or business and the
                              - 17 -


     return to the taxpayer, though substantially the
     product of his services, legally arises not from his
     own trade or business but from that of the corporation.
     * * * [Id. at 202.]

See also Burnet v. Clark, 287 U.S. 410 (1932); Dalton v. Bowers,

287 U.S. 404 (1932); Weigman v. Commissioner, supra.

     In this case, James’ transfer of $650,000 to Quotum provided

the necessary capital for Quotum to embark on what, with

hindsight, now appears to have been an ill-advised quest for

Russian airplanes.   It was, however, a corporate quest in which

James was only one of several participants.   James’ involvement

in the plan was as an officer and investor.   His investment of

$650,000 is not deductible by him as an expense of a trade or

business of his own under section 162.

     Christopher has an even weaker position regarding the

deductibility of his Schedule C loss.    He simply gave $150,000 to

his brother.   His brother was supposed to invest it in the plan

on Christopher’s behalf.   If the plan worked and a viable

business resulted, Christopher thought that he might get involved

in operations and that his investment would generate a profit.

These facts simply do not establish that Christopher was in a

trade or business for purposes of section 162, nor do they

establish that his investment of $150,000 is deductible as “cost

of goods sold” as claimed on his 1992 Federal income tax return.
                                - 18 -


     Petitioners have failed to prove that they were engaged in a

trade or business involving “international transportation” as

alleged on Schedules C of their Federal income tax returns for

1992.     Petitioners have conceded that they were not in the trade

or business of making loans.     Consequently, they are not entitled

to deduct the losses claimed on their respective Schedules C for

1992.

Did Petitioners Incur Theft Losses Under Section 165(c)(2) or
(3)?

        Subject to certain limitations, any loss sustained during

the taxable year and not compensated for by insurance or

otherwise is deductible.     See sec. 165(a).   In the case of

individuals, the losses deductible under section 165(a) are

limited to (1) losses incurred in a trade or business, see sec.

165(c)(1), (2) losses incurred in any transaction entered into

for profit, see sec. 165(c)(2), and (3) with respect to property

not connected with a trade or business or a transaction entered

into for profit, a casualty or theft loss, see sec. 165(c)(3).

        As an alternate position, petitioners argue that if they are

not allowed to deduct the losses claimed on their respective

Schedules C attached to their 1992 returns because the losses

were not incurred in a trade or business, they should be allowed

to claim them as theft losses under section 165(c)(2) or (3).
                               - 19 -


Respondent asserts that petitioners have failed to prove that the

requirements for a theft loss have been met.   We agree.

     In order for a deduction to be allowed under section 165(a),

the loss “must be evidenced by closed and completed transactions,

fixed by identifiable events, and, except as otherwise provided

in section 165(h) and §1.165-11, relating to disaster losses,

actually sustained during the taxable year.”   Sec. 1.165-1(b),

Income Tax Regs.   For purposes of section 165(a), a loss arising

from theft is sustained during the taxable year in which the

taxpayer discovers the loss.   See sec. 165(e); sec. 1.165-

8(a)(2), Income Tax Regs.   The term theft includes, but is not

limited to, larceny, embezzlement, and robbery.   See sec. 1.165-

8(d), Income Tax Regs.   Whether a theft within the meaning of

section 165 has occurred “depends upon the law of the

jurisdiction wherein the particular loss occurred.”     Monteleone

v. Commissioner, 34 T.C. 688, 692 (1960).

     Petitioners urge us to find that a theft occurred based

primarily on the fact that they did not recover the funds which

were transferred to Quotum’s bank account in January 1992.    They

claim that they were defrauded since the funds advanced have

vanished, and they never acquired any Russian airplanes.

Petitioners bear the burden of proving that a theft has occurred

and that the requirements of section 165 have been met.    See Rule

142(a); Allen v. Commissioner, 16 T.C. 163, 166 (1951).    In order
                              - 20 -


to carry their burden, petitioners must establish both the

existence of a theft within the meaning of section 165 and the

amount of the loss.   See Elliott v. Commissioner, 40 T.C. 304,

311 (1963).

     In Allen v. Commissioner, supra, we described the operation

of the burden of proof in theft loss cases as follows:

          Petitioner has the burden of proof. This includes
     presentation of proof which, absent positive proof,
     reasonably leads us to conclude that the article was
     stolen. If the reasonable inferences from the evidence
     point to theft, the proponent is entitled to prevail.
     If the contrary be true and reasonable inferences point
     to another conclusion, the proponent must fail. If the
     evidence is in equipoise preponderating neither to the
     one nor the other conclusion, petitioner has not
     carried her burden. [Id. at 166.]

The analysis described above, when applied to the facts of this

case, leads to only one conclusion.

     The record in this case is extremely sparse.   Although both

James and Christopher testified at trial, only James was directly

involved in any way in the attempt to acquire the airplanes.

James’ testimony at trial was quite general and not very

informative.   Although he had some documents related to the

airplane acquisition efforts that he introduced into evidence at

trial, many of the documents were not offered or admitted for the

truth of their contents.   None of the other key participants,

such as Michael Donnelly, E. B. Leedy, Brian Wilcox, or a
                               - 21 -


representative of Truemax, were called as witnesses11 to

establish whether a theft occurred and, if so, the date and place

of the theft.

     This unsatisfying factual record does not permit us to find

that a theft occurred.    At most, the record in this case suggests

that, of the $650,000 transferred to Quotum in January 1992, at

least $42,000 was returned to James, $250,000 was paid for

insurance, $70 was paid for bank charges, $72,000 was given to

Truemax Sweden, and $281,000 was taken by Michael Donnelly into

Russia to make a partial payment for the airplanes with James’

approval.   There is no proof that a theft occurred or, if it did,

when it occurred or where.    The record suggests only that a very

risky business deal was in process and that it went sour at some

point in time and for unknown reasons.

     Petitioners have also failed to prove that they were the

victims of any theft.    The record indicates that the funds

advanced by James were transferred to Quotum, a corporation, and

that the funds were used, at least in part, for Quotum’s business

expenses.   The record is devoid of evidence sufficient to


     11
       Although some of these participants may have resided
overseas and, consequently, could not be compelled to attend
trial in the United States, there has been no showing whatsoever
as to where these individuals resided or that they were unwilling
to provide testimony. At least two of the participants, Michael
Donnelly and E. B. Leedy, apparently were U.S. citizens.
According to Michael Donnelly’s bankruptcy file, he resided in
the United States.
                                - 22 -


establish that Quotum either obtained the funds under false

pretenses, embezzled the funds, or otherwise stole the funds from

petitioners.   Petitioners have failed to prove that Quotum

obtained petitioners’ funds by deception.     Cf. Martin v.

Commissioner, T.C. Memo. 1988-369.

     Petitioners have also failed to prove for what portion, if

any, of the funds advanced there was no reasonable prospect of

recovery.   The record suggests that a deposit of $250,000 was

made toward the purchase of insurance for several Russian

airplanes under contract to Quotum.      The sum was allegedly paid

to an insurance broker to activate insurance coverage.     James

testified that he was informed that the insurance deposit was

refundable.    Although James asserts that he attempted to obtain a

refund of the $250,000 paid and that the broker refused to deal

with him, there is no probative evidence that Quotum made a claim

for the return of the premium, or that the claim was rejected for

legally sufficient grounds.

     The facts and circumstances surrounding the transfer of

$150,000 to James by Christopher also fail to establish theft.

Christopher voluntarily gave a check to James which was then

deposited in a Michigan bank.    At trial, James was unable to

explain what he did with Christopher’s money, and there is no

proof elsewhere in the record that the money was ever transferred

overseas or used in the quest for Russian airplanes.
                               - 23 -


       For all of these reasons, we conclude that petitioners have

failed to satisfy their burden of proving that they sustained a

theft loss in 1992 within the meaning of section 165.

Do the Amounts Deducted Qualify as Business Bad Debts Under
Section 166?

       As another alternative argument, petitioners contend that

they are entitled to a business bad debt deduction under section

166.    Section 166 permits a deduction for any debt that becomes

worthless within the taxable year.      Nonbusiness bad debts are

treated as losses resulting from the sale or exchange of a short-

term capital asset.    See secs. 166(d)(1), 1211(b), 1212(b).

Business bad debts are deductible as ordinary losses to the

extent of the taxpayer’s adjusted basis in the debt.      See sec.

166(b).

       Petitioners base their claim to a business bad debt

deduction on the promissory note allegedly executed in favor of

James by Michael Donnelly and Brian Wilcox in the face amount of

$611,750.    The promissory note bore no interest and was payable

on demand on or after February 20, 1992.      It is not clear whether

petitioners are contending that this promissory note supports a

business bad debt deduction for both James and Christopher, nor

is it clear what amount petitioners are claiming.

       Whatever petitioners’ contentions are concerning this issue,

petitioners must first establish that (1) a bona fide debt
                               - 24 -


existed between each of the petitioners and the alleged debtors

which obligated the debtors to pay petitioners a fixed or

determinable sum of money, (2) the debt was created or acquired

in or in connection with a trade or business of petitioners, and

(3) the debt became worthless in 1992.    See sec. 166; United

States v. Generes, 405 U.S. 93 (1972); Calumet Indus., Inc. v.

Commissioner, 95 T.C. 257, 285 (1990); Beaver v. Commissioner, 55

T.C. 85, 91 (1970); Black v. Commissioner, 52 T.C. 147, 151

(1969).   A gift or contribution to capital is not debt within the

meaning of section 166.    See Calumet Indus., Inc. v.

Commissioner, supra at 284; Kean v. Commissioner, 91 T.C. 575,

594 (1988).    Petitioners bear the burden of proof on this issue.

See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

     Our review of the record in this case confirms that

petitioners have failed to prove any of the three elements

necessary to establish their claim to a business bad debt

deduction.    We address each of them below.

     Did a Bona Fide Debt Exist?

     In order for us to find that a bona fide debt was created

for purposes of section 166, petitioners must prove that there

was “a genuine intention to create a debt, with a reasonable

expectation of repayment” and that the intention was consistent

with the “economic reality of creating a debtor-creditor

relationship”.    Litton Bus. Sys., Inc. v. Commissioner, 61 T.C.
                              - 25 -


367, 377 (1973).   Whether the requisite intention to create a

true debtor-creditor relationship existed is a question of fact

to be determined from a review of all the evidence.     See id.

Factors considered in making the analysis include (1) the names

given to the certificates evidencing the indebtedness, (2) the

presence or absence of a fixed maturity date, (3) the source of

payments, (4) the right to enforce payments, (5) participation in

management as a result of the advances, (6) the status of the

advances in relation to regular corporate creditors, (7) the

ratio of debt to capital of the corporation, (8) the ability of

the corporation to obtain credit from outside sources, (9) the

use to which the advances were put, (10) the failure of the

debtor to repay, and (11) the risk involved in making the

advances.   See Calumet Indus., Inc. v. Commissioner, supra;

Anchor Natl. Life v. Commissioner, 93 T.C. 382, 400 (1989); Dixie

Dairies Corp. v. Commissioner, 74 T.C. 476, 493 (1980).     No

single factor is determinative, and not all factors are

applicable in each case.   See Dixie Dairies Corp. v.

Commissioner, supra.    “The various factors * * * are only aids

in answering the ultimate question whether the investment,

analyzed in terms of its economic reality, constitutes risk

capital entirely subject to the fortunes of the corporate venture

or represents a strict debtor-creditor relationship.”     Fin Hay

Realty Co. v. United States, 398 F.2d 694, 697 (3d Cir. 1968).
                               - 26 -


     Applying the above factors, we find that the advance made by

James to Quotum was a capital contribution and not a bona fide

loan.   In exchange for the advance of $650,000, James received

both a stock certificate, issued in the name of his closely held

corporation, Candid, for 125 shares of Quotum’s stock, and what

purports to be a promissory note allegedly signed by Brian Wilcox

and Michael Donnelly.    The promissory note did not contain an

interest provision nor was it secured; in fact, it appears from

this sparse record that there was no security to offer.    The

advance was not made to Brian Wilcox and Michael Donnelly

personally but, instead, was made directly into Quotum’s bank

account at Nordbanken.    As further consideration for the advance,

James was elected president of Quotum.

     On the record before us, it does not appear that Quotum had

any capital other than that provided by James.    Although the

promissory note on which petitioners rely had a fixed maturity

date enabling James to demand payment at any time thereafter, it

does not appear that Quotum had any source of repayment available

other than the funds provided by James.    The financial status of

the two alleged debtors, Brian Wilcox and Michael Donnelly, is

not in the record, except insofar as it has been established that

Donnelly filed a bankruptcy petition in September 1992.    It does

not appear that Quotum had any ability to obtain credit from

outside sources.   Although some of the money advanced by James
                               - 27 -


was repaid, it appears that the repayment came from the funds

transferred by James to Quotum’s Nordbanken account.

     In the face of competing documentation and on these facts,

we conclude that James advanced the funds in exchange for an

ownership interest in Quotum and a management position with the

corporation.    Consideration of the relevant factors leads us

inescapably to the conclusion that James made a capital

contribution to Quotum.    As to Christopher, the record

establishes only that Christopher gave $150,000 to James to

invest in the quest to acquire Russian airplanes.    Petitioners

have failed to prove that they lent funds to Quotum or to Brian

Wilcox and Michael Donnelly or that a true debtor-creditor

relationship was ever established.

     Even If a Debt Was Created, Was It a Business Bad Debt?

     Even if we found that a bona fide debt was created, the debt

was not created in proximate relation to a trade or business of

petitioners.    As we concluded earlier in this opinion, the trade

or business in question, if there was one, was Quotum’s, not

petitioners’.    “When the only return is that of an investor, the

taxpayer has not satisfied his burden of demonstrating that he is

engaged in a trade or business”.     Whipple v. Commissioner, 373

U.S. at 202.
                               - 28 -


     Did Petitioners Demonstrate That the Debt Was Worthless?

     Petitioners contend that they have demonstrated that the

alleged debt is worthless because Michael Donnelly declared

bankruptcy, and the debt in question was discharged.    Although

bankruptcy of the debtor “is generally an indication of the

worthlessness of at least a part of an unsecured and unpreferred

debt”, sec. 1.166-2(c)(1), Income Tax Regs., the bankruptcy of

Michael Donnelly does not establish the worthlessness of the

alleged debt in this case.   Petitioners’ argument that a bona

fide debt was created is based on the promissory note allegedly

executed by both Michael Donnelly and Brian Wilcox.    Petitioners

have made no showing whatsoever regarding the ability of Brian

Wilcox to pay the balance owed under the note.

     Regarding Christopher’s transfer of $150,000 to James, the

record shows only that Christopher’s check was delivered to James

after James had already transferred $650,000 to Quotum, and the

check was deposited in a local bank.    There is no evidence

proving that James subsequently transferred Christopher’s money

to Quotum or used the money in an effort to obtain Russian

airplanes.12   Petitioners have not shown on these facts that

Christopher could not request and obtain repayment of his advance




     12
       James could not recall or explain what he did with
Christopher’s funds.
                              - 29 -


from James.   Absent such proof, petitioners have failed to

establish that the alleged debt was worthless in 1992.

Did Petitioners Sustain Capital Losses Under Section 165(f)?

     Petitioners’ final argument is that, at a minimum, they

should be entitled to a capital loss under section 165(f).

Section 165(f) provides that “Losses from sales or exchanges of

capital assets shall be allowed only to the extent allowed in

sections 1211 and 1212.”

     Since we have concluded that the advance made by James was a

contribution to the capital of Quotum, we treat petitioners’

argument as a claim for a capital loss attributable to worthless

securities under section 165(g).   Section 165(g) provides, in

pertinent part, that if any security which is a capital asset

becomes worthless during the taxable year, the resulting loss

shall be treated as a loss from the sale or exchange of a capital

asset.   The term security includes stock in a corporation.   See

sec. 165(g)(2)(A).

     Petitioners’ argument for a capital loss, like all of their

other arguments, fails for lack of proof.   The record reflects

that, in consideration of the advance of $650,000 by James, he

was entitled to receive a specified amount of Quotum’s stock.

The stock was apparently issued to an S corporation, Candid,
                              - 30 -


Inc., in which James was a shareholder.13    According to James,

the stock was issued in Candid’s name on his lawyer’s advice.

     The structure that James chose for his investment in Quotum

provides the framework for our analysis.     Although Candid owned

the stock in Quotum which petitioners now seek to write off as

worthless, petitioners did not present any evidence regarding

what position, if any, Candid took concerning its ownership

interest in Quotum’s stock.   Petitioners did not introduce any of

Candid’s Federal income tax returns into evidence, nor did they

prove how the alleged loss generated by the worthlessness of

Quotum’s stock affected, if at all, petitioners’ Federal income

tax returns for 1992.   Petitioners did not prove whether Candid

had distributable net income or loss for 1992, nor did they prove

their basis, if any, in Candid’s stock.     In short, petitioners

have failed to provide the necessary information to determine

whether Candid had a distributable net loss for 1992 and, if so,

who may claim the loss.   They have also failed to prove what

their basis in Candid’s stock was in 1992.

     Petitioners have not argued that Candid’s ownership of

Quotum’s stock should be disregarded.   The record is what it is;

in its present state, the record is simply inadequate to support




     13
       The testimony concerning the extent of James’ ownership
interest in Candid is conflicting. See supra note 6.
                             - 31 -


petitioners’ claim that they are entitled to a capital loss under

either section 165(f) or 165(g).

Are Petitioners Liable for the Accuracy-Related Penalties Under
Section 6662?

     Respondent determined that petitioners’ underpayment of tax

was due to negligence or intentional disregard of rules or

regulations and that, therefore, they are liable for the

accuracy-related penalty under section 6662.    Petitioners dispute

this determination, claiming that they relied upon the advice of

their accountant in reporting the moneys paid on Schedules C to

their returns and that the accountant’s advice was rendered after

the accountant researched applicable tax law.

     Section 6662(a) authorizes the imposition of a penalty equal

to 20 percent of an underpayment attributable to negligence or

disregard of rules or regulations.    See sec. 6662(a) and (b)(1).

For purposes of section 6662, the term negligence includes any

failure (1) “to make a reasonable attempt to comply with the

provisions of * * * [the Internal Revenue Code]”, sec. 6662(c),

(2) “to exercise ordinary and reasonable care in the preparation

of a tax return”, sec. 1.6662-3(b)(1), Income Tax Regs., and (3)

“to keep adequate books and records or to substantiate items

properly”, id.   The term disregard includes “any careless,

reckless, or intentional disregard” of rules or regulations.

Sec. 6662(c); sec. 1.6662-3(b)(2), Income Tax Regs.   Section
                              - 32 -


1.6662-3(b)(2), Income Tax Regs., defines these actions as

follows:

     A disregard of rules or regulations is “careless” if
     the taxpayer does not exercise reasonable diligence to
     determine the correctness of a return position that is
     contrary to the rule or regulation. A disregard is
     “reckless” if the taxpayer makes little or no effort to
     determine whether a rule or regulation exists, under
     circumstances which demonstrate a substantial deviation
     from the standard of conduct that a reasonable person
     would observe. A disregard is “intentional” if the
     taxpayer knows of the rule or regulation that is
     disregarded. * * *

The penalty does not apply, however, if the taxpayer demonstrates

that he had reasonable cause for the underpayment and he acted in

good faith with respect to the underpayment, as required by

section 6664(c).   See sec. 1.6662-3(a), Income Tax Regs.

     The record in this case supports a conclusion that

petitioners claimed they were in a trade or business of

“international transportation” in order to obtain a dollar-for-

dollar tax deduction for the funds invested in an attempt to

start a new business to purchase Russian airplanes.   In so doing,

petitioners ignored their own documentation which, inadequate as

it may be, suggests that a foreign corporation, Quotum, was the

entity formed to acquire the airplanes.   Petitioners’ reporting

position also ignored the promissory note given to James and the

stock certificate reflecting that Candid, not petitioners, owned

an interest in Quotum.   Although petitioners’ accountant

testified that he researched the tax law, it appears that he did
                                - 33 -


so without reviewing or considering the documentation that

petitioners had regarding their respective investments.     That

documentation indicated the following, all of which is

inconsistent with a conclusion that petitioners engaged in two

different Schedule C businesses during 1992:

     (1) James’ investment was transferred directly to Quotum;

     (2) in exchange for that investment, James received both

stock in Quotum and a promissory note.   The stock was issued to

James’ closely held S corporation, Candid.   James also became

president of Quotum and actively participated in Quotum’s effort

to acquire Russian airplanes;

     (3) Quotum apparently never acquired any airplanes or

engaged in any business;

     (4) at least part of the funds advanced by James was

expended on business expenses of Quotum, and, to the extent so

used, was not stolen, or reflective of a bad debt; and

      (5) Christopher gave $150,000 to James after James had

already transferred $650,000 to Quotum’s account in Nordbanken.

Christopher gave that amount to James to invest in Quotum; he did

not use the money in his own trade or business.   The record does

not disclose what James did with Christopher’s money.

     The itemization above reflects only some of the factual

reasons why we conclude that, if research was done as

petitioners’ accountant testified, it was inadequate and
                              - 34 -


unreliable.   Either the accountant was not given the relevant

facts and documents, or he ignored them.    In any event, in order

for petitioners to prevail on a claim that they reasonably relied

in good faith on a competent return preparer, they must

demonstrate that they supplied all necessary information to the

preparer, they reasonably relied on the preparer’s advice, and

the incorrect returns resulted from the preparer’s mistakes.      See

Weis v. Commissioner, 94 T.C. 473, 487 (1990) (dealing with the

addition to tax for negligence under section 6653).    Petitioners

have failed to satisfy their burden of proof on this issue.

Conclusion

     We have considered carefully all remaining arguments made by

petitioners for a result contrary to that expressed herein, and,

to the extent not discussed above, we find them to be irrelevant,

unnecessary to address, or without merit.    We hold on this very

unsatisfying record that petitioners have failed to carry their

burden of proof on any of the alternative arguments presented in

this case.

     To reflect the foregoing,


                                      Decisions will be entered

                                 for respondent.
