                         T.C. Memo. 1995-522



                       UNITED STATES TAX COURT



           DOUGLAS V. AND MAGDALENE MERANTE, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent


       Docket No. 17218-93.                Filed November 1, 1995.


       Douglas V. Merante, pro se.


       Allison Rodgers, for respondent.


                          MEMORANDUM OPINION


       NAMEROFF, Special Trial Judge:     This case was heard pursuant

to the provisions of section 7443A(b)(3)1 and Rules 180, 181, and

182.



       1
          All section references are to the Internal Revenue Code
in effect for the year at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
                                 - 2 -


     Respondent determined a deficiency in petitioners' Federal

income tax for 1990 in the amount of $5,090.    The sole issue to

be decided is whether petitioner is entitled to any deduction in

connection with an alleged business bad debt of $32,722, which

respondent disallowed in full.    Respondent contends,

alternatively, that the alleged debt was an investment or a

nonbusiness bad debt, and, in any event, that it has not been

shown to have become worthless in 1990.

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

The stipulation of facts is incorporated herein by reference.

Petitioners resided in Murrieta, California, at the time of the

filing of their petition.

     Prior to 1988, Douglas V. Merante (hereinafter petitioner

when used in the singular) was involved in corporate management.

Petitioner had served as vice president of Superior Steel in New

York.   In addition, petitioner was an investor and president of a

corporation entitled Koramics Inc. (Koramics), which specialized

in importing high-quality, high-tech ceramic tile from Germany

and Belgium.   However, Koramics was unsuccessful and by 1987

became inactive.   In 1988, petitioners relocated to California,

and petitioner began looking for new business opportunities.

Shortly thereafter, petitioner met Richard Sheldon (Sheldon) at a
                              - 3 -


Glen Ivy property and became interested in an operation called

Time To Share.2

     Glen Ivy Resorts (Glen Ivy) owned and operated extensive

time-share resort properties in the United States.   Sheldon

operated a marketing company called Time To Share.   The function

of Time To Share was, through various incentive programs, to

bring potential clients to visit sales locations of Glen Ivy,

whereupon Glen Ivy's sales staff would attempt to sell time-share

properties to prospective clients.

     Sheldon apparently convinced petitioner that the Time To

Share venture had good potential for profit, and petitioner

became involved in the operation of Time To Share.   Petitioner

was not an employee of Time To Share and did not receive a

salary, but he did oversee one of Time To Share's offices and

exercised some management functions.   Petitioner's description of

     2
          The public records of the State of California reflect
that a fictitious business name statement was filed on Jan. 17,
1989, signed by Betty Sheldon, Sheldon's wife, providing that, as
of Jan. 17, 1989, Time To Share was a fictitious name of Betty
Sheldon and Jeff Arcuri, and that the business was conducted by a
general partnership. On Feb. 27, 1989, a fictitious business
name statement was filed reflecting that Time To Share as of Feb.
15, 1989, was a fictitious business name of Betty Sheldon and the
business was being conducted by an individual. Subsequently, a
public notice published on Jan. 8, 1990, and filed on Jan. 23,
1990, in a County Clerk's office, stated that a partnership of
Jeffrey Arcuri, Richard Sheldon, and PRU Enterprises, doing
business under the fictitious firm name of Time To Share, was
dissolved on Dec. 1, 1989, and that said business in the future
will be conducted by Richard Sheldon and PRU Enterprises. The
record contains no information with regard to the identification
or structure of PRU Enterprises.
                                - 4 -


his role with Time To Share in this regard was quite vague.   The

exact date of petitioner's commencement of activities with Time

To Share was not set forth in the record.

     On January 3, 1989, petitioner wrote a check to Sheldon for

$2,500.   The memo portion of the check states "Glitter Glaze TTS

startup expenses".    It is not exactly clear what was intended by

the phrase Glitter Glaze TTS, although TTS may have referred to

Time To Share, and Glitter Glaze may have had something to do

with Koramics or some other paint enterprise.

     Apparently, Time To Share developed cash flow problems and

needed infusions of funds from time to time to maintain its

operating expenses.   Sheldon prevailed upon petitioner to assist

with this problem, and it appears petitioner was the sole source

of assistance.   On February 6, 1989, and March 23, 1989,

petitioner wrote two checks payable to Sheldon, each in the

amount of $5,000.    The memo portion of these checks contains the

phrases "for partnership for Time To Share" and "general

partnership in Time To Share", respectively.    No notes or other

documents of indebtedness were signed by Sheldon with regard to

these transactions at this time.

     On April 2, 1989, and again on April 7, 1989, petitioner

gave $2,500 cash to Sheldon.   On April 2, 1989, Sheldon signed a

document that states:
                              - 5 -


     Time To Share hereby acknowledges this 2nd day of April 1989
     receipt of $2,500 cash from Douglas Merante as a loan to the
     company (Time To Share).

Sheldon signed the document as president of Time To Share.    On

April 7, 1989, Sheldon signed a document stating:

     I hereby acknowledge on behalf of Time To Share receipt of
     $2,500 cash from Douglas Merante as a loan to Time To Share.

     On April 11, 1989, petitioner wrote a check payable to

Sheldon for $5,000, with a memo note "Time To Share gen.

partnership"; and on April 29, 1989, petitioner wrote a check to

Sheldon for $2,000, with a memo note "Time To Share".   As of

April 29, 1989, including the January 3, 1989, Glitter Glaze

check, petitioner had transferred $24,500 to Sheldon.

     On April 29, 1989, a document entitled "Agreement" was

signed by petitioner and Sheldon that purported to form a general

partnership between petitioner and Sheldon

     for the purpose of engaging in various businesses including
     but not limited to: Time To Share * * * and the Merante
     Group Ltd., a California Corporation (through which the
     parties hereto intend to promote and find licensees for the
     manufacture of Plekodur Solid Paint and other specialty
     paints, coatings and possibly other products currently
     manufactured by * * * a West German firm with whom the
     Merante Group Ltd. has a special relationship.

The partnership agreement also provides that the parties thereto

are to have equal ownership in each of the United States

entities; i.e., Time To Share and the Merante Group Ltd.3    The

     3
          The record contains no information with regard to an
entity entitled the Merante Group Ltd. Glitter Glaze TTS may
                                                   (continued...)
                                 - 6 -


partnership agreement made no provision with regard to capital

contributions to the partnership, nor any reference to the

advances made by petitioner to Sheldon prior to the date of the

document.     Nevertheless, Sheldon and petitioner signed a document

entitled "Cancellation of General Partnership Agreement and

Partnership Agreement" as of April 30, 1989.

       On January 30, 1990, petitioner transferred a car to Sheldon

in return for a check in the amount of $2,900.     In the memorandum

portion of the check is written "Time To Share repayment on

loan."     The check was returned for insufficient funds, and

Sheldon has never made good on the check, nor has he returned the

car.

       On June 18, 1990, petitioner purchased an "official check"

in the amount of $2,500 payable to Sheldon.     On that date,

Sheldon and Merante signed a document entitled "AGREEMENT" which

provided:

       In return for a loan this day by [petitioner] to [Sheldon]
       of $2,500 and for other loans which together with the herein
       referred to load [sic] total $27,000, [Sheldon] promises to
       repay the entire total of $27,000 to [petitioner] no later
       than Wednesday, June 27, 1990.

       On July 25, 1990, petitioner gave Sheldon cash of $1,068.

       On October 9, 1990, Sheldon signed a document entitled

"PROMISSORY DEMAND NOTE" in which he agreed to repay a loan to

       3
      (...continued)
have had some connection with the paint activity referred to in
the partnership agreement.
                                - 7 -


petitioner in the amount of $2,869, which was given to Sheldon

"in the form of N.S.A. water filters, literature and sales aids".

Sheldon promised to pay said amount no later than October 15,

1990.    Petitioner stated that he had purchased the water filter

units for resale; however he transferred these units, plus

affiliated paraphernalia, to Sheldon.    The record does not

reflect petitioner's cost of the transferred assets.

     On October 19, 1990, a document entitled "PROMISSORY DEMAND

NOTE" was signed by Sheldon as president of Time To Share.     In

this document, Time To Share acknowledged an indebtedness to

petitioner in the amount of $32,722, which consisted of:     (1) The

June 18, 1990, note of $27,000; (2) the October 9, 1990, note of

$2,869; (3) the order for NSA materials of $1,785; and (4) the

cash loaned July 25, 1990, in the amount of $1,068.    The

promissory demand note further provided:

     This note is due and payable on November 1, 1990, and no
     notice whatsoever, either oral or written shall be required
     on the part of Douglas V. Merante and Magdalene Merante.
     Interest shall be calculated from the date of each
     respective loan as listed herein at a rate of 10 percent per
     annum.4 Demand shall be deemed made for the full amount on
     November 1, 1990.

     TIME TO SHARE HEREBY WAIVES any and all recourse regarding
     the indebtedness listed herein and ACKNOWLEDGES THAT ALL
     MONIES LISTED HEREIN ARE OWED TO DOUGLAS V. MERANTE AND
     MAGDALENE MERANTE AS JUST BUSINESS DEBTS.



     4
          This is the first point in time that any mention of
interest appears.
                                - 8 -


     Subsequently, Sheldon became difficult to contact.     He

avoided telephone calls from petitioner and apparently moved from

the Orange County area to San Luis Obispo.     Time To Share was

virtually out of business, and, allegedly, Glen Ivy was having

difficulties itself, while owing Time To Share a substantial sum

of money.    Sometime in 1991 or 1992, Glen Ivy filed for

bankruptcy.

     Petitioner received a letter dated December 15, 1990, signed

by Sheldon as president of Time To Share, stating that Time To

Share was unable to pay the $32,722.     The letter provides, in

part:

     Your many inquiries regarding the payment of the note signed
     by Time To Share dated October 19, 1990, have made it
     necessary for me to contact you at this time to let you know
     that we have no monies with which to fulfill this obligation
     to you and Maggie.

     I am truly sorry for this situation and realize that this is
     a great deal of money for you to lose but we simply do not
     have the funds to make even a small payment possible. The
     way it appears now, we will probably have to close the
     company and the loans that you have made to Time To Share
     will not be repaid.

     As of the end of 1990, Sheldon had no assets and was

insolvent.

     Full deductibility from ordinary income is allowed for the

worthlessness of business bad debts, whereas worthless

nonbusiness bad debts are accorded short term capital loss

treatment.    Sec. 166(a) and (d).   We find that petitioner's

advances to Sheldon were nonbusiness debts.     We do not agree with
                                - 9 -


respondent's contention that the transactions were investments

rather than bona fide loans.    Suffice it to say that the weight

of the evidence supports the finding that petitioner and Sheldon

intended a debtor-creditor relationship, rather than an equity

relationship.

     In order to qualify as a business bad debt, the debt must

have been created or acquired in connection with a trade or

business of the taxpayer (section 166(d)(2)(A)), or the loss must

have been incurred in petitioner's trade or business (section

166(d)(2)(B)).   Petitioner must demonstrate that the loss

resulting from the worthlessness of the debt bears a "proximate

relationship" to a trade or business in which he was engaged.

This is a question of fact.    Sec. 1.166-5(b), Income Tax Regs.

The test for determining whether a particular debt bears a

"proximate relationship" to the taxpayer's trade or business was

set forth by the Supreme Court as follows:

     in determining whether a bad debt has a "proximate"
     relation to the taxpayer's trade or business, as the
     Regulations specify, and thus qualifies as a business
     bad debt, the proper measure is that of dominant
     motivation, and that only significant motivation is not
     sufficient. * * * [United States v. Generes, 405 U.S.
     93, 103 (1972)].

     If the interest of the lender is predominantly that of an

investor, the debt will be characterized as a nonbusiness bad

debt, because management of one's own investments, no matter how
                               - 10 -


extensive, does not constitute a trade or business.    Higgins v.

Commissioner, 312 U.S. 212, 218 (1941).

     In the instant case, it is unclear whether petitioner was

engaged in any trade or business in 1989 and 1990.    He was

involved in the activities of Time To Share, but the extent of

those activities is uncertain.    He received no remuneration

whatsoever for his efforts, and we cannot even classify him as an

employee.    Petitioner does not contend, nor does the record

support a finding, that petitioner was in the business of making

loans.   Accordingly, to the extent that the advances are proven

worthless in 1990, we hold that the debts were nonbusiness bad

debts, deductible as short-term capital losses.5

     A bad debt is deductible only in the year it becomes

worthless.    Denver & R. G. W. R. Co. v. Commissioner, 32 T.C. 43,

56 (1959), affd. 279 F.2d 368 (10th Cir. 1960); Feinstein v.

Commissioner, 24 T.C. 656, 658 (1955).    Petitioner has the burden

of proving that the debt became worthless during the year in

question.    Rule 142(a); Estate of Mann v. United States, 731 F.2d

267, 275 (5th Cir. 1984); James A. Messer Co. v. Commissioner, 57


     5
          The $2,900 check of Jan. 30, 1990, is not a true loan
or advance. It was payment for the sale of a car. The record is
insufficient to allow any deduction on that account. Moreover,
the amount of loss with regard to the Oct. 9, 1990, promissory
note for $2,869 given for transfer of water filters, etc.,
depends upon petitioner's basis in the transferred assets, which
has not been established herein. Consequently, no part of the
$2,869 is deductible herein.
                                - 11 -


T.C. 848, 861 (1972).    When or whether a debt became worthless is

a question of fact, the answer to which lies in an examination of

all the circumstances.     Boehm v. Commissioner, 326 U.S. 287, 293

(1945); Estate of Mann v. United States, supra at 275; Dallmeyer

v. Commissioner, 14 T.C. 1282, 1291 (1950).    The taxpayer must

show some identifiable event which proves worthlessness in the

year claimed.    United States v. S.S. White Dental Manufacturing

Co., 274 U.S. 398, 401 (1927); Dallmeyer v. Commissioner, supra

at 1291-1292.    There is no standard test or formula for

determining worthlessness within a given taxable year; the

determination depends upon the particular facts and circumstances

of the case.     Lucas v. American Code Co., 280 U.S. 445, 449

(1930); Crown v. Commissioner, 77 T.C. 582, 598 (1981); Dallmeyer

v. Commissioner, supra at 1291.

     On balance, we believe that petitioner's ability to recover

anything from Time To Share or Sheldon became fully worthless in

December 1990.    Time To Share's business was gone, as were its

assets.   Indeed, the constant need of Sheldon to borrow funds and

his submission of a worthless check were strong clues that

petitioner would not get his money back.    Sheldon's letter and

disappearance in December of 1990 solidified the view that

nothing would be recovered.    Moreover, Sheldon confirmed this by

testifying credibly that he was insolvent at the end of 1990.
                              - 12 -


     Respondent contends that the advances were not worthless

because Sheldon admitted that Time To Share had a receivable from

Glen Ivy of a substantial amount at the end of 1990.   We do not

believe this allegation is significant in that Time To Share was

having difficulty collecting from Glen Ivy for some time,

indicating that Glen Ivy was probably in dire financial straits,

as further evidenced by its filing for bankruptcy in 1991 or

1992.   Moreover, petitioner would have had to obtain a judgment

against Sheldon and/or Time To Share first and then proceed

against Glen Ivy (probably along with numerous other creditors)

at a prohibitive cost.   This type of effort is not required to

establish worthlessness.   Accordingly, we hold that petitioners

are entitled to a short term capital loss deduction of $3,000 on

their 1990 return.


                                         Decision will be entered

                                    under Rule 155.
