                          T.C. Memo. 1996-273



                        UNITED STATES TAX COURT



              BILLIE AND FLORENCE LYKINS, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 21868-94.                     Filed June 12, 1996.



        Joseph L. Rosenbaum, for petitioners.

        Paul J. Krazeise, Jr., for respondent.


                MEMORANDUM FINDINGS OF FACT AND OPINION


        ARMEN, Special Trial Judge:   This case was assigned pursuant

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

182.1

        Respondent determined a deficiency in petitioners' Federal

income tax for the taxable year 1990 in the amount of $6,169.

        1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                 -2-

     After concessions by the parties, the issues remaining for

decision are: (1) Whether an advance by petitioner Billie Lykins

to Tag Coal Corp. was a loan or a capital contribution; and, if

the advance was a loan, (2) whether such advance was a "business"

or a "nonbusiness" debt within the meaning of section 166.

     Some of the facts have been stipulated, and they are so

found.   Petitioners resided in Versailles, Kentucky, at the time

that their petition was filed with the Court.

                           FINDINGS OF FACT

     Petitioner Billie Lykins (petitioner) grew up in eastern

Kentucky and has lived there for most of his life.    Petitioner

worked for the Kentucky State Police for 26 years until he

retired in 1976.    After retiring from the State Police,

petitioner spent a few months doing contract work for coal

companies and then was appointed the U.S. Marshall for the

Eastern District of Kentucky.

     In or about 1981, after resigning his appointment as a

marshall, petitioner began working for Coal Mack, a coal company.

Petitioner was in charge of the overall operations of the coal

company, including production, transportation, leasing, and

settling labor disputes.

     Petitioner was very familiar with the coal mining industry

in eastern Kentucky and contemplated starting his own coal-

related business.    Petitioner frequently talked with Michael

Templeman (Mr. Templeman), his stepson, about his desire to enter
                                 -3-

a coal-related business.    Mr. Templeman is petitioner Florence

Lykins' (Mrs. Lykins) son.

     Mr. Templeman and John Adkins (Mr. Adkins) were sole, equal

partners in J & M Equipment Co. (J & M), a partnership engaged in

the business of leasing, as lessor, heavy machinery used for

grading and excavating property connected with construction

projects and coal mining.    The record does not clearly indicate

the specific amount of J & M's outstanding liabilities; however,

it appears that J & M had outstanding liabilities of

approximately $700,000.

     Mr. Templeman and Mr. Adkins were also sole, equal

shareholders in Tag Coal Corp. (Tag Coal), a corporation that

performed grading and excavation services for construction

projects located in eastern Kentucky.    Tag Coal leased equipment

from J & M in order to conduct its business.    Tag Coal was the

primary lessee and customer of J & M.

     In August 1984, Tag Coal was performing general excavation

work for Commonwealth Development Corp. (Commonwealth).    Although

Tag Coal was ultimately liable for employment taxes incurred in

connection with the excavation work, the terms of the contract

between Commonwealth and Tag Coal required Commonwealth to pay

the employment taxes incurred by Tag Coal.    However, before the

project was completed, Commonwealth filed for bankruptcy and

failed to pay $175,970.51 in employment taxes owed by Tag Coal.

Commonwealth also failed to pay approximately $1,000,000 in other
                               -4-

payments due Tag Coal under the parties' contract.    Tag Coal

filed mechanic's liens in an effort to collect these amounts.

     The Commissioner notified Mr. Templeman and Mr. Adkins that

if Tag Coal did not pay its employment tax liability, then the

Internal Revenue Service (IRS) would proceed to collect such

liability from J & M and its assets.2

     Sometime prior to August 27, 1984, Mr. Adkins indicated that

he wanted to withdraw as a partner from J & M.    Mr. Adkins and

Mr. Templeman discussed the possibility of Mr. Templeman's buying

Mr. Adkins' interest in the partnership.    Mr. Templeman also

discussed the situation with petitioner.    Petitioner expressed an

interest in purchasing Mr. Adkins' partnership interest.    At some

point prior to August 30, 1984, petitioner and Mr. Templeman

orally agreed to become equal partners in J & M.

     On August 27, 1984, Mr. Adkins agreed to transfer his

50-percent partnership interest in J & M to Mr. Templeman.    In

exchange, Mr. Templeman agreed, inter alia: (1) To assume and pay

all delinquent taxes by August 30, 1984, and (2) to relieve Mr.

Adkins of all liabilities relative to both J & M and Tag Coal.

Although an agreement was executed, it was never consummated and

was effectively abrogated by the parties.


     2
       As responsible officers of Tag Coal, Mr. Templeman and Mr.
Adkins would be liable for the 100-percent penalty under sec.
6672, and the IRS was of the view that their personal assets,
including their partnership interests in J & M, would be subject
to distraint.
                                 -5-

     Mr. Adkins did not contemplate transferring, nor did he ever

transfer, any interest in Tag Coal to either Mr. Templeman or

petitioner.   Mr. Adkins retained his interest in Tag Coal because

he hoped that Tag Coal could recover the substantial amounts owed

to it by Commonwealth.

     On August 30, 1984, petitioner issued a check in the amount

of $175,970.51 to Tag Coal for the purpose of permitting Tag Coal

to pay its outstanding employment tax liability.   The memo entry

at the bottom of the check reads "Loan to Tag Coal Corp."   The

amount advanced by petitioner was recorded as a loan payable on

Tag Coal's corporate books.   Tag Coal used the proceeds from the

check to pay its employment tax liability.   In a document styled

"Agreement" dated August 30, 1984, Mr. Adkins and Mr. Templeman

granted petitioner a "judgement without protest" against Tag Coal

for a "loan made to Tag Coal".

     Petitioner considered himself to be an equal partner in J &

M on August 30, 1984; however, he did not terminate his

employment with Coal Mack at that time because Coal Mack had not

yet hired his successor.   Petitioner did not want to leave Coal

Mack until his position had been filled.   Thus, on August 30,

1984, petitioner was employed by Coal Mack and was simultaneously

performing services for J & M.   Specifically, petitioner

negotiated contracts for J & M and supplied the contractors with

J & M's equipment.
                                 -6-

     On October 1, 1984, Mr. Adkins, Mr. Templeman, and

petitioner executed a contract in which Mr. Adkins agreed to

transfer his 50-percent partnership interest in J & M to

petitioner.   In exchange, petitioner agreed to assume and pay all

of Mr. Adkins' share of J & M's outstanding liabilities.    Prior

to October 1, 1984, petitioner and Mr. Templeman had applied for

and received a $700,000 loan in order to satisfy J & M's

outstanding liabilities.

     Sometime before October 1, 1984, Mr. Adkins developed severe

heart problems.    Mr. Adkins' medical condition prevented him from

executing the October 1, 1984, agreement on an earlier date.

     Sometime in 1985, Tag Coal paid petitioner $44,806.72

against the amount advanced by petitioner on August 30, 1984.

     Tag Coal was ultimately unsuccessful in recovering the

substantial payments owed to it under its contract with

Commonwealth.   Consequently, on September 11, 1989, Tag Coal

filed a petition for bankruptcy under chapter 7 with the

bankruptcy court for the Eastern District of Kentucky.    At the

time that the petition was filed, Tag Coal owed petitioner

$131,163.79 in respect of the amount advanced by petitioner on

August 30, 1984.

     On an amended income tax return (Form 1040X) for 1989,

petitioners claimed that the amount advanced to Tag Coal and not

repaid; i.e. $131,163.79, was a business bad debt.   On an amended

income tax return (Form 1040X) for 1990, petitioners claimed a
                                  -7-

net operating loss (NOL) carryover from 1989.      A substantial

portion of the carryover was attributable to the business bad

debt deduction claimed by petitioners on Form 1040X for 1989.

                                OPINION

     In 1990, petitioners claimed an NOL carryover stemming from

a business bad debt deduction reported on Form 1040X for 1989.

At issue in this case is the deductibility of the carryover

claimed by petitioner.    The resolution of this issue turns on

whether the advance made by petitioner to Tag Coal on August 30,

1984, was a loan or a capital contribution, and, if the payment

was a loan, whether it was a business or a nonbusiness loan.       We

address these issues in turn.

     1.     Capital contribution issue

     Section 166 allows a deduction for any bad debt that becomes

worthless during the taxable year.      A bona fide debt is a debt

that arises from a debtor-creditor relationship based upon a

valid and enforceable obligation to pay a fixed or determinable

sum of money.    Sec. 1.166-1(c), Income Tax Regs.    This is in

contrast to a contribution to capital or equity investment, which

is not considered debt for purposes of section 166.      Kean v.

Commissioner, 91 T.C. 575, 594 (1988); sec. 1.166-1(c), Income

Tax Regs.

     The existence of a bona fide debt is a factual inquiry that

turns on the facts and circumstances of the particular case, and

the taxpayer bears the burden of proving that a bona fide debt
                                 -8-

existed.    Dixie Dairies Corp. v. Commissioner, 74 T.C. 476, 493

(1980); Litton Business Sys., Inc. v. Commissioner, 61 T.C. 367,

377 (1973).   Factors considered in determining whether an amount

advanced is a loan or a capital contribution include: the intent

of the parties; the names given to the written instruments

evidencing the advance; the failure of the party receiving the

advance to repay; the right to enforce repayment; the presence or

absence of a fixed maturity date; participation in management as

a result of the advance; and the risk involved in making the

advance.    Dixie Dairies Corp. v. Commissioner, supra.   No single

factor is decisive, and, due to the myriad of circumstances in

which this issue can arise, some of the factors may not be

relevant in a particular case.    Id.

     Respondent contends that petitioner's advance to Tag Coal on

August 30, 1984, was a capital contribution and not a loan.

Respondent does not apply the foregoing factors to reach her

conclusion; rather, respondent argues that the August 27 and

October 1, 1984 agreements prove that petitioner paid, in part,

$175,970.51 in exchange for his 50-percent partnership interest

in J & M.

     We note that the following events occurred somewhat

contemporaneously:   petitioner advanced $175,970.51 to Tag Coal

to satisfy its outstanding employment tax liability; petitioner

received a 50-percent partnership interest in J & M; and

petitioner applied for and received a $700,000 loan intended to
                                 -9-

satisfy J & M's other outstanding liabilities.   Apparently,

respondent interprets the contemporaneity of these events to

support her contention.    However, we draw no such inference from

the timing of these events.   Rather, we think that petitioner, in

two contemporaneous but separate transactions, assumed

approximately $700,000 of liabilities in exchange for his

interest in J & M and made a loan to Tag Coal.   We reach this

conclusion by applying the above mentioned factors to the facts

of this case.

     First, the parties genuinely intended the amount advanced by

petitioner to be a loan.   Petitioner and Mr. Templeman both

testified at trial that they considered the advance to be a loan.

We found petitioner and Mr. Templeman to be credible witnesses,

and we have no reason to question their veracity.

     Second, the parties' intent is confirmed by written

instruments characterizing the advance as a loan.   For example,

in a document styled "Agreement" dated August 30, 1984, the

amount advanced by petitioner is referred to as a "loan made to

Tag Coal Corporation for delinquent taxes in the amount of

$175,970.51."   Additionally, petitioner referred to the payment

as a loan on the memo line of the check issued to Tag Coal.

Finally, the advance was recorded as a loan on Tag Coal's

corporate books.

     Third, within approximately one year after the advance, Tag

Coal repaid petitioner $44,806.72 of the $175,970.51 advanced.
                               -10-

There is nothing in the record to suggest that petitioner's 50-

percent partnership interest in J & M decreased or was otherwise

affected by such repayment.   This is compelling evidence that the

advance to Tag Coal was not tied to an equity interest in J & M,

and that the advance was a loan as opposed to a capital

contribution.

     Fourth, Tag Coal's failure to repay $131,163.79 of the

amount advanced was not voluntary.     The outstanding debt became

worthless only because Tag Coal was forced to declare bankruptcy

after Commonwealth defaulted on its contract.     We have no reason

to think that Tag Coal would not have repaid the outstanding loan

if Tag Coal had remained solvent.     Moreover, there is no

indication in the record, nor does respondent contend, that

petitioner could have foreseen that Tag Coal would become

insolvent.   In sum, petitioner reasonably believed that Tag Coal

could and would repay the loan.

     Petitioner's genuine intent to create a debtor-creditor

relationship, the reasonable expectation of repayment, and the

absence of any change in petitioner's equity interest in

J & M upon repayment by Tag Coal lead us to conclude that the

advance by petitioner to Tag Coal was a loan and not a capital

contribution.   Accordingly, we decide this issue for petitioners.
                                 -11-

     2.      Business versus nonbusiness bad debt

     We must next decide whether petitioner's loan to Tag Coal

was a business or a nonbusiness debt within the meaning of

section 166.

     As previously mentioned, section 166 allows a deduction for

any bad debt that becomes worthless during the taxable year.3

Business bad debts are fully deductible from ordinary income;

however, nonbusiness bad debts of taxpayers other than

corporations are treated as short-term capital losses.     Sec.

166(d)(1).     A nonbusiness bad debt is defined as a debt other

than "(A) a debt created or acquired * * * in connection with a

trade or business of the taxpayer; or (B) a debt the loss from

the worthlessness of which is incurred in the taxpayer's trade or

business."     Sec. 166(d)(2).

     The question of whether a debt is a business or nonbusiness

debt is essentially a question of fact, the resolution of which

depends upon whether the debt is "proximately" related to the

trade or business of the taxpayer.      Sec. 1.166-5(b), Income Tax

Regs.     A proximate business relationship exists only if the

taxpayer's dominant motivation in making the loan was for

business reasons.     United States v. Generes, 405 U.S. 93 (1972).

Thus, in order to receive the favorable tax treatment afforded to

business bad debts, petitioner must prove that he was engaged in

     3
       Respondent does not dispute that the advance, if it was a
debt, as we have so held, became worthless in 1989.
                                -12-

a trade or business, and that the worthless debt was proximately

related to that trade or business.

     Respondent contends that the debt was not acquired or

created while petitioner was in the trade or business of leasing

equipment because petitioner advanced funds to Tag Coal on August

30, 1984, and did not become a partner in J & M until October 1,

1984.

     It is true that the October 1, 1984, agreement was the first

written instrument reflecting petitioner's 50-percent partnership

interest in J & M.    However, based on the record as a whole, we

think that petitioner was in the trade or business of leasing

equipment and was acting as a partner in J & M prior to actually

executing the October 1, 1984, agreement.   In this regard, the

record demonstrates that petitioner and Mr. Templeman had orally

agreed, no later than August 30, 1984, that they were equal

partners in J & M.    The intent of Mr. Templeman and petitioner to

create an equal partnership before October 1, 1984, is supported

by objective evidence, most significantly by the fact that

petitioner was performing important services on behalf of J & M

by August 30, 1984.   For example, petitioner negotiated contracts

for J & M and supplied J & M's equipment to the partnership's

lessees.

     Further, we think that the August 27, 1984, agreement, the

October 1, 1984, agreement, and the discussions surrounding these

agreements, represented a single effort designed to convey a 50-
                               -13-

percent partnership interest in J & M to petitioner.   The record

does not explain why Mr. Templeman and Mr. Adkins entered the

August 27, 1984, agreement without petitioner; however, the

testimony of petitioner and Mr. Templeman at trial indicates that

a transfer of Mr. Adkins' partnership interest to petitioner was

contemplated by all three parties.    We have no reason to doubt

their testimony.   Moreover, we are satisfied that one significant

reason that the August 27, 1984, agreement was not amended

earlier was because of Mr. Adkins' medical condition and his

unavailability due to his serious condition.

     Respondent points out that on August 30, 1984, petitioner

was employed by Coal Mack.   This fact does not alter our

analysis.   A taxpayer can be engaged in more than one trade or

business at the same time.   Syracuse v. Commissioner, T.C. Memo.

1981-340.   Moreover, the only reason petitioner remained employed

by Coal Mack after August 30, 1984, was because Coal Mack had not

yet hired his successor.

     For the foregoing reasons, we conclude that petitioner was

in the trade or business of leasing equipment at the time that he

made the loan to Tag Coal.

     Respondent also contends that petitioner's motivation for

making the loan did not have a proximate relationship to

petitioner's trade or business of leasing equipment.   In this

regard, respondent argues that petitioner's dominant motivation

in making the loan was to relieve Mrs. Lykins' son, Mr.
                               -14-

Templeman, of his potential liability for Tag Coal's outstanding

employment taxes and that the loan was thus personal in nature.

Petitioner contends that this dominant motivation for making the

loan was to "keep the equipment working", thereby protecting J &

M's ability to lease, as lessor, such equipment to its clients.

     Although petitioner's loan to Tag Coal undoubtedly benefited

Mrs. Lykins' son, Mr. Templeman, we do not think that the desire

to confer such benefit was the controlling factor in petitioner's

decision to make a loan to Tag Coal.   Rather, for the following

reasons, we think that the motivation for making the loan was as

articulated by petitioner and that such motivation was

proximately related to his trade or business of leasing

equipment.

     The IRS had informed Tag Coal that if the corporation did

not pay its outstanding employment tax liability, the IRS would

proceed against the assets held by J & M to satisfy such

liability.   If petitioner had not loaned money to Tag Coal, and

if the IRS had proceeded against J & M's assets; i.e. the

equipment, J & M would not have had equipment to lease to its

clients.   This would have effectively precluded petitioner from

carrying on his trade or business of leasing equipment.

     In addition, Tag Coal was the primary lessee and customer of

J & M.   Since petitioner is a 50-percent partner in J & M, we can

readily accept his testimony concerning his desire to "keep Tag

afloat".
                               -15-

     Accordingly, we conclude that petitioner's dominant

motivation in making the loan to Tag Coal was to protect J & M's

equipment and ultimately petitioner's ability to lease such

equipment to third parties.   We therefore hold that the debt owed

to petitioner by Tag Coal is appropriately characterized as a

business bad debt and is deductible by petitioners as such.

     In order to reflect our disposition of the disputed issues,

as well as the parties' concessions,



                                           Decision will be entered

                                      under Rule 155.
