                           T.C. Memo. 1999-257



                         UNITED STATES TAX COURT



        HAROLD F. AND BARBARA J. SWIATEK, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10978-97.                        Filed August 4, 1999.



     Harold F. Swiatek and Barbara J. Swiatek, pro sese.

     Deborah Stanley, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS,    Judge:      Respondent   determined   a   deficiency   in

petitioners' 1991 Federal income tax in the amount of $95,283 and

a section 6662 accuracy-related penalty in the amount of $19,057.

     The dispute in this case centers on respondent's determination

that petitioners had $295,315 of unreported income in 1991, and
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that $271,836 of this amount is attributable to payments Harold F.

Swiatek (petitioner) received from Jose Garcia and/or from two of

Mr. Garcia's businesses.          Petitioners maintain that these payments

were       loans.      Thus,     the     issue   for    decision    concerns       the

characterization        (loan    or    income)   of    the    $271,836   petitioner

received from Mr. Garcia and/or his businesses in 1991.1

       All section references are to the Internal Revenue Code as in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.                All dollar amounts are

rounded.

                                 FINDINGS OF FACT

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

stipulation of facts and the attached exhibits are incorporated

herein by this reference.

       Petitioners resided in Miami, Florida, at the time they filed

their petition.

Retail Automation Inc. Credit Corp.

       Retail       Automation    Inc.    Credit      Corp.   (RAI),     located    in

Hackensack, New Jersey, was a finance company which purchased

installment sales contracts from retailers.                   In 1989, petitioner



       1
          Petitioners failed to address $23,479 of the total
amount of unreported income determined by respondent. We treat
this failure as a concession by petitioners that they did in fact
receive $23,479 of unreported income during 1991.
     Respondent concedes the sec. 6662 accuracy-related penalty.
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became the vice president of RAI, receiving annually a salary of

$100,000 and a car allowance of $2,000. He was responsible for

conducting     all    of     RAI's   operations,    which      included    sales,

marketing, advertising, credit, collection, and dealer relations.

       Jose Garcia (Mr. Garcia) was a client of RAI.                    He sold,

financed, and installed alarm and security systems to consumers in

South Florida, doing business as AVD Security Systems (AVD) and

Lauren Investments (LI). Mr. Garcia regularly sold his installment

contracts to RAI.

       While visiting Mr. Garcia's businesses on RAI's behalf in

April 1991, petitioner was offered the position of president of a

bank   Mr.   Garcia    and    others   were    creating   in    South     Florida.

Petitioner accepted Mr. Garcia's offer.

       Mr. Garcia agreed to advance money to petitioner in order to

facilitate petitioners' move from their home in Pennsylvania to

Florida.     These advances were to be interest free until January 1,

1994, at which time interest would be applied to any unpaid balance

at the rate of 6 percent per annum.

       In November 1991, petitioners moved to Florida.                     Between

October and December 1991, petitioner assisted Mr. Garcia in

preparing for the opening of the bank, which was scheduled to occur

on January 6, 1992.
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Mr. Garcia's Business Arrangements

     Mr. Garcia embezzled funds from RAI by submitting false

installment contracts.     By the end of August 1991, petitioner

became aware of the situation but nonetheless failed to take any

action to stop Mr. Garcia's behavior.

Payments Made to Petitioners

     During   1991,   petitioner    received   a   total   of   $271,835.58

(rounded to $271,836) from Mr. Garcia and/or AVD and LI, as

follows:

                 Date                          Amount

                 5/14                        $751.92
                 5/14                       1,584.95
                 5/14                       1,303.52
                 6/5                        4,356.14
                 6/25                       2,846.76
                 7/3                        2,242.24
                 7/5                        2,832.66
                 7/12                       2,257.32
                 7/17                       2,247.18
                 7/30                       2,103.06
                 8/1                       30,000.00
                 8/9                       30,000.00
                 8/16                      30,000.00
                 8/29                      30,000.00
                 9/13                       2,392.97
                 9/13                      30,000.00
                 10/9                      15,000.00
                 10/9                       2,483.32
                 10/16                     20,000.00
                 10/16                      2,597.15
                 10/21                     15,000.00
                 10/23                      2,417.51
                 11/8                       2,362.82
                 11/13                      2,417.92
                 11/14                      1,300.00
                 11/21                      2,502.67
                 11/21                      1,300.00
                 11/27                      2,641.00
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                   12/5                            15,126.12
                   12/13                            1,300.00
                   12/13                            2,749.43
                   12/23                            5,118.92
                   12/23                            2,600.00

                     Total                        271,835.58

     No notes were given and no collateral was received with

respect to these payments.

Petitioners' Real Estate

     During      1991,     petitioners      owned     two      condominiums     in

Pennsylvania, a condominium in New Jersey, and a condominium in

Florida.   The    aggregate        equity   in    these     properties     totaled

approximately $245,000.        After petitioner agreed to accept the

position   in    Florida,    petitioners      decided     to   sell    their   four

condominiums.

     On October 30, 1991, petitioners purchased a house in Kendall,

Florida, for $375,000. The payments petitioner received from Mr.

Garcia and/or AVD and LI were used for the following purposes:

$115,000   to    purchase    the    Kendall      house,   $70,000     to   purchase

furniture, an undisclosed amount to remodel the Kendall house, and

the remaining amount to pay petitioners' attorneys.

Mr. Garcia's Disappearance

     In early January 1992, Mr. Garcia informed petitioners that

the bank would never open. Contemporaneously, Mr. Garcia fled Dade

County, Florida.

RAI Lawsuit
                                     - 6 -


      Sometime in 1992, RAI filed a lawsuit against petitioners and

others, alleging fraud with respect to Mr. Garcia's falsified

contracts.       RAI   sought   $6   million     in   damages.      Petitioners

defaulted, and judgment was entered against them.

Guilty Plea

      Criminal charges were brought against petitioner as a result

of his involvement in defrauding RAI.             Petitioner pled guilty to

conspiring to commit mail fraud.          He was sentenced to 2 years in

Federal prison but served only 17 months. In addition, he was

ordered to pay $7,169,210 in restitution to RAI.              (His obligation

to   RAI   was   joint   and    several   with    that   of   the    other   co-

conspirators.)

Federal Income Tax Return

      Petitioners did not report the $271,836 petitioner received

from Mr. Garcia and/or AVD and LI on their 1991 tax return.

Moreover, they did not report any income petitioner received from

his work between October and December 1991 in setting up the bank.

Petitioner's Bankruptcy

      On November 1, 1993, petitioner filed for bankruptcy.                   He

listed Mr. Garcia as having a $270,000 unsecured nonpriority claim.

Mr. Garcia did not file a proof of claim.

      On February 8, 1994, petitioner received a discharge in

bankruptcy.
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Notice of Deficiency

     On February 28, 1997, respondent issued a notice of deficiency

increasing     petitioners'   1991   taxable       income    by    $295,315,

attributing $271,836 of this amount to payments petitioner received

from Mr. Garcia and/or AVD and LI.        Respondent also determined a

section   6662(a)   accuracy-related     penalty    but,    as    noted,   now

concedes the penalty.

                       ULTIMATE FINDINGS OF FACT

     The $271,836 petitioner received from Mr. Garcia and/or AVD

and LI in 1991 were loans.

                                OPINION

     The issue for decision centers on the characterization of the

$271,836 petitioner received during 1991 from Mr. Garcia and/or AVD

and LI.      Petitioners maintain that these payments were loans;

respondent contends they constitute income.

     Whether an advance is characterized as a loan or income is a

factual question which we determine by considering the entire

record.   See Fisher v. Commissioner, 54 T.C. 905 (1970).           In order

for a bona fide loan to exist, two requirements are necessary: (1)

A good faith intent to make repayment on the part of the recipient

of the funds, and (2) a good faith intent to enforce repayment on

the part of the lender of the funds.       See, e.g., id. at 909-910.

     Petitioners have the burden to prove that the payments from

Mr. Garcia and/or AVD and LI were loans.       See Rule 142(a); Welch v.
                                     - 8 -


Helvering, 290 U.S. 111 (1933).          To rule in petitioners' favor, we

must be convinced that both petitioner and Mr. Garcia intended the

payments to be loans.        To perform our task, we must distill truth

from falsehood. See Diaz v. Commissioner, 58 T.C. 560, 564 (1972);

Arcia v. Commissioner, T.C. Memo. 1998-178.

      We carefully observed petitioners at trial and found them to

be   credible    and    truthful    witnesses.        We   are   satisfied       that

petitioners     sincerely    believed       a    debtor-creditor       relationship

existed at      the   time   Mr.   Garcia       provided   petitioner     with    the

payments as a short-term bridge loan, on the basis of petitioners'

real estate holdings.          Relying on these payments, petitioners

uprooted and moved south, using the money to purchase a home in

Florida   as    well    as   to    pay   for      remodeling     and    furniture.

Petitioners regarded this favorable financing from Mr. Garcia as

unavailable in the normal course of business.                      However, they

understood that once petitioner began to receive a salary from the

bank, he would repay the $271,836 to Mr. Garcia and/or his two

businesses.

      Petitioner introduced into evidence a copy of a letter, dated

April 21, 1991, he wrote to Mr. Garcia which outlined their loan

agreement.     This letter embodies petitioner's understanding of the

loan.   (Respondent notes that the letter was not found when police

searched Mr. Garcia's residence and businesses.                  We believe that

either it was lost or Mr. Garcia took it when he decided to flee
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Dade County.)    In addition, we are mindful that petitioner listed

his debt to Mr. Garcia when he filed for bankruptcy protection in

November 1993.

       We also accept petitioners' testimony that Mr. Garcia had a

good   faith   intent    to    collect   the   $271,836.   Thus,   we    find   a

"consensual recognition" by both petitioner and Mr. Garcia of an

obligation to repay.          Cf. Moore v. United States, 412 F.2d 974,

978-980 (5th Cir. 1969).

       In sum, we find as an ultimate fact that the $271,836 was a

bona    fide   loan     from    Mr.   Garcia    to   petitioner     in    1991.

Consequently, we hold that $271,836 of the amount of unreported

income ($295,315) determined by respondent is not includable in

petitioners' 1991 income.

       To reflect the foregoing and concessions by the parties,



                                                      Decision will be

                                                entered under Rule 155.
