                         T.C. Memo. 2000-108



                       UNITED STATES TAX COURT



          VICTOR I. ROSENBERG AND DEBORAH I. ROSENBERG,
   Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8299-98.                  Filed March 29, 2000.



     Martin Aaron Schainbaum and David B. Porter, for

petitioners.

     Howard J. Schneck and Maria T. Stabile, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:    Respondent determined that petitioners have

deficiencies in income tax and additions to tax as follows:
                                 - 2 -

                                         Addition to tax
          Year      Deficiency              Sec. 6651
          1989       $67,419                $17,586
          1990        16,501                  7,409
          1991        16,765                  6,947
          1992        14,961                  None

     Petitioners formed Cabana Boy Productions, Inc. (Cabana

Boy), a subchapter C corporation.     Cabana Boy tried

unsuccessfully to produce a movie.       Petitioners contend that they

advanced to or paid on behalf of Cabana Boy $2,111,701.20 (the

advances or claimed advances).1

     Following concessions, the issues for decision are:

     1.   Whether petitioners’ advances to Cabana Boy were loans,

as petitioners contend, or equity, as respondent contends.      We

hold that they were equity and therefore are not deductible as

bad debts under section 166.

     2.   Whether petitioners may disregard Cabana Boy’s C

corporation status and deduct the advances as if Cabana Boy had

been organized as an S corporation and used the advances to pay

ordinary and necessary expenses.     We hold that they may not.

     3.   Whether petitioners’ advances to Cabana Boy were made

to produce or collect income or for the management, conservation,

or maintenance of property held to produce income and are thus

deductible under section 212.     We hold that they are not.


     1
        Respondent contends that petitioners did not advance or
pay that amount to or on behalf of Cabana Boy. Based on our
resolution of the issues in dispute, we need not decide whether
the amount petitioners claim is correct.
                                 - 3 -

     4.   Whether petitioners’ advances to Cabana Boy were made

to promote Dr. Rosenberg’s medical practice and thus are

deductible by petitioners as advertising or promotional expenses.

We hold that they are not.

     Section references are to the Internal Revenue Code in

effect for the years in issue.    Rule references are to the Tax

Court Rules of Practice and Procedure.

                           FINDINGS OF FACT

A.   Petitioners

     Petitioners Victor I. Rosenberg (Dr. Rosenberg) and Deborah

I. Rosenberg (Mrs. Rosenberg) lived in New York, New York, when

they filed the petition.     Dr. Rosenberg has been a plastic

surgeon since 1970.   Petitioners' residence and Dr. Rosenberg's

medical practice were located at the same address in New York

during the years in issue.    Almost all of Dr. Rosenberg’s income

was from his medical practice.    Mrs. Rosenberg worked in Dr.

Rosenberg’s medical office until 1986.

     Before and during the years in issue, Dr. Rosenberg

continuously sought publicity for his plastic surgery practice in

periodicals and on television.    He advertised in New York.

Before 1986, articles about plastic surgery that mentioned or

featured Dr. Rosenberg appeared in the New York Daily News, the

New York Times, the New York Post, Lifestyles, the National

Enquirer, Vogue, Cosmopolitan, Bazaar, Every Woman, Prime Time,
                                - 4 -

Self, US, Hairdo & Beauty, and Show Business.    Dr. Rosenberg

spoke about plastic surgery in three appearances on the

television show "Live With Regis" in 1987.    He also appeared on

the television shows "Live With Regis and Kathie Lee", the "Oprah

Winfrey Show", and "Donahue".    These appearances brought Dr.

Rosenberg many new patients.    Dr. Rosenberg listed these articles

and appearances in his curriculum vitae.

B.   Cabana Boy

     1.    Beginning of the Cabana Boy Project

     In 1985, petitioners stayed at the Beverly Hills Hotel in

Beverly Hills, California, while Dr. Rosenberg attended a medical

convention.    Ashley Tyler (Tyler) and Jeffrey Kinart (Kinart)

worked as cabana boys at the hotel swimming pool where they met

petitioners.    Tyler wanted to make a movie from the novel,

Neuromancer, by William Gibson (Gibson).    Mrs. Rosenberg read the

novel and became excited about the idea of making a movie based

on it.    Tyler visited petitioners in New York at the end of 1985

and moved to New York to live with petitioners early in 1986.

     2.    Incorporation of Cabana Boy

     On dates not stated in the record, petitioners

consulted their attorney, Richard Fabricant (Fabricant), and

their accountant, Arnold Hyman (Hyman) (petitioners’ advisers),

about the Cabana Boy project.    Mrs. Rosenberg attended the
                                 - 5 -

meetings regarding Cabana Boy's formation.    Dr. Rosenberg did not

attend those meetings.

     Petitioners’ advisers recommended that petitioners form a

corporation for the Cabana Boy project.    Fabricant filed the

Cabana Boy certificate of incorporation in New York on January

27, 1986, which established Cabana Boy as a subchapter C

corporation with a purpose of making feature motion pictures.

     Mrs. Rosenberg was president and treasurer of Cabana Boy.

Tyler was executive vice president and secretary.    Kinart was

vice president for creative development.    Dr. Rosenberg was not

an officer of Cabana Boy.   In February 1986, Cabana Boy paid

Gibson $100,000 for the movie, television, and allied rights in

the Neuromancer novel.   Mrs. Rosenberg signed the agreement for

Cabana Boy.

     3.   The Shareholders’ Agreement

     On March 29, 1986, petitioners, Tyler, and Kinart (the

shareholders) and Cabana Boy signed a shareholders agreement.

Mrs. Rosenberg signed the shareholders agreement for Cabana Boy.

In the shareholders agreement:    (a) Cabana Boy agreed to issue 49

shares to Tyler, 49 shares to Kinart, and 100 shares to

petitioners; (b) Mrs. Rosenberg agreed to assign to Cabana Boy

the motion picture and other rights to the Neuromancer novel as

consideration for the issuance of petitioners’ stock; and (c)

Tyler and Kinart each agreed to pay $10 per share (i.e., $490
                                 - 6 -

each) to Cabana Boy for their shares of Cabana Boy stock and to

work full time for Cabana Boy.    Cabana Boy issued shares as

follows:   100 to petitioners on March 29, 1986, 49 to Tyler on

June 25, 1986, 24.5 to petitioners on July 10, 1986, and 24.5 to

Tyler on July 10, 1986.

     An unsigned promissory note (sample note) is attached to the

Cabana Boy shareholders' agreement.      The note has the word

"sample" written on the front and on the Cabana Boy signature

block.    The sample note said that $100,000 was payable by Cabana

Boy to petitioners on demand.

     4.    Operation of Cabana Boy

     Cabana Boy operated primarily from petitioners’ residence,

but also had offices in New York, California, and at Shepperton

Studios in London.   Beginning in 1986, Mrs. Rosenberg worked full

time for Cabana Boy.   Mrs. Rosenberg, Tyler, and Kinart (until

July 1986) managed Cabana Boy.    Mrs. Rosenberg hoped to produce

more movies after they completed the Neuromancer movie.

     In 1986, Cabana Boy had a separate checking account.        Dr.

Rosenberg began to transfer money to the Cabana Boy checking

account in 1986.   Dr. Rosenberg did not sign any loan agreements

between himself and Cabana Boy.    Petitioners did not ask for or

receive interest on any of the money they advanced to Cabana Boy.
                                      - 7 -

       Cabana Boy hired entertainment lawyer Howard Singer (Singer)

to negotiate and draft contracts.         Cabana Boy also hired

entertainment lawyer Jerry Simon Chasen (Chasen).

       Hyman was Cabana Boy's certified public accountant from 1986

to 1991 or 1992.       Hyman created books for Cabana Boy that were

separate from the books for Dr. Rosenberg’s medical practice and

accounted separately for Cabana Boy and Dr. Rosenberg’s medical

practice.       Petitioners and their assistant (Nancy Barret) or

Viewpoint Management Co. kept the books and records for Cabana

Boy.    Petitioners gave information to Hyman to prepare financial

statements and tax returns.       Hyman used that information to

prepare financial statements.

       5.      Cabana Boy Publicity

       On July 7, 1986, Cabana Boy retained a public relations

firm.       Articles about Cabana Boy appeared in periodicals

including the Hollywood Reporter, L.A. Weekly, Newsweek, People,

the Wall Street Journal, the New York Times, the Village Voice,

Rolling Stone, Screen International, Science Fiction Chronicle,

and Variety.       Some of the articles published about Cabana Boy and

the Neuromancer project mentioned Dr. Rosenberg.         However, Dr.

Rosenberg did not list Cabana Boy articles in his curriculum

vitae, and he did not advertise his medical practice in

California.
                                 - 8 -

C.     The Neuromancer Movie Project

       Mrs. Rosenberg and Tyler began to write the screenplay for

the Neuromancer movie in 1986.    On November 26, 1986, Cabana Boy

hired a producer and a production designer.

       The Neuromancer movie was planned to include many special

effects.    At its Shepperton Studios office, Cabana Boy prepared

storyboards showing key scenes and costume designs, and sketches

showing special effects and makeup.      Mrs. Rosenberg frequently

traveled between New York, London, and California to work on the

Cabana Boy project.

       On August 4, 1988, Chasen sent the Neuromancer screenplay to

the U.S. Copyright Office for registration on behalf of Cabana

Boy.

D.     Kinart’s and Tyler’s Departure

       In July 1986, Cabana Boy and its shareholders met and

removed Kinart as an officer and director of Cabana Boy.      Cabana

Boy agreed to pay Kinart 1 percent of the net profits from the

distribution and exhibition of any film based on the book

Neuromancer or a related production.

       Tyler stopped working for Cabana Boy at the end of 1987 and

resigned as an officer and director on February 18, 1988.      Mrs.

Rosenberg continued to work on the Neuromancer project after

Tyler left.
                                 - 9 -

E.   The Tri-Star Pictures Agreement

     On June 2, 1989, Cabana Boy, Tri-Star Pictures, Inc. (Tri-

Star), and petitioners signed an agreement (1) for petitioners to

develop the Neuromancer screenplay into a feature length motion

picture; (2) for Tri-Star, at its discretion, to produce the

movie; and (3) for petitioners to be credited as producers of the

movie on screen and in paid advertisements.

F.   Financing Cabana Boy

     In October 1986, Cabana Boy formed a New York limited

partnership named Neuromancer Partners to raise funds for the

Neuromancer project.   Singer drafted a private placement

memorandum for Neuromancer Partners.

     On August 26, 1987, Cabana Boy hired a consultant named Ron

Joy (Joy) to obtain financing.    Joy was not successful.

     On September 22, 1987, Cabana Boy borrowed $750,000 from

R.G. Capital Corp. (R.G. Capital), which was due on September 22,

1988.   Petitioners personally guaranteed repayment of the loan.

     In November 1987, Cabana Boy formed a Delaware limited

partnership named Neuromancer Partners, L.P. to raise funds for

the Neuromancer project.    Cabana Boy was the general partner for

Neuromancer Partners, L.P.

     On February 24, 1988, Cabana Boy paid William H. Blair

(Blair) $10,000 to obtain financing for Cabana Boy within 120

days.   Cabana Boy also agreed to pay Blair an amount equal to 3
                              - 10 -

percent of the financing Blair obtained and 10 percent of Cabana

Boy’s profits from the Neuromancer project.

     On September 27, 1988, Mrs. Rosenberg (individually), Cabana

Boy, Keith Cavele (a London producer), and Motion Picture Finance

Company Ltd. (a London firm) borrowed $50,000 from Warren Harris

(Harris) for the Neuromancer project.   The loan agreement

provided that Harris would receive repayment with 25 percent

interest and 2.5 percent of any profits from the film.

     On October 19, 1988, Fabricant obtained about $2.2 million

by mortgaging petitioners’ residence.   Petitioners used the

proceeds to pay a previous mortgage of about $1 million and to

finance Cabana Boy.

G.   Cabana Boy Financial Statements

     Hyman prepared unaudited financial statements for Cabana

Boy’s taxable years ending November 30, 1987 and 1988, from

information provided by management.    In the financial statements,

Hyman treated the payments that petitioners made to or on behalf

of Cabana Boy as loans.   Hyman did not express any opinion as to

the accuracy of the information provided by Cabana Boy when he

prepared the Cabana Boy financial statements.   The financial

statements indicated that Cabana Boy owed petitioners $137,102 on

November 30, 1987, and $953,505 on November 30, 1988.    Hyman also

reported the following on Cabana Boy's 1987 and 1988 financial

statements:
                               - 11 -

           Year       Liabilities            Equity
           1987        $887,937            ($204,556)
           1988         954,758             (315,821)

H.   Tax Returns

     On its 1986 return, Cabana Boy reported that loans from

shareholders were $391,045 at the beginning of 1986 and $137,102

at the end of 1986.   Hyman prepared Cabana Boy's Forms 1120, U.S.

Corporation Income Tax Returns, for its taxable years ending

November 30, 1987 through 1990.     On June 22, 1995, Mrs. Rosenberg

signed Cabana Boy's corporate tax returns as president.

Petitioners did not treat their advances to Cabana Boy as loans

or claim bad debt deductions on their individual income tax

returns.

I.   Dissolution of Cabana Boy

     Cabana Boy was dissolved on March 24, 1993.    Petitioners

never demanded repayment of any money spent on the Cabana Boy

project.

                               OPINION

     Petitioners offer several alternative theories to support

the deduction of their advances to Cabana Boy:    (A) The advances

were debt, not equity; (B) their advances to Cabana Boy were

business expenses of Cabana Boy which petitioners may deduct as

if Cabana Boy were an S corporation, or they were Cabana Boy’s

alter ego; (C) petitioners may deduct the advances under section

212 as expenses to produce income; and (D) petitioners may deduct
                                - 12 -

the advances as advertising or promotional expenses of Dr.

Rosenberg’s plastic surgery practice.

A.   Whether Petitioners' Advances to Cabana Boy Were Debt or
     Equity

     Petitioners contend that their advances to Cabana Boy were

loans that became worthless in the years in issue.      Respondent

contends that the claimed advances were equity.

     A taxpayer may deduct a bona fide debt that becomes

worthless in the taxable year.    See sec. 166(a)(1).    Taxpayers

generally bear the burden of proving that the transfers by the

taxpayers to the corporations were loans and not equity.      See

Rule 142(a); Dixie Dairies Corp. v. Commissioner, 74 T.C. 476,

493 (1980).   The question of whether a transfer of funds to a

closely held corporation is debt or equity must be decided based

on all the relevant facts and circumstances.    We consider various

factors in deciding whether a loan is bona fide.    See Estate of

Mixon v. United States, 464 F.2d 394, 402 (5th Cir. 1972).      No

single factor controls.   See John Kelley Co. v. Commissioner, 326

U.S. 521, 530 (1946); Fin Hay Realty Co. v. United States, 398

F.2d 694, 697 (3d Cir. 1968).    We next apply these factors to

this case.

     1.   Name Given to the Certificate Evidencing the Transfer
          of Funds

     The issuance of a stock certificate in exchange for an

advance suggests that the advance is equity, and the issuance of
                                - 13 -

a bond or note suggests that it is debt.      See Estate of Mixon v.

United States, supra at 403.     Cabana Boy issued stock

certificates to petitioners as consideration for the motion

picture rights.   However, there are no signed notes or loan

agreements relating to the remaining $2,011,701.20 in advances

petitioners claim to have made.    Tyler testified that there were

loan documents, but none were offered into evidence.       Petitioners

contend that they intended their advances to be governed by the

terms of the sample note.    We disagree.    We do not consider the

sample note because it was unsigned.       This factor is neutral.

     2.    Interest Payments

     Making an advance without charging interest suggests that

the advance is not a loan.     See National Carbide Corp. v.

Commissioner, 336 U.S. 422, 435 n.16 (1949); Estate of Mixon v.

United States, supra at 409.     There is no evidence that

petitioners charged or received interest from Cabana Boy.      This

factor favors respondent.

     3.   Fixed Maturity Date or Repayment Schedule

     The absence of a fixed maturity date or repayment schedule

suggests that advances are equity.       See Estate of Mixon v. United

States, supra at 404; American Offshore, Inc. v. Commissioner, 97

T.C. 579, 602 (1991).    Petitioners contend that the repayments

were to be made on demand because the unsigned sample note so

stated.   We disagree.   We are not convinced that the sample note
                               - 14 -

applies to the claimed advances, and there is no evidence that

Cabana Boy had to repay petitioners at any time.    This factor

favors respondent.

     4.    Collateral or Other Security

     The absence of any requirement for collateral or other

security suggests that advances are equity.    See Slappey Drive

Ind. Park v. United States, 561 F.2d 572, 580 n.11 (5th Cir.

1977); Zimmerman v. United States, 318 F.2d 611, 613 (9th Cir.

1963).    There is no evidence that petitioners required Cabana Boy

to provide collateral or any other security.    This factor favors

respondent.

     5.     Treatment of Advances in Books and Records

     Treatment of advances as debt in books and records suggests

that the advances are loans.   See Tyler v. Tomlinson, 414 F.2d

844, 850 (5th Cir. 1969); American Offshore, Inc. v.

Commissioner, supra at 604.    Hyman treated some of the advances

as debt on Cabana Boy's financial statements and tax returns.

This factor favors petitioners.

     6.    Repayments

     The making of repayments suggests that advances were loans.

See Tyler v. Tomlinson, supra; American Offshore, Inc. v.

Commissioner, supra at 603.    There is no evidence that Cabana Boy

made any repayments to petitioners.
                                  - 15 -

     Petitioners point out that the balance sheets on Cabana

Boy’s tax returns show that shareholder loans decreased by

$253,943 from the beginning to the end of 1986 and contend that

this shows that Cabana Boy repaid that amount in 1986.     We

disagree.   Tax returns do not establish the truth of the facts

stated therein.    See Lawinger v. Commissioner, 103 T.C. 428, 438

(1994); Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979).       This

factor favors respondent.

     7.     Thin Capitalization

     Thin capitalization (i.e., a high ratio of debt to equity)

generally suggests that an advance to a closely held corporation

is a capital contribution.    See Hardman v. United States, 827

F.2d 1409, 1414 (9th Cir. 1987); Electronic Modules Corp. v.

United States, 695 F.2d 1367, 1370 (Fed. Cir. 1982); Estate of

Mixon v. United States, supra at 408.      Thin capitalization is a

significant factor because it reflects the extent to which

creditors are shielded against business losses and declines in

property values.    See Hardman v. United States, supra.

     Cabana Boy's 1987 and 1988 unaudited financial statements

show the following:

            Year      Liabilities        Equity
            1987       $887,937        ($204,556)
            1988        954,758         (315,821)
                                   - 16 -

Cabana Boy’s debt-to-equity ratios for 1987 and 1988 were

extremely high because shareholders' equity was negative.2           See

Dunmire v. Commissioner, T.C. Memo. 1981-372; Steiner v.

Commissioner, T.C. Memo. 1981-212, affd. without published

opinion 688 F.2d 825 (3d Cir. 1982).

       Petitioners contend that the debt-to-equity computations

should not include the $750,000 loan from R.G. Capital which

petitioners guaranteed and repaid.          However, excluding the

$750,000 would not change our analysis because reducing Cabana

Boy’s liability by $750,000 does not change the fact that

shareholders’ equity was negative in 1987, and thus the debt-to-

equity ratio was very high.        This factor favors respondent.

       8.      Third Party Loans

       If the party receiving an advance can borrow funds in an

arm's-length transaction on similar terms, the advances may

appear to be debt.       See Electronic Modules Corp. v. United

States, supra at 1370; Estate of Mixon v. United States, supra at

410.       Cabana Boy borrowed $750,000 from R.G. Capital in 1987.

Petitioners personally guaranteed the loan.          The loan document is

not in evidence.       Petitioners have not shown that the terms of

the R.G. Capital loan are like the terms of their advances.




       2
        A meaningful debt-to-equity ratio cannot be computed for
1987 and 1988 because the owners have negative equity in those
years. See Dunmire v. Commissioner, T.C. Memo. 1981-372.
                                 - 17 -

     Petitioners contend that Cabana Boy borrowed $2.2 million

from Crossland Mortgage Corp.      We disagree.   That loan was to

petitioners.

     Petitioners point out that Cabana Boy borrowed $50,000 from

Harris.    However, the terms of that loan differ from the terms of

the advances because Cabana Boy had three coborrowers and Harris

wanted to be paid a high interest rate and also receive a

percentage of the profits from the movie.       This factor favors

respondent.

     9.    Use of Funds

     Using cash advances to finance initial business operations

such as daily operating expenses may suggest that the advances

were equity.    See Slappey Drive Ind. Park v. United States, supra

at 583; Plantation Patterns, Inc. v. Commissioner, 462 F.2d 712,

722 (5th Cir. 1972).      Cabana Boy used $100,000 of the advances to

acquire the rights to Neuromancer.        Cabana Boy used the remainder

of the funds at issue to pay for all of its operations including

daily expenses.    This factor favors respondent.

     10.    Source of Repayments

     Advances are more likely to be equity if the only source of

funds for repayment is corporate earnings.        See Electronic

Modules Corp. v. United States, supra at 1372; Estate of Mixon v.

United States, supra at 405.       Petitioners contend that Cabana Boy

did not need corporate earnings to repay the advances because it
                                - 18 -

could get loans or other financing from third parties.

Petitioners did not show that anyone else was willing to advance

funds to Cabana Boy.   Cabana Boy had little success obtaining

financing from third parties.    This factor favors respondent.

     11.   Subordination

     Subordination of repayment of an advance to other

indebtedness suggests that the advance is equity.    See Estate of

Mixon v. United States, supra at 406; United States v. Henderson,

375 F.2d 36, 40 (5th Cir. 1967).    Petitioners point out that

there is no evidence that there were any subordination

agreements.   However, even if there were no subordination

agreements, timely payment by the alleged debtor to other

creditors while not repaying advances effectively subordinates

the advances to the rights of the other creditors who receive

payment in the interim.    See American Offshore, Inc. v.

Commissioner, 97 T.C. at 603; Inductotherm Indus., Inc. v.

Commissioner, T.C. Memo. 1984-281, affd. without published

opinion 770 F.2d 1071 (3d Cir. 1985).    Cabana Boy paid its

creditors, but it never repaid petitioners and petitioners never

asked to be repaid.    Thus, petitioners effectively subordinated

their advances to those of other corporate creditors.       This

factor favors respondent.
                               - 19 -

     12.    Increased Management Participation

     If making an advance increases an individual’s right to

participate in the management of the entity which received it,

then that person may be participating as a shareholder rather

than as a creditor.    See Estate of Mixon v. United States, supra

at 406; United States v. Henderson, supra.       Mrs. Rosenberg

participated in Cabana Boy’s management because petitioners owned

63 percent of the stock.    This factor is neutral.

     13.    Advances Proportionate to Stock Ownership

     If advances by shareholders are proportionate to their stock

ownership, an equity contribution is indicated.      See Estate of

Mixon v. United States, supra at 409; American Offshore, Inc. v.

Commissioner, supra at 604.    Petitioners owned 63 percent of the

stock and provided all of the advances.     Thus, while petitioners

were the controlling shareholders, the advances were not

proportionate.    This factor is neutral.

     14.    Right To Enforce Repayment

     A taxpayer’s right to enforce repayment of an advance

suggests that the advance is a loan.     See Estate of Mixon v.

United States, supra at 405; American Offshore, Inc. v.

Commissioner, supra at 603.    There is no evidence that

petitioners had any right to enforce repayment of the claimed

advances.    Petitioners contend that they had a right to enforce

repayment because Dr. Rosenberg could call the loans on demand.
                                - 20 -

We disagree.    The demand feature appears on the unsigned sample

note.    This factor favors respondent.

     15.    Taxpayers' Intent

     The taxpayer’s statement of intent is relevant if the

objective facts are ambiguous.    See Estate of Mixon v. United

States, 464 F.2d at 407; Tyler v. Tomlinson, 414 F.2d at 850;

American Offshore, Inc. v. Commissioner, supra at 604.      The

objective facts show that the advances were equity.   Thus, this

factor does not apply.

     16.    Conclusion

     We conclude that petitioners’ advances were equity and not

debt.3   Thus, petitioners may not deduct the advances as bad

debts under section 166 for the years in issue.

B.   Whether Petitioners May Disregard Cabana Boy’s Subchapter C
     Status and Deduct Their Advances

     Petitioners point out that expenses for Cabana Boy and

petitioner’s medical practice were both paid from the medical

practice checking account, and that both activities were located

in petitioners’ home.    Petitioners contend that they may treat

Cabana Boy as if it were an S corporation.   We disagree.    Cabana

Boy was a C corporation.    There is no evidence that petitioners

intended Cabana Boy to elect S status.    Even if they had wanted



     3
        In light of our conclusion, we need not decide whether
the debts were business debts or whether and when they became
worthless.
                                - 21 -

Cabana Boy to be an S corporation, those intentions would be

irrelevant because what matters is what petitioners did.     See Don

E. Williams Co. v. Commissioner, 429 U.S. 569, 579-580 (1977);

Commissioner v. National Alfalfa Dehydrating & Milling Co., 417

U.S. 134, 148-149 (1974).

      Citing Arrowsmith v. Commissioner, 344 U.S. 6 (1952),

petitioners contend that they may disregard Cabana Boy’s

subchapter C status because they were Cabana Boy's alter ego.        We

disagree.   In Arrowsmith v. Commissioner, supra, two taxpayers

liquidated their corporation and reported a capital gain.     See

id. at 7.   Later, the taxpayers paid a judgment against the

corporation, and deducted the judgment as an ordinary business

expense on their personal income tax returns.     The U.S. Supreme

Court held that the judgment was a capital expense.     See id. at

9.   Arrowsmith does not establish that Cabana Boy should not be

treated as a C corporation.

      Cabana Boy had a business purpose and assets, did business,

entered into contracts, and had officers.     It was a subchapter C

corporation, separate from petitioners, and petitioners treated

it as such.    We conclude that petitioners may not disregard

Cabana Boy’s subchapter C status.

C.    Whether Petitioners May Deduct the Advances Under Section
      212

      Petitioners contend that they may deduct the advances under

section 212.    We disagree.   A taxpayer may deduct ordinary and
                                - 22 -

necessary expenses for the production or collection of income or

for the management, conservation, or maintenance of property held

for the production of income.    See sec. 212(a).   However, a

taxpayer may not deduct a contribution of capital to a

corporation under section 212.    See Conant v. Commissioner, T.C.

Memo. 1986-415.   Petitioners may not deduct the claimed advances

under section 212 because they were contributions to the capital

of Cabana Boy.

D.   Whether Petitioners May Deduct the Advances as Advertising
     or Promotional Expenses for Dr. Rosenberg’s Plastic Surgery
     Practice

     Petitioners contend that they may deduct the advances as

advertising or promotional expenses for Dr. Rosenberg’s plastic

surgery practice under section 162 because they paid those

amounts to attract patients for Dr. Rosenberg from the motion

picture industry.4   Dr. Rosenberg testified that he paid the

advances to publicize his medical practice.    Dr. Rosenberg’s

testimony is not consistent with the objective evidence.     In his

curriculum vitae, he listed the articles and television shows in

which he appeared, but he did not mention Cabana Boy or any

Cabana Boy publicity.   None of the articles in the exhibit



     4
        Petitioners contend that they may deduct their advances
under sec. 162 because Dr. Rosenberg made the advances to protect
his credit worthiness or business reputation. We disagree. Dr.
Rosenberg did not so testify. In any event, petitioners have not
shown how paying the claimed advances would protect his credit or
reputation.
                              - 23 -

containing Dr. Rosenberg’s publicity mention Cabana Boy or the

movie “Neuromancer”.   There are no documents in evidence that

suggest that Dr. Rosenberg’s plastic surgery practice had

anything substantial to do with Cabana Boy except to provide a

source of funds.   Seven of the 27 articles in the record

publicizing Cabana Boy mention Dr. Rosenberg.   Those that do

describe him as Mrs. Rosenberg’s husband or part of the family

that Tyler and Kinart met at the pool.   Only five articles

describe Dr. Rosenberg as a New York plastic or cosmetic

surgeon.5   Dr. Rosenberg’s only other apparent advertising

benefit from Cabana Boy was that he appeared as a guest on “Live

With Regis”.

     Tyler testified that he wrote a letter to Cabana Boy’s

public relations firm to request it to publicize Dr. Rosenberg;

however, the letter on which he relied did not include that

instruction.

     We conclude that petitioners did not pay the advances to

Cabana Boy to attract patients for Dr. Rosenberg from the motion




     5
        This is so even though Tyler testified that the content
of most of the articles had been provided to the publications by
Cabana Boy’s public relations firm.
                             - 24 -

picture industry.

     To reflect the foregoing and concessions of the parties,6


                                        Decision will be entered

                                   under Rule 155.




     6
        Respondent determined and contends that petitioners did
not have a cost of goods sold of $150,000 in 1989. Petitioners
did not address this issue on brief. We deem petitioners to have
conceded this issue. See Burbage v. Commissioner, 82 T.C. 546,
547 n.2 (1984), affd. 774 F.2d 644 (4th Cir. 1985); Wolf v.
Commissioner, T.C. Memo. 1992-432, affd. 13 F.3d 189 (6th Cir.
1993).
