                          T.C. Memo. 1996-485



                        UNITED STATES TAX COURT



                RAYMOND R. WEIGEL, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13607-94.                  Filed October 29, 1996.


     John D. Moats, for petitioner.

     William R. Davis, Jr., for respondent.


                MEMORANDUM FINDINGS OF FACT AND OPINION

     FAY, Judge:     By statutory notice of deficiency dated

April 29, 1994, respondent determined deficiencies in and

additions to petitioner's Federal income taxes in the amounts

listed below:

                                                  Additions to Tax
                                                        Sec.
       Year                  Deficiency               6651(a)
       1987                   $55,011                 $13,751
       1988                    55,973                  13,233
       1989                     1,842                     --
       1990                    28,053                   7,010
                                - 2 -

      All section references are to the Internal Revenue Code in

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

Tax Court Rules of Practice and Procedure, unless otherwise

indicated.    The issues for decision are:1

      (1)   Whether any portion of improvements made by Goshorn

Construction & Pipeline, Inc. (Goshorn), petitioner's wholly

owned corporation, to property owned by petitioner and leased to

Goshorn in 1987 constituted a constructive dividend to petition-

er.

      (2)   Whether any portion of disbursements made to or on

behalf of petitioner by Goshorn during the years 1987 through

1990, constituted dividends to petitioner.

      (3)   Whether, pursuant to section 6651(a), petitioner is

liable for additions to tax for the tax years 1987, 1988, and

1990.

                          FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are incorpo-

rated herein by this reference.    At the time the petition was

filed, petitioner resided in Arvada, Colorado.    Tangaree Weigel,

not a party to this case, was petitioner's wife for all the years

at issue.



      1
      In the statutory notice of deficiency, respondent deter-
mined that petitioner did not have a sufficient basis under sec.
1366(d)(1) to deduct S corp. losses of $215,205 in the 1989 tax
year. Petitioner conceded this determination.
                              - 3 -

Leasehold Improvements

     From 1980 through the years at issue, petitioner was the

sole stockholder of Goshorn, a pipeline construction corporation.

In 1985, Goshorn had its principal offices at 52nd and Wadsworth

Boulevard in Denver, Colorado (Denver premises).   However, due to

an urban renewal project, Goshorn's Denver premises were con-

demned and Goshorn was forced to relocate.   Goshorn had several

criteria for the location of its new offices, including heavy

industrial zoning, adequate yard space for vehicles and equip-

ment, and office space.

     Goshorn located three lots of real property at 5300 Eudora

Street in Commerce City, Colorado (Eudora property), which met

its criteria for a new location.   The Eudora property could be

zoned to accommodate heavy industrial use, had ample yard space,

and had an existing house that could be used as an office.

Petitioner purchased the Eudora property for $500,000 in 1985.2

During 1987 and in later years, petitioner leased the third lot

(lot 3) to Goshorn for $5,000 a month.   The leasing arrangement

was memorialized in a standard two-page lease that petitioner's

secretary purchased from an office supply store.   Petitioner was

not able to locate the document at trial.




     2
      Petitioner's accountant advised petitioner to purchase the
property and lease the land back to Goshorn Construction &
Pipeline, Inc. (Goshorn), in order to reduce any gain on a
subsequent sale of the property.
                               - 4 -

     Commerce City required that certain improvements be made to

the Eudora property in order to obtain the rezoning Goshorn

needed to conduct its business.   During 1987, Goshorn made

improvements to lot 3 necessary to comply with Commerce City's

industrial zoning requirements and to meet Goshorn's business

needs.   The required improvements, costing $134,752.52, consisted

of a paved parking lot and improvements to convert the pre-

existing building on lot 3 into office space.   Goshorn occupied

and used the premises from the time the improvements were made

until it ceased doing business in 1992.

     During 1985, petitioner, in consultation with Lloyd Sweet,

Jr., petitioner's certified public accountant, and with the real

estate agent involved in the purchase of the Eudora property,

determined that the fair market rental value of the Eudora

property and surrounding rental properties was $1,000 per acre

per month.   Lot 3, which was the portion Goshorn leased, con-

sisted of 5 acres.   Thus, a rent of $5,000 per month was charged.

The leasehold improvements were reported on Form 4562, Deprecia-

tion and Amortization, as 5-year property on Goshorn's Federal

tax returns.

     In 1992, Goshorn stopped renting lot 3 from petitioner.

Subsequently, lot 3 was leased to a third party for $4,500 per

month.

     Respondent determined that the leasehold improvements made

to the Eudora property by Goshorn during 1987 constituted a tax-
                               - 5 -

able dividend to petitioner for that year.   Petitioner challenges

this conclusion, claiming that the leasehold improvements were

not taxable dividends.

Loans

     During the taxable years at issue, Goshorn made transfers of

cash to petitioner.   There are no notes memorializing any of

these cash transfers.

     Goshorn's transfers to petitioner were disclosed in

Goshorn's financial statements that were given to third parties.

Goshorn has never declared a dividend.   Respondent determined in

the notice of deficiency that these advances, characterized as

loans on Goshorn's financial statements, were in fact dividends

to petitioner.   Respondent determined that petitioner received

dividend income in the following amounts:

                 Tax Year                      Amount

                   1987                        $21,040
                   1988                        216,621
                   1989                         52,775
                   1990                        102,196

     According to its 1986 fiscal year Federal income tax return,

as of November 1, 1987, Goshorn had no outstanding loans to

stockholders and had unappropriated retained earnings of

$867,958.   During Goshorn's tax year ending October 31, 1988,

Goshorn made transfers of $350,059.92 to or for the benefit of

petitioner, and petitioner was credited with $168,1243 in reduc


     3
      The $168,124 credited to petitioner during the fiscal year
ending Oct. 31, 1988, consisted of two overall amounts. The
                                - 6 -

tions to these transfers.    Included in the amounts transferred

for petitioner's benefit by Goshorn was $5,725.02 to Ray Weigel,

Inc.    No amounts were credited as reductions to the transfers

from Goshorn to Ray Weigel, Inc., during Goshorn's tax year

ending October 31, 1988.    Thus, there was a net transfer to

petitioner for the tax year ending October 31, 1988, of

$181,935.92.    As of October 31, 1988, Goshorn reported unappro-

priated retained earnings of $990,035.

       For its tax year ending October 31, 1989, Goshorn made two

separate transfers to petitioner or to entities solely owned by

petitioner.

       First, Goshorn recorded a transfer of $126,126 to Technical

Packaging, Inc., d.b.a. Tek-Pak (Tek-Pak), an S corporation

engaged in the packaging business.      During the tax years at

issue, petitioner was the sole shareholder of Tek-Pak.      As of

October 31, 1990, Goshorn's books and records reflected that the

"amount receivable" from Tek-Pak had been reduced by $104,213, to

$21,913.    As of September 30, 1991, Goshorn's books and records

reflected that the "amount receivable" from Tek-Pak had been

reduced to zero.

       Second, Goshorn recorded a transfer to petitioner per-

sonally, in the amount of $147,776.01.      Petitioner was credited



first $60,000 was a credit for the $5,000 monthly rent due
petitioner from Goshorn. The remaining $108,124 consisted of
three transfers from petitioner's wife, Tangaree Weigel, to
Goshorn.
                                - 7 -

with a $45,000 reduction to that amount for the accrual of

Goshorn's rent to petitioner.    For Goshorn's tax year ending

October 31, 1989, Goshorn reported unappropriated retained

earnings of $867,324.

     During all of the tax years at issue, petitioner and Goshorn

each held 50 percent of the shares of stock in Racon Construction

Co. (Racon), a C corporation engaged in construction.    The com-

bining balance sheet of Goshorn and Racon for their tax years

ended October 31, 1990, reflects as an asset $392,617 as the

amount due from stockholder.    The detailed balance sheets of

Goshorn state that, as of September 30, 1991, there was

$379,898.05 due from the stockholder.

Late Filing Penalty

     Petitioner requested an automatic extension for filing a

1987 Federal income tax return until August 15, 1988, and a

further extension for filing until October 15, 1988.    Petitioner

and his wife filed their joint 1987 Federal income tax return on

August 16, 1990.

     Petitioner applied for and received an extension of time to

file a 1988 Federal income tax return until October 16, 1989.

Petitioner and his wife filed their joint 1988 Federal income tax

return on October 11, 1990.    Petitioner and his wife filed their

joint 1990 Federal income tax return on October 6, 1992.
                                 - 8 -

                                OPINION

Leasehold Improvements

     Respondent argues that $134,752.52 in leasehold improvements

made to lot 3 of the Eudora property, which was owned by peti-

tioner and leased to Goshorn, constituted constructive dividend

income to petitioner.    For the following reasons, we disagree

with respondent's argument.

     Generally, improvements made by a lessee to a leasehold

estate, where fair rent to the lessor of the property is

otherwise provided for, do not result in realization of income by

the lessor in the year of improvement, or upon the termination of

the lease.   Sec. 109; sec. 1.109-1, Income Tax Regs; see M.E.

Blatt Co. v. United States, 305 U.S. 267, 277 (1938).       Here,

petitioner and Goshorn agreed on an equitable rent of $5,000 per

month for the Eudora property.

     Respondent directs our attention to Jaeger Motor Car Co. v.

Commissioner, T.C. Memo. 1958-223, affd. 284 F.2d 127 (7th Cir.

1960), where we decided a taxpayer received dividend income

consisting of improvements made by his wholly owned corporation

to a building that it leased from him.       The outcome was predi-

cated, in part, on the year-to-year term of the lease between the

taxpayer and his corporation.     Id.     Here, petitioner's secretary

selected a sample form with a month-to-month lease term.

Therefore, respondent contends that Goshorn's leasehold improve-

ments resulted in dividend income to petitioner.
                                - 9 -

     In evaluating a leasing arrangement between a taxpayer and

his wholly owned corporation, we must consider not only the lease

itself, but also the testimony of witnesses and the surrounding

circumstances.    Cf. Stinnett v. Commissioner, 54 T.C. 221, 233

(1970) (explaining that many factors are reviewed by a court in

determining if a lease is for a specified or indefinite term).

Petitioner testified that the premises were purchased solely with

the intent of leasing a portion to Goshorn.   We find it probative

that Goshorn did lease these premises for many years, up until

the time it was forced out of business for financial reasons.

Further, the nature of the improvements indicates that they were

made for the long-term benefit of Goshorn's business.   Given the

testimony and the surrounding circumstances, we believe peti-

tioner intended that the leasing arrangement with Goshorn would

continue for an extended duration.

     The facts herein are more in the mode of Bardes v. Commis-

sioner, 37 T.C. 1134 (1962).    The taxpayer in Bardes leased real

property to his closely held corporation, and that corporation

constructed a building costing $848,184 on the taxpayer's land.

Id. at 1141.   We held that the improvements made by the corpora-

tion did not result in dividend income to the taxpayer.    Id. at

1149.

     Like the taxpayer in Bardes, petitioner here has leased the

land to his wholly owned corporation under commercially reason-

able terms.    The rent was established at an amount commensurate
                                - 10 -

with that charged for similar parcels of real estate in the same

locale.   Additionally, petitioner intended that the duration of

the lease extend well beyond the month-to-month term indicated in

the document.   Thus, as in Bardes, the expenditures incurred by

petitioner's corporation were in fact made pursuant to bona fide

business transactions between petitioner and Goshorn.      Conse-

quently, we hold that petitioner did not realize dividend income

as a result of Goshorn's expenditures for leasehold improvements.

Loans

     A distribution by a corporation to a shareholder constitutes

a loan, rather than a constructive dividend, if, at the time of

its disbursement, the parties intended that the shareholder repay

the loan.   Crowley v. Commissioner, 962 F.2d 1077, 1079 (1st Cir.

1992), affg. T.C. Memo. 1990-636; Wiese v. Commissioner, 93 F.2d

921 (8th Cir. 1938), affg. 35 B.T.A. 701 (1937); Miele v. Commis-

sioner, 56 T.C. 556, 567 (1971), affd. without published opinion,

474 F.2d 1338 (3d Cir. 1973).    The issue of whether a transfer by

a corporation to a shareholder constitutes a loan or a

constructive dividend is a factual issue, which "depends pri-

marily upon the good-faith intention of the shareholder to repay

the amounts received and the intention of the corporation to

require repayment."   J.A. Tobin Constr. Co. v. Commissioner, 85

T.C. 1005, 1022 (1985).   Transfers to a shareholder of a closely

held corporation require special scrutiny because of the

unfettered control exercised by that shareholder.    Id.    Peti-
                                - 11 -

tioner bears the burden of proof that the amounts in question

were loans and not constructive dividends.      Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

     Petitioner testified that the amounts were intended as

loans.     His statement of intent must be considered in the context

of the surrounding circumstances.     Williams v. Commissioner, 627

F.2d 1032, 1034 (10th Cir. 1980), affg. T.C. Memo. 1978-306.

Courts have typically weighed the following objective factors in

order to determine whether a shareholder's receipts from a

corporation constitute dividends rather than loans:

     (a)    The taxpayer's degree of control over the corporation;

     (b)    the existence of restrictions on the amount of

            disbursements;

     (c)    the corporate earnings and dividends history;

     (d)    the use of customary loan documentation, such as

            promissory notes, security agreements or mortgages;

     (e)    the ability of the shareholder to repay;

     (f)    the treatment of the disbursements on the corporate

            records and financial statements;

     (g)    the creation of legal obligations, such as payment of

            interest, repayment schedules, and maturity dates;

     (h)    the corporation's attempts to enforce repayment; and

     (i)    the shareholder's intention or attempts to repay the

            loan.
                                - 12 -

Busch v. Commissioner, 728 F.2d 945, 948 (7th Cir. 1984); Dolese

v. United States, 605 F.2d 1146 (10th Cir. 1979); Alterman Foods,

Inc. v. United States, 505 F.2d 873, 877 n.7 (5th Cir. 1974);

Nahikian v. Commissioner, T.C. Memo. 1995-161.      No single factor

is determinative.   Alterman Foods, Inc. v. United States, 222 Ct.

Cl. 218, 223, 611 F.2d 866, 869 (1979); Boecking v. Commissioner,

T.C. Memo. 1993-497.

a.   The taxpayer's degree of control over the corporation

      Petitioner had exclusive, unfettered control over Goshorn.

Mr. Sweet testified that petitioner was involved in all phases of

the business, from participation in respondent's audit to

management decisions.   Such unrestrained control weighs in favor

of constructive dividends.     Epps v. Commissioner, T.C. Memo.

1995-297.

b.   The existence of restrictions on the amount of disbursements

      Between November 1, 1987, and September 30, 1991, Goshorn's

books recorded that petitioner's "loan" account increased from

zero to $379,898.05.    Petitioner never testified that a ceiling

existed on the amount that he could borrow from Goshorn.     This

factor weighs in favor of constructive dividends.      Crowley v.

Commissioner, supra at 1081.

c.   The corporate earnings and dividends history

      Generally, a distribution by a corporation to its share-

holders, to the extent of earnings and profits, is a dividend,

unless the distribution is within one of the exceptions of the
                                - 13 -

Code.     Secs. 301(c)(1), 316(a); Dolese v. United States, supra at

1152.     During the tax years at issue, Goshorn reported earnings

between $867,000 and $990,000.     The disbursements to petitioner

were never greater than Goshorn's retained earnings.

        Goshorn never declared a dividend for any of the years that

petitioner owned and operated it.     These factors militate against

a finding of a bona fide loan.     Crowley v. Commissioner, supra at

1085.

d.   The use of customary loan documentation

        Petitioner did not execute any notes to Goshorn reflecting

his obligation to repay these amounts.     Additionally, Goshorn was

never provided a security interest against any of petitioner's

property.     Customary loan documentation is not a prerequisite to

a bona fide loan, but "its absence unquestionably is relevant to

the parties' intent."     Id. at 1082.   The absence of loan

documentation leaves the taxpayer "with one less string to strum

for the factfinder."     Id.

e.   The ability of the shareholder to repay

        "Whether the shareholder, at the time of the disbursement,

has a realistic ability to repay it is a factor which sheds light

on his intentions."     Baird v. Commissioner, T.C. Memo. 1982-220.

        Petitioner testified that the sums in question were intended

to be fully repaid through the sale of either lot 1 or lot 2 of

the Eudora property.     Petitioner testified that, in 1991 or 1992,

he received an offer to purchase lot 2 of the Eudora property for
                              - 14 -

$360,000, but that a sale never came to fruition.    As of Novem-

ber 1, 1995, the date of trial, the Eudora property was encum-

bered by three deeds of trust securing obligations totaling

approximately $650,000 to the Aurora National Bank.    Petitioner

believes his equity in the Eudora property to be approximately $1

million.   In addition to the Eudora property, petitioner also

owns his personal residence and the property adjacent to his

residence.   Petitioner testified that the property adjacent to

his personal residence has a value of at least $200,000.

     Respondent argues petitioner is unable to repay the moneys

advanced to him by Goshorn.   The secured loans encumbering the

Eudora property amount to $650,000.    Petitioner also owes

approximately $400,000 for unpaid unemployment taxes for his

corporations; Goshorn, Racon, and Tek-Pak.    Additionally,

petitioner is personally liable for $50,000 of unpaid debts of

Goshorn.   In total, petitioner owes various creditors $1.1

million dollars.   Other than his testimony, the record is devoid

of anything to support petitioner's valuation of the Eudora

property, his residence, or the property adjacent to his resi-

dence.   Petitioner bears the burden of proof.   Rule 142(a).

There is nothing in the record to support petitioner's contention

that he had the ability to repay the amounts in question.     There-

fore, we agree with respondent that petitioner has failed to

prove that he owns assets that equal the amount of his debt.
                              - 15 -

f.   The treatment of the disbursements on the corporate records

      Goshorn recorded the disbursements to petitioner as loans on

its corporate books.   Petitioner and Mr. Sweet discussed the

disbursements for the purpose of preparing Goshorn's financial

statements and tax returns.   Additionally, the disbursements were

disclosed to Goshorn's bank during the process of negotiating

loans from the bank.   These circumstances weigh in favor of

treating the disbursements as loans.

g.   The creation of legal obligations

      Taking into account the absence of any loan documentation,

petitioner failed to prove that any definite maturity date

existed for the loans.   During the years in issue, the only funds

that Goshorn credited against petitioner's shareholder loan

account consisted of the rent that Goshorn owed petitioner for

the use of the Eudora property.   Goshorn's rent was $5,000 per

month.   For the 1987 and 1990 tax year, Goshorn credited $60,000

each year to petitioner's loan account for rent; i.e., 12 months

at $5,000 per month.   However, in 1988 and 1989, Goshorn only

paid $50,000 and $25,000 in rent respectively.   Thus, for 1988

and 1989, petitioner only reduced his shareholder loan amount by

$50,000 and $25,000.   Therefore, for 1988 and 1989, there was no

regular repayment schedule.

      Petitioner has failed to prove a fixed maturity date and has

not made fairly regular repayments.    Thus, he has failed to prove
                              - 16 -

that legal obligations were created, and this factor weighs in

favor of treating the disbursements as dividends, not loans.

h.   The corporation's attempts to enforce repayment

      Petitioner produced no evidence of any steps taken by

Goshorn to compel repayment of the amounts that it carried as an

account receivable from shareholder.   This factor weighs in favor

of treating the distributions as constructive dividends.

i.   The shareholder's intention or attempts to repay

      Repayment is strong evidence that a disbursement was

intended as a loan.   Crowley v. Commissioner, 961 F.2d at 1083.

Where corporate distributions are repaid in full or in part from

time to time, a true loan is indicated.   Baird v. Commissioner,

supra.   Here, petitioner has made numerous repayments over the

years.

      First, petitioner's largest credits against his "loan

account" came from the rent that Goshorn owed petitioner for the

use of the Eudora property.   These credits totaled $195,000

during the years in issue.

      Second, petitioner has also been repaying a number of

Goshorn's liabilities.   Petitioner has been personally paying

Goshorn's liabilities to Reddi-Mix Concrete, a debt of about

$40,000 and to a pipeline company for material, a debt of about

$10,000.   These payments amount to approximately $50,000.

      Finally, in April 1993, petitioner and his wife personally

borrowed $181,320.36 from the Aurora National Bank and used the
                                - 17 -

loan proceeds to repay a preexisting note Goshorn owed the bank.

Goshorn reduced petitioner's shareholder loan account by the

amount of proceeds.   This loan was secured by a lien on peti-

tioner's principal residence.    These repayments weigh in favor of

treating the disbursements as loans.

Summary

     In summary, despite petitioner's testimony that he intended

the advances to be loans, the objective factors heavily weigh in

favor of constructive dividends.    Therefore, we sustain respon-

dent's determination that, for tax years 1987, 1988, 1989, and

1990, the amounts of $21,040, $216,621, $52,775, and $102,196,

respectively, constitute dividends to petitioner rather than

loans.

Addition to Tax for Late Filing

     Section 6651(a)(1) imposes an addition to tax for a tax-

payer's failure to timely file a return, unless the taxpayer

shows that the failure is due to reasonable cause.   The amount

added to the tax is 5 percent of the tax required to be shown on

the return if the failure is for not more than one month, with an

additional 5 percent for each additional month or fraction there-

of during which the failure continues, but not to exceed 25 per-

cent in the aggregate.   Sec. 6651(a)(1); sec. 301.6651-1(a)(1),

Proced. & Admin. Regs.   For purposes of calculating the addition

to tax, the date prescribed for filing is determined by taking
                                - 18 -

into account any extension of time for filing granted by respon-

dent.     Sec. 301.6651-1(a)(1), Proced. & Admin. Regs.

     Petitioner bears the burden of proving that reasonable cause

existed for such failure.     Rule 142(a); United States v. Boyle,

469 U.S. 241, 245 (1985); Electric & Neon, Inc. v. Commissioner,

56 T.C. 1324, 1342 (1971), affd. without published opinion 496

F.2d 876 (5th Cir. 1974); Cepeda v. Commissioner, T.C. Memo.

1993-477, affd. without published opinion, 56 F.3d 1384 (5th Cir.

1995).     Petitioner failed to timely file his 1987 Federal income

tax return.     His 1987 Federal income tax return, due on Octo-

ber 15, 1988, owing to extensions, was not filed until August 16,

1990.

        Petitioner asserts that the lateness of the return resulted

from a change from one accounting firm to another.      Mr. Sweet

testified that he was not involved in preparing petitioner's

return for 1987.     The record sheds virtually no light on why the

return was filed late.

        Petitioner has failed to show that he exercised ordinary

business care and prudence in filing his 1987 Federal income tax

return.     See United States v. Boyle, supra at 247.

        Petitioner obtained a filing extension through October 16,

1989, for his 1988 Federal income tax return.     Petitioner and

Mrs. Weigel filed their 1988 Federal income tax return on

October 11, 1990.     Petitioner obtained no extensions for his 1990

Federal income tax return, which was due April 15, 1991.
                              - 19 -

Petitioner's 1990 Federal income tax return was filed on

October 6, 1992.

     Petitioner claims that the 1988 and 1990 Federal income tax

returns were filed late because of difficulties in obtaining

information from an employee of Tek-Pak.    At trial, petitioner

asserted that the person whom he hired to run Tek-Pak, an S

corporation of which petitioner was sole shareholder, did not

provide petitioner with all the documents that he needed in order

to file his returns.   Petitioner failed to explain, however, what

steps, if any, he took to obtain the records from Tek-Pak.    In

any event, he has not established that any difficulty he

encountered in that regard amounts to reasonable cause for the

delinquent filing of the returns.   See sec. 301.6651-1(c),

Proced. & Admin. Regs.

     Petitioner has failed to show why the additions to tax for

late filing should not apply to him for 1987, 1988, and 1990.      We

hold that petitioner is liable for the additions to tax for

failing to timely file his 1987, 1988, and 1990 Federal income

tax returns.

        To reflect the foregoing,

                                           Decision will be entered

                                    under Rule 155.
