                        T.C. Memo. 1999-104



                     UNITED STATES TAX COURT



         JOSEPH F. AND DOROTHY M. GERMAN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12954-96.              Filed March 31, 1999.



     L. Patrick O’Day, Jr., for petitioners.

     Gail K. Gibson, for respondent.



                        MEMORANDUM OPINION


     THORNTON, Judge:   Respondent determined a deficiency in

petitioners’ 1990 Federal income tax in the amount of $21,890.

The issue for decision is whether certain purported loans made by

petitioner husband (hereinafter petitioner) are deductible as a
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business bad debt under section 166(a).1      We hold that they are

not.


Background

           The parties have stipulated some of the facts, which are

so found.      The stipulated facts and the accompanying exhibits are

incorporated herein by this reference.      When they filed their

petition, petitioners were married and resided in Hankinson,

North Dakota.

       From about 1948 until 1984, petitioner earned his living as

a farmer.      In 1984, he ceased farming and began to sell off the

more than 800 acres of farmland he had acquired during his years

of farming.

       In the late 1970's, petitioner met Wayne Aaland (Aaland), a

contractor who built stores and motels.      Together, they formed

several corporations, identified in the record as Magna

Development, Magna Realty, and American Energy (the

corporations).      The corporations were formed for purposes that

included constructing and insulating homes.      Petitioner received

a 20-percent interest in each of the corporations.

       Upon forming the corporations and periodically thereafter

until about 1990, petitioner advanced money for the business

enterprises with Aaland.      These advances are evidenced in the

record by copies of some 21 promissory notes, all but one of


       1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue.
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which are signed by Aaland, generally in his individual capacity,

and sometimes in his capacity as president of Fidelity

Construction Corp. of America or Magna Financial Development

Corp.2    The notes range in amounts from $1,000 to $100,000, and

were payable as of a date certain at a specified rate of

interest.

     The advances were not fully repaid on time.       In 1987 and

again in 1992, petitioner and Aaland entered into debt

consolidation agreements making Aaland personally responsible for

repayment of the outstanding debts.       As of December 31, 1992, the

balance of the debt to petitioner was $335,200, excluding

interest.

         In 1979 and again in 1984, petitioner borrowed money from

Aaland, as evidenced by two promissory notes signed by petitioner

and totaling $37,344.

     The record is sketchy as to petitioner's involvement in the

corporations.     Petitioner testified that he was a vice president

“most of the time”, but he had no office.       He testified that he

had authority to sign corporate checks “for a while.       I don't

know how long, but not very long.”       He testified that he was

involved in some management decisions and that he “helped now and

then” in the corporations.     His testimony strongly suggests,

however, that his involvement with the corporations, apart from


     2
       One note, dated May 21, 1984, in the amount of $39,301.25,
is signed by Dean J. Ralston, who is identified on the note as
vice president and secretary of Magna Financial Development Corp.
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advancing money, was very limited.3       There is no evidence that he

received any salary from the corporations.

     Aaland became ill at an unspecified time in the early 1990's

and subsequently died in 1993 or 1994.

         On their 1992 joint Federal income tax return, petitioners

claimed a business bad debt deduction with respect to Aaland’s

outstanding debt.     They carried back a portion of the resulting

net operating loss to their 1990 taxable year, generating a full

refund of the tax paid for that year, in the amount of $21,890.

In the notice of deficiency for the 1990 taxable year, respondent

disallowed the carryback of the net operating loss, resulting in

a deficiency in the amount of the refund.       Respondent argues that

the funds advanced by petitioner to Aaland gave rise to a

nonbusiness bad debt in 1992 and therefore are deductible only as

a short-term capital loss that cannot be carried back.4


Discussion

     Section 166(a) generally allows a deduction for debts that

become wholly or partially worthless within the taxable year.        In


     3
         On direct examination, petitioner testified as follows:

             Mr. O’Day:   Did you continue any types of activities
                          with the corporations after you stopped
                          farming [in 1984]?
            Petitioner:   Oh, yes.
             Mr. O’Day:   What types of involvement did you have?
            Petitioner:   Like I had before.
             Mr. O’Day:   What would those be?
            Petitioner:   Loan someone money like a darn fool.
     4
       Respondent has not raised any issue as to whether the
purported debts at issue in fact became worthless in 1992.
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the case of a taxpayer other than a corporation, a loss from a

nonbusiness debt that becomes worthless is treated as a short-

term capital loss, section 166(d), and consequently is subject to

the limitations of sections 1211 and 1212.

        A nonbusiness debt is defined in section 166(d)(2) 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.”

     The relevant inquiry is whether petitioner’s advances were

proximately related to his conduct of a trade or business; the

determinative factor is his dominant motivation in incurring the

debt.   See United States v. Generes, 405 U.S. 93, 103-104 (1972);

sec. 1.166-5(a)(2), Income Tax Regs.

     Petitioner testified that he formed the corporations with

Aaland and advanced him money “As an investment to make more

money.”   Investing does not constitute a trade or business.     See

Whipple v. Commissioner, 373 U.S. 193, 202 (1963); see also

Higgins v. Commissioner, 312 U.S. 212 (1941); Deely v.

Commissioner, 73 T.C. 1081 (1980), supplemented by T.C. Memo.

1981-229; Rollins v. Commissioner, 32 T.C. 604, 615 (1959), affd.

276 F.2d 368 (4th Cir. 1960).    Nor does petitioner’s limited

activity in aid of the business ventures with Aaland constitute a

separate business.   Cf. Ferguson v. Commissioner, 253 F.2d 403

(4th Cir. 1958), affg. 28 T.C. 432 (1957).
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     Relying on Commissioner v. Groetzinger, 480 U.S. 23 (1987),

petitioners argue that petitioner was in the trade or business of

making loans because he made loans to Aaland on a regular basis

and his primary purpose was to make money.   In Groetzinger, the

Supreme Court held that a gambler who spent 6 days a week at a

race track for 48 weeks a year, and 60 to 80 hours a week on

gambling-related activities, such as studying racing forms and

programs, to the exclusion of all other employment, was engaged

in the trade or business of gambling.

     Petitioner's occasional advances to Aaland, though occurring

over a long period of time, are not comparable to the full-time

gambling activity described in Commissioner v. Groetzinger,

supra.   When he first made the advances to Aaland and until he

retired some years later, petitioner made his living as a farmer.

Petitioner does not contend that he ever had any money-lending

activities apart from his dealings with Aaland and the

corporations.

     Moreover, the circumstances of petitioner’s alleged money-

lending activities do not bespeak a business.    Although prior

advances to Aaland remained undischarged, petitioner continued

for years to make additional advances to him and his ventures

exclusively.    During this same period, petitioner borrowed

significant sums from Aaland, rather than trying to collect the

amounts Aaland owed him.    The record is devoid of evidence that

petitioner ever took any action, apart from entering into debt
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consolidation agreements with Aaland, to enforce collection of

principal or interest that Aaland owed him.

      Viewed in its totality, the evidence in the record strongly

suggests that petitioner’s purported loans to Aaland were

actually in the nature of contributions of risk capital, in

return for which petitioner received his 20-percent ownership

interests in the corporations and by which he sought to protect

his initial investment.   Even assuming, however, that petitioner

made bona fide loans to Aaland (and respondent has not argued

otherwise), the record does not support a conclusion that

petitioner had a separate business of lending money.       Cf. Sales

v. Commissioner, 37 T.C. 576 (1961); Rollins v. Commissioner,

supra at 613; Estate of Palmer v. Commissioner, 17 T.C. 702

(1951).

     Accordingly, we sustain respondent's determination.

     To reflect the foregoing,

                                         Decision will be entered for

                                 respondent.
