United States Court of Appeals,
Fifth Circuit.
No. 96-60112.
Dennis E. BOLDING; Dixie R. Bolding, Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
July 18, 1997.
Petition for Review of a Decision of the United States Tax Court.
Before REAVLEY, GARWOOD and BENAVIDES, Circuit Judges.
GARWOOD, Circuit Judge:
This appeal involves disputed deficiencies in the income tax
returns of appellants Dennis and Dixie Bolding, husband and wife,
for the taxable years 1988, 1989, and 1990. The Boldings filed a
petition contesting the deficiencies in the United States Tax
Court. The court entered a memorandum opinion, unofficially
reported at 70 T.C. (CCH) 110, rendering a decision in favor of the
Commissioner of Internal Revenue (Commissioner). We reverse.
Facts and Proceedings Below
In the late 1970s, Dennis Bolding (Taxpayer) 1 began a cattle
ranch operation, breeding and selling cattle for the meat market.
Taxpayer was advised by his accountant that he should conduct his
cattle ranching operation through a corporation for liability
purposes. Accordingly, in August 1983 Taxpayer formed Three Forks
1
References to "Taxpayer" in the singular are to Dennis
Bolding; Mrs. Bolding is a party to this case solely because she
filed joint income tax returns with her husband for the years at
issue.
1
Land & Cattle Company (Three Forks), a Texas corporation which
periodically engaged in both the commercial and the registered
cattle businesses.2 The corporation was structured as a Subchapter
S corporation, and at all times was wholly owned by Taxpayer, who
was its president.
Prior to 1990, Taxpayer had lent approximately $500,000 to
Three Forks, money which he had obtained from the sale of his prior
businesses, including a beer distributorship and a ranch. Although
these loans were recorded in Three Forks' books and records as
loans from a shareholder, no promissory notes for these loans were
prepared or executed. Sometime during 1990, Taxpayer and his
accountant realized that Three Forks would not be able to repay
Taxpayer the money he had lent it. As a result, the indebtedness
for the money previously advanced as a loan to Three Forks was
contributed by Taxpayer to the capital of the corporation.
At the beginning of 1990, Taxpayer leased a ranch known as the
Hopper Ranch. He needed additional funds to purchase cattle to
stock his ranching operation. He contacted the Citizens State Bank
of Lometa in Lometa, Texas (Bank), and explained that he wanted a
loan to fund his cattle operation. The Bank required Taxpayer to
submit a personal financial statement and a proposed operating
statement showing the planned use of the funds. Pursuant to the
Bank's request, Taxpayer submitted his personal financial statement
2
The commercial cattle business involves breeding cows and
selling the calves to the meat market, while the registered cattle
business involves raising and sometimes selling cattle for breeding
purposes.
2
(showing a net worth in excess of $2,000,000, with over $200,000
cash on hand) and proposed operating statement, explaining the need
for and his proposed use of the funds. The proposed operating
statement indicated that Taxpayer wanted the loan to fund a
"cow-calf operation" in which he would purchase 400 cows and 20
bulls and graze them on 4,800 acres. He asked for a line of credit
from the Bank in the amount of $250,000. No financial information
with respect to Three Forks was asked for or submitted.
The Bank approved the $250,000 line of credit and prepared a
promissory note, which Taxpayer signed, naming "Dennis E. Bolding
d/b/a Three Forks Land & Cattle Co." as the maker-borrower. The
Bank also required the filing of a security agreement and a UCC-1
financing statement. The security agreement was signed "Dennis E.
Bolding d/b/a Three Forks Land & Cattle Co.," and provided the Bank
with a security interest in the cows and bulls that were to be
acquired with the funds borrowed under the line of credit. The
UCC-1 statement, however, was signed by Taxpayer simply as "Dennis
E. Bolding."
Taxpayer believed that he was borrowing the funds in his
personal capacity and not on behalf of Three Forks. Also, the Bank
indicated that it was making the loan to Taxpayer alone and based
upon his personal credit. None of the loan documents prepared by
the Bank was prepared for Three Forks as debtor, nor were any
signed by anyone on behalf of the corporation.3
3
In addition to the $250,000 loan, the Bank also made other
loans to Taxpayer and Three Forks during 1990. On March 8, 1990,
the Bank lent $25,000 to Taxpayer individually. The note was made
3
The funds were disbursed directly from the Bank to Three
Forks' corporate account and were used by Three Forks to purchase
cattle.4 Principal and interest payments were made to the Bank
from time to time with respect to the $250,000 line of credit.
Such principal and interest payments to the Bank were made by
checks drawn on Three Forks' account.
By the end of 1990, the total amount outstanding on the line
of credit, net of all repayments, was $223,000. The line of credit
was rolled over into later years, after its initial maturity, but
ultimately went into default in March 1994 with an outstanding
balance. The Bank sued Taxpayer for repayment on the outstanding
balance of the loan; no action was taken against Three Forks.
Three Forks reported an ordinary loss for its 1990 year of
$93,769. Taxpayer deducted, among other things, that amount on his
out to and signed by "Dennis E. Bolding." The note stated that the
purpose of the loan was to pay the IRS. The proceeds of the loan
were deposited in Taxpayer's personal account, and Taxpayer made
all payments on this loan from his personal account. On July 13,
1990, and August 8, 1990, the Bank lent $35,000 and $32,000,
respectively, to Taxpayer individually and Three Forks. The notes
reflected that the makers were "Dennis E. Bolding, Individual and
Three Forks Land & Cattle Company" and provided two signature
lines, one for "Dennis E. Bolding, Individual" and one for "Dennis
E. Bolding, President." The funds from these two loans were
deposited into Three Forks' account, and Three Forks made all
payments of principal and interest to the Bank with checks drawn
from its corporate account. The referenced three loans for
$25,000, $35,000, and $32,000 are not at issue here.
4
The Tax Court erroneously found that Taxpayer occasionally
received partial disbursements of the loan into his personal
account. As discussed later, the court apparently failed to
consider the parties' stipulation that all proceeds from the
$250,000 loan were deposited into Three Forks' corporate account.
4
1990 income tax return as his share of the S corporation's loss.5
Also, Taxpayer deducted a carryover loss from the corporation's
1989 tax return in the amount of $25,454, for a total loss of
$119,223. After reporting a capital gain of $19,681 from the
corporation in the corporation's 1990 tax return, the net loss from
the corporation claimed in Taxpayer's 1990 tax return was $99,542.
The corporation's loss deducted on Taxpayer's 1990 tax return
created a net operating loss for that year and a carryback to the
1988 year in the amount of $62,170. Petitioner claimed an
additional net operating loss carryback to 1988 from 1989 for
$15,344.
The Commissioner disagreed with Taxpayer's deductions, and
issued a statutory notice of deficiency in July 1993. The
Commissioner disallowed the entire $99,542 net loss claim for 1990
on the grounds that Taxpayer had insufficient basis in Three Forks'
stock to support such an allowance. The Commissioner also reduced
the net operating loss carrybacks claimed to Taxpayer's 1988 tax
return in the aggregate amount of $64,136.
Taxpayer and his wife filed a petition in the Tax Court
seeking redetermination of the deficiencies set forth in the
notice. After settlement by the parties, the only issue presented
to the Tax Court was whether the Commissioner correctly determined
5
Under section 1366(a) of the Internal Revenue Code, a
shareholder of a Subchapter S corporation is entitled to deduct
from gross income his pro rata share of any loss sustained by that
corporation. Section 1366(d)(1), however, limits the shareholder's
deduction to the sum of the shareholder's adjusted basis in his
stock and the adjusted basis of any indebtedness of the corporation
to the shareholder.
5
that Taxpayer was not entitled to deduct on his federal income tax
return for 1990 the $99,542 net operating loss incurred by Three
Forks. Although corporate losses deducted prior to 1990 had
exhausted his adjusted basis in Three Forks, Taxpayer maintained
that his basis in the corporation increased during 1990 as a result
of the $250,000 line of credit obtained from the Bank. According to
Taxpayer, he, solely in his individual capacity, borrowed the funds
under the $250,000 credit from the Bank and, in turn, he lent those
funds to Three Forks. Taxpayer argued that his basis in Three
Forks at the end of 1990 equaled the outstanding balance on this
line of credit.
The Commissioner, on the other hand, maintained that Three
Forks, rather than Taxpayer, was the true borrower from the Bank
with respect to the funds advanced under the $250,000 line of
credit so that, consequently, there was no loan by Taxpayer to the
corporation with respect to that line of credit. Accordingly, the
Commissioner concluded that Taxpayer's basis in the corporation did
not increase as a result of the funds advanced by the Bank on the
$250,000 loan and that Taxpayer, therefore, was not entitled to
deduct any of the corporation's $99,542 net operating loss on his
individual return for 1990.
Following a one-day trial, the Tax Court entered a memorandum
opinion holding that Taxpayer was not entitled to deduct the
corporation's net operating loss. The Tax Court found as a fact
that Taxpayer, rather than Three Forks, was the true borrower from
the Bank with respect to the funds disbursed under the $250,000
6
line of credit. The court, however, ultimately agreed with the
Commissioner that Taxpayer did not have sufficient basis in Three
Forks' stock or debt to entitle him to deduct any of the
corporation's $99,542 net operating loss. According to the court,
the evidence showed that the funds from the loan were deposited
sometimes directly from the Bank to Three Forks' accounts, and
sometimes to Taxpayer's personal account, and Taxpayer had failed
to show how much went to Three Forks.6 After recomputation of the
deficiency, the Tax Court entered its decision determining
deficiencies in Taxpayer's federal income tax for the years 1988,
1989, and 1990 in the amounts of $17,896, $103, and $5,091,
respectively. From this decision, Taxpayer now appeals.
Discussion
The key issue in this case centers around the nature of the
$250,000 line of credit. If, as the Commissioner contends, the
loan was one from the Bank to Three Forks, Taxpayer could not have
invested the proceeds of the loan in the corporation, and thus his
basis in the corporation would not have increased and would not
suffice to allow him to deduct its operating losses. On the other
hand, if the line of credit was actually a loan from the Bank to
Taxpayer, who then invested the funds in or loaned them to his
corporation, the Taxpayer's basis in the corporation would be
correspondingly increased and sufficient to allow him to deduct its
referenced losses. See In re Breit, 460 F.Supp. 873, 875
6
As discussed below, the Commissioner does not defend the Tax
Court's decision on this basis, and concedes that all the $250,000
advanced on the line of credit went to Three Forks.
7
(E.D.Va.1978). In other words, we must determine whether the
$250,000 line of credit was a loan from the Bank to Three Forks or
whether it was a loan to Taxpayer, who in turn furnished it to
Three Forks as either a loan or a capital contribution. See Estate
of Leavitt v. Commissioner of Internal Revenue, 875 F.2d 420, 422
(4th Cir.), cert. denied, 493 U.S. 958, 110 S.Ct. 376, 107 L.Ed.2d
361 (1989).
We review the decision of the Tax Court under the same
standards that apply to district court decisions: issues of law
are reviewed de novo and findings of fact are reviewed for clear
error. Valero Energy Corp. v. Commissioner of Internal Revenue, 78
F.3d 909, 912 (5th Cir.1996). The question presented here—whether
the $250,000 line of credit was a loan to Taxpayer or to Three
Forks—is one of fact, and the Tax Court's findings of fact will not
be overturned unless clearly erroneous. See Reser v. Commissioner
of Internal Revenue, 112 F.3d 1258, 1264 (5th Cir.1997);
Plantation Patterns, Inc. v. Commissioner of Internal Revenue, 462
F.2d 712, 724 (5th Cir.), cert. denied, 409 U.S. 1076, 93 S.Ct.
683, 34 L.Ed.2d 664 (1972); see also Estate of Leavitt, 875 F.2d
at 424; In re Breit, 460 F.Supp. at 875. A finding of fact is
clearly erroneous when, even though there may be evidence to
support the finding, the reviewing court upon examination of the
entire evidence is left with the definite and firm conviction that
a mistake has been committed. Justiss Oil Co. v. Kerr-McGee
Refining Corp., 75 F.3d 1057, 1062 (5th Cir.1996). After examining
the record in this case, we are convinced that the Tax Court's
8
finding that the $250,000 line of credit was a loan from the Bank
to Taxpayer is not clearly erroneous.
"Ordinarily, taxpayers are bound by the form of the
transaction they have chosen; taxpayers may not in hindsight
recast the transaction as one that they might have made in order to
obtain tax advantages." Harris v. United States, 902 F.2d 439, 443
(5th Cir.1990); see also Estate of Leavitt, 875 F.2d at 423
(explaining that, as a general rule, "taxpayers are liable for the
tax consequences of the transaction they actually execute and may
not reap the benefit of recasting the transaction into another one
substantially different in economic effect that they might have
made"). In this case, the "form" of the $250,000 line of credit is
consistent with a loan from the Bank to Taxpayer, not to Three
Forks. The promissory note was signed by Taxpayer, not in his
representative capacity on behalf of Three Forks, but rather as an
individual borrower. Taxpayer did not sign the note, or for that
matter any other document associated with the $250,000 line of
credit, as "President" of Three Forks or in some other
representative capacity. Cf. Reser, 112 F.3d at 1264 (explaining
that one of the relevant factors in determining whether a bank
loaned money to a taxpayer individually is whether the promissory
note was executed by taxpayer alone or with his corporation).
Moreover, instead of including Three Forks' identification number
on the note—which the Bank would have done had Three Forks been the
borrower—the note contained only Taxpayer's personal social
security number. Finally, Taxpayer signed both the security
9
agreement and UCC-1 financing statement in his individual capacity.
Clearly, all of the loan documents, in form, establish that
Taxpayer was the true borrower of the line of credit.7
The Commissioner contends that even if this Court agrees with
Taxpayer's argument that the form of the note demonstrates that
Taxpayer was the true borrower, this Court should disregard the
form of the transaction and instead look to the substance of the
transaction and understand the loan for what it really was—a loan
from the Bank to Three Forks. The IRS often may disregard form and
recharacterize a transaction by looking to its substance. See
Reser, 112 F.3d at 1265 n. 30; Harris, 902 F.2d at 443; see also
Estate of Leavitt, 875 F.2d at 424 n. 10 (stating that the
Commissioner "may recharacterize the nature of the transaction
according to its substance while overlooking the form selected by
the taxpayer"); Cornelius v. Commissioner of Internal Revenue, 494
F.2d 465, 471 (5th Cir.1974) (explaining that use of the "substance
over form" doctrine is appropriate "at the request of the
Commissioner to prevent a taxpayer from unjustifiably using his own
forms and labels as a shield from the incidence of taxation").
Although not directly on point, this Court's decisions in
Harris and Reser are instructive. The taxpayers in Harris, J.H.
7
The "d/b/a" designation by no means conclusively proves that
Taxpayer signed the note on behalf of Three Forks. See Sullivan v.
Brinsky, No. 95-2164, 1996 WL 183552 (7th Cir. April 12, 1996)
(unpublished opinion) (holding that defendant was personally bound
by the terms of his collective bargaining agreement despite signing
the agreement "d/b/a/"). In fact, even the Commissioner concedes
that the "d/b/a" designation is, at best, "ambiguous and
uncertain."
10
Harris (Harris) and William Martin (Martin), wanted to convert a
pornographic theater into a wedding hall and approached Hibernia
National Bank (Hibernia) to obtain a $700,000 loan to fund their
project. To shield themselves from liability, the taxpayers formed
Harmar, a Louisiana corporation which elected to be taxed pursuant
to Subchapter S of the Internal Revenue Code. The taxpayers were
the sole shareholders of Harmar. Hibernia agreed to make the loan,
and Harmar executed two promissory notes payable to Hibernia for
$350,000 each. One of the notes was secured by certificates of
deposit of Harris individually and of his wholly-owned corporation,
Harris Mortgage Corporation. Harmar secured both notes by using
the mortgage on the theater as collateral. Harris and Martin also
executed personal guarantees of the notes in the amount of $700,000
each in favor of Hibernia. Id. at 440.
The taxpayers sought to deduct on their 1982 income tax
returns Hamar's 1982 net operating loss of $104,013. The IRS
disallowed the deduction, concluding that the taxpayers lacked
sufficient basis in Hamar, and that the $700,000 loan from Hibernia
did not increase taxpayers' basis in Hamar, because it was a loan
from Hibernia to Hamar. The district court granted summary
judgment for the IRS, rejecting the taxpayers' argument that the
Hibernia loan should be recharacterized to reflect what taxpayers
contended was its true substance, namely a loan from Hibernia to
taxpayers followed by a loan of the same funds from taxpayers to
Hamar. Id. at 440-41. In affirming the district court's order,
this Court looked to all of the facts and circumstances surrounding
11
the loan agreement, and in particular, undisputed evidence that:
"Each of the two $350,000 promissory notes was executed by and
only in the name of Harmar.... Hibernia, an independent
party, in substance earmarked the loan proceeds for use in
purchasing the subject property to which Harmar took title,
Harmar contemporaneously giving Hibernia a mortgage to secure
Harmar's debt to Hibernia. The bank sent interest due notices
to Harmar, and all note payments were made by checks to
Hibernia drawn on Harmar's corporate account. Harmar's books
and records ... reflect the $700,000 loan simply as an
indebtedness of Harmar to Hibernia.... Hibernia's records
showed Harmar as the "borrower' in respect to the $700,000
loan and the renewals of it. Harmar's 1982 tax return, ...
indicates that Harmar deducted $12,506 in interest expenses.
Because only the Hibernia loan generated such expenses for
that period, it is reasonably inferable that the deduction
corresponded to that loan. The 1982 Harmar return showed no
distribution to Taxpayers, as it should have if the $700,000
Hibernia loan on which Harmar paid interest was a loan to the
Taxpayers. Further, the return shows the only capital
contributed as $2,000 and the only loan from stockholders as
$68,000, but shows other indebtedness of $675,000. In short,
Harmar's 1982 income tax return is flatly inconsistent with
Taxpayers' present position. Moreover, there is no indication
that Taxpayers treated the loan as a personal one on their
individual returns by reporting Harmar's interest payments to
Hibernia as constructive dividend income. In sum, the
parties' treatment of the transaction, from the time it was
entered into and for years thereafter, has been wholly
consistent with its unambiguous documentation and inconsistent
with the way in which Taxpayers now seek to recast it." Id.
at 443-44.
In Reser, Don Reser (Don) was the sole shareholder of Don C.
Reser, P.C. (DRPC), a Subchapter S professional corporation formed
to broker large real estate projects. Don and DRPC approached
Frost Bank and requested a line of credit for operating capital.
Frost Bank approved the line of credit and documented the loan with
fourteen promissory notes executed jointly by Don and DRPC in favor
of Frost Bank during the years 1985 through 1989. Don and DRPC
were jointly and severally liable for repayment of the loan;
however, the loan was not collateralized with any property
12
belonging to either Don or DRPC. Whenever DRPC needed funds from
the line of credit, Don would have Frost Bank directly deposit the
funds into DRPC's corporate account. The funds were used by Don
for DRPC's operating capital and for his own personal use.
The IRS disallowed Don's attempt to deduct DRPC's losses on
his 1987 and 1988 income tax returns because his basis in DRPC was
insufficient. The IRS concluded that the line of credit loan was
a loan from Frost Bank to DRPC, which could not increase Don's
basis in DRPC, and was not, as Don contended, a loan from Frost
Bank to Don, the proceeds of which Don then loaned to DRPC. The Tax
Court, following trial on the merits, agreed with the IRS, and we
affirmed.8 We held that the Tax Court was not clearly erroneous in
its finding that the loan was one by Frost Bank to DRPC, rather
than one by Frost Bank to Don, with Don in turn loaning to DRPC. We
observed:
"First, the promissory notes payable to Frost Bank were
executed by Don and DRPC together, indicating on their face
that Frost Bank did not lend the money to Don alone. Second,
Frost Bank always deposited the loan proceeds directly into
DRPC's account. Third, Don, individually, did not make any
repayments on the loan to Frost Bank, but DRPC made both
principal and interest payments to Frost Bank. Finally, DRPC's
corporate tax returns reflected the notes as payable to Frost
Bank, not to Don, even though the returns listed other notes
payable to Don....
... Neither DRPC's 1987 nor 1988 corporate return
reflected the alleged indebtedness to Don. Furthermore, there
is no evidence that (1) Don ever received or that DRPC ever
paid any interest or principal on these notes or (2) DRPC made
any "loan' repayments to Don." Reser, 112 F.3d at 1264-65
8
We reversed as to Don's spouse solely on the ground that she
had established the innocent spouse defense.
13
(internal footnote omitted).9
Applying the factors relied on by this Court in Harris and
Reser to the case at bar, we conclude that the Tax Court did not
clearly err in finding that the $250,000 line of credit was a loan
from the Bank to Taxpayer individually. As discussed earlier, the
promissory note, security agreement, and UCC-1 financing statement
were all signed by and only in the name of Taxpayer individually.
Taxpayer did not sign the loan documents as "President" (or
otherwise as agent) of Three Forks, nor were these documents signed
by any other representative of the corporation.
It is uncontroverted the Bank intended and understood that
Taxpayer, and not Three Forks, was the borrower in the loan. Jerry
Albright, the Bank's vice-president and one of the loan officers
responsible for approving the $250,000 line of credit, testified at
9
At trial Don also relied on purported copies of promissory
notes allegedly executed by him on behalf of DRPC, payable to him
personally, and purporting to reflect DRPC's debt to him in the
amount of the Frost Bank loan. We observed that during the course
of the IRS audit, which specifically questioned the deductibility
of DRPC's losses and sought to ascertain Don's basis in DRPC, Don
produced the notes payable to Frost Bank and DRPC's ledgers but
never took the position that he had loaned the funds to DRPC. He
did not mention that theory until the auditor informed him of her
determination that because the loan was from Frost Bank to DRPC it
did not increase Don's basis in DRPC, so his basis was insufficient
to deduct DRPC's losses. Even then, Don did not produce any
documentation for his theory. Later, the IRS issued a notice of
deficiency. We noted that "[c]uriously," it was not until after
this 1991 notice of deficiency that Don produced the asserted
copies of the DRPC notes payable to him. Id. as 1261. We went on
to hold: "The delayed appearance of these notes caused the Tax
Court to question their authenticity; and we find no clear error
in the court's decision to disregard them entirely." Id. at 1265
(emphasis added). Hence, it is proper to treat our Reser case as
one in which there simply were no authentic notes from DRPC to Don.
14
trial that he intended the loan to be one to Taxpayer, that the
Bank looked to Taxpayer as the obligor, that in deciding whether to
approve the loan, the Bank requested financial information only
from Taxpayer personally and not from Three Forks, and that when
the loan went into default in March 1994, the Bank looked solely to
Taxpayer for repayment. In fact, it appears that neither Albright
nor any other Bank official even knew of Three Forks' existence as
a corporate entity when the Bank extended the line of credit to
Taxpayer, as the Bank never asked for any financial information
respecting Three Forks or, for that matter, any proof of Three
Forks' corporate status, such as a corporate certificate of good
standing or articles of incorporation.10 See Harris, 902 F.2d at
444 n. 12.
Three Forks' 1990 corporate year-end balance sheet reflected
the loan as one from Taxpayer to the corporation, and Three Forks'
1990 corporate tax return shows the line of credit as a loan from
Taxpayer, appearing as "loans from stockholders." Cf. Reser, 112
F.3d at 1265 (discussing relevance of corporation reporting loan as
indebtedness to taxpayer). Moreover, unlike the loan transaction
in Harris, where Hibernia furnished the $700,000 on the same day
the purchase of the theater closed, the cattle which acted as
collateral on the loan were purchased by Three Forks after the Bank
10
Albright testified that had the loan been made to the
corporation, there would have been a signature line for the
corporation, the corporation's taxpayer identification number would
have appeared on the note, and the Bank would have required a
corporate good standing certificate and corporate financial
documents.
15
loan closed.
As the Commissioner aptly points out, however, Taxpayer failed
to include as income on his 1990 tax return the interest payments
made to him by Three Forks, on the loan from him to Three Forks, a
factor the Harris and Reser Courts found to be of some importance.
Taxpayer testified that he did not include any of the interest
payments on his 1990 tax return—either those to him by Three Forks
or those by him to the Bank—because he charged Three Forks the
exact same amount of interest that the Bank charged him on the
$250,000 line of credit. Thus, the interest payments from Three
Forks to Taxpayer and the interest payments from Taxpayer to the
Bank essentially canceled each other out. We agree with the
Commissioner that Taxpayer should have reported on his 1990 tax
return the interest payments that he received from Three Forks.
However, Taxpayer's unrebutted testimony at trial was that on his
1991 and 1992 personal income tax returns, he reported as interest
income the total amount of interest paid by Three Forks to the Bank
on the line of credit. On those same returns, Taxpayer also
deducted an identical amount, representing the payment by him of
that same amount of interest to the Bank on the line of credit.
The Commissioner did not object to this testimony, nor did he
produce the 1991 and 1992 tax returns to rebut the testimony
(despite having access to Taxpayer's original returns). Moreover,
there is no evidence that when Taxpayer filed either his 1991
return or his 1992 return he was aware that the IRS was questioning
16
his deduction of the Three Forks loss or his basis in Three Forks.11
Based on our assessment of the totality of the circumstances
surrounding the $250,000 line of credit, we conclude that the Tax
Court did not commit clear error in finding that the Bank loan was
solely to the Taxpayer individually.
This conclusion, however, does not end our inquiry, for we
must next consider whether the Tax Court erred in finding that
Taxpayer failed to prove that he advanced any proceeds of the
$250,000 loan to Three Forks. The Tax Court stated in its
memorandum opinion that:
"We are not prepared to find and hold on the basis of the
present record that [Taxpayer] either made an additional
investment in the stock of ... [Three Forks], or loaned
additional money to the corporation in 1990, ... which would
allow him to claim the 1990 losses of the corporation in his
personal return."
The Tax Court's finding on this point is clearly erroneous.
The court mistakenly overlooked the parties' stipulation of facts,
which expressly provided that all of the proceeds from the $250,000
line of credit were deposited into Three Forks' corporate account.
Further, the Commissioner concedes that if we were to find that the
$250,000 line of credit was extended to Taxpayer individually
(which we do), then we must necessarily find that Taxpayer was
entitled to correspondingly increase his Three Forks basis, as all
of the loan proceeds were deposited into Three Forks' account. In
sum, because the Bank loan was to Taxpayer alone, and he caused all
11
The only evidence as to Taxpayer's knowledge in this respect
is that the IRS notice of deficiency respecting Taxpayer's 1990
return was mailed to Taxpayer July 29, 1993.
17
of the proceeds of the loan to be deposited into Three Forks'
corporate account as a loan by him to Three Forks, the Tax Court
should have concluded that Taxpayer was entitled to his full
deductions. The court's failure to do so was clear error.
Conclusion
The Tax Court did not clearly err in finding that Taxpayer was
the true sole borrower of the $250,000 Bank line of credit, but
erred in concluding that Taxpayer failed to demonstrate that he
advanced the funds to Three Forks. For these reasons, the judgment
of the Tax Court is
REVERSED.
18