Sellers v. Commissioner

T.C. Memo. 2000-235

UNITED STATES TAX COURT

PHILIP A. SELLERS AND ESTATE OF CAROLINE R. SELLERS, DECEASED,
PHILIP A. SELLERS, EXECUTOR, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17064-97. Filed August 3, 2000.

William B. Sellers, for petitioners.

Joseph Ineich, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

THORNTON, Judge: Respondent determined deficiencies in

petitioners’ Federal income tax and accuracy-related penalties

under section 6662 for taxable years 1993 and 1995 as follows:
 - 2 -

Penalty
Year Deficiency Sec. 6662(a)
1993 $49,843 $9,969
1995 9,567 1,913

Unless otherwise indicated, 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.

After concessions,1 the issues for decision are:

1. Whether the notice of deficiency inadequately described

the basis for respondent’s determinations, so as to justify

placing the burden of proof on respondent.

2. Whether advances that petitioner husband (hereinafter

petitioner) made to a related corporation are deductible as bad

debts under section 166.

3. Whether advances that petitioner made to a related

corporation are deductible as ordinary losses under section 165.2

1
Respondent concedes that petitioners’ losses from the
advances at issue are long-term capital losses that are
deductible under sec. 165(f), subject to the limitations of sec.
1211. Petitioners have failed to address, either at trial or on
brief, respondent’s assertion of sec. 6662 accuracy-related
penalties. We treat their failure to argue as, in effect, a
concession of this issue. See Rule 151(e)(4) and (5); Sundstrand
Corp. v. Commissioner, 96 T.C. 226, 344 (1991).
2
Respondent’s disallowance of petitioners’ net operating
loss carryover deduction for 1995 appears to be a computational
matter, depending entirely on our resolution of the proper income
tax treatment of petitioner’s advances to the related
corporation.
 - 3 -

FINDINGS OF FACT

The parties have stipulated some of the facts, which are

incorporated in our findings by this reference. When they filed

their petition, petitioners were married and resided in

Montgomery, Alabama. Subsequent to filing the petition,

Caroline R. Sellers died. The Estate of Caroline R. Sellers has

been substituted as a party.

Petitioner’s Background

Since 1947, petitioner has been in the investment banking

business, making loans to companies and individuals. Since at

least 1968, petitioner has made loans through his sole

proprietorship, Continental Mortgage Co. (Continental Mortgage).

Petitioner is also a 75-percent shareholder of Philip A.

Sellers & Co., Inc. (PASEL), which engages in investment banking.

His son, Philip L. Sellers (Philip), owns the remaining 25

percent of PASEL. PASEL owns all the stock of Merchant Capital

Corp. (Merchant Capital), an investment banking business with a

concentration in municipal type business.

The Gandy’s Acquisition

In 1987, PASEL acquired a 67-percent ownership interest in

Kenneth H. Bauer & Associates, Inc. (KHB), a newly organized

Georgia corporation formed for the purpose of acquiring interests

in existing businesses, including Gandy’s Industries, Inc.

(Gandy’s), a Georgia corporation that manufactured pool tables
 - 4 -

and related equipment. PASEL acquired its 67-percent ownership

interest in KHB as partial consideration for a $544,000 loan that

it made to KHB to facilitate KHB’s leveraged buy-out of Gandy’s.3

The other 33-percent ownership interest in KHB was held by its

president and director, Steven K. Bauer (Bauer). KHB, which had

no assets other than its ownership interest in Gandy’s, then took

Gandy’s name. Consequently, PASEL and Bauer then held ownership

interests in Gandy’s of 67 percent and 33 percent, respectively.

KHB acquired Gandy’s through the issuance of $5,040,000 in

Macon-Bibb County Industrial Revenue Bonds (the Gandy’s bonds).

The underwriter of the Gandy’s bonds was Merchant Capital, which,

as previously described, was a wholly owned subsidiary of PASEL.

In 1988 and 1989, petitioner and PASEL made separate loans

to Gandy’s totaling over $250,000. Bauer, who was then Gandy’s

president, cosigned for the loans in his individual capacity.

The loans were not repaid, and judgments were entered against

Bauer, resulting in the transfer to PASEL of Bauer’s ownership

interest in Gandy’s.4 At some time not specified in the record,

3
On Dec. 17, 1987, Philip A. Sellers & Co., Inc. (PASEL),
lent $544,000 to Kenneth H. Bauer & Associates (KHB), pursuant to
a promissory note, bearing 11 percent interest, with principal
and accrued interest payable in two installments on Mar. 17,
1988, and Dec. 17, 1988. On July 1, 1988, this loan was repaid
in full.
4
On June 24, 1988, petitioner lent $150,000 to Gandy’s
Industries, Inc. (Gandy’s) pursuant to a promissory note, payable
in 60 days with 11 percent interest. The note is signed by
(continued...)
 - 5 -

Philip became president of Gandy’s and remained in that position

during the years in issue.5 Sometime prior to 1993, in a manner

not revealed in the record, Merchant Capital became a 50-percent

owner of Gandy’s.

The Advances in Question

Gandy’s never produced enough income to pay any of the

interest on the $5,040,000 Gandy’s bonds. After

June 1, 1988, Gandy’s was delinquent on its bond interest

payments.6 Philip handled most of the negotiations with the

bondholders with respect to Gandy’s failure to make payments on

the bonds.

In 1990, petitioner was aware that because of a nationwide

recession and because of Gandy’s heavy debt repayment burden

relating in part to the bond project, Gandy’s was experiencing

4
(...continued)
Steven K. Bauer (Bauer) both in his capacity as president of
Gandy’s and in his individual capacity. The note was not repaid,
and petitioner sued Bauer. On Feb. 20, 1990, judgment was
entered for petitioner.

On Mar. 22, 1989, PASEL lent $104,000 to Gandy’s pursuant to
a promissory note payable in monthly installments of $10,000 plus
accrued interest, beginning Apr. 1, 1989. The note was cosigned
by Bauer in his individual capacity. The note was not repaid.
PASEL sued Bauer and obtained a judgment that included the
transfer of Gandy’s stock.
5
It is unclear from the record what continuing involvement,
if any, Bauer had in Gandy’s during the years in issue.
6
The Gandy’s project bonds bore interest from Dec. 1, 1987,
at a per annum rate of 11 percent, payable semiannually on
Dec. 1, 1987, and June 1 of each year, commencing June 1, 1988.
 - 6 -

cash-flow problems and was struggling to survive. Because its

assets had already been leveraged, Gandy’s was unable to obtain

financing from financial institutions. In 1990, petitioner,

either directly or through his wholly owned corporation

Continental Mortgage, advanced $300,000 to Gandy’s as follows:

Date Amount

7/30/90 $100,000
8/13/90 40,000
8/13/90 60,000
12/11/90 100,000

Each of these four advances (the 1990 advances) was evidenced by

a promissory note, each stating an 8-percent interest rate. The

July 30, 1990, promissory note indicates a due date of

December 31, 1991.7 The December 11, 1990, promissory note

indicates a due date of December 11, 1991. The other two

promissory notes were payable on demand.

Gandy’s used the 1990 advances for working capital and to

meet daily operating expenses.

During 1991 or 1992, Gandy’s made no repayments of the 1990

advances. During 1991 and 1992, neither petitioner nor any other

party made any additional advances to Gandy’s.

7
The note in the record regarding the July 30, 1990,
advance is dated Dec. 31, 1990, and bears a handwritten notation
that it “covers wire of 7/30/90”.
 - 7 -

On January 7, 1993, and January 27, 1993, petitioner made

two additional advances to Gandy’s of $25,000 each. Neither

advance is evidenced by a note.

On December 2, 1993, petitioner wired an additional $10,483

to a broker to pay shipping charges on slate from Italy that

Gandy’s had ordered for use in the manufacture of pool tables.

This advance is evidenced by a demand note bearing 8 percent

interest.

Although Gandy’s was in default on two of petitioner’s

advances after December 31, 1991, petitioner did not sue Gandy’s

for collection or otherwise demand payment of principal or

interest with respect to any of the advances.

Petitioner’s advances to Gandy’s from 1990 through 1993 were

all unsecured, because Gandy’s had pledged all its assets to

other lenders. Petitioner’s advances to Gandy’s were

subordinated to the Gandy’s bonds.

Gandy’s treated all the advances in question (with the

possible exception of the $10,483 advance of December 2, 1993) as

shareholder debt and accrued interest thereon.8 It was Gandy’s

intention to repay the advances as soon as Gandy’s started

producing positive cash-flow. This never happened. On its

September 30, 1991, and September 30, 1992, Forms 1120, U.S.

8
The record does not reveal how Gandy’s treated the
December 1993 advance of $10,483.
 - 8 -

Corporate Income Tax Return, Gandy’s reported net losses of

$1,205,578 and $1,412,516. Near the end of 1993, Gandy’s had

retained earnings deficits of approximately $4 to $5 million.

On December 23, 1993, Gandy’s repaid $5,000 of petitioner’s

advances.9 Otherwise, Gandy’s repaid neither principal nor

interest on any of the advances made by petitioner from 1990

through 1993.

Default on the Gandy’s Bonds and Foreclosure

Gandy’s never made any interest or principal payments on

the Gandy’s bonds. On February 1, 1994, the Gandy’s bonds

trustee declared Gandy’s in default of its bond obligations and

foreclosed on Gandy’s assets. Philip purchased Gandy’s assets

from the foreclosure, and Gandy’s has continued to operate under

the name Macon Manufacturing. In 1994 and 1995, petitioner

advanced additional, undisclosed sums to Macon Manufacturing.

Petitioners’ Return Positions and Respondent’s Determinations

On their 1993 joint Federal income tax return, petitioners

deducted $355,483 as a bad debt deduction and reported a net

operating loss of $169,331.10 On their 1995 joint Federal income

tax return, petitioners claimed a net operating loss of $177,794,

9
The record does not reveal specifically to which advance
this repayment related. Petitioner testified that the repayment
was allocated “to principal.”
10
This amount represents the total amount of money that
petitioner advanced to Gandy’s in 1990 and 1993, less the $5,000
that Gandy’s repaid in Dec. 1993.
 - 9 -

of which $169,331 represented a carryover of the 1993 net

operating loss.

In the notice of deficiency for taxable year 1993,

respondent disallowed petitioners’ claimed bad debt deduction

“because it has not been established that any amount of bad debts

existed in fact and in law.” Similarly, for taxable year 1995,

respondent disallowed the $169,331 claimed net operating loss

carryover “because it has been determined that a net operating

loss did not exist in the year that caused the carryforward.”

OPINION

A. The Parties’ Contentions

Petitioners argue that the advances to Gandy’s were loans

that petitioner made in the course of his lending business, that

the loans became worthless in 1993, and that they are properly

deductible either under section 166 as business bad debts or

under section 165 as ordinary losses incurred in a trade or

business.

Respondent agrees that petitioner was in the business of

lending money but argues that the advances in issue represent

contributions to Gandy’s capital rather than debt. At trial and

on brief, respondent concedes that petitioners are entitled to

deduct the losses under section 165 but only as long-term capital

losses, pursuant to section 165(f).
 - 10 -

B. Burden of Proof

Under generally applicable principles, petitioners bear the

burden of proving entitlement to a deduction resulting from

petitioner’s advances to Gandy’s. See Rule 142(a); United States

v. Janis, 428 U.S. 433, 441-442 (1976); Welch v. Helvering, 290

U.S. 111, 115 (1933); Amey & Monge, Inc. v. Commissioner, 808

F.2d 758, 761 (11th Cir. 1987), affg. T.C. Memo. 1984-642.

Petitioners argue that the notice of deficiency failed to

set forth the reasons for respondent’s determinations with

sufficient specificity to satisfy the requirements of section

7522 and that respondent should therefore bear the burden of

proof.

Section 7522(a) provides in relevant part that any notice of

deficiency “shall describe the basis for, and identify the

amounts (if any) of, the tax due * * *. An inadequate

description under the preceding sentence shall not invalidate

such notice.”

The purpose of section 7522 is to give the taxpayer notice

of the Commissioner’s basis for determining a deficiency. See

Shea v. Commissioner, 112 T.C. 183, 196 (1999). Here the notice

of deficiency sufficiently apprised petitioners of the basis for

respondent’s deficiency determination and identified the amount

of tax due. At trial, respondent has taken no position that

would require petitioners to present evidence different from that
 - 11 -

necessary to resolve the determinations that were described in

the notice of deficiency, so as to justify placing the burden of

proof on respondent. Cf. Shea v. Commissioner, supra at 197.

The burden of proof remains with petitioners.

C. Bad Debt Deduction

A taxpayer generally may deduct a debt that becomes

worthless within the taxable year. See sec. 166(a)(1). Whether

a transfer of funds to a closely held corporation constitutes

debt or equity is determined based on all relevant facts and

circumstances. The Court of Appeals for the Eleventh Circuit, to

which an appeal of this case would generally lie, applies a

nonexclusive 13-factor test as enunciated in Estate of Mixon v.

United States, 464 F.2d 394, 402 (5th Cir. 1972). See In re

Lane, 742 F.2d 1311, 1314-1315 (11th Cir. 1984); Stinnett’s

Pontiac Serv., Inc. v. Commissioner, 730 F.2d 634, 638 (11th Cir.

1984), affg. T.C. Memo. 1982-314. The Mixon factors are:

(1) The names given to certificates evidencing the indebtedness;

(2) the presence or absence of a fixed maturity date; (3) the

source of payments; (4) the right to enforce payment; (5) the

effect on participation in management; (6) the status of the

contribution in relation to regular corporate creditors; (7) the

parties’ intent; (8) "thin" or adequate capitalization;

(9) identity of interest between creditor and stockholder;

(10) the source of interest payments; (11) the ability of the
 - 12 -

corporation to obtain loans from outside sources; (12) the use to

which the advances were put; and (13) the failure of the debtor

to repay on the due date. See also Dixie Dairies Corp. v.

Commissioner, 74 T.C. 476, 493 (1980).

The identified factors are not equally significant, nor is

any one factor determinative. See Estate of Mixon v. United

States, supra; Dixie Dairies Corp. v. Commissioner, supra. The

factors must be evaluated in light of all the facts and

circumstances. See Dixie Dairies Corp. v. Commissioner, supra.

1. Names Given to the Certificates

The issuance of a note may be indicative of bona fide debt.

See Estate of Mixon v. United States, supra. The existence of a

note, however, is not in and of itself conclusive. An unsecured

note, with payments thereon made long after the due date or else

not at all, weighs toward equity. See Stinnett’s Pontiac Serv.,

Inc. v. Commissioner, supra; Estate of Van Anda v. Commissioner,

12 T.C. 1158, 1162 (1949), affd. per curiam 192 F.2d 391 (2d Cir.

1951).

Two of petitioner’s 1993 advances, of $25,000 each, were not

evidenced by any kind of debt instrument. As applied to these

two advances, this factor weighs toward equity.
 - 13 -

The four 1990 advances were each evidenced by promissory

notes,11 as was the December 2, 1993, advance of $10,483. All

the notes were unsecured. Apart from the $5,000 repayment made

in late 1993, which was not allocated specifically to any of the

notes, there were no repayments. When petitioner made the

advances, either he singly, or else he and Philip together, owned

all the interest in Gandy’s, either directly or through their

wholly owned corporations PASEL or Merchant Capital, which was

also underwriter of the Gandy’s bonds.12 Throughout this period,

Philip was president of Gandy’s. Where a transaction involves a

closely held corporation, the form and labels used may signify

little, because the parties can mold the transaction to their

will. See Anchor Natl. Life Ins. Co. v. Commissioner, 93 T.C.

382, 407 (1989). Accordingly, we assign little weight to the

labeling of certain of the advances as notes.

2. The Presence or Absence of a Fixed Maturity Date

The presence of a fixed maturity date is indicative of debt

but is not dispositive. See American Offshore, Inc. v.

11
One of these notes indicates on its face that it was made
some 6 months after petitioner had wired the principal amount to
Gandy’s, suggesting the absence of a “businesslike, arm’s length
transaction.” Estate of Mixon v. United States, 464 F.2d 394,
403 (5th Cir. 1972).
12
The record is unclear about the exact configuration over
time of ownership interests in Gandy’s among petitioner, Philip,
and their corporations. Petitioners state in their reply brief
that petitioner “eventually held all the [Gandy’s] stock”.
 - 14 -

Commissioner, 97 T.C. 579, 602 (1991). The absence of a fixed

maturity date or repayment schedule may indicate a contribution

to capital rather than a loan. See Stinnett’s Pontiac Serv.,

Inc. v. Commissioner, supra; Estate of Mixon v. United States,

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

602.

Five out of seven of petitioner’s advances to Gandy’s had no

fixed maturity date and no repayment schedule. The notes

reflecting the other two advances had 1-year maturity dates, but

the significance of this factor is diminished by Gandy’s failure

to make repayments in accordance with the maturity dates and

petitioner’s failure to make any efforts to collect.

This factor weighs against a bona fide debtor-creditor

relationship.

3. Source of the Payments

Repayment that depends on corporate earnings has the

appearance of a contribution to capital. See Estate of Mixon v.

United States, supra at 405; see also Stinnett’s Pontiac Serv.,

Inc. v. Commissioner, supra at 638-639. Gandy’s controller

testified that repayment of the advances from petitioner was

contingent on the company’s making a profit. Similarly,

petitioner testified that in order for his advances to be repaid,

Gandy’s had to operate successfully.

This factor weighs toward equity.
 - 15 -

4. Right To Enforce Payment

A definite obligation to repay principal and interest weighs

toward debt. See Stinnett’s Pontiac Serv., Inc. v. Commissioner,

supra at 639. Repayment that is within the discretion of the

parties and not conditioned upon the occurrence of certain events

weighs toward equity. See id. Even where there is a basic right

to enforce payment, failure to take customary steps to ensure

payment–-such as securing the advance or establishing a sinking

fund–-weighs toward equity. See In re Lane, 742 F.2d at 1317.

As far as the record reveals, Gandy’s had no fixed

obligation to repay the two 1993 advances of $25,000 each. With

regard to the other five advances, even if we were to assume

arguendo that petitioner had a basic right to enforce payment,

petitioner made no effort to do so and failed to take customary

steps to ensure payment. The advances were unsecured. There is

no evidence that any sinking fund was established by which the

principal and interest could be paid. In short, the record does

not establish that the parties expected Gandy’s to repay the

advances.

This factor weighs toward equity.

5. Increased Participation in Management

An increase in the nominal creditor’s participation in

management of the nominal debtor as a result of the advance

weighs toward equity. See Stinnett’s Pontiac Serv., Inc. v.
 - 16 -

Commissioner, supra at 639. The record is inadequate for us to

evaluate whether petitioner’s management interest in Gandy’s

increased as a result of his advances.

This factor is neutral, and we give it no weight.

6. Status of the Contributions in Relation to Regular
Corporate Creditors

Subordination of repayment of an advance to other

indebtedness weighs toward equity. See Estate of Mixon v. United

States, 464 F.2d at 406. Petitioner’s advances were subordinated

to the Gandy’s bonds. Moreover, despite advancing Gandy’s more

than $360,000 in 1990 and 1993, petitioner received only a token

payment of $5,000 at the end of 1993. Gandy’s controller

testified that petitioner’s advances were used to pay Gandy’s

suppliers-–suggesting a de facto subordination of petitioner’s

advances to these creditors.

This factor weighs toward equity.

7. The Parties’ Intent

Although the parties’ intent is relevant, the “subjective

intent on the part of an actor will not alter the relationship or

duties created by an otherwise objectively indicated intent.”

Id. at 407. The parties’ stated intent is not necessarily

conclusive of the parties’ true intent as revealed by the

objective facts. See In re Lane, supra at 1316; Tyler v.

Tomlinson, 414 F.2d 844, 850 (5th Cir. 1969).

Petitioner argues that he intended to make the loans in
 - 17 -

furtherance of his trade or business of lending money, in order

to make Gandy’s profitable so as to help his investment banking

business prosper. The objective facts in the record, however, do

not support the conclusion that these advances were made in a

manner consistent with normal lending practices or consistent

with petitioner’s own practices in making loans to other,

unrelated borrowers. Although petitioner testified that he

intended the advances to be repaid, the record does not reveal

that he made any efforts to collect principal or interest on the

advances over a period of 2 to 3 years. Petitioner was aware of

Gandy’s perilous financial situation when he first made the

advances in issue and could not realistically have expected to be

repaid, especially in light of Gandy’s delinquency on the Gandy’s

bonds, to which his advances were subordinated. He acknowledged

that he made the 1990 advances on an unsecured basis at a time

when Gandy’s needed the advances to operate. He made three

further unsecured advances in 1993, without having received or

requested repayment of the overdue 1990 advances, and in two

instances without receiving any kind of debt instrument.

This factor weighs toward equity.

8. Thin or Adequate Capitalization

Advances to corporations are generally indicative of equity

where the corporation is thinly capitalized (i.e., has a high

ratio of debt to equity). See Stinnett’s Pontiac Serv., Inc. v.
 - 18 -

Commissioner, 730 F.2d 634, 638-639 (11th Cir. 1984); Estate of

Mixon v. United States, supra at 408. Gandy’s controller

testified that when petitioner made the advances in question,

Gandy’s debts far exceeded its equity.

This factor weighs toward equity.

9. Identity of Interests Between Creditor and Shareholder

If stockholders make advances in proportion to their stock

ownership, a capital contribution is indicated. See Estate of

Mixon v. United States, supra at 409. Petitioner argues that his

advances to Gandy’s were not proportional to his ownership

interests since he made all the advances and Gandy’s had other

shareholders. The only other shareholders, however, were

corporations that he and Philip wholly owned and of which

petitioner was the majority shareholder, thereby weakening if not

negating any significance otherwise accorded to a lack of

proportionality. See Slappey Drive Indus. Park v. United States,

561 F.2d 572, 584 (5th Cir. 1977) (“Because shareholding family

members were thus less likely to attribute major significance to

departures from strict equality in their positions, the instances

of disproportionate debt and equity holdings provide a much

weaker inference than they ordinarily would that the ostensible

debt was in fact what it purported to be”).
 - 19 -

This factor is neutral, and we give it no weight.13

10. Source of Interest Payments

“[A] true lender is concerned with interest.” Curry v.

United States, 396 F.2d 630, 634 (5th Cir. 1968). Failure of the

putative lender to insist on interest payments suggests that he

is instead interested in the future earnings of the corporation

or increased market value of his ownership interest, thereby

indicating equity contributions. See Stinnett’s Pontiac Serv.,

Inc. v. Commissioner, supra at 640. Petitioner never demanded,

and Gandy’s never made, interest payments on the advances.

This factor weighs toward equity.

11. Ability To Obtain Funds From Outside Lenders

If a party receiving an advance can borrow funds from

another lender in an arm’s-length transaction on similar terms,

the advance may appear to be debt. See Electronic Modules Corp.

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

Mixon v. United States, supra at 410. Petitioner alleges to have

made completely unsecured loans to Gandy’s at a time when all its

assets were completely leveraged and when it was deeply

13
To the extent that petitioner, as majority shareholder
and father of the sole minority shareholder, controlled the
corporations that held ownership interests in Gandy’s (and there
is no evidence to the contrary), we could also conclude that
there was identity of interest between petitioner and the other
shareholders–-a factor that would weigh strongly toward treating
the advances as equity. Cf. Plantation Patterns, Inc. v.
Commissioner, 462 F.2d 712, 722 (5th Cir. 1972).
 - 20 -

encumbered by delinquent debt on the Gandy’s bonds. Petitioner

allegedly relied upon uncertain future earnings for repayment and

generally insisted upon no fixed schedule for repayment. We are

unpersuaded that any unrelated third party would have made loans

to Gandy’s on these terms and in these circumstances. Indeed,

Gandy’s controller testified that when petitioner made the

advances, Gandy’s could not have obtained financing from any

other financial institution.14

This factor weighs toward equity.

12. Extent To Which the Advances Were Used To Acquire
Capital Assets

The use of a shareholder’s advances to pay day-to-day

operating expenses, rather than to acquire capital assets, tends

to indicate that the advances are bona fide indebtedness. See

Stinnett’s Pontiac Serv., Inc. v. Commissioner, supra at 639;

Estate of Mixon v. United States, 464 F.2d at 410. Gandy’s used

the advances as working capital to meet day-to-day operating

expenses.

This factor weighs toward debt.

14
In support of its argument that Gandy’s could obtain
financing from other sources, petitioner cites the controller’s
testimony that during 1991 and 1992, Gandy’s factored its
accounts receivable with a factoring company. This testimony
does not establish, however, that the factoring company would
have made unsecured loans to Gandy’s on terms similar to those
that pertained to petitioner’s advances.
 - 21 -

13. The Failure of the Debtor To Repay on the Due Date

This factor is the most telling of the Mixon factors. See

In re Lane, 742 F.2d at 1317. Except for a token $5,000

repayment at the end of 1993, Gandy’s repaid none of the

advances, nor did petitioner ever demand repayment. We conclude

that petitioner never intended to compel repayment of the

advances. Cf. Stinnett’s Pontiac Serv., Inc. v. Commissioner,

supra at 640.

This factor weighs strongly toward equity.

Conclusion

In light of the foregoing, we conclude and hold that

petitioner’s advances to Gandy’s were capital contributions and

not bona fide debt. Therefore, petitioner may not deduct the

advances as bad debts under section 166.

D. Characterization of Petitioner’s Losses as Ordinary or
Capital

Petitioners argue that even if petitioner’s advances to

Gandy’s constituted capital contributions rather than bona fide

indebtedness, they are nevertheless entitled to claim ordinary

losses under section 165 rather than the capital losses to which

respondent has conceded they are entitled, because petitioner was

in the business of lending money and because his initial

involvement with Gandy’s came in furtherance of his business

rather than as an investment. In support of their position,

petitioners cite W.W. Windle Co. v. Commissioner, 65 T.C. 694
 - 22 -

(1976) and various other cases for the proposition that ordinary

loss treatment may be permitted with respect to assets that were

acquired for a business purpose rather than for an investment

purpose.

A loss from the sale or exchange of a capital asset is

generally subject to section 1211(a), which limits the amount of

the loss allowed. See sec. 165(a). Section 1221 generally

defines “capital asset” as “property held by the taxpayer

(whether or not connected with his trade or business)”, but

specifically excludes five classes of assets. The cases cited

and relied upon by petitioners were all decided under the

doctrine of Corn Prods. Refining Co. v. Commissioner, 350 U.S. 46

(1955), in which the Supreme Court appeared to recognize a

nonstatutory exception to the section 1221 definition of capital

asset, in holding that certain futures contracts acquired and

held for a business purpose qualified as a noncapital asset. In

Arkansas Best Corp. v. Commissioner, 485 U.S. 212, 223 (1988),

however, the Supreme Court called into question the continuing

vitality of many of the cases that had been decided under the

Corn Products doctrine, stating that “a taxpayer’s motivation in

purchasing an asset is irrelevant to the question whether the

asset is ‘property held by a taxpayer (whether or not connected

with his business)’ and is thus within § 1221’s general

definition of ‘capital asset.’”
 - 23 -

Petitioners do not argue, and the facts do not indicate,

that petitioner’s ownership interest in Gandy’s qualifies for any

of the section 1221 exclusions from the definition of capital

assets. Notwithstanding that petitioner was in the business of

lending money, and regardless of the purpose for which he

initially acquired the stock, his ownership interest in Gandy’s

was a capital asset as generally defined in section 1221.

Accordingly, we conclude, pursuant to respondent’s

concession, that petitioner’s advances to Gandy’s resulted in

long-term capital losses, deductible pursuant to the limitations

of section 1211(b).

To reflect the foregoing and concessions by the parties,

Decision will be entered

under Rule 155.