Unknown

                    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


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      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.




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