We look to various facts and circumstances to indicate whether a taxpayer is in the business of lending, such as: Imel v. Commissioner, 61 T.C. 318, 323 (1973); Sales v. Commissioner, 37 T.C. 576 (1961); Barish v. Commissioner, 31 T.C. 1280 (1959). (1) The total number of loans made; (2) the time period over which the loans were made; (3) the adequacy and nature of the taxpayer's records; (4) whether the loan activities were kept separate and apart from the taxpayer's other activities; (5) whether the taxpayer sought out the lending business; and (6) the amount of time and effort expended in the lending activity; and the relationship between the taxpayer and his debtors. * * *
This fact does distinguish Payte's purchase of partnership interest from those cases which disallowed deductions by specifically distinguishing Axelrod, supra. See Robert E. Imel, 61 T.C. 318 (1973); William K. Coors, 60 T.C. 368 (1973); Frank J. Saia, ¶ 74, 300 P-H Memo TC (1970). These cases distinguish Axelrod, supra on the basis that a central feature of Axelrod, supra is that the claimed expenses were for the purchase of interest in the claimant's own ongoing business.
If anything, the loan would be part of a lending trade or business, but isolated and irregular loans to trusted individuals do not support that conclusion either. See Imel v. Commissioner, 61 T.C. 318, 323 (1973) (holding that a taxpayer's eight or nine loans over a four-year period was not a lending trade or business); Heinbockel v. Commissioner, T.C. Memo. 2013-125, at *31-*32 (holding that a taxpayer's occasional loans to her brother was not a lending trade or business). Mr. Morgan's actions and words support our conclusion that he was no longer carrying on a homebuilding trade or business.
But "[t]he right to deduct bad debts as business losses is applicable only to the exceptional situations in which the taxpayer's activities in making loans * * * [are] so extensive and continuous as to elevate that activity to the status of a separate business." Imel v. Commissioner, 61 T.C. 318, 323 (1973); Cooper v. Commissioner, T.C. Memo. 2015-191, 110 T.C.M. (CCH) 321, 321 (describing factors used to evaluate whether a taxpayer's lending activity rises to the level of a discrete trade or business). There is no support in the record for petitioner's assertion that he was in the business of lending money.
When one individual lends money to another, "[t]he right to deduct bad debts as business losses is applicable only to the exceptional situations in which the taxpayer's activities in making loans * * * [are] so extensive and continuous as to elevate that activity to the status of a separate business." Imel v. Commissioner, 61 T.C. 318, 323 (1973); Cooper v. Commissioner, T.C. Memo. 2015-191, at *13 (describing factors used to evaluate whether a taxpayer's lending activity rises to the level of a discrete trade or business). Nothing in the record indicates that Mary was ever in the business of lending money.
Moreover, in order for a taxpayer to be entitled to a bad debt deduction under section 166(a) in connection with the trade or business of lending money, the debt must have been sustained in the course of the taxpayer's activity of making loans that was "so extensive and continuous as to elevate that activity to the status of a separate business." Imel v. Commissioner, 61 T.C. 318, 323 (1973). Petitioner testified, and we have found, that he made approximately six loans to certain individuals over the approximately 30 years during which he conducted petitioner's real property activities.
Even if we accepted the flowchart as credible proof, we don't find that making a couple loans to one's brother over a few years' time is a trade or business. See Imel v. Commissioner, 61 T.C. 318, 323 (1973) (finding that the making of less than ten loans over the course of a four-year period didn't elevate that activity to the status of a separate business); Sales v. Commissioner, 37 T.C. 576, 580 (1961) ("We do not believe, in view of the factual matrix of this case, that the making of an isolated loan of $120,000 is so extensive an activity as to justify a finding by this Court that the partnership was engaged in the business of lending money"). When First Wilshire sued over the abandoned Compton property, the Heinbockels did ring up some lawyer's bills trying to recover the amount of money they had loaned to Lydia's brother for that property.
The fact that a loan or payment is made in furtherance of an employer's trade or business does not mean that it is proximately related to that of the employee. Shinefeld v. Commissioner, supra; Imel v. Commissioner, 61 T.C. 318 (1973); cf. Deputy v. du Pont, 308 U.S. 488 (1940). There is absolutely no evidence showing that the petitioners entered into the guaranty arrangement in the interest of his employment with B & G, and the testimony of Mr. Benak that he agreed to make the guaranty payment to protect the goodwill of B & G was vague and conclusory—-there was no specific information provided as to how his employment with B & G would be harmed if the petitioners failed to fulfill their obligation under the guaranty.
The result reached herein is buttressed by comparing the “activity” tests applied elsewhere. Cf. Wilson v. Commissioner, 42 T.C. 914, 925 (1964), revd. on other grounds 353 F.2d 184 (9th Cir. 1965), and Hanson v. United States, 338 F. Supp. 602, 612 (D. Mont. 1971) (both cases applying the “active conduct” test of sec. 355). Also cf. Imel v. Commissioner, 61 T.C. 318, 323 (1973), and Krause v. Commissioner, 26 T.C.M. 358, 36 P-H Memo T.C. par. 67,068 (1967) (determining whether a taxpayer's lending activities qualify as a trade or business). Also cf. Davenport v. Commissioner, 70 T.C. 922, 934-935 (1978) (Judge Featherston dissenting) (determining whether a small loan company, Greenbelt Finance, Inc., was “largely an operating company” under sec. 1.1244(c)-1(g)(2), Income Tax Regs.).
The parties are in agreement that, in determining whether the debts bore a proximate relationship to petitioner's trade or business, ‘the proper measure is that of dominant motivation.’ United States v. Generes, 405 U.S. 93 (1972); Robert E. Imel, 61 T.C. 318, 324 (1973). The issue is one of fact.