Jitendra & Aruna Shah v. Commissioner of Revenue and Aruna Shah v. Commissioner of Revenue (June 28, 2005)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


JITENDRA AND ARUNA SHAH	    v. 	COMMISSIONER OF REVENUE

Docket No. C266883

ARUNA SHAH		  	    v. 	COMMISSIONER OF REVENUE

Docket No. C271781				Promulgated:
							June 28, 2005


These are appeals under the formal procedure pursuant to G.L. c. 58A, § 6 and G.L. c. 62C, § 39(c) from the refusal of the appellee to grant an abatement of resident personal income taxes, assessed under G.L c. 62, § 4, against Aruna Shah for calendar year 1997 and against Jitendra and Aruna Shah (the "appellants") for calendar year 2001.   
Commissioner Gorton heard the appeals and was joined in the decisions for the appellee by Commissioners Scharaffa and Rose.  
These findings of fact and report are made at the request of the appellants and the appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.


Morris N. Robinson, Esq. for the appellants.

Timothy R. Stille, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
On the basis of testimony and exhibits submitted during the hearing of these appeals, the Appellate Tax Board ("Board") made the following findings of fact.  Jitendra Shah, the founder and sole shareholder of Shah Construction Co., Inc. ("Shah, Inc."), was a civil engineer who was educated and trained in India.  He immigrated to Boston in 1969 with just a few dollars in his pocket and began seeking employment in construction.  After working as a project superintendent for an unrelated company, Mr. Shah eventually began working as a general contractor, and he formed Shah, Inc. in 1976.  Mr. Shah held the positions of president, treasurer, director, and employee of Shah, Inc.; his wife, Aruna Shah, held the positions of clerk, director, and employee.  Shah, Inc. primarily provided contract work for the United States ("U.S.") government.  Mr. Shah testified that, since its incorporation, Shah, Inc. successfully performed about 200 U.S. government contracts.  
These appeals resulted from the audit of the Massachusetts Resident Income Tax Form 1 ("Form 1") filed by the appellants for calendar year 2001 and the Form 1 filed by Mrs. Shah for calendar year 1997.  During the audit of her separate 1997 Form 1, Mrs. Shah consented to an extension of time for the Commissioner of Revenue ("Commissioner") to assess personal income taxes.  On June 4, 2001, the Commissioner issued to Mrs. Shah a Notice of Intent to Assess ("NIA") for 1997, showing a proposed assessment of $11,268 of personal income tax plus interest.  The Commissioner subsequently issued to Mrs. Shah a Notice of Assessment ("NOA") dated January 9, 2002, showing the identical personal income tax liability plus additional interest.  Mrs. Shah paid the tax due and timely filed an Application for Abatement.  By Notice of Abatement Determination dated February 3, 2003, the Commissioner notified Mrs. Shah that he had denied her Application for Abatement.  Mrs. Shah seasonably filed her petition with the Board.  On the basis of the foregoing, the Board found that it had jurisdiction over the 1997 appeal. 
On January 20, 2003, the Commissioner issued to the appellants an NIA for 2001, showing a proposed assessment of $16,196 of personal income tax plus interest.  The Commissioner then issued an NOA dated September 24, 2003, showing the identical personal income tax liability plus additional interest.  The appellants paid the tax due and timely filed an Application for Abatement.  By Notice of Abatement Determination dated October 16, 2003, the Commissioner notified the appellants that he had denied their Application for Abatement.  The appellants seasonably filed their petition with the Board.  On the basis of the foregoing, the Board found it had jurisdiction over the 2001 appeal.  
The issue in these appeals is whether the appellants properly deducted as worthless debts certain unpaid loans which they made to Shah, Inc.  The total amount of tax at issue is $27,464, exclusive of interest. 
Loan #1:  Amounts paid pursuant to a settlement agreement 
On August 24, 2001, the appellants paid $992,143 as part of a settlement agreement, giving rise to an indebtedness in that amount owed to them by Shah, Inc.  Relevant background information provides the circumstances which gave rise to the settlement agreement.  At all times germane to these appeals, the U.S. government required general contractors to obtain surety bonds as a condition to bidding on a project ("bid bonds") and as a condition to receiving an award of a contract ("performance bonds").  The bonding company that guaranteed the bid and performance bonds for Shah, Inc. during the tax years at issue was the United States Fidelity and Guarantee Company ("USF&G").  On April 21, 1995, the appellants signed a Master Surety Agreement with USF&G, which created unlimited personal liability on the bid and performance bonds for Shah, Inc.  On March 31, 1996, Mr. Shah also entered a loan agreement with Fleet Bank whereby he agreed to personally guarantee a $750,000 line of credit, because USF&G would not issue bonds without a personal guarantee.  
On August 24, 2001, after Shah, Inc. had ceased its operations, the appellants entered into a settlement agreement with USF&G to release them from the personal liability established under the Master Surety Agreement.  Pursuant to their settlement, the appellants paid a total of $992,143 to USF&G, and in return, they received an assignment of USF&G's claims against Shah, Inc. in the bankruptcy proceedings that were pending in court.  This right of subrogation included the right to succeed to any claims that Shah, Inc. had against any other party.  At the hearing before the Board, the appellants presented no evidence relating to the worthlessness of these claims of Shah, Inc.
Loan #2:  Series of promissory notes issued by Mrs. Shah
During the final quarter of 1997, from September to December, Mrs. Shah made loans reflected in several promissory notes, totaling $740,000, to Shah, Inc., which had begun to face financial distress.  Shah, Inc. repaid some of the loans made by Mrs. Shah that year, including a payment of $25,000 on December 24, 1997.  Less than a week later, on December 29, 1997, Mrs. Shah lent Shah, Inc. an additional $50,000.  By the end of 1997, there was an outstanding principal balance on the loans of $300,000.  At the hearing before the Board, Mrs. Shah presented no evidence of any efforts to secure payment on the loans during 1997.  
Edward Nangle, the Certified Public Accountant for Shah, Inc., attempted to establish that Shah, Inc. became insolvent during 1997.  He cited Shah, Inc.'s $3,412,380 loss sustained during that year, and the fact that USF&G refused to issue any more bid or performance bonds.  As a result of the loss of its bonding, Shah, Inc. lost over $1 million in contracts that had previously been awarded and was not accorded any additional contracts.  Tax returns entered into evidence, however, demonstrated that the appellants continued to draw a salary from Shah, Inc. during 1998.  According to the Disclosure Statement filed with the appellants' 2001 U.S. Individual Income Tax Return, entered into evidence, Shah, Inc. "became bankrupt and was dissolved during the year 1998."  

The deductions at issue
The appellants deducted the loans at issue on their joint Form 1 filed for calendar year 2001 and on Mrs. Shah's separate Form 1 filed for calendar year 1997.  On Schedule C of their joint Form 1, the appellants claimed a business income loss of $992,413, the amount paid to USF&G as part of the settlement agreement.  Their 2001 Form 1 showed a refund due of $16,000.  On Schedule C of her separately-filed Form 1, Mrs. Shah claimed a business income loss of $300,000, the total amount of the outstanding loans she had made to Shah, Inc. during the final quarter of 1997.  Her 1997 Form 1 showed a refund due of $11,521.        
The Board's findings
The Board first found that the appellants failed to meet their burden of proving that the debts became worthless in the years in which they claimed the deductions.  With respect to Mrs. Shah's 1997 deduction, the Board found that Mrs. Shah failed to demonstrate that she actually sought repayment of the loans during 1997.  Moreover, the Board found that Mrs. Shah failed to demonstrate that Shah, Inc. had officially ceased all operations by the end of 1997.  The facts that Shah, Inc. paid Mrs. Shah $25,000 less than a week before the end of 1997, that Mrs. Shah continued to lend money to Shah, Inc. until two days before the close of the year, that the appellants continued to draw a salary from Shah, Inc. in 1998, and that Shah, Inc. did not enter bankruptcy until 1998, weighed heavily against a finding that Shah, Inc. had ceased its operations by the end of 1997 and was actually insolvent.  With respect to the 2001 deduction, the Board found that the appellants failed to present any evidence that there was no hope of recovery under the right of subrogation which they received as a result of their settlement with USF&G.    
The Board further found that the appellants failed to meet their burden of proving that the loans at issue were made in connection with the appellants' performance of services as employees of Shah, Inc.  A review of the Form 1 from 1995, the year that the appellants signed the Master Surety Agreement, and the Form 1 from 1997, the year that Mrs. Shah made the various loans to Shah, Inc., established that the salaries drawn by the appellants were quite small in comparison with their overall taxable income.  In 1995, the ratio of the appellants' wages from Shah, Inc. to their total income before deductions and exemptions was approximately 34%.  In 1997, the ratio of Mrs. Shah's wages to her total income before deductions and exemptions was approximately 17%, and assuming the relevance of Mr. Shah's wages, the ratio of the appellants' combined wages to Mrs. Shah's total income before deductions and exemptions was still less than 50%.   Moreover, the Board found that Mr. Shah's investment interest as founder and sole shareholder of Shah, Inc., his personal guarantee on the $750,000 line of credit, and the appellants' unlimited liability on the Master Surety Agreement with USF&G, all weighed heavily against a finding that the appellants' motivation for making the loans was to protect their jobs.  Rather, the evidence created a strong inference that the appellants' motivation was to protect their investment in Shah, Inc. and to avoid personal liability on the Master Surety Agreement.  Therefore, for the reasons stated in the following Opinion, the Board found that the Commissioner properly denied the deductions at issue.  Accordingly, the Board issued decisions for the appellee in these appeals.

OPINION
At issue in these appeals is whether the appellants properly claimed as worthless debt deductions the loans that they made to Shah, Inc.  Mrs. Shah claimed a deduction of $300,000, the amount of unpaid loans she made to Shah, Inc. during 1997, on her 1997 Form 1, and the appellants claimed a deduction of $992,413, the amount paid to USF&G as part of the settlement agreement, on their 2001 Form 1.
Massachusetts Part B adjusted gross income is defined as "Part B gross income less the following deductions:- (1) [t]he deductions allowable under section sixty-two . . . of the Code."  G.L. c. 62, § 2(d).  The appellants argued that the deductions at issue were authorized pursuant to Code § 62(a)(2)(A), which allows as a deduction the following:
Reimbursed Expenses of Employees. --  The deductions allowed by part VI (section 161 and following) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowing arrangement with his employer. . . .

The appellants outlined a four-prong test for deductibility of expenses under Code § 62(a)(2)(A).  The test requires that the expenses be (1) allowed by Part VI of the Code; (2) paid by the taxpayer; (3) paid in connection with the taxpayer's performance of services as an employee; and (4) paid under a reimbursement or similar arrangement with the employer.  The appellants argued that the loans at issue met each of the four prongs listed above, because deductions for worthless debts are allowed pursuant to Part VI of the Code, specifically Code § 166, and because they paid the expenses in connection with their performance of services as employees of Shah, Inc.  Code § 166 provides that "[t]here shall be allowed as a deduction any debt which becomes worthless within the taxable year."
The Commissioner argued, inter alia, that a Code § 166 deduction is not an allowable Massachusetts deduction, because this deduction is claimed on Schedule A of the U.S. Resident Individual Tax Return, and consequently it is not an allowable deduction on the Form 1.  The Commissioner then contended that even if worthless debt deductions are allowable in Massachusetts pursuant to Code § 62(a)(2)(A), the appellants nonetheless failed to meet their burden of proving that the debts became worthless in the years in which they claimed their deductions, and that they incurred the expenses in connection with their performance of services as employees of Shah, Inc.
The Board reserved ruling on whether Code § 166 deductions may be allowable in Massachusetts pursuant to Code § 62(a)(2)(A), because the Board based its decisions on the two factual grounds raised by the Commissioner: (1) whether the debts became worthless in the year in which the appellants claimed the deductions; and (2) whether the appellants made the loans in connection with their performance of services as employees of Shah, Inc.  The Board found that the appellants failed to meet their burden of proving both facts, and therefore they were not entitled to claim the disputed deductions on their Forms 1.  
1.  The appellants failed to meet their burden of 
    proving that the loans became worthless during the 
    years they claimed the deductions.

Taxpayers claiming a deduction under Code § 166 bear the burden of proving by a preponderance of the evidence that the debt became worthless within the year that they claim the deduction.  K & K Service Co., Inc. v. United States, 568 F.Supp. 38, 40 (D. Mass. 1983) (citations omitted).  In Osborne v. Commissioner of Revenue, 2005 Mass. ATB Adv. Sh. 254 (Docket No. C266648, May 5, 2005) ("Osborne"), the Board provided the following standards for proving the year of worthlessness under Code § 166: 
To avail himself of the deduction, "a taxpayer must prove that on January 1 of the taxable year the debts had some intrinsic or potential value, and that by December 31 the debts had lost all such value." Estate of Mann, 731 F.2d 267, 275 (5th Cir. 1984). Courts have been exacting in requiring proof of worthlessness: "[t]he taxpayer must usually show identifiable events to prove worthlessness in the year claimed." American Offshore, Inc. v. Commissioner of Internal Revenue, 97 T.C. 579, 593 (1991). Debts are wholly worthless when "there are reasonable grounds for abandoning any hope of repayment in the future, and it could thus be concluded that they have lost their 'last vestige of value.'" Estate of Mann, 731 F.2d at 276 (citations omitted.)  

Id. at 260-61.  As explained below, the Board ruled that the appellants failed to show any "identifiable events" that could establish that the loans had "lost their 'last vestige of value'" during years in which they claimed the deductions.  Accordingly, the appellants failed to meet their burden of proving that the debts had become worthless during the tax years at issue. 
		a.  The deduction claimed in 1997.
The Board found that Mrs. Shah failed to show identifiable events that proved the worthlessness of the loans in 1997, the year in which she claimed the deduction.  First, Mrs. Shah offered no evidence that she actually sought repayment of the loans that she made to Shah, Inc. during 1997; she merely offered the existence of a balance on the loans at the end of 1997.  "Nonpayment of a debt, without more, 'does not render the debt worthless for purposes of determining deductibility.'"  Osborne, 2005 Mass. ATB Adv. Sh. at 261 (citation omitted).  Mrs. Shah offered no evidence that she ever made a demand for payment on the promissory notes.  "A bad debt deduction is not allowed where a taxpayer takes no action to collect a debt and presents no evidence to show that such collection efforts would have been futile."  Hood Sailmakers, USA v. Commissioner of Revenue, 1999 Mass. ATB Adv. Sh. 96, 105 (Docket No. F213360, March 12, 1999) (citing Loewi & Co. v. Commissioner, 232 F.2d 621, 624-25 (7th Cir. 1956)).  See also Cole v. Commissioner of Revenue, 871 F.2d 64, 67 (7th Cir. 1989) ("Cole") (finding facts which might substantiate a claim of worthlessness include persistent refusal to pay on demand) and Hotel Continental, Inc. v. Commissioner of Internal Revenue, 70 T.C.M. (CCH) 295 (Docket No. 5590-93, August 3, 1995), aff'd, 97-1 U.S. Tax Cas. (CCH) P50464 (9th Cir. 1997) (ruling that a taxpayer needed to offer evidence "that collection efforts . . . would have been futile").  The Board ruled that the mere existence of an outstanding balance, without any evidence to show the futility of collection efforts, was insufficient to prove that the debts had become worthless.  
Furthermore, a debt does not become worthless while the debtor corporation remains a going concern.  Magnon v. Commissioner of Internal Revenue, 73 T.C. 980, 999 (Docket Nos. 4204-77, 4281-77, February 28, 1980).  Even where a debtor entity is insolvent to the extent that it cannot pay its debts in full and there is a possibility of bankruptcy, its continued operation nonetheless establishes a potential ability to pay its debts and thus refutes a finding that a debt has become worthless.  Randall v. Commissioner of Revenue, 41 T.C.M. (CCH) 186 (Docket No. 8251-75, October 14, 1980).  See also Osborne, 2005 Mass. ATB Adv. Sh at 261-62 ("The business continued operating, employees continued to draw salaries, and the business retained its distributorship rights for suppliers whose products it sold.").  
Mrs. Shah failed to prove that Shah, Inc. had ceased all operations by the end of 1997.  The Board accorded no weight to the testimony of Mr. Nangle, who did not rely on any "identifiable events" to support a finding that Shah, Inc. had become insolvent by the end of 1997.  His opinions were irrelevant, because the evidence before the Board established the opposite proposition.  First, the appellants continued to collect salaries from Shah, Inc. during 1998.  Second, Mrs. Shah continued to lend money to Shah, Inc. until December 29, 1997, two days before the close of the year, when she loaned an additional $50,000 to the company.  See Cole, 871 F.2d at 68 (ruling that appellant's willingness to make further advances to the debtor thwarted a finding of worthlessness).  Finally, the $25,000 payment by Shah, Inc. to Mrs. Shah on December 24, 1997, about a week before the close of the calendar year, weighed heavily against a finding that the debt had become totally worthless by the end of 1997.  Cf. id. at 67 (factors weighing against a finding of worthlessness include debtor's payment of interest on a debt) (citing 2 Bittker, Federal Taxation of Income, Estates and Gifts ¶ 33.3, at 33-11 (1981)).   
The best evidence of insolvency was Shah, Inc.'s official declaration of bankruptcy, which did not occur until 1998, the year after Mrs. Shah claimed her deduction.  Before that event, there remained the potential ability for Shah, Inc. to pay at least some of its debts, thus refuting a finding that the loans had become worthless during 1997, the year prior to insolvency.  Cf. Rondeau v. Commissioner of Revenue, 1997 Mass. ATB Adv. Sh. 424 (Docket No. 191701, May 16, 1997) (finding that a second mortgage did not become "worthless" until the first mortgage-holder foreclosed on the property).  See also Dewey v. Commissioner, 66 T.C.M. (CCH) 1899 (Docket No. 25759-91, December 30, 1993) ("[T]he mere failure of a debtor to pay promptly does not justify a determination that the debt is worthless in the absence of any investigation as to the debtor's solvency.").  
The Board ruled that Mrs. Shah failed to meet her burden of proving that the loans she made to Shah, Inc. had become worthless in 1997, the year in which she claimed the deduction.  Accordingly, the Board ruled that the Commissioner's assessment for that year was proper.
		b.  The deduction claimed in 2001.
According to Treasury Regulations section 1.166-9(a), when a taxpayer makes a payment in discharge of an obligation to act as a guarantor, the payment is treated as a business debt becoming worthless in the year in which payment on the guarantee was made.  However, when the agreement also provides a right of subrogation to the taxpayer, "treatment as a worthless debt is not allowed until the taxable year in which the right of subrogation or other similar right becomes totally worthless (or partially worthless in the case of an agreement which arose in the course of the taxpayer's trade or business)."  Treasury Regulations section 1.166-9(e)(2).  See Putnam v. Commissioner, 352 U.S. 82, 85 (1956); see also Intergraph Corp. v. Commissioner of Internal Revenue, 106 T.C. 312, 324 (Docket No. 21286-93, May 8, 1996), aff'd 97-2 U.S. Tax Cas. (CCH) P50597 (11th Cir. 1997) ("[W]here a guarantor does have rights of subrogation and reimbursement from the original debtor (regardless of whether or not these rights are expressly stated in the guaranty agreement), the provisions of section 1.166-9(e)(2), Income Tax Regs., apply, and the guarantor is not entitled to a bad debt deduction until the rights of subrogation and reimbursement are shown to be worthless.").  To meet the burden of proving that a right to subrogation has become worthless, a taxpayer must show "the futility of any hope of recovery under his right of subrogation." Read v. Commissioner, 73 T.C.M. (CCH) 3000 (Docket No. 21250-94, June 11, 1997).  
On August 24, 2001, the appellants paid $992,413 to USF&G as part of the settlement agreement.  Pursuant to their settlement, the appellants received an assignment of USF&G's claims against Shah, Inc. in the pending bankruptcy proceedings, which included the right to succeed to any claims that Shah, Inc. had against any other party.  The appellants presented no evidence relating to the worthlessness of these claims of Shah, Inc.  The appellants had the burden of proving the facts necessary to justify their claim for abatement.  William Rodman & Sons, Inc. v. State Tax Commissioner, 373 Mass. 606, 610 (1977).  The Board ruled that the appellants failed to meet their burden of proving that their right of subrogation in Shah, Inc. had become worthless in 2001, the year in which they claimed the deduction.  Accordingly, the Board ruled that the Commissioner's assessment was proper.
2.  The appellants failed to meet their burden of  
    proving a business motivation for the loans at  
    issue.

The appellants' argument for deductibility requires that they demonstrate that the debts at issue were related to their employment with Shah, Inc.  See Code § 62(a)(2)(A) (allowing deductions for "expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee").  The Board, however, found that the appellants failed to meet their burden of proving that the loans at issue were related to the appellants' employment with Shah, Inc.  
In determining whether a debt is business or non-business, the inquiry must focus on whether the loss bears a "proximate" relation to the taxpayer's business.  Treasury Regulations section 1.166-5(b).  The U.S. Supreme Court has interpreted "proximate" to require that the taxpayer's desire to protect employment must be the "dominant motivation" for making the loan.  United States v. Generes, 405 U.S. 93, 103 (1972) ("Generes").  Moreover, because a taxpayer's testimony that he was motivated by job protection can often be "self-serving," id. at 106, "[t]he objective facts surrounding loans, rather than the subjective intent, control."  Kelson v. United States, 503 F.2d 1291, 1293 (1974) (citing Generes, 405 U.S. at 104).  
In determining the dominant motive for a loan, especially one made by a sole shareholder to a corporation in which he is also an employee, "courts look primarily to three objective factors: the size of the taxpayer's investment, the size of his after-tax salary and the other sources of gross income available to the taxpayer at the time of the loan."  Hutchinson v. Commissioner, 43 T.C.M. 440 (Docket No. 4071-80, February 1, 1982) (citing Generes, supra), Scifo v. Commissioner, 68 T.C. 714, 723 (Docket Nos. 6788-75, 6789-75, August 23, 1977), Shinefeld v. Commissioner, 65 T.C. 1092 (Docket No. 2504-73, March 3, 1976) ("Shinefeld"), Smith v. Commissioner, 60 T.C. 316, 318 (Docket No. 3342-69, May 31, 1973) ("Smith")).  The smaller the taxpayer's salary in relation to his investment in the company, including the size of the loan, and his other sources of income, the less likely that the taxpayer's dominant motivation was protection of his job as opposed to protection of his investment interests.  Generes, 405 U.S. at 106 (finding that the taxpayer's testimony that he was motivated solely by the protection of his $12,000 annual salary was "strained all the more" when weighed against his investment in the corporation, including the loan, and "his personal interest in the integrity of the corporation as a source of living for his son-in-law and as an investment for his son and his other son-in-law").  
A review of appellants' Forms 1 for 1995, the year they signed the Master Surety Agreement with USF&G, and 1997, the year Mrs. Shah made several loans to Shah, Inc., revealed that the appellants' salaries from Shah, Inc. accounted for a fairly low ratio of their overall income.  On their 1995 Form 1, the ratio of the appellants' combined wages of $98,800 to their total combined income before deductions and exemptions was approximately 34%.  On Mrs. Shah's 1997 Form 1, the ratio of her wages of $36,400 to her total income before deductions and exemptions was approximately 17%.  Even assuming the relevance of her spouse's income of $66,000, the appellants' combined wages came to only 48% of Mrs. Shah's total income before deductions and exemptions, less than half of her total income.  The Board ruled that the appellants' testimony that they were motivated by the protection of their salaried jobs with Shah, Inc. was "self-serving" at best.  Generes, 405 U.S. at 106.  The Board relied on the objective facts, which weighed heavily against finding a business motive for the loans at issue. 
The instant appeals were akin to Shinefeld, 65 T.C. at 1099, where the Tax Court ruled that, from an objective standpoint, the taxpayer's dominant motive for making a loan was not job protection but instead the protection of his investment in the corporation that he had founded:  "If one motive must be lifted from its psychic matrix and labeled 'dominant,' it would be the motive to protect [the corporation] itself, the business which petitioner had built from a shoestring and still regarded as 'his.'"  Mr. Shah emigrated from India with the equivalent of a "shoestring" in his pocket and built a successful company, bearing his name, which performed many lucrative government contracts.  Along with being an employee, Mr. Shah served as its sole shareholder, president, treasurer, and a director, Mrs. Shah served as clerk, director, and an employee, and their son was an employee.  Moreover, the appellants had a large investment interest at stake in making loans to Shah, Inc., namely the $750,000 line of credit and, of critical importance, the unlimited personal liability resulting from the Master Surety Agreement with USF&G.  Thus, analogous to the taxpayer's situation in Shinefeld, supra, the facts, objectively viewed, establish that the dominant motive for the appellants in making the loans was to protect Shah, Inc. itself, the source of the appellants' investment and subject of their personal guarantee, not to protect a combined salary of approximately $100,000, less than half of their overall taxable incomes during the relevant tax years.  See also Smith, 60 T.C. at 319-20 (finding the taxpayer to have a non-business motive where the taxpayer's investment was relatively large, the taxpayer's salary was relatively small, and the taxpayer's other sources of income were relatively large).  
The Board ruled that, based on the objective evidence, the appellants could not meet their burden of proving a dominant business motivation for making the loans at issue.  Rather, the evidence weighs heavily toward a finding that the loans were non-business in nature.  The Board thus ruled that the Commissioner properly denied the deductions at issue.

Conclusion
The Board ruled that the appellants failed to meet their burdens of proving that loans made to Shah, Inc. became worthless during the years in which they claimed the deductions at issue and that their dominant motives for making the loans was related to their employment with the company.  Accordingly, the Board issued decisions for the appellee in these appeals.  
					THE APPELLATE TAX BOARD

By:_____________________________Chair

   _____________________________Commissioner


   _____________________________Commissioner


   _____________________________Commissioner


   _____________________________Commissioner
					

			   		   
A true copy:



Attest: ____________________________
	   Assistant Clerk of the Board

  The appellants offered no evidence that Mrs. Shah ever charged interest to Shah, Inc. on any of the loans, nor did she deduct on her 1997 Form 1 any sums attributable to interest on the loans.
  Mr. Shah's Form W-2 showed wages of $16,500 and Mrs. Shah's Form W-2 showed wages of $4,900 from Shah, Inc.
  The appellants claimed the $992,413 loss on Schedule C of their joint U.S. Individual Income Tax Return for 2001.
  Mrs. Shah also claimed the $300,000 loss on Schedule C of her separately-filed U.S. Individual Income Tax Return for 1997.
 In 1995, the appellants filed a joint Form 1 claiming total income before deductions and exemptions of $291,956, including their combined wages from Shah, Inc. of $98,800.  
 On her 1997 Form 1 filed separately, Mrs. Shah claimed total income before deductions and exemptions, of $214,625, including her wages from Shah, Inc. of $36,400.  On his Form 1 filed separately, Mr. Shah claimed wages from Shah, Inc. of $66,000 before deductions and exemptions.   
  References to "Code" in the General Laws, as well as herein, are to the Internal Revenue Code.   
 The appellants' discussion of the fourth prong is omitted here because it is not pertinent to the Board's ruling in these appeals.
  Only a bad debt related to a taxpayer's business would be eligible for deduction in Massachusetts.  See G.L. c. 62, § (a)(2)(A)
  Motivation is to be determined as of the date when a taxpayer makes a guarantee rather than the date when a payment in discharge of liability as guarantor is made.  See French v. United States, 487 F.2d 1246, 1248 (1st Cir. 1973).

ATB 2005-353