Deputy v. du Pont, 308 U.S. 488">308 U.S. 488 (1940), enunciated the general principle that expenses of a corporation paid by a shareholder ^{*345 either a loan or a contribution to capital. See Noland v. Commissioner , 269 F.2d 108">269 F.2d 108, 111 (4th Cir. 1959), affg. a Memorandum Opinion of this Court; Westerman v. Commissioner, 55 T.C. 478">55 T.C. 478, 482 (1970); Rink v. Commissioner, 51 T.C. 746">51 T.C. 746 (1969). However, an exception is made when a taxpayer makes expenditures to protect or promote his own business, even though the transaction giving rise to the expenditures originated with another person (or entity), and would have been deductible by that person (or entity) if payment had been made by him (or it). See Lohrke v. Commissioner, 48 T.C. 679">48 T.C. 679, 684-685 (1967); Pepper v. Commissioner, 36 T.C. 886 (1961); Bronston v Commissioner, T.C. Memo. 1975-5.}

Accordingly, we must decide whether petitioner made these payments in order to protect his own trade or business.

*346

Trade or Business

Section 162 allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Petitioners allege that petitioner Donald S. Morris was in the trade or business of forming corporations, consulting from 1977 through 1981, or building earthen dams, and that the payments were made to protect petitioner's business reputation and credit with the various banking institutions.

Respondent contends that petitioners have failed to prove that the activity of "Donald S. Morris," as reported on their 1981 Schedule C, constituted a trade or business. Additionally, respondent contends that petitioner was merely an investor in Producers and Shelby, and expected to receive capital appreciation and dividends as the fruits of his involvement therein. We agree with respondent.

Whether activities of an individual constitute carrying on a trade or business depends upon an examination of the facts in each particular case. Higgins v. Commissioner312 U.S. 212">312 U.S. 212, 217 (1941). As the Supreme Court stated in Whipple v. Commissioner, 373 U.S. 193">373 U.S. 193, 202 (1963):

Devoting*347 one's time and energies to the affairs of a corporation is not of itself, and without more, a trade or business of the person so engaged. Though such activities may produce income, profit or gain in the form of dividends or enhancement of the value of an investment, this return is distinct to the process of investing and is generated by the successful operation of the corporation's business, as distinguished for the trade or business of the taxpayer * * * .

Since the business of a corporation is separate from the business of its officers and shareholders, Deputy v. du Pont, supra, the taxpayer must establish that the compensation he sought from his activity is other than the "normal investor's return and that the income received is directly for his services rather than indirectly through the successful operation of the corporate enterprise." Deely v. Commissioner, 73 T.C. 1081">73 T.C. 1081, 1093 (1980). See Whipple v. Commissioner, 373 U.S. at 203.

It is clear, based on Whipple and Deely, that for an activity (forming corporations or consulting) to qualify as a separate business, it must be conducted for a fee, commission, *348 or with the immediate purpose of selling the corporations at a profit in the ordinary course of that business. See Bodzy v. Commissioner, 331">321 F.2d 331 (5th Cir. 1963), affg. in part and revg. in part a Memorandum Opinion of this Court; United States v. Byck, 325 F.2d 551">325 F.2d 551 (5th Cir. 1963); Millsap v. Commissioner, 46 T.C. 751">46 T.C. 751 (1966), affd. 387 F.2d 420">387 F.2d 420 (8th Cir. 1968).

Petitioner alleges that (1) his dominant motive in forming the corporations and consulting was to replace the annual $ 120,000-plus income he lost when he terminated his employment with Drillco; ^{*349 in 1981 petitioner never received any type of income from any of the corporations he helped form, including Producers. Instead all fees paid by those corporations were paid directly to Donald S. Inc. "To be in a trade or business one must intend to make a profit." Leamy v. Commissioner , 85 T.C. 798">85 T.C. 798, 807 (1985). It is clear that petitioner did not expect to make a profit from his consulting activity or from forming these corporations. He, individually, never received a dime.}

Additionally, we find petitioner was not even engaged in the trade or business of being an employee of Producers. Low v. Nunan, 154 F.2d 261">154 F.2d 261 (2d Cir. 1946), affg. a Memorandum Opinion of this Court; Snarski v. Commissioner, T.C. Memo. 1981-328.

*350

Accordingly, we find petitioner's motive in guaranteeing Producers' performance bonds was not to protect his salary or employment with Producers.

Petitioner also never received a salary or any other form of compensation from Donald S. Inc. from 1977 through 1980. Therefore, any payments petitioner made to or for the benefit of Shelby (or Producers) were again not made to protect his income from or employment with Donald S. Inc. ^{Gould v. Commissioner, 64 T.C. 132">64 T.C. 132 (1975).}

Additionally, we find petitioner did not consider himself to be in the trade or business of consulting. Petitioner described his business activity as "Investments" on his Schedules C from 1978 through 1981. It is well settled law that management of one's investments does not constitute a trade or business. Whipple v. Commissioner, 373 U.S. at 202;*351 Higgins v. Commissioner, supra.

Based on the foregoing, we find that, in the absence of any salary or other compensation, petitioner's activities of forming the various corporations or providing services to them fails to constitute a separate trade or business. Low v. Nunan, supra; Meyer v. Commissioner, T.C. Memo 1983-208">T.C. Memo. 1983-208; Nichols v. Commissioner , T.C. Memo 1963-148">T.C. Memo. 1963-148. The evidence supports a finding that petitioner's motive in entering into the relationships with the various corporations was that of an investor.

Petitioner also claims that his activities, after January 1, 1979, could properly be characterized as "Donald S. Morris," doing business as "Producers Construction Company" and that all the payments to or on behalf of Shelby were related to the construction of the earthen dams. Again, we disagree and find that petitioner did not step into the trade or business of building earthen dams.

Producers and Shelby, not petitioner, were in the trade or business of building earthen dams. Petitioner held a 50-percent stock interest in Producers and a 25-percent stock interest in Shelby. At the time Producers entered*352 into the contract with Shelby it still had its corporate certificate, was still recognized as a corporation for Federal tax purposes, and remained a separate entity. See Messer v. Commissioner, 438 F.2d 774 (3d Cir. 1971), affg. 52 T.C. 440">52 T.C. 440 (1969); United States v. Young,604 F. Supp. 164">604 F. Supp. 164 (N.D. Okla. 1984); McDonnell v. Commissioner, T.C. Memo. 1965-125. The fact that petitioner honestly considered the completion of the earthen dams his personal obligation, rather than that of the defunct Producers, or that petitioner might have been required by law to pay any obligations arising under the indemnity agreement should Producers default, is of no consequence in determining whether he was in a separate trade or business. Ihrig v. Commissioner, 26 T.C. 73">26 T.C. 73, 76 (1956). The mere furnishing of management or other services to a corporation in return for a normal investor's return is not a trade or business. Whipple v. Commissioner, supra.

Moreover, petitioner did not report any of the income received pursuant to the government contracts on any of his personal income tax returns. The*353 three government contracts were completed on July 13, 1979, November 28, 1979, and February 7, 1980. Obviously payment was made to "Producers" since it was the only entity the government contracted with. If petitioner had, in fact, stepped into Producers' shoes, then any payments made to Producers would have been reported on petitioner's Schedules C. They were not.

Based on the foregoing, we conclude that everything petitioner did with respect to, and on behalf of Producers and Shelby, he did in his capacity as a shareholder. Accordingly, we find that petitioner was not in a separate trade or business of either forming corporations, consulting, or of building earthen dams. ^*354

Bad Debt or Contribution to Capital

We must next decide whether petitioners are entitled to deduct any portion of the completion costs as bad debts under section 166, or whether they properly constitute contributions to capital.

Petitioners allege that the payments were made to complete the earthen dams and, alternatively, since they expected repayment, the advances and disbursements should be treated as loans. Respondent, however, contends that petitioners have failed to establish the relationship of these payments with any guarantees and, therefore, they represent capital contributions to Shelby. Alternatively, respondent contends that if the payments are characterized as loans they are deductible only as nonbusiness bad debts, since they were not proximately related to any trade or business of petitioner. Respondent also contends that petitioners have failed to reduce the amount they now claim by the $ 20,000 Shelby paid them on May 25, 1979.

In distinguishing between debt or equity, the courts resolve the issue on a case-by-case basis, depending upon the facts and circumstances of the particular case. John Kelley Co. v. Commissioner, 326 U.S. 521">326 U.S. 521, 530 (1946);*355 Harlan v. United States, 409 F.2d 904">409 F.2d 904, 907 (5th Cir. 1969). In determining whether a shareholder's payment to or on behalf of a corporation is a loan or a contribution to capital, the United States Court of Appeals for the Fifth Circuit, to which any appeal in this case will lie, uses the following 13 factors:

(1) the names given to the 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 of principal and interest;

(5) participation in management flowing as a result;

(6) the status of the contribution in relation to regular corporate creditors;

(7) the intent of the parties;

(8) "thin" or adequate capitalization;

(9) identity of interest between creditor and stockholder;

(10) source of interest payments;

(11) the ability of the corporation to obtain loans from outside lending institutions;

(12) the extent to which the advance was used to acquire capital assets; and

(13) the failure of the debtor to repay on the due date or to seek a postponement. [Texas Farm Bureau v. United States, 725 F.2d 307">725 F.2d 307, 311 (5th Cir. 1984), quoting*356 Estate of Mixon v. United States, 464 F.2d 394">464 F.2d 394, 402 (5th Cir. 1972).]

No single factor alone is determinative and they should be used only as aids in analyzing the transaction. Furthermore, for an advance or disbursement to constitute a true loan there must have been at the time the parties entered into the transaction an unconditional intention on the part of the transferee to repay the money, and an unconditional intention on the part of the transferor to secure repayment. Haag v. Commissioner, 88 T.C. 604">88 T.C. 604 (1987); Haber v. Commissioner, 52 T.C. 255">52 T.C. 255, 266 (1969), affd. 422 F.2d 198">422 F.2d 198 (5th Cir. 1970). See Slear v. Commissioner, T.C. Memo. 1987-395.

On November 13, 1981, after extensive negotiations with Mr. Pouyer, petitioner paid Shelby (Petro Site) $ 300,000 pursuant to the Producers/Shelby contract. Although petitioner was not personally liable under the Producers/Shelby contract to pay Shelby if Producers failed to do so, it is clear that petitioner was ultimately personally liable under American's indemnity agreement.

Petitioner had two choices with respect to paying Producers' creditors: *357 (1) wait and allow American, as surety, to pay off any liens on the project and then, when called upon to do so, indemnify American for its payments; or (2) to immediately pay off the customers' claims directly, thereby limiting his losses by avoiding the necessity of reimbursing American for its expenses and costs, including counsel fees.

We believe petitioner would have been required to make good on the indemnity. Although, in form, petitioner's obligation ran to American, in substance petitioner was ultimately liable to pay off any creditors associated with the government contracts. By paying the customer directly, petitioner merely "telescoped the transaction," thereby avoiding additional expenditures that would have arisen had American been called upon first to liquidate the creditors' claims. Andrew v. Commissioner, 54 T.C. 239">54 T.C. 239 (1970).

An indemnitor in a four-party situation is to be treated the same as a guarantor. United States v. Hoffman, 423 F.2d 1217">423 F.2d 1217 (9th Cir. 1970); Horne v. Commissioner, 59 T.C. 319">59 T.C. 319, 333-337 (1972), affd. 523 F.2d 1363">523 F.2d 1363 (9th Cir. 1975), cert. denied 439 U.S. 892">439 U.S. 892 (1978);*358 Nicewander v. Commissioner, T.C. Memo. 1975-234. A guarantor, upon payment, stands in a creditor-debtor relationship with his principal, and must look to section 166 for deduction of related losses. ^{United States v. Generes, 405 U.S. 93">405 U.S. 93, 103 (1972);*359 Whipple v. Commissioner, supra; Benak v. Commissioner, 77 T.C. 1213 (1981); Shinefeld v. Commissioner, 65 T.C. 1092">65 T.C. 1092, 1096 (1976); Modell v. Commissioner, T.C. Memo. 1983-761. Additionally, we find that the $ 300,000 payment was worthless in 1981 when petitioner paidShelby (Petro Site). See Putnam v. Commissioner, 352 U.S. 82 (1956); Nelson v. Commissioner, 281 F.2d 1">281 F.2d 1, 4 (5th Cir. 1960), affg. a Memorandum Opinion of this Court; Modell v. Commissioner, supra.}

Based on the foregoing, we find petitioner is entitled to a $ 300,000 short-term capital loss under section 166(d) in 1981.

As for the remaining $ 295,786, ^*360

After reviewing the evidence we hold that petitioner failed to prove that (1) the $ 110,786 in fact applied to an outstanding loan of Shelby.

(1) Petitioner testified that he anticipated repayment of the sums so expended. Producers, however, was defunct as of February 21, 1979. Therefore, petitioner could not have expected repayment from Producers, but rather must have expected repayment from Shelby. Petitioner, however, did not present any documentary evidence establishing the existence of a bona fide debtor-creditor relationship with Shelby; i.e., maturity date, notes, fixed payment schedule, *361 or payment of interest.

The absence of notes or other instruments of indebtedness, or the absence of a fixed maturity date and a fixed obligation to repay, are strong indications that the advances are capital contributions rather than loans. Estate of Mixon v. United States, 464 F.2d 394">464 F.2d 394, 403-404 (5th Cir. 1972).

Moreover, petitioner testified that although he expected repayment of the amounts advanced to Shelby, he did not expect repayment until Shelby had sufficient funds available to pay him back. If the expectation of repayment depends solely on the success of the borrower's business, the transaction has the appearance of a capital contribution. Estate of Mixon v. United States, 464 F.2d at 405. Moreover, an expectation of repayment solely from corporate earnings is not indicative of bona fide debt regardless of its reasonableness. See Lane v. United States, 742 F.2d 1311">742 F.2d 1311, 1314 (11th Cir. 1984); Betson v. Commissioner, 802 F.2d 365">802 F.2d 365, 371 (9th Cir. 1986), affg. in part and revg. in part a Memorandum Opinion of this Court.

Additionally, we note that Shelby was capitalized with only $ 1,000, and petitioner*362 was the only shareholder who had the financial wherewithal to fund the corporation's expenses. Thin or inadequate capitalization is strong evidence that the advances are capital contributions rather than loans. See Estate of Mixon v. United States, 464 F.2d at 408. Accordingly, we hold that petitioner failed to prove that a true debtor-creditor relationship existed with Shelby. ^{*363 and was signed on behalf of Shelby by Don Morris as vice president.}

Thus, we conclude that petitioner voluntarily made the payment on behalf of Shelby. See Noland v. Commissioner, 269 F.2d 108">269 F.2d 108, 111 (4th Cir. 1959), affg. a Memorandum Opinion of this Court, cert. denied 361 U.S. 885">361 U.S. 885 (1959); Westermam v. Commissioner, 55 T.C. 478">55 T.C. 478, 482 (1970).

(3) Petitioner alleges that Crocker National Bank told him that the $ 100,000 certificate of deposit was applied against an outstanding loan of Shelby. In support thereof, petitioner introduced a November 8, 1979, bank slip debiting $ 479,649.53 from his account "for the purchase of two (2) cashier's checks to pay off Crocker National Bank, California." Below this inscription, petitioner wrote "100,000 CD applied to principal 579,649.53." We find this evidence insufficient to prove that the $ 100,000 certificate was in fact applied to any loan of Shelby. Accordingly, we hold that petitioners failed to prove that the $ 100,000 was even a capital contribution.

Based upon the foregoing, we conclude that $ 195,786 properly represents capital contributions to Shelby rather than loans.

To reflect*364 the foregoing,

Decision will be entered under Rule 155.

Footnotes

1. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and in effect for 1981. All Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Before August 1977 Mr. Whiting approached petitioner and asked him if they could go into business together. However, because petitioner was still employed with Drillco, he declined.↩
3. Mr. Muegge, Producers, petitioner, and Mr. Rosson.↩
4. In December 1977 petitioner formed Donald S. Inc., a wholly owned Texas corporation. It was to engage in the principal activity of "Business Services" with the product being "Consulting." Petitioner used the corporation as an accounting entity to account for the revenues and expenses of the consulting arrangements he had with Whiting, Chance, Producers, and others.↩
5. Shelby was not formally incorporated until January 3, 1979.↩
6. This resulted from its failure to file its franchise tax report and revive its right to do business in 1978.↩
7. Although KC&S remained responsible for completing the other two contracts, Shelby actually completed them.↩
8. On June 26, 1980, Shelby, through petitioner as vice president, executed a $ 34,729.39 promissory note payable to First State Bank of Bellaire. On September 24, 1980, the note was renewed. On May 18, 1981, the note was paid in full. ↩
9. A company unrelated to petitioner. ↩
10. On February 26, 1982, pursuant to an amendment to the Articles of Incorporation, Shelby's name was officially changed to Petro Site, Inc.↩

11. Donald S. Inc. received and reported on its Form 1120 [Corporation Income Tax Return], the following amounts:

↩

	Whiting	Chance	Producers	Shelby
1978	$ 21,000.00	$ 22,464.25	$ 9,501.00	$ -0-
1979	37,000.00	33,080.68	-0-	6,000.00
1980	50,000.00	39,376.70	-0-	20,000.00
1981	65,000.00	8,314.32	-0-	-0-
1982	5,000.00	-0-	-0-	6,000.00

12. This includes employees or corporate officers. See Rink v. Commissioner, 51 T.C. 746↩ (1969).
13. "To replace such income, Donald S. Morris has sought consulting fees and salaries from corporations which he helped form."↩
14. See Van Fossan v. Commissioner, T.C. Memo. 1983-703; Meyer v. Commissioner, T.C. Memo. 1983-208↩.
15. The only distribution petitioner received from Donald S. Inc. occurred in 1981 when he received a $ 50,000 director's fee which he included on his 1981 Schedule C.↩
16. Even if we were to find that petitioner was in a separate trade or business, only the $ 300,000 payment to Shelby (Petro Site) could possibly qualify as a section 162 deduction in 1981, since all other payments were made before that year. Furthermore, the $ 300,000 could qualify as a deduction only if we found it was an ordinary and necessary expense rather than a loan (debt), or a capital contribution. See Bronston v. Commissioner, T.C. Memo. 1975-5↩.
17. A debt arising out of a guarantee that has been performed is a "debt" under section 166. Horne v. Commissioner, 59 T.C. 319">59 T.C. 319 (1972), affd. 523 F.2d 1363">523 F.2d 1363 (9th Cir. 1975), cert. denied 439 U.S. 892">439 U.S. 892 (1978). See Casco Bank & Trust Co. v. United States, 544 F.2d 528">544 F.2d 528 (1st Cir. 1976), cert. denied 430 U.S. 907">430 U.S. 907 (1977); Nelson v. Commissioner, 281 F.2d 1↩ (5th Cir. 1960), affg. a Memorandum Opinion of this Court.
18. The $ 295,786 amount was calculated by subtracting $ 300,000 (the short-term capital loss) and $ 20,000 (Shelby's repayment to petitioner) from $ 615,786.↩
19. The $ 110,786 was calculated by subtracting the $ 20,000 repayment from the $ 130,786 total payments made directly to Shelby.↩
20. Although petitioner reported $ 37,500 interest income from Petro Site on his 1981 return, he failed to establish the source or reason for such payment, and whether it was related to the advances in issue.↩