Memorandum Findings of Fact and Opinion
QUEALY, Judge: The respondent determined deficiencies in the Federal income tax due from the petitioner as follows:
| Year | Deficiency |
| 1960 | $39,159.90 |
| 1961 | 51,588.00 |
| 1962 | 51,192.00 |
| 1963 | 39,387.00 |
| 1964 | 24,153.00 |
The respondent has conceded the fraud issue for all the years in question, and the only issue presented for decision is whether the following amounts constituted taxable income under section 61 1 in the indicated years:
| Year | Amount |
| 1960 | $67,305.00 |
| 1961 | 95,550.00 |
| 1962 | 95,000.00 |
| 1963 | 78,300.00 |
| 1964 | 59,300.00 |
The evidence consists of a stipulation of facts with exhibits attached and oral testimony and exhibits received at trial. The stipulations of facts are incorporated herein by this reference.
The petitioner, Sidney Fairchild, was a legal resident of Collingswood, New Jersey, at the time his petition in this case was filed. The Federal income tax returns of Sidney Fairchild (hereinafter referred to as "petitioner") for the calendar years 1960 through 1964, inclusive, were filed with the district director of internal revenue at Camden, New Jersey.
Petitioner is the president and sole stockholder of Custom Paint and Chemical Co., Inc. (hereinafter referred to as "Custom") and Polymer Coatings, Inc. (hereinafter referred to as "Polymer"). Petitioner was also the sole stockholder in or sole proprietor of the following business entities: Penn-Jersey Waterproofing Co., Inc., Petroleum Associates, Industrial Factors, Inc., Commercial Industrial Institute, Consumer Construction Co., Southern Construction Co., and Surety Finance Co. 2
Custom remains in existence as a corporation, but it has no payroll and is not a going business at the present time. Polymer, which operates "under the same roof" as Custom, has one employee in addition to petitioner, but it is no longer engaged in any manufacturing operations. In the course of its existence, Custom has never shown a profit. Polymer was formed as a successor to Custom in order to secure more adequate financing for the business.
Petitioner has very little formal education and none whatsoever in chemistry. Petitioner's practical experience in the chemical field was as a salesman, however, he has worked extensively in the paint and chemical business since 1940 and is self-taught in the more sophisticated aspects of the business.
Petitioner reported the following amounts as income in the indicated years:
| Year | Income |
| 1960 | $1,200 |
| 1961 | 5,200 |
| 1962 | 5,200 |
| 1963 | 5,200 |
| 1964 | 5,200 |
Petitioner first met Dr. Robert A. Cooper (hereinafter referred to as "Dr. Cooper"), a medical doctor and prominent surgeon in Camden, New Jersey, in 1954. Petitioner's initial contact with Dr. Cooper was for the purpose of selling oil leases to him. Dr. Cooper purchased such oil leases from petitioner for $3,000. The leases proved to be worthless.
In 1954, petitioner also informed Dr. Cooper of his chemical business and indicated that between $9,000 and $15,000 was needed to develop it. In making the initial advancements to petitioner, Dr. Cooper relied on petitioner's representations as to the nature and quality of the products which had been or were being developed by petitioner. In ensuing years, Dr. Cooper continued to make advancements to petitioner. Petitioner received from Dr. Cooper the following amounts in the years indicated:
| Year | Amount |
| 1954 | $ 6,900.00 |
| 1955 | 72,202.00 |
| 1956 | 46,245.00 |
| 1957 | 67,493.00 |
| 1958 | 69,060.00 |
| 1959 | None |
| 1960 | 67,305.00 |
| 1961 | 95,550.00 |
| 1962 | 3 95,000.00 |
| 1963 | 4 78,300.00 |
| 1964 | 59,300.00 |
| 1965 | 68,700.00 |
| 1966 | 30,400.00 |
| 1967 | 41,900.00 |
| 1968 | 20,600.00 |
| 1969 | 26,384.00 |
The total amount advanced by Dr. Cooper to the petitioner during the period of 1954 through 1969 was $845,339. 5 Of this amount, $395,455 was advanced to the petitioner during the calendar years 1960 through 1964, inclusive. All of the advances were in the form of cash. No security was taken by Dr. Cooper, and there has been no repayment of the advances except in minimal amounts.
The advancements were generally sought on an "emergency" basis to be used for payment of payroll, salesmen's commissions and accounts payable. Any questions which Dr. Cooper had concerning the business or the development of the process were answered by petitioner. However, Dr. Cooper never went to the plant and never examined the books of account of the business, choosing instead to rely entirely on the information supplied by petitioner. He also did not receive any written annual reports.
As time passed, the funds were generally given in response to petitioner's representations that progress in the development of a marketable product and the business made the success of the venture a foreseeable possibility. These representations were coupled with predictions that if additional capital was not obtained, the business would fail with the resulting loss of Dr. Cooper's entire investment. Dr. Cooper expected that petitioner would "paint" a more positive than negative picture when he was asking for money. 1507
The original oral agreement between petitioner and Dr. Cooper was that in return for the funds advanced, Dr. Cooper would receive a 50 percent share of the profits from the venture, if any. At the time of the original agreement, there was no intention on Dr. Cooper's part that the funds advanced be considered loans to the petitioner.
As the amounts of money advanced became substantial, Dr. Cooper became alarmed, and the petitioner and Dr. Cooper decided to cast the advancement transactions in the form of loans so that in the event the business was unsuccessful, Dr. Cooper would have the opportunity to attempt to take a tax deduction. This transformation of the advancements into the form of loans took place in a few months or approximately 1 year from Dr. Cooper's initial advancement to petitioner for the development of the chemical business.
In his income tax return for the year 1959, Dr. Cooper attempted to take a bad debt deduction in the amount of $263,000 for the funds advanced to petitioner in the previous years. This claim of Dr. Cooper was not allowed by the Internal Revenue Service.
Dr. Cooper would not have made any advances during the calendar years 1960 through 1964 if the advances had not been cast in the form of loans, i.e., if petitioner had not been willing to sign the notes as evidence of the debt. During these years, Dr. Cooper considered this method as the only way in which he could hope to be repaid.
When the advances were cast as loans, Dr. Cooper received as evidence of the indebtedness monthly notes handwritten by himself and signed by petitioner. There was never any written agreement relating to the sharing of profits between petitioner and Dr. Cooper. The notes evidenced a promise to repay in 12 months at 6-percent interest. The notes are negotiable and are unconditional and legally enforceable obligations to repay.
There were no restrictions on the use of the funds although it was understood between petitioner and Dr. Cooper that a very "large percentage" of the advances was to be used for the development of a marketable product on which the success of the venture was contingent. It was also understood that some of the funds would be used for petitioner's personal living expenses. During the years in question, petitioner's total living expenses were between approximately $8,000 and $10,000 per year.
Dr. Cooper stated that there was at all times an understanding between petitioner and himself that repayment was to be made on the advancements. Dr. Cooper regarded the advances as loans and expected repayment with interest. His hopes as to there ever being actual profits have diminished over the years. Nevertheless, following repayment of the advances, he expected to share in the profits of Custom as the original oral agreement between the parties in relation to the sharing of profits did not change despite the fact that the transactions were cast in the form of loans and notes given. 6