United States Court of Appeals
                           FOR THE EIGHTH CIRCUIT
                                    ___________

                                    No. 98-3241
                                    ___________

Melvyn L. Bell,                       *
                                      *
    Appellant,                        *
                                      * Appeal from the United States
    v.                                * Tax Court.
                                      *
Commissioner of Internal Revenue,     *
                                      *
    Appellee.                         *
                                 ___________

                              Submitted: September 15, 1999

                                   Filed: January 5, 2000
                                    ___________

Before RICHARD S. ARNOLD, FLOYD R. GIBSON, and LOKEN, Circuit Judges.
                           ___________

LOKEN, Circuit Judge.

       The Internal Revenue Code allows taxpayers to deduct “bad debts.” An
individual taxpayer may deduct from ordinary income a business debt if it becomes
totally or partially worthless during the tax year. Any unused portion of that deduction
increases the taxpayer’s net operating losses that may be carried back to offset taxable
income in earlier tax years. However, an individual’s nonbusiness bad debts are only
recognized when they become totally worthless, and they are treated as short-term
capital losses, which means they may offset no more than $3,000 of ordinary income
and may not be carried back to prior tax years. See 26 U.S.C. §§ 166(a), (d); 172(b),
(d)(4); 1211(b)(1); United States v. Generes, 

, 95-96 (1972). A debt is a
business debt if it is proximately related to a trade or business of the taxpayer. See 26
U.S.C. § 166(d)(2)(A); Treas. Reg. (26 C.F.R.) § 1.166-5(b).

       In this case, for his 1988 tax year, Melvyn L. Bell deducted $5,360,636 of his
outstanding loans to two corporations he owned, claiming the loans were partially
worthless business debts. After carrying back the unused amount of this deduction to
offset 1985 and 1986 income, Bell and his wife claimed and received $523,000 in tax
refunds. The Commissioner of Internal Revenue subsequently denied this bad debt
deduction and asserted substantial deficiencies in all three tax years. The Bells
petitioned the Tax Court to redetermine these deficiencies. See 26 U.S.C. § 6213.
After a trial, the Tax Court adopted one of the Commissioner’s alternative theories and
held that the bad debt deduction must be disallowed because the loans in question did
not relate to Bell’s trade or business. Bell appeals.1 We affirm.

                                           I.

       In 1973, Bell acquired a substantial equity interest in Environmental Systems
Company (“ENSCO”) and became its chairman and chief executive officer. In 1985,
with his ENSCO stock worth more than $50,000,000, Bell decided to leave the
company, pursue other business opportunities, and reduce his ENSCO holdings. Bell
acquired ownership interests in and loaned money to a variety of other businesses,
including Bell Equities, Inc. (“BEI”), which he started in 1986. BEI’s business strategy
was to acquire and rehabilitate financially distressed companies. It acquired all or
nearly all the stock of six unprofitable companies, including The Entertainment and



      1
       Mrs. Bell’s separate appeal has been severed and is being held in abeyance
while the Commissioner considers her request for relief under the recently enacted
“innocent spouse” provisions of the Code. See 26 U.S.C. § 6015.

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Leisure Corporation (“Telcor”), which in turn acquired four distressed theme parks.
BEI also acquired one profitable business, the Kaufman Lumber Company.

       Bell financed the effort to turn around these distressed companies by extending
loans to BEI and Telcor, using proceeds from the sale of ENSCO stock and from
substantial personal bank borrowings secured by additional ENSCO stock. The
strategy was seriously disrupted by the stock market crash of October 1987, which
drastically reduced the market value of Bell’s remaining ENSCO stock. The resulting
turmoil at ENSCO forced Bell to recommit his personal energies to that company. The
drop in ENSCO’s stock price lessened the value of the collateral for Bell’s bank loans,
and the banks pressured him for repayments. Meanwhile, the distressed BEI and
Telcor subsidiaries were not turning around. Indeed, by late 1988 three of those
companies had ceased operations. Bell faced an immediate cash crisis.

       In preparing the Bells’ joint 1988 tax return, their tax advisers calculated that
$5,360,636 of Bell’s loans to BEI and Telcor became worthless that year. Claiming
that amount as a business bad debt deduction, the Bells obtained immediate hardship
refunds in May 1989. The issue on appeal is whether the bad debt deduction was
improper because the partially worthless loans in question did not relate to Bell’s trade
or business. “The question whether a debt is a nonbusiness debt is a question of fact.”
Treas. Reg. § 1.166-5(b). Thus, we review for clear error the Tax Court’s
determination that Bell’s loans to BEI and Telcor were nonbusiness debts. See Millsap
v. Commissioner, 

, 422 (8th Cir. 1968). The taxpayer has the burden of
proof on this issue. See Deely v. Commissioner, 

, 1092 (1980).

                                           II.

        “[N]ot every income-producing and profit-making endeavor constitutes a trade
or business. . . . [T]o be engaged in a trade or business, the taxpayer must be involved
in the activity with continuity and regularity.” Commissioner v. Groetzinger, 480 U.S.

                                          -3-
23, 35 (1987). Bell received over $300,000 in salary from ENSCO in 1988. “[B]eing
a salaried corporate executive may be a trade or business,” 

,
but Bell does not argue that his loans to BEI and Telcor were in any way related to his
work at ENSCO. Nor does Bell argue he was in the trade or business of making loans,
as the taxpayer contended in Imel v. Commissioner, 

, 323 (1973). Thus,
the issue is whether the loans to BEI and TELCOR were related to a second trade or
business that Bell started when he decided to disengage from ENSCO. See Katz v.
Commissioner, 

, 1043 (1960) (an individual may be engaged
in more than one trade or business). This additional trade or business must be
something other than devoting time and energy to his investments. “[I]nvesting is not
a trade or business [because] the return to the taxpayer, though substantially the
product of his services, legally arises not from his own trade or business but from that
of the corporation.” Whipple v. Commissioner, 

, 202 (1963).

       Bell argues that his loans to BEI and Telcor were related to the trade or business
of “buying, rehabilitating and reselling corporations.” Taxpayers have been litigating
this theory for decades. Its governing parameters were defined by the Supreme Court
in Whipple. In that case, the taxpayer sold his equity interests in twelve corporations
in 1951 and formed eight new corporations. In 1951 and 1952, he acquired a bottling
franchise and bottling equipment, constructed a bottling plant, and then sold the bottling
equipment and leased the plant to one of his corporations. In 1952 and 1953, he made
sizable cash advances to the corporation. The bottling business failed, and the taxpayer
deducted the debt owed him by the corporation from his 1953 taxable income as a
business bad debt. Resolving a conflict in the circuits, the nearly unanimous Court
affirmed the Tax Court’s determination that the taxpayer was not in the trade or
business of “organizing, promoting, managing or financing corporations”:

            Devoting 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. . . . Even if the taxpayer demonstrates an independent trade or

                                           -4-
      business of his own, care must be taken to distinguish bad debt losses
      arising from his own business and those actually arising from activities
      peculiar to an investor concerned with, and participating in, the conduct
      of the corporate business.

             If full-time service to one corporation does not alone amount to a
      trade or business, which it does not, it is difficult to understand how the
      same service to many corporations would suffice. To be sure, the
      presence of more than one corporation might lend support to a finding
      that the taxpayer was engaged in a regular course of promoting
      corporations for a fee or commission, or for a profit on their sale, but in
      such cases there is compensation other than the normal investor’s
      return, income received directly for his own services rather than
      indirectly through the corporate enterprise . . . . [S]ince the Tax Court
      found, and the petitioner does not dispute, that there was no intention here
      of developing the corporations as going businesses for sale to customers
      in the ordinary course, the case before us inexorably rests upon the claim
      that one who actively engages in serving his own corporations for the
      purpose of creating future income through those enterprises is in a trade
      or business. That argument is untenable . . . and we reject 

(emphasis added; citations omitted). Bell argues he satisfies the
Supreme Court’s test in Whipple because he engaged in the trade of business of
acquiring troubled companies, quickly rehabilitating them, and selling them for a profit
greater than “the normal investor’s return.” Like the Tax Court, we disagree.

       The biggest problem with Bell’s theory is that he did not provide personal
services to the distressed businesses for which he might expect compensation in
addition to an investor’s return. Whipple declared the general rule that investing is not
a trade or business. The Court also recognized that promoting corporations can be a
trade or business, and that some corporate promoters may be compensated for their
personal services through the sale of the corporations being promoted. For this
exception to apply, the sale must occur in a manner that confirms that the taxpayer’s


                                          -5-
profits were, in the words of Whipple, “received directly for his own services.” For
example, “an early and profitable sale” of the corporation is evidence that the taxpayer
held it for sale to customers in the ordinary course of the taxpayer’s (rather than the
corporation’s) business. Townshend v. United States, 

, 1012 (Ct. Cl.
1967); see Deely, 

. Bell did not actively manage BEI or its troubled
subsidiaries. Indeed, after the market crashed, Bell’s personal energies were needed
by ENSCO; his primary contribution to BEI’s turnaround efforts was to provide
working capital through loans to BEI and Telcor. That is the role of an investor.

       Second, Bell’s theory fails to distinguish between his trade or business and that
of BEI. BEI was in the business of rehabilitating troubled corporations. Though
wholly owned by Bell, it was a separate taxpayer (in tax parlance, a Subchapter C
corporation). Bell’s contribution was to invest in BEI and Telcor by making working
capital loans. As Whipple makes clear, investing in BEI was not a trade or business.

        Third, Bell’s theory suffers because BEI never successfully rehabilitated and sold
any of the troubled companies. Bell correctly notes that a trade or business need not
succeed to be legitimate. But Bell claims that the distressed corporations were “held
in inventory” for prompt resale. A sale out of inventory is taxed as ordinary income;
investors usually prefer that their profits be taxed as capital gains. Not surprisingly,
therefore, Bell’s contemporaneous financial records listed his interest in BEI as an
investment, reflecting the normal investor’s intent that any profits from BEI’s
turnaround activities would be taxed at the more favorable capital gains rate. Thus, as
initially structured and recorded by Bell, the formation of BEI, its acquisitions, and
Bell’s working capital loans bear the indicia of investor activities.2


      2
       This is no doubt why very few taxpayers assert they are in the trade or business
of buying and selling corporations. See 2 BORIS I. BITTKER & LAWRENCE LOKKEN,
FEDERAL TAXATION OF INCOME, ESTATES AND GIFTS ¶ 33.6, at 33-23 (2d ed. 1990);
cf. United States v. Clark, 

, 895-96 (1st Cir. 1966). When a corporate

                                           -6-
        Finally, as the Tax Court noted, BEI employees testified at trial that BEI’s
objective was to purchase companies and turn them around for resale or for retention
as successful ongoing concerns. This testimony was inconsistent with Bell’s theory.
“It is the early resale which makes the profits income received directly for services, for
the longer an interest is held, the more profit becomes attributable to the successful
operation of the corporate business.” Deely, 

-94.

       For the foregoing reasons, the Tax Court’s finding that Bell’s loans to BEI and
Telcor were nonbusiness debts is not clearly erroneous. “The facts showed no more
than a loss by an investor in a corporation resulting from a transaction entered into to
bring profit to the corporation, and thereby to its stockholders.” United States v. Byck,

, 555 (5th Cir. 1963). Accordingly, we affirm.

      A true copy.

             Attest:

                 CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.




promoter or rehabilitator claims that he took stock in a new or distressed corporation
in lieu of a fee for his services, the stock becomes his inventory and its sale generates
ordinary income, just as cash received for his services would have been ordinary
income. Unless a taxpayer who claims to be in the trade or business of promoting or
rehabilitating corporations is willing to treat his profits as ordinary income, he is not
entitled to treat losses such as bad debts as ordinary losses. In our view, the few cases
in which taxpayers have prevailed on this issue since Whipple are of questionable
authority because they inexplicably ignored this aspect of the issue. See Farrington v.
United States, 

(Bankr. N.D. Okla. 1990); Newman v. Commissioner, 

(1989); Farrar v. Commissioner, 

(1988).


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