IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 13-60322

Summary Calendar

DFSYSTEMS, INCORPORATED,

Petitioner - Appellant

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent - Appellee

Appeal from a Decision 

of the United States Tax Court

Case No. 17261-11

Before DAVIS, SOUTHWICK, and HIGGINSON, Circuit Judges.

PER CURIAM:*

Petitioner DF Systems appeals the decision of the United States Tax 

Court that it had a deficiency in federal income tax for the taxable year 2006. 

We AFFIRM.

DF Systems is an electrical contracting company owned and operated by 

Larry Dorman and his wife, Gladys Dorman. In 2000, DF Systems received a 

letter from one of its customers, requesting work to be performed by minority 

* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not 

be published and is not precedent except under the limited circumstances set forth in 5TH 

CIR. R. 47.5.4.

United States Court of Appeals

Fifth Circuit

FILED

December 10, 2013

Lyle W. Cayce

Clerk

 

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contractors. Lorie Dorman Schroder, the Dorman’s daughter, formed E.L. 

Construction, Inc., in order to meet this request. DF Systems then convened a 

special board meeting and voted “to advance money to E.L. Construction, Inc. 

for the [purpose] of getting this corporation started and pursue minority work.” 

The minutes of this meeting do not establish the amount of money that DF

Systems intended to advance to E.L. Construction, an interest rate for the

money advanced, a repayment schedule, or any security taken. DF Systems 

did not enter into a written loan agreement with E.L. Construction, the 

purported borrower, and did not take an equity interest in the company.

Unrelated to this transaction, in 2005 DF Systems wrote 19 checks to

Jose Padilla, a long-time employee of the company who was forced to stop 

working due to a terminal illness, and three other checks to Reuben Padilla, 

Jose Padilla’s son. DF Systems recognized these payments at a special board 

meeting but did not indicate that the checks were intended to be a loan. There 

was no written agreement, and the records do not establish a definite amount 

to be advanced, terms of repayment, interest rate, or collateral provided as a 

security interest.

On its 2006 federal income tax return, DF Systems claimed a bad-debt 

deduction of $56,656 related to its payments to E.L. Construction and $25,320 

related to its payments to the Padillas. After an audit, the Commissioner

disallowed the deductions, concluding that DF Systems failed to establish “that 

these amounts were bad debts arising from true debtor-creditor relationships, 

based upon valid and legally enforceable obligations, that these amounts 

became worthless during the taxable year, or that you took all reasonable steps 

to collect the debts.” Based on a disallowance of these deductions, the 

Commissioner found a tax deficiency in the amount of $30,728.

DF Systems sought redetermination of the deficiency in the United 

States Tax Court. Following a trial, the tax court issued its decision. The tax 

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court agreed with the Commissioner that neither of the monetary transfers 

were bona fide loans because no objective factors indicated that DF Systems 

had entered into a genuine debtor-creditor relationship with either alleged 

borrower. In reaching this conclusion, the tax court found Gladys Dorman’s 

and Lorie Dorman Schroder’s testimony to the contrary “unconvincing.” The 

tax court held that DF Systems had an income tax deficiency for the year 2006 

in the amount of $30,728.

DISCUSSION

We review the tax court’s findings of fact for clear error and conclusions 

of law de novo. Green v. Commissioner, 507 F.3d 857, 866 (5th Cir. 2007). 

“[W]hether payments or disbursements by a taxpayer are to be treated as debts 

for tax purposes is an issue of fact.” Piggy Bank Stations, Inc. v. Commissioner, 

755 F.2d 450, 452 (5th Cir. 1985); see also Saunders v. Commissioner, 720 F.2d 

871, 873 (5th Cir. 1983) (“Whether a certain transaction creates a creditordebtor relationship is a question of fact . . . .”).1

A taxpayer may claim a bad-debt deduction under Section 166 of the 

Internal Revenue Code only for a bona fide debt. “A bona fide debt is a debt 

which arises from a debtor-creditor relationship based upon a valid and 

enforceable obligation to pay a fixed or determinable sum of money.” Treas. 

1 The Commissioner suggests that our precedents are unclear as to whether review of 

the debtor-creditor relationship is a question of law or fact, though DF Systems appears to 

accede to clear-error review. See e.g., Estate of Mixon v. United States, 464 F.2d 394, 402 (5th 

Cir. 1972) (stating that the evaluation of whether a monetary advance is debt or equity is a 

question of law subject to de novo review); Texas Farm Bureau v. United States, 725 F.2d 307, 

312 (5th Cir. 1984) (stating that the debt-capital contribution determination is a question of 

law except when the court is evaluating the debtor’s subjective intent). We explained in 

Saunders why the clear-error standard is the correct one here. Saunders, 720 F.2d at 873 

n.3. Review here is for clear error because DF Systems relies on the subjective intent of the 

parties to establish the existence of a bona fide debt. This is a question of “pure fact.” Texas 

Farm Bureau, 725 F.2d at 312.

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Reg. § 1.166-1(c). In order to determine the existence of bona fide debt, we 

have considered the following non-exclusive factors: 

(1) the names given to the certificates evidencing the indebtedness; 

(2) [t]he presence or absence of a fixed maturity date; (3) [t]he 

source of payments; (4) [t]he 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.

Estate of Mixon, 464 F.2d at 402.

DF Systems attempts to distinguish its situation from other cases 

applying the Mixon factors. It argues that the tax court’s reliance on precedent 

“addressing shareholder loans to corporations and loans between interrelated 

corporations” caused that court to focus too narrowly on the form of the 

transaction and disregard the evidence of the parties’ intent. See Piggy Bank 

Stations, Inc., 755 F.2d at 452; Texas Farm Bureau, 725 F.2d at 311. We agree 

that some of the factors may not apply to the arrangement with E.L.

Construction because its terms were so incomplete. In addition, although DF

Systems cites an unpublished decision applying the Ninth Circuit’s shorter, 

slightly differently-worded list of factors, that list is almost identical in 

substance to our own and is arguably a good fit here only because it condenses

the Mixon factors in a way that better meets the present circumstance. See

Todd v. Commissioner, 486 F. App’x 423, 426 (5th Cir. 2013).

Regardless of which list we use to evaluate the circumstances 

surrounding the transactions between DF Systems and E.L. Construction, 

nothing about the subsequent dealings between those companies indicates that 

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there was a debtor-creditor relationship. We agree with DF Systems that the 

absence of a formal loan agreement is not determinative, but the absence of a 

formal loan agreement is certainly relevant. See United States v. Williams, 

395 F.2d 508, 510-11 (5th Cir. 1968). More powerful in our analysis is the 

purported loan’s lack of real substance. Id. There was no initial fixed or 

determinable sum to be repaid, specified interest rate, repayment schedule,

maturity date, or collateral taken as a security interest. The absence of these 

objective economic indicia of genuine debt greatly weakens the argument that 

a debtor-creditor relationship was intended. See Alterman Foods, Inc. v. 

United States, 505 F.2d 873, 879 (5th Cir. 1974). 

As for DF Systems’ evidence, a notation in the minutes of the special 

board meeting that “money” would be “advanced” to E.L. Construction does not 

establish the existence of bona fide debt. Moreover, the numerous debits and 

credits made under an E.L. Construction account in DF Systems’ accounting 

records, which vary widely over time and amount, do not prove that E.L. 

Construction was making repayments on a loan. For instance, the recurring 

payments made to Chase Automotive Finances and non-corresponding credits 

from numerous companies, under the heading “job,” suggest that DF Systems 

was paying E.L. Construction’s expenses and collecting its revenues. In any 

event, these records are “little more than additional declarations of intent” and 

do little to substantiate DF Systems’ argument that it had a debtor-creditor 

relationship with E.L. Construction. Id. Finally, the tax court did not err in 

finding Gladys Dorman’s and Lorie Dorman Schroder’s testimony regarding 

the companies’ intent unconvincing based in part upon cross-examination that 

revealed Schroder misunderstood the meaning of “solvent” and that E.L. 

Construction had very few assets. See MacGuire v. Commissioner, 450 F.2d 

1239, 1244 (5th Cir. 1971).

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Similarly, DF Systems offers no objective evidence to support its 

argument that it loaned the $25,320 to the Padillas. Instead, it again relies on 

the minutes of a special board meeting, a number of accounting entries in its 

journal, and the alleged uncontradicted testimony at trial. This evidence is 

subject to the same criticism as the evidence related to its dealings with E.L. 

Construction: it is subjective and there are no reliable indicia of genuine debt. 

Alterman Foods, 505 F.2d at 879. Here, as with E.L. Construction, there was 

no initial fixed sum of money to be repaid, repayment schedule, interest rate, 

or collateral. Although Dorman’s trial testimony that Padilla intended to 

repay the debt was uncontradicted in the sense that the Commissioner offered 

no witnesses to rebut it, the trial court did not err by finding it unconvincing

in light of the other objective evidence. MacGuire, 450 F.2d at 1244-45.

In evaluating whether a debt is bona fide, we “look not to mere labels or 

to the self-serving declarations of the parties, but to the more reliable criteria 

of the circumstances surrounding the transaction.” Tyler v. Tomlinson, 414 

F.2d 844, 850 (5th Cir. 1969). The tax court did not clearly err in upholding 

the Commissioner’s determination that DF Systems had a tax deficiency in the 

amount of $30,728 for the year 2006. We AFFIRM.

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