UNITED STATES COURT OF APPEALS

Tenth Circuit

Byron White United States Courthouse

1823 Stout Street

Denver, Colorado 80294

(303) 844-3157

Patrick J. Fisher, Jr. Elisabeth A.Shumaker

Clerk Chief Deputy Clerk

September 3, 1997

TO: All recipients of the captioned order and judgment

RE: 95-9005, Litchfield v. Commissioner

 July 9, 1997

Please be advised of the following corrections to the captioned decision:

There are two corrections on page two of the order and judgment. In the

fifth sentence of the second paragraph, the word “loan” should be changed to

“give,” so that the sentence reads: “Petitioner Litchfield agreed to borrow and

give to . . . .” In the first sentence of the third paragraph, the word “loaned”

should be changed to “gave,” so that the sentence reads: “In May 1983, Litchfield

borrowed $100,000 from a bank and gave it . . . .”

Please make the corrections.

Very truly yours,

Patrick Fisher, Clerk

Susie Tidwell

Deputy Clerk
* This order and judgment is not binding precedent, except under the

doctrines of law of the case, res judicata, and collateral estoppel. The court

generally disfavors the citation of orders and judgments; nevertheless, an order

and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.

F I L E D

United States Court of Appeals

Tenth Circuit

JUL 9 1997

PATRICK FISHER

Clerk

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

C. WAYNE LITCHFIELD and

JUDY S. LITCHFIELD,

Petitioners-Appellants,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellee.

No. 95-9005

Appeal from U.S. Tax Court

(T.C. No. 11136-92)

ORDER AND JUDGMENT*

Before BRORBY, BARRETT, and MURPHY, Circuit Judges.

After examining the briefs and appellate record, this panel has determined

unanimously to grant the parties’ request for a decision on the briefs without oral

argument. See Fed. R. App. P. 34(f) and 10th Cir. R. 34.1.9. The case is

therefore ordered submitted without oral argument.
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C. Wayne and Judy S. Litchfield petition for review of the Tax Court’s

determination of a deficiency on their 1985 federal income tax return. We have

jurisdiction under 26 U.S.C. § 7482, and affirm.

Simplifying a complicated scenario, the facts are as follows. In early 1983,

Xenerex Corporation and its wholly owned subsidiary, Matrix, owed more than

$277,000 in fees to the law firm of Ferguson & Litchfield, but were unable to

pay. Petitioner Wayne Litchfield was a partner of the law firm at the time. 

Xenerex/Matrix agreed to pay $100,000 on its attorney fee account from funds

held in escrow by the law firm. Petitioner Litchfield agreed to borrow and give to

Xenerex/Matrix another $100,000, if Xenerex/Matrix would also pay that

$100,000 to the law firm. In return, Xenerex/Matrix agreed to issue stock to

Litchfield and give him a “put,” i.e., a contract right to require Xenerex/Matrix to

repurchase the stock.

In May 1983, Litchfield borrowed $100,000 from a bank and gave it to

Xenerex/Matrix. The company did not give Litchfield a promissory note. 

Instead, it issued to Litchfield 285,714 shares of restricted common stock and

gave him a “repurchase agreement” requiring the company to buy the stock back

within 120 days or else pay 12 percent interest on the $100,000. Litchfield

assigned the repurchase agreement and stock certificates to his bank as collateral

for his loan.
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The date for Xenerex/Matrix to repurchase the stock was extended a

number of times. Although the company paid some interest to Litchfield’s bank

and made a partial payment to Litchfield on the repurchase agreement, it went

bankrupt in September 1985, and Litchfield’s remaining stock became worthless. 

Litchfield filed a trade creditor’s claim in the bankruptcy proceeding, and was

eventually ordered to be paid six cents on the dollar for his investment.

Petitioners claim the transaction outlined above created a debtor/creditor

relationship between Litchfield and Xenerex/Matrix, and the loss was deductible

on petitioners’ taxes as a bad business debt. The Internal Revenue Service

argued, and the Tax Court found, that the transaction represented a nondeductible

short-term capital investment and loss. On appeal, petitioners contend the Tax

Court erred when it determined that the loan from Litchfield to Xenerex/Matrix

was not deductible as a bad business debt.

Whether a bona fide debt existed is a question of fact. The Tax Court’s

finding on this point is therefore reviewed for clear error. See Estate of Holl v.

Commissioner, 54 F.3d 648, 650 (10th Cir. 1995). “[A] factual finding is clearly

erroneous when the reviewing court ‘on the entire evidence is left with a definite

and firm conviction that a mistake has been committed.’" Id. (quoting United

States v. United States Gypsum Co., 333 U.S. 364, 395 (1948)).
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Petitioners argue that the transaction was “a loan with an unorthodox

documentation.” See Appellants’ Br. at 19. We are not persuaded. After

reviewing the record, we agree with the Tax Court that petitioner’s relationship

with Xenerex/Matrix “cannot be characterized as a bona fide debtor-creditor

relationship and that neither the stock certificates nor the stock repurchase

agreement represent evidence of a bona fide debt.” R., Vol. I, Doc. 15 at 25. In

support of this conclusion, petitioner’s letter of November 16, 1983, to his bank is

most telling. In that letter, petitioner stated that the price of the Xenerex/Matrix

stock on the original put date would enable Xenerex/Matrix to pay its liability to

him, but that he wished to delay the put date because the market price of the stock

was expected to rise to $.75 to $1.25 per share. See Ex. 18-R. This is not true

creditor language. The Tax Court’s finding is not clearly erroneous.

AFFIRMED.

Entered for the Court

James E. Barrett

Senior Circuit Judge