Opinion ID: 433554
Heading Depth: 1
Heading Rank: 2

Heading: The Debts--A Business Basis?

Text: 22 The Government first contends that there was insufficient evidence presented at trial for the jury to find that the taxpayer's dominant motivation in making the loans was his trade or business as a broker. It emphasizes that the taxpayer's loans benefitted the company on which his brother and nephew were financially dependent and were thus for personal, not business, reasons. Moreover, it says, the taxpayer himself had a substantial personal ownership interest in Diversa to protect, and protecting one's investment is a decidedly non-business motivation. Finally, the risk of the loans does not compare with any potential reward from this business. All considered, the Government concludes, the District Court erred in denying its motions for directed verdict and j.n.o.v. 23 As the Government well knows, this Court is not the first body to view the evidence. Here, the jury was the factfinder, and it has already made a determination of the facts. 8 We look only to whether reasonable men and women could have arrived at a verdict other than for the Government. Of course, we consider all the evidence at trial, but in the light and with all reasonable inferences most favorable to the estate. If we find evidence of such a quality and weight that reasonable and fair-minded jurors in the exercise of impartial judgment could have reached different conclusions, the verdict stands. Boeing Co. v. Shipman, 411 F.2d 365 (5th Cir.1969) (en banc). Our narrow task is to guard against errors of law and patently incorrect determinations of fact. 24 A reading of the record by those illuminating principles shows that the Government cannot prevail on this issue. 25 Of course the loans were made between brothers. This is important--not dispositive. We must consider all the facts unique to this case in determining whether the taxpayer's loans created business or non-business debts. Hogue v. Commissioner, 459 F.2d 932, 937 (10th Cir.1972); Young v. Commissioner, 33 T.C.M. 397, 402 (1974). 26 The testimony at trial shows that the taxpayer and Mann conducted their business transactions as businessmen. 9 Mann himself described how they bargained over the taxpayer's commission fees: 27 Q. Were there occasions when you negotiated the amounts of [brokerage] fees with your brother, Guy Mann, or [his associate] Len Acton? 28
29 Q. Was it [the] kind of negotiations you would have conducted with any person, any broker? 30 A. Sure. Arms length. We were trying to save money. 31 This business relationship is further borne out by Mann's testimony about their negotiations over a particular commission (related to two large bank loans for Diversa) on which Mann succeeded in obtaining more favorable payment terms for Diversa. 32 Moreover, Dale Carpenter (the former Secretary of Diversa) testified that the taxpayer's loans were treated like any other corporate indebtedness, and were included in SEC disclosure reports. As both Carpenter and Douglas Russell (the former Treasurer of Diversa) testified, notes or security agreements were prepared for the loans. 10 As summed up by Russell, when [the loan] transactions occurred, ... there was no indication ... that they were a gift. 33 In arguing that the taxpayer was merely protecting an investment, the Government emphasizes that the taxpayer apparently had over 150,000 shares of Diversa stock at the time of his death in 1973, an ownership interest which it characterizes as substantial. Of course, investing does not constitute a trade or business for purposes of a bad business debt deduction. Whipple v. Commissioner, 373 U.S. 193, 83 S.Ct. 1168, 10 L.Ed.2d 288 (1963); Miles Production Co. v. Commissioner, 457 F.2d 1150 (5th Cir.1972). Thus, if the taxpayer was seeking to protect or enhance his ownership interest in Mann's organization, the loans would have created non-business debts. 34 However, the Government focuses on the wrong time period. The taxpayer made the loans between 1967 and 1970. At that time, he had no substantial investment in the organization to preserve. As Carpenter and Mann Jr. testified, he then had either no shares or an insignificant number of shares in Murmanill and Inwood Securities. As Carpenter further related, the taxpayer also had only about 4,000 or 5,000 shares in Diversa, out of several million shares then outstanding. The jury was perfectly free to believe that testimony. From it, the jury could conclude that the taxpayer was not motivated to make the loans by his investment interest in the organization. 35 Finally, we disagree that under United States v. Generes, 405 U.S. 93, 92 S.Ct. 827, 31 L.Ed.2d 62 (1972), the numbers do not add up. In that case, the taxpayer (Generes) owned 44% of a construction business, for which he also served as president. To help the company through certain financial difficulties, Generes directly and indirectly loaned it over $300,000. Ultimately, the company went into receivership, and Generes was not reimbursed. He claimed a bad business debt deduction, asserting that he made the loans to protect his job and $12,000 annual salary--a legitimate business reason. See, e.g., Trent v. Commissioner, 291 F.2d 669 (2d Cir.1961). 36 The Supreme Court held that, in determining whether a bad debt has a proximate relation to the taxpayer's trade or business, 11 the proper measure is that of dominant motivation. 405 U.S. at 103, 92 S.Ct. at 833. It reversed the jury verdict for Generes because it was based on an erroneous instruction of the law. 37 Rather than remand for a new trial, the Court rendered j.n.o.v. for the Government. It discounted the taxpayer's testimony as obviously ... self-serving, and found that no reasonable jury could conclude that Generes' dominant motivation in making the loans was to protect his salary as president. Under the dominant-motivation standard, the Court said, a trier of fact could compare the risk against the potential reward and give proper emphasis to the objective rather than to the subjective. Id. at 104, 92 S.Ct. at 833. Comparing Generes' $7,000 (after tax) salary to the over $300,000 in loans left no room for reasonable minds to differ. This was especially obvious considering that he owned 44% of the company and had a substantial investment in it, and that his son and two sons-in-law were in varying degrees dependent on the firm. Id. at 106, 92 S.Ct. at 834. 38 There is much more evidence here to support a dominant business motivation than in Generes. Certainly, the taxpayer's family interest in the survival of his brother's company was strong. However, his personal ownership interest in the holding organization was nowhere near Generes' in the construction company. On the contrary, there was credible evidence at trial that his was practically negligible. More important, the taxpayer's potential gain from the continued existence of Mann's organization was infinitively more than the relatively meager salary Generes could have expected. There was testimony that, in the twenty-odd years before he made the loans, the taxpayer had shared with his associate some $430,000 in cash brokerage commissions from transactions involving Murmanill or Diversa. His profit from non-cash brokerage commissions was even more substantial. In the University Computing deal alone, the taxpayer earned a stock commission ultimately worth over $11 million. 12 39 In short, the evidence considered as a whole created a proper and disputed question of fact. The jury, as the factfinder, decided the question in a reasonable manner. We can and would not overturn that decision. 40