Opinion ID: 343188
Heading Depth: 1
Heading Rank: 1

Heading: Bad Debt Deduction.

Text: 5 Taxpayer James J. Caligiuri testified that in 1954 he and his wife loaned $7,500 to his wife's brothers for use by the Crocker Poultry and Egg Company, a company owned and operated by three of Mrs. Caligiuri's brothers (Paul, James, and Anthony Leto), but Mr. Caligiuri was unsure whether the brothers-in-law gave a note in return for the advance. Mr. Caligiuri admitted that the parties did not discuss a date when repayment was due, nor did they discuss interest. These brothers never paid any interest, and never repaid any part of the advance. Taxpayer Rose Caligiuri testified that she gave her brothers the $7,500 because they were in financial trouble, and, at the time, she and her husband had extra cash which they had been saving in order to buy a house and furniture. Mrs. Caligiuri described her agreement with her brothers as follows: 6 Well, I'll tell you, they were losing money. They were going to pay me when they started making money.    (M)y husband kept saying you better start having them pay you. Well, they didn't have it to pay me. So, how could I get money off of them? I just couldn't. 7 A mortgage dated March 2, 1954, from Crocker Poultry to the taxpayers, was acknowledged and filed in the first week of August 1958. Approximately one week later, Crocker Poultry petitioned and was adjudged bankrupt. The referee in bankruptcy treated the Caligiuris' claim as an unsecured debt, and ordered that $749 be paid on the $7,500 advance. 8 The tax court, relying heavily on the portion of Mrs. Caligiuri's testimony quoted above, found that repayment of the advance was contingent upon the success of the Crocker Poultry Company, and thus was not a legally enforceable, bona fide debt. 9 We affirm the conclusion of the tax court that on the record of this case the taxpayers are not entitled to a § 166 nonbusiness bad debt deduction, but we do not endorse the tax court's reliance on Mrs. Caligiuri's testimony, quoted above, as a basis for denying the taxpayers' claim. 10 The Commissioner's determinations as to deductibility are prima facie correct, and the taxpayer has the burden of proving otherwise. E. g., Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L.Ed. 212 (1933); Elot H. Raffety Farms, Inc. v. United States, 511 F.2d 1234, 1238 (8th Cir. 1975), cert. denied, 423 U.S. 834, 96 S.Ct. 57, 46 L.Ed.2d 52. Thus, the taxpayers have the burden of establishing that: (1) a bona fide debt was owed to them, and (2) the debt became worthless in 1958. 11 All the facts and circumstances must be considered in determining whether the advance created a bona fide debt. Inasmuch as this alleged debt involves an intra-family transaction, we must give particularly close scrutiny to the facts. The record reveals that the indicia of a bona fide debt are almost entirely lacking in this case. The record contains no note or other written evidence that the advance was intended to be a loan. The payment of interest was not required, and the loan was not due on a specific date. The money was advanced for use in the Crocker Poultry Company at a time when the business was operating at a loss, and no payments were ever made on the alleged loan. The taxpayers made no efforts to collect the alleged debt, other than to make a claim in bankruptcy on the Crocker Poultry Company. In light of this record, the finding that the $7,500 advance was not a bona fide debt is supported by substantial evidence, and is not clearly erroneous. See, e. g., Constantin v. Commissioner, 25 CCH Tax Ct. Mem. 166 (1966); Tanner v. Commissioner, 21 CCH Tax Ct. Mem. 646 (1962); and Hauser v. Commissioner, 19 CCH Tax Ct. Mem. 852 (1960). 12 Assuming, arguendo, that a bona fide debt existed, we doubt that the taxpayers established the worthlessness in 1958 of the alleged debt. The loan was made to Mrs. Caligiuri's three brothers, James, Paul, and Anthony Leto, for use in their operation of Crocker Poultry. Crocker Poultry became a bankrupt in 1958, but no evidence establishes the insolvency of the three brothers in 1958. 2 13 Because the questions arising here are factual, and the record supports the tax court's findings and determination, we affirm its denial to the taxpayers of a nonbusiness, bad debt deduction by reason of the $7,500 cash advance to Mrs. Caligiuri's brothers. 3 14