Document: 31 L.Ed.2d 62 92 S.Ct. 827 405 U.S. 93 UNITED STATES, Petitioner,v.Edna GENERES, Wife of, and Allen H. Generes. No. 70—28. Argued Nov. 8, 1971. Decided Feb. 23, 1972. Rehearing Denied March 27, See 1033, 1274. Syllabus Respondent taxpayer owned 44% of the stock a closely held construction corporation, with an original investment $38,900, received annual salary $12,000 for serving as president on part-time basis. His total income was about $40,000 year. He advanced money to corporation signed indemnity agreement bonding company, which furnished bid performance bonds contracts. The defaulted contracts in 1962 over $158,000 indemnified company extent more than $162,000. went into receivership he obtained no reimbursement these sums. On his tax return took loss direct loans nonbusiness bad debt, but claimed indemnification business debt deducted it against ordinary asserted net carrybacks portion unused 1962, pursuant 26 U.S.C. § 172. Treasury Regulations provide that if, at time worthlessness, has 'proximate' relationship taxpayer's business, qualifies debt. In suit refund testified sole motive signing protect $12,000-a-year employment corporation. jury asked determine whether 'was proximately related trade or being employee' court refused Government's request instruction applicable standard dominant motivation charged significant satisfies Regulations' requirement proximate relationship. jury's verdict Court Appeals affirmed, approving significant-motivation standard. Held: 1. determining relation thus proper is rather motivation. Pp. 103-105. 2. There nothing record would support favor had dominant-motivation been embodied instructions. P. 106—107. 427 F.2d 279, reversed remanded. Matthew J. Zinn, Washington, D.C., petitioner. Max Nathan, Jr., New Orleans, La., respondents. Mr. Justice BLACKMUN delivered opinion Court. 1 A owed indemnifying shareholder-employee became worthless 1962. issue this federal whether, shareholder-employee, obligation within meaning reach §§ 166(a) (d) Internal Revenue Code 1954, amended, (d),1 implementing 1.166—5.2 2 issue's resolution important taxpayer. If may use offset carryback purposes under 172 Code, other hand, if be treated short-term capital subject restrictions imposed such losses by 166(d)(1)(B) 1211 1212, its restricted 172(d) (4). one entirety, does not allocation part nonbusiness. 3 obligation, focus bears business. If, one, aforementioned desirable consequences then ensue. 4 present case turns measure required relation. Does necessitate 'dominant' 'significant' sufficient? 5 Tax amount somewhat excess involved. taxpayer, Generes,3 prevailed trial District 67—2 U.S.T.C. 9754 (ED La.). appeal , Fifth Circuit affirmed divided vote. 279 (CA5 1970). Certiorari granted, 401 972, 91 1189, 28 L.Ed. 321 (1971), resolve conflict among circuits.4 6 * young man 1909 began work son-in-law, William F. Kelly, later engaged independently similar work. During World War II two men formed partnership their participation equal. enterprise proved successful. 1954 Kelly- Generes Construction Co., Inc., organized corporate successor partnership. It heavy-construction primarily public works projects. 7 Kelly each corporation's outstanding stock. shares $38,900. remaining 12% son another son-in-law. from $12,000. executive vice-president $15,000. 8 performed different services worked full field charge day-to-day operations. Generes, devoted six eight hours week enterprise. reviewed bids jobs, made cost estimates, sought bank financing, assisted securing are essential public-project addition full-time position savings loan association founded 1937. of.$19,000. also sources income. gross averaged year during 1959—1962. 9 Taxpayer personal funds enable complete jobs. guaranteed banks purchase machinery equipment. addition, presence respect particular significance. Most were Maryland Casualty Co. That underwriter sign bond issued 1958, however, order eliminate need individual contracts, blanket whereby they agreed indemnify it, up designated amount, any suffered surety increased line credit $2,000,000. $14,000,000 period through 10 seriously underbid projects project necessary Kelly. $162,104.57. same loaned $158,814.49 assist financial difficulties. subsequently unable obtain it. 11 non-business income.5 Later filed claims 1959—1961, asserting operating those years portion, deduction. 12 due course United States Eastern Louisiana. At jury, special interrogatory, objection, relationship.6 motivation.7 13 After twice returning clarification given, found employee Judgment entered 14 majority approved so specified Second Weddle v. Commissioner Revenue, 325 849, 851 (1963), finding comfort doing tort law's concept cause. Judge Simpson dissented. F.2d, 284. holding Seventh Niblock 417 1185 (1969), Chief Lumbard, separately concurring Weddle, 852, primary applied. 15 A. fact responsible litigation dual status relative both shareholder employee. These interests same, differences occasion consequences. jargon, Generes' interest. nature composed initially tax-paid dollars. Its rewards expectative flow, effort, earnings appreciation. centered effort labor, endeavor received. consist pre-tax 16 Thus, becomes and, indeed, character uncollectible. Did center interest interest? former, deserves prevail here. Trent 291 669 (CA2 1961); Jaffe Commissioner, T. C. Memo 67,215; Estate Saperstein T.C. 70,209; Faucher 70,21 7; Rosati 70,343; Rev.Rul. 71—561, 1971—50 Int.Rev.Bull. 13. 17 B. Although arising contexts, cases decided recent merit initial mention. major paid out behalf deduction assertable unsuccessful quest: 18 Putnam 352 82, 77 175, 144 (1956), practicing lawyer who obligations labor newspaper fully deductible 1948 23(e)(2) 1939 Code. prescribed statute incurrence 'in transaction profit, though connected business.' rejected approach treatment 23(k) all. 60—48, 1960—1 Cum.Bull. 112. 19 Whipple 373 193, 83 1168, 288 provided organizational, promotional, managerial approximately 80% constituted hence, debts owing him when 1953. contention Whipple's investing is, '(d)evoting one's energies affairs itself, without more, person engaged.' U.S., 202, S.Ct., 1174. rationale contrary conclusion inconsistent principle personality separate shareholders necessarily indicated approval proximate-relation test: 20 'Moreover, there proof (which might difficult furnish where stockholder) keep job otherwise maintaining Compare (291 1961().' 204, 1175. 21 carefully noted distinction between shareholders.8 22 approach, do govern, one. They indicate, cautious free-wheeling Obviously, endeavored frame bring area above quotation Revenue. III 23 We conclude specify, motivation, only sufficient. number reasons: 24 itself distinguishes items. so, example, 165 losses, 166 debts, 162 expenses. gives benefits expenses, lesser benefits, none all, despite latter just adverse consequence former. But policy structure ever since Act 1916, 5(a), 39 Stat. 759, differently did sustained profit. And specific 1942 incorporated debts. 56 820. 25 point, statutes have distinction, Congress therefore intended meaningful obliterated blunted interpretation tends equate think emphasis upon tendency that. Application tend undermine circumscribe Court's shareholder's mere activity As Lumbard pointed disagreeing concurrence supra, 852—853, motives protecting salary—-are inevitably involved, inquiry whther provides will always produce affirmative answer result judgment 27 attribute workability. guideline certainty trier fact. compare risk potential reward give objective subjective. noted, employee-shareholder, making guaranteeing usually acts motivations, employment. By measure, logical ensues prevents motive, however small insignificant, controlling convenience. This importance system largely dependent voluntary compliance. D. test strengthens consistent mandate 262 262, 'no shall allowed personal, living, family expenses' except provided. considerations circumventing provision. 29 E. 166(d) given provisions 165(c)(1), see, Imbesi 361 640, 644 (CA3 1966), 165(c)(2), see Austin 298 583, 584 1962). areas, consistency desirable. also, Duberstein, 363 278, 286, 80 1190, 1197, 1218 (1960). 30 inconsistency, suggests, urging here having urged appropriate liability accumulated-earnings 531 531, includability estate, estate purposes, transfer contemplation death 2035, 2035. Sections 2035 Congress' avoidance activity. Donruss 393 297, 303, 89 501, 504, 495 Farmers' Loan & Trust Bowers, 98 794 1938), cert. denied, 396 648, 59 589, 1074 (1939). G. word perhaps most fortunate, naturally tempts terms. temptation, best rejected, we reject law factors duty, foreseeability, secondary cause, plural consideration, cause developed application factors. little place aspects usual, item either deduction, IV 32 reached means instructions, based erroneous that, least, new required. examined record, find n.o.v. States, therefore, must ordered. Neely Martin K. Eby 386 317, 87 1072, 75 (1967). 33 dissent, 284 285, real evidence offered bearing own testimony 'to my job,' 'I figured three years' I get out,' never once gave (his corporation) thought.'9 34 statements obviously self-serving. standing alone, bear light analysis. What purporting say $38,900 investment, actual value prior misfortunes know, plus integrity source living son-in-law whatever thinking. comparison strained all taxpaid. With $40,000, well bracket 40% joint 1958—1962. ss 68A 8. $7,000 after before state tax. figure, $12,000, possible significance less 1/5 investment.10 35 facts explanation falls weight, reasonable minds could ascribe, directed preservation Kelly-Generes Inc. 36 remanded direction States. 37 38 Jujstice POWELL REHNQUIST consideration decision case. MARSHALL, concurring. 40 agree join add few additional words legislative history wording itself. 41 now well-established entitled deduct incurred because status—e.g., unrecoverable. See, e.g., Lundgren 376 623 (CA9 1967); Smith 55 260 (1970). 201, 1173, (1963). equally established, bad-debt enhance goes bad. 42 single question presented how 43 offer 1.166 5(b) Regulations, Income contends demonstrate 'primary dominant' undertaking rise attributable employee, shareholder, comply regulation. sufficiently demonstrated giving 'significantly' motivated status. 44 properly concludes acceptance advocated blunt Commissioner's slightly thrust various sections Were with, torn tests lower courts been. 849 1963), (CA7 1969), points out, choose apportion according strength them. Left all-or-nothing history, intend especially neither language nor regulations explicitly require other, burden types identical. Fortunately, clear compelling obviates speculation intent enacting 166. And, intent. 45 Prior identically. But, year, amended distinguish two. defined 'other worthlessness business,' presumably encompassed others. demarcation remains essentially definition expanded limited purpose including 'a created acquired . connection taxpayer' 'incurred in' business—e.g., growing circumstances removed H.R.Rep.No. 1337, 83d Cong., 2d Sess., 21—22; S.Rep.No.1622, 24; 194 n. 1, 1170; 674. 46 congressional distinguishing prevent taxpayers lending friends relatives knew repay deducting loan. amendment apparent go long way toward escaping Code's monetary limit dependency deductions prohibition expenses casting payments, gifts, expenditures form destined become H.R.Rep.No.2333, 77th 45, 76—77; S.Rep.No.1631, 90. 47 predecessor put investments footing investments.' 92, 179, 180, (1956). recognized often minor difference, any, John Kelley 326 521, 66 299, 90 278 (1946); Bowersock Mills Power 904 (CA10 1949). 48 concerned possibility businesses exploit technical forms can cast gain unwarranted 49 perfect example undercuts effect statute. drawing invested almost $200,000. guarantor payment bonds, risked $2,000,000 ultimately $162,000, salary. view set forth Court, doubt 50 simply lent $162,000 latter's collapsed, plainly prevailed. sort intra-family bar served conduit should make difference. salary, claim nominal not, opinion, result. Moreover, instead strengthen economic position, receive $200,000 contribution guarantee irrelevant purposes. 51 sum, produces results totally odds goals draw wanted permit bore permits Under 165(c)(1) primary-motivation used some capacity, 640 Gilmore, 372 39, 623, 570 utilized done. 52 WHITE, whom BRENNAN joins. 53 While Parts I, II, reversal, remand directions hold hearing still exists 'dominantly' relevant transactions (d). Federal Rule Civil Procedure 50(d) appellate considers motion n.o.v., 'determin(e) appellee trial, (direct) granted.' Because drastic emphasized motions granted procedural prerequisites Rules strictly complied with. Cone West Virginia Pulp Paper 330 212, 215—217, 67 752, 754—756, (1947). case, power reverse grant Government moved (or, alternative, trial) inappropriate decision, opportunity heard, determined cannot stand, factual issues remain trial. overturned judge applied evidentiary unlike certain rulings error presents accompanying question: enough standard? 327, 1079. repeated tribunal questions, Fairmount Glass Works Cub Fork Coal 287 474, 481—482, 252, 254—255, 439 (1933); Montgomery Ward Duncan, 311 243, 253, 61 189, 195, 85 147 (1940), awkwardly equipped issues, particularly absence adversary argument, extensive intimate knowledge perspective peculiarly available alone.' 216, 755. allow decide merited 54 DOUGLAS, dissenting. 1.166—5(b)(2), govern 'the resulting debt's becoming taxpayer.' dominant.' state: 'If conduct worthless,' deductible. Ibid. instructed Regulations: 'Do you preponderance Company?' unanimously answered 'Yes.' 57 finding. officer needed perform jobs bid. To president, vice-president, personally agreement. 58 operate. Without happened, lose job. seems me salaried sense directly hoped-for success Whether prudent act our concern. Nor concern benefit hindsight entailed risks wholly disproportionate stake 60 Obtaining corporation; keeping going secure. meet desires Department rewritten. Helvering Wilshire Oil 308 90, 100—102, 18, 24—25, 84 101. protest what repeatedly protested, iron ambiguties Act, remedy recasting presentation problem Joint Committee Taxation committee Congress1 regularly rewrites much abler forecast revenue needs spot loopholes abuses thrive. said Lester, 366 307, 81 1343, 1348, 306, 'Resort litigation, Congress, change too temptation government longer purse endurance (Concurring opinion.) Knetsch 364 361, 371, 132, 137, 128 (dissenting opinion). 63 Had voted petition vote dismiss improvidently granted. 'rule four' certiorari granted2 objectors participate stated length late Harlan Ferguson Moore-McCormack Lines, 559—562, 459, 478—480, 515. 64 officer's afloat. affirm Appeals, 279. '§ Bad '(a) General rule.— '(1) Wholly debts.—There taxable '(d) Nonbusiness debts.— rule.—In corporation— '(A) subsections (a) (c) apply debt; '(B) therefrom considered sale exchange, asset months. '(2) defined.—For paragraph (1), term 'nonbusiness debt' than— (as be) taxpayer; Treas.Reg. Tax: '26 CFR 1.166—5 '(b) defined. For section section, .. subparagraph (2) paragraph, worthless, comes exception subparagraph. .' Edna wife named party returns Mrs. question. below 1969). 260, 268—271 (1970), felt constrained, expressed Golsen 742 aff'd, 445 985 1971), Circuit. Cases avoided include Stratmore 420 461 1970), 398 951, 1870, 291; Patterson, 331 753, 757 1964); Gillespie 1025, 1032 Millsap 387 (CA8 1968). commentary Sw.U.L.Rev. 135 (1971); Tex.Tech.L.Rev. 318 Wash. Lee L.Rev. 161 (1971). difference explained. 'A creation significantly rendered merely non-qualifying well, even one.' 'You must, short, 'Mr. convinces motivating factor insure receiving company. insufficient protection insurance reason agreement.' 'Even demonstrates independent own, care taken actually activities peculiar investor participating in, App. 59. Rather 1/3, suggested, 59, overlooking pretax earnings. Skelly 394 678, 690 691, 1379, 1386—1387, 642 hearings bill 1925 Van Devanter, headed sponsoring said: 'For instance, five votes granting four proceed theory many members court, instances, impressed propriety taking uniform petitions writs considered.' Hearing S. 2060 2061 Subcommittee Senate Judiciary, 68th 1st (1924). acted reliance representation. H.R.Rep.No.1075, 3. originally drafted 1922 Taft assistance Day, McReynolds. Hearings Jurisdiction Courts Supreme befoe House Commttee 67th Sess. (1922). representing 1924 McReynolds, Sutherland. 2061,

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