Legal Document

373 U.S. 193 83 Supreme Court Reporter 1168 10 United States Reports Lawyer’s Edition 2d Series KF101.8 U54 288 Atlantic Judge WHIPPLE et al., Petitioners,v.COMMISSIONER OF INTERNAL REVENUE. Number 305. Argued March 26, 27, 1963. Decided May 13, Rehearing Denied June 17, See 374 858, 1863. Charles Dillingham, Houston, Tex., for petitioners. Solicitor Gen., Archibald Cox, Washington, D.C., respondent. Mr. Justice WHITE delivered the opinion of Court. 1 Section 23(k)(1) Internal Revenue Code 19391 provides deduction in full worthless debts other than nonbusiness bad while § 23(k)(4) restricts to treatment accorded losses on sale short-term capital assets.2 The statute defines a debt part as 'a * loss from worthlessness which is incurred taxpayer's trade or business.' 23(k)(4). question before us whether petitioner's activities connection with several corporations he holds controlling interests can themselves be characterized business so permit owed by one him treated within general rule 'business' rather 'nonbusiness' debt. 2 Prior 1941 petitioner was construction superintendent and an estimator lumber company but during that year over next ones instrumental forming member series partnerships engaged supply business. In 1949 1950 original incorporator seven corporations, some were successors partnerships, 1951 sold his interest along equity five others rental business, profit sales being reported long-term gains. 1952 formed eight new Mission Orange Bottling Lubbock, Inc., bought stock corporation known Mason Root Beer3 acquired related vending machine From 1953 also land, disposed restaurant participated oil ventures. 3 On April 25, 1951, secured franchise Dry Corporation entitling produce, bottle, distribute sell beverages various counties Texas. Two days later purchased assets soleproprietorship bottling conducted pursuant sole proprietorship. July 1, though retaining own name, equipment organized mentioned, owned approximately 80% shares outstanding.4 land Lubbock erected plant thereon at cost $43,601 then leased 10-year term prescribed rental. Depreciation taken individual tax returns 1953. 4 Petitioner made sizable cash advances 1953, December balance due him, including $25,502.50 still owing totaled $79,489.76. 15, advanced additional $48,000 pay creditors same day received transfer book value $70,414.66. net amount ultimately $56,975.10, became issue here. During no payments interest, rent salary although did receive such income corporations.5 5 deducted $56,975.10 computing taxable income. Commissioner, claiming debt, assessed deficiencies. Tax Court, after determining not organizing, promoting, managing financing soft drinks money lending, sustained A divided Appeals affirmed, Cir., 301 Federal Reporter, 2nd 108, upon claim conflict6 among Courts Appeals, we granted certiorari. 371 875, 146, 9 113. I. 6 concept engaging distinguished pursued laws. As early 1916, Congress, providing separately those transactions entered into profit, 5, Act chapter 463, 39 Statutes-at-Large 756, broad range producing satisfying narrow category This pattern has been followed elsewhere Code. See, e.g., 23(a)(1) (2) (ordinary necessary expenses); 23(e) (1) (losses); 23(l)(1) (depreciation); 122(d)(5) (net operating deduction). It surprising, therefore, approach problem applying here much writing slate. 7 Burnet versus Clark, 287 410, 53 207, 77 L.Ed. 397 (1932), long-time president principal stockholder dredging endorsed notes forced pay. These amounts deductible current under existing law, carry years it have resulted operation regularly carried taxpayer. Board denied carry-over District Columbia held otherwise grounds taxpayer devoted all time energies carrying compelled circumstances endorse company's order funds.7 turn reversed reinstated judgment since '(t)he respondent employed officer corporation; own. unfortunate endorsements ordinary occasional intended preserve investment shares. its stockholders are generally separate entities.' similar case, Dalton Bowers, 404, 205, 389, decided day, applied principles.8 8 few arose another context. large diversified holdings, substantial du Pont Company, obtained block distribution officers increase their management efficiency. taxpayer, result, obligated refund annual dividends taxes these sought deduct expenses paid 23(a) 1928. Deputy Pont, 308 488, 60 363, 84 416 (1940), assuming arguendo investing estate nevertheless because 'had origin effort efficiency management' 'arose out *. well established decisions this do any blending corporation's stockholders.' U.S., 494, S.Ct., 366, 416. Reliance placed Clark supra. assumed squarely up decision Higgins 312 212, 61 475, 85 783 (1941). Here portfolio securities incident thereto 23(a). Second Circuit evidence insufficient establish 'The merely kept records collected securities, through managerial attention investments. No matter how continuous extended work required may be, facts sufficient law courts reverse Board.' 218, 478, 783. Such state cases when 1942, amended respects crucial case. response case give relief type taxpayers, see H.R.Rep. 2333, 77th Cong., Sess. 46, disturbing Court's definition 'trade business' following had 1916 '(enlarging) incomes reference deductible,' McDonald 323 57, 62, 65 96, 98, 89 68; Gilmore, 372 39, 45, 623, 627, 570, include production 11 At time, remedy what deemed abuses permitting fully deducted, prior Congress restricted 23(k) business9 provided losses. deliberately used words business,' terminology familiar laws, respective committees clear test 'is substantially purpose ascertaining transaction covered section 'incurred paragraph section.' H.R.Rep.No. 76—77; S.Rep.No. 1631, 90. 23(e)(1), course, successor old long distinguish between undertaken profit. upshot broadened reach amounting conversely narrowed exclude arising sources. 12 1942 amendment 23(k), already noted, Putnam Commission, 352 82, 90—92, 175, 179—180, 144, accomplish far more deny deductibility family friends. designed make proximate laws recognized falls short reaching every making activity. II. 13 Petitioner, must demonstrate lying heart lower brought here: That where furnishes regular services many independent shown. But against background amendments Dalton, Burnet, cases, rejected. 14 Devoting one's affairs itself, without more, person engaged. Though produce income, gain form enhancement investment, return distinctive process generated successful himself. When only investor, satisfied burden demonstrating product services, legally arises corporation. Even if demonstrates own, care actually peculiar investor concerned with, participating in, conduct corporate 15 If full-time service does alone not, difficult understand would suffice. To sure, presence might lend support finding course promoting fee commission, Ballantine, Corporations (rev. ed. 1946), 102, sale, Giblin 227 692 (C.A.5th Cir.), there compensation normal investor's return, directly indirectly enterprise, principles therefore offended. hand, found, dispute, intention developing going businesses customers inexorably rests who actively engages serving creating future enterprises argument untenable light Higgins, reject it.10 Absent evidence,11 furnishing reward different flowing We are, agreement aspect below. III. 16 With respect claims petitioner, unwilling disturb determinations affirmed combination cannot say they clearly erroneous. Commissioner Duberstein, 363 278, 289 291, 80 1190, 1198—1200, 1218. Nor need consider deal hold working executive E.g., Trent 291 669 (C.A.2d Cir.).12 either and, event, contention groundless record shown one. Moreover, proof (which furnish dominant stockholder) loan keep job proximately maintaining employee. Compare 17 concerned, however, position owner lessor real dispute fact regard business13 argues While dealt assertions relating phases find court possibility Orange, tenant landlord. take whatsoever merits remand further proceedings 18 Vacated remanded. 19 DOUGLAS dissents. 1954 provision, 166, identical 1939 Preceding enactment Code, statements witnesses urging express provision overturn contrary like Smith, 203 310 Hearings House Committee Ways Means Forty Topics Pertaining General Revision 83d 1st (pt. 3), 1519—1525, bills introduced purpose, H.R. 3165 4853, finally enacted, suggested modifications. general, extent gains exchange assets, plus $1,000, whichever smaller. 117(d)(2). 1211(b), root beer bottled Lubbock. Beer failed year, involved suit, reflects $3,300 $53.33 issued 88% outstanding charter authorize which, subsequently issued, reduced 77%. Sometime end increased holdings about 79.5% He totaling $1,680.15 $2,285.35 $1,747.59 1953; $15,570.78 $12,225.19 salaries $29,400 $33,450 note 10, infra. relied announced Wasburn 51 949, 953: 'A party investments stock, particular occupation, live constitute question. may, active enterprise Bowers owning debtor corporation, argued comprehensive exploiting inventions limited purposes personal transcended entities. contentions 'He (his corporation) something apart affairs, accepted credits officer, claimed himself loans become worthless, caused taxation distinct Nothing indicates regarded agent authority contract act behalf. Ownership enough show creation Certainly, purposes, entity *.' 206, 389. character controlled attending subsequent acquisition use borrowed funds put recipient, determined relation resulting debt's becoming bears becomes amendment.' 77; S.Rep. Treasury Regulations 118, 39.23(k)—6(b), adopts language 23(k). contain contrary, disapprove Maytag States, 153 Ct.Cl. 622, 647 (Ct.Cl.); Mays 272 788 (C.A.6th Cir.); Stokes' Estate, 200 637 (C.A.3d Foss 75 326 (C.A.1st Washburn 949 (C.A.8th Sage KF6280 A2 U55 299; Campbell 510; Cluett 1178. Maloney Spencer, 172 638 (C.A.9th Dorminey 26 940. 122 carry-over) Folker Johnson, 230 906 Overly 243 576 Batzell 266 (C.A.4th Roberts 258 634 Pierce 254 885 Cir.). cf., McGinn 76 680, 99 American Law 564 Hughes 38 755 (C.A.10th business) Schmidlapp 96 118 297 Noland 269 111 Although 10-year-lease-agreement.

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