Court Opinion

ID: 9454209
Source: CourtListenerOpinion
Date Created: 2023-08-04 18:39:30.17618+00
Date Added: 2024-06-11T17:34:01.110418
License: Public Domain

SWYGERT, Circuit Judge
(dissenting).
In my opinion, the taxpayer, Northeastern Consolidated Company, correctly claimed as a deduction upon its federal income tax return for the taxable year ended March 31, 1956, the $199,-791.09 item which represented the unpaid balance of advances made by the taxpayer to Northeastern Electric Construction Corporation (NECCO).
Although the majority’s application of the relevant Revenue Code provisions without reference to their subsequent case law treatment may in certain situations aid in determining whether a cash advancement should be classified as a loan or an investment of capital, this technique is not appropriate for solving the problem presented in this case.
That we are not presented with a case of first impression is graphically demonstrated by Byerlite Corp. v. Williams, 286 F.2d 285 (6th Cir. 1960). This important case was heavily relied upon by the taxpayer, but is not mentioned in the majority opinion.
In Byerlite the Sixth Circuit held that advances made by the Byerlite Corporation to its subsidiary, the Byerlite Export Company, Ltd., were loans rather than contributions to capital and therefore the taxpayer was entitled to deduct from its ordinary income as a worthless debt the loss of such loans. The situation there presented and the facts in case at bar are compellingly analogous. The only factual difference is that in Byerlite the Export Company was a wholly owned subsidiary of the taxpayer whereas here NECCO was not a subsidiary of the taxpayer (although there was common stock ownership of the two corporations). In my opinion, this differ*80ence is without legal significance. In both eases, proper resolution of the tax question depends upon whether the taxpayer's expenditures were proximately related to his business activities. This court must decide whether the taxpayer’s expenditure served a recognizable business purpose.
In the course of his opinion, Chief Judge McAllister in Byerlite said:
On the books of Byerlite, the advances to Export were carried as accounts receivable; on Export’s books, as accounts payable. This is the nomenclature of debt. Of course, the government is not bound in its tax collecting activities by the terminology used by a taxpayer if such terminology is used to disguise something quite different. However, if the stockholders of a corporation determine just how much of their funds they care to risk in the form of capital and how much, if any, they are willing to lend as a credit, and, when the venture is closed up, they take their loss as to such amount as they have loaned, and this leaves them in a position to enjoy more favorable deduction privileges than if they had put it all in as capital, this does not entitle the Commissioner of Internal Revenue to rewrite their balance sheet for them and show to be capital what was intended to be a loan. * * * The decisive factor is not what the payments are called but what, in fact, they are, and that depends upon the real intention of the parties. * * * The indicia relied upon by the government are not controlling. The fact that advancements to a corporation are made without requiring any evidence of indebtedness or fixing any date for repayment; without requiring the payment of any interest; and with the realization that the tangible assets of the corporation were not such, at any given time during the taxable period, as to repay any part of the loan — was not a controlling consideration requiring a conclusion that the advances were not loans, and that a deduction from ordinary income for a bad debt was not properly allowable, when the advances became uncollectible.
******
From the foregoing, it appears that losses of great sums of money resulting from large loans to corporations with slight capital, and even purchases of stock in corporations, are held not to be investments in capital, where the intent to invest was not present and where the funds were loaned, or stock purchased, only to promote the business purposes of the stock purchaser or lender, (footnotes omitted.) 286 F.2d at 290-291.
There, as here, the Government argued that the advances made by the taxpayer constituted contributions of capital and attempted to support the argument by indulging in various fictions unsupported by the realities of the situation. Judge McAllister’s response to the Government’s contention is squarely applicable to this ease:
In arguing that appellant is not entitled to a bad debt deduction, the government is obliged to contend, as the District Court found, that Byerlite’s advances to Export were not loans but were an investment in Export’s capital stock. Such a contention is based upon a theory that seems most unreal and artificial. Export had no need to sell stock, and Byerlite had no need to purchase stock to carry out the contemplated operations. To deprive By-erlite of a deduction for a bad debt on the ground that it was investing in Export’s stocks, rather than loaning money to Export, would seem to require a complicated, unreal, artificial assumption to be substituted for an ordinary, normal, and regular method of doing business, which, in this case, was characterized by the absence of any motive to operate otherwise than as shown by the records of the two companies, and with no hint of subterfuge or attempt to evade simple, straightforward business practices— *81and, certainly, with no thought of advantage in manner of operation, or as to tax consequences. 286 F.2d at 292.
One of the fictions suggested by the Government to support its theory that, the advances to NECCO were contributions to capital rather than loans is that the taxpayer was actually a shareholder in NECCO and that the debt carried on the taxpayer’s books was in reality an investment. That the Government’s position is illogical can be demonstrated by hypothesis. If NECCO had been a successful operation and not only repaid the taxpayer’s cash advances but also generated a profit, this profit, would have been distributed not to the taxpayer, but to NECCO’s stockholders. The taxpayer would have had no claim to such profit. Under such circumstances would the Government have attempted to tax such profit to the taxpayer ? To ask the question is to answer it.
I would reverse the judgment of the district court.