Court Opinion

ID: 9471828
Source: CourtListenerOpinion
Date Created: 2023-08-05 03:42:03.825422+00
Date Added: 2024-06-11T17:42:35.853470
License: Public Domain

WELLFORD, Circuit Judge,
concurring in part and dissenting in part.
I agree completely with the majority in its well-expressed opinion that the loss, which was claimed by the taxpayer in 1973, was a nonbusiness bad debt deduction.
I would, however, hold that he could deduct this nonbusiness bad debt as “totally worthless” in the calendar year 1973. The facts in Dustin v. Commissioner, 53 T.C. 491 (1969), aff’d, 467 F.2d 47 (9th Cir.1972), are *363very different from the facts in this case as to the worthlessness of debt in the year claimed. In Dustin, for instance, the court of appeals noted that in the year after the claimed worthlessness of the partnership debt there, the partnership’s “debts were paid and it enjoyed profits.” 467 F.2d at 48. Further, it was pointed out that its “creditors were patient and not pressing .... [I]t had obtained and repaid a loan from a second bank and, at the end of the year, had obtained a second loan from the second bank.” Id. Finally, Dustin himself showed a net “asset value of $17,000 in the partnership” the year after the debt was charged off as worthless against that same partnership. Id.
In contrast to Dustin, Holland’s corporation, Hot Wax Records, Inc., as of the fiscal year ended April 30, 1973, showed a loss in excess of $185,000 with accumulated net operating loss deductions exceeding $1,360,-000. In prior tax years it had suffered and reflected operating losses of nearly $1,000,-000 and over $320,000, respectively. The capital stock in the corporation was only $2,000. Its major assets were advances to artists ($271,000 approximately), a “receivable from stockholder and employee” — Holland himself ($58,500) — and an “inter-company payable” ($109,000 approximately). Current liabilities, among others, included $541,000 in “advances from distributors” and $104,000 in accrued royalties and fees payable as of April 30, 1973. In sum, the corporation was in an extreme deficit position of over $489,000 as of April 30, 1973, and had reflected substantial losses over at least the prior four operating years.
Holland described the corporation as “always in a tight cash flow problem”; he claimed the deduction because of its “inability to pay” and “on the advice of my counsel, my tax lawyer.” He testified that he claimed the loss after paying off the bank loan as guarantor based on the attorney’s “information,” since the debt was worthless. He conceded that he did not sue his corporation or attempt to collect the debt, “knowing obviously that the company cannot pay.” It was unfortunate that taxpayer or his attorney did not present corporate fiscal year returns for the period ending April 30, 1974, or as of December 31, 1973, but I would not hold this to be fatal to taxpayer’s claiming an evident worthless debt as of the end of 1973.
Holland conceded that the corporation was not dissolved during 1973, but said it did “not really” continue any business after that time. The advances to artists, he testified, could not be recouped in 1973 (or at any time), none of the assets had any recognizable real value, and finally, he testified, “at that time [1973], it was nothing, you know. There was nothing really there to do anything with.” This is a prima facie showing, it seems to me, not rebutted by the government in any respect, that taxpayer should be entitled to claim the nonbusiness bad debt loss of $48,761.51, to the extent allowable in 1973.
I would reverse the Tax Court on that issue accordingly.