Court Opinion

ID: 9471827
Source: CourtListenerOpinion
Date Created: 2023-08-05 03:42:03.822209+00
Date Added: 2024-06-11T17:42:35.852403
License: Public Domain

PER CURIAM.
Taxpayer Edward Holland, Jr. challenges the Tax Court’s refusal to allow him a $50,000 business bad debt deduction for a loan that he made to his own company. See Tax Ct. Memo Dec., P.H. ¶ 82,428 (1982).
Holland is a song writer and record producer. At all times relevant to this case, he was also president and sole shareholder of Hot Wax Records, Inc., a corporation formed for the production of musical recordings. First incorporated in 1968, Hot Wax experienced numerous financial difficulties throughout its life and was finally dissolved in 1976. As president of the corporation, Holland was entitled to receive a salary. However, because of the company’s financial problems, Holland’s salary was never actually paid to him but instead accrued on the corporate books. In 1973, the taxable year at issue here, Holland’s purported salary was $15,000.
Between 1968 and 1973, Holland from time to time advanced money to the company, either as unsecured loans or capital investments. By 1973, these outstanding advances amounted to about $100,000. In February 1973, the company obtained a six-month, $48,761.51 promissory note from a Detroit bank. In August, the note was renewed with interest, but also with new security, namely one of Holland’s own certificates of deposit. On December 6, 1973, the bank foreclosed on the note and used the proceeds of Holland’s certificate of deposit to pay off the note and accumulated interest for a total of $50,051. Subsequently, Holland claimed the $50,051 payment as a business bad debt deduction on his 1973 personal income tax return pursuant to I.R.C. § 166(a). The Commissioner disallowed the deduction and assessed a deficiency of $5,238.02. The Tax Court upheld the Commissioner’s decision, finding that the debt was not a business bad debt. The Tax Court also refused to allow Holland to take a nonbusiness bad debt deduction (deductible only as a short-term capital loss) for the loss in 1973 because Holland had failed to prove that the debt had become totally worthless in that year. On appeal, we affirm.
Initially, we note that decisions of the Tax Court on factual issues are not reversible unless clearly erroneous. Ten*362nessee Securities v. Commissioner, 674 F.2d 570, 573 (6th Cir.1982), citing Commissioner v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960). In United States v. Generes, 405 U.S. 93, 92 S.Ct. 827, 31 L.Ed.2d 62 (1972), in a fact situation almost identical to this one, the Supreme Court held that a bad debt can qualify as a business bad debt only if the taxpayer’s dominant motivation in making the loan to his employer, id. at 103, 92 S.Ct. at 833, was to protect his business interest as an employee of the company (i.e., his salary) and not his investment interest in the company. Id., at 101, 92 S.Ct. at 832. See. also Tennessee Securities, supra, at 575.
At trial, the taxpayer claimed that his dominant motivation in providing security for Hot Wax’s $48,000 promissory note was to protect his salary as an employee of the company. .Such self-serving declarations need not be given much weight. See Generes, supra, 405 U.S. at 106, 92 S.Ct. at 834. Moreover, an examination of the financial considerations at stake casts substantial doubt on Holland’s claim. Holland admitted that he had never actually been paid a salary by Hot Wax. Holland also admitted that he had invested $100,000 of his own money in the firm over the past three years. Given these facts, it seems far more likely that Holland guaranteed the note in an effort to protect his very real investment in the company and not his nebulous interest in a phantom salary. And certainly we cannot hold that the Tax Court was clearly erroneous in reaching the same conclusion.
The Tax Court also held that Holland could not deduct this transaction as a nonbusiness bad debt in 1973 because he failed to show that the debt had become “totally worthless” in 1973 as required by Treas.Reg. § 1.166-5. Holland is correct when he states that as guarantor of the loan, once he made good on the loan, he took the position of the original creditor and could claim a bad debt deduction when that debt became worthless. Putnam v. Commissioner, 352 U.S. 82, 85-86, 77 S.Ct. 175, 176-177, 1 L.Ed.2d 144 (1956). None-
theless, as guarantor, he was still required to prove that the debt had indeed become worthless, and worthless in the year for which the deduction was claimed. “Generally this burden is met by showing that some identifiable event occurred during the course of the year which effectively demonstrates the absence of potential value. ... The unsupported opinion of the taxpayer alone that the debt is worthless will not usually be accepted as proof of worthlessness.” Dustin v. Commissioner, 53 T.C. 491, 501-02 (1969), aff’d, 467 F.2d 47 (9th Cir.1972) (citations omitted in original). In this case, Holland could point to no particular fact or circumstance which showed that the debt had become worthless. The debt itself was collected by the bank on December 6, 1973. Holland offered no evidence concerning the financial condition of his company as of that date, and no explanation of why future income from the company, even if operating at a loss, would not be available to pay back the debt. We also note the very short period between the time the debt was collected, December 6, and the end of the taxable year. Common sense indicates that, short of a total collapse, twenty-six days would not ordinarily be a long enough interval in which a creditor could reasonably conclude that he would never be repaid. For all these reasons, we find the Tax Court was justified in concluding that the taxpayer failed to prove the debt had become totally worthless in 1973 and, therefore that the debt was not deductible even as a nonbusiness bad debt.
Accordingly, the decision of the Tax Court is affirmed.