Court Opinion

ID: 9424750
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:12:39.007725+00
Date Added: 2024-06-11T17:22:45.173155
License: Public Domain

Mr. Justice Marshall,
concurring.
I agree with and join the opinion of the Court. In doing so I add a few additional words of legislative history in support of the wording of the Internal Revenue Code itself.
It is now well-established law that a corporate employee is entitled to deduct as a business bad debt a bad debt incurred because of his employee status — e. g., a loan made to protect his job which becomes unrecoverable. See, e. g., Trent v. Commissioner, 291 F. 2d 669 (CA2 1961); Lundgren v. Commissioner, 376 F. 2d 623 (CA9 1967); Smith v. Commissioner, 55 T. C. 260 (1970). See also Whipple v. Commissioner, 373 U. S. 193, 201 (1963). The law is equally well established, however, that a shareholder is not entitled to a business bad-debt *108deduction when a loan which he has made to enhance his stock interest in a corporation goes bad.
The taxpayer in this case is both an employee and a shareholder of a single corporation, and the question thus presented is how to determine the proper tax treatment of loans made by him to the corporation that became uncollectible.
The Internal Revenue Code itself does not offer any test for determining when a bad debt is a business bad debt, but § 1.166-5 (b) of the Treasury Regulations on Income Tax provides that a loss from a worthless debt is deductible as a business bad debt only if the relation between the loss and taxpayer’s trade or business is a proximate one. The Commissioner contends that the taxpayer must demonstrate that the “primary and dominant” motivation for the undertaking that gave rise to the bad debt was attributable to his status as an employee, and not as a shareholder, in order to comply with the regulation. It is the taxpayer’s position that the proximate relationship is sufficiently demonstrated if the undertaking giving rise to the bad debt was “significantly” motivated by his employee status. The District Court and Court of Appeals agreed with the taxpayer.
The opinion of the Court properly concludes that acceptance of the test advocated by the taxpayer would blunt somewhat the distinction between business and nonbusiness expenses, and that the Commissioner’s test is slightly more consistent with the thrust of various sections of the Internal Revenue Code. Were this all we had to work with, however, I would be as torn between the two tests as the lower courts have been. Compare Weddle v. Commissioner, 325 F. 2d 849 (CA2 1963), with Niblock v. Commissioner, 417 F. 2d 1185 (CA7 1969), and Smith v. Commissioner, 55 T. C. 260 (1970). As the Court’s opinion points out, Congress did not *109choose to apportion the tax treatment of bad debts according to the strength of the various interests of the taxpayer that gave rise to them. Left with an all-or-nothing approach and no legislative history, one might well conclude that Congress did intend to blunt the distinction between business and nonbusiness bad debts, especially since neither the language of the Code nor the regulations explicitly require one test or the other, and since the burden on the taxpayer of both types of losses is identical. Fortunately, there is a clear and compelling legislative history that obviates any need for speculation as to Congress’ intent in enacting § 166 of the Code, 26 U. S. C. § 166. And, only the Commissioner’s test is consistent with that intent.
Prior to 1942 the Internal Revenue Code treated business and nonbusiness bad debts identically. But, in that year, Congress amended § 23 (k) of the 1939 Code in order to distinguish between the two. A nonbusiness bad debt was defined as one “other than a debt the loss from the worthlessness of which is incurred in the taxpayer’s trade or business,” and business bad debts presumably encompassed all others. The demarcation remains essentially the same under § 166 of the 1954 Code except that the definition of business bad debts is expanded for the limited purpose of including within it “a debt created or acquired ... in connection with a trade or business of the taxpayer” but not “incurred in” the business — e. g., a debt growing out of a trade or business that becomes worthless under circumstances removed from the trade or business. See H. R. Rep. No. 1337, 83d Cong., 2d Sess., 21-22; S. Rep. No. 1622, 83d Cong., 2d Sess., 24; Whipple v. Commissioner, supra, at 194 n. 1; Trent v. Commissioner, supra, at 674.
The major congressional purpose in distinguishing between business and nonbusiness bad debts was to prevent taxpayers from lending money to friends or relatives who *110they knew would not repay it and then deducting against ordinary income a loss in the amount of the loan. Prior to the 1942 amendment of the Code, it was apparent that taxpayers could go a long way toward escaping the Code’s monetary limit on dependency deductions and its prohibition against deductions for personal expenses by casting support payments, gifts, and other expenditures in the form of loans destined to become bad debts. H. R. Rep. No. 2333, 77th Cong., 2d Sess., 45, 76-77; S. Rep. No. 1631, 77th Cong., 2d Sess., 90.
A related congressional purpose in enacting the predecessor to § 166 was “to put nonbusiness investments in the form of loans on a footing with other nonbusiness investments.” Putnam v. Commissioner, 352 U. S. 82, 92 (1956). Congress recognized that there often is only a minor difference, if any, between an investment in the form of a stock purchase and one in the form of a loan to a corporation. See, e. g., Kelley Co. v. Commissioner, 326 U. S. 521 (1946); Bowersock Mills & Power Co. v. Commissioner, 172 F. 2d 904 (CA10 1949).
It is apparent that Congress was especially concerned about the possibility that closely held family businesses might exploit the technical differences among the forms in which investments can be cast in order to gain unwarranted deductions against ordinary income.
This case is a perfect example of how the “significant” motivation test undercuts the intended effect of the statute. The taxpayer was drawing an annual salary of $12,000 from a family corporation in which he had invested almost $200,000. As the guarantor of the corporation’s performance and payment construction bonds, the taxpayer risked a potential liability of $2,000,000 and ultimately incurred an actual liability of $162,000, which is the amount that he sought to deduct as a business bad debt. The jury found that the risk was incurred because the taxpayer was “significantly” motivated by *111his interests as a corporate employee and by his $12,000 salary. In view of all the facts set forth in the opinion of the Court, especially the fact that the taxpayer had a gross income of approximately $40,000, I have no doubt whatever that the same jury would have found that the taxpayer's “primary and dominant” motivation was to protect his investment, not his salary.
If this taxpayer had simply lent his son-in-law $162,000 and then sought to deduct that amount as a business bad debt when the latter’s business collapsed, he plainly could not have prevailed. This was just the sort of intra-family loan that Congress intended to bar from treatment as a business bad debt. The fact that a corporation served as a conduit for the loan should make no difference. If the taxpayer had received only interest on the loan rather than a salary, he could claim no business bad-debt deduction. The fact that he took a nominal salary for nominal services does not, in my opinion, require a different result. Moreover, if instead of guaranteeing the construction bonds, the taxpayer had invested $162,000 in the corporation to strengthen its economic position, that investment would receive the same treatment as the prior investment of $200,000 and any loss would not be deductible against ordinary income. The fact that the intra-family contribution was made in the form of a guarantee should be irrelevant for income tax purposes.
In sum, I find that the “significant” motivation test produces results that are totally at odds with the goals of the statute. The conclusion that I draw from the legislative history is that Congress wanted to permit deductions against ordinary income for bad-debt losses only when the losses bore the same relation to the taxpayer’s trade or business as did other losses that the Code permits to be deducted against ordinary income. Under § 165 (c)(1) of the Code, 26 U. S. C. § 165 (c)(1), the primary-motivation test has always been used to deter*112mine whether these other losses are incurred in a trade or business or in some other capacity, see, e. g., Imbesi v. Commissioner, 361 F. 2d 640 (CA3 1966), United States v. Gilmore, 372 U. S. 39 (1963). The same test should also be utilized with respect to bad debts if Congress’ will is to be done.
Mr. Justice White,
with whom Mr. Justice Brennan joins.
While I join Parts I, II, and III of the Court’s opinion and its judgment of reversal, I would remand the case to the District Court with directions to hold a hearing on the issue of whether a jury question still exists as to whether taxpayer’s motivation was “dominantly” a business one in the relevant transactions under 26 U. S. C. §§ 166 (a) and (d). Federal Rule of Civil Procedure 50 (d) provides that when an appellate court considers a motion for judgment n. o. v., it may “determin[e] that the appellee is entitled to a new trial, or . . . [direct] the trial court to determine whether a new trial shall be granted.” Because of the drastic nature of a judgment n. o. v., this Court has emphasized that such motions should be granted only when the procedural prerequisites of the Federal Rules have been strictly complied with. Cone v. West Virginia Pulp & Paper Co., 330 U. S. 212, 215-217 (1947). In the present case, this Court has the power to reverse the judgment without the grant of a new trial since the Government properly moved for a judgment n. o. v. (or, in the alternative, for a new trial) in the District Court. Neely v. Eby Construction Co., 386 U. S. 317 (1967). The circumstances here are inappropriate for such a decision, however, since taxpayer has never had an opportunity to be heard, after it is determined that his verdict cannot stand, as to whether factual issues remain on which he is entitled to a new trial. A decision *113that a verdict must be overturned because the trial judge applied an erroneous evidentiary standard is unlike certain other appellate rulings that an error of law was made because it inevitably presents an accompanying factual question: is there enough evidence to present a jury question under the proper evidentiary standard? Neely v. Eby Construction Co., supra, at 327. This Court has often repeated that a trial court is the most appropriate tribunal to determine such factual questions, Fairmount Glass Works v. Cub Fork Coal Co., 287 U. S. 474, 481-482 (1933); Montgomery Ward & Co. v. Duncan, 311 U. S. 243, 253 (1940), since appellate courts are awkwardly equipped to resolve such issues, particularly in the absence of adversary argument, and since the trial judge has an extensive and intimate knowledge of the evidence and issues “in a perspective peculiarly available to him alone.” Cone v. West Virginia Pulp & Paper Co., supra, at 216. I would therefore allow the trial court to decide whether a new trial is merited in this case.