Harsha v. U.S.
| Decision Date | 26 February 1979 |
| Docket Number | No. 77-1572,77-1572 |
| Citation | 590 F.2d 884 |
| Parties | 79-1 USTC P 9168 William N. HARSHA and Barbara J. Harsha, Appellants, v. UNITED STATES of America, Appellee. Tenth Circuit |
| Court | U.S. Court of Appeals — Tenth Circuit |
Gene A. Castleberry of Castleberry, Lisle & Kivel, Oklahoma City, Okl., for appellants.
Thomas M. Walsh, Tax Div., Dept. of Justice, Washington, D. C. (M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews and Jonathan S. Cohen, Tax Div., Dept. of Justice, Washington, D. C., on brief; John E. Green, U. S. Atty. and Richard F. Campbell, III, Asst. U. S. Atty., Oklahoma City, Okl.), for appellee.
Before McWILLIAMS, BARRETT and McKAY, Circuit Judges.
William N. Harsha and Barbara J. Harsha 1 (Harsha) appeal from an order granting summary judgment to the United States of America (IRS) in a tax refund suit brought pursuant to 28 U.S.C. § 1346(a)(1).
Harsha is an orthopedic surgeon practicing medicine in Oklahoma City, Oklahoma. In 1960, Don W. Jeffery, a truck driver, came to Harsha complaining of "back trouble." Harsha's treatment of the problem, which extended from 1960 to 1968, included removal of a ruptured disk, spinal fusion, removal of an infected bone wax granuloma, physical therapy, bracing, and exercise.
By April, 1962, all surgical procedures had been completed. Nevertheless, an examination revealed that Jeffery still suffered from an unstable back and could not engage in the type of loading and lifting activity normally associated with truck driving. Much of the pain associated with Jeffery's prior back trouble had been eliminated.
During this period of post-operative treatment, Jeffery became severely depressed. He viewed himself as a "parasite" living off society. He was unable to work. Jeffery relied on a veteran's pension and welfare for subsistence. He knew that, in all probability, he could not return to his old line of work and he worried about the future.
In an effort to provide psychological support and improve Jeffery's physical condition, Harsha conceived of a plan whereby Harsha and Jeffery would form a corporation, which in turn would employ Jeffery as a truck driver. In April of 1962, Bildon, Inc., was created. Harsha personally loaned $10,000.00 to the corporation for its start up costs. Harsha's intent in advancing the initial capital outlay and forming the corporation was solely to provide a means to encourage and rehabilitate Jeffery. Harsha testified, by deposition, that he entered into the agreement with no expectation of profit or personal gain.
Initially, the operation consisted of a single "rig" operated by Jeffery. According to Harsha, the therapeutic effect of the trucking operation on Jeffery was dramatic. He benefited both psychologically and physically.
The business, on the other hand, suffered financial reverses. In an effort to get the business "back on its feet," and avoid bankruptcy, Harsha personally underwrote the purchase of 23 additional trucks at a cost of approximately $600,000.00. Another $50,000.00 to $75,000.00 was loaned to the company by Harsha for servicing, garaging and repairing the vehicles.
Aside from guaranteeing the expansion, Harsha paid, from time to time, the current operating expenses of the business. By the latter part of 1965, Harsha had personally guaranteed in excess of $900,000.00 of the corporation's debts. Bildon, Inc., ceased business in February of 1966. Thereafter, the creditors called on Harsha to fulfill his guarantees. Ultimately, Harsha settled his obligations for $208,766.40. It is this amount which Harsha claims to be deductible on a dollar-for-dollar basis as a business bad debt.
The sole question on appeal is whether Harsha's losses are sufficiently related to his medical practice to be fully deductible as business bad debts, as opposed to non-business bad debts which must be deducted as short-term capital losses.
I.
Tax deductions are matters of legislative grace which do not turn on general equitable considerations. Commissioner of Internal Revenue v. Nat. Alfalfa Dehydrating, 417 U.S. 134, 94 S.Ct. 2129, 40 L.Ed.2d 717 (1974). Deputy v. Du Pont, 308 U.S. 488, 60 S.Ct. 363, 84 L.Ed. 416 (1940). In asserting a claim for deduction, a taxpayer must show that he has satisfied every requirement of the appropriate statute and its accompanying regulations. See, New Colonial Company v. Helvering, 292 U.S. 435, 440, 54 S.Ct. 788, 78 L.Ed. 1348 (1934).
Section 166(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 166(a) provides for the deduction of bad debts which become worthless during the taxable year. In the case of an individual taxpayer, this deduction is allowed as an offset against ordinary income only if the debt is a "business" debt. 26 U.S.C. § 166(d)(1)(A). The treasury regulations interpreting § 166, as it applies to individual taxpayers, require that the taxpayer claiming a "business" bad debt allowance establish (1) that he is engaged in a trade or business, and (2) that the bad debt loss is proximately related to the conduct of that trade or business. 26 C.F.R. 1.166-5(b) (1977). See also: Whipple v. Commissioner of Internal Revenue, 373 U.S. 193, 83 S.Ct. 1168, 10 L.Ed.2d 288 (1963).
In United States v. Generes, 405 U.S. 93, 92 S.Ct. 827, 31 L.Ed.2d 62 (1972), the Supreme Court held that the proper standard for determining whether a bad debt has a "proximate" relation to a taxpayer's business is whether the taxpayer's dominant motivation in making the loans or guarantees was to benefit his trade or business. See also: Kelson v. United States, 503 F.2d 1291 (10th Cir. 1974); Hogue v. C.I.R., 459 F.2d 932 (10th Cir. 1972).
In assessing the question of what the dominant motivation of the taxpayer was at the time he made the loan or guarantee, objective facts surrounding the loan or guarantee, rather than subjective intent, control. Kelson v. United States, supra, at p. 1293. Where, however, it is clear that the taxpayer's subjective intent in making the loan or guarantee in question was not to benefit his trade or business, summary judgment is proper.
In Imbesi v. C.I.R., 361 F.2d 640 (3rd Cir. 1966), cited with approval by the Supreme Court in United States v. Generes, supra, the Court stated:
The primary intent or motive of the taxpayer has always been the ultimate test for determining whether losses are deductible because incurred in a trade or business . . . or on the other hand are not deductible because they are personal expenses. (Citations.)
It is true that motive ordinarily is not put in(to) issue. This is because the usual enterprise is...
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