Abrams v. Commissioner
| Decision Date | 09 August 1962 |
| Docket Number | Docket No. 82665. |
| Citation | 21 TCM (CCH) 1039,1962 TC Memo 190 |
| Parties | Morris Abrams v. Commissioner. |
| Court | U.S. Tax Court |
Abraham Baumgarten, Esq. 400 Madison Ave., New York, N. Y., and I. Robert Rozen, Esq., for the petitioner. Gerald J. Robinson, Esq., for the respondent.
Respondent determined deficiencies in income tax in the amounts of $5,460.38 for the year 1949 and $3,092.42 for the year 1950.
The principal issue is whether losses sustained by petitioner as the result of advances to the El Paso Biltmore Corporation and Acme Television Service, Inc., and the payment as guarantor of a bank loan of the latter corporation, were deductible by him as losses sustained in the trade or business of promoting, organizing, financing or lending money to business ventures.
Some of the facts have been stipulated, and, as stipulated, they are incorporated herein by reference.
Petitioner, a resident of New York City, filed his income tax returns for the taxable years with the district director of internal revenue, third district, 484 Lexington Avenue, New York City.
In 1949 and 1950, petitioner was the president of the Abbott Glass Co., Inc. For his services as president he received from it compensation of $25,000 in 1949 and $30,000 in 1950.
Petitioner worked at the Abbott Glass Company each weekday (except Saturday and Sunday) from 6:30 a. m. to 3:00 p. m. He was a bachelor and after hours and on Saturdays and Sundays he had time on his hands. He liked to speculate and in his spare time he participated in some business ventures. In some instances he advanced money needed to start the business, and if more money was required he made additional advances. Some of the ventures were carried on in corporate form, and petitioner acquired a stock interest therein. Petitioner expected his advances to be repaid although in each instance they were placed at the risk of the business. Petitioner's participation in these ventures started in 1932 or 1937 and "practically stopped about ten years ago." During that period he made advances to, and acquired an interest in, the Zetka Television Company, Acme Television Service, Inc., El Paso Biltmore Corporation, Tucson Motel, Saratoga Health Products, Sea Lion Food Products Corporation, Modern Mirror Company, and the Fifth Avenue Drive-In Corporation.
Acme Television Service, Inc. was organized in the latter part of 1947 to engage in the business of servicing and repairing television sets, and petitioner became one of its stockholders. In the early part of 1948, he made six loans totalling $4,500 to Harry Kunstler. These were personal loans made for the purpose of enabling Kunstler to purchase an interest in the corporation. Kunstler died in January 1962.
Acme Television Service, Inc. engaged in business for a period of about 18 months in 1948 and 1949. During that period petitioner made advances to the corporation with the expectation that they would be repaid. When it ceased to do business in 1949, $6,000 of the advances made to it by petitioner remained unpaid and any right he had to collect this amount became worthless.
During the period Acme Television Service, Inc. engaged in business it borrowed money from the Manufacturers Trust Co. and petitioner guaranteed the payment of the loan. In 1949 Acme had no assets and could not pay $3,628.69 borrowed by it. The bank called upon petitioner to make payment, and he paid the bank $3,628.69 during that year.
In his income tax return for the year 1949, petitioner claimed a deduction under "Miscellaneous", as follows:
Loss in connection with loans to Acme Television Service, Inc., and H. Kunstler. Company out of business. No assets. Loans uncollectible $14,128.68.
The $14,128.68 consisted of the following:
Loans to Harold Kunstler ...... $ 4,500.00
Advances to Acme Television
Service Inc. ................. 6,000.00
Payments to Manufacturers
Trust Co. by petitioner as
guarantor on loans made by
the bank to Acme Television
Service Inc. ................. 3,628.68
__________
$14,128.68
In the notice of deficiency for 1949, respondent disallowed the claimed deduction for loans of $4,500 to Harold Kunstler for lack of substantiation. He also determined that the loss of $6,000 sustained by petitioner as a result of his advances to Acme Television Service Inc. constituted a longterm capital loss under the provisions of Sections 23(g) and 117 of the 1939 Code, and that the $3,628.68 paid by petitioner as endorser for loans made by the Manufacturers Trust Company constituted a nonbusiness bad debt deductible as a shortterm capital loss under Section 23(k)(4) of the 1939 Code. In the alternative he determined that $9,628.68 of the loss of $14,128.68 claimed by petitioner in his 1949 return constituted a nonbusiness bad debt deductible as a short-term capital loss under Section 23(k)(4). In computing the deficiency for the year 1949 he allowed as a deduction the maximum capital loss deduction of $1,000 provided for in Section 117(d)(2) of the 1939 Code.
In his income tax return for 1950 petitioner claimed a deduction under "Miscellaneous" of a loss of $6,066.04. In a schedule attached to his return, this loss was computed as follows:
Loss sustained in connection with
loans made to El Paso Biltmore
Corp
Amount of Loans in Notes ............ $20,911.82
The property of the El Paso Biltmore
Corp. was sold in 1950 and
the following is the amount realized
on the loans
Cash ................... $1,759.64
Notes Receivable ....... 7,020.10
_________
Total amount realized ........... 8,779.74
__________
Loss sustained on loans ............. $12,132.08
½ Each reported by George and
Morris Abrams ...................... $ 6,066.04
George Abrams is the brother of petitioner. Petitioner and George made advances to the El Paso Biltmore Corporation, which operated a motel. In 1950 the property of the corporation was sold and the amount realized on the sale was not sufficient to permit the corporation to repay the amounts advanced by petitioner and his brother, as a result of which petitioner sustained a loss of $6,066.04 in that year.
In the notice of deficiency for the year 1950, respondent determined that the claimed loss of $6,066.04 in connection with advances made by petitioner to El Paso Biltmore Corporation constituted either a long-term capital loss under the provisions of Sections 23(g) and 117 of the 1939 Code, or a nonbusiness bad debt deductible as a short-term capital loss under Section 23(k)(4) of the 1939 Code. In computing the deficiency for the year 1950 respondent allowed as a deduction the maximum statutory capital loss deduction of $1,000 provided for in Section 117(d)(2) of the 1939 Code.
The parties have stipulated that petitioner made advances of $6,000 to Acme Television Service, Inc.; that in 1949 he as guarantor of loans made by the Manufacturers Trust Company to Acme Television Service, Inc. paid the bank $3,628.68; that he made advances to El Paso Biltmore Corporation; and that any rights petitioner had because of these advances and payments became worthless in the taxable years in which petitioner claimed loss deductions in his returns. They disagree as to the nature of the losses. Petitioner contends that he was engaged in the business of promoting, organizing, financing and managing business enterprises; that the losses were sustained in that business; and that they were business losses deductible in their entirety under the provisions of Section 23(e)(1) or 23(k)(1) of the 1939 Code. Respondent contends that they were either capital losses or losses from nonbusiness bad debts, the deduction of which is limited by the provisions of Section 117(d)(2) of the 1939 Code to the $1,000 which he allowed. Pertinent provisions of the 1939 Code are set forth in the margin.1
Petitioner had the burden of proving that the losses were sustained in the business of promoting, organizing, financing and managing business enterprises. He testified that the building in which his records were kept was condemned, that he had to move about seven years ago, and that when he moved his records were lost. In the absence of such records, he attempted to establish by his testimony the business nature of his...
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