Boissevain v. Comm'r of Internal Revenue

• Decision Date: 20 September 1951
• Docket Number: Docket No. 29377.
• Citation: 17 T.C. 325
• Parties: JAN G. J. BOISSEVAIN AND MARIAN A. BOISSEVAIN, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

17 T.C. 325

JAN G. J. BOISSEVAIN AND MARIAN A. BOISSEVAIN, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 29377.

Tax Court of the United States.

Promulgated September 20, 1951.

DEDUCTIONS FROM INCOME — BAD DEBTS— NONBUSINESS DEBTS— SECTION 23(k)(4).—On the facts, held, that a debt of a corporation to the petitioner which became worthless in 1944 is a ‘non-business debt‘ under section 23(k)(4) of the Code. Louis Janin, Esq., for the petitioner.

John D. Picco, Esq., for the respondent.

The respondent has determined a deficiency in income tax for 1944 in the amount of $1,966.35. The respondent concedes that the petitioners are entitled to a deduction for $1,000 for a long term capital loss from the worthlessness of stock of Double Arrow Ranch, Inc., under section 117(d) of the Code. The petitioner concedes that the amount of a deduction claimed for a bad debt loss does not exceed $6,493.94. The only question to be decided is whether the petitioner Jan G. J. Boissevain is entitled to deduct the entire amount of a debt of Double Arrow Ranch, Inc., as a business bad debt under section 23(k)(1), as he contends, or whether the debt is a nonbusiness debt under section 23(k)(4) as the respondent has determined. The facts have been stipulated.

The petitioners filed joint returns for 1944 with the collector for the district of Michigan.

FINDINGS OF FACT.

We find the facts as they have been stipulated by the parties. The facts are as follows:

The petitioners, who are married, now reside in San Mateo County, California. During the taxable year 1944 they resided in Grosse Pointe, Michigan. The question to be decided relates only to Jan G. J. Boissevain, and he is referred to hereinafter as the petitioner.

In the early part of 1929 the petitioner was employed by an investment corporation in Spokane, Washington. In the spring of 1929 the petitioner became interested in the possibilities of engaging in the business of operating a dude ranch in Montana for profit. He visited Montana, looked at properties, investigated the dude ranch business, and decided to engage in that business. Upon his return from the trip to Montana, he resigned from his position in Spokane and made arrangements to withdraw his funds from a bank. He returned to Montana in October 1929 and arranged for the purchase of ranch property.

In 1929 the petitioner organized a Montana corporation, the name of which was subsequently changed to Double Arrow Ranch, Inc. The corporation was organized for the purpose of acquiring, improving, developing, and operating a livestock and dude ranch near Greenough, Montana. The petitioner acquired 494 shares of the common stock of the corporation for cash in the amount of $49,400. From 1929 to 1931, the petitioner obtained purchasers for $30,000 of the preferred stock of the corporation. The petitioner was one of the incorporators of the corporation and held the office of president from the time of its organization until its dissolution in 1944. As president of the corporation, the petitioner decided its policies. The corporation expended $31,725.41 for real property and $23,120.04 for the construction of buildings on the property.

From 1929 until April 1942, the petitioner devoted all of his time to the management and operation of the Double Arrow Ranch. He expected to build up a profitable business. In the year 1929 the business depression throughout the country began. The Double Arrow Ranch was operated for several years with the hope that it would earn profits, but the business was not profitable, and the corporation lost money from its inception. During the period in which the ranch operations were carried on, the petitioner did not receive from the corporation any compensation for his services as manager of the ranch or for his services as president of the corporation. The petitioner has never received any salary, dividends, or other income from the Double Arrow Ranch corporation. During the period from the time the corporation was organized and the ranch business was undertaken until the petitioner moved to Michigan and obtained employment there in 1942, the petitioner did not participate in any other business venture.

During the time that Double Arrow Ranch was operated, the petitioner made frequent and numerous loans to the Double Arrow Ranch corporation. The unpaid balance of the indebtedness of the corporation to the petitioner for these loans was $10,354.54 in 1944, which debt was unsecured.

In 1941 the petitioner's personal funds were low, and he concluded that the losing venture should be terminated. In 1941 it was decided to discontinue operations and to sell the ranch. In the fall of 1941, the ranch property was listed for sale with a real estate agent who had national contacts at the offering price of $100,000, and the agent issued a printed, illustrated leaflet describing the property, the location, the ranch houses, and other improvements. In April 1942, the property was rented to a tenant for a nominal rental to cover mortgage interest and taxes. The tenant left the property in the winter of 1942, and thereafter it was vacant. In the spring of 1942, all of the ranch furniture, equipment, and machinery was sold at auction, and the proceeds were used to pay obligations of the corporation. In September 1943, the mortgagee commenced foreclosing proceedings upon default in the payment of interest on the mortgage. In January 1944, the ranch property was sold at a sacrifice sale for $20,000.

The petitioner and his wife moved to Grosse Pointe, Michigan, in 1942. In 1942 the petitioner became employed as a salesman by Johns-Manville Sales Corporation, Highland Park, Michigan, and he has been employed by that corporation ever since. From 1942 through 1944, the only income the petitioner received was from Johns-Manville.

From 1942 until the Double Arrow Ranch property was sold in 1944, the petitioner was in frequent touch with the real estate broker with whom the Double Arrow Ranch property was listed, with other brokers, and with others regarding the sale of the ranch property.

The proceeds from the sale of the ranch property were sufficient to pay the remaining debts of the Double Arrow Ranch corporation and part of its indebtedness to the petitioner. After applying the proceeds of the sale to the various debts of the corporation, there remained an unpaid and uncollectible balance of the amount owing to the petitioner by the corporation of $6,493.94. The corporation was dissolved in 1944 after the sale of the ranch property.

The parties have stipulated that the debt of the corporation to the petitioner in the amount of $6,493.94 became ‘totally worthless‘ in 1944 upon the dissolution of the corporation.

The petitioner was not engaged in a business of promoting or financing the Double Arrow Ranch corporation in 1944. He was not engaged in a business of loaning money, or of organizing, financing, and promoting corporations in 1944. His activities relating to the organization of Double Arrow Ranch corporations in 1929, and of managing its business affairs from 1929 to 1944, did not constitute the conduct of a business of his own. The only corporation which the petitioner organized in 1929, and during the following years until 1944, was the Double Arrow Ranch corporation, and during that period the petitioner was not engaged in a business or organizing, promoting, financing, or loaning funds to corporations. The debt of the Double Arrow Ranch corporation to the petitioner was not a debt the loss from the worthlessness of which was incurred in the petitioner's business. It was a nonbusiness debt.

OPINION.

HARRON, Judge:

The only issue is whether the loss sustained in 1944 by the petitioner from the worthlessness of the debt of the Double Arrow Ranch corporation shall be considered a loss from the sale or exchange in 1944 of a capital asset held for not more than six months under the provisions of section 23(k)(4) of the Internal Revenue Code,¹ as the respondent has determined; or whether the loss is one from a worthless debt which comes within the scope of section 23(k)(1),¹ as amended by section 23(k)(4), so as to be deductible in the entire amount of the loss, as the petitioner contends.

The petitioner's contentions in this proceeding present a narrow question, whether he was engaged in a business of his own consisting of the organization, the promotion, the financing, and the management of the Double Arrow Ranch corporation, which for convenience will be referred to hereinafter as the D.A.R. corporation. Under section 23(k)(4), a debt and the loss from its worthlessness must bear a proximate relation to a business of the taxpayer. Section 29.23(k)-6 of Regulations 111, H. Rept. No. 2333, 77th Cong., 2d Sess., p. 77, 1942-2 C.B. 431;² Robert Cluett, 34d, 8 T.C. 1178, 1179, 1180. The relation of the loss which is sustained in a taxable year must be proximate to the taxpayer's business in that year. The parties are agreed that the loss from the worthlessness of the D.A.R. corporation debt was sustained in 1944. The petitioner recognizes the statutory requirement that the year of the loss is the year in which must exist the proximate relation of the loss to the taxpayer's business in that year. Therefore, the only materiality of facts relating to any business of the petitioner during years prior to 1944, is in connection with his burden of proving that in 1944 he was engaged in a business of his own, apart from the business of the D.A.R. corporation, to which the bad debt loss in 1944 was proximately related. In order to meet the statutory requirements above referred to with respect to the year 1944, the petitioner alleges that he was engaged in his own business which consisted of promoting and financing, and managing the D.A.R. corporation. He contends that after 1941 and during 1944 his activities were incident to carrying to completion his alleged individual business....