Greenspan v. Commissioner
| Decision Date | 06 February 1980 |
| Docket Number | Docket No. 5255-76. |
| Citation | 39 TCM (CCH) 1000,1980 TC Memo 33 |
| Parties | Leon J. Greenspan and Irene Greenspan v. Commissioner. |
| Court | U.S. Tax Court |
Leon J. Greenspan, pro se, 14 Pine Brook Dr., White Plains, N.Y. Richard M. Campbell and Karen Martino, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in petitioners' income tax as follows:
Addition to tax
Year Deficiency Sec. 6653(a)1
______________________________________________________
1972........... $117,133.58 $5,856.68
1973........... 6,653.93 332.70
Concessions having been made by both parties, the issues remaining for decision are whether petitioners are entitled to certain deductions for business bad debts, losses, or expenses in 1973.
The parties agree that the medical deductions for the years at issue will be recomputed to take into consideration the concessions and our decision.
Petitioners resided in White Plains, N.Y., at the time they filed their petition herein. They filed their joint income tax returns for 1972 and 1973 with the District Director, Internal Revenue Service, New York, N.Y. Leon Greenspan (hereinafter Greenspan) is an attorney and a member of the law firm of Greenspan and Jaffe in White Plains.
On May 17, 1968, Greenspan and one Howard Harper loaned $18,750 to Group V Ltd., a New York corporation, payable in 90 days with interest of 7.5 percent per annum payable monthly, commencing June 17, 1968. Raymond Filiberti (hereinafter Filiberti), who represented that he was sole owner of all the issued and outstanding shares of Group V Ltd. guaranteed the loan. Group V Ltd. and Filiberti assigned as security for the loan Filiberti's ten shares of Group V Ltd. stock (representing all of the outstanding shares); all of their right, title, and interest in certain coal deposits in Tennessee and in the literary property known as "Born in Wedlock"; and their right, title, and interest in and to a contract between Group V Ltd. and one Judy Garland for the exclusive use of the latter's services, including the gate receipts from six specified performances by Ms. Garland in September and October, 1968.
Greenspan and Harper each had a one-half interest in the loan. They filed suit against Group V Ltd. and Filiberti in October 1968 in the Supreme Court, State of New York, Westchester County, alleging that no part of the note had been paid. On June 26, 1970, they obtained a judgment in the amount of $21,720.12, consisting of $18,750 principal, $2,925 interest, and $45.12 costs.
Greenspan and Harper tried unsuccessfully to collect on the judgment. They investigated Filiberti's assets from 1970 through 1972 ,while receiving promises to pay; by late 1972, Greenspan concluded that Filiberti's net assets were virtually nonexistent.2 He determined that the judgment was worthless in 1973 when he learned of other substantial judgments obtained against Filiberti for fraud and embezzlement and that Filliberti was then in jail.
Greenspan represented one Wesley Smith (hereinafter Smith) in connection with the purchase by Smith of a cosmetics company. This was the only transaction in which Greenspan had been involved with Smith as his client. On the date of the sale, the seller refused to transfer title to the business unless he received some cash. As Smith had none, Greenspan loaned him $2,500 and the sale was completed. Upon Smith's failure to repay the loan, Greenspan commenced an action against Smith in the Supreme Court, State of New York, Westchester County. He received a verdict in his favor and obtained a judgment against Smith on December 27, 1974, in the amount of $3,448.55, consisting of $2,500 principal, $656.25 interest, and $292.30 costs and disbursements.
A subpoena duces tecum was served upon Smith in January 1975, commanding him to appear for the taking of testimony and the production of certain documents. In 1975, after a supplementary proceeding conducted by Greenspan and his law partner, Paul Jaffe, in which Smith was examined as to his assets, Greenspan determined that Smith had none.
On June 12, 1973, Greenspan's broker, Kidder, Peabody and Co., sold LTV bonds in the face amount of $200,000 in Greenspan's account for $79,331.80. Of the bonds sold, $43,000 face amount belonged to Greenspan's father-in-law, Abe Gordon, and had been transferred into Greenspan's account in November 1971 as collateral to cover a margin call. At the same time, Kidder, Peabody and Co. also sold LTV bonds in the face amount of $50,000 belonging to Joseph Greenspan, Greenspan's father, for $19,062.50. On August 6, 1973, Greenspan purchased LTV bonds in the face amount of $43,000 for $19,797.92.
When Greenspan began his practice of law, both his father and father-in-law had referred clients to him. He had close family and personal relationships with both and felt that he had a moral, although not a legal, obligation to reimburse any loss they may have suffered when their LTV bonds were erroneously sold.
On December 10, 1971, Frank Sacco, defendant in United States v. Sacco, United States District Court, Middle District of Florida, Orlando Division, requested Greenspan be appointed counsel as replacement for Gregory Presnell, who was appointed counsel on July 15, 1971. Sacco, a former client of Greenspan's who had fallen on hard times, asked him to come to Florida to represent him. Despite the fact that Sacco's request to the court was denied on December 10, 1971, Greenspan traveled to Florida to represent him. On January 27, 1972, Greenspan paid the Robert Meyer Hotel, Orlando, Florida, $1,085.12.
On March 9, 1972, the Court of Appeals for the Fifth Circuit ordered that Presnell be relieved as court appointed attorney and that Greenspan be appointed to represent Sacco on his appeal. On April 11, 1972, the District Court denied Greenspan's motion that he be appointed counsel nunc pro tunc in order to be paid by the Government for expenses incurred prior to March 9, 1972. The Court of Appeals for the Fifth Circuit denied his motion for appointment as counsel nunc pro tunc on May 18, 1972.
OpinionPetitioners argue that Greenspan's loans to Group V Ltd. and to Smith were business debts, because they arose in connection with Greenspan's trade or business of being an attorney, and that they became worthless in 1973 and are, therefore, deductible under section 166(a). In the alternative, they argue the losses are either from a transaction entered into for profit, thereby entitling them to an ordinary loss deduction under section 165(c)(2), or that they are deductible as ordinary and necessary business expenses under section 162(a).
Respondent argues that petitioners are not entitled to an ordinary deduction because Greenspan was not in the business of making loans and because the loans were not proximately related to his trade or business of being an attorney. He further contends that petitioners have not established that the debts became worthless in 1973.
Initially, we note that petitioners' attempts to bring the Group V Ltd. and Smith transactions under section 165 and 162 are totally without merit. Both transactions involved debts and it has long been established that, in such situations, the creditor is entitled to a deduction for worthlessness, if at all, only under the provisions of the Code relating to bad debts. Putnam v. Commissioner 45-1 USTC ¶ 9234, 352 U.S. 82, 87-88 (1956) (under the 1939 Code); United States v. Generes 72-1 USTC ¶ 9259, 405 U.S. 93, 100, 101-102 (1972) (under the 1954 Code).
As a further initial observation, we also note that it is well-settled that a taxpayer can be engaged in more than one trade or business at the same time. Achong v. Commissioner 57-2 USTC ¶ 9828, 246 F. 2d 445, 447 (9th Cir. 1957), affg. a Memorandum Opinion of this Court Dec. 21,649(M); Cushman v. United States 56-2 USTC ¶ 9689, 148 F. Supp. 880, 887 (D. Ariz. 1956); Sherman v. Commissioner Dec. 18,119, 16 T.C. 332, 337 (1951). The record herein, however, is clearly insufficient to warrant the conclusion that Greenspan's activities as a lender were sufficiently extensive and continuous so as to elevate that activity to the status of a separate business.3 Cf. Imel v. Commissioner Dec. 32,239, 61 T.C. 318, 323 (1973), and cases cited thereat. Indeed, petitioners do not seriously argue that Greenspan's lending activities had any significance separate and apart from his law practice.
We thus turn to the question as to whether there was a sufficient nexus between the Group V Ltd. and Smith loans, on the one hand, and Greenspan's law practice on the other, to constitute the indebtednesses involved as business debts. The issue is one of fact. Smith v. Commissioner , 60 T.C. 316, 318 (1973); sec. 1.166-5(b), Income Tax Regs.
After weighing all the evidence — which is meager to say the least — we conclude that the group V Ltd. and Smith transactions gave rise to nonbusiness debts. With respect to the Group V Ltd. loan, there is no evidence whatsoever as to any connection with Greenspan's law practice. Greenspan merely testified that he entered into the transaction in order "to make a profit," i.e. through earning interest. Such being the case, the loan is a nonbusiness debt under section 166(d)(2)(A). With respect to the Smith loan, we recognize that the loan would not have been made but for the fact that Smith was a client of Greenspan's firm and the sale would not have been closed without it. But Smith's relationship to the firm was a one-shot situation and we are not persuaded that, in such a situation, the mere existence of a "but for" relationship, in a single transaction such as the Smith loan, is sufficient to enable petitioners to carry their burden of proof. Gustin v. Commissioner Dec. 28,874(m), T.C. Memo. 1968-42, affd. per curiam 69-2 USTC ¶ 9510 412 F. 2d...
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