Hickerson v. Commissioner of Internal Revenue, 112
| Decision Date | 11 January 1956 |
| Docket Number | No. 112,Docket 23641.,112 |
| Citation | 229 F.2d 631 |
| Parties | John M. HICKERSON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Second Circuit |
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Peter W. Quinn, New York City, for petitioner (Eugene C. Wohlhorn, Bellaire, N. Y., of counsel).
H. Brian Holland, Ellis N. Slack and L. W. Post, Washington, D. C., for respondent.
Before SWAN, FRANK and LUMBARD, Circuit Judges.
The basic question is whether the bad debts here involved are business or non-business bad debts, as defined in Section 23(k) (4). Under the definition in that subsection, a "`non-business debt'" is a debt other than one "evidenced by a security as defined in paragraph (3) and other than a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business." The loans were not evidenced by a security as defined in paragraph (3). Whether the loss from a worthless debt is incurred in the taxpayer's trade or business depends on Treas. Reg. 111, Section 29.23(k) (6). We think this a valid regulation.
The facts here are similar to those in Commissioner of Internal Revenue v. Smith, 2 Cir., 203 F.2d 310, 311. There, the taxpayer, a stockholder and officer of several corporations, invested in a corporation engaged in dairy farming. He served as treasurer and manager of the farm and participated to some extent in the activities of the farm corporation. He made substantial loans to that corporation which were never repaid because the corporation became insolvent and made a general assignment of its assets for the benefit of its creditors. The taxpayer sought to deduct the worthless debts as business bad debts but they were disallowed by the Commissioner. This court held that, since the taxpayer was admittedly not in the business of lending money, the bad debts were not incurred in the taxpayer's "trade or business" and therefore they were "non-business debts."
Here, too, the taxpayer admits that he was not in the business of lending money. He contends, however, that he was engaged in a trade or business in which he sustained a loss from worthless debts. He asserts that his investment in, and his participation in the management of, various newspapers constituted the trade or business of operating and developing "newspapers from defunct organizations to successful ones." He contends that this was a trade or business, separate and distinct from that of Pioneer, and that the losses from bad debts were proximately related thereto.
If we assume that the taxpayer was engaged merely in the "trade or business" of a stockholder actively participating in the management of the corporations of which he is an officer, we think that the loans were not incidental to this "trade or business." In effect, we so held in Commissioner of Internal Revenue v. Smith, supra.
The cases cited by taxpayer which hold that active participation in the management of a corporation by a stockholder can constitute a trade or business are not conclusive, since none holds that a loan made by a stockholder-officer to his corporation was made pursuant to the taxpayer's "trade or business." Commissioner of Internal Revenue v. Stokes' Estate, 3 Cir., 200 F.2d 637, 638, and Maloney v. Spencer, 9 Cir., 172 F.2d 638, also cited by taxpayer, are inapposite since the trade or business involved in each of those cases was...
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