Levin v. United States, 39-77.

• Decision Date: 18 April 1979
• Docket Number: No. 39-77.,39-77.
• Citation: 597 F.2d 760
• Parties: Samuel B. LEVIN and Gertrude Levin v. The UNITED STATES.
• Court: U.S. Claims Court

597 F.2d 760

Samuel B. LEVIN and Gertrude Levin v. The UNITED STATES.

No. 39-77.

United States Court of Claims.

April 18, 1979.

COPYRIGHT MATERIAL OMITTED

William Sturner, Bethesda, Md., attorney of record for plaintiff.

David C. Hickman, Washington, D.C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D.C., for defendant Theodore D. Peyser, Washington, D.C., of counsel.

Before FRIEDMAN, Chief Judge, and DAVIS and KASHIWA, Judges.

OPINION

PER CURIAM:

This case comes before the court on defendant's motion, filed March 13, 1979, requesting that the court adopt, as the basis for its judgment in this case, the recommended decision of Trial Judge Roald A. Hogenson, Chief of the Trial Division, filed January 31, 1979, pursuant to Rule 134(h), as the basis for its judgment in this case, plaintiff having filed no intent to except thereto, and the time for so filing pursuant to the Rules of the court having expired. Upon consideration thereof, without oral argument, since the court agrees with the trial judge's recommended decision, as hereinafter set forth,^* it hereby grants defendant's motion and affirms and adopts the recommended decision as the basis for its judgment in this case. Therefore, it is concluded as a matter of law that plaintiff is not entitled to recover, and the petition is dismissed.

OPINION OF TRIAL JUDGE

HOGENSON, Trial Judge:

This case arises out of a partial disallowance of a claim for refund of federal income taxes paid for taxable year 1967 based on a carry-back from net operating loss incurred in 1970. Three issues are presented: (1) whether taxpayer's extensive buying and selling of securities on the stock market constitute a "trade or business" within reach of section 166, the business bad debt provision of the Internal Revenue Code of 1954;¹ (2) whether a loan to another stock investor allegedly made to prevent sale of his holdings in a particular corporation in which taxpayer had a substantial stock investment, was a "business" debt for purposes of section 166; and (3) whether or not the loan in fact became worthless within the claimed year.

This case turns on resolution of these three questions of fact. The issues presented have been extensively litigated and, consequently, there is considerable case law to guide recommended conclusions. For reasons to be discussed below, defendant must prevail.

From the time he was a young man, taxpayer Samuel B. Levin,² devoted virtually all his working time to the purchase and sale of securities. His initial investments made during and immediately following World War II brought him substantial profits. Although he frequently purchased heavily in the stock of one company or another, he was generally active in purchases and sales of stocks of various corporations. For instance, in 1961, the year of the indebtedness note in question, he conducted 332 transactions which represented the transfer of 112,400 shares with a total value of $3,452,125.

Routinely taxpayer visited the corporations in which he was interested and talked to company officers, traveling out of town for these visits when necessary. His days were frequently spent in the brokerage houses on Wall Street; he ate lunch with brokers at the Stock Exchange Club; and he attended lectures sponsored by securities analysts when the topics were of interest. He maintained ledger sheets of all his stock transactions, attended stockholders' meetings, and generally spent his time purchasing and selling securities on his own account.

It was taxpayer's practice to purchase to the extent of allowable margin. He traded with four to six brokerage houses in order to disperse his large number of shares in any one corporation, as many brokers prohibited concentrated holdings in their margin accounts. In addition, this practice avoided pressure to liquidate his entire investment in a particular company to meet a single broker's margin call. Prior to the market decline in late 1969 and early 1970, taxpayer was exceedingly successful in his stock transactions. In 1968, for instance, he held stock valued at nearly $8 million with a margin debt of approximately $3 million, leaving him a net worth of about $5 million. His only other source of income was $5,000 in salary for sitting on the board of directors of a small oil-producing company.

As early as 1950 taxpayer became interested in Central Railroad Company of New Jersey (hereinafter Central Railroad) and began purchasing its shares. By 1961 his holdings in this company amounted to almost 62,000 shares purchased at nearly $1.5 million. During the time he was increasing his Central Railroad holdings he met Irving Like (hereinafter debtor), a former stockbroker who was also trading on his own account, and shared taxpayer's interest in Central Railroad. A business friendship developed. In 1956, at taxpayer's suggestion and with his assistance, debtor was elected to the Board of Directors of Central Railroad, eventually becoming a member of the Executive Committee. In this capacity he provided a continuous source of information to taxpayer regarding Central's business, which taxpayer believed safeguarded his substantial holdings in this company.

Although these men had no social contacts beyond their business relationship, debtor borrowed $3,000 from taxpayer in 1957 to help pay for a daughter's wedding. The debt was repaid 6 months later when debtor's stocks went up in price and he was able to borrow on his margin accounts.

During 1960 debtor's wife underwent four cancer operations. In order to meet hospital and doctor expenses he again borrowed from taxpayer in a series of loans beginning in March: First a $3,000 loan, then three $1,000 loans, and finally a loan for $5,000 late in October 1960. A portion of the $5,000 loan was to be used to meet debtor's margin calls.

Almost a year later, July 1961, debtor received additional margin calls from his brokers. To meet these demands he borrowed $25,000 more from taxpayer. Approximately 1 month following the final loan, on August 28, 1961, debtor executed a demand note payable to taxpayer for $36,000, the total amount of the six unpaid loans. Debtor understood the purpose of the note was to allow taxpayer to collect from his estate in the event he died before repayment.

All of the loans, including the initial wedding loan in 1957, were without interest. The resulting note made no provision for interest. Taxpayer testified his orthodox religious beliefs prevented him from charging interest on any loan, business or personal. Apparently the series of loans to debtor were the only loans taxpayer ever made.

At no time did debtor make payment on any portion of the $36,000 loan and, in August 1967, the New York statute of limitations barred suit to enforce payment on the note.

At the time the loans were made, debtor held about 5,000 shares of Central Railroad, having increased such holdings from 2,700 shares which he held in 1956 when he became a director of that company. The 5,000 shares of Central Railroad represented the largest holding in debtor's stock portfolio. Taxpayer had already received one margin call himself regarding his Central Railroad stock and was concerned that without the loans debtor would sell his Central shares which would lower the market price and precipitate additional margin calls for taxpayer. Central Railroad went into receivership in 1967 and debtor was forced to sell his shares at a loss in order to meet living expenses. Taxpayer continued to hold his stock in this company, however, until 1970 when he was likewise forced to sell. At the time Central became bankrupt, taxpayer's net worth was approximately $5 million; and he did not need payment of the $36,000 note to meet personal expenses. Even with the rapidly declining market in late 1969 and early 1970, taxpayer had sufficient funds so that he did not need repayment of the loans until the fall of 1970 when he made a demand on debtor and asked him to sign a new note. At that time, both parties knew the statute of limitations had run on the original note and, although debtor hoped to be able to repay taxpayer at some point, he refused to renew the note. Debtor was concerned that should taxpayer die, he would be sued on the note by taxpayer's estate.

In seeking to carryback to 1967 net losses incurred in 1970, taxpayer made the following statement on his 1970 federal income tax return, schedule C:

In 1961 taxpayer in the course of his operation as a securities trader loaned Irving Like $36,000 for which he received a demand note. Mr. Like was also a substantial buyer and seller of securities and had been helpful to taxpayer in his securities trading activities. In 1970 when taxpayer had severe financial reversals, taxpayer requested payment. Mr. Like advised that he also was in financial distress, in ill health and could not and would not pay the note. Statutory period for taking court action to enforce collection expired and taxpayer had to write off the loan as a bad debt loss.

Taxpayer was allowed to carryback net operating losses from 1969 and 1971 to taxable years 1966 and 1968. Also, he was allowed to carryback to taxable year 1967 some of the business operating loss he incurred in 1970, but he was denied a refund of $13,847 in 1967 taxes for carryback from 1970 of the claimed business bad debt of $36,000. Taxpayer timely brought suit to recover this amount.

I. Trade or Business

In order to claim a business bad debt loss under section 166 of the Internal Revenue Code, a taxpayer must establish that he is engaged in a trade or business and that the loss bears a direct relationship to that trade or business. 26 C.F.R. § 1.166-5 (1978);³ Townshend v. United States, 384 F.2d 1008, 1010, 181 Ct.Cl. 635, 640 (1967).

Although the Supreme Court has yet to find a taxpayer properly characterized as a securities "trader," it is clear such a section 166 "businessman" exists, given the proper facts. Higgins v....