Benjamin A. Stratmore and Helen Stratmore v. United States

judge strike shall and sentences pleas, the convictions may there- thereon. Defendant entered rearraigned proceed- further after be depending upon how ings had, he

plead. remanded.

Reversed and

Benjamin and Helen A. STRATMORE Plaintiffs, Stratmore, America, UNITED STATES Defendant-Appellant. Justice, Dept, Ruby, Tax Stanley L. No. 17786. (Johnnie M. Washington, Division, C.D. Appeals

United Court States Atty. Gen., A. Walters, Jack- Lee Asst. Third Circuit. Friedlander, Attys., son, A. William Argued Sept. 1969. D.C., Washington, Justice, Don- Dept, of brief), Atty., on Horowitz, U. S. ald Jan. Decided appellant. Rehearing Denied Jan. J., Wayne, Statmore, N. Kenneth T. appellee. STAHL, STALEY, SEITZ and Before Judges. Circuit THE COURT OPINION OF Judge. SEITZ, Circuit brought Plaintiffs, taxpayers, an ac- a refund of court for in the district tion year contend- for the income taxes ing guaran- $17,088.00they paid as corpora- promissory taxpayers' by endorsements were ex- the decided was The case August facts, prior which ecuted Rid- stipulation of when court on voluntary petitions following. and er and filed In General discloses reorganization bankruptcy seeking and taxpayers, husband in prior thereto Chapter Bankruptcy wife, XI stockholders of the and officers were (Rider) and insistence, At Corporation Act. payers tax- creditors’ Rider B. B. Corporation Manufacturing plan did not file claims. A General functioning payment whereby en- approved (General), was both obligations per owing in They acquired an interest cent of the credi- terprises. paid. corporations instrumental tors would be were in 1938 and Rider Taxpayer, discharged bankruptcy forming were in De- from General thereafter, Benjamin Stratmore, and still cember was certain of A. pri- corporations. payment His the creditors demanded president both past corporate during fifteen balance mary debts from duties financing payers guarantors so corporate as years to secure have been agreed Taxpayers pay their corporations part could meet notes. the debt owed these operational creditors set- needs. full obligations guaran- tlement of their as operations with commenced General pay- tors. We are concerned with the $50,000.00, it bor- capitalization ment made them in 1959. Rider turn had Rider. rowed from original money On individu- certain return tax borrow the money payment direct- who not lend treated the 1959 als ly would aas time, because, debt, Gen- only non-business bad to General deductible capital When Gener- short-term They eral without assets. was loss. later Benjamin capital increased, filed claiming amended al’s return need payment entirely fi- A. to seek additional was Stratmore had deductible under 165(c) nancing (2) section for it. of the Internal Reve- nue Code court, of 1954. In the district banking exhausting credit with After taxpayers contended that the amount institutions, compelled to Stratmore was they paid guarantors corporate money for Rider General borrow (1) notes either a loss in transac- typical from certain individuals. tion profit though entered into for transaction, these individuals lend would connected business, trade or un- corporations money but to one of the der section (2), or a bad require personal- debt incurred in a trade or un- guarantee ly corporate promissory der section 166(a) (d). by endorsing “significant it or business need be motiva- of trade conduct engaged explic- at the tion.” The district court did worthless, itly applying. state what test it was debt becomes time the [fully that, exception further Government contends comes debt within subpara- event, that neither provided facts here meet deductible] test. graph.” Commissioner, agree 373 We Whipple Government that also v. 1168, taxpayers 201, L.Ed.2d 10 have not met their burden S.Ct. U.S. showing significant of (1963). even a motiva- tion. Because of this view we take willing assume The Government record, unnecessary find it we to de- appeal that purposes this for cide whether the correct test is one pursuant

payment by these mo- gave guarantees to a bad rise their tivation. that, con- However, contends it debt.1 ruling The heart of the trary of the district district court’s fac- to the following taxpayers, tual evaluation is found in the the contention portion opinion a busi- of its : payment deductible as was not debt because ness bad would have ceased “Rider and General showing burden to meet their failed for the loans obtained to function but that found which it could be facts by plaintiffs. corporations said proximately to their related the loss loans not have been And those would officers, corporate positions as salaried guaranty. A plaintiffs’ made without inves- as their interests rather than to corpora- cessation business corporation. tors in the a loss tions have resulted challenge plaintiffs' positions. It has does not salaried Government acting gave stipulated plaintiffs proposition as sala- one that corporate consid- their executive can be their lent ried indorsements engaged or busi- trade and General with ered be credit Rider purposes expectation This of the bor- ness for statute. use extremely guaranteed loans then for decision the leaves rowed provide plaintiffs practical problem corporations as to difficult whether factually receipts by way of sal- demonstrated ‘with increased guarantors proxi- ary their their loss as the value of and enhance being mately corpora- proprietary interests said related to or, officials, concretely, corporate more tions.’ Such motivation is sufficient enlargement F.Supp. retention cases.” cited salaries. at 62-63. stipulation clearly par- a The shows that contends The Government endorse- tial motivation for proximately related to pro- was to guarantor by sustained a unable showing a ple, is not even there by very cover from the debtor is its taxpayers’ stock of the extent record nature a from which loss debt to capital But contributions. interests and subrogated guarantor upon the becomes free were the district even discharging guarantor. liability his as there was consider whether The Court went on to decide that such considering employee motivation without regarded a loss must be as a bad debt motivation, proprietary the extent loss, deductible as such or not at all. taxpayers have failed would still taxpayers distinguish carry Put- their sufficient facts nam They v. Commissioner. assert appears to The district court burden. Jersey guarantor New under law a can- heavily on the have relied subrogated rights not be by of a guaranteed the that, loans without the creditor the until claim of the creditor salaries, along taxpayers, taxpayers’ against paid the debtor has been corporations, have ceased the with They argue they full. since not did exist. But since liability guaran- settled their on the provide to the amounts as even evidence tees less than full amount salaries, possible for their it was due, they subrogated never became impor- how district court to evaluate rights Because, of the creditors. salary maintenance tant the factors say taxpayers, subrogated they were not willingness to and increase were rights, to the creditors’ there was no guarantee the loans. “debt” which could “become worthless” True Therefore, argue, hands. stipulated facts ferred 165(c) loss must fall under section present to ful- sufficient (2) aas transaction entered into requirement. But statutory fill profit, though not connected with apart approach, difficulty its with since it cannot be a not articulate fact did bad debt under section 166. applying, it was of motivation standard challenge The Government does not justify infer- an facts while the is that as a contention that matter tax- endorsing the notes ence that in subrogation of state law there was no by extent to some payers motivated were here with because settled their sal- protect and enhance desire to paid than full creditors less do not warrant positions, the facts aried guarantees. Rather, amount due on signifi- finding action was such it contends that bad debts section within employee by factor. cantly motivated by 166 include not di- debts created by loans, payment by rect but an indirect endorse- that the We conclude arrangement fully type deductible ment or other taxpayers was not a 166(a) secondary under section creates bad debt liability part corporate (d). on the stock- against present case claims stockholder holder, no times right all relevant the debtors of subro- law the state under has in the hands more collectible following payment. gation original guarantors than those means certain We turn result To allow the tax lender. position sound payers’ law state presence tech- or absence of this on the here, where, claims creditors’ right subrogation state under nical totally ex- against the debtor had the Putnam would be to undermine law Plan tinguished approval change capital could doctrine — taxpay- prior Reorganization to the ordinary almost at will. losses losses we But payment creditors. ers’ guarantor example, every could ob- For Putnam essence think reaching ordinary simply tain an Congressional Court view pay- agreement with the creditor 166(c) purpose behind section amount than full ment less play the statu- part intended to it was avoiding guarantor’s liability, thus treatment tory common tax for a scheme taxpay- subrogation. holdWe by a of all losses suffered guarantees pursuant payment to the ers’ corporation providing his stockholder not a loss under section financing: are to be losses these rather a non-business bad but capital As the Court losses. treated 166(d). section Putnam, real pointed in is no out “There judgment The the district loss or economic difference between will be reversed. a the form of investment in of an made corporation and one to a direct loan (dissenting). Judge STAHL, Circuit guaran- indirectly of a in the form made agree majority that IWhile consequences loan. tax teed bank The should the decision of the district court in should * all reason be same affirmed, not be I must dissent " * * 92-93, at 352 U.S. at 77 S.Ct. outright holding not de- entitled a business bad debt duction under Rev- of the Internal § meaningful emphasize un- is not It later, be- enue As I Code.1 discussed duly principle the common of subro- law appellees op- lieve should afforded be gation analyzing substantial reali- in portunity stipulation a be relieved upon which is ties federal taxation clearly improvident. insufficient and When the turns to the based. creditor Regu- guarantor According Treasury payment, is the debt al- ready lations,2 Putnam a uncollectible. full In both a deduction based 2. The 1. I ing in a transaction faction of their appellees ductible under part, as business debt The tion of whether each stantially mining becoming of section shall, red am a trade or Regulations F.2d — in accord with question particular for this a trade follows: whether a worthless the same manner majority compelled § whether a debt is a non- purpose, guarantees entered into for case. The provide, business for loss (1). question the alternate lias been incurred loss on a debt’s has been incur- be made For loss pay in are not de- determina- of fact for deter- pertinent purposes purposes taxpayer in amounts incurred profit. satis- hold- sub- in the Internal test red “in connection with” note self establish is a within the worthless ness of the the character becomes termined payer resulting the trade or subparagraph. § 1.166-5 subparagraph in” the but applicable infra. proximate is rather engaged (b). worthless, bears Revenue Code does exception provided by tnxpayer. taxpayer’s refers statutory one in relation which the loss * (2) the debt “proximate at the trade or busi- and losses “incur- * of this in which the debt to debts created debt’s If that the conduct of business. « time provision is paragraph, becoming relation” the debt relation C.F.R. comes de- it- only proper majority opinion, from a loss bad debt As indicated proximately stipula- where the loss is related this case decided on a below taxpayer. ap- fact trade or business of the which established that pellee-taxpayers Therefore, loss is suf- to enhance where bad debt acted both preserve fered an individual in the course investment and to corpo- activity, key his issues in their economic two salaries determining deductibility: rate arise in district court con- officers. cluded that since the showed (1) engaged Was the did trade or business considerations loss; trade or the time of enter into the decision of the guarantee loans, there was a suf- specific activity Was the relationship ficient between subse- gave part of the rise to the bad debt quent taxpayers’ loss and trade business? business to warrant the debt deduc- bad tion. may de- issue resolution of each argued The Government has here that pend to some extent on the the district court’s conclusion was erro- motivation, but care should taken grounds. neous on either of two question of to confuse the two.3 The proximate relationship only in arises Primary Motivation pointed connection with the latter. As majority opinion, First out is not Government asserts obligation resulting where an activi- contested here that the pursuant paid corporations debt loss is entered into ties as officers both business and stock amounted to a investment considera- held tions, issue, trade or is not entitled to a business. The therefore, guarantees of business bad deduction under 4 corporations proves part or 166 unless to the of he that the loans were business proximately primary. motivation was in fact It were related to that busi- argues since the ness.

3. anteeing appellees ing business. trade or business or a hibition of related to their quoted language mit of the loss under the supra, Revenue, In Imbesi v. are deductible because incurred profit, However, deductible trade or taxpayer test expenses. [T]he dispute, case the instant the deduction. Regulations issues this court said: involving primary racing or on the other hand the activities were 361 F.2d 640 At business or dogs has § determining 361 F.2d at 644. because the notes mentioned in issue is whether appeal, Commissioner breeding, always trade engaged in dealt and the intent Inibesi set horses, or they (1), only in forth deductibility been the ultimate or training business personal hobby. transactions breeding, whether (3d case referred to motive conceded that constituted of Internal in note sufficiently text, trade taxpayer and the personal are and ex- 1966), of the train- losses guar- in a of a i. first per- not or e., in 4. The than— purposes “nonbusiness able taxpayer shall be allowed whicii Sec. 166. Bad follows: lessness of which is trade or business of the sis (1) (d) (1) Wholly (a) ^[*] (A) ^[*] (A) (B) year. added.) relevant case Nonbusiness General General Rule —In the becomes worthless within the tax- Nonbusiness nonbusiness a debt [subsection other debt may be) sjs ^[*] trade or debt” paragraph parts rule'— Debts. Ü.S.C. than a worthless created or as a deduction debts— loss sfc means a (a) debt; of debt business. connection with a § corporation— ] § from the incurred shall not (1), 166 taxpayer; defined —For debts —There sfc acquired (as H: debt other case provide the term (Empha- any worth- apply # ^[*] of a debt or designed only full to make deduct- 166 “wás shows § was tried the case which proxi- e., ibility upon preserva- motivations, a bad debt turn its i. two connection with activities which employment mate enhancement tion recognized unspecified a trade or present the tax laws investment, were ”* * * met business 373 U.S. at degrees, taxpayers have not discussing proved that S.Ct. at 1173. Without not and have burden proximate connection ex- whether such a deductibili- to the full entitled were case, isted in Court there held ty to a entitled argument reject do as I this I would losses bad debt deduction language either believe that corpora- on loans made to a soft drink regulations, which or the the statute promoted tion he had because his collectively “in connection refer to debts activity or not amount to a trade did with,” “proximate” and in in” “incurred business. can relation to the taxpay- require fairly be said question course, only Here, primary dominant busi- ers show a connec- “proximate awas whether there employment motivation.5 ness appellee-taxpayers’ tion” between language import both busi- is that acknowledged trade guarantees and their mo- and investment ness corpora- as officers or business transac- tivations made. loans tions negating without the one in which a Speaking situations connection of the transaction with engaged trade or payer in a taxpay- other, consequently it, Supreme before unlike the case rather er need show Whipple say on to went Court than a demonstrates “the where business bad debt.6 order deduct a own, his dependent or business distinguish bad Language Supreme taken to care must be used Court- arising busi- area, Whipple own leading from his losses case in arising ac- actually those of Internal ness and v. Commissioner peculiar concerned an investor 373 U. L.Ed.2d tivities S. S.Ct. in, Upon with, participating the conduct (1963), supports this view. atS. legislative 373 U. history corporate business.” examination of the (Emphasis add- Code, provision at 1174. the 83 S.Ct. the bad debt predecessor to ed.) Court concluded that the

5. Debts Revenue (1962), See In he is than when by 1961)]. made to missioner, rendering mate continued It would should be considered [footnote note Weddle 851 Note, loan is no Under Section when 9 employed Code, (2d keep is While operation omitted; continuing corporation’s certainly services when stated: Shareholder-Creditor 291 F.2d made Cir. necessary tlie text 75 Commissioner, less 1963), Ilarv.L.Rev. corporation by 166 of the Internal see Trent v. Com- question of a condition of sufficiently seem that avoid thereto. the 669 to assure shutting his business discussed management corporation. being voluntarily (2d Cir. 325 F.2d proxi- i>roxi- loans down infra fired Bad 601 the the istence neither precludes desire be resolved his investment and his sonal business fruitless twined with his sonal though vation tain his whether tify poration. ^[*] mate ‘-I: distinguish distinction between “business” relationship ^[*] other motives personal the when the shareholder's employment making a determination protect Inevitably Code by taxpayer’s motive is investment such motives debt seeking * business so the loan nor both in such cases * inextricably the sufficient are treatment, without his investment *, primary maintain taxpayer to or also that Regulations is to in the any effort two; determine present. the ex- protect making seems inter- might main- moti- even per- per- cor- jus- will 468 evidence, ing court concluded taxpayer Thus, that seem it would relationship that the loss had investment having both business and, fact, re- taxpayer’s employment a busi- entitled to should motivations guarantees build “made to aris- sulted from losses debt deduction bad ness corpora- up the stock of the value of ing of transactions out approach closely with tion.” 417 F.2d at 1187. identified “peculiar to” quite similar undoubt- in Niblock was effect This standard investment. many taxpayer that cases where shows edly met where argued was generating the loss officer-stockholders have the transaction con- suffered by bad losses were

significantly motivated appear way course of trade or business. does In no siderations. the statute a situation such courts have cases estab- require regulations support usually evidence in examined the proximate connection lishment proximate a trade connection showing depend on a should indicating without pri- leading the loss transaction significant motiva- primary or the or busi- marily the trade motivated applicable.8 On standard ness. hand, appeals has ex- other one court rejected primary only pressly motivation called has been attention Our enti- has held appeals test and has case in which one to a business bad debt deduction tled demands squarely that § held significantly motivated he least was at primary motivation application interests in enter- Inter- v. Commissioner Niblock test. ing leading to the (7th into the transaction Revenue, Cir. 417 F.2d nal Inter- loss. Weddle v. Commissioner 1969).7 does the court in this case Even Revenue, (2d F.2d 849 Cir. applied nal directly to have not seem 1963).9 follow. This is the test I would examin- After it articulated. rule which 1968); rell, (5th Cir. Niblock: said Lundgren v. Commissioner of Internal a de- to obtain In order for 1967) debt, Revenue, (9th Cir. 376 F.2d 623 duction (by corporate employ- prove its citation Weddle v. Commis- bis must pri- sioner of Internal note 9 the dominant and ment furnished mary infra thereto, making text the court have ad- motivation indicating approval signifi- guarantees. We dis- vances and the motivating rule); Kelly agree cant motivation v. Patter- son, 1964). applied the ma- 331 F.2d factor test that was * * * generally Annot., [WecM/e], jority be- Federal Income Tax: We inject corporation Stockholder’s loan to as ba- that will lieve that test deduction, interpreta- certainty sis for business bad debt into sufficient ICC, (1952). supra, dom- A.L.R.2d 633 is the tion of Section test inant and Supreme 9. Weddle was decided after (Em- we 417 F.2d 1187. have stated. Whipple Court’s of ICC treatment in added.) phasis Revenue, v. Commissioner of Internal devoutly certainty be While supra. sought interpretation the tax the opinion Judge below, Augelli In the laws, not fairness we sacrifice should expressing described Weddle as the “view order to achieve certain- the necessary proximate that the relation test, ty. significant while motivation The might be where the established even i>ri- flexible, preesnts no insurmount- more mary motivating cause for the hav- loan application. More im- able difficulties ing standpoint been made was from the portantly, nothing in statute or the the stockholder-investor, if there was adoption regulations compel appears significant secondary motivation primary motivation rule. being lated to the trade or business employee.” F.Supp. See, g., Spillers at 03. e. Commissioner Millsap Revenue, See also 407 F.2d v. Commissioner Internal (8th 1969); Internal Cir. United States v. Wor- Sig- taxpayers’ Support amount salaries and Evidence Sufficiency of ownership, the the value of their stock Test Motivation nificant for their desire to retain their reason argument second Government’s positions corporations, the the evidence insufficient there was that past history taxpayers’ financial the allowance the to sustain the below dealings employment. signifi- under the even deduction evidence, the Without such decision the approach. While motivation cant sustained. the district court cannot be the majority does not decide majority My disagreement with the significant stand- motivation primary or although my from that stems belief applied, it concludes ard tois stipulation sufficiently establish did proof argument Government’s significant nec- business motivation is meritorious. neither standard meets permit essary to deduct agreement with I extent am To this debt, losses as a business we view, but, my does this majority present record should not hold matter. not end the completely from barred stipulation before claiming the deduction. to establish insufficient by par- stipulation is entered into A the bad proximate between connection ties for their mutual convenience and taxpayers’ loss and litigation, expedite disposition it shows officers because given any greater ef- should not be sig- have been In I fect than that this case intended. stipulation motivation. nificant into believe entered possibility open it was leaves misapprehension under not. sufficiently showed the evidence necessary to secure the If owning corpo- deduction. Any taxpayer stock in a stipulation, high- had it is there been employed can which he is ration ly probable kind that evidence of the trans- probably claim to have entered necessary support a full deduction like that this ease action signifi- taxpayer, at least under the status to his benefit test, cant would have been motivation order the full deduc- to obtain mind. brought however, out at trial. tion, reason- must ably considera- show that record, In the state incidental, i.e., he tions were more than instance, we do know the exact even pos- negating produce evidence must amount salaries sibility that investment considerations holdings. Cer- the size stock important the transaction were so probative tainly, of this nature evidence undertaken even had have been on the of motivation have issue entirely the business considerations been developed stip- at a trial. Thus the showing, Failing absent. such effect, ulation, given conclusive is a taxpay- court cannot conclude windfall the Government because activity peculiar to invest- ers’ was not adducing prevents purposes. ment justify necessary try evidence their claim. indicating factors all

Without govern that would case discre- I believe the courts have the standard, insufficient, parties it can tion to relieve among improvident inept stipulations noted that relevant ele- comparison injustice.10 prevent a ments be where to do so would 1968), agreeing with the Tax Court’s Distributors M. E. Central Inc. v. Cf. Inc., application 943, (5th F.2d 946 Cir. 403 T.. denying Corp., 1968); standard in a bad debt v. deduction Mitchell & P. Shoe C. States, 1960); (5th and Decker v. United 244 F. F.2d 114 Cir. 286 1965). Supp. (N.D.Iowa Rickenbaker, Maryland Casualty Co. v. Knight Newspapers utility company v. Commission- and limited the a to against remedy er of Internal 143 F.2d 1007 the state. 1944), deficiency (6th a as- Cir. was appeals The court of held that the law holding against corporation, a sessed a protected from liabil- contractor company, in- include in for failure to ity injuries property necessarily to paid by come a an affiliate. dividend per- incident to and unavoidable in the argued taxpayer dividend contract, formance of his was because its distribution not income stipulation permit was a insufficient illegal subsequently re- was and was finding on the issue. The court on went stipula- scinded. The ease was tried a say: tion Tax That court before the Court. might possible by applica- While held that had failed proof tion rules of burden of proof the ev- meet its burden because going burden of evi- forward with illegality stipulation idence in the on the dence to reach some kind of decision sufficiently de- was not dividend present record, on the we do not feel pendable. motion for just this would ensure a result hearing, on the contention that based [Footnote In clear in- omitted.] stipulation inadequacy power stances a court has to relieve oversight, by Tax due to was denied parties stipulation of a entered into Holding had Court. the Tax Court misapprehension law, erred, appeals the court observed * * * just may as a new trial exercise of a sound discretion “[t]he granted prevent miscarriage require seem to the court justice. accordingly We remand the permit to establish facts case to the district court to consider had, parties litigation permitting parties to vacate good faith, by considered covered amplify stipulation or to take stipulation.” 143 F.2d at 1009. The steps such other ap- as the court taking case was remanded for prove. 272 F.2d at 433-434. further evidence. Campanella & A Boston Edison v. similar Co. result was reached in Aetna Co., Cardi Construction 272 F.2d 430 Life Barnes, Insurance Co. v. 361 F.2d (5th 1959), 1966). (1st a case in Cir. Cir. There trial misunderstanding possible erroneously led court had recovery the law allowed parties try theory on a clearly by group the lawsuit on an barred adequate stipulation disability policy. However, fact. Boston insurance utility Edison, company, possibility held an ease- there recovery was a on a adjacent ment over tract con- different land to a basis which had over- by plaintiff. demned looked the state of Massachusetts stipula- As the highway. upon construction of a Two which the case was tried was utility company’s poles support were dam- insufficient a conclusion on aged weight applicability when embankment theory, of an of the alternate ground built a contractor caused the remanded the case consid- adjoining property justice surface eration required of whether plaintiff shift. The trial opportunity court dismissed be afforded an utility company's ground suit stipulation on the withdraw legislation protected contractor further evidence.11 1944); (4th 11. The Cir. court said: course, Schmucker, Bradford v. 135 F.2d Of for us to remake 1943); Snyder reject the parties Dravo record or that which the Corp., (W.D.Pa.1947). 6 F.R.D. their formal have generally Annot., proffered trial, 161 A.L.R. 1161 to the and now to this (1946). policy provi- Court. But since these Co., presentation Colliery of further Winding and to allow Gulf Brast v. repeat, 1938), do tax ease I would so (4th a To evidence.13 F.2d 179 Cir. appellees if cannot permitted to the basis that even was in which stipulation, damaging motivation come within from withdraw test, proper deter- rule to follow said: court mining aof allowance developed subsequently facts Where 166 whether under debt deduction § particular respect show, significant To motivation. there is stipulation inadver- matter, was that a may appellees entitled to that end opportunity may signed, party be re- tently proof offer prejudice to is no where there lieved I conceive to come within what 181. opposite party. F.2d at test. correct And further: government collected taxes * * * By right to collect. it had no [relieving the this action government stipulation] the only re- prejudice. It was suffered no quired it had col- the sum

to refund right lected, to collect. it had no America, UNITED STATES of at 182. 94 F.2d Appellee, case, v. if the Likewise in sup- ultimately able CAIELLO, Appellant. Richard v. 166, the Gov- port their claim 212, No. Docket 33175. legal prejudice would suffer no ernment Appeals United States Court required bad debt to allow the if were Second Circuit. deduction. Argued Oct. 1969. stip- inadequacy appears It Decided Dec. 1969. Edison, here, in Boston like that ulation April Certiorari Denied 1970. misapprehension of le- due to a See 90 S.Ct. 1358. gal proof of the elements Therefore, I remand claim.12 district court for consideration justice require interests of its to re-

the court exercise discretion stipulation

lieve the per- existing have such sions an immediate and state of law induced then * * * haps preju- impact, think that decisive we law case * * * justice. Logan the administration Co. v. results.” Lumber dice judgment the reversal on the of Internal Commissioner 1966). directly jjresented should not theories Cir. prejudice Employee right required appellees would be 13. Of course pursue theory Es- on remand. petition to the district to submit a pecially stipulated this so since alleging grounds asking for such relief as to the of ter- facts critical element stipulation. relieving them of the (and mination of hence Boulger Destructor Co. Camden Morse surance) conclusory, not are stated in 1956). (3d Mills, 239 F.2d 382 Fibre evidential, 361 F.2d factual terms. It have is understandable they prevailed below. acted before as may my misapprehension Furthermore, be under- examihation Such parties standable view of uncertain case submitted in low- briefs of the adequacy appears law in As been observed er this area. lias context, stipulation support un- different deduction a somewhat theory payer be relieved of the effect der the into under a mistake not before the district court. “entered notes tors of officers tions of fully either deductible stockholders en- transaction loss incurred though profit connect- into for tered under sec- trade or business ed with 165(c) (2) of Revenue the Internal 1954, or, alternatively, a bad Code in a trade or un- incurred (d). 166(a) dis- der section Judge, Stahl, Circuit dissented. against trict court ruled favor of former contention but United latter. Stratmore v. them on the (D.N.J.1968). States, F.Supp. appeals. Government

Notes

notes them. Without these not have endorsements loans could We consider first the district corporations been obtained and ruling payment court’s consti functioning. would have ceased fully tuted deductible business bad 166(a) (d) provide, debt. Section aggregate Although amount insofar as here pertinent, an indi stipula- forth set such loans is vidual can deduct bad debt very tion, substantial is clear that acquired full if it is created Furthermore, sums involved. with, connection the loss therefrom gave stipulated that in, is incurred trade or credit to and lent endorsements resolving applied business. The test expectation corporations “with the issue of whether a loss is incurred in funds corporations’ of these use said Treasury a trade or found in increased provide them with Regulation (2): 1.166-5(b) way salary inhance ceipts proprietary of their the value purposes subparagraph (2) [sic] “For corporations.” paragraph, in said character of terests employee rela- that his interest as an was the determined is to be guaranteeing resulting motivation2 taxpayers, becoming notes. bears worthless debt’s relying Commissioner, taxpayer. If on Weddle (2d 1963), argue one in proximate is a relation

ment of the notes of a stock- separate proprietary inter- necessary to show tect and enhance holder-employee, it is completed. urged view has been For tliat rea in the alterna 1. The Government son, us, pay it the Government informs is not tive in the district raising capital the contribution issue a contribution ment should be treated appeal. on this capital, The Govern bad debt. not a pres its brief ment states Commissioner, position ently reviewing v. F.2d 1185 has de Niblock 1969). . until not to advance termined argue Taxpayers course, in the alterna which, is not a basis ests, guarantees resulting tive that constituted treating therefrom as a loss profit Certainly, transactions into for where entered bad debt. meaning employee motiva- within section proprietary and both admittedly present, the extent of the Internal Revenue Code pursuant payments most and that the proprietary motivation is guarantees determining there losses rath these resulted in relevant “significant” employee er motiva- than bad debts. awas Yet, court made tion. Commissioner, 352 U.S. Putnam proprie- finding of this to the extent (1956), 77 S.Ct. 1 L.Ed.2d sparse indeed, motivation; tary Supreme Court held record, For none. exam- could there

Case Details

Case Name: Benjamin A. Stratmore and Helen Stratmore v. United States

Court Name: Court of Appeals for the Third Circuit

Date Published: Jan 29, 1970

Citation: 420 F.2d 461

Docket Number: 17786

Court Abbreviation: 3rd Cir.