United States v. Forrester A. Clark
358 F.2d 892
1st Cir.
1966
Check Treatment

*1 America, UNITED STATES Appellant, Defendant, Plaintiffs, al., A. et

Forrester CLARK Appellees.

No. 6617. Appeals

United States Court

First Circuit.

March

Rehearing April Denied *2 Judge.

McENTEE, Circuit partner taxpayer1 Plaintiff is a senior brokerage firm in a well known securities Boston from in major part which derives claims of income. He sepa- individually also he is seeking out, promoting, rate business of organizing, managing and “quite num- and a business ventures has Apparently of ber taxpayer small businesses.”2 reputation acquired a Amongst helping companies. small taxpayer in which business ventures during actively the re- became interested past, small Massachusetts cent were two as Endure Paint Cor- known poration Prod- and Electronic Detection eventually Company, ucts which both cor- became insolvent. Neither of these porations any connection with the At other. various times between Warhaftig, Atty., Dept, L. Solomon guar- taxpayer personally and Justice, Roberts, with whom Richard M. obligations anteed the two these cor- Acting Atty. Gen., Asst. Lee Jackson A. porations direct loan one made a Walter, Attys., Dept, and David 0. of them. Justice, Garrity, Jr., W. Arthur U. S. Basically, presents appeal this Atty., Sullivan, John Paul Asst. U. S. question taxpayer entitled whether the Atty., Meyer Atty., Rothwacks, debts, deduct as losses business bad Dept, Justice, Washington, C., resulting D. were sustained guarantees these him from brief, appellant. on and this loan. This in turn presents question the narrower wheth- Philip Cronin, Boston, Mass., M. er within business bad debts Park, Mass., whom Boston, Edward C. meaning of 166 of the Inter- Section brief, appellees. was on nal Revenue of 1954.3 Code ALDRICH, Judge, Before Chief Mc- Briefly the In 1952 facts are these. COFFIN, Judges. ENTEE and Circuit Eaton, one a friend 1. His only because had become ty-five Taxpayer “§ 166. which becomes comes worthless within the taxable apply taxable shall (1) (A) (B) (1) Wholly (d) (a) General Rule.— [*] wife Nonbusiness Debts.— General Rale. —In the case of a where subsections Bad year. allowed testified any other [*] actively joint Debts. joined worthless nonbusiness enterprises. than as a worthless within nonbusiness (a) returns were filed. [*] involved in some for- as a deduction a over corporation— party plaintiff debts. —There debt; [*] (c) shall debt be- any years year, $ debt ness which is incurred fined. —For or business of the er’s trade or business. capital asset held for not change, during the term ‘nonbusiness debt’ means a debt months. Amendments the loss considered a (2) (B) (A) Stat. [as may be) a a other debt the loss debt created amended 1606] resulting than— purposes # loss ofAct connection with a Nonbusiness debt [*] from taxpayer; from therefrom taxable Sec. [*] acquired (as » the sale paragraph (1), the worthless- more P.L. year, Technical shall taxpay- 85-866, than 6 or ex- trade of a de- be principal in Elec- president stock- interested became also Company, officers which Detection in when its Paint tronic of Endure holder sought failing business, approached obtain- him view to with the then ing capital. ad- He succeeded additional financial assistance raising years from followed In the two vice. reference friends. several For this the advised Eaton with *3 option management purchase in stock an to of the business received to the option company. received, en- this the When for Endure obtained several loans taxpayer hoped dorsing had no value but the bank. When the its notes to the company successful Endure was would become due and these notes became thereby paid pay valuable. the the stock would become them either to he unable money company He chosen a director of this the was himself or loaned Endure *4 rations not a is trade business within is bur It well settled that the meaning statute. he den was on the to show that was entitled to the claimed deductions. legal principles The announced States, 281, White v. United 305 59 U.S. controlling Whipple in are here. We 179, (1938); L.Ed. United S.Ct. 83 172 viewing have searched the record and Byck, (5th 325 F.2d 551 Cir. States v. light evidence in the most to favorable prevail In here order to he taxpayer, do not find this neces we (1) individually to show that sary required evidence” “additional as seeking out, promoting, the business of Whipple. there is some evidence While managing organizing, financing and taxpayer may engaged that have been claimed; (2) ventures that business as promoting corporat business regard his activities with to Endure ions,5 promoting corporations even if part Electronic Detection a were that may rehabilitating include ones there old business; guaran (3) said that his evidentiary holding no basis for that resulting tees loan losses regard his activities with to Endure and proximately therefrom were related to part Electronic Detection of that said individual business. United States business, e., promoting i. that he was Byck, supra. v. companies. these two there Nor is leading authority on the evidence that intended to going develop Whipple question basic involved these “as here is Commissioner, businesses for sale customers in 373 U.S. 83 to S.Ct. 1168, 10 ordinary compensat (1963), L.Ed.2d 288 in which the course” or that Supreme corpo Court to ion him from laid down the tests as received either flowing ration what constitutes a was different from that business within meaning activity Taxpayer’s to an of Section 166. investor. sole In that rendering making p. p. the court advice and advances said at at S.Ct. “Devoting energies 1174: to in and did amount one’s Endure of itself time promotion. corporation to the to no affairs of is not a There is evidence a itself, more, whatever intended to de without a trade or busi engaged.” person velop prospec- ness of the In so order sale to government

Mr. seek- 5. The concedes that over Clark’s trade or business of out, years ing promoting, financing organizing, can be said to have enterprises. managing “promoted” enterprises? business six business “4. sustained AVas the bad-debt loss worth- in connection with Electronic Detection 6. All he received from Endure was Inc., Products, from Elec- sustained in connection less stock and all received pur- options Mr. Detection were with Clark’s or business tronic trade spec- seeking out, organizing, only promoting, stock that at best a chase managing financing and enter- business ulative value. prises?” thought Whipple con- Clearly to be investors. his status in this We tive company believe. implication trolling its clear because of did not rise above the level loss-producing an investor.7 when a equally consistent least are at activities Assuming taxpayer’s rais being his with investor as his an ing of Electronic on behalf “promotion”, promoting, being in the business Detection was the subse managing enterprises guarantees quent loans of two substantial question, met his burden. he has not operating to failing company of this cover the deficits taxpayer’s other ac- bar the case at proximately re were not background tivities, evi- as introduced any promotion. lated to they dence, relevant, nei- cut are not seeking corporation success make way other so far as the ther one nor the ful in order that the value of his stock particular concerned. in issue are losses options and that the would be enhanced affirmative can find no substantial We pro would investments of his friends suffered other that these were evidence testimony, According tected. taxpayer own than as an within the investor compensation for received no definition. guarantees. subjecting of his This Petition denied. corporation assets to the risks merely constituted an invest by taxpayer. ment Pokress Com See

missioner, (5th 234 F.2d Cir. *5 language explicit of the view similarity to the instant its

case, the trial we must conclude denying government’s court erred CORPORATION, TANKERS AND TRAMPS motions and for directed verdict llant-Appellee-Cross-A Libe judgment notwithstanding verdict on ppellant, However, issue. the business bad debt govern- judgment verdict TUGS JANE McALLISTER and MARGA ment in limited to this this case should be McALLISTER, engines, RET M. their issue since clear the would it is boilers, etc., Brothers, Inc., McAllister be entitled to recover some amount as Respondent-Appellant-Cross-Appellee, nonbusiness deductions. bad debt Daisey, Respondent-Appellee. judgment Pilot L. of the district court aside, vacated, 270, verdict is set No. Docket 29254. court for further is remanded to that Appeals United States Court of proceedings consistent herewith. Second Circuit. 10, Argued March Rehearing

On Petition 18, April Decided PER CURIAM. petition rehearing,

In his Whipple Com-

asserts that the facts of

missioner Internal Revenue L.Ed.2d 288

U.S. 83 S.Ct. clearly distinguishable

make that case opinion

from the case at bar. If our thought gave impression that we fours, do not so

the facts were on all we Byck, supra.

7. United States v. notes Taxpayer on commit- no in- and later went its executive pay received to them. management For his services he efforts tee. loans. For these terest on these options additional from taxpayer received received stock from time time the to received, company. company. the stock in the When had no this stock value. guaran- taxpayer In the fall of 1957 company. teed a substantial for loan the again bad into In 1955 Endure fell company Thereafter the went into the arranged taxpayer a set- times and the taxpayer red and in December of the A cor- tlement its creditors. new obliged guar- pay $30,000 to was on his poration, Corporation, was Endure Paint However, antee. at the same time he to take over of the formed the business signed guarantee approxi- a second for company. taxpayer this The old financed mately $27,000 he because he said wanted corporation by obtaining bank new two company “keep going.” to see the At totalling $25,000 personally loans he that time owned about a interest funds 30% executed the notes. Part of these February in it. In demand was of 1959 working capital for for used were repay- made on for Detection Electronics corporation. The the new stock being and, company ment this loan corporation as placed was escrow new in insolvent, taxpayer pay required to agreed was security for creditors. It was guarantee. $23,000 pursuant to his second released the that when this stock was making compensation He received no taxpayer one-third would receive about guarantees. re- it. was a testified this ward his services. At that time the payments None of said made to or on hoped taxpayer stock no value but the of either Electronics behalf Endure or by making it the com- to make valuable Detection ever the tax- recovered pany successful. payer, and he losses in full deducted these as bad federal in- business debts on his ad- In 1956 Endure an loaned come returns. tax The Commissioner making $18,- $3,000, ditional a total of Deficiency disallowed these deductions. guaranteed by 651.58 loaned to or the tax- paid. followed, assessments which were payer. noti- October of 1956 Eaton After the tax- denial claims for refund of a seri- fied the that because brought payer Both sides suit. illness he could in busi- ous continue jury claimed a trial sub- and the was liquidated ness. The jury special ques- mitted to on four fol- as a result incurred the tions.4 lowing guaran- losses on his loans and gov- 1956; $8,000 in 1957 At the close of the tees: evidence $5,651.58 on ernment moved a directed verdict in 1958. during aging enterprises Only questions material business 4 are They years 1956, appeal. and 1959? on this as follows: are engaged Mr. in the “3. Was bad-debt loss sustained “2. Was Clark seeking out, pro- Paint in connection Endure trade or business of with the Corporation moting, organizing, man- connection with sustained in activities, finding ground to sustain a pro- law, engaged constitute a in the trade as a matter did not meaning financing corporations, moting business within the the bad compensa- court denied this reward or debt statute. trial must show jury corporations “Yes” all is different motion. The answered tion from these flowing questions and that four and returned a verdict from that to an investor taxpayer. Thereupon “developing for the and for an intention given going support mo- same of its for sale reasons as businesses verdict, gov- ordinary of a course.” tion for direction customers Bodzy judgment Commissioner, supra; ernment moved notwith- standing (5th Commissioner, motion the verdict which 321 F.2d 331 Cir. evidence, government appeal, also denied. On Without this additional furnishing organizational, promo- erred de- contends that the trial court nying managerial corpo- its motions. tional and services to