Barish v. Commissioner , 31 T.C. 1280 ( 1959 )

Max M. Barish and Etta Barish, Petitioners, v. Commissioner of Internal Revenue, Respondent

Barish v. Commissioner

Docket No. 64841

United States Tax Court

31 T.C. 1280; 1959 U.S. Tax Ct. LEXIS 210;

March 31, 1959, Filed

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Decision will be entered for the respondent.

Petitioner asserts that he was in the business of promoting, organizing, and financing businesses and of lending money. It is stipulated that his loans to Barman Auto Sales, Inc., became worthless in 1953. Held:

1. There being no proof that petitioner promoted, organized, or financed said debtor, it follows that no proximate relation between the bad debt and the alleged business has been shown and claimed business deduction is disallowed.

2. Petitioner's activities were not extensive enough to prove he was in the business of lending money, hence, the bad debt is disallowed as a business deduction.

Sidney J. Matzner, Esq., for the petitioners.

Richard W. Janes, Esq., and Cyrus A. Johnson, Esq., for the respondent.

Forrester, Judge.

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FORRESTER

The respondent has determined a deficiency of $ 3,015.38 in the petitioners' income tax for the year 1953. The sole issue is whether the losses suffered from the worthlessness of certain loans made by Max Barish should be treated as business or nonbusiness bad debts.

FINDINGS OF FACT.

Some of the facts have been stipulated and are so found.

Max M. Barish, hereinafter referred to as the petitioner, and Etta Barish, husband and wife, filed their joint Federal income tax return for the calendar year 1953 on the cash basis with the district director of internal revenue at Los Angeles, California.

The petitioner's principal business interest and activity during 1953 was in connection with Max Barish, Inc., a new-car dealership in which he had had a substantial stock interest for several years. During 1953 petitioner owned 50 per cent of the stock of said corporation, was its president and a director, and, as he admitted on cross-examination "[was] the driving force behind this business."

Said corporation's Federal income tax return for the fiscal year beginning November 1, 1952, and ending October 31, 1953, was signed by the petitioner in his capacity as president. It shows sales of $ 2,518,832.55 and Schedule E presents the following information:

		Time devoted
Names and addresses of officers	Official title	to
		business
Max M. Barish, 10717 Wilshire	President	90%
Blvd., West L.A., Calif.
Howard Barish, 14744 McCormick	Secretary	100%
St., Van Nuys, California.
Lois Barish, 9581 Alcott St., Los	Treasurer	Part
Angeles, Calif.
Barney Miller, 2916 South Oakhurst,	Assistant treas	100%
Los Angeles, Calif.

	Percentage of corporation's
	stock owned
Names and addresses of officers
	Common	Preferred
Max M. Barish, 10717 Wilshire	50%
Blvd., West L.A., Calif.
Howard Barish, 14744 McCormick	None
St., Van Nuys, California.
Lois Barish, 9581 Alcott St., Los	None
Angeles, Calif.
Barney Miller, 2916 South Oakhurst,	None
Los Angeles Calif.

	Amount
Names and addresses of officers	of compensation
Max M. Barish, 10717 Wilshire	$ 24,000
Blvd., West L.A., Calif.
Howard Barish, 14744 McCormick	12,130
St., Van Nuys, California.
Lois Barish, 9581 Alcott St., Los	2,100
Angeles, Calif.
Barney Miller, 2916 South Oakhurst,	8,230
Los Angeles, Calif.
	$ 46,460

Petitioner does not contest any of the facts as shown by the above portions of said return except the showing that he devoted 90 per cent of his time to said business. As to this item, when asked if it were correct, he testified without further explanation "No, it couldn't be." Yet the record shows that in 1953 this business employed 35 to 40 persons, had sales of over $ 2,500,000, that petitioner was there every day it was open and was its "driving force." We conclude, and find as facts, all of the above excerpted items from said income tax return.

During the period from 1944 through 1953, the petitioner had numerous other business interests. The following table shows those which were promoted and organized by him and the nature of his interest:

Name of enterprise	Nature of petitioner's	Type of business
	interest
Barish Motors	Proprietor	Auto dealership and
		repair
Vernon Western Recreation	Proprietor	Bowling alley
Hydraulic Jack Venture	Joint venturer	Hydraulic jacks
Albro Industries	Partner	Auto seat covers
Max Barish, Inc	50% stockholder	New car dealership
Monogram Homes Builders	Partner	Apartment building
		construction.
Travelers Motion Picture Co	Partner	Special railroad motion
		picture equipment.
Catalina Apartments	Partner	Apartment building
		construction.
Gasoline Service Station	"1/3 Interest," type	Service station
	not shown
Big Town Motors	Stockholder	Used car dealership
Ace Investment Co	Stockholder	Investment company
Massie Engineering Corp	Stockholder	Electronic relays
Bluebell Manor	Partner	Apartment buildings
Occidental Kingsley Apts	Partner	Apartment buildings
Screw Products of America	Stockholder

	Period during which interest was held
Name of enterprise
	1944	1945	1946	1947	1948
Barish Motors			XY	XY	XY
Vernon Western Recreation
Hydraulic Jack Venture
Albro Industries
Max Barish, Inc
Monogram Homes Builders			XY	XY	XY
Travelers Motion Picture Co
Catalina Apartments
Gasoline Service Station
Big Town Motors
Ace Investment Co
Massie Engineering Corp
Bluebell Manor
Occidental Kingsley Apts
Screw Products of America

	Period during which interest held
Name of enterprise
	1949	1950	1951	1952	1953
Barish Motors	XY	XY	XY
Vernon Western Recreation
Hydraulic Jack Venture
Albro Industries
Max Barish, Inc		XY	XY	XY	XY
Monogram Homes Builders	XY	XY	XY	XY	XY
Travelers Motion Picture Co
Catalina Apartments			XY	XY	X z
Gasoline Service Station
Big Town Motors
Ace Investment Co	XY	XY	XY	XY	XY
Massie Engineering Corp
Bluebell Manor				Y	X z
Occidental Kingsley Apts
Screw Products of America				XY	XY

	Dollar amount
Name of enterprise	of petitioner's
	interest
Barish Motors	Not shown.
Vernon Western Recreation	Not shown.
Hydraulic Jack Venture	$ 1,300.
Albro Industries	$ 3,000.
Max Barish, Inc	Not shown.
Monogram Homes Builders	$ 5,000.
Travelers Motion Picture Co	Not shown.
Catalina Apartments	Not shown.
Gasoline Service Station	Not shown.
Big Town Motors	Not shown.
Ace Investment Co	Not shown.
Massie Engineering Corp	Not shown.
Bluebell Manor	$ 14,000.
Occidental Kingsley Apts	$ 47,000.
Screw Products of America	Not shown -- petitioner
	got stock
	in payment of his
	loan to another
	organizer.

Key: X -- denotes first half of year.

Y -- denotes last half of year.

? -- denotes failure of proof as to exact period in year.

z -- sold July 31, 1953.

In addition to the above equities petitioner became a creditor of 4 of the above enterprises as follows:

Name of firm	Amount	Date loan	Maturity
(debtor)	of loan	extended	date of loan
Max Barish, Inc	Unknown	Unknown	Unknown
Ace Investment Co	$ 1,000	Aug. 27, 1946	On demand
	1,000	May 15, 1947	On demand
	2,500	July 14, 1947	On demand
Massie Engineering	4,000	Unknown	Unknown
Gasoline Service	1,900	Unknown	Unknown
Station.
Total	10,400

Name of firm	Date loan	Rate of	Evidence
(debtor)	repaid	interest	of loan
Max Barish, Inc	Unknown	Unknown	Unknown.
Ace Investment Co	Unknown	3%	Note.
	Unknown	3%	Note.
	Unknown	3%	Note.
Massie Engineering	Unknown	Unknown	Unknown.
Gasoline Service	Not repaid	Unknown	Unknown.
Station.
Total

In addition to all of the above, petitioner had made the following loans for undisclosed purposes and which were outstanding during 1953:

Name of firm	Amount	Date loan	Maturity
(debtor)	of loan	extended	date of loan
Lorne Corsaut	$ 2,500.00	June 5, 1952	Unknown
Lorne Corsaut	1,000.00	June 26, 1952	Unknown
Lorne Corsaut	1,000.00	July 10, 1952	Unknown
Lorne Corsaut	1,000.00	July 25, 1952	Unknown
Lorne Corsaut	1,000.00	Aug. 6, 1952	Unknown
Rubinstein	3,360.32	Dec. 8, 1952	On demand
Insurance Mart	5,000.00	Nov. 30, 1953	Unknown
Rainbow Turkey
Ranch:
Unsecured	7,500.00	Unknown	Unknown
Secured by several
small trust
deeds	7,500.00	Unknown	Unknown
Total	29,860.32

Name of firm	Date loan	Rate of	Evidence
(debtor)	repaid	interest	of loan
Lorne Corsaut	Unknown	Unknown	Unknown.
Lorne Corsaut	Unknown	Unknown	Unknown.
Lorne Corsaut	Unknown	Unknown	Unknown.
Lorne Corsaut	Unknown	Unknown	Unknown.
Lorne Corsaut	Unknown	Unknown	Unknown.
Rubinstein	Unknown	Blank	Note.
Insurance Mart	Unknown	Unknown	Unknown.
Rainbow Turkey
Ranch:
Unsecured	Unknown	Unknown	Unknown.
Secured by several
small trust
deeds	Unknown	Unknown	Unknown.
Total

Petitioner reported $ 830.29 interest income in 1953 on Schedule C (Profit (or Loss) from Business or Profession) of his return. His salary, as reported by him for said calendar year, was $ 19,000 from Max Barish, Inc., and $ 1,000 from Barman Auto Sales, Inc., hereinafter referred to as Barman.

Barman, a used-car dealership, was incorporated on December 18, 1951, had a fiscal year ending March 31, and had 3,000 shares of common stock (its only class) outstanding on March 31, 1953, and March 31, 1954. Said stock was shown on Barman's balance sheets at $ 1 per share.

On May 29, 1952, the petitioner acquired either 24.25 or 24.5 per cent of the Barman stock (i.e., about 727.5 shares), at a total cost of $ 485 (66 2/3 cents per share).

Schedule E (Compensation of Officers) of Barman's returns shows the following:

		Time devoted
Name	Title	to business
Fiscal year beginning April 1, 1952
Morris R. Rothman	President	All
Max M. Barish	Secretary treasurer	Part
Frank B. Sanders	Vice president	Part
Fiscal year beginning April 1, 1953
Morris R. Rothman	President	100%
Frank B. Sanders	Vice president	Part
Max M. Barish	Secretary treasurer	Part

	Percentage of corporation's
	stock owned		Amount of
Name			compensation
	Common	Preferred
Fiscal year beginning April 1, 1952
Morris R. Rothman	48.5		$ 39,000
Max M. Barish	24.25		12,200
Frank B. Sanders	24.25		6,800
			$ 58,000
Fiscal year beginning April 1, 1953
Morris R. Rothman	48.5		$ 15,000
Frank B. Sanders	24.5		6,000
Max M. Barish	24.5		3,000
			$ 24,000

At a time undisclosed by the record, petitioner loaned Barman $ 16,750 on its 2-year, 6 per cent notes. It is stipulated that these notes became worthless in 1953.

The petitioner was not in the trade or business of lending money in 1953, and the losses due to the worthlessness of his loans to Barman were not proximately related to any trade or business of the petitioner during 1953.

OPINION.

The petitioner contends that his loans to Barman constituted business bad debts deductible in full under section 23(k)(1) of the Internal Revenue Code of 1939¹ and based upon the dual premises, as stated by petitioner, that he was "in the business of promoting, organizing and financing businesses and of lending money."

Respondent contends they were nonbusiness loans and deductible only in a limited amount under section 23(k)(4) of the Internal Revenue Code of 1939. ²

1. Considering petitioner's contentions in the same order as advanced, we need not and do not decide whether petitioner has sustained the heavy burden imposed by law ³ of proving that he was "in the business of promoting, organizing and financing businesses."

Petitioner has devoted much time and effort in this direction, showing his organization and promotion activities in 15 distinct enterprises in 10 years and separate financing activity (if personal loans can be so characterized) as to 4 of them.

However, as concerns his loans of $ 16,750 here at issue, we are given no facts from which it could even be inferred that petitioner had had anything at all to do with promoting, organizing, or financing his debtor, Barman Auto Sales, Inc. Indeed, the inferences are all to the contrary to wit:

(1) Barman was incorporated on December 18, 1951. Petitioner acquired his stock on May 29, 1952, vendor unknown.

(2) Barman's common stock was shown as its only class and as 3,000 shares outstanding at $ 1 per share, and all held by 3 shareholders, as per its balance sheets of March 31, 1953, and March 31, 1954.

(3) Petitioner acquired either 24.25 per cent or 24.5 per cent of said stock at 66 2/3 cents per share.

(4) Neither the dates, the purposes, the security (if any) nor the manner in which evidenced ⁴ is shown as to petitioner's loans to Barman.

From the above it might be inferred that petitioner made a bargain purchase of an equity security from some third party, and, as shown by Barman's income tax returns, succeeded in becoming an officer and a salaried employee of Barman and his loans to Barman may have been made to protect or enhance those positions.

It is axiomatic that some proximate relationship must be shown between an alleged business loan and the alleged business. Thomas Reed Vreeland, 31 T.C. 78">31 T.C. 78; S. D. Ferguson, 28 T.C. 432">28 T.C. 432, affd. 253 F. 2d 403 (C.A. 4, 1958); Wheeler v. Commissioner, 241 F. 2d 883 (C.A. 2, 1957), affirming T.C. Memo 1955-138">T.C. Memo. 1955-138; also cf. Dalton v. Bowers, 287 U.S. 404">287 U.S. 404. Petitioner has not even attempted to show such relationship, presumably because it did not exist.

2. Turning now to petitioner's contention that he was in the business of lending money, the record shows that, excepting the Barman loans, petitioner had made 9 loans, totaling $ 29,860.32, to 4 borrowers, which loans were still outstanding in 1953. One of these loans was made in 1953, 6 were made in 1952, and as to the other 2, the date made is not shown.

Even if we add the 6 loans made to the 4 businesses which petitioner had "promoted, organized and financed," the total is only raised to something over $ 40,260.32, ⁵ and as it is not shown that these 6 loans were outstanding in 1953, they should not be considered. Jan G. J. Boissevain, 17 T.C. 325">17 T.C. 325.

In addition to all of the above, petitioner shows a loan of $ 5,000 made to his partner in Travelers Motion Picture Co. and presumably in 1949. Nothing further concerning this loan is shown and petitioner has presented no other or further loans for our consideration.

As we stated in Charles G. Berwind, 20 T.C. 808">20 T.C. 808, 815, affd. 211 F. 2d 575"The authority * * * [to deduct bad debts as business losses] is applicable only to the exceptional situations where the taxpayer's activities in * * * making loans * * * have been regarded as so extensive as to constitute a business." See also Dominick J. Salomone, 27 T.C. 663">27 T.C. 663;Hadwen C. Fuller, 21 T.C. 407">21 T.C. 407; Higgins v. Commissioner, 312 U.S. 212">312 U.S. 212.

Petitioner here devoted 90 per cent of his time to a business having sales of over $ 2,500,000, and was the "driving force" of such business, receiving a salary of $ 19,000 from it in the year in issue. As against this he shows outstanding loans in 1953 of $ 29,860.32 (plus the $ 16,750 here in contention) and interest income of $ 830.29.

We hold that petitioner has failed in the proof of his second contention and that his bad debt losses in 1953 of $ 16,750 were not proximately related to any trade or business of his during such year.

Decision will be entered for the respondent.

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Footnotes

• 1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.

  In computing net income there shall be allowed as deductions:

  * * * *

  (k) Bad Debts. --

  (1) General rule. -- Debts which become worthless within the taxable year * * * This paragraph shall not apply in the case of a taxpayer, other than a corporation, with respect to a non-business debt, as defined in paragraph (4) of this subsection. * * *↩

• 2. SEC. 23. DEDUCTIONS FROM GROSS INCOME

  In computing net income there shall be allowed as deductions:

  * * * *

  (k) Bad Debts. --

  (4) Non-business debts. -- In the case of a taxpayer, other than a corporation, if a non-business debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 6 months. The term "non-business debt" means a debt * * * other than a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business.↩

• 3. See Thomas Reed Vreeland, 31 T.C. 78">31 T.C. 78; Aubrey S. Nash, 31 T.C. 569">31 T.C. 569; Dominick J. Salomone, 27 T.C. 663">27 T.C. 663; Hadwen C. Fuller, 21 T.C. 407">21 T.C. 407↩.

• 4. The stipulation of facts recites that Barman's corporate records reflect that the corporation issued notes bearing 6 per cent interest and maturing in 2 years; neither such records nor the notes are in evidence and the record is otherwise silent.↩

• 5. Amount of petitioner's loan to Max Barish, Inc., not shown.↩