Comm'r of Internal Revenue

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Tax Court of the United States.Dec 28, 1950
15 T.C. 958 (U.S.T.C. 1950)

Docket No. 23886.



Samuel Sklar, Esq., for the petitioners. Stephen P. Cadden, Esq., for the respondent.

Loan to real estate corporation by petitioner engaged in the paper business held not shown to be not a non-business bad debt under section 23(k)(4), I.R.C. Samuel Sklar, Esq., for the petitioners. Stephen P. Cadden, Esq., for the respondent.

Petitioners challenge respondent's determination of a deficiency in income and victory tax of $6,685.60 for 1943. The only issue is whether or not a loss sustained by petitioner Harold Kushel resulted from a non-business bad debt under section 23(k)(4), Internal Revenue Code, and thus gave rise only to a short term capital loss.


Petitioners, husband and wife, are residents of Brooklyn, New York, and filed a joint return for 1943 with the collector of internal revenue for the first district of New York.

Petitioner Harold Kushel, hereinafter called petitioner, has been active in the paper and bag business since 1910. In that year he founded the National Paper & Supply Co., which was later incorporated as the National Consumers Paper Corp., and which became, in 1933, the Metropolitan Paper & Bag Corporation, hereinafter called Metropolitan. In 1934 the East Coast Paper Products Corp., hereinafter called East Coast, was organized for the business of converting and producing various paper products, and since that time petitioner has been connected with that corporation as its treasurer. In 1943 petitioner owned an interest of 29 per cent in Metropolitan, and petitioner and his wife owned 50 per cent of the stock of East Coast.

In 1919 petitioner and others formed the Continental Contracting Corporation, which completed several construction jobs, including building repairs and street paving contracting work. Petitioner was a stockholder and served as treasurer. The corporation acquired certain property on Bay Parkway, between 70th and 71st Streets, and constructed six single-family houses which were sold. Petitioner and his brother, Benjamin Kushel, each bought a house which they subsequently made their home. Some years later, some of the six houses on Bay Parkway, between 70th and 71st Streets, were acquired by Ray-Gen Corporation, all of whose stock was owned by petitioner, his brother Benjamin, and their wives, with petitioner serving as president.

In 1932 the 7004 Bay Parkway Corporation was organized. All of the stock was owned by petitioner's wife and sister-in-law. The corporation acquired some of the six houses on Bay Parkway, between 70th and 71st Streets. Petitioner and his brother became liable on a $13,000 bond, in connection with one of those houses. An application for a change in zoning of the area was granted, and construction plans for a large apartment house and stores were filed. However, the plans were never carried out due to the depression and war. In order to aid the corporation to hold the property and to meet its expenses such as taxes, mortgage payments, and repairs, petitioner and his brother extended loans at various times. Petitioner's loans were made from his personal funds, or were made by corporations in which he had an interest and charged to his personal account. Petitioner received six promissory notes of varying dates and amounts. Petitioner never received interest, had no security, made no demands for repayment, and instituted no suits for recovery of the money.

Petitioner has invested in other real estate enterprises. In 1939 or 1940 petitioner and his brother formed the Broadway Petition Corporation which owned and operated a commercial building in Elmhurst, Long Island, with petitioner serving as treasurer of the corporation. At another time petitioner and his brother each owned 50 per cent of the stock of a corporation which owned and managed an apartment house at 2155 71st Street in Brooklyn. Petitioner and his brother formed a corporation to acquire property on Avenue H between 7th and 8th Streets in Brooklyn, which was subsequently conveyed to them, and which they own in their own names.

From 1939 to 1941 or 1942 petitioner was ill and not active in business. At the end of that period petitioner opened an office from which to develop his own paper business. He advanced a loan of $9,000 to East Coast which was in difficulties. In 1942 or 1943 petitioner gave up his own office to use the offices of East Coast. He also used the offices of Metropolitan. During 1943 petitioner rendered services to both Metropolitan and East Coast, as well as engaging in his own paper business. In 1943 East Coast's volume of sales was about $500,000. Metropolitan had a volume of sales in that year of between $600,000 and $1,000,000.

In December 1943 the 7004 Bay Parkway Corporation liquidated. Prior to that time petitioner had made loans to it amounting to $15,054.02. Upon liquidation petitioner received assets worth $1,244.78 in part payment of the indebtedness, and the balance of the debt, amounting to $13,809.24, became worthless. Petitioner had no other investment in that corporation.

During 1943 petitioner did not hold himself out to the public as a money lender or as a contractor. Petitioner was not in the real estate business in that year; he did not maintain a separate office for a real estate or money lending or contracting business; he had no employees for any such business; and he kept no separate bank accounts for any such business. Petitioner had no similar type of loans outstanding to other real estate holding companies in 1943.

Petitioner's income tax return for 1943 reported a salary of $3,900 from Metropolitan, a salary of $1,652, from East Coast, and net profit of $23,017.79 from petitioner's business as a dealer in paper and paper products. The total receipts of the latter business were reported as $543,141.23. The only other income reported was the sum of $250 as net capital gain and $45 interest income. Petitioner claimed a deduction for a bad debt loss of $13,809.24.

Respondent's notice of deficiency disallowed the deduction on the ground that it ‘is a loss from worthlessness of a nonbusiness debt * * *‘

Petitioner was not in the real estate, contracting, or money lending business but was engaged in the paper business in 1943.

The loss from the worthlessness of the debt in question was not incurred in petitioner's trade or business.


OPPER, Judge:

Petitioner's failure to carry his burden of proof has resulted in our finding the ultimate fact in accordance with respondent's determination. There is no evidence from which we can conclude that, with respect to the business as to which the bad debt was suffered, petitioner was more than a ‘passive investor,‘ Foss v. Commissioner (CCA-1), 75 Fed.(2d) 362; or that he was in the tax year either in the real estate business or in the business of making loans, Regulations 111, section 29.23(k)-6; or for the matter of that, that he was ever in any business other than that of paper and bags. certainly the record, unlike that in Vincent C. Campbell, 11 T.C. 511, shows affirmatively that he was not a stockholder, and it is not clear that he was even a nominal officer or director of the debtor corporation. It follows that since the debt was not represented by a ‘security,‘ and the loss was not incurred in the trade or business of the taxpayer, the requirements of section 23(k)(4) to constitute the deduction in controversy a business bad debt have not been met. The Omaha National Bank v. Commissioner (CCA-8), 183 Fed.(2d) 899.

SEC. 23. * * *(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 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.

Similarly, we find no proof that as far as this taxpayer was concerned, the transaction was entered into for profit so that the deduction could be taken as a loss under section 23(e)(2) even if we assume that the two remedies are not mutually exclusive. See Spring City Foundry Co., 292 U.S. 182.

SEC. 23. * * *(e) LOSSES BY INDIVIDUALS.— In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *

Decision will be entered for the respondent.

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