Opinion
Docket No. 29513.
1951-10-25
ESTATE OF WILLIAM P. PALMER, JR., JEAN H. PALMER AND GEORGE H. P. LACEY, CO-EXECUTORS, AND JEAN H. PALMER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
George Farr, Jr., Esq., for the petitioners. Cyrus A. Neuman, Esq., for the respondent.
The owner of one-half the stock of a corporation, in which he was an active officer, made loans to the corporation from time to time. Held, in the circumstances of this case, the uncollectible portion of the loans upon dissolution of the corporation was a ‘non-business‘ bad debt within the meaning of section 23(k)(4) of the Internal Revenue Code. George Farr, Jr., Esq., for the petitioners. Cyrus A. Neuman, Esq., for the respondent.
The Commissioner determined a deficiency in income tax liability of William P. Palmer, Jr., deceased, and Mrs. Jean H. Palmer, surviving wife, in the amount of $13,745.89 for the calendar year 1946. The only issue presently in dispute is whether a bad debt in the amount of $33,661.64 representing uncollectible loans to Greenbrier Farms, Incorporated (hereinafter referred to as ‘Greenbrier Farms‘), was a ‘non-business‘ bad debt within the meaning of section 23(k)(4) of the Internal Revenue Code.
FINDINGS OF FACT.
A stipulation of facts was filed, which is hereby incorporated by reference as part of our findings.
William P. Palmer, Jr. (referred to hereinafter as ‘Palmer‘), and Jean H. Palmer, his wife, filed their joint individual income tax return for the year 1946 with the collector of internal revenue for the 18th district of Ohio. Palmer died on October 18, 1948, and his widow and George H. P. Lacey became co-executors of his estate.
Greenbrier Farms was an Ohio corporation, organized in 1939 for the purpose of engaging in the farming and poultry business and in related activities. Its total authorized stock, 250 shares, was issued in equal amounts to Palmer and one R. J. Evans for $200 a share, and both continued to own the stock in equal amounts during the existence of the corporation. Palmer became a director and president of the corporation, which offices he continued to hold until dissolution of the corporation.
Palmer made loans to the corporation between October 29, 1940, and May 18, 1944, in the aggregate amount of $64,600; all of the loans were evidenced by notes bearing interest at the rate of 5 per cent, secured by a first mortgage on the corporation's real estate.
From September 1941 until August 1945 Palmer was on active duty with the Coast Guard of the United States, and for the most part was stationed outside of continental United States.
Upon the liquidation and dissolution of the corporation in September 1946, Palmer received partial payment on the notes. The total unpaid balance of $33,661.64 became worthless in 1946, which Palmer and his wife deducted as a bad debt in their joint income tax returns for 1946.
Palmer graduated from college in 1930, thereafter working for a brokerage house as an employee, and from 1935 to 1939 as a special partner in the brokerage firm of Prescott & Company. Palmer's father died, leaving funds in trust for him, which were distributed partly in 1938 and 1943. Prior to 1939, Palmer experimented with raising chickens by the ‘battery‘ method on his farm. As a result of the experiments, Greenbrier Farms was incorporated.
After unsuccessful efforts to borrow money for the corporation from a bank, the first of the loans described above was made by Palmer. Evans made a similar loan in the same amount, and most of the subsequent loans made by Palmer (some of them on Palmer's behalf by an attorney-in-fact) were matched by loans in equal amounts made by Evans.
Palmer spent most of his time on the affairs of Greenbrier Farms prior to his going into the armed services.
Prior to 1939, Palmer had become interested in raising dogs and had run kennels where he trained and sold dogs. This was an individual proprietorship.
From 1931 until 1939 and from 1946 until his death in 1948, Palmer was a special partner in Prescott & Company, dealing in securities and conducting a brokerage business. His activities as a special partner did not involve the investment of his own funds in any other enterprise.
Palmer became a stockholder and officer of Greenbrier Products, Incorporated, an Ohio corporation organized in 1941 to sell machines for plucking poultry. He purchased stock and made loans to this corporation, which loans were repaid in full on dissolution of the corporation. Greenbrier Products and Greenbrier Farms had common stockholders and officer. The machines sold by Greenbrier Products, were used by Greenbrier Farms; and prior to the formation of Greenbrier Products, Greenbrier Farms performed all of the functions which Greenbrier Products later assumed.
During the 1930's, Palmer had purchased stock in two other corporations, one manufacturing carbon paper and typewriter ribbons, and the other manufacturing a sun tan lotion. He did not make any loans to these two corporations, nor did he participate in their affairs.
Palmer had bought and sold first editions and rare editions in sporting books, principally fishing books. He conducted such business for profit.
After his discharge from the armed forces in August 1945, Palmer was ill, and never returned to active work with Greenbrier Farms.
Throughout its corporate existence, Greenbrier Farms never showed a profit for a full year. Palmer received no salary from Greenbrier Farms from the time of his entry in the armed forces until the dissolution of the corporation.
Palmer was not engaged in 1946, or prior thereto, in the trade or business of lending money to corporations or of promoting, organizing, or financing them, nor was he engaged in the farming business, which was the business of Greenbrier Farms. His loss on his loans to Greenbrier Farms was not incurred in any trade or business in which he was engaged.
OPINION.
RAUM, Judge:
The conclusion that the business of Greenbrier Farms was not the business of Palmer follows of necessity from such decisions as Jan G. J. Boissevain, 17 T.C. 325; A. Kingsley Ferguson, 16 T.C. 1248; Dalton v. Bowers, 287 U.S. 404; Burnet v. Clark, 287 U.S. 410; and Deputy v. duPont, 308 U.S. 488, 493-494. True, a different result has been reached in some exceptional situations where the taxpayer's activities in making loans to a number of corporations and financing various enterprises have themselves been regarded as so extensive as to constitute a business. Cf. Weldon D. Smith, 17 T.C. 135; Henry E. Sage, 15 T.C. 299; Vincent C. Campbell, 11 T.C. 510. However, we are satisfied by the facts before us that petitioner's activities in making loans and financing enterprises were not of such character as to constitute a business. He made loans only to Greenbrier Farms and Greenbrier Products. As far as this record shows, his stock purchases, in several other corporations, were of no different character from those made by any other passive investor in securities. Palmer's activities, as disclosed by this record, hardly furnish the basis for classifying him as one who was in the business of financing corporate enterprises or other ventures. We conclude that the facts of this case bring it within the Boissevain and related decisions, and are not sufficient to justify the exceptional treatment allowed by the Smith, Sage, and Campbell decisions.
Decision will be entered under Rule 50.