Opinion
Docket No. 47948.
1955-03-15
LARRY E. WEBB AND AGNES WEBB, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Arthur F. Krause, Esq., for the petitioners. Wayne L. Prim, Esq., for the respondent.
Arthur F. Krause, Esq., for the petitioners. Wayne L. Prim, Esq., for the respondent.
DEDUCTIONS.— Petitioner invested $5,000 in a joint venture or partnership engaged in dealing in automobiles. The business failed in 1949. Held, petitioner sustained a business loss in 1949 properly deductible in full in that year.
The Commissioner determined a deficiency of $1,558.96 in the income tax of the petitioners for 1949. The only issue for decision is whether an amount of $5,000 is to be deducted as a business or nonbusiness bad debt, or as a business loss.
FINDINGS OF FACT.
The petitioners are husband and wife. They filed a joint return for 1949 with the collector of internal revenue for the first district of California.
From 1942 through 1949 Larry E. Webb (hereafter called the petitioner) was employed as general manager of a Pontiac-Cadillac dealership in Vallejo, California, by its proprietor, Page H. Lamoreaux. The major portion of the petitioner's income during the years 1947 through 1949 was received from this employment.
Through his association with Lamoreaux and his contact with others in the automobile business the petitioner became interested in participating in the organization of three automobile dealerships. The first was formed on January 1, 1948, and was known as Lewco. Under the arrangement, the petitioner, together with Lamoreaux, was to loan money and provide advisory services to the Ed Stone Motors Company in consideration of the sharing of one-third each in the profits of the venture. The dealership was profitable and the petitioner received income therefrom in 1948 and 1949.
The second venture was referred to as Gigco. The arrangement followed the pattern of the first, the agreements providing for loans and advisory services in consideration of a one-third share in the profits. The automobile agency involved was known as the Frank Mayes Motor Company. The petitioner invested the sum of $5,000 in this venture and received as evidence thereof a promissory note signed by Frank Mayes payable on demand. This venture failed in 1949 and the note became worthless in that year. The petitioner claimed this loss as a business bad debt. The Commissioner, in determining the deficiency, held it was a nonbusiness bad debt allowable under section 23(k)(4) of the Internal Revenue Code of 1939 subject to the limitations of section 117(d)(2).
A third venture, Tiffco, was organized on March 15, 1949, in which the petitioner and three others were interested. Each advanced $7,500 to the venture, but the petitioner withdrew within a month and received the return of his advance.
With respect to each of the ventures described above the participants were given notes evidencing their investments in the businesses. A contract was also signed providing for payment of 33 1/3 per cent of the profits, and in each instance there was a further agreement which granted the joint venturers an option to purchase the dealership at book value. The joint venturers in each instance referred to themselves in the agreements as partners.
The petitioner devoted time to the dealerships and performed the advisory and other services required of him by his agreements.
ULTIMATE FINDINGS.
The petitioner, during the year in question, was a joint venturer or partner in the business of dealing in automobiles and conducting the automobile agencies referred to above, and had invested the sum of $5,000 in Gigco. Gigco failed and was liquidated in 1949 and the loss occurred in that year. The loss was proximately related to petitioner's business.
OPINION.
TIETJENS, Judge:
The Commissioner, in determining the deficiency, held the $5,000 loss to be a nonbusiness bad debt allowable under section 23(k)(4) subject to the limitations of section 117(d)(2), Internal Revenue Code of 1939. The petitioner alleges this to be error and prays that the deduction be allowed as a business bad debt. Petitioner also contends on brief, without objection, that the loss was allowable as a business or investment loss.
On the facts, we think that the loss in question was a loss incurred in petitioner's business and not as a bad debt. Though petitioner took a note in connection with the transaction it appears that the amount of the note really was evidence of petitioner's investment in the joint venture. There is nothing to show that he ever attempted to collect the note or that he shared in the assets of the venture along with other creditors. On brief, petitioner's counsel complains of respondent's treatment of the obligation as a debt. Of course this treatment was justified because petitioner himself had to characterized the obligation both in his pleadings and in the opening statement.
We recognize that there is a distinction between losses and worthless debts; we also recognize that the courts have considered, without objection, claims for the allowance of a bad debt or a loss in the alternative. 5 Mertens, Law of Federal Income Taxation, sec. 28.38. O. D. Bratton v. Commissioner, 217 F.2d 486. See also Lidgerwood Manufacturing Co., 22 T.C. 1152, where this Court said:
Obviously, a ‘loss,‘ in the generic sense, cannot be both a ‘bad debt’ and a ‘business loss.’ Spring City Foundry Co. v. Commissioner, 292 U.S. 182 (1934). But the petitioner is not precluded from arguing both theories in the hope of showing the applicability of one of them to the facts presented.
As indicated above, petitioner suffered his loss as a result of his investment in a joint venture or partnership. A loss of this type is deductible in the year it is sustained. Herman J. Sternberg, 32 B.T.A. 1039. Respondent concedes here that the loss was suffered in 1949 and we think it is properly allowable in full in that year.
Reviewed by the Court.
Decision will be entered for the petitioners.