Whipple owned 80% of the stock
in a corporation that made soft drinks, and he was also the CEO. He made
a number of loans to the corporation to try to keep in business, but it
went bankrupt anyway.
Whipple was not going to get
his loan repaid...
When he filed his taxes,
Whipple deducted the loss as a business bad debt under 26 U.S.C. §166. The IRS
assessed a deficiency.
The IRS argued that the
loans were not made as part of the lender's (Whipple's) business,
therefore they were a non-business bad debt and could only be deducted as a short-term capital
loss.
Whipple argued that the loan
was a business loan, and therefore was a business bad debt, which could be deducted against ordinary
income.
The Tax Court found for the
IRS. Whipple appealed.
The Appellate Court affirmed.
Whipple appealed.
The US Supreme Court mostly
affirmed, but remanded on one issue.
The US Supreme Court found
that Whipple's deduction was a non-business bad debt.
Whipple argued that he was a
shareholder in a corporation in the trade or business of making soft
drinks, therefore the loans he made were connected to his trade or
business.
But the Court found that a
shareholder is not in a trade or business just because the corporation
is in that trade or business.
Whipple argued that he was
the CEO of the corporation, therefore lending money to the corporation
increased the probability he would have work as a CEO (See Charles J.
Haslam v. Commissioner (33 T.C.M.
482 (1974)).
But the Court found that
Whipple's interest in the corporation was stronger as a shareholder than
as an employee, and the loan was made to protect his stock value, not
his salary.
Whipple argued that he was
in the trade or business of selling stocks in corporations that produce
soft drinks (the companies were his inventory).
The Court didn't buy that
argument either.
Finally, Whipple argued that
he was also corporation's landlord because he owned the building that
they leased. Whipple argued that had made the loan in order to keep them
in business so they'd keep paying him rent.
The Court remanded on this
issue to see if the loss from the debt was proximally related to
Whipple's real estate business.
