DocketNumber： Docket No. 7406-81.
Filed Date： 7/11/1983
Status： Non-Precedential
Modified Date： 11/21/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
HAMBLEN,
Petitioner discussed his plans with Dr. Barry S. Hillman (hereinafter Hillman), a medical associate, and Lawrence Feitlinger (hereinafter Feitlinger), a realtor and contractor. They held meetings with representatives of the Mt. Carmel Hospital, who indicated that they were favorably disposed to the construction of a medical office building on hospital property.
Petitioner, Hillman, and Feitlinger discussed formation of a partnership for purposes of conducting this venture. They had an attorney prepare a rough draft of a partnership agreement, but never finalized or signed any such agreement.
To finance the start-up expenses of the construction project, Feitlinger suggested to petitioner and Hillman that some funds were needed, and petitioner, Hillman, and Feitlinger obtained a $250,000 loan from the American Bank of Central Ohio. Subsequently, on November 9, 1973, petitioner, Hillman, and Feitlinger executed a one-year cognovit promissory*395 note to the American Bank of Central Ohio for $250,000. The promissory note was secured by all of the stock of the Feitlinger Construction Company. At or about the same time, a checking account was opened at the American Bank of Central Ohio in the name of the Feitlinger Construction Company, and the proceeds of the loan ($250,000) were deposited into that account. Neither petitioner nor Hillman had an interest in the Feitlinger Construction Company or any signatory powers with respect to the aforementioned checking account. Indeed, as of November 9, 1973, they did not even know of the existence of the checking account or that the proceeds of the loan would be deposited in such account. *396 also withdrew from the project. Sometime in early 1974, some construction began on the Mt. Carmel Hospital property, but ceased shortly thereafter. *397 note was due on November 9, 1975, but was otherwise identical to the original promissory note.
Petitioner, Hillman, and Feitlinger defaulted on the payments required under the second promissory note. On July 10, 1975, the American Bank of Central Ohio filed a complaint against petitioner and Hillman in the Court of Common Pleas of Franklin County, Ohio, requesting a judgment against them for default on the promissory note, and a cognovit judgment was rendered against them. They filed a motion for relief from judgment on July 21, 1975, and a hearing was held thereon on September 3, 1975. On January 20, 1976, the Court of Common Pleas rendered its decision overruling their motion for relief from judgment. Petitioner and Hillman appealed that decision to the Court of Appeals, Franklin County, Ohio, which affirmed the decision of the Court of Common Pleas.
In February 1975, Feitlinger filed a petition with the Bankruptcy Court for relief under Chapter XI of the Bankruptcy Act. Subsequently, petitioner and Hillman filed complaints against Feitlinger in the Bankruptcy Division of the U.S. District Court for the Southern District of Ohio, objecting to the dischargeability of the debts*398 claimed in each such action.
On December 23, 1976, the American Bank of Central Ohio and petitioner entered into a "Covenant Not to Enforce Judgment", whereby the bank agreed not to enforce its judgment against petitioner in exchange for a payment of $60,000. Petitioner paid the bank $60,000 on the same date. Petitioner also assigned to the American Bank of Central Ohio any interest that he had against Feitlinger pursuant to the complaint that he had filed in the Bankruptcy Division of the U.S. District Court for the Southern District of Ohio.
On his 1976 income tax return, petitioner claimed a business bad deduction of $60,000. In the notice of deficiency, respondent determined that petitioner was entitled to a nonbusiness bad debt deduction which is only deductible as a short-term capital loss under section 166(d).
OPINION
We must determine whether petitioner is entitled to a business bad deduction in the amount of $60,000.
Respondent maintains that petitioner is only entitled to a nonbusiness bad debt deduction for the $60,000 payment he made to the American Bank of Central Ohio. It is respondent's position that, under the facts of the instant case, petitioner*399 must be considered to have signed the promissory notes to the American Bank of Central Ohio as an accomodation maker or guarantor for the principal obligor, Feitlinger. *400 Section 166(a) provides that a deduction shall be allowed for any debt which becomes wholly worthless during the taxable year. Section 166(d), however, provides that, in the case of a taxpayer other than a corporation, a loss attributable to the worthlessness of a nonbusiness bad debt shall be treated as a short-term capital loss. Pursuant to section 166(d)(2), a non-business debt is defined as follows:
(2) Nonbusiness debt defined.--For purposes of paragraph (1), the term "nonbusiness debt" means a debt other than--
(A) a debt created or acquired (as the the case may be) in connection with a trade or business of the taxpayer; or
(B) a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business.
To be treated as a business debt, the debt must be proximately related to the taxpayer's trade or business.
When a taxpayer pays the debt of a third party because of his prior guarantee of such debt, a new debt arises between the taxpayer and*401 the third party by reason of the law of subrogation.
On the record before us, petitioner's guarantee of the loan from the American Bank of Central Ohio and the resulting bad debt loss must be treated as a nonbusiness bad debt under section 166(d). Respondent's determination is presumptively correct and petitioner bears the burden of proving otherwise.
In the first instance, petitioner has not established that the four requirements of section 166(f) were satisfied. There is no evidence whatsoever in the record with respect to the use of the loan proceeds even though section 166(f) requires that the proceeds must be used in the trade or business of the borrower. In other words, as argued by respondent, petitioner had to prove that the proceeds of the loan from the American Bank of Central Ohio were used in Feitlinger's trade or business. *404 leasehold or otherwise, in the Mt. Carmel Hospital property. Thus, there is simply nothing in the record which shows that Feitlinger put the proceeds of the loan to the use to which petitioner had intended or that he in any way or to any extent used such proceeds in his trade or business.
Since petitioner has failed to meet the requirements of section 166(f), we must decide whether he is entitled to a business or nonbusiness bad debt deduction under section 166(d). Once again, petitioner has utterly failed to establish the facts necessary to sustain his position. We cannot find that petitioner's guarantee of the loan to Feitlinger was proximately related to petitioner's trade or business. The record clearly shows that petitioner was a practicing surgeon during the years in issue. While he argued that he was also in the business of real estate development, the only support in the record for this assertion is his own self-serving testimony. Such testimony, however, was vague, sparse, and wholly inadequate. Although petitioner listed his investments, he provided little detail*405 as to the nature of those investments and the extent of his involvement with respect thereto. Accordingly, we cannot find that any of his investments rose to the status of a trade or business.
Nevertheless, petitioner argues that he is a member of a partnership between himself, Hillman, and Feitlinger, that he acted in his capacity as a partner in guaranteeing the loan from the American Bank of Central Ohio, and that he was engaged in the trade or business of the partnership in so doing. Since petitioner has failed to prove that a partnership existed or, even if it did, that it was engaged in trade or business, we need not address the merits of his argument. *406 in the record that they held themselves out as partners. After obtaining the loan, petitioner and Hillman engaged in very little, if any, activity with respect to the proposed construction venture and it appears that Feitlinger was given the unfettered use of the proceeds of the loan. The record leaves little doubt that the proposed deal between these three men disintegrated quickly after the loan was obtained. In June 1974, Hillman withdrew from the venture, and soon thereafter petitioner's participation also ceased. Petitioner's testimony indicates that he believes Feitlinger was attempting to push Hillman and him out of the project in order to make a better deal for himself. Regardless, on these facts, we can only conclude that petitioner, Hillman, and Feitlinger never really reached any agreement on how they would conduct the proposed venture.
Furthermore, even if we assume that a partnership did indeed exist, there is nothing in the record which establishes that the partnership ever engaged in a trade or business. All that the record shows is that petitioner, Hillman, and Feitlinger, engaged in some preliminary discussions with representatives of the Mt. Carmel Hospital, *407 formulated some plans regarding the construction of a medical office building on the hospital's property, and acquired a loan from the American Bank of Central Ohio. Beyond that, there is no indication that they engaged in any other activity. Consequently, their activities preceded the actual conduct of trade or business and, as such, represent mere plans for a trade or business that were never realized. See
To reflect the foregoing,
1. Unless otherwise indicated, section references are to the Internal Revenue Code of 1954, as amended and in effect for the years in issue. ↩
2. Petitioners concede that they are liable for an addition to tax for negligence or intentional disregard of rules and regulations under sec. 6653(a) based upon the final determination of the deficiency for 1976.↩
3. It appears that none of the loan proceeds was used for the proposed construction project. [Entire record]↩
4. The record does not indicate either the identity of the contractor performing the construction or the identity of the owner of the interest (whether by lease or fee) for whom the construction was being performed.↩
5. Respondent maintains that both petitioner and Hillman were guarantors.↩
6. Petitioner has not disagreed with respondent characterizing him as a guarantor rather than a primary obligor on the obligation to American Bank of Central Ohio. Indeed, any argument to that effect would be of no avail to petitioner because as a primary obligor on the loan he would not be entitled to a bad debt deduction for the repayment of
7. Sec. 166(f) provided:
(f) GUARANTOR OF CERTAIN NONCORPORATE OBLIGATIONS:--A payment by the taxpayer (other than a corporation) in discharge of part or all of his obligation as a guarantor, endorser, or indemnitor of a noncorporate obligation the proceeds of which were used in the trade or business of the borrower shall be treated as a debt becoming worthless within such taxable year for purposes of this section (except that subsection (d) shall not apply), but only if the obligation of the borrower to the person to whom such payment was made was worthless (without regard to such guaranty, endorsement, or indemnity) at the time of such payment.↩
8. Respondent has not argued that any of the other requirements of sec. 166(f) were not satisfied.↩
9. See