Taxation – Federal Income Tax – Stockholder’s Contractual Duty to Creditors to Finance Corporation as a Business for Purposes of Bad Debt Deduction

In 1946 petitioner organized a wholly-owned corporation for the sole purpose of producing a single motion picture at the estimated cost of $175,000. He obtained loan commitments from two lending institutions for $170,000 in exchange for his agreement to increase the paid-in capital to $25,000 and to guarantee personally the financing of the completion of the picture should the budgeted funds prove inadequate. In addition, petitioner made further commitments to secure the institutions’ loans. Eventually, $53,273.65 was advanced by petitioner to fulfill his obligations under the agreements. In 1948 the debt which the corporation owed him was deemed worthless and petitioner deducted his loss as a business bad debt. The Commissioner claimed that the advances were capital contributions, and that even if they were loans, the loss was not incurred in petitioner’s trade or business and, therefore, was a nonbusiness bad debt. Held, petitioner’s activities, including fulfillment of his commitments and guaranties, were sufficient to constitute a business within the meaning of the statute. Particular stress was placed on the fact that he had no discretion in making the loans but was under a contractual duty to third parties to make them. George J. Schaeffer, 24 T.C. 638 (1955).