Taxation-Federal Income Tax-Worthless Debt of Corporation Deductible Only as a Nonbusiness Bad Debt by Creditor-Partnership

A partnership formed for the purpose of holding and renting real estate and “such other business and enterprises” as might be agreed upon by the partners loaned 120,000 dollars to a corporation which manufactured liquid hair spray for women. This was the only loan the partnership had made. The controlling shareholder in the debtor-corporation was another corporation of which every shareholder was either a parent or grandparent of the partners. The debtor-corporation was to repay the loan in monthly installments of 3,000 dollars plus interest at the rate of twelve percent on the unpaid balance. When the debt became worthless, the partnership deducted the full amount of the loss from ordinary income, which resulted in a net operating loss for that year. Petitioner, one of the partners, then deducted her proportionate share of this loss on her individual return. In a deficiency notice, the Commissioner increased petitioner’s taxable income, explaining that the deduction taken by the partnership was limited to 1,000 dollars as a nonbusiness bad debt because of section 166(d) of the Internal Revenue Code. On petition to the Tax Court, held, for the Commissioner, four judges dissenting. The loan was not proximately related to the partnership’s real estate business nor was the partnership engaged in the business of lending money. Stuart M. Sales, 37 T.C. 576 (1961).