Rudolph L. Gross and Catherine D. Gross v. Commissioner of Internal Revenue

This is a petition for review of a tax court decision that taxpayers’ losses from non-repayment of loans were not proximately related to any trade or business conducted by taxpayers as individuals, and hence were not fully deductible as business bad debts but were qualified, in a limited manner, as nonbusiness bad debts (See 166 Internal Revenue Code of 1954) and Treasury Regulations § 1.166-5. Tax years 1958 and 1961 are involved.

Petitioners organized, and had invested, (with one Burt Wilson) $30,000 in a corporation, Union Finance Co. The stockholders made advances to the corporation, totaling $55,000, which were treated as loans to the corporation by both the corporation and the lenders, thus enabling Union to enlarge its line of credit with its bank. The notes to the lenders were subordinated to the bank credit and bore interest at 8% or 10%.

These notes were found by the tax court to be nonbusiness bad debts, which did not become worthless until 1962. In October, 1961, the heirs of Burt Wilson had filed suit against petitioners and Union Finance Co., seeking a receivership and an accounting. A receiver was appointed and subsequently the bank discontinued its line of credit…