Milton E. Anderson and Mae E. Anderson v. United States

The appellee taxpayers instituted a refund suit, seeking to recover taxes paid because the Internal Revenue Service disallowed a deduction claimed by the taxpayers for bad debts under 26 U.S.C. § 166 (1970). The District Court granted a judgment for the taxpayers, and the Government appeals.

In 1949 Milton Anderson commenced a floor covering business as a sole proprietorship. He incorporated the business in 1956, exchanging the assets of his business for stock in the corporation. The corporation rented its premises from Anderson. During the 1960’s Anderson made several loans to the corporation, loans which the corporation regularly repaid until 1968. In that year and afterwards repayment came intermittently, and Anderson never recovered all of his money. In 1970 the corporation gave Anderson a promissory note consolidating prior loans and providing an interest rate of seven percent. In 1971 the corporation issued a second note consolidating the prior note with subsequent loans, and Anderson made further loans throughout 1971 and 1972. Although the corporation could have borrowed money from commercial sources, Anderson found it more convenient to lend the money himself. As…