No. 112, Docket 23641.United States Court of Appeals, Second Circuit.Argued December 8, 1955.
Decided January 11, 1956.

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The taxpayer seeks review of a decision of the Tax Court which upheld the Commissioner’s determination that a deficiency of $2,829.09 existed in the taxpayer’s income tax for 1944. The Commissioner found that bad debts of $29,025.87, which the taxpayer had reported as business bad debts, were, in fact, non-business bad debts under Section 23(k)(4) of the Internal Revenue Act of 1939, as amended, 26 U.S.C.A., and that therefore they were to be treated as short-term capital losses with limited deducibility under Section 117(d)(2).

Taxpayer was employed by an advertising agency from 1929 to early 1939, when he established his own agency, J.M. Hickerson, Inc. The taxpayer is the sole stockholder of J.M. Hickerson, Inc., and serves as its president. In 1928, the taxpayer and another acquired the stock of the Brownsville Publishing Company (hereinafter referred to as Brownsville) which published a newspaper. He served as its president until 1939 and as a director until 1941. He participated to some extent in the management of that corporation until 1937, when he asked that his salary as president be discontinued because he could not devote sufficient time to its corporate business. Between 1930 and 1938, Brownsville purchased four other local newspapers in Pennsylvania and promoted their circulation.

In February 1934, the taxpayer’s brother, A.E. Hickerson, and certain “associates” acquired the stock of Philadelphia Suburban Newspapers, Inc. (hereinafter referred to as Philadelphia) which published two daily newspapers (later changed to weekly papers). The money and credit of Brownsville were used for this acquisition, and the taxpayer was elected president and director of Philadelphia. Sometime prior to February 27, 1937, Brownsville purchased 2,730 shares of Philadelphia’s stock. Taxpayer served as president of Philadelphia until February 20, 1939, and as director until July, 1940. He was actively engaged in various activities and projects of Philadelphia for a time, but at a meeting of the Board of Directors held on February 27, 1937, the taxpayer stated that he had been unable to do much work for the corporation since the beginning of 1937, and therefore felt that his salary from the corporation should be terminated.

On March 22, 1941, taxpayer sold his stock in Brownsville and Philadelphia. On September 13, 1941, taxpayer purchased the stock of The Pioneer Press, Inc. (hereinafter referred to as Pioneer) which published a newspaper known as the Carbondale Leader in Carbondale, Pennsylvania. Taxpayer became president, treasurer and a director of Pioneer and participated to a considerable degree in its management. Between September 13, 1941 and September 8, 1944, taxpayer made loans to Pioneer amounting to $24,760. In addition, he repaid to J.M. Hickerson, Inc. $5,850. which that corporation had loaned to Pioneer.

On June 1, 1942, the taxpayer purchased the Bethesda Journal, an unincorporated

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weekly newspaper in Bethesda, Maryland. The taxpayer employed an editor but participated to a substantial degree in various activities of that newspaper. The Tax Court found that the taxpayer’s purchase of the Bethesda Journal “was made for the purpose of acquiring a newspaper which could be used as an aid to the advertising business of Hickerson, Inc. In October, 1942, Hickerson, Inc., advertised that it could offer a test market basis for newspaper advertising because of its connections with Pioneer and the Bethesda Journal. Hickerson, Inc., obtained some business as a result of such advertising.”

After a few months of profitable operation, Pioneer began to lose money because many people left Carbondale to work in defense plants in other cities. In December, 1943, Pioneer suspended operation, and in September, 1944, the taxpayer sold his stock in Pioneer, releasing Pioneer from its debt, as part of the transaction.

In his income-tax return for 1943, the taxpayer took a deduction of $22,500 as a business bad debt arising from the amounts advanced to Pioneer during that and previous years. In 1944, the taxpayer took a deduction of $6,525.89 as a business bad debt representing the undeducted portion of his loans to Pioneer. In auditing the taxpayer’s 1943 return, the Commissioner disallowed the $22,500 bad-debt deduction. Taxpayer thereupon filed an amended tax return for 1944 in which he took a deduction of $29,025.27 as a business bad debt. The Commissioner disallowed this deduction, contending that it was a non-business bad debt. He was upheld by the Tax Court, and the taxpayer brought this petition for review.

Peter W. Quinn, New York City, for petitioner (Eugene C. Wohlhorn, Bellaire, N.Y., of counsel).

H. Brian Holland, Ellis N. Slack and L.W. Post, Washington, D.C., for respondent.

Before SWAN, FRANK and LUMBARD, Circuit Judges.

FRANK, Circuit Judge.

The basic question is whether the bad debts here involved are business or non-business bad debts, as defined in Section 23(k) (4). Under the definition in that subsection, a “`non-business debt'” is a debt other than one “evidenced by a security as defined in paragraph (3) and other than a debt the loss from the worthlessness of which is incurred in the taxpayer’s trade or business.” The loans were not evidenced by a security as defined in paragraph (3). Whether the loss from a worthless debt is incurred in the taxpayer’s trade or business depends on “the relation which the loss * * * bears to the trade or business of the taxpayer. If that relation is a proximate one in the conduct of the trade or business in which the taxpayer is engaged at the time the debt becomes worthless, the debt is not a non-business debt for the purpose of this section.” Treas. Reg. 111, Section 29.23(k)(6). We think this a valid regulation.

The facts here are similar to those in Commissioner of Internal Revenue v. Smith, 2 Cir., 203 F.2d 310, 311. There, the taxpayer, a stockholder and officer of several corporations, invested in a corporation engaged in dairy farming. He served as treasurer and manager of the farm and participated to some extent in the activities of the farm corporation. He made substantial loans to that corporation which were never repaid because the corporation became insolvent and made a general assignment of its assets for the benefit of its creditors. The taxpayer sought to deduct the worthless debts as business bad debts but they were disallowed by the Commissioner. This court held that, since the taxpayer was admittedly not in the business of lending money, the bad debts were not incurred in the taxpayer’s “trade or business” and therefore they were “non-business debts.”

Here, too, the taxpayer admits that he was not in the business of lending money. He contends, however, that he was engaged in a trade or business in which he sustained a loss from worthless

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debts. He asserts that his investment in, and his participation in the management of, various newspapers constituted the trade or business of operating and developing “newspapers from defunct organizations to successful ones.” He contends that this was a trade or business, separate and distinct from that of Pioneer, and that the losses from bad debts were proximately related thereto.

If we assume that the taxpayer was engaged merely in the “trade or business” of a stockholder actively participating in the management of the corporations of which he is an officer, we think that the loans were not incidental to this “trade or business.” In effect, we so held in Commissioner of Internal Revenue v. Smith, supra.

The cases cited by taxpayer which hold that active participation in the management of a corporation by a stockholder can constitute a trade or business are not conclusive, since none holds that a loan made by a stockholder-officer to his corporation was made pursuant to the taxpayer’s “trade or business.” Commissioner of Internal Revenue v. Stokes’ Estate, 3 Cir., 200 F.2d 637, 638, and Maloney v. Spencer, 9 Cir., 172 F.2d 638, also cited by taxpayer, are inapposite since the trade or business involved in each of those cases was other than merely that of a stockholder and officer of the corporation to which loans were made. In Stokes, the court held that the taxpayer was engaged in the business of the development and promotion of patents. In Maloney v. Spencer, supra, the taxpayer was found to be in the business of leasing food-processing plants.

However, the taxpayer here not only contends that he is in the business of serving as a stockholder-officer actively engaged in the corporation’s work; he goes further and says that he is in the business of investing in and developing defunct newspapers to improve their operation and make them profitable. Other courts have held that such activity can constitute a “trade or business.” In Vincent C. Campbell, 11 T.C. 510, the Tax Court held that the taxpayers were engaged in “the business of organizing and operating corporations engaged in the retail coal business * * *” and that worthless loans made to one of the twelve corporations which the taxpayer organized and operated constituted business bad debts. In a similar case, Giblin v. Commissioner, 227 F.2d 692, 696, the Fifth Circuit held that the taxpayer was “engaged in the business of seeking out business opportunities, promoting, organizing and financing them, contributing to them substantially 50% of his time and energy and then disposing of them at either a profit or loss * * *.” The facts showed that, between 1926 and 1945, Giblin had, “on eleven or twelve occasions * * * contributed his time, talent and energy to the exploitations of an idea to make money apart from his practice of law.”

Even were we to accept the rationale of the Campbell and Giblin cases, we think it inapplicable here. The Tax Court properly held that taxpayer was not engaged in the separate trade or business of developing defunct newspapers. In its opinion, the Tax Court said, “As we pointed out in Charles G. Berwind (20 T.C. 808, affirmed 2 Cir., 211 F.2d 575), the authority contained in the Campbell and similar cases is applicable only where the taxpayer’s activities in promoting, financing, managing and making loans to a number of corporations have been regarded as so extensive as to constitute a business separate and distinct from the business carried on by the corporation themselves.” After discussing the taxpayer’s activities with respect to the various newspapers, the Tax Court concluded that “* * * it is apparent that petitioner’s activities with respect to Brownsville, Philadelphia and Pioneer lacked the extensiveness necessary to bring them within the Campbell case, where it was shown that from 1929 through 1944 the taxpayer had organized, operated and financed twelve corporations.”

Since the losses from debts incurred by the taxpayer were not proximately related

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to a trade or business in which the taxpayer was engaged at the time they became worthless, the debts were non-business debts and are deductible only as short-term capital losses.