In Uncategorized on 07/24/2013 at 17:03

June Shaw gets stung when her bad debt turns out to be neither a debt, nor bad when she claimed it was, in the eponymous 2013 T. C. Memo. 170, filed 7/24/13.

That learned jurist Judge Lauber, the star of my blogpost,  “Acceuillons, Let’s Welcome, Judge Albert B. Lauber”, 2/5/13, is the decider. And he wastes not his judicial learning on the desert air here.

June is bookkeeper and CFO of her family’s real estate business, but in her spare time she sold an apartment building she herself owned, taking away a seven-figure capital gain just before the real estate market cratered in 2008, and reporting on the installment method. Big taxable payment comes in in 2009.

Coincidentally, Brother Ken needs money for a development venture the family business is undertaking, because his money lady walked away as the real estate market headed south.

June steps in and  takes a note from the business, interest and principal accruing until the due date of the note in 2011. The note is unsecured, and evidences an open line of credit.

June funds about $900K, but claims the loan is a business bad debt and became worthless in 2009.

No, says IRS. No, says Judge Lauber. On both counts.

Interfamilial loans get close scrutiny. Even if the paper formalities are observed, what the parties did is the real test.

No arms’-length lender would have made the deal June did, and no arms’-length lender would have forborne to demand payment, give notice of default, or sue.

Moreover, the note wasn’t due until 2011, so what evidence was there in 2009 that June wouldn’t have been repaid? Merely that a business loses money, and its prospects are none too bright, doesn’t mean it couldn’t recover. June had the books and records as CFO; if she had evidence that the viability of the family business as a going concern was going down the drain, she never introduced the records, so Judge Lauber invokes our old chum Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), aff’d, 162 F.2d 513 (10th Cir. 1947). If June had evidence of worthlessness, she’d introduce it. If she doesn’t, then she loses.

The deal is more like a gift or capital contribution. It doesn’t resemble a commercial loan as to economic substance, June didn’t act like a creditor, and she never established that she had no chance of recovering her money by 2011.

No debt, but plenty of sting. Big deficiency, late payment addition, and substantial understatement of tax.


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