United States v. Generes - 405 U.S. 93, 92 S. Ct. 827 (1972)

Rule:

In determining whether a bad debt has a "proximate" relation to a taxpayer's trade or business, as the Regulations specify, and thus qualifies as a business bad debt, the proper measure is that of dominant motivation, and that only significant motivation is not sufficient.

Facts:

Respondent taxpayer owned 44% of the stock of a closely held construction corporation, with an original investment of $ 38,900, and received an annual salary of $ 12,000 for serving as president on a part-time basis. His total income was about $ 40,000 a year. He advanced money to the corporation and signed an indemnity agreement with a bonding company, which furnished bid and performance bonds for the construction contracts. The corporation defaulted on contracts in 1962 and the taxpayer advanced over $ 158,000 to the corporation and indemnified the bonding company to the extent of more than $ 162,000. The corporation went into receivership and he obtained no reimbursement for these sums. On his 1962 income tax return the taxpayer took his loss on direct loans to the corporation as a nonbusiness bad debt, but he claimed the indemnification loss as a business debt and deducted it against ordinary income and asserted net loss carrybacks for the portion unused in 1962, pursuant to 26 U. S. C. § 172. The jury was asked to determine whether signing the agreement "was proximately related to his trade or business of being an employee" of the corporation. The court refused the Government's request for an instruction that the applicable standard was that of dominant motivation and charged the jury that significant motivation satisfied the Regulations' requirement of proximate relationship. The jury's verdict was for the taxpayer and the Court of Appeals affirmed, approving the significant-motivation standard. The court granted certiorari to the United States Court of Appeals for the Fifth Circuit to decide whether respondent's bad-debt deduction was properly decided using the significant-motivation test.

Issue:

Was the respondent’s bad debt deduction properly decided using the significant-motivation test? 

Answer:

No.

Conclusion:

The court reversed, concluding that in determining whether a bad debt had a "proximate" relation to a taxpayer's trade or business, and thus qualified as a business bad debt, the proper measure was that of dominant motivation, and that only significant motivation was not sufficient. In this case, the court held that there was nothing in the record that would support a jury verdict in the taxpayer's favor had the dominant-motivation standard been embodied in the instructions.