United States v. Generes

405 U.S. 93 (1971)

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Nature of the Case

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Facts

Kelly-Generes Construction Co., Inc., was organized and engaged in the heavy-construction business, primarily on public works projects. Generes (P) 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 working 6-8 hours per week. His total income was about $40,000 a year. P 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 P obtained no reimbursement for these sums. P took his loss on direct loans to the corporation as a nonbusiness bad debt, but 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. Treasury Regulations provide that if, at the time of worthlessness, the debt has a 'proximate' relationship to the taxpayer's business, the debt qualifies as a business bad debt. D denied the deductions and P petitioned. P testified that his sole motive for signing the indemnification agreement was to protect his $12,000-a-year employment with the corporation. The jury was instructed 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 satisfies the Regulations' requirement of proximate relationship. P got the verdict, and the Court of Appeals affirmed. The Supreme Court granted certiorari.