Whipple v. Commissioner

373 U.S. 193 (1963)

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Nature of the Case

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Facts

P was a construction superintendent and an estimator for a lumber company but was also instrumental in forming and was a member of a series of partnerships engaged in the construction or construction supply business. In 1949 and 1950 he was an original incorporator of seven corporations. He sold his interest in the corporations along with his equity in five others in the rental and construction business, the profit on the sales being reported as long-term capital gains. In 1951 and 1952 he formed eight new corporations, one of which was Mission Orange Bottling Co. P bought the stock of a corporation known as Mason Root Beer and acquired an interest in a related vending machine business. From 1951 to 1953 he also bought and sold land, acquired and disposed of a restaurant, and participated in several oil ventures. P secured a franchise from Mission Dry Corporation to bottle, distribute and sell Mission beverages in various counties in Texas. P then purchased the assets of a sole proprietorship in the bottling business and conducted that business pursuant to his franchise as a sole proprietorship. P sold the bottling equipment to Mission Orange Bottling Co., of which P owned approximately 80% of the shares outstanding. In 1952 he purchased land and erected a bottling plant at a cost of $43,601 and then leased the plant to Mission Orange for a 10-year term at a prescribed rental. Depreciation was taken on the new bottling plant on P's individual tax returns for 1952 and 1953. P made cash advances to Mission and on December 1, 1953, the balance due him totaled $79,489.76. On December 15, 1953, he advanced an additional $48,000 to pay general creditors and on the same day received a transfer of the assets of the corporation with a book value of $70,414.66. The net amount totaling $56,975.10, became worthless in 1953. P deducted the debt as a business bad debt. The upset D greatly wherein D claimed the debt was a nonbusiness bad debt. The Tax Court agreed with D holding that P was not in the business of organizing, promoting, managing, or financing corporations. The Court of Appeals affirmed. The Supreme Court granted certiorari.