- 5 -
the case of a taxpayer other than a corporation, a loss from a
nonbusiness debt that becomes worthless is treated as a short-
term capital loss, section 166(d), and consequently is subject to
the limitations of sections 1211 and 1212.
A nonbusiness debt is defined in section 166(d)(2) as “a
debt other than--(A) a debt created or acquired * * * in
connection with a trade or business of the taxpayer; or (B) a
debt the loss from the worthlessness of which is incurred in the
taxpayer’s trade or business.”
The relevant inquiry is whether petitioner’s advances were
proximately related to his conduct of a trade or business; the
determinative factor is his dominant motivation in incurring the
debt. See United States v. Generes, 405 U.S. 93, 103-104 (1972);
sec. 1.166-5(a)(2), Income Tax Regs.
Petitioner testified that he formed the corporations with
Aaland and advanced him money “As an investment to make more
money.” Investing does not constitute a trade or business. See
Whipple v. Commissioner, 373 U.S. 193, 202 (1963); see also
Higgins v. Commissioner, 312 U.S. 212 (1941); Deely v.
Commissioner, 73 T.C. 1081 (1980), supplemented by T.C. Memo.
1981-229; Rollins v. Commissioner, 32 T.C. 604, 615 (1959), affd.
276 F.2d 368 (4th Cir. 1960). Nor does petitioner’s limited
activity in aid of the business ventures with Aaland constitute a
separate business. Cf. Ferguson v. Commissioner, 253 F.2d 403
(4th Cir. 1958), affg. 28 T.C. 432 (1957).
Page: Previous 1 2 3 4 5 6 7 Next
Last modified: May 25, 2011