MR. JUSTICE MARSHALL, concurring.
I agree with and join the opinion of the Court. In doing so I add a few additional words of legislative history in support of the wording of the Internal Revenue Code itself.
It is now well-established law that a corporate employee is entitled to deduct as a business bad debt a bad debt incurred because of his employee status—e.g., a loan made to protect his job which becomes unrecoverable. See, e.g., Trent v. Commissioner, 291 F. 2d 669 (CA2 1961); Lundgren v. Commissioner, 376 F. 2d 623 (CA9 1967); Smith v. Commissioner, 55 T.C. 260 (1970). See also Whipple v. Commissioner, 373 U.S. 193, 201 (1963). The law is equally well established, however, that a shareholder is not entitled to a business bad-debt [p108] deduction when a loan which he has made to enhance his stock interest in a corporation goes bad.
The taxpayer in this case is both an employee and a shareholder of a single corporation, and the question thus presented is how to determine the proper tax treatment of loans made by him to the corporation that became uncollectible.
The Internal Revenue Code itself does not offer any test for determining when a bad debt is a business bad debt, but § 1.166-5 (b) of the Treasury Regulations on Income Tax provides that a loss from a worthless debt is deductible as a business bad debt only if the relation between the loss and taxpayer's trade or business is a proximate one. The Commissioner contends that the taxpayer must demonstrate that the "primary and dominant" motivation for the undertaking that gave rise to the bad debt was attributable to his status as an employee, and not as a shareholder, in order to comply with the regulation. It is the taxpayer's position that the proximate relationship is sufficiently demonstrated if the undertaking giving rise to the bad debt was "significantly" motivated by his employee status. The District Court and Court of Appeals agreed with the taxpayer.
The opinion of the Court properly concludes that acceptance of the test advocated by the taxpayer would blunt somewhat the distinction between business and nonbusiness expenses, and that the Commissioner's test is slightly more consistent with the thrust of various sections of the Internal Revenue Code. Were this all we had to work with, however, I would be as torn between the two tests as the lower courts have been. Compare Weddle v. Commissioner, 325 F. 2d 849 (CA2 1963), with Niblock v. Commissioner, 417 F. 2d 1185 (CA7 1969), and Smith v. Commissioner, 55 T.C. 260 (1970). As the Court's opinion points out, Congress did not [p109] choose to apportion the tax treatment of bad debts according to the strength of the various interests of the taxpayer that gave rise to them. Left with an all-or-nothing approach and no legislative history, one might well conclude that Congress did intend to blunt the distinction between business and nonbusiness bad debts, especially since neither the language of the Code nor the regulations explicitly require one test or the other, and since the burden on the taxpayer of both types of losses is identical. Fortunately, there is a clear and compelling legislative history that obviates any need for speculation as to Congress' intent in enacting § 166 of the Code, 26 U.S.C. § 166. And, only the Commissioner's test is consistent with that intent.
Prior to 1942 the Internal Revenue Code treated business and nonbusiness bad debts identically. But, in that year, Congress amended § 23 (k) of the 1939 Code in order to distinguish between the two. A nonbusiness bad debt was defined as one "other than a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business," and business bad debts presumably encompassed all others. The demarcation remains essentially the same under § 166 of the 1954 Code except that the definition of business bad debts is expanded for the limited purpose of including within it "a debt created or acquired... in connection with a trade or business of the taxpayer" but not "incurred in" the business—e.g., a debt growing out of a trade or business that becomes worthless under circumstances removed from the trade or business. See H.R. Rep. No. 1337, 83d Cong., 2d Sess., 21-22; S. Rep. No. 1622, 83d Cong., 2d Sess., 24; Whipple v. Commissioner, supra, at 194 n. 1; Trent v. Commissioner, supra, at 674.
The major congressional purpose in distinguishing between business and nonbusiness bad debts was to prevent taxpayers from lending money to friends or relatives who [p110] they knew would not repay it and then deducting against ordinary income a loss in the amount of the loan. Prior to the 1942 amendment of the Code, it was apparent that taxpayers could go a long way toward escaping the Code's monetary limit on dependency deductions and its prohibition against deductions for personal expenses by casting support payments, gifts, and other expenditures in the form of loans destined to become bad debts. H.R. Rep. No. 2333, 77th Cong., 2d Sess., 45, 76-77; S. Rep. No. 1631, 77th Cong., 2d Sess., 90.
A related congressional purpose in enacting the predecessor to § 166 was "to put nonbusiness investments in the form of loans on a footing with other nonbusiness investments." Putnam v. Commissioner, 352 U.S. 82, 92 (1956). Congress recognized that there often is only a minor difference, if any, between an investment in the form of a stock purchase and one in the form of a loan to a corporation. See, e.g., Kelley Co. v. Commissioner, 326 U.S. 521 (1946); Bowersock Mills & Power Co. v. Commissioner, 172 F. 2d 904 (CA10 1949).
It is apparent that Congress was especially concerned about the possibility that closely held family businesses might exploit the technical differences among the forms in which investments can be case in order to gain unwarranted deductions against ordinary income.
This case is a perfect example of how the "significant" motivation test undercuts the intended effect of the statute. The taxpayer was drawing an annual salary of $12,000 from a family corporation in which he had invested almost $200,000. As the guarantor of the corporation's performance and payment construction bonds, the taxpayer risked a potential liability of $2,000,000 and ultimately incurred an actual liability of $162,000, which is the amount that he sought to deduct as a business bad debt. The jury found that the risk was incurred because the taxpayer was "significantly" motivated by [p111] his interests as a corporate employee and by his $12,000 salary. In view of all the facts set forth in the opinion of the Court, especially the fact that the taxpayer had a gross income of approximately $40,000, I have no doubt whatever that the same jury would have found that the taxpayer's "primary and dominant" motivation was to protect his investment, not his salary.
If this taxpayer had simply lent his son-in-law $162,000 and then sought to deduct that amount as a business bad debt when the latter's business collapsed, he plainly could not have prevailed. This was just the sort of intra-family loan that Congress intended to bar from treatment as a business bad debt. The fact that a corporation served as a conduit for the loan should make no difference. The fact that he took a nominal salary for nominal services does not, in my opinion, require a different result. Moreover, if instead of guaranteeing the construction bonds, the taxpayer had invested $162,000 in the corporation to strengthen its economic position, that investment would receive the same treatment as the prior investment of $200,000 and any loss would not be deductible against ordinary income. The fact that the intra-family contribution was made in the form of a guarantee should be irrelevant for income tax purposes.
In sum, I find that the "significant" motivation test produces results that are totally at odds with the goals of the statute. The conclusion that I draw from the legislative history is that Congress wanted to permit deductions against ordinary income for bad-debt losses only when the losses bore the same relation to the taxpayer's trade or business as did other losses that the Code permits to be deducted against ordinary income. Under § 165 (c)(1) of the Code, 26 U.S.C. § 165 (c)(1), the primary-motivation test has always been used to [p112] determine whether these other losses are incurred in a trade or business or in some other capacity, see, e.g., Imbesi v. Commissioner, 361 F. 2d 640 (CA3 1966), United States v. Gilmore, 372 U.S. 39 (1963). The same test should also be utilized with respect to bad debts if Congress' will is to be done.