The opinion of the court was delivered by: SOFAER
MEMORANDUM OPINION AND ORDER
In this action, pursuant to 28 U.S.C. § 1346(a)(1), Hershel Krasnow seeks a refund of federal income taxes paid for the years ending December 31, 1968 and December 31, 1971. The Government has moved for partial summary judgment dismissing certain of plaintiff's claims. The motion is granted.
In mid-1970, Hershel Krasnow decided to invest in a small brokerage firm, the Kern Securities Corporation ("Kern Securities"), which had been founded by Krasnow's long-time acquaintance, Arthur M. Kern. On June 10, 1970, Krasnow entered into a series of investment and employment contracts with Kern Securities and certain of its officers. Krasnow agreed to purchase stock in the corporation and to make or arrange for subordinated loans to the firm. The apparent purpose of this agreement was to improve Kern Securities' capital situation. Pursuant to this agreement, Krasnow loaned a portfolio of securities to Arthur M. Kern, who in turn loaned them to Kern Securities. Krasnow waived any recourse on the loans against Kern Securities; repayment was guaranteed by three officers and stockholders of the corporation. Simultaneously, Krasnow became Chairman of Kern Securities' Executive Committee, as well as a Senior Vice-President and the Manager of its Underwriting and Syndication Department.
On July 15, 1970, an audit revealed that Kern Securities had been operating in violation of Rule 325 of the New York Stock Exchange ("NYSE"), which specifies capital requirements for member firms. On July 21, in an attempt to resolve Kern Securities' capital problems, the plaintiff signed a Memorandum of Understanding with Kern Securities, several of its officers, and the NYSE which included a promise that Hershel Krasnow would help Kern Securities obtain a loan from his wife to be used to improve the corporation's capital. The next day, Sylvia Krasnow loaned $ 90,000 in cash and 500 shares of preferred stock to Reuben Rose, who then loaned them to Kern Securities on a subordinated basis. Despite this loan, the corporation remained in violation of Rule 325, and in November 1970, Kern Securities terminated its operations as an exchange member and commenced liquidation of its assets.
Beginning in October 1970, Hershel and Sylvia Krasnow demanded repayment of their loans. In early 1971, some of the securities loaned by Hershel Krasnow and all of the securities and a portion of the cash loaned by Sylvia Krasnow were returned or repaid. No further repayments were made until 1976. In December 1972, Hershel Krasnow brought suit against Kern Securities and various individuals. On or about February 18, 1976, Rose and Kern Securities paid Krasnow $ 10,000, and in May 1977 the Krasnows settled or discontinued all of their remaining claims against Kern Securities and the individual defendants.
In 1974, Hershel Krasnow filed an administrative claim with the Internal Revenue Service for a refund of income taxes paid for the tax years 1968 and 1971. Krasnow asserted that he had incurred a business bad debt loss of $ 157,520 in 1971 and was entitled to claim an ordinary loss deduction for that year and a net operating loss carryback deduction for 1968. Krasnow had not claimed such a deduction on his tax returns for 1971. The examining agent disallowed this deduction, determining that the loss was non-business in nature and thus eligible only for short-term capital loss treatment, and that Krasnow had failed to establish that the debt became worthless in 1971. That decision was affirmed on administrative appeal, leading Krasnow to commence this suit for a refund. The government has moved for partial summary judgment on three separate issues. No motion is made for judgment on plaintiff's claim that moneys he advanced to Kern Securities in his own name created a business or non-business debt that became wholly worthless in 1971; issues involved in this claim remain to be tried.
I. The Loan From Sylvia Krasnow
The Government's first ground for summary judgment is based on the loan from Sylvia Krasnow to Reuben Rose. The Government asserts that this loan cannot give rise to a business bad debt under section 166 of the Internal Revenue Code, which allows a taxpayer to deduct as an ordinary loss any business debt that becomes worthless in a given tax year. The Code defines a business debt as:
(A) a debt created or acquired (as the case may be) 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 plaintiff concedes that Sylvia Krasnow "was not engaged in any trade or business at any time pertinent to this action." Joint Trial Order Paragraph III(8). The Government contends that this fact precludes any debt owed to Sylvia Krasnow from being accorded bad business debt status under section 166; it takes the position that any connection between the loan from Sylvia Krasnow and Hershel Krasnow's business is irrelevant. When "the taxpayer making the loan that gives rise to a debt is not engaged in a trade or business," the Government argues, "she may not deduct that debt as a business debt no matter what relation that debt may have to the business of another." Government's Memorandum in Support of Its Motion for Summary Judgment at 5.
None of the cases cited by the Government conclusively establishes its position. Some articulate criteria for deciding when a given debt is for business purposes, but involve situations somewhat different than the facts of the present litigation. See, e.g., United States v. Generes, 405 U.S. 93, 92 S. Ct. 827, 31 L. Ed. 2d 62 (1972); Harsha v. United States, 590 F.2d 884 (10th Cir. 1979); Hogue v. Commissioner, 459 F.2d 932 (10th Cir. 1972). Others are more analogous, and stand for the proposition that, when a taxpayer makes a loan to a friend or family member, the loan cannot be said to have a business purpose unless it somehow serves a business purpose of the taxpayer. For example, in Hunsaker v. Commissioner, 615 F.2d 1253 (9th Cir. 1980), it was held that loans made by the taxpayer to aid his father's real estate business could not form the basis for a bad debt deduction when the taxpayer had failed to prove that the dominant motivation for the loans was to benefit his own business purpose. See also United States v. Generes, supra (loan to aid son-in-law); Levin v. United States, 220 Ct. Cl. 197, 597 F.2d 760 (Ct.Cl.1979) (loan to aid business friend). The case now before the Court involves facts that are arguably different from those in the cases discussed and cited. Here the central question, at least for purposes of the motion for summary judgment, is whether a loan made by a taxpayer's wife in order to aid a taxpayer's business may ever be attributed to the taxpayer.
The plaintiff claims, in effect, that his relationship with his spouse is such that her loans should be treated as his. He claims he will be able to prove that he directed his wife to make the loan to Rose, and that as a dutiful wife she agreed. He states that he will also prove that the immediate purpose of the loan was to benefit Kern Securities, and thus himself as an employee and investor, and that the financial condition of Kern Securities at the time of the loan makes it clear that Sylvia Krasnow could not have been making the loan for her own benefit. Hershel Krasnow concedes that Sylvia Krasnow would also have benefitted from the transaction, but claims that any ...