Petition — Horne v. Commissioner

————

’ cite eae

vi Poe Lourie, U, gr"

| FILED

Ju 23 1978

|

|_MicHaey

—LHAEL RODAK, JR., CLERK

>.

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1977

77-1824

No.

M. SETH HORNE and MAURINE D. HORNE,

Appellants,

Vv.

COMMISSIONER OF INTERNAL REVENUE

TITICN FOR A WRIT OF CERTIORARI

HE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Of Counsel:

KELLY & KELLY

662 Security Center

222 North Céntral Avenue

Phoenix, Arizona 85004

A ae

INDEX

Opinion Below

Jurisdiction

Questions Presented

Statutes and Regulations

Involved

Statement of the Case

Reasons for Granting the

Writ

Conclusion

Certificate of Service

Appendix, one volume

(separately bound)

TABLE OF CASES AND AUTHORITIES

Cases:

Page

Nr

or ow NMNMrF

Allen v. Commissioner, 283 F.2d

785 (7th Cir. 1960)

Commissioner v. Cornat

Holding Co., 324 U.S.

331 (1945)

Eckert v. Burnet, 283 U.S.

140 (1931)

Howell v. Commissioner,

69 F.2d 447 (8th Cir.,

1934)

Lutz v. Commissioner, 282

F.2d 614 (5th Cir., 1960)

Putnam v. Commissioner,

352 U.S. 82 (1956)

Stahl v. United States, 441

F.2d 999 (D.C. Cir., 1970)

16

14

19

11-14

12, 16,

20

14, 15,

17

AZo 14-16,

20

4

Aa erent

Page

Stratmore v. United States,

420 F.2d 461 (3d Cir., 1970) 14

United States v. Generes,

405 U.S. 93 (1972) 13, 16,

20

United States v. Hoffman,

423 F.2d 1217 (9th Cir., 13, 14,

1970) 1G. ive

20

Statutes:

Internal Revenue Code of 1954

__ Sec. 162 (26 U.S.C.A. 2-3, 12,

7 a § 162) 16

Sec. 165 (26 U.S.C.A. 2-3, 5,

§ 162) 12, 16,

19

Sec. 166 (26 awa 3, 10-1l,

18

Sec. 1211 (26 U.S.C.A.

§ 162) 10-11

Sec. 6213 (26 U.S.C.A.

§ 162) 10

Sec. 7442 (26 U.S.C.A.

§ 162) 10

Sec. 7483 (26 U.S.C.A.

§ 162) ll

United States Code

28 U.S.C. § 1254(1) 2

28 U.S.C. § 2483 ll

ii

Treasury Regulations

Page

Reg. § 1.166-5 4, 18-19

iii

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1977

No.

M. SETH HORNE and MAURINE D. HORNE,

Appellants,

Vv.

COMMISSIONER OF INTERNAL REVENUE

Appellee.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

HUBERT E. KELLY

Attorney for Appellants.

Of Counsel:

KELLY & KELLY

662 Security Center

222 North Central Avenue

Phoenix, Arizona 85004

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1977

No.

M. SETH HORNE and MAURINE D. HORNE,

Appellants,

Ve

COMMISSIONER OF INTERNAL REVENUE

Appellee.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

The petitioners, M. SETH HORNE and

MAURINE D. HORNE, respectively pray that

a Writ of Certiorari be issued to review

the judgment herein of the United States

Court of Appeals for the Ninth Circuit

(hereinafter referred to as the Ninth

Circuit) entered in the above-entitled

case on September 30, 1975, petition for

rehearing denied on March 27, 1978.

OPINIONS, JUDGMENTS, AND ORDERS BELOW

On November 27, 1972, the United

2

States Tax Court (hereinafter referred

to as the Tax Court) filed its opinion

herein which is reported at 59 T.C. 319

(1972) and pursuant thereto entered its

decision on February 12, 1973. The

opinion and decision are set forth in

the appendix at pages i through 40 and

at page 41, respectively.

The Ninth Circuit filed its opinion

and judgment on September 30, 1975, af-

firming the decision of the Tax Court.

The opinion is reported at 523 F.2d

1363 (9th Cir., 1975) and set forth in

the appendix at pages 42 through 49.

On March 27, 1978, the Ninth Cir-

cuit filed its order denying petitioners'

petition for rehearing. The order is

set forth in the appendix at page 50.

JURISDICTION

The judgment of the Ninth Circuit

was filed on September 30, 1975, and

the order denying the petition for re-

hearing was filed on March 27, 1978.

Jurisdiction of this Court is invoked

under 28 U.S.C. Section 1254 (1).

QUESTION PRESENTED

Where the taxpayer, M. SETH HORNE,

made payments pursuant to an indemnity

agreement, entered into by him with a

bonding company concerning an antecedent

debt for which he had no responsibility,

are such payments deductible either as

Ordinary and necessary business ex-

penses under Section 162 or losses in-

curred in a trade or business, or in-

curred in a transaction entered into for

profit under Section 165(c) of the

aiden |

.

3

Internal Revenue Code of 1954?

STATUTES AND REGULATIONS INVOLVED

Internal Revenue Code of 1954:

SEC. 162. TRADE OR BUSINESS

EXPENSES.

(a) In General.--There shall be

allowed as a deduction all the ordi-~

nary and necessary expenses paid or

incurred during the taxable year in

carrying on any trade or business,

(26 U.S.C.A. § 162)

SEC. 165. LOSSES.

(a) General Rule.--There shall be

allowed as a deduction any loss sus-

tained during the taxable year and not

compensated for by insurance or other-

wise.

(c) Limitation on losses of

individuals.--In the case of

an individual, the deduction under

subsection (a) shall be limited to

(1) losses incurred in a trade

or business;

(2) losses incurred in any trans-

action entered into for

profit, though not con-

nected with a trade or

business;

(26 U.S.C.A. § 165)

SEC. 166. BAD DEBTS.

(a) General Rule.--

ah —-

+

(1) Wholly worthless debts.--

There shall be allowed as a deduc-

tion any debt which becomes worth-

less within the taxable year.

(d) Nonbusiness Debts.--

(1) General rule.--In the case

of a taxpayer other than a corpora-

tion--

(A) subsections (a) and (c)

shall not apply to any nonbusiness

debt; and... .

(2) Nonbusiness debt defined.--

For purposes Of paragraph (1), the

term "nonbusiness debt" means a debt

other than--

(A) a debt created or ac-

quired (as the case may be) in

connection with a trade or busi-

ness of the taxpayer; or

(B) a debt the loss from

the worthlessness of which is

incurred in the taxpayer's

trade or business.

(26 U.S.C.A. § 166)

Treasury Regulations:

REG. § 1.166-5

a * *

(b) Nonbusiness debt defined--For

purposes of section 166 and this

section, a nonbusiness debt is any

debt other than--

5

(1) A debt which is created, or

acquired, in the course of a trade

or business of the taxpayer,

determined without regard to the

relationship of the debt to a trade

or business of the taxpayer at the

time when the debt becomes worth-

less; or

(2) A debt the loss from the worth-

lessness of which is incurred in the

taxpayer's trade or business.

The question whether a debt is a

nonbusiness debt is a question of

fact in each particular case. The

determination of whether the loss

on a debt's becoming worthless has

been incurred in a trade or business

of the taxpayer shall, for this pur-

pose, be made in substantially the

same manner for determining whether

a loss has been incurred in a trade

or business for purposes of section

.165(c) (1). For purposes of sub-

paragraph (2) of this paragraph,

the character of the debt is to be

determined by the relation which

the loss resulting from the debt's

becoming worthless bears to the trade

or business of the taxpayer. If

that relation is a proximate one

in the conduct of the trade or

business in which the taxpayer is en-

gaged at the time the debt becomes

worthless, the debt comes within

the exception provided by that

subparagraph. * * *

Treas. Reg. § 1.166-5, T.D. 6500,

26 C.F.R. § 1.166-5 (1960)

6

REG. § 1.166-l(c)

Only a bona fide debt qualifies

for purposes of section 166. A

bona fide debt is a debt which

arises from a debtor-creditor

relationship based upon a valid

and enforceable obligation to pay

a fixed or determinable sum of

money. A gift or contribution

to capital shall not be considered

a debt for purposes of section

166.

Treas. Reg. § 1.166-li(c), T.D.

6996, 26 C.F.R. § ie 66-lic)

(1970).

STATEMENT OF THE CASE

The taxpayers, M. SETH HORNE and

MAURINE D. HORNE, are husband and wife

and reside in Phoenix, Arizona. M. SETH

HORNE (hereafter referred to as "HORNE")

is a real estate developer and investor.

In 1951, HORNE and two others formed a

general partnership (hereafter the

"Partnership”) to engage in the business

of real estate development. Later that

year, the Partnership purchased all the

outstanding shares of James Stewart and

Co., Inc. (hereafter referred to as "COINC"),

thinking that COINC's construction

activities would compliment the Partner-

ship's real estate activities. The

total purchase price amounted to

$296,406.25. COINC's stock was ac-

quired in the names of the individual

partners according to their interests

in the Partnership. HORNE's basis in

the COINC stock was $194,442.50. At

that time, COINC had a wholly owned

subsidiary, James Stewart Corporation

5

(hereafter referred to as "CORP").

In 1952, COINC caused a second

subsidiary, James Stewart Company

(hereafter referred to as “CO")

to be formed. Like COINC, both CO and

CORP performed construction and general

contracting work.

In the conduct of their construc-

tion business, the three corporations

were required to post performance

bonds on the jobs they undertook.

Bonds were obtained from the New

Amsterdam Casualty Company (here-

after referred to as "NEW AMSTERDAM").

COINC and CORP agreed to indemnify

NEW AMSTERDAM for any losses incurred

as surety for CO. CORP and CO agreed

to in demnify NEW AMSTERDAM from any

losses incurred surety for COINC.

From the start, HORNE and the

other partners were active in the

management of COINC as members of

its board of directors. HORNE was

immediately made Vice-President.

He held that office until 1955, when

he was elevated to President and

Chairman of the Board -- positions

which he held through 1960. HORNE

was also a member of the board of

directors of both CORP and CO.

In 1953, HORNE was elected Vice-

President of CORP, and in 1954, chairman

of its board. HORNE was president of

CO from its inception.

The Partnership was the manager of

COINC, and CORP and CO were its oOpera-

tional arms. The Partnership engaged

in all phases of real estate development,

although after acquiring COINC,

a great deal of the partners’

time was devoted to overseeing

the parent and its subsidiaries.

During the years 1952 through

1960, HORNE received no compensa-

tion of any kind from COINC, CORP

or CO for services rendered.

Also, none of the corporations paid

any dividends during those years.

CORP and CO did, however, pay

management fees to COINC; and

COINC in turn paid management

fees to the Partnership.

By 1960, all three corporations

were in severe financial trouble.

NEW AMSTERDAM was informed that CO

could not complete all its contracts

and that COINC and CORP did not

have sufficient funds to meet

their obligations as indemnitors

under the cross-indemnity agreements.

At this point, NEW AMSTERDAM esti-

mated its liability on the bonds

written on CO's behalf at approxi-

mately one and one-half million.

None of the partners were indivi-

dually liable on the bonds and

therefore NEW AMSTERDAM requested

the partners to contract to indem-

nify it for any loss incurred on

the three corporations’ bonds.

The other partners refused, but

HORNE acceded. He did so realizing

that unless he agreed, the corpora-

tions would be taken over by the

bonding company, their assets would

be liquidated and they would probably

end up in bankruptcy. Not only

would he lose his investment in

COINC, but, most importantly, his

ite ‘iii ‘

\

9

credit reputation would be ruined.

Thus, because the ability to borrow

large amounts of money was crucial

to the conduct of a real estate

development business, HORNE would

no longer be able to participate

in such business on an individual

basis, or as a major figure ina

partnership or corporation.

In January 1961, following

negotiations, HORNE and NEW

AMSTERDAM entered into an indemnity

agreement whereby HORNE and CO

jointly and severally agreed to pay

NEW AMSTERDAM amounts expended by

NEW AMSTERDAM pursuant to bonds

issued in connection with the con-

tracts previously entered into by

CO, and all amounts for which CO

was obligated under the earlier

cross-indemnity agreements. The

agreement between NEW AMSTERDAM

and HORNE was unlike usual indemnity

agreements entered into by a bonding

company and a third-party indemnitor.

Generally, a bonding company requires

the indemnity agreement at the outset

of the transaction and the indemni-

fication is given at the time the bond

application is executed. The agree-

ment between NEW AMSTERDAM and HORNE

was an original undertaking by him.

, Contemporaneous with the negotia-

tion of the January 20 agreement, the

Partnership was dissolved and the cor-

porations reorganized with HORNE re-

ceiving all the stock in CO.

In accordance with the January 20

agreement, HORNE paid to NEW AMSTERDAM

$237,434.46 in 1966, $121.749.22 in

1967, and $238,246.66 in 1968.

‘

_ ‘ ; ‘

i aa a a a

10

He deducted one-half of these amounts

as losses. The balance for each year

was treated as a loan to CO by HORNE

and as an account payable by CO to

HORNE.

On February 6, 1970, the Commissioner

forwarded to the taxpayers, as required

by law, a statutory notice of defi-

ciency by which he disallowed the

deductions claimed by HORNE for 1966,

1967, and 1968 on the grounds that the

amounts paid by him to NEW AMSTERDAM

represented contributions to capital

and not losses incurred in a trans-

action entered into for profit.

Alternatively, the Commissioner in-

voked the provisions of Section 166 of

the Internal Revenue Code of 1954,

holding that if the amounts paid by

HORNE were found to be loans (a) the

loans did not become worthless in the

taxable year in which the deductions

were claimed, or (b) if worthless,

the loans were nonbusiness bad debts

and therefore subject to the lLimita-

tions of Section 1211 of the Internal

Revenue Code of 1954.

Within the time provided by Section

6213 of the Internal Revenue Code of

1954 (26 USC § 6213), the taxpayers filed

a petition with the Tax Court on May 7,

1970, seeking a redetermination of the

deficiencies determined to be due from

them by the Commissioner. Juris-

diction was conferred on the Tax Court

by Sections 6213(a) and 7442 of the

Internal Revenue Code. (26 USC §§

6213(a), 7442).

8 ss te - —~e _ = ——a Le ee eee een Tae s.r eee

>

1l

The Tax Court held that upon payment

to the bonding company HORNE was both an

indemnitor and a guarantor, that he did

acquire a "remedy over” against CO, and

this "remedy over" represented a debt

falling within the provisions of Section

166. The Tax Court further held that CO

was financially able to pay HORNE during

the relevant years and the debts were

not worthless, and therefore no deduction

was allowed. Section 1211 of the Interal

Revenue Code of 1954. (26 USC § 1211).

On February 12, 1973, the Tax Court

entered its decision pursuant to the |

opinion filed November 27, 1972. Within

the 90-day period set forth in 28 USC

§ 7483, on May ll, 1973, the taxpayers

filed their Notice of Appeal to the

United States Court of Appeals for the

Ninth Circuit. Jurisdiction was con-

ferred upon that Court by 28 USC § 2483.

On appeal, the Ninth Circuit affirmed.

It held that Section 166 is applicable

to payments by an indemnitor regard-

less of the existence of an independent

debt between the corporation and the

taxpayer. In view of the Tax Court's

determination that the debts were not

worthless, no deduction was permitted.

On October. 25, 1975, appellants filed

a petition for rehearing. The court

denied the petition for rehearing on

March 27, 1978.

REASONS FOR GRANTING THE WRIT

I. The decision of the Ninth Cir-

cuit is in conflict with Howell v.

Commissioner, 69 F.2d 447 (8th Cir.,

1934), cert. denied 292 U.S. 654,

on the question of whether payments

;

12

under an indemnity agreement are

to be given bad-debt treatment;

in conflict with Stahl v. United

States, 441 F.2d 999 (D.c. Cir.,

1970) on the question of the ap-

plicability of section 166(d) to

the instant transaction; and in con-

flict with Lutz v. Commissioner,

282 F.2d 614 (5th Cir., 1960), on

the question of the applicability

of section 162 to the inst ant

transaction.

A. Howell v. Commissioner,

supra, has long been recognized as

the controlling case establishing

deductible losses under section

165(c). The distinction between a

guarantor on the one hand as op-

posed to the indemnitor on the other,

was stated by the court as follows:

"Although the ordinary surety

or guarantor is a creditor of the

principal debtor, the same cannot

be true of an indemnitor who

does not undertake to assume or

discharge the obligations of another,

but has, on his own account, con-

tracted to pay a sum of money

upon the occurrence of a certain

event, usually the happening or

the ascertainment of a loss. There

is no privity, either actual or

implied, between the promisor in the

undertaking the loss from the non-

performance of which is indemnified

against and the indemnitor, and the

latter, if the loss occurs, does

not, by payment of it, discharge

any one's obligations but his own."

69 F.2d at 451.

be

13

64. nate

The error of the Tax Court, which

the Ninth Circuit compounded, was their

refusal to recognize the January 20

agreement as a new and independent

undertaking by HORNE to NEW AMSTERDAM

for which he had no personal obliga-

tion prior to the agreement. They did

so while at the same time recognizing

HORNE's motivation for entering into

the agreement to be for the purpose

of protecting of his financial integrity

and reputation as a real estate

developer.

Both the Ninth Circuit and the

Tax Court likened HORNE's situation

to that of the taxpayer in United States

v. Hoffman, 423 F.2d 1217 (3th Cir.,

1970). However, the Hoffman case

presented a question of “substance

over form" and the Ninth Circuit con-

cluded from the facts, that Hoffman

was a guarantor even though the bond-

ing agreement referred to him as an

indemnitor. The facts of that case

reflected that the taxpayer-stock-

holder agreed to indemnify simul-

taneously with the execution of the

bonding application by the corporation

with the surety.

Following the Hoffman case, this

court decided United States v. Generes,

405 U.S. 93 (1972), which has striking

: factual similarities to the Hoffman

case. In deciding Generes this court

did not disapprove of indemnity losses,

Or the principal of Howell v. Commis-

sioner, supra, but instead resolved

a conflict among the circuits as to

the motivation tests to be applied

in determining whether a debt is deduct-

ible as a business bad debt under section

166.

‘

, : .

ee a enna

14

HORNE's transaction with NEW

AMSTERDAM was an independent under-

taking by him rather than a simul-

taneous transaction as was apparent

in Hoffman, supra. As such HORNE's

case falls w the principal of

Howell v. Commissioner, supra,

which HORNE maintains creates a

conflict which must be resolved by

this court.

B. Also following the Hoffman

decision, the Court of Appeals for the

District of Columbia decided Stahl v.

United States, supra, which criticized

Hoffman and those cases which made a

blanket declaration that the principals

of Putnam v. Commissioner, 352 U.S. 82

(1956) applied in all cases where a tax-

payer-stockholder made an undertaking

(whether or not involving subrogation)

in order to protect or enhance his posi-

tion in the corporation. See also,

Stratmore v. United States, 420 F.2d

461 (3a Cir., 1970), cert. denied 398

U.S. 951 (1970).

The Stahl case presents a well-

reasoned Opinion. While the facts differ

from those now before the court, it

clearly recites the proposition that

section 116 has application only to

a bona fide debt existing at the time

the transaction was entered into. The

court, applying the principal of sub-

stance over form, Commissioner v. Conat

Holding Co., 324 U.S. 531, 334 (1945),

held that a loan of securities by the

taxpayer to her brokerage firm which

she agreed could be used as part of the

capital of the firm, did not create a

"loan" or an “indebtedness” within the

meaning of section 166. Upon the

a ee

es nae Ca) en ar

7

7

|

x

LJ

§

y

-

»

4

4

v

;

:

15

ultimate loss of the securities, the

court held that section 166 had no ap-

plication because when the transaction

was entered into initially there was no

bona fide debt as provided by Treasury

Regulations § 1.166-l(c), 26 C.F.R. §

1.166-l(c) (1970), to wit:

,

"Only a bona fide debt qualifies for

purposes of Section 166. A bona fide

debt is a debt which arises from a debtor-

creditor relationship based upon a valid

and enforceable obligation to pay a

fixed or determinable sum of money.

A gift or contribution to capital

shall not be considered a debt for

purposes of Section 166."

441 F.2d at 1003.

Prior to the January 20 agreement

there was no debt existing between HORNE

and NEW AMSTERDAM. Moreover, the Janu-

ary 20th agreement did not create a debt

but merely a promise by HORNE to hold

NEW AMSTERDAM harmless from loss.

Until that loss arose there was nothing

to which section 166 could possibly

have had application.

The loss which ultimately came

upon HORNE did not follow from a

bona fide debt. Treas. Reg. § 1.166-1

(c). Neither did a bona debt come

about by the process of subrogation

as set forth in Putnam v. Commissioner,

supra. HORNE's loss was real and sus-

tained by him for a valid business

purpose.

Since there was no bona fide

debt to which HORNE's loss could at-

tach, he maintains that section 166

ale 1 Ape d) BOD AUR Let eb ee

tin bv

By:6 Bs iT WP ed "ds

aac A i ick a RRR A PRL ce 8 aN ot DB BLE ce tn

16

has no application and that his

loss was properly deductible pursuant

to section 165(c)(1) or (2). HORNE

further maintains that Hoffman, supra,

is in conflict with Stahl v. Commis-

sioner,supra, and that this conflict

constitutes an additional reason for

the granting of the writ.

C. The reasoning of Stahl v.

Commissioner likewise creates a conflict

between the Hoffman case, on the one hand,

and Lutz v. Commissioner, supra, on the

other. See also Allen v. Commissioner,

283 F.2d 785 (C.A. 7, 1960). Lutz

presented facts of the taxpayer-

stockholder paying the debts of a corpora-

tion to preserve his credit reputation

and standing. The Fifth Circuit allowed

such payments as deductions under section

162.

HORNE was primarily and dominantly

motivated to enter into the January 20th

agreement in order to protect his finan-

cial integrity and reputation so that

he could remain in real estate develop-

ment. That motivation (see United

States v. Generes, supra) carried over

to the time when the payments were

made by him under the January 29th

agreement. The payments were not made

to satisfy his “neighborly amenities,

ox to heighten his reputation for

generosity and opulence." Lutz v.

Commissioner. They were made by him

for a dominantly motivated business

purpose. Therefore the payments

are also deductible pursuant to

section 162.

The holding of the Ninth Circuit

to the contrary in Hoffman puts it

17

in conflict with the Pifth Circuit

which conflict should be resolved

by this court.

II. The Ninth Circuit's opinion

in United States:v. Hoffman has created

confusion and uncertainty in an important

area of federal income tax law which

should be settled by this court.

The opinion of the court in

United States v. Hoffman was per

curiam and as such the opinion does

not set forth the Ninth Circuit's

reason in detailed analysis with

respect to its approach to an

important issue of federal income

tax law of first instance. Before

Hoffman the question of an “indem-

nitor" being the same as a “guarantor"

had not been decided.

In HORNE's case, the Ninth Circuit

had an opportunity to speak with

clarity on the issue; however, it is

respectfully submitted that the court's

reasoning is fundamentally wrong as a

matter of law. In the Ninth Circuit's

opinion it was stated that HORNE sought

to distinguish Putnam v. Commissioner,

supra, and United States ¥. Hoffman,

on the grounds that the essence of the

Putnam rule was that the taxpayer as

guarantor acquired upon payment a

claim against th: corporation by

subrogation, which was the ulti-

mate "debt" that became worthless.

It was further pointed out that:

"the loss resulting from [the

worthlessness Of a nonbusiness

debt] . . ..includes not only any

loss sustained by the obligee of

’ : ‘

18

the debt but any loss sustained by a

third party. [The court concluded

that] the section is triggered by

the worthlessness of the principal

debt, and no independent debt between

principal debtor and the third

party, created by subrogation, is

necessary." [sic]

HORNE submits the court's analysis

to be fundamentally wrong. The Ninth

Circuit has referred to section 166

(d) (1) as a source definition of the

character of HORNE's loss. However,

HORNE submits that those provisions

relate to the treatment to be accorded

the loss, not its definition. Section

166(d) (2) defines the nature of the

nonbusiness bad debt to be a debt created

or acquired in connection with a trade

or business of the taxpayer; or a debt

the loss from the worthlessness of which

is incurred in the taxpayer's trade or

business. Treasury Regulation § 1.165-5

refines further, by providing:

bd . « *«

(b) Nonbusiness debt defined--For

purposes of section 166 and this

section, a nonbusiness debt is any

debt other than--

"(1) A debt which is created, or

acquired, in the course of a trade

or business of the taxpayer, deter-

mined without regard to the relation-

Ship of the debt to a trade or

business of the taxpayer at the time

when the debt becomes worthless; or

"(2) A debt the loss from the worth-

lessness of which is incurred in the

taxpayer's trade or business.

19

"The question whether a debt is a

nonbusiness debt is a question of fact

in each particular case. The deter-

mination of whether the loss on a

debt's becoming worthless has been

incurred in a trade or business

of the taxpayer shall, for this

purpose, be made in substantially

the same manner for determining

whether a loss has been incurred

in a trade or business for pur-

poses of section 165(c)(1l1). For

purposes of subparagraph (2) of this

paragraph, the character of the

cebt is to be determined by the rela-

tion which the loss resulting from

the debt's becoming worthless bears

to the trade or business of the tax-

payer. If th at relation is a

proximate one in the conduct of the

trade or business in which the tax-

payer is engaged at the time the debt

becomes worthless, the debt comes

within the exception provided by that

subparagraph. * * * (Emphasis

supplied)

Treas. Reg. § 1.166-5, T.D. 6500,

26 C.F.R. § 1.166-5 (1960)

HORNE maintains that the record is

uncontradicted in its support that prior

to the January 20th agreement COINC, CORP

and CO were in irreversible financial

difficulty and for all practical pur-

poses bankrupt. The "debt" to which

the Ninth Circuit has referred was

at that time worthless. Had HORNE

acquired the debt at that time section

166 would not have applied as it is

well established that section 166 does

not apply where the debt was worthless

when acquired. Eckert v. Burnet,

283 U.S. 140 (1931).

20

The foregoing constitutes additional

reason why HORNE's loss does not fall

within the debt provisigns of section

166. More importantly, however, the

Ninth Circuit has not spoken in Hoffman,

SUPE a, with clarity on the one hand

w e at the same emasculating the losses

of true indemnitors under section 165(c).

That coupled with the additional ques-

tions and conflicts raised by Stahl

v. Commissioner, supra, and Lutz v.

Commissioner, supra, taken together

with the possi ty of conflict

with United States v. Generes, supra,

creates an atmosphere of uncertainty

and confusion in the area of federal

income tax law which should be re-

solved by this court.

CONCLUSION

For the foregoing reasons, it is

respectfully prayed that this court

grant this petition for a writ of

certiorari to the United States Court

of Appeals for the Ninth Circuit herein.

Respectfully submitted,

UAE ts

HUBERT E. KELLY

Attorney for Appellant

Of Counsel:

KELLY & KELLY

662 Security Center

222 North Central Avenue

Phoenix, Arizona 85004

June 23, 1978

21

CERTIFICATION OF SERVICE

I, HUBERT E. KELLY, attorney for

Appellants, hereby certify that I

served by mail four (4) true and cor-

rect copies of the PETITION FOR A WRIT

OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE NINTH CIRCUIT

on counsel for Appellee, Commissioner of

Internal Revenue, on the Fae day

of June, 1978, by placing sa copies

in an envelope addressed to M. Scott

Ferguson, Assistant Attorney General,

Tax Division, United States Department

of Justice, Washington, D.C. 20530;

said envelope was then sealed and

deposited in the United States Post

Office at Phoenix, Arizona, on the

aforesaid aed with the postage thereon

a) Atoka

Hubert E. Kelly

Attorney for LY tang