Howard S. Bugbee v. Commissioner

Brief Fact Summary. Petitioner loaned $19,750 to a friend who he thought would use the money to turn an idea into a successful business venture. The friend did not succeed and Petitioner claimed the loan as a short-term capital loss on his tax return.

Synopsis of Rule of Law. In order to establish a debtor-creditor relationship, a bona fide debt must exist based on a valid and enforceable obligation to pay a fixed and determinable amount of money.

Facts. Howard Bugbee, Petitioner, filed a federal income tax return for the year 1966. He lived in Hawaii and filed the return with the district director of internal revenue in Los Angeles, California. Petitioner was president and owned the majority of the stock in Poop Deck, Inc. The business was for operating a beer parlor. Petitioner met Paul Billings in the beer parlor and they got to know each other. Petitioner started giving Billings money for him to turn some of his ideas into business ventures. There were informal and more formal notes representing the exchange of money totaling $19,750. The notes provided for interest at 6% but no interest was ever paid, and Billings never repaid the principal. Billings was unemployed and used some of the money for personal living expenses. Petitioner reported a bad-debt loss on his 1966 income tax return of $19,750 as a capital loss, and was used to offset long-term capital gain.

Issue. Was Petitioner entitled to claim the loss as a short-term capital loss?

Held. Judge Sterrett issued the opinion for the Tax Court in holding that Petitioner was entitled to claim the loss because a valid debtor-creditor relationship existed.

Discussion. The Tax Court focuses on determining the intent of the parties and notes that facts illustrate that both parties intended the money to be a loan that was to be repaid. Petitioner made the loans because he thought Billings would use them to succeed in business and he expected to be repaid. Further, he at times made demand for repayment. There were no indications that repayment was contingent upon Billings’ success.