WHIPPLE v. COMMISSIONER

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Argument of Charles Dillingham

Chief Justice Earl Warren: Number 305, A.J. Whipple, et al., Petitioners, versus Archibald -- versus Commissioner of Internal Revenue.i

Solicitor General.

Unknown Speaker: Wrong one.

Chief Justice Earl Warren: Yes.

Mr. Dillingham.

Mr. Charles Dillingham: Mr. Chief Justice, Associate Justices, may it please the Court.

This proceeding originated where an income tax deficiency for the years 1952 and 1953, the issues by the time they reached the Tax Court, had narrowed to three.

First, involving a deduction for a payment made by the petitioner to one DM Dossier which was decided favorably for the taxpayer, the Government has not appealed that.

The second involved some statutory penalties in which partially decided in favor of the petitioner and partially for the Government.

Neither side has appealed that.

The issue before this Court coming by certiorari from the Fifth Circuit has split decision.

Judge Hutcheson dissenting and the sole issue in this case is whether the $56,975.10 bad debt owed by Mission Orange Bottling Company Inc. to petitioner was a business bad debt or a non-business bad debt within Section 23 (k) (1) and 23 (k) (4) of the Internal Revenue Act of 1939.

It was stipulated in the Tax Court by the Commissioner, one, that this was a debt; and two, that it became worthless in 1953, the tax here in question.

The only and the real issue in this case as responded admits in his brief is whether the extensive, varied, regular and continuous activities of the petitioner over a long period of years were business activities or were investment activity.

Some idea of how extensive these activities were or how varied they were can be gathered from a quick glance at the many items on his 1952 income tax on page 20 of the record.

How extensive they were can be determined from how many -- from the substantial sums amounting to over $150,000 in ordinary income which these activities generated in the years 1952 out of which the bad debt in question arose in the form of $62,800 in salaries from six corporations in the form of $27,500 in rent from three separate building, in the form of over $4,000 in interest from 17 different parties and $56,000 from partnership income.

These came from enterprises of which the petitioner was the architect.

He created these himself.

These came from business not investment activity.

1941 to 1953, the petitioner organized some 22 corporations, 10 partnerships and a number of joint ventures.

Some idea of the way the petitioner operated can be seen from the account of high form and promoted the tile distributorship with a man named Lisby on page 88 and 89 of the record.

He also entered into the restaurant business.

He promoted oil deals in West Texas and in Lee -- in Lee County and Washington County.

He went out and suddenly bought some property from Fairway Department Stores when they were under the gun to out of five-day deadline to begin construction for which he was paid a fee and paid ordinary income on.

Justice John M. Harlan: How would you define the business activity that you claim?

Mr. Charles Dillingham: Mr. Justice Harlan, it's very difficult to define a petitioner's business activities and I think that was the -- one of the troubles of the decision of the Tax Court.

They were trying to fit it into a particular category to try to give it a label, a label and I think it's always dangerous instead of analyzing the things to give the label.

Justice John M. Harlan: The trouble that --

Mr. Charles Dillingham: He was, he was --

Justice John M. Harlan: The trouble that is that the statute requires that he'd be given a label or the statute has given it a label.

Mr. Charles Dillingham: Well, I don't -- it says a business --

Justice John M. Harlan: Yes.

Mr. Charles Dillingham: -- petitioner's business.

I would say that if you have to state what his business was and this is not the kind of label that's ordinarily given, it was in -- he was in the business of promoting, organizing, financing, and leasing to corporations, partnerships, and joint vec -- ventures and conduct -- and conducting business activities from which he had -- he intended and had reasonable expectation.

And in fact did generate substantial sums of ordinary income separate and apart from the operations and the income and the corporations themselves.

Justice John M. Harlan: Supposing these have been going enterprises that he had nothing to do with, I mean independently himself and he'd made some loans from time to time, do one or more going corporations and --

Mr. Charles Dillingham: Well, I think --

Justice John M. Harlan: -- without a small stock interest --

Mr. Charles Dillingham: -- that he did that --

Justice John M. Harlan: -- would that -- would those be deductible?

Mr. Charles Dillingham: Alright, I would think if he made -- if he organized the corporation --

Justice John M. Harlan: No, I said if he had not organized them.

Mr. Charles Dillingham: I think if he made loans to them, if he managed them, if he rented to them, if he collected interest from them, then that could be a business managing the corporation --

Justice John M. Harlan: But you turned my question around, I am saying, supposing he had none of those relationships with the corporation but simply he'd made a loan.

Mr. Charles Dillingham: Well, if he had simply made a loan to the corporations, he might have made a number of loans as he might qualify for being in the lending business.

We're not resting our case on that.

Justice John M. Harlan: Well my -- my only point is that you cannot escape the necessity of showing that these were business bad debts, that means showing that they were incurred in connection with some kind of business which it kept taxpayers engaged, would you agree with that much?

Mr. Charles Dillingham: I would agree with some kind of business but I think that the answer to business consists of two things.

One is continued regular activities, the other is the creation of ordinary income.

Both of these he did for over a long period of years.

Justice John M. Harlan: You've got findings of facts against you, is it not?

Mr. Charles Dillingham: Your Honor, I don't believe that the findings of fact are against us.

I believe that the Tax Court held that which --- that he was not in a -- in a business because the business of organizing and promoting and lending to corporations.

And ignored the fact that he'd been leasing to them because he didn't form the corporations for sale and that is the crux of this case.

That is a rule which I believe is so narrow rule that it -- it has simplicity, but the -- the only trouble with it doesn't apply to anybody as the respondent pretty well admits in his brief.

And it's against the weight of authority and certainly not within the intent of Congress.

He formed these corporations in many -- with many different people that made different purposes in many different localities, and not only did he invest his money and induce others to invest his money in a stock in these corporations, but over a period of 10 years, he carried on a regular activity of advancing temporary financing to these various corporations and partnerships with the idea that they would pay it for their special demands that they have at the particular time, they argued they would pay it back and it would be reloaned to others.

Justice Byron R. White: (Inaudible)

Mr. Charles Dillingham: He is -- he is engaged since --

Justice Byron R. White: (Inaudible)

Mr. Charles Dillingham: He claimed to make a profit and his purposes was -- is shown by the fact that that's what he did.

He created a series of enterprises that paid him a salary that he created tenants that paid him rent.

He -- in the course of these loans, he collected interests, and those are all items of income which are separate and apart from the income of the corporations themselves.

Justice Byron R. White: How about dividends?

Mr. Charles Dillingham: Dividends come from ownership and investment in the corporation.

His dividends are negligible, Mr. Justice White.

They were about $3,400 compared to a hundred and fifty -- strictly on the corporation of $94,000.

Justice Byron R. White: How about the sale of the stocks?

Mr. Charles Dillingham: The sale of the stock, that is -- I think in one of the things that, that worried the Tax Court was that sale of the -- of the stock -- you're talking about the sale of stock in 1951?

Justice Byron R. White: Well, I'm talking about the dividends -- of these dividends (Inaudible)

Mr. Charles Dillingham: No, sir.

He never claimed to be in the business of forming a corporation to sale, if he -- we've had, we wouldn't have been here.

The Tax Court would have given him relief.

Justice Byron R. White: You don't claim that?

Mr. Charles Dillingham: No, he never did.

At the end of the trial, the Tax Court after we had rested our case, the Tax Court gave him an opportunity to introduce testimony or evidence that he might overlooked as to -- as to having form the corporations for sale.

Justice Byron R. White: (Inaudible)

Mr. Charles Dillingham: Well, yes.

He would have had ordinary income, had he done that but he's been pers -- perfectly consistent throughout in saying that he did not -- a lot would have qualified in his case, he didn't intend it, but he formed these corporations to make -- to carry -- to furnish him of the livelihood to the say -- to furnish him of the salaries and rent and income, he lived on this.

He was not a -- this is not the type of person, he's not a promoter.

This is a small businessman who is creating different enterprises.

And I am -- and take -- going into different ones with different people, so that there will be more of these entities to pay him salaries.

More entities to pay him rent.

More entities to pay him interest.

This is the way he made his living.

This is --

Justice Arthur J. Goldberg: Mr. Dillingham, (Inaudible)

Mr. Charles Dillingham: No, Mr. Justice Goldberg, I wouldn't.

I would say that he was, he was in one sense a promoter but as the -- as the Tax Court restricted the term “promoter” to the type of person who forms not a corporation for sale.

He should try to unload it on somebody to profit or maybe hold it for a while in a crèche.

Justice Arthur J. Goldberg: But I know --

Mr. Charles Dillingham: Now --

Justice Arthur J. Goldberg: -- this term exists --

Mr. Charles Dillingham: Yes.

Justice Arthur J. Goldberg: That he would --

Mr. Charles Dillingham: No.

Justice Arthur J. Goldberg: -- do business for himself in varied forms of enterprise, is that correct?

Mr. Charles Dillingham: Well, I --

Justice Arthur J. Goldberg: (Inaudible)

Mr. Charles Dillingham: -- perhaps object to the term capitalist because --

Justice Arthur J. Goldberg: It said gone out of stock --

Mr. Charles Dillingham: Yes.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Charles Dillingham: Well he was, he was well except -- he was more -- he -- there was -- it was true as one of the witnesses had testified.

He was this sort of person because of his abilities in raising money and then putting things together.

He was a sort a person that people brought enterprises to but he didn't wait for him to bring them to him.

He went out and created these enterprises.

He found different people.

As you see all through the record a number of different people that he would organize this one with and that one of different enterprise.

And his business was the overall management coordination of these activities and through -- these enterprises paid him salaries for doing that and paid him these other num -- these other elements of ordinary income and I want to point out right --

Justice Byron R. White: Mr. Dillingham, is it -- would your argument be exactly the same if he was in only one company and it was a large company and he'd spent all of his time managing that company, and he got salary, and he got interest, he loaned that money and he spend all this time at it, he was an officer of it?

Mr. Charles Dillingham: Mr. Justice White, I would say that my argument might be the same if I were up here before this Court, but I think that the situation is entirely different and it's best to -- to post hypothetical, I would say that hypothe --

Justice Byron R. White: Yes, but in time, the opinion of the things you're talking would be just as meaningful in the case --

Justice Arthur J. Goldberg: No.

Justice Byron R. White: -- of that company?

Mr. Charles Dillingham: No, I don't believe so because --

Justice Byron R. White: What does it -- what does it --

Mr. Charles Dillingham: Because if you form one corporation, you -- and with a certain set of stockholders, that is a relatively simple operation.

But this man's business was, is creating with a set of different stockholders who -- and corporations with different purposes in different localities who -- you don't find some of these stockholders, Mr. Finley in his bottling plant was not interested in building houses or the lumber business, and you don't have some of these others not interested in oil deal, and certainly Mr. Head wasn't interested in investing in a corporation --

Justice Byron R. White: So the fact that he was loaning money to the company or giving it managerial advice, it isn't what distinguishes his business?

Mr. Charles Dillingham: It -- it --

Justice Byron R. White: The fact that he is doing it to a lot of them.

Mr. Charles Dillingham: I think that that -- you asked me whether the same as an refer -- as an ordinary corporation, I would say that the person who is loaning this to a number of corporations and keeps creating them has his managerial functions are much more complicated, and are much more expensive and more -- much more regulated.

If you organize a corporation once, that part of it certainly is over.

This --

Justice Byron R. White: Does these translates -- the complexity translates the nonbusiness to a business person?

Mr. Charles Dillingham: The com -- the -- I said earlier that businesses consist of two -- to me two and I think the courts have recognized two elements.

One is as distinguished from an investment that you enter into for profit.

You must have to have continuous regular activity.

Now, that -- this complexity of this -- of his enterprise and the fact that he organized a number of them and financed them, and had to watch the financing of this and to seizure its credit was -- the money was in that.

And its credit was right and yet it didn't rely idle gave him a full time, kept him busy as a full time business.

The second is that you must create ordinary income through these various activities and this was his purpose was creation of ordinary income.

And this income is separate and apart from the corporations themselves.

Salaries, rent, interest are for services and facilities furnished to the corporations.

They are deductible from the corporation's income and as distinguished from dividends where -- which is the part of an investment income which comes to a taxpayer for his ownership in the corporation.

And the dividend is merely a distribution of the corporation's profits for which today the tax laws give recognition to some credit because they say it's a double taxation.

So I would -- I would say that these activities definitely were pecuniary regular cost to those of other businesses distinguished from just going in from profit and they generate ordinary income separate and apart.

Now, the rule the Tax Court however, unfortunately, in spite of these activities rule that you cannot be in the business of promoting, organizing, managing, and financing corporations.

And I say gave no consideration at all to the extent of leasing operations with the taxpayer unless you form the corporations in our course of language for sale as going businesses to customers in the course of the business of promoting them.

Now, certainly if you did that, that would be one method of creating inco -- ordinary income but it isn't the only method.

And such a rule is to say the respondent points out to find people who have corporations and inventory ready for sale is a considerably more imaginary than real.

Furthermore, the extension of the rule that the -- the respondent makes and says that the term dealer and enterprises is used by the Fifth Circuit, the majority in the Fifth Circuit would include the promoter who forms the corporation for a fee is equally unrealistic.

The promoter who forms the corporation for a fee and then goes on and forms another corporation is certainly not going to be financing the corporations.

And therefore, no question ever arises under 23 (k), there is no debt and because the very definition of a promoter as used by Professor Valentine in the quotation in his brief is one whose primary purpose is to got out and seek other people who will finance the corporations.

And so not only -- so the rule of the lower courts, we submit, is not only without reason.

It is a radical departure from as we point at in the first and second points of our original brief from the established authorities and contrary to the intent of Congress.

It is contrary to the long established decisions of the Tax Court, acquiesced in by the Commissioner before the 1954 Revenue Act.

The Revenue Act of 1954 was passed without substantial change at all as acknowledged by the respondent.

That substantial change in the wording of Section 23 (k), given a new number, that's all.

It -- the -- and it was contrary to the -- this is contrary as the respondent admits to the decisions in the First, Third, Sixth and Eighth Circuits and the Court of Claims the -- we submit that the only Circuit that supports his position is the Ninth as in the Holtz case.

The respondent has cited in his brief three cases in the Second Circuit, but I guess overlooked citing that these three cases in the Second Circuit has subsequently been substantially limited and modified in such -- by evident that they have been severely restricted and their application limited by the letter -- later cases in the same Circuit, Second Circuit, Folker versus Johnson and Trent versus Commissioner.

Justice Byron R. White: (Inaudible)

Mr. Charles Dillingham: The second -- I would say the question is open in the Second Circuit.

Although, when you read the Trent decision which gives a clear and detailed analysis of the trade or business cases, you -- certainly have a decision and holdings in limiting these others that are favorable to our position.

Actually, the taxpayer was allowed business bad debt in that case, he had made loans.

He was an employee.

He'd made loans to protect his job.

I see no reason why a person who makes loans to protect his job but a person who would make loans to protect his job is allowed to business bad debt deduction while a person who makes loans that create -- his job shouldn't be.

Justice Byron R. White: (Inaudible)

Mr. Charles Dillingham: No.I'm not claiming that I would --

Justice Byron R. White: (Inaudible)

Mr. Charles Dillingham: I don't feel that the Second Circuit has had to pass on the real organization management and of financing corporation cases.

Now, this theory of organizing, managing, and financing corporations of business is not my idea, this was decided by the Tax Court in bad --

Justice Byron R. White: (Inaudible)

Mr. Charles Dillingham: Yes.

Justice Byron R. White: (Inaudible)

Mr. Charles Dillingham: Yes.

Justice Byron R. White: (Inaudible)

Mr. Charles Dillingham: Well, I'm not sure they wouldn't, Mr. Justice White.

All I said was at least one of his activities that of organizing corporations would only be a single transaction.

I'm saying -- I think that your -- that the idea of going out and promoting and organizing is one business activity of the petitioner, where he has a number of corporations that wouldn't exist in that case and so our case is strong.

I don't believe that one or single -- I think that --

Justice Byron R. White: (Inaudible)

Mr. Charles Dillingham: If that was -- I think that that was proximately related to his business if his business is organizing and financing and leasing to corporations.

Justice Arthur J. Goldberg: (Inaudible)

Justice Byron R. White: That this bottling corporation was just like -- it was formed in the same way as all of the others.

Now, the fact that it unfortunately wasn't that they were successful because that's the history of bad debt cases, and I don't think that your business disappears because -- a retail merchant's business doesn't disappear because one of his customers doesn't pay him or even that he picked the wrong line of hats that won't sell.

This bottling corporation is made for the same purposes and in the same line of activities as all these other corporations are formed.

He went into all sorts of enterprise.

Justice Arthur J. Goldberg: (Inaudible)

Justice Byron R. White: Well, if somebody doesn't pay you a debt that that becomes a loss because their customer's business goes bad.

You'd always have the risk of -- when you make a loan, you always have the risk of the debtor not succeeding.

And he -- this was -- as far as the record shows and as far as on my personal knowledge is, this was the only, only instance and this is with which he suffered the loss.

I don't think that it's reasonable to have a man who's paid ordinary income all -- over all these years and have a successful business and the first time he suffers the lost to say well, that's different.

That should now be a capital investment or something.

That's what the -- this was just like the others as far as his purposes and the way he operate in connection with it.

Actually, this, in this corporation, he furnished one thing.

He didn't some of the others.

And that was -- he actually furnished some of them personally held and allowed them operate under a franchise, was still in his personal name and that he was personally responsible for.

If there are no more questions, thank you.

Chief Justice Earl Warren: Mr. Solicitor General.

Argument of Cox

Mr. Cox: Mr. Chief Justice, may it please the Court.

I would like to recall your attention in the beginning to the precise words of the statute Section 23 (k) of the Revenue Act of 1939 which was inserted in 1942.

That provides that a loss on a bad debt would be fully deductible from ordinary income if and only if it is a debt -- the loss from which is incurred in the taxpayer's trade or business.

To provide -- to obtain the full deduction therefore, the taxpayer must show not only first, that he was engaged at some point in a trade or business, but also second, that the loss was incurred in that trade or business.

Now, the first requirement of a trade or business plainly cannot be satisfied merely by showing that the taxpayer entered into the transaction with the hope of reaping a profit.

Now, the tax laws have consistently distinguished between trade or business, a comparatively narrowed term and transactions entered into for profit or income producing transaction.

A looser term which may or may not include a narrower one but which in any event is frequently used in our position.

It's also settled that investing ones money and receiving a return in the form of income or capital gain is not a trade or business, no matter how much time, effort or attention it consumed.

The second requirement that the loss be incurred in the trade or business is the rock upon which much of my brother's argument is founded.

Mr. Dillingham seeks to bundle up together all these taxpayer's miscellaneous activities including the debt of the resulting loss and then to ask whether or not the petitioner is engaged in a trade or business, but this is only half of necessary inquiry.

Section 23 (k) doesn't say that anyone engaged in a trade or business may deduct any bad debt.

It says that the loss must be incurred in the trade or business, and obviously the same man may be both engaged in a trade or business as to part of his activity.

And he may be investor as another part or as by may using for an example Mr. Dillingham might do if he were to invest money in the Alaska Wildcat Mining Corporation.

That would not be a loss if it were unfortunate that was incurred in but for tax purposes is the trade or business of practicing law.

Justice Arthur J. Goldberg: If one was investment banker to a particular business (Inaudible)

Mr. Cox: I would think that money lending, if I may large enough scale and repetitive enough and to enough people involve really dealing in money and became a trade or business.

But the courts, the courts below had found against the taxpayer on that point.

If I remember correctly in his reply brief, he disclaims being in business as a money lender.

Justice Arthur J. Goldberg: Now, what about the whole issue of capital?

Mr. Cox: Well, I was thinking, Mr. Justice, that one of my difficulties in answering was that I don't know what went on behind that door and probably you do.

But to put it a little --

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: To put it little differently, the term capitalist may describe activities some of which constitute engagement in a trade or business or it may not.

And I think this is indeed the part to which I was leading up was I think that really here there is no alternative to analyzing the petitioner's activity with those two critical questions in mind.

Was some relevant part of them trade or business?

If the answer is yes, then was the loss incurred in or as part of the activities that constitute trade or business?

Not as part of his total and wider activity.

So with that in mind I propose first to look at the taxpayer's relations with Mission Orange, his activities there would have view to showing that none of them constituted a trade or business.

And second that if any part of them did constitute a trade or business, the loss was not incurred in that part.

After that, I would like to turn to his other activities and go on to show that they do not affect the case and in dealing with that part of the case, I shall emphasize that whether or not some of them were trade or business such as his partnerships which probably were, the loss was not incurred in connection there with.

Now, as to the fact, the petitioner first became interested in Mission Orange early in 1951.

For about three months, he operated the enterprise as a sole proprietor under that state of course of bottling and distributing soft drinks was his trade or business.

Then in July 1951, in order to avoid the personal liability that would be attendant upon carrying on that trade or business of distributing goods to the public, he transferred -- he formed the Mission Orange Corporation and transferred the assets to the corporation.

And the bottling and distributing of soft drink then became the corporation's trade or business.

And his activities in connection with bottling and distributing soft drinks, producing soft drinks became activities in the corporation's business and the promotion thereof.

Justice Potter Stewart: Did he get a salary from this corporation?

Mr. Cox: He got no salary from this corporation.

He made no claim until his reply brief in this Court that he had any arrangement calling for payment or that he intended to get a payment or that he was hoping in the future to get a payment that has been interjected for the first time in the reply brief and I shall deal with it little later on.

Originally, he put $25,000 into the company by transferring the assets to it on credit and he had also put in something over $8,000 in the form of stock.

Then his stock holdings were increased to something between $30,000 and $31,000 and he begged during 1952 and 1953 cash advances totaling about $55,000.

So that by December 1, 1953, he had in advance just less than $80,000 to the corporation, quite apart from his stock investment.

In December 1953, when the company was apparently already hopelessly insolvent, he put up another $55,000, I think it was, to pay off trade creditors and the assets were all transferred to him.

And without stopping to discuss the detail, you'll note that both courts below indicated that this was a separate special transaction which might not qualify regardless of the main one.

During the period, he was the dominant shareholder and president of the corporation.

He made important policy decisions, prescribed to business practices and during part of the time he performed the functions of plant manager.

He received no salary, as I said earlier, in response to Mr. Justice Stewart's question.

Now, this branch of case -- and it is necessary to make some division here, raises the question which we take it that certiorari was granted to resolve, whether a man who organizes one or more corporations, puts money into them as a shareholder and as a large lender manages their business but does all this with the expectation of profiting as a lender and shareholder may nevertheless, when one of the corporations failed, deduct his losses on the debts on the ground that he was engaged in a trade or business and that the loss was incurred in that trade or business.

The petitioner, as you have heard, would answer both questions yes on the ground that there's some difference between an active and a passive investor.

And he is sustained in that by decisions in the First, Eighth Circuits and in the Court of Claims.

We answered no to either or both questions depending on the assumptions, and I think we are squarely sustained by the decisions in the Second, Fifth, and Ninth Circuit.

I would like to emphasize two just before we recess.

That we think it is quite wrong to speak as if the current of authorities was continuous up until the Revenue Act of 1954.

Commissioner against Smith, a Second Circuit decision which sustained this and which we think is not in any way been overruled or qualified was decided in 1953.

And two cases in this Court, Dalton and Bowers, and Burnett and Clark go all the way back to 1932.

And we think they sustained us in principle.

I'll address myself to that general question first tomorrow morning, Mr. Chief Justice.

Chief Justice Earl Warren: We'll recess now.

Print this transcript Transcript: 

Argument of Cox

Chief Justice Earl Warren: Whipple et al., Petitioners, versus Commissioner of Internal Revenue.

Mr. Solicitor General.

Mr. Cox: Mr. Chief Justice, may it please the Court.

Yesterday, I pointed out that in order to qualify for a business bad debt deduction under Section 23 (k), it was necessary for the taxpayer to show not only that some part of his activities constituted trade or business, but also second and equally important that the loss on the debt was incurred in the trader business, that is to say in that part of his activities which constituted trade or business.

We had then gone over at these taxpayers' relationship to Mission Orange Corporation with a view of applying those tests to it.

His activities had been described and I think it can be fairly summarized to say that he organized the corporation, that he put up the financing some $80,000, partly less than half but partly in the form of stock so that he became the 80% dominating stockholder, and the rest in the form of loans.

And then he continued to give an indeterminate amount of time to the affairs of the Mission Orange Corporation managing and carrying on its business.

And the question as this case originally came before the Court was whether those activities including the debt could be bundled together so as to say that there was a trade or business and that the loss was incurred in the trade or business.

In other words, the taxpayer was pressing that he was not a passive investor, who we conceded would not be entitled to the business bad debt deduction, but was arguing that he was an active investor, and that this activity entitled him to the full business bad debt deduction.

It seems to us that there are several thoughts in that argument.

The first is that it overlooks the distinction so penetrating in our law between a corporation and its shareholders.

After all, the property of the corporation is not the property of the stockholders, and the business of the corporation is not the business of the stockholders, even in the case of a one-man corporation.

Justice John M. Harlan: Where was the other 20% of the stock?

Mr. Cox: It was -- some family and some apparently employees, and about the rest, the finding showed nothing.

It was scattered over six or seven people.

When the petitioner transferred the bottling and distributing business which had been his business before he formed the corporation, then he went out of the business and his activities that they're on in behalf of the business became activities in the corporation's business and in support of his investment.

The second difficulty it seems to us with petitioner's effort to distinguish between active and passive investors is that uncompensated personal activities aimed at building up a corporation's business so as to increase one's dividends or increase the value of one stockholdings or make ones debts more secure, is not an independent trade or business.

Those activities, we think, are no different in principle from the activities that the taxpayer was engaged in the Higgins case, activities that were time consuming, but were directed and intending to and increasing the value of investments rather than a trade or business.

For carrying on a trade or business as Justice Frankfurter said in Deputy against du Pont, involves holding oneself out to others as engaged in selling goods or services without some sale or exchange or without some quid pro quo or consideration.

No amount of promoting, advising, performing, or managing corporation can constitute a trade or business.

And this doesn't mean that advising or managing a company or promoting companies can never be a trade or business or where one receives a fee either in dollars or in some other form in the form of an allocation of stuff or in the form of property perchance, then of course, the element of sale or exchange is present and we would concede that the trade or business element of the case was made out.

But in this case, there was no quid pro quo.

There was no element of exchange.

He received no salary, there's not slightest evidence and certainly no finding that he ever intended to receive a salary.

All it was done was activities intended to increase his profit through dividends and through appreciation of the value of the shares and increasing the chance that he would get the repayment of his debt.

But all of those, as I say, were directed at the investments.

Justice Byron R. White: Was it irrelevant that he got salaries from other corporations which were part of what he said was his business?

Mr. Cox: As I said, yes, they -- I think that is irrelevant because you can't bundle it all together and these --

Justice Byron R. White: Well, part of his claim, I suppose, is that he -- he did a trade or business because it is in other corporations.

Mr. Cox: It would seem to me that he -- that, I would agree that he is in trade or business in the corporations for which he works and receives salary.

But at that point, he fails on the other requirement to where he can't show that this loan was in anyway related to those other trade or business activities.

Justice Byron R. White: So it really -- the salary point the -- is not determinant in anyway.

Mr. Cox: I think that the salary point with respect to the other business is certainly not determinative, and I would say that the salary point even with respect to Mission Orange --

Justice Byron R. White: If he had his salary for Mission Orange, you would still be making the same argument, wouldn't you?

Mr. Cox: I would subject to this qualification.

It would be substantially the same.

And this was the next objection to this area that I would like to express --

Justice Byron R. White: But then, there wouldn't be a quid pro quo or would there?

Mr. Cox: I think the element of trade or business would be made out, to with that he and then to the extent that he was rendering services to that corporation would be in a trade or business.

If he had to pay a secretary for example in order to be an officer of the corporation, then he could deduct this incident to his trade or business to that expense.

But that would remand request where these large loans in anyway related to his trade or business of rendering services to the corporation, and I would be arguing, if I might just say a word or two more in answering the question, I would be arguing and do argue here that there is no relationship between the loans and any services that he rendered to Mission Orange.

Indeed, there are several reasons for asserting that very confidently.

The first place, he never made this claim before the Tax Court or before the Court of Appeals or in this Court until he had read our brief and shifted his ground in an effort, we flatter our things to ourselves in thinking to avoid enforcing it.

In the second place, the loans were so great in size compared to any return that he could have gotten from these part time personal services that it seems foolish to think that he was making the loans to the company so that he could protect his job.

Now the reason I said a minute ago, Justice White that I would recognize one qualification, there are cases, the leading cases Commissioner against Trent in the Second Circuit, where a man in order to continue to hold his job was forced to lend money to the corporation, and indeed when he stopped lending any more money, he was fired.

So there was very good evidence that he have to put up some money to hold the job.

In that sort of case, we would agree, certainly we don't argue the contrary here that the necessary relationship existed.

But here there wasn't that kind of relationship and it was never suggested there was, and that there was a flat finding against the taxpayer on that point.

On page 32 in the opinion of the Tax Court, it is said, “We cannot find that the purpose of these loans was other than to protect that investment such lending activity does not constitute a trade or business.

Justice Byron R. White: Well it's -- I suppose it's possible to conceive a trade or business in which you do organize and help managed corporations with the idea of the -- your stock increasing in value when selling the stocks.

Mr. Cox: I -- I would have --

Justice Byron R. White: In which event you would be a --

Mr. Cox: Yes.

Justice Byron R. White: -- part of the business might be --

Mr. Cox: Yes.

Justice Byron R. White: -- making loans, part of the business might be working for a salary.

Mr. Cox: Well, I would -- I think I would suggest they were separate parts.

Let me -- let me just say a word or two to supply a transition and then come to your question.

Let us now look in terms of the actual facts here as to the question whether the number of corporations which the taxpayer was interested in makes any difference assuming that I'm right looking at Mission Orange loans.

But I would say if it's two or three or four or five, and that he has formed some and holds the stock with no immediate notion of selling it, that then it is simply an investment.

The same principle applies as you suggested yesterday whether there's one or two or three or four or five.

And of course, this is just what the Second Circuit said in the Smith case.

Now, I would agree that if there are enough corporations, then in legal theory, there are some other arguments that a taxpayer might make.

One might buy and sell corporations as he did choose coal mines or something like that.

Justice Byron R. White: (Inaudible)

Mr. Cox: Perhaps so, but one can conceive of a corporation being a stock in trade.

Unknown Speaker: (Inaudible)

Mr. Cox: Of a number of them.

Justice Byron R. White: (Inaudible)

Mr. Cox: I think it would to qualify.

But again, the findings are clear here by both courts below that this taxpayer did not in -- deal in corporation and that he falls short on that ground.

Indeed, there's no evidence that he had any notion ever of disposing of the Mission Orange stock.

He wasn't a dealer in the corporation.

Justice Potter Stewart: If he had been, then the profit on the sale --

Mr. Cox: It would be --

Justice Potter Stewart: -- of these corporations would be ordinary income and not capital gain.

Mr. Cox: And of course I think that is the common sense behind what we're arguing about, that although I can't -- as Your Honor will immediately realize, press this to a logical conclusion because there are too many exception.

Still I think the central core of the business bad debt deduction is that you -- when the debts came in, they would come in to gross receipts in the ordinary income and therefore, what doesn't come in, it's fair to set it off against it.

But now, I can't press this too far, but I think this is the central core of the thing and that therefore any claim that doesn't satisfy that, it has to be looked at with greater care and it might otherwise be the case.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: Yes.

Yes.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: He will want to take it as --

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: That's correct.

That's correct.

The other possibility other than buying and selling corporations, just to touch all the bases, is that he's a manufacturer and seller of corporations.

So one can conceive that by stretching his imagination a good deal of that kind of activity, but of course, again the finding is against him that he wasn't the dealer in corporations.

Justice John M. Harlan: So, the situation that he was -- that this is a partnership instead of a corporation?

Mr. Cox: Then, wouldn't the income from the Mission Orange business be taxable to the petitioner as ordinary income.

In other words, the partnership like a sole entrepreneur, he would be engaged in the trade or business.

But here he runs into the objection that the corporation's business is not his business.

And I may say in that connection that the leading case of course, distinguishing between the corporation's business and the taxpayer's business is Burnet and Clark which we think on its fact is an all force with this case.

In Burnet and Clark the taxpayer was the majority shareholder in a dredging company.

He spent his time working for the dredging company.

He did have some incidental enterprises which were in a related field.

In order to keep the dredging company alive, he endorsed a number of its notes and under Putnam we can think of those just as if they were debts.

Later the corporation failed and he did not recover, could not recover the full amount of the debt.

He sought to deduct it on the ground that this was a loss -- a loss incurred or resulting from the operation of a trade or business.

The Second Circuit said it was.

It said, “You can't breakdown this activity.”

This Court reversed and held that the monetary losses from the endorsements, the debt losses were not part of the trade or business.

Now, the Court didn't consider all the arguments that are presented here by Mr. Dillingham but the holding is perfectly clear.

The only factual difference it seems to me today that Clark did not form the company.

But a companion case, Dalton against Bowers, was the one involving six corporations.

And there the taxpayer had formed them, but the Court indicated that that made no difference whatsoever.

There are a number of other miscellaneous arguments that are made.

I want to deal with just two of them and each in a sentence.

The taxpayer argues while I was in the bottling and distributing business, I had this other root beer company and I had a franchise to sell dispensing machines, and I want to take the whole thing together and say I was in the bottling business.

Well of course, there he runs into the problem that I was just addressing myself to, that the company so far as the Mission Orange part was concerned with what was in the business, and he cannot claim that he was.

Another argument that I should mention very gratefully and I'm sorry this has to be --

Justice Potter Stewart: So he was -- he was an officer of the company, wasn't he?

Mr. Cox: Oh yes.

Justice Potter Stewart: President?

Mr. Cox: Yes.

Justice Potter Stewart: I supposed the president of General Motors could say, “I'm in the business of manufacturing automobiles.”

Mr. Cox: Well, he could say it, it's for --

Justice Potter Stewart: Even though he technically wasn't, he was an employee of a corporation --

Mr. Cox: Yes.

Justice Potter Stewart: -- which was --

Mr. Cox: He could say it in an ordinary conversation but he wouldn't be in the business of manufacturing and selling automobiles for the purposes of the tax law because that's General Motor's business.

I mean, business is often used and this Court in other context has used it in a broader sense, I couldn't deny that.But the case, you say, that the Flint, Stone and Tracy used a new business and I mean, these clarifications are not applicable here.

Justice Byron R. White: (Inaudible)

Mr. Cox: No.

Justice Potter Stewart: We haven't had that case yet.

Mr. Cox: There is one other aspect of the case that I should mention.

The argument is made, it was made orally and it is made from the reply brief, while I was in the business of leasing real estates, and these loans were made to protect my interest in the rents from the real estate that I lease to Mission Orange.

Well, I would agree again that as a matter of legal theory one can conceive a case in which a loan might be made to protect one's interest in rentals.

I supposed the easiest example would be -- we owned a lot and department store and then leased it to the company that was operating the department store and it needed cash to get over a difficult time.

If it was a profitable lease, you might put up the money in order to protect your interest in the lease.But here, the facts just don't bear this out.

In the first place, the argument was never made in the Tax Court.

In the second place, most of the loans were made before the building -- that was the -- the building was leased to Mission Orange and the testimony was that the building was built and the land was used for the purpose in order to try and save Mission Orange, in other words, to try to save the investment rather the other -- than the other way around, and then finally we come to the point that I emphasized before that there is a critical finding of fact on this point against the petitioner to with that the loan was made only for the purpose of protecting the investment and that finding is certainly supported by a substantial evidence.

And we think it's conclusive on all of these minor aspects of the case.

Justice Arthur J. Goldberg: General, may I ask you this, (Inaudible) your argument, that you can conceive this situation, you can conceive that -- you'll put in mind the factual question, isn't it, the (Inaudible) appeared to have filed in the Tax Court or the Court of Appeals (Inaudible) --

Mr. Cox: Yes.

I would put -- I was thinking about that overnight.

I would put the point this way Justice Goldberg.

The question whether a loss is incurred in a trade or business is very much a question of fact.

The only question raised here which is not on the fact is whether as a matter of law being what Mr. Dillingham calls an active investing that it say being active in the affairs of the company to which you loan the money is as a matter of law enough to get the deduction.

We say that it is not.

He has some earlier cases, let's say that it is, we say that those things can't be bundled up together as a matter of law that if the -- factually the thrust is to gain through investment, then the Higgins case is controlling.

Then we say once you accept Higgins and apply it to the person who is active in promoting his investment, all the remaining questions are questions of fact and that here we have the concurrent findings of two bodies below in our favor on all those questions of fact.

Chief Justice Earl Warren: Mr. Dillingham.

Argument of Charles Dillingham

Mr. Charles Dillingham: Mr. Chief Justice, Associate Justices, may it please the Court.

I only have two minutes so I'll make two statements.

As shown in the brief, a question of whether a person is in a business is a mixed question of law.

In fact, Solicitor General is taking a long time and the Court's time discussing the facts.

I suggest that the reason is the Court has justified in considering this case on certiorari is not to determine the facts in this case but to whether Congress intended to lay down a rule that which the lower courts say it did by requiring that the only way you can get bad debt treatment is by having corporations for sale, whether they intended a rule like that to which would threw these enterprising, energetic, small businessmen like Mr. Whipple in the same category as somebody who inherited a bond and kind of go bad in a safe deposit box.

Now, this taxpayer showed clearly in the organization and management, and the renting to and the financing of his corporations that he generated three other sources of ordinary income separate and apart from that of the corporation.

He's not claiming he's in them -- that he is in the corporation's business organizing and managing and financing corporations is not the same as bottling drinks.

He's never claimed that.

And he -- but he did -- he did carry on the same activities in connection with Mission Orange as he did with all of these other corporations from which he got this $94,000.

He induced some seven other people to invest in it and I don't know of any relativity if it was included in it and he -- he was the -- he was the active manager of it.

Mr. Barnhart testified, it's the evidence on page 116 and 118 will show.

He --

Justice Arthur J. Goldberg: (Inaudible)

Mr. Charles Dillingham: That's right, Mr. Justice Goldberg, and he has never claimed that he was in the business of organizing corporations for sale.

He was, as I pointed out yesterday, he was offered the opportunity by the Tax Court to present evidence that he had -- he formed corporations for sale which under the Tax Court rule would have given him the deduction claim.

He's been completely consistent.

He organized these corporations not as a promoter.

He organized these corporations to operate them and to furnish him with a salary and rent and dividend income.

And he entered into a lease with this corporation providing for $500,000 -- $500 a month for ten years.

And as the controlling stockholder in this, had this corporation succeeded, you can be sure he would have seen to it that he would have been paid a salary and interest as he -- as well as this rent, as well as he will -- it was in all of the other corporations.