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Howard S. Bugbee v. Commissioner

United States Tax Court
34 T.C.M. 291 (1975)


Howard S. Bugbee (plaintiff) operated a beer parlor in California. In 1957, Bugbee met Paul Billings, a customer at the beer parlor. The two became friends and often discussed possible business ventures for Billings to pursue. Bugbee believed that Billings could successfully pursue some of these ventures and began loaning money to Billings. Between September 1958 and December 1960, Bugbee loaned Billings a total of $19,750 represented by 11 different notes. The notes were unconditional and unsecured. They indicated an interest rate of about six percent. However, Billings never paid interest or repaid any part of the principal. During the period when Bugbee loaned Billings money, Billings had little money and was unemployed. Although Bugbee expected Billings to pay him back after one of his business ventures became successful, repayment was not predicated on Billings’ success. At trial, Billings acknowledged that the loan was personal and he had an obligation to repay it regardless of his success. In 1967, Bugbee requested several times that Billings repay the money, but Billings did not. On his tax return for 1966, Bugbee reported a bad debt to Billings and claimed the $19,750 as a short-term capital loss. The Commissioner (defendant) disallowed the bad debt deduction on the grounds that Bugbee had not established that a debtor-creditor relationship existed between Bugbee and Billings.

Rule of Law


Holding and Reasoning (Sterrett, J.)

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