Owens v. Commissioner

William Owens (plaintiff) owned Owens Financial Group, Inc. (OFG), a commercial lending company, and also made personal loans. Between 1999 and 2013, Owens personally made at least 66 loans totaling over $24 million. Owens conducted his personal lending through OFG, which handled all related correspondence, documentation, servicing, and legal matters. In 2002, Owens began personally lending to David Lohrey, who owned West Coast Linen and Lohrey Investments, LLC, an entity he planned to use for expansion. Lohrey Investments initially borrowed $2.75 million, but as the business expanded, Lohrey required additional funding. Despite missed payments, Owens believed in the company’s success and continued lending. By 2008, Owens had loaned Lohrey Investments approximately $9.5 million. In late 2008, West Coast Linen filed for bankruptcy. Its facilities immediately shut down. Lohrey informed Owens that Lohrey Investments would also file, which it did in January 2009. Owens recovered nothing from any of the bankruptcies. On his 2008 federal tax return, Owens claimed a $9.5 million bad-debt deduction under § 166 of the tax code. The commissioner of the Internal Revenue Service (defendant) disallowed the deduction, asserting that Owens was not engaged in the trade or business of lending, the loans were not bona fide, and the debt did not become worthless in 2008. Owens petitioned the tax court for a redetermination.