Howard S. Bugbee v. Commissioner
34 T.C.M. 291 (Tax Ct. 1975)

  • Bugbee was friends with Billings. They talked about various business ventures, and over the years Bugbee gave Billings loans of almost $20k to investigate business prospects. But Billings was a deadbeat who never followed through on any prospects and never repaid the money.
    • Bugbee had IOUs from Billings claiming that he'd repay with interest, but he never did.
  • When he filed his taxes, Bugbee reported the $20k as a short-term capital loss (under 26 U.S.C. 166), and used it to offset some capital gains he had that year.
  • The IRS denied the claim. Bugbee appealed.
    • The IRS argued that Bugbee hadn't established that the money he gave Billings was a loan, it could have just been a gift. In addition, since the 'loans' were unsecured, Bugbee did not have an expectation that he would be repaid.
      • In order to count as a bad debt short-term capital loss, Bugbee would have to show evidence that he was in a debtor-creditor relationship with Billings.
  • The Tax Court found for Bugbee and allowed him to claim the short-term capital loss.
    • The Tax Court noted that to qualify under 166 there must first be a bona fide debt that arises from a debtor-creditor relationship upon a valid and enforceable obligation to pay a fixed and determinable sum of money.
    • Basically, the Court weighed the evidence and found that although Bugbee was friends with Billings, and Billings was objectively unlikely to ever pay him back, Bugbee subjectively believed that he would be paid back.
      • Therefore, Bugbee satisfied the condition that a debtor-creditor relationship had been established.