Whipple v. Commissioner
373 U.S. 193 (1963)

  • Whipple owned 80% of the stock in a corporation that made soft drinks, and he was also the CEO. He made a number of loans to the corporation to try to keep in business, but it went bankrupt anyway.
    • Whipple was not going to get his loan repaid...
  • When he filed his taxes, Whipple deducted the loss as a business bad debt under 26 U.S.C. 166. The IRS assessed a deficiency.
    • The IRS argued that the loans were not made as part of the lender's (Whipple's) business, therefore they were a non-business bad debt and could only be deducted as a short-term capital loss.
    • Whipple argued that the loan was a business loan, and therefore was a business bad debt, which could be deducted against ordinary income.
  • The Tax Court found for the IRS. Whipple appealed.
  • The Appellate Court affirmed. Whipple appealed.
  • The US Supreme Court mostly affirmed, but remanded on one issue.
    • The US Supreme Court found that Whipple's deduction was a ­non-business bad debt.
    • Whipple argued that he was a shareholder in a corporation in the trade or business of making soft drinks, therefore the loans he made were connected to his trade or business.
      • But the Court found that a shareholder is not in a trade or business just because the corporation is in that trade or business.
    • Whipple argued that he was the CEO of the corporation, therefore lending money to the corporation increased the probability he would have work as a CEO (See Charles J. Haslam v. Commissioner (33 T.C.M. 482 (1974)).
      • But the Court found that Whipple's interest in the corporation was stronger as a shareholder than as an employee, and the loan was made to protect his stock value, not his salary.
    • Whipple argued that he was in the trade or business of selling stocks in corporations that produce soft drinks (the companies were his inventory).
      • The Court didn't buy that argument either.
    • Finally, Whipple argued that he was also corporation's landlord because he owned the building that they leased. Whipple argued that had made the loan in order to keep them in business so they'd keep paying him rent.
      • The Court remanded on this issue to see if the loss from the debt was proximally related to Whipple's real estate business.