UNITED STATES V. GENERES
405 U.S. 93 (1971)
NATURE OF THE CASE: The IRS (D) appealed a decision holding that a transaction was a
business debt within the meaning and reach of 166(a) and (d) of the Internal Revenue Code
of 1954, as amended, 26 U.S.C.S. 166(a), (d).
FACTS: Kelly-Generes Construction Co., Inc., was organized and engaged in the
heavy-construction business, primarily on public works projects. Generes (P) owned 44% of
the stock of a closely held construction corporation, with an original investment of
$38,900, and received an annual salary of $12,000 for serving as president on a part-time
basis working 6-8 hours per week. His total income was about $40,000 a year. P advanced
money to the corporation and signed an indemnity agreement with a bonding company, which
furnished bid and performance bonds for the construction contracts. The corporation
defaulted on contracts in 1962 and the taxpayer advanced over $158,000 to the corporation
and indemnified the bonding company to the extent of more than $162,000. The corporation
went into receivership and P obtained no reimbursement for these sums. P took his loss on
direct loans to the corporation as a nonbusiness bad debt, but claimed the indemnification
loss as a business debt and deducted it against ordinary income and asserted net loss
carrybacks for the portion unused in 1962. Treasury Regulations provide that if, at the time
of worthlessness, the debt has a 'proximate' relationship to the taxpayer's business, the
debt qualifies as a business bad debt. D denied the deductions and P petitioned. P testified
that his sole motive for signing the indemnification agreement was to protect his
$12,000-a-year employment with the corporation. The jury was instructed to determine whether
signing the agreement 'was proximately related to his trade or business of being an
employee' of the corporation. The court refused the Government's request for an instruction
that the applicable standard was that of dominant motivation and charged the jury that
significant motivation satisfies the Regulations' requirement of proximate relationship. P
got the verdict and the Court of Appeals affirmed. The Supreme Court granted certiorari.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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