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JURY VERDICT ALLOWING BAD DEBT DEDUCTION IS OVERTURNED.

JAN. 10, 2000

O'Neal's Feeder Supply Inc. v. U.S.

DATED JAN. 10, 2000
DOCUMENT ATTRIBUTES
  • Case Name
    O'NEAL'S FEEDER SUPPLY, INC. v. UNITED STATES OF AMERICA.
  • Court
    United States District Court for the Western District of Louisiana
  • Docket
    No. 2:96 CV 0514
  • Judge
    Wilson, Alonzo P.
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    bad debt deduction
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2000-3495 (17 original pages)
  • Tax Analysts Electronic Citation
    2000 TNT 27-5

O'Neal's Feeder Supply Inc. v. U.S.

                    UNITED STATES DISTRICT COURT

 

                    WESTERN DISTRICT OF LOUISIANA

 

                        LAKE CHARLES DIVISION

 

 

                            JUDGE TRIMBLE

 

 

                       MAGISTRATE JUDGE WILSON

 

 

                          MEMORANDUM RULING

 

 

[1] Currently before the court is a renewed motion for judgment as a matter of law filed by the defendant. (Doc. 57).

[2] Plaintiff originally claimed bad debt deductions of over $700,000 on its 1988 federal tax return. The Internal Revenue Service (IRS) disallowed the vast majority of these deductions. Plaintiff paid the assessed deficiency and filed a claim for refund with the IRS which was denied. This suit was filed in order to contest the IRS's determination with regard to 18 accounts totaling $613,436.70 in disallowed bad debt deductions. Following a jury trial the jury determined that Plaintiff was entitled to bad debt deductions with respect to 16 of the 18 accounts. Defendant has filed the present motion contending that a judgment as a matter of law should be entered in its favor dismissing all claims of Plaintiff.

     We test jury verdicts and motions for summary judgment for

 

     sufficiency of the evidence under the Boeing Co. v. Shipman, 411

 

     F.2d 365 (5th Cir.1969) (en banc), standard. Under Boeing,

 

     "[t]here must be a conflict in substantial evidence to create a

 

     jury question." Id. at 375. Substantial evidence is defined as

 

     "evidence of such quality and weight that reasonable and fair-

 

     minded men in the exercise of impartial judgment might reach

 

     different conclusions." Id. at 374. Consequently, "[a] mere

 

     scintilla of evidence is insufficient to present a question for

 

     the jury." Id. Even if the evidence is more than a scintilla,

 

     "Boeing assumes that some evidence may exist to support a

 

     position which is yet so overwhelmed by contrary proof as to

 

     yield to a directed verdict." Neely v. Delta Brick and Tile Co.,

 

     Inc., 817 F.2d 1224, 1226 (5th Cir. 1987).

 

 

Rhodes v. Guiberson Oil Tools, 75 F.3d 989, 993 (5th Cir. 1996) (en banc) (footnote omitted).

[3] Section 166(a)(1) of the Internal Revenue Code, 26 U.S.C. section 166(a)(1), allows a taxpayer to deduct any business debt that becomes wholly worthless during the tax year that the deduction is taken. The IRS disallowed the deductions at issue here. Therefore, Plaintiff bears the burden of proving, by a preponderance of the evidence, that: (1) the debts at issue had some value as of January 1, 1988; and (2) that the debts were totally worthless by December 31, 1988. Cox v. Commissioner, 68 F.3d 128, 131 (5th Cir. 1995); Estate of Mann v. United States, 731 F.2d 267, 275 (5th Cir. 1984).

[4] "Debts are wholly worthless when there are reasonable grounds for abandoning any hope of repayment in the future, and it could thus be concluded that they have lost their 'last vestige of value.'" Estate of Mann v. United States, supra at 276 (citations omitted). "The taxpayer must demonstrate an identifiable event that rendered the debt worthless." Cox v. Commissioner, supra at 131-32. "[E]vents subsequent to a given taxable year -- events which may include repayment before the bad debt deduction claim is filed -- neither prove nor disprove whether the business debt was worthless in that year. If and when such a debt becomes wholly worthless must be determined from the facts and circumstances known or which reasonably could have been known at the end of the year of asserted worthlessness." Estate of Mann v. United States, supra at 278. Thus, the question presently presented is whether there was substantial evidence presented to support the conclusion by the jury that Plaintiff, in the exercise of "sound business judgment" based upon as complete information as was reasonably obtainable, could have determined that each of the 18 accounts at issue here had become worthless. Estate of Mann v. United States, supra at 276. 1

GUNTER EGG FARMS, INC.

[5] Gunter Egg Farms, Inc. (Gunter Egg) owed Plaintiff $151,954 at the end of 1988. This amount was written off as a bad debt on the 1988 tax return. Gunter Egg's 1988 tax return shows a loss of $264,059. Cost of goods sold exceeded gross receipts by over $13,000. Hollis O'Neal testified that Plaintiff had no knowledge of Gunter Egg's assets at the time the debt was written off. (Transcript, 6/21/99, p.50). Apparently, the corporation had little tangible assets other than the birds. Most of the property was owned by the Gunters individually. However, it was not until well after 1988 that it was established that only the corporation owed the debt. There is little or no specific evidence of Gunter Egg's assets and liabilities as of the end of 1988. There was some evidence indicating that during 1988 the price of grain generally increased and that the price of eggs decreased. At one time the sole stockholder's son explored the possibility of taking over the corporation and obtaining a loan in order to pay off the debt. He was not able to accomplish this in time and ultimately the corporation filed for bankruptcy.

[6] In accordance with what appears to be a fairly consistent pattern, O'Neal's wrote off the balance due at the end of 1986 ($28,941) as a worthless debt. The next year, 1987, it then first credited the payments received to recovery of that debt. By the end of 1987 Gunter Egg's balance was $51,955 despite the fact that charges exceeded payments by only a little over $20,000 /2/. Plaintiff again wrote off the total balance ($51,955) as a worthless debt. Once again in 1988 payments were first credited to the recovery of this $51,955 bad debt. By the end of 1988 the balance owed by Gunter Eggs was the $151,954 at issue in this case even though charges exceeded payments by only $80,359. This included over $19,000 in interest.

[7] Apparently, O'Neal's used this practice in order to keep these debts from prescribing. While this is far from determinative it does suggest that Plaintiff did not believe that these accounts were entirely worthless. Additionally, where, as here, Plaintiff continued to extend additional credit from year to year the effect of this practice is to alter the timing of the tax. More troublesome is the concept that these debts were wholly worthless at the end of every year. If so, then what happened during each following year to give these debts value?

[8] Plaintiff continued to extend credit to Gunter Eggs at least through July of 1988. Gunter Eggs made no further purchases after September, 1988. It continued as an ongoing business, but purchased its feed from another supplier. However, they did continue to make regular monthly payments through May of 1989. A note attached to the 12/01/88 statement indicates that John Gunter phoned Hollis O'Neal and told him that Gunter Eggs would try to pay $5,000 per week. $5,000 was paid during November and December. $4,000 was paid the next month and Margaret Gunter sent a note that the payments would increase back to $5000 as soon as possible. In fact, payments were made as late as 1990. The owner of the corporation instructed the bookkeeper to pay any money in the checking account to O'Neal's.

[9] In 1989 Plaintiff continued to send invoices to Gunter Eggs and continued to accrue interest. This practice required Plaintiff to report the accrued but unpaid interest as income on its tax return. The debt was not taken off Plaintiff's books until December, 1990. This was when it was determined that the debt was "truly gone," and that O'Neal's had "given up all hope." (Transcript 6/18/99, Vol. II, p. 107). The continued accrual of interest seems inconsistent with a belief that the debt was, in fact, worthless. While it may be argued that the net effect is that no tax is paid so long as the interest is written off each year as a bad debt it is difficult to understand how this interest debt ever had value if it is written off as tota[l]ly worthless each year. If the interest debt never had value then it could not be written off as a bad debt.

[10] Plaintiff also continued to correspond with Gunter Eggs demanding payment on the account throughout 1989 and into 1990. Hollis O'Neal also visited with John Gunter on one occasion in 1988. In approximately May of 1990, Plaintiff explored the possibility of getting a mortgage as security for the debt. In August of 1990 Plaintiff referred the account to an attorney for collection. Suit was ultimately filed and a consent judgment was taken. The judgment was never collected.

[11] There is not substantial evidence to support the conclusion of the jury that the debt had become totally worthless as of the end of 1988. The evidence establishes little more than that Plaintiff had the subjective opinion that the debt was worthless and that economic conditions relative to the egg market, in general, were not good. This is not enough to sustain a finding that the debt was totally worthless. Lunsford v. Comm., 212 F.2d 878 (5th Cir. 1954); 8 Mertens, Law of Federal Taxation, section 30.66, ch. 30, p. 148 & section 30.67, ch. 30. p. 154.

GEORGE SCHLESSINGER

[12] George Schlessinger was also an egg farmer. His $272,271 debt to Plaintiff was written off as totally worthless as of the last day of 1988. Schlessinger ceased his operation in February 1989, but it was evident by the end of 1988 that he was going to shut down his operation. As of the end of 1988 Schlessinger's property was subject to a mortgage in favor of a bank. However, Plaintiff did not know the balance and did not ask Schlessinger what the balance was. The last payment on the mortgage was due in May, 1989. In fact, it was paid off in March, 1989. Soon thereafter Schlessinger conveyed his home and 100 acre farm to Plaintiff in satisfaction of the debt to Plaintiff. He moved to Kentucky to manage a retirement community. In 1993 the house and farm were sold for approximately $105,000 with Plaintiff providing financing.

[13] In the second half of 1988 Schlessinger's debt significantly increased. Hollis O'Neal met with him to discuss possible solutions and none was found. Mr. O'Neal proposed financing the replacement of the chickens so that Schlessinger could stay in business, but Schlessinger declined. Schlessinger informed Hollis O'Neal that he was going to go out of business. According to Mr. O'Neal Schlessinger gave him no "firm commitment" on how he would handle the account. Mr. O'Neal indicated that when the Schlessingers first mentioned giving him their property he was not receptive to the idea. He indicated that he did not want the farm, in part, because of potential environmental liability related to chicken waste on the property. He did admit that the property had some net worth. (Transcript, 6/21/99, p. 72). Plaintiff had little or no specific information about Schlessinger's debts or the value of his assets at the end of 1988.

[14] Plaintiff's records reveal that it followed its typical pattern of writing off Schlessinger's balance at the end of each year and then applying payments the following year to recovery of the bad debt previously written off. Plaintiff continued to extend credit to Schlessinger into 1989. Plaintiff did not write the account off as a "bad debt" on its records until February, 1989. At that time it quit sending invoices and accruing interest.

[15] There is not substantial evidence to support the conclusion of the jury that the debt had become totally worthless as of the end of 1988.

HERMAN GADDIS

[16] Herman Gaddis was a dairy farmer. In the late 1980's there was a general decline in the dairy industry. At the end of 1988 Gaddis owed Plaintiff $48,835. This amount was written off in 1988 as totally worthless. His dairy farm was affected by the general decline in the dairy industry. However, with the help of operating loans from the FHA he kept in operation until 1992 when he declared bankruptcy. Each year Plaintiff would write off the balance of Gaddis' account at the end of the year and then report payments the next year as the recovery of the previous bad debt.

[17] Plaintiff continued to sell to Gaddis on credit in 1989. It advised him in the beginning of December, 1989, that future purchases would be C.O.D. However, it appears that he continued to receive credit periodically. On June 4, 1990, Plaintiff got Gaddis to sign a note and mortgage. However, it was never able to collect the full balance due to Gaddis declaring bankruptcy.

[18] Mr. Gaddis testified that as of 12/31/88 he could not have fully paid O'Neal's although he anticipated that he would one day be able to do so. Besides being a dairy farmer he worked in the oil field making approximately $150,000 per year.

[19] There is not substantial evidence to support the jury's conclusion that the debt was totally worthless as of the end of 1988.

DAVID KENNEDY

[20] David Kennedy was and still is a dairy farmer. Plaintiff wrote a note on Kennedy's 12/01/1988 statement confirming that he had told Plaintiff that he would start decreasing his balance in January, 1989. Plaintiff wrote off his $31,380 balance at the end of 1988 as worthless. In fact, Kennedy did start reducing his balance. The balance was reduced almost every month and by December, 1989, the balance was down to less than $23,000. Kennedy's account was reduced to zero in 1994. There is no evidence of any specific information or event known or reasonably knowable that would support a conclusion that Kennedy would not be able to make some payment on his balance as promised.

[21] Plaintiff followed its pattern of writing off Kennedy's balance each year and then showing payments in the following year as collection on the prior year's bad debt. In 1989 Plaintiff continued to do business with Kennedy and showed the entire 1988 bad debt as being collected. Plaintiff never wrote off Kennedy's account on its books and continued to accrue interest on his account.

[22] In 1988 Kennedy's property was subject to mortgages originally securing almost $200,000 in debt in favor of the FHA. By the end of 1987 he had reached his lending limit on his operating loan with FHA. However, Kennedy had been notified of a government program whereby his loan could be refinanced and a portion of his debt written off. Plaintiff was aware that Kennedy was a candidate for some type of government assistance through the FHA. However, the agreement to restructure the debt was entered into in early 1989.

[23] In defendant's exhibit 3 Plaintiff takes the position that Kennedy was insolvent at the end of 1988 so that the debt should be considered worthless. Technical insolvency is not enough to establish that the debt is totally worthless. 8 Mertens, Law of Federal Taxation, section 30.67, ch. 30. There is not substantial evidence to support the jury's conclusion that Mr. Kennedy's debt was totally worthless at the end of 1988.

TED HEBERT

[24] Ted Hebert was a dairy farmer. He owned no land and his cattle and equipment were mortgaged. The account was kept current in 1986 and 1987, but in early 1988 Mr. Hebert began to fall behind. Up to 15% of his dairy herd died in 1988. O'Neal's, for the first time, wrote off his $27,270 balance as totally worthless at the end of 1988. Thereafter, Mr. Hebert was required to pay for feed purchased from O'Neal's as it was delivered. Testimony of Hollis O'Neal indicated that the setbacks Mr. Hebert suffered in 1988 together with the "explosion" of his account balance from $15,841.14 to $27,270 led him to believe that the account was worthless.

[25] At the end of 1988 Mr. Hebert still intended to keep making payments on his account. Mr. Hebert closed down his dairy farm in approximately May, 1989. In 1989 O'Neal's began legal proceedings in order to obtain a judgment against Hebert. In response he threatened to take bankruptcy. However, he was able to complete a workout with his creditors. Under the workout, in August, 1989, O'Neal's received $19,000 as full payment on his $27,270 balance.

[26] There is not substantial evidence to support the jury's conclusion that Mr. Hebert's debt was totally worthless at the end of 1988.

MIKE KING

[27] Mike King was and is a dairy farmer that owned approximately 30 acres and used another 160 acres owned by his father. He has done business with Plaintiff since the 1970's. Hollis O'Neal considers him to be an "excellent" dairy farmer. His land, crops and equipment were mortgaged to FHA, but he paid these off in 1988. In 1988 the price of milk fell up to 40%. This forced King to sell some of his cow to pay his bills. In 1989 he was able to obtain commercial loans to cover operating expenses. In defendant's exhibit 3 O'Neal's takes the position that the debt was worthless at the end of 1988 because his debts exceeded his liabilities and "it appeared he was never going to get out of debt and was truly insolvent."

[28] In 1987 King's payments exceeded his charges at O'Neal's. King's balance declined for the first five months of 1988, but then it increased each month thereafter. In 1988 his charges totaled $80,039 and his payments totaled $81,046. Following its common practice, O'Neal's charged off King's $22,002 balance as a totally worthless debt. Prior to doing this Hollis O'Neal "visited" with King but "did not go into his private banking affairs or his private affairs." O'Neal's charged off the balance each year and then first credited subsequent payments to recovery of the previously charged off bad debt. Therefore, he did not know the amount of King's debt or his cash flow. O'Neal's continued to extend credit to King. However, King was making his own feed and purchasing feed from another supplier during at least part of 1989 & 1990. By the end of 1990 the balance was down to less than $1000. There is not substantial evidence to support the jury's conclusion that Mr. King's debt was totally worthless at the end of 1988.

RICKY THOMPSON

[29] Ricky Thompson is a cattle farmer. He has been doing business with O'Neal's since the 1970's. Petitioner took the position that at the end of 1988 Mr. Thompson was insolvent from "a commercial lender point of view." In accordance with its practice of writing his balance off each year Thompson's balance of $19,301 was written off as totally worthless at the end of 1988. Thompson paid $5000 on his account on 1/18/89. A "farm and Home Plan" dated 12/20/88 (plaintiff's exh. 31) indicated a net worth of over $180,000 although Thompson testified that his actual net worth at that time was somewhat lower. On January 11, 1989, Thompson was notified that FHA had approved a $144,000 disaster loan. However, he did not apply for this loan the very end of 1988. By the end of 1989 Thompson's balance was just over $4000. O'Neal's continued to carry the account on its books and continued to accrue interest. In 1992 O'Neal's' attorney sent a demand letter and subsequently suit was filed. Ultimately the account was paid and the suit was dismissed.

[30] There is not substantial evidence to support the jury's conclusion that Mr. Thompson's debt was totally worthless at the end of 1988.

DALE VINCENT

[31] Dale Vincent was a grain farmer. He had done business with O'Neal's since the 1960's. He owned some land but leased the majority of the land that he farmed. In 1988 his payments to O'Neal's exceeded his charges by over $8,000. Over $5,000 was paid on the account in December, 1988. His balance at the end of 1988 was $18,312. This was written off as a totally worthless debt. The records in evidence indicate that, as with many other accounts, the balance at the end of each year was written off as totally worthless. O'Neal's continued to extend credit to Vincent in 1989. By June, 1989, the balance was up to over $122,000. The next statement shows a substantial payment. A substantial payment had also been made in June of 1988.

[32] It appears that FHA would grant operating loans to Vincent each year. O'Neal's was apparently aware of this. At the end of June, 1987, Vincent's balance was up to $116,872.22, and O'Neal's sent him a note asking him to advise them of the status of his loan.

[33] There was a pending personal injury suit over an electrocution accident which was ultimately dismissed in 1991. Until then O'Neal's did have hope that recovery from this suit might be used to pay off the account. O'Neal's filed suit and obtained a judgment in 1991 for over $129,000. Vincent filed for bankruptcy.

[34] There is not substantial evidence to support the jury's conclusion that Mr. Vincent's debt was totally worthless at the end of 1988.

RAYMOND ALVAREZ

[35] Raymond Alvarez was a dairy farmer. He operated on leased land. From 1984 through 1988 Alvarez's payments exceeded his charges each year, however, because of interest charges his balance increased over this time period to $32,942.65 by the end of 1988. O'Neal's wrote off $27,941 on the basis that Alvarez's debt was totally worthless. The records in evidence indicate that Plaintiff wrote off Alvarez's account every year as totally worthless.

[36] Alvarez continued to do business with O'Neal's but it appears that he was on essentially a cash basis by 1989. Alvarez passed away in 1991, however, his son has continued the family farming business. O'Neal's continued to carry the account of its books and accrue interest until November, 1991. In 1988 Alvarez owned cattle and equipment that was mortgage free.

[37] There is not substantial evidence to support the jury's conclusion that Mr. Alvarez's debt was totally worthless at the end of 1988.

HENRY SUYDAM

[38] Henry Suydam was a dairy farmer. He closed down his farm in late 1990. He owned approximately 102 acres of land. He property was mortgaged to FHA. During 1988 his balance with O'Neal's increased from $2,569 to $16,722. This amount was written off as totally worthless at the end of 1988. O'Neal's continued to extend credit to Suydam. Most years O'Neal's wrote off the balance of his account as worthless and then reported any payments the following year as a recovery of bad debt. The records reflect that Suydam made regular monthly payments during 1988 and those payments continued into 1989. Apparently O'Neal received a consignment on Suydam's milk production and this continued into 1989. Suydam continued to do business with O'Neal's throughout 1989. On December 27, 1988, Mr. and Mrs. Suydam signed an agreement to pay each month on outstanding NSF checks totaling over $16,000. In 1990 an attorney sent a demand letter. Suit was filed the next year. However, Suydam abandoned his farm and could not be served.

[39] There is not substantial evidence to support the jury's conclusion that Mr. Suydam's debt was totally worthless at the end of 1988.

C.B. TRACY

[40] C.B. Tracy is a dairy farmer and has been doing business with O'Neal's since the 1970's. His balance with O'Neal's had built up gradually over the years. However, in 1988 his payments exceeded his purchases by over $3,000. His mortgage debt to FHA greatly exceeded the worth of his property. However, in 1989 FHA agreed to "write down" most of his debt. Tracy continues to deal with O'Neal's.

[41] O'Neal's regularly wrote off Tracy's balance at the end of each year and at the end of 1988 they wrote off his balance of $10,718. However, O'Neal's continued to extend credit to Tracy. Tracy made regular payments on his account during and after 1988.

[42] There is not substantial evidence to support the jury's conclusion that Mr. Tracy's debt was totally worthless at the end of 1988.

JAMES McKEE, JR.

[43] James McKee, Jr. is a dairy and beef farmer. He owns approximately 56 acres of land and rents additional acreage. At the end of 1988 he owed O'Neal's $10,245. O'Neal's wrote off this debt as totally worthless at the end of 1988. The following year they showed this amount as recovered and wrote off another balance in excess of $16,000. McKee continued to do business with O'Neal and O'Neal continued to extend credit after 1988. McKee made regular payments on his account during and after 1988. There were recorded mortgages with a face amount totaling approximately $70,000 in 1988. There is no evidence as to the actual balance owed. O'Neal's filed suit to collect this account in 1989. Thereafter McKee began making payments on his account. The account was paid off in 1991.

[44] There is not substantial evidence to support the jury's conclusion that Mr. McKee's debt was totally worthless at the end of 1988.

CLAY MCDANIEL

[45] Clay McDaniel is a dairy farmer began doing business with O'Neal's since the 1970's. He owns approximately 70 acres of land. He had a substantial number of mortgages, judgments and liens encumbering his assets. For most of the years from 1983 to 1988 McDaniel decreased the balance owed to O'Neal's. In 1988 the balance decreased from $9,666 to $9,599. This amount was written off as a totally worthless debt at the end of 1988. O'Neal's wrote off the balance due at the end of each year during the years leading up to 1988. McDaniel quit the doing business with O'Neal's in early 1988 and made only a few small payments on his account that year. In April, 1988, O'Neal's got its attorney to write a demand letter and suit was filed shortly thereafter. A default judgment was taken in early 1989. In July, 1988 O'Neal's wrote the account off its books and quit accruing interest.

[46] There is substantial evidence to support the jury's conclusion that Mr. McDaniel's debt was totally worthless as of the end of 1988.

BRIAN LEDOUX

[47] Brian Ledoux was a dairy farmer. He owned approximately 205 acres. The land was purchased in 1982 with the help of a FHA loan. He borrowed another $50,000 to start up his dairy operation in 1987. Ledoux began doing business with O'Neal's in 1987. By the end of that year his balance was $9,456. At the end of 1988 his balance was down to $9,277, and Ledoux had made regular payments on his account each month which regular payments continued into 1989. O'Neal's wrote this debt off as totally worthless. Ledoux testified that by the end of 1987 his debts exceeded his assets. However, Ledoux continued his dairy operation, continued to do business with O'Neal's and O'Neal's continued to sell to him on credit. O'Neal's also continued to carry the account on its books and continued to correspond with Ledoux with regard to payments on the account. In 1990 the Ledouxs signed a promissory note and this was eventually paid off. Ledoux managed to pay off the debt by selling some cattle that he kept on his father's property. Through 1991 O'Neal's wrote off the total balance on Ledoux's account as totally worthless.

[48] There is no substantial evidence to support the jury's conclusion that this debt was totally worthless by the end of 1988.

WILSON CHAISSON

[49] Wilson Chaisson is a dairy farmer that began doing business with O'Neal's in 1987. He owns 94 acres which was and is financed by FHA. At the end of 1987 his balance was $3,282, and that had increased to $7,189 by the end of 1988. This debt was written off as totally worthless at the end of 1988. Chaisson was making regular payments at the end of 1988 and beginning of 1989. In December, 1988, his balance was reduced by several hundred dollars. Chaisson advised O'Neal's in December, 1988, that he was trying to freshen his cows and that he expected milk production to pick up. O'Neal's continued to grant credit to Chaisson in 1989 and he continued to do business with O'Neal's until July, 1989. Chaisson has continued in the dairy business up to the present time. Chaisson's balance at the end of subsequent years was also written off as worthless. O'Neal's filed suit on the account in 1990. Judgment was obtained in 1991 for almost $18,000. Subsequently, Chaisson was discharged in bankruptcy. The account was carried on O'Neal's books and interest continued to accrue until October, 1990.

[50] There is no substantial evidence to support the jury's conclusion that this debt was totally worthless by the end of 1988.

LEO CORMIER

[51] Leo was a grain farmer. His assets were substantially encumbered. He had contemplated bankruptcy in 1982 but had worked out an arrangement with creditors, including O'Neal's, to pay off his debt over time. At the end of 1987 Cormier's balance with O'Neal's was over $28,000. In 1988 he charged only $214 at O'Neal's and his payments exceeded $8,000. At the end of 1988 O'Neal's wrote off $3,784 as totally worthless. O'Neal's had routinely written off Cormier's year end balance as totally worthless each year. It continued to carry his account on its books and to accrue interest. Cormier made no significant purchases at O'Neal's after July, 1987. The $8,000 paid in 1988 was paid in January of that year. There were no other payments on account for the remainder of that year or in 1989. O'Neal's never recovered the balance owed to them. At the time of trial Mr. Cormier was working as a housekeeper with one of the casinos.

[52] There is substantial evidence to support the jury's conclusion that this debt was totally worthless by the end of 1988.

[53] There is substantial evidence to support a conclusion that all of the accounts at issue were partially worthless as of the end of 1988. However, the issue presented in this case is whether each of the accounts was totally worthless. With the exception to Mr. Cormier and Mr. McDaniel there is not substantial evidence to support a conclusion that the debts at issue were totally worthless at the end of 1988. To this extent Defendant's motion is GRANTED. Within 30 days of this date counsel for Defendant shall submit a judgment, which has been approved as to form by counsel for Plaintiff, in accordance with this memorandum ruling.

[54] THUS DONE AND SIGNED in Chambers at Lake Charles, Louisiana, this 10th day of January, 2000.

                                   Alonzo P. Wilson

 

                                   United States Magistrate Judge

 

FOOTNOTES

 

 

1 For a discussion of the facts and circumstances tending to show that a debt is or is not worthless see 8 Mertens, Law of Federal Taxation, ch. 30.

2 There was also $2,743 in interest added to the balance.

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Case Name
    O'NEAL'S FEEDER SUPPLY, INC. v. UNITED STATES OF AMERICA.
  • Court
    United States District Court for the Western District of Louisiana
  • Docket
    No. 2:96 CV 0514
  • Judge
    Wilson, Alonzo P.
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    bad debt deduction
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2000-3495 (17 original pages)
  • Tax Analysts Electronic Citation
    2000 TNT 27-5
Copy RID