dissenting: I do not believe this Court is justified in determining that all advances made by petitioner to Harriston Lumber were bona fide loans up to a certain date and that all advances of a similar nature and under similar circumstances made thereafter were in the nature of capital contributions. I would consider all of petitioner’s advances as loans and allow the bad debt deduction accordingly.
All of the capital stock of Harriston Lumber was owned by Foundation, not petitioner. The majority opinion recognizes that petitioner had a valid business reason for advancing funds to Harriston from July 1,1957, up to June 30,1960, and acknowledges that those advances were bona fide loans, even though the lumber business had had lean years prior to this time and Harriston operated at a loss throughout this period. The purpose of those advances is said to have been to assure petitioner of a supply of lumber for its activities as sales agent and to enable its principal to finance its inventory requirements and operating expenses. Petitioner protected itself with respect to those advances by collecting Harriston’s sales proceeds and applying them against its “running account” with Harriston. Because of these factors the majority concludes that the advances prior to June 30, 1960, were loans.
There is nothing in the majority opinion to indicate that the reason or purpose for petitioner advancing funds to Harriston changed in June of 1960, but only that the likelihood of repayment appeared to be considerably reduced, despite the fact that petitioner still had control of Harriston’s sales receipts. Nor is there anything in the opinion to indicate why petitioner would continue to throw its money away if it thought there was no likelihood of recovering it. This was a business judgment and I think the court should be very reluctant to substitute their judgment for that of management, Malone & Hyde, Inc., 49 T.C. 575 (1968), particularly where the courts may not have before them all of the information available to management at the time the judgments were made.
The majority opinion, in determining that the advances were bona fide loans up to a certain point and thereafter “were in the nature of contributions to capital,” relies on tests and criteria which have evolved from cases in which the issues were whether advances made to thinly capitalized corporations were loans or equity investments, and cases in which the advances were made by the principal stockholders of the recipient corporations. I seriously doubt that those criteria should be afforded much weight in a situation such as we have here where petitioner owned none of the stock of Harriston, a part of petitioner’s business was derived from Harriston’s operations, and there is no proof that petitioner had any ulterior tax motive in continuing to make these advances. There is no suggestion that petitioner became a stockholder of Harriston as a result of these “capital contributions” and there may be considerable doubt that petitioner was entitled to a capital loss deduction when Harriston was liquidated and dissolved.1
Further, even if we accept the conclusion of the majority that the advances made by petitioner after June 30, 1960, were not loans but in the nature of capital, I would apply the entire $71,177.24 of “net advances” to repay the most recent advances, thus reducing the amount of “capital contributions,” rather than applying it, as the majority does, against the advances made prior to June 30,1960, thus reducing the amount of the bad debt deduction allowed. The distinction made by the majority between the advances made prior to June 30, 1960, and the advances made after that date is purely fictitious, and I see no justification for extending the fiction even further to require that all amounts available upon liquidation of Harriston be applied against the pre-1960 “loans” rather than against the post-1960 “capital contributions,” which probably made possible the recovery of the $71,177.24.
In fn. 9 to the majority opinion there is an implication that petitioner might have been entitled to a capital loss deduction if it had had a tax effect; but the Code provision under which such a deduction might have been allowable is not mentioned.