Before DUFFY and CASTLE, Circuit Judges, and GRUBB, District Judge.
Don T. Allen, individually, and as executor of the estate of his deceased wife,*fn1 petitioners, prosecute this appeal from a decision of the Tax Court of the United States which determined deficiencies in income tax for the calendar years 1952 and 1953 in the respective amounts of $12,570.66 and $9,974.80, and disallowed a related refund claimed for 1953 in the amount of $681.46. The Tax Court decided that certain amounts sought to be deducted in full as business bad debts, expenses or losses, under Sections 23(a) (1)(A) and (e)(1) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 23(a) (1)(A),(e)(1), were deductible only to a limited extent as capital losses or nonbusiness bad debts.
These amounts, which taxpayer claims are deductible in full, represent payments taxpayer made to or for the benefit of a Tucson, Arizona, housebuilding corporation and which taxpayer contends were made for business reasons rather than as capital investments. The taxpayer claims that the payments are business losses and expenses and contends that the Tax Court erred in classifying the losses and expenses as capital losses or non-business losses and by failing to apply the proper legal test of classification between business and capital losses.
The contested issues are:
1. Whether the Tax Court applied the correct legal criteria in classifying the amounts involved as capital or non-business losses.
2. Whether the Tax Court was clearly in error in its finding that the advances made by the taxpayer to or on behalf of the Arizona housebuilding corporation were not proximately related to the taxpayer's business.
In 1949 Allen became associated with Mobilhome Corporation of America (hereinafter called Mobilamerica), a California corporation principally owned by Hugh Curran and controlled by him and his brother Roland. Mobilamerica and Curran had developed a process for building small homes on a mass production assembly-line basis and transporting them by truck to prepared residential sites. Mobilamerica sold franchises for use of its process. Allen became its agent and franchise representative, on a commission basis, for an area covering about five midwest states. In the next two years Allen devoted his entire time to this venture, obtained five licensees but earned commissions of less than $10,000.00. In late 1950 Allen purchased the business and franchise of the Mobilamerica licensee in the Milwaukee, Wisconsin area and thereafter actively and successfully carried on the business of the Milwaukee franchise as a sole proprietor under the name of Don T. Allen Industries.
In January 1952, Hugh Curran informed the taxpayer that he was negotiating a deal to act as a subcontractor in building 100 houses for use at a mine site located about 40 miles from Tucson, Arizona; and he invited the taxpayer to participate in the project. The contract price for the 100 houses was to be about $700,000, of which 95 per cent was to be paid when the houses were delivered, with the balance to be paid when they were accepted; and construction was to begin in about 30 days. The taxpayer accepted the invitation to participate, and, on February 19, 1952, he and Hugh and Roland Curran organized an Arizona corporation to handle the project. This corporation was named Mobilhome Corporation of Tucson (hereinafter called the Tucson corporation).
The stockholders of the Tucson corporation, their proportionate share interest (which continued without change), and the amounts which they paid for these interests, were:
Hugh Curran 20% 1,000 cash
Roland Curran 20% 1,000cash
Ned H. Abrams 10% Architectural services