                  United States Court of Appeals
                             For the Eighth Circuit
                         ___________________________

                                 No. 13-1780
                         ___________________________

                                Harry Robert Haury

                              lllllllllllllllllllllAppellant

                                           v.

                        Commissioner of Internal Revenue

                              lllllllllllllllllllllAppellee
                                    ____________

                     Appeal from the United States Tax Court
                                 ____________

                            Submitted: January 13, 2014
                               Filed: May 12, 2014
                                 ____________

Before LOKEN, MURPHY, and SMITH, Circuit Judges.
                           ____________

LOKEN, Circuit Judge.

       Harry Haury, a software engineer, filed no federal individual income tax return
for 2007. The Commissioner of Internal Revenue issued a notice of deficiency in
May 2010, alleging unpaid taxes, penalties, and interest of more than $250,000 based
on a substitute return prepared by the Internal Revenue Service. The deficiency
asserted taxable salary income of $149,216 and taxable withdrawals from Haury’s
Individual Retirement Account (“IRA”) totaling $434,964. Haury responded by
petitioning the Tax Court for redetermination of the deficiency, filing a return for
2007 that reported, as relevant here, $149,217 in wage income, $319,964 in taxable
IRA distributions, and a business bad debt loss of $413,156. After a trial on mostly
stipulated facts, the Tax Court rejected Haury’s claim that he made an offsetting
$120,000 rollover IRA contribution, denied him a bad debt deduction because the
worthless loans in question were nonbusiness bad debts, and determined a deficiency
of $225,284.40 in unpaid taxes, $43,992.99 for failure to file a timely return, and
$8,748.35 for failure to pay estimated tax. Haury appeals, challenging the Tax
Court’s IRA rollover and business bad debt rulings. We reverse on the IRA rollover
issue, affirm on the bad debt issue, and remand for redetermination of the deficiency.

       A. The IRA Rollover Issue. Haury developed “workflow automation and
document imaging” technology in the late 1990s and licensed the technology to
several related companies using the name “Nu Paradigm.” By 2007, two of these
companies, NuParadigm Government Systems, Inc. (“NPGS”) and NPS Systems, Inc.,
were competing as subcontractors for a substantial government contract. To fund
product development and working capital needs, Haury made secured loans to the two
companies in 2006 and 2007. Three loans in April, May, and July 2007 were funded
using distributions withdrawn from Haury’s IRA account. NPS Systems and NPGS
issued demand promissory notes payable to the IRA trustee “on behalf of Harry
Haury’s IRA account number.” Haury was less than 59 ½ years old that year, so his
IRA distributions were taxable as ordinary income subject to a 10% additional tax.
See 26 U.S.C. (“I.R.C.”) §§ 408(d)(1), 72(t). Haury also made a $120,000
contribution to his IRA account in April 2007. The issue on appeal is whether that
contribution was a qualifying “rollover” that reduced Haury’s 2007 taxable IRA-
distribution income by $120,000. As transaction timing is critical to § 408(d) issues,
we summarize Haury’s withdrawals from and contributions to his IRA account in
2007:




                                         -2-
       Transaction Date           Withdrawals            Contributions
       February 15, 2007          - $120,000.00
       April 9, 2007              - $168,000.00

       April 30, 2007                                    $120,000.00
       May 14, 2007               - $100,000.00

       July 6, 2007               - $46,933.06
       October 25, 2007           - $31.32
       Total:                     - $434,964.38          $120,000.00


         An individual may exclude an IRA distribution from taxable income if it is
“rolled over” into an IRA account. The entire amount is excluded if it “is paid into
an individual retirement account . . . for the benefit of such individual not later than
the 60th day after the day on which he receives the payment or distribution.” I.R.C.
§ 408(d)(3)(A)(i). An amount less than the entire distribution is likewise excluded
if it is paid into an IRA. I.R.C. § 408(d)(3)(D). The rollover contribution exception
does not apply if the distributee used the exception to exclude another distribution in
the year prior to the date of the distribution in question. I.R.C. § 408(d)(3)(B).

       Proceeding pro se, Haury explained at trial that his April 30 $120,000
contribution came as the result of repayment by the companies of a prior loan funded
by his IRA account. Seizing on the fact that the $120,000 April 30 contribution
matched a $120,000 February 15 withdrawal, the Commissioner argued that it was
not a qualifying rollover contribution because it was not made within the 60-day time
limit in § 408(d)(3)(A)(i). The Tax Court agreed and included the $120,000 in
determining the amount of Haury’s taxable income from IRA distributions that year.

       On appeal, now represented by counsel, Haury argues that the $120,000 IRA
contribution on April 30 was a qualifying partial rollover of the $168,000 IRA
distribution made on April 9, less than 60 days before the contribution. That the 60-

                                          -3-
day limit in § 408(d)(3)(A)(i) was satisfied is clearly correct, as government counsel
reluctantly acknowledged at oral argument. The government nonetheless asserts two
feeble defenses to this contention. First, it argues that the partial rollover issue was
forfeited because Haury failed to argue it to the Tax Court. Frankly, we are appalled
by the unfairness of this contention. At trial, the pro se Haury simply explained the
facts, as the presiding Tax Court judge directed him to do. It was the Commissioner’s
attorneys who matched up the two $120,000 transactions and, ignoring the obviously
applicable partial rollover provision in § 408(d)(3)(D), asserted that the rollover
contribution was untimely. The issue before the Tax Court was whether this was a
qualifying rollover contribution under I.R.C. § 408(d)(3). The Tax Court was
obligated to fairly apply that statute to the facts presented, particularly for a taxpayer
who is pro se. See Transp. Labor Contract/Leasing, Inc. v. Commissioner, 461 F.3d
1030, 1034 (8th Cir. 2006). Though we generally do not consider issues not raised
below, as the Supreme Court said in a tax case many years ago, we should “where
injustice might otherwise result.” Hormel v. Helvering, 312 U.S. 552, 557 (1941).
We conclude this is such a case.

       Second, the Commissioner argues that we cannot grant relief on the basis of a
qualifying partial rollover because Haury failed to prove that he had not made a prior
rollover contribution within one year of April 30, 2007. This contention is factually
without merit, if not downright silly. As government counsel conceded at oral
argument, the IRS had access to the transactions in Haury’s IRA account during the
year prior to April 30, 2007. Had there been a prior rollover contribution, it would
have been a complete defense to Haury’s rollover contention, because the one-year
limitation in § 408(d)(3)(B) applies to all rollover contribution claims, whether
complete or partial. Had the IRS’s exhaustive review of the transactions in Haury’s
IRA account revealed a disqualifying prior rollover contribution during the prior year,
the Commissioner would have asserted this defense before the Tax Court, making the
60-day limit the Commissioner in fact asserted unnecessary. As the Commissioner
did not raise the one-year issue, Haury had no need to address it at trial.

                                           -4-
      As the above chart makes clear, Haury’s April 30, 2007 IRA contribution of
$120,000 was made well within 60 days of the April 9 distribution of $168,000.
Therefore, it was a qualifying partial rollover contribution under § 408(d)(3)(D) and
Haury is entitled to reduce his taxable 2007 IRA distributions by $120,000. The Tax
Court’s contrary ruling is reversed.

       B. Worthless Business Debt Deduction. Individual taxpayers may deduct
from taxable ordinary income “any debt which becomes worthless within the taxable
year,” but not if it is a “nonbusiness debt.” I.R.C. § 166(a)(1), (d)(1)(A).1 A
nonbusiness debt is one that was not created or acquired in connection with, or
incurred in, the taxpayer’s “trade or business.” § 166(d)(2). The Treasury
Regulations provide that a worthless debt falls within the business debt “exception”
if the relation between the loss caused by its becoming worthless, and the trade or
business of the taxpayer, “is a proximate one.” Treas. Reg. § 1.166-5(b)(2). In
United States v. Generes, 405 U.S. 93 (1972), the Supreme Court resolved a conflict
in the circuits over how to construe the word “proximate” -- a word the Court
described as “not the most fortunate,” id. at 105 -- when the taxpayer is owed a
worthless debt by a business in which he is both a shareholder and an employee. The
taxpayer’s “status as a shareholder was a nonbusiness interest,” the Court explained,
whereas his “status as employee was a business interest.” Id. at 100-01. In these
circumstances, to determine whether the bad debt has a proximate relation to the
taxpayer’s trade or business, as the Treasury Regulations require, the Court held that
the “proper measure” is the taxpayer’s “dominant motivation” in making or
guaranteeing the loan. Id. at 103-04.




      1
       Worthless nonbusiness debts may be deducted, but only as capital losses
subject to the greater limitations found in I.R.C. § 1211. See 26 C.F.R. (“Treas.
Reg.”) §§ 1.166-5, 1.1211-1.

                                         -5-
     In this case, Haury made four secured working capital loans to NPS Systems
and NPGS between June 2006 and July 2007:


          Loan Date              Amount               Borrower
          June 6, 2006           $107,505.69          NPS Systems
          April 10, 2007         $168,000.00          NPS Systems

          May 15, 2007           $100,000.00          NPGS

          July 6, 2007           $46,933.06           NPGS
          Total:                 $422,438.752


At the time he made the loans, NPS Systems, operated by NPGS, was working as a
subcontractor to obtain a $32 million government contract. Haury testified that he
loaned money “as an employee of the company to . . . keep the company afloat . . .
[and to] fund[] working capital to allow us to continue operating” during the
development phase of the contract. On October 5, 2007, believing “the company was
in good . . . and improving financial condition,” Haury helped NPGS obtain an
additional $500,000 loan from Tim Swank by subordinating his secured loans to
Swank’s. In December 2007, NPS System’s prime contractor was “frozen out” of the
government contract. With NPS Systems deprived of its only source of business,
Haury requested payment of his loans. NPGS’s president responded, “it is ridiculous
to assume [the notes you hold] would ever be repaid.”

      At the time of trial, Haury was president, secretary, and sole member of the
board of directors of NPS Systems, and CEO and one of three directors of NPGS.
There was testimony that he was not in charge of day-to-day operations in 2007, and

      2
       Haury explains that the $413,156 bad debt deduction claimed on his self-
prepared 2007 return reflected a mathematical error; $422,439 is the correct amount.
The discrepancy is irrelevant given our resolution of the issue.


                                        -6-
his responsibilities as “employee” in 2007 are unclear. It is undisputed that he
received salaries of $136,916.44 from NPGS and $12,300.98 from NPS Systems in
2007, his sole source of wage or salary income. The record does not clarify his
ownership interests in the two corporations, but it is evident that Haury and his wife
held substantial, most likely controlling ownership interests.

      Based on this evidence, the Tax Court found that Haury made bona fide loans
to NPGS and NPS Systems that became totally worthless in December 2007.
However, applying the “dominant motivation” standard of Generes, the Tax Court
found that the worthless loans were nonbusiness debts because “[p]rotection of
[Haury’s] investment interests in the companies, rather than protection of his salary,
was the dominant motivation for the loans.” Accordingly, the Tax Court denied
Haury’s claim of a worthless-debt deduction under I.R.C. § 166(a).

       On appeal, Haury argues the Tax Court erred because his substantial salary,
lack of other sources of income, and minimal investment make this case more like
Litwin v. United States, 983 F.2d 997 (10th Cir. 1993), where the Tenth Circuit
affirmed the grant of a worthless business debt deduction to a principal shareholder-
CEO, than Generes, where the Supreme Court held that a substantial shareholder and
part-time employee had failed to prove dominant business motivation as a matter of
law. “The question whether a debt is a nonbusiness debt is a question of fact. Thus,
we review for clear error the Tax Court’s determination that [Haury’s] loans to
[NPGS and NPS Systems] were nonbusiness debts.” Bell v. Commissioner, 200 F.3d
545, 547 (8th Cir. 2000) (quotation omitted).

       On this record, there was no clear error. Haury’s nonbusiness motivations for
making the loans included, at a minimum, his considerable if unquantified equity
interests in NPGS and NPS Systems, and his interest in enhancing the return on his
investment in the licensed technology. His interest as an employee is far from clear.



                                         -7-
He failed to prove any role in the 2007 day-to-day operations, and his action in
subordinating his own loans to persuade Swank to invest makes his role in 2007 look
more like an owner-investor than an employee. No doubt Haury made the loans to
protect the substantial salaries he received in 2006 and 2007, but on this minimal
record the Tax Court was entitled to view the 2007 salary as a form of return-on-
investment that did not prove Haury’s dominant motivation was to protect a business
interest as an employee. “We will not find clear error if the tax court’s account is
plausible in light of the record viewed in its entirety, even if we would have weighed
the evidence differently.” Musco Sports Lighting, Inc. v. Commissioner, 943 F.2d
906, 907 (8th Cir. 1991) (quotation omitted). The Tax Court did not clearly err in
finding that Haury failed to prove that his dominant motivation for making the four
loans in question made them deductible bad debts when they became worthless in
December 2007.

       The decision of the Tax Court is reversed in part, and the case is remanded for
a redetermination of the deficiency in accordance with this opinion.
                        ______________________________




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