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treated as a business debt only in certain limited circumstances, for example, if the loan arises as
part of the business of lending money, or as part of the business of developing, promoting and
selling corporate enterprises.
The effect of Whipple on the Butler decision was initially unclear, especially in light of the enactment
of Sec. 707. However, in 1965, the Tax Court reaffirmed Butler in Stanchfield, TC Memo 1965-305.
In Stanchfield, the taxpayer advanced cash to a construction company owned by his son-in-law. The
court concluded that the taxpayer and his son-in-law had formed a general partnership and the
advances were capital contributions. The taxpayer, however, had also guaranteed debt of the
"partnership," which he was later called on to pay.
In discussing the tax treatment of the payment on the guarantee, the Stanchfield court considered
the loss on the guarantee to be a bad debt loss. Then, citing Butler, it held that the loss was a
business bad debt because the taxpayer was a partner in the partnership. The court distinguished
Whipple on the grounds that Whipple dealt with a shareholder-creditor and a corporate debtor,
while the taxpayer in Stanchfield was a creditor of the partnership of which he was a partner.
Notwithstanding Stanchfield, it is questionable whether Butler continues to be reliable precedent.
Under Sec. 707, a partnership's business might not be attributed to the partner. If the partnership's
business is not attributed to the partner, the Whipple Court's reasoning would appear to be
applicable in the partnership setting, causing the debt to be characterized as a nonbusiness debt.
Notwithstanding these questions, the Service has not withdrawn or limited its acquiescence in
Butler. Moreover, Butler has been applied by the Tax Court in a post-1954 Code setting. As a
consequence, tax advisers should be entitled to continue relying on Butler, at least for the time
being.