OPINION.
FisheR, Judge:At various times, when the value of the assets of decedent’s estate available for the payment of claims did not exceed $26,413.05 (cash in the amount of $3,923.05 and securities of a fair market value not in excess of $22,490), petitioner acquired claims against the estate totaling somewhat in excess of $48,635.56. The amount by which the claims exceeded the above total figure arises from the fact (here immaterial) that some of the smaller claims were purchased for amounts less than their face value. One claim, in the amount of $33,194.91, is attributable to petitioner’s rights as subrogee, and the circumstances of its acquisition will be discussed later. The remaining claims (somewhat in excess of $15,440.65) were purchased for that amount. The estate was obviously insolvent. By order of the Surrogate’s Court dated August 3, 1945, petitioner received, in payment of her claims, cash in the amount of $3,923.05, and securities which we have found had a then total fair market value of $22,490. The cash and securities turned over to petitioner in payment of her claims represented the total remaining assets of the estate.
Petitioner asserts that she is entitled, subject to the restrictions as to amount in the applicable statute, to a nonbusiness bad debt deduction, and carry-over, because of the excess of the total of her subrogation claim plus the amount paid by her for the remaining claims against the estate over the sum of the cash and value of securities received by her from the estate in payment of her claims.
In our opinion, such a deduction is not allowable upon the facts in the instant case.
For convenience, we will first consider the problem in relation to the claims purchased by petitioner for $15,440.65. We must bear in mind that at all times here material, the estate was insolvent, and that, at the times the claims were purchased, petitioner could have had no reasonable hope that the claims would be paid in full. The total amount of $26,413.05, representing cash and the value of the securities of the estate which she received in 1945, was the highest amount which she could have hoped, within reason, to realize from her claims (including that acquired by subrogation) during the period in which such claims were acquired. The securities were actually worth less at the time the claims were acquired. Since the total claims so acquired were in excess of $48,635.56, and the highest amount then realizable was $26,413.05, the extent of the insolvency of the estate was manifestly substantial. It should be added that the claims now under consideration were acquired by petitioner by purchase. They did not represent obligations due her arising out of transactions to which she was originally a party, such as obligations for money loaned by her.
Boiled down to essentials, the issue is whether petitioner may pay out for the purchase of claims an amount greatly in excess of their value, without reasonable hope of recouping more than a maximum of about 54 per cent of the amount so paid, and seek some further re-coupment of her loss by virtue of an income tax deduction. As already stated, petitioner has actually received at least the full extent of the values existing at the time the claims were purchased by her. We do not here face a situation in which petitioner, for example, purchased debts for $15,440.65 at a time when such debts were worth substantially that amount, or more, but later became less valuable and were liquidated for a lesser sum. Our problem arises in a setting in which debts were acquired for that amount at a time when it was obvious that the limited assets available for their payment were worth far less, and there could be no reasonable expectation of collecting the amount of the consideration paid therefor.
We have already indicated that our answer is in the negative, and that petitioner is not entitled to the benefit of the provisions of the law relating to nonbusiness bad debts in relation to the considerations paid by her in excess of the value of the claims at the time of their acquisition. We find this view supported in principle by the authorities.
In American Cigar Co. v. Commissioner, (C. A. 2) 66 F. 2d 425, it was held that advances to a corporation by stockholders believing that they would not be repaid were not deductible as bad debts. The court said, in part (p. 427) :
The taxpayer takes the position that the notes taken on account of the advances were ascertained to be worthless at the very time the advances were made. The Board has found as a fact that petitioner made the advances fully believing that the obligations they created were worthless and uncollectible, and there is evidence to support such a finding. * * * Such advances, made with the belief they would never be repaid, * * * are not deductible as bad debts.
In Hoyt v. Commissioner, (C. A. 2) 145 F. 2d 634, the same court held that where a mother guaranteed her daughter’s brokerage account knowing .that it was probable that the daughter could not pay any loss or deficit for which taxpayer might become liable because of the guarantee, the loss sustained by taxpayer was not deductible as a debt which became worthless. In distinguishing Shiman v. Commissioner, (C. A. 2) 60 F. 2d 65, Judge Frank said, in part (p. 636) :
But what we said in that case serves rather to sustain the Tax Court’s decision. * * * there was * * * no showing that, at the time when the guaranty was made, the brother-in-law (who was insolvent when the taxpayer was called upon to pay the broker under the guaranty) was not in such financial condition that there then was little probability that he could not repay any amount which taxpayer might later be called upon to pay the broker.
The case of Houk v. Commissioner, (C. A. 5) 173 F. 2d 821, has been urged in support of a contrary conclusion. Admittedly, the facts of that case are in many respects similar to those of the instant case. We point out, however, that the court, in outlining the issue before it, said (pp. 823, 824) :
The Tax Court based its conclusion on the theory that the Trust had “assumed and paid” the notes and judgments and that such action was purely voluntary. The question to be decided, therefore, is whether the Tax Court properly held the acquisition of these notes to be voluntary assumption rather than purchase. If the acquisition was a voluntary assumption without consideration, there is no basis for the Trust to include any part of the obligation represented by the notes and judgments in computing its bad-debt deduction. On the other hand, if the Trust purchased existing obligations against the estate in order to protect Trust property or an obligation due the Trust, it stands as assignee and may offset the price paid against the benefit realized, in determining the bad-debt deduction on the obligation due it to the extent such obligation is unrecoverable.
Later, on page 824, the court added the following:
As a matter of conservation of the estate of the decedent, in order to reap from it as large a part of the indebtedness due by it to the Trust as possible, as well as for protection of liens and properties owned by the Trust and subject to some of the estate obligations, it was necessary that the Trust acquire the notes and judgments in question. The acquisition was, of course, voluntary in that no legal duty rested upon the trustees to pay obligations of the decedent. Conversely, however, failure to take the affirmative steps of acquisition would have constituted indifference to, if not positive neglect of, the duty which did rest upon the trustees to save and protect the trust corpus, including debts due it, for the beneficiaries. As we see it, the trustees voluntarily, i. e., willingly and deliberately, pursued a course of action made mandatory by what they considered sound business judgment.
There is nothing in the opinion of the court in Houk v. Commissioner, supra, to indicate what view it may have taken if presented with an issue in which it was required to decide whether or not to allow a bad debt deduction to a taxpayer who had purchased obligations under circumstances in which there was no reasonable hope of recovering substantial parts of the considerations paid therefor. If such an issue is to be deemed implicit in the Houk case, we nevertheless do not have the benefit of any expression of opinion by the court on that subject.
In the light of the foregoing, we find nothing in the opinion in Houk v. Commissioner, supra, which requires us to depart from the principles affirmatively set forth in American Cigar Co. v. Commissioner and Hoyt v. Commissioner, supra, particularly since our views, resulting from our own independent analysis of the problem, are to the same basic effect as those expressed in the latter cases.
We have made no reference to petitioner’s reasons for purchasing the claims against the estate in the instant case for considerations in excess of their value. Petitioner’s reply brief suggests reasons, but there is no evidence to support the suggestions, however probable they may be. In fairness to petitioner, however, we think it proper to state that there is nothing in the record to indicate either lack of bona fides or a dominant motive to reduce taxes in the acquisition of the claims.
We now turn to that part of the problem relating to petitioner’s claim arising out of her right of subrogation. We hold, for reasons analogous to those already stated, that the transaction does not permit us to allow any deduction. We discuss the issue separately, because the required analysis must be applied to a problem of some subtlety which may be illusory at first glance.
Petitioner was the beneficiary of two policies of insurance on the life of decedent. Decedent borrowed money from a trust company, giving notes executed by petitioner and himself, depositing the policies as collateral security. Upon the facts, we agree that petitioner was an accommodation endorser. Upon decedent’s death, the Trust Company used the proceeds of one of the policies to pay part of the loans. Petitioner paid the balance of the loans, received the remaining proceeds of the policies, and took an assignment of the Trust Company’s claim against the estate for the entire amount of the loans.
Petitioner maintains that she was subrogated to the right of the Trust Company to collect the amount of the loans from decedent’s estate (to the extent, of course, of the assets of the estate available for the payment thereof). Her position is that the bank was not required to look to the collateral for the payment of the loans, but could have collected the loans from the estate to the extent of the available assets. She reasons, therefore, that she, as beneficiary of the policies, had the right to require the estate to exonerate her from the payment of the loans out of the collateral (the insurance policies) deposited as security for the loans, and that since the loans were paid in part by her, and in part from the proceeds of the policies, she is subrogated to the rights of the Trust Company, and, as subrogee, has a claim against the estate. The law of the State of New York is applicable. We agree with petitioner’s contention in this respect. In re Cummings’ Estate, 105 N. Y. S. 2d 104, 106; Chamberlin v. First Trust & Deposit Co., 15 N. Y. S. 2d 168. In re Jones' Estate, 81 N. Y. S. 2d 386. It is to be noted, however, that her right of exoneration, and her claim as subrogee, arise, not out of the fact that she paid part of the loans (since the amount so paid by her was promptly repaid out of the thereby increased proceeds of the policies paid directly to her as beneficiary) but because, under the laws of New York, upon the facts in this case, it is presumed that the husband intended that the loan be paid out of the assets of his estate, to the extent available for that purpose, in preference to payment out of the proceeds of the policies. The Trust Company, as a secured creditor, had the right to look first to its security in collecting the loans, but, from the standpoint of petitioner, as between the assets of the estate and the collateral deposited as security, the law presumes that the available assets of the estate constitute the primary fund for the payment of the indebtedness. See In re Cummings’ Estate, supra. In other words, it is clear that petitioner’s claim against her husband’s estate would have been the same if the loans due the Trust Company had been paid entirely out of the proceeds of the policies. Likewise, the consequences would have been no different if she herself had paid the entire amount of the loans.
Petitioner next takes the step which presents the issue before us. She urges that since she acquired a claim against the estate, and since part of it was uncollectible because of the insolvency of the estate, the uncollectible portion is to be treated as a nonbusiness bad debt. She attributes no force to the fact that at the time she acquired the claim, she could have had no reasonable hope of collecting a substantial part of it, and that she has received full value for that part of the claim which she might reasonably have hoped to collect.
We think that the issue may be brought into sharper focus by a simple illustration. Let us assume that petitioner was the beneficiary of a policy of insurance on the life of decedent in the amount of $50,000, and that decedent had borrowed $20,000 from a bank, depositing the policy as security for the loan. Let us assume further that decedent’s estate, after the payment of priority claims and expenses of administration, was without any assets available for the payment of general creditors. Under these circumstances, petitioner could have had no hope of realizing anything beyond the net equity of $80,000 representing the amount of the policy less the loan. She could, of course, pay the loan and receive the full amount of the policy, but the result would be the same, because, in addition to the $80,000 equity, she would merely receive the return of the $20,000 which she had expended in payment of the loan. In either event, she would have a subrogation claim against decedent’s estate for $20,000 (not because of any payment by her, but because of her husband’s presumed intention) but the value of the claim when she acquired it would have been zero. Again, the claim would not have arisen out of a transaction in which she herself had originally paid value, such as by a loan of money. The decedent, of course, had received the benefit of the lean. Considering the practical nature of the income tax laws, it would indeed be startling to discover that we are bound to direct the taxing authorities to mitigate the effect of such circumstances by recognizing an allowance to petitioner of a loss for a nonbusiness bad debt. We see no distinction in principle between an estate with available assets of zero and one which has assets from which petitioner could have had no hope of recouping her claimed loss.
We have found no authority in the law itself or in the decisions which requires us to hold for the petitioner under these circumstance^. It is our view, on the basis of the underlying principles already discussed, that since, to the extent of her claimed loss, petitioner could have had no reasonable hope of realizing value at the time she acquired the claim, she is not entitled to have her loss recognized as a nonbusiness bad debt. It is clear that she has been repaid to the extent of the full value (as distinguished from the face amount) of her subrogation claim as of the time it arose.
In December of 1946, petitioner received the sum of $17,849.29 as a result of the liquidation of Frontier Iron Works. She had acquired 300 shares of the stock of this company from her husband’s estate as of August 3, 1945, the stock being part of the securities turned over to her in payment of her claims. Respondent has submitted a number of theories leading to the assertion that petitioner has failed to establish a basis for the stock in excess of $600. We find that petitioner has established a basis for said stock, as of August 3, 1945, the date she acquired it, to the extent of $7,350, which was its fair market value as of that date and the fair value on the same date of that portion of her claims against the estate in payment of which she acquired the stock. . We find, therefore, that petitioner, in December 1946, realized a long-term capital gain of $10,499.29 as a result of the liquidation of the company.
Reviewed by the Court.
Decision will Toe entered wider Bule 50.