*875 Under articles of copartnership certain partners agreed to indemnify other partners against any loss sustained by the new partnership from any accounts taken over from an old partnership. Petitioner was a partner who was thus indemnified against certain alleged losses from worthless debts involved in this proceeding. Since the partnership agreement is controlling and upon petitioner's failure to prove that he had to bear any share in the alleged losses in spite of the indemnity provision, it is held that petitioner is not entitled to a deduction for a share in a partially worthless debt in the taxable year; held, further, that petitioner has failed to prove the extent of any loss from a debt in question in 1933 to the partnership of which he was a member.
*368 The Commissioner determined a deficiency in income tax for the calendar year 1933 in the amount of $626.29. The deficiency results from several adjustments made by respondent, all of which petitioners concede have been determined correctly. However, petitioners*876 contend, in their petition to this Board, that they are entitled to an additional deduction from gross income of a share in a partnership loss from a debt ascertained to be partially worthless in 1933. Neither the petitioners nor the partnership deducted the amount of such debt from gross income in their respective income tax returns for the taxable year. The sole question is whether Kenneth Walsh, a member of a partnership, is entitled to deduct a share of a loss from a debt alleged to have been ascertained to be worthless and charged off by the partnership of which he was a member. If the claimed loss is allowed it will offset the amount of the deficiency.
Certain facts and certain agreements, notes and deeds have been stipulated. Other facts appear in the record of oral testimony and documentary evidence. We make the following findings of fact.
FINDINGS OF FACT.
Kenneth Walsh and Eleanor S. Walsh, residents of Hillsborough, California, filed a joint income tax return, with the collector for the first district of California, as husband and wife, for the calendar year 1933. The term "petitioner" will hereinafter be used to refer to Kenneth Walsh alone.
*369 *877 The copartnership of Walsh, O'Connor & Barneson engaged in the general stock brokerage business with offices at Los Angeles and San Francisco. It was formed December 15, 1930, as a result of a "merger" of Walsh, O'Connor & Co. and H. J. Barneson & Co. Petitioner was a member of the copartnership of Walsh, O'Connor & Barneson. After December 1, 1931, he was a member of its executive committee. Under the articles of partnership, amended December 1, 1931, his interest in the firm's earnings was 23 percent.
The businesses and properties of H. J. Barneson & Co., and Walsh, O'Connor & Co. were conveyed to Walsh, O'Connor & Barneson, hereinafter called the new partnership, on or about December 15, 1930. Individuals who had been members of the old partnerships and entered into the new partnership will be referred to hereinafter as the Barneson partners and Walsh, O'Connor partners. The new partnership consisted of the following: Kenneth Walsh, George R. O'Connor, Cliff M. Weatherwax, Arthur N. Earll, R. M. Marshall, Eric L. Pedley, H. J. Barneson, Jr., Leslie Barneson, and James R. Kennedy, as general partners, and Edward M. Walsh and John Barneson as limited partners. The first nine*878 persons were the first to ninth parties, inclusive, and Edward M. Walsh and John Barneson were the tenth and eleventh parties, respectively. Paragraph 12 of the articles of partnership of Walsh, O'Connor & Barneson, dated December 13, 1930, provided for certain guaranties and indemnities as follows: The parties of the first, second, third, fourth, fifth, and sixth parts (Kenneth Walsh being the party of the first part) jointly and severally agreed to indemnify and hold harmless the new partnership formed, and the parties of the seventh, eighth, ninth, and eleventh parts (Barneson partners) of and from:
* * * any losses which may be sustained by the new partnership from any accounts taken over from Walsh, O'Connor and Co. which are unsecured, or partially secured, or not properly margined at the time of the commencing of this partnership, such accounts to be determined and identified as those segregated and set apart by the New York Stock Exchange as unsecured, partially secured or insufficiently margined accounts upon the New York Stock Exchange audit of said questionnaire of the new firm, which will be made up and filed with the New York Stock Exchange in or about the month of*879 January, 1931.
The parties of the seventh, eighth, and ninth parts (some of the Barneson partners) agreed jointly and severally to pay or discharge and to indemnify and hold harmless the limited partnership formed, and the parties of the first, second, third, fourth, fifth, sixth, and tenth parts (Kenneth Walsh and other Walsh, O'Connor partners) from:
* * * any losses which may be sustained by the new partnership from any accounts taken over from H. J. Barneson & Co., which are unsecured, or partially secured, or not properly margined at the time of the commencement of this *370 partnership, such accounts to be determined and identified as those segregated and set apart by the New York Stock Exchange as unsecured partially or insufficiently margined accounts upon the New York Stock Exchange audit of said questionnaire of the new firm which will be made up and filed with the New York Stock Exchange in or about the month of January, 1931.
By paragraph sixth of the articles of partnership, provision was made for the contribution of property by the H. J. Barneson & Co. partners to the new partnership, as follows:
Sixth. * * * and the parties of the seventh, eighth*880 and ninth parts, who together with M. Eyre Pinckard constituted general partners of the firm of H. J. Barneson & Co., with the consent of John Barneson, sole limited partner, do hereby assign, transfer and set over unto the new firm (Walsh, O'Connor & Barneson) all and singular the property and assets of said firm of H. J. Barneson & Co. as the same may be at the time of the commencement of the new partnership hereby created.
Among the accounts of the H. J. Barneson partnership transferred to the new partnership were two accounts of Walter S. Bachman and Juliet Bachman, husband and wife, hereinafter designated the Bachman accounts. At the time of the commencement of the new partnership, the debit balance for these two accounts totaled approximately (the same or greater) $98,051.51.
The articles of partnership of the new partnership provided generally what the capital contribution of each general partner in the new partnership would be, as follows:
Seventh. The capital contribution of each general partner shall be the respective amount to the credit of his capital account on the books of his respective old firm at the time of the commencement of the new firm subject to*881 such adjustments as may be made in partners' accounts on the audit by the New York Stock Exchange of the questionnaire to be submitted by the new partnership to the New York Stock Exchange in or about the month of January, 1931 * * *. The contributions of the general partners shall be deemed to have been fully made by the transfer of the assets of the old firms hereinabove provided for.
A questionnaire was prepared for the New York Stock Exchange by the new partnership in January 1931, in which the Bachman accounts were listed as partially secured accounts.
Regulations of the New York Stock Exchange required that members have free capital equal to 5 percent of their outstanding debits representing either securities listed on a recognized stock exchange, or by cash, exclusive of all items such as stock exchange memberships, furniture and fixtures, nonmarketable collateral, and unsecured obligations of various kinds. For the purpose of acquiring this information the New York Stock Exchange periodically sends out questionnaires to its members.
In September 1931 an investigation was made to determine whether the free capital of Walsh, O'Connor & Barneson was sufficient to meet*882 the New York Stock Exchange requirements. The accounts *371 were gone over and analyzed as of August 31, 1931. The accounts received from Walsh, O'Connor & Co. and from H. J. Barneson & Co. were analyzed. All the partly secured and unsecured accounts were analyzed to show deficiencies between the debit balances of accounts and the values of collateral. As a result, new capital was found to be needed and, in October 1931, $262,500 new capital was paid in. A consolidated statement as of October 31, 1931, was made and on this statement $1,000,239.62 was charged against partnership capital, representing an adjustment of general ledger and customers' accounts. The Bachman accounts were included in the analysis and in this adjustment. They were written down to a value of $27,641. The Bachman accounts had been carried on the books of the new partnership showing a debit balance due August 31, 1931, in the total amount of $98,051.51. They were deemed "deficient" under the New York Stock Exchange requirements in the amount of $70,410.51. This amount was charged off as a loss and was included in the total amount of $1,000,239.62 charged against partnership capital on the general*883 ledger in October 1931. The two Bachman accounts were transferred from the general ledger to the "Securities of Doubtful Value Ledger", as memorandum accounts for whatever they would yield. They were removed from the assets of the partnership. The executive committee of Walsh, O'Connor & Barneson instructed that the "write-offs" should be charged against the capital shares of the partners of the respective predecessor firms. The total write-offs were charged against paid in partnership capital on the general ledger in October 1931. The capital accounts of the partners who had been members of partnerships which had previously held the accounts that were written down as of August 31, 1931, were charged with the respective shares of the write-downs of the accounts they had contributed to the new partnership. The $70,410.51 charge-off of the Bachman accounts was in 1931 charged to the capital accounts of the Barneson partners.
The firm of Walsh, O'Connor & Barneson discontinued business on February 20, 1932, at which time such of the accounts as were acceptable were taken over by another brokerage firm and the remaining accounts were liquidated. The accounts of doubtful security, *884 of which the Bachman account was one, were not taken over and remained on the books of Walsh, O'Connor & Barneson. Their liquidation was in charge of L. S. Ackerman, of Ackerman, Wayland & Matthews, attorneys. A simple cash record of receipts and disbursements was maintained by these attorneys in their liquidating work. No regular entries were made in the partnership books after the business closed in February 1932 and no formal charge-off was made in 1933 of the Bachman account as a debt ascertained to be worthless, after the settlement of the claim against the Bachmans, *372 on the books of the partnership or of the attorneys. In 1933 the new partnership was in liquidation.
After October 31, 1931, the Bachman accounts were carried as memorandum accounts of doubtful value for collection purposes. Regardless of the charge-offs and write-downs of these accounts, in October 1931, it was hoped to recover something from the Bachmans. So far as the Bachmans were concerned, the debit balances in their accounts on October 31, 1931, totaled $94,462.34. Negotiations were undertaken with the Bachmans regarding their accounts separate from the various adjustments made in October*885 1931.
On November 30, 1931, Walter S. Bachman executed a note payable to the new partnership in the amount of $94,462.34, due November 30, 1933, pursuant to an agreement dated November 30, 1931, executed by and between the Bachmans and Walsh, O'Connor & Barneson. It was provided in the agreement that the note of $94,462.34 could be paid in full by payment of one-half the principal amount of the note, plus interest accrued on the unpaid balance of the face amount at any time prior to the due date of the note.
Bachman was unable to pay his note of November 30, 1931, or any part thereof, prior to its due date in 1933. Negotiations between him and L. S. Ackerman, attorney for Walsh, O'Connor & Barneson, in liquidation, were undertaken. Ackerman investigated Bachman's financial status and ascertained that all his assets were pledged and his sole source of income was his salary as president and manager of Puro Filters Co. On December 22, 1933, a new agreement was entered into by and between Walter and Juliet Bachman and Walsh, O'Connor & Barneson. Under this agreement the November 1931 agreement was terminated in consideration for the following:
1. Transfer to the new partnership*886 of all right title and interest in 1,957 shares of Universal Consolidated Oil Company common stock having a fair market value of $6,066.70 on December 22, 1933.
2. Deed to a certain piece of real estate in the County of Los Angeles having a fair market value of $2,558.97 on December 22, 1933.
3. A new promissory note of Walter S. Bachman, dated December 22, 1933, to Walsh, O'Connor & Barneson, in the amount of $14,850, payable $400 on January 1, 1934 and $400 on the first of each month thereafter, secured by 297 shares of Puro Filters Company preferred stock. Upon default of any installment payment the note was to become due and payable together with seven per cent interest and the new partnership was authorized then to sell the Puro Filters stock at public or private sale. Bachman agreed to pay any deficiency upon sale of the collateral.
The November 30, 1931, note was returned to Walter S. Bachman. The piece of real estate conveyed to the new partnership was sold by them in February 1934 for a net sum of $2,558.97. On December 22, 1933, there was paid on the Bachman debt a total of $8,625.67; there remained an indebtedness of $14,850.
*373 The indemnity provision*887 in paragraph 12 of the articles of copartnership was never modified.
No deduction for any loss from the Bachman accounts was taken in either the partnership income tax return or the individual return of Kenneth Walsh for 1933. Petitioner signed the partnership return.
OPINION.
HARRON: Kenneth Walsh, petitioner, alleges that the new partnership suffered a partial bad debt loss in 1933 when a compromise settlement of the Bachman debt was executed. It is alleged that a debt was ascertained to be partially worthless and charged off by the new partnership in accordance with the requirements of section 23(j) of the Revenue Act of 1932. It is alleged in the petition that the Bachman debt amounted to $100,366.19 in 1932 (amount of a note of Bachman, $94,462.34, due November 30, 1933, plus accrued interest not proved). It is alleged in the petition that the partnership realized, under a compromise settlement agreement dated December 22, 1933, an aggregate amount of $23,475.05 (the amount of a new note, $14,850, plus the fair market values of Universal Consolidated Oil stock and a piece of real estate). It is then alleged that the loss to the partnership in 1933 was $76,891.15*888 and it is alleged that petitioner's share in this loss should be computed at not less than 24.75 percent and that his share in the loss is $19,032.16. We think all the allegations are in error. One error is as to what was realized from the settlement in 1933. Only $8,625.67 was realized. The $14,850 was a continuation of the debt.
The evidence in this proceeding suffers from the loss of the general ledger of the new partnership in which the capital accounts of the partners were kept. It is apparent that the adjustments referred to in paragraph 7 of the articles of partnership were not made until October 1931, ten months after the new partnership was formed. Whether or not the adjustments made then in the capital of the partnership constituted such reorganization as is referred to in article 604 of Regulations 77 1 is not a question before us. Whether those adjustments determined the value of contributions of accounts to the partnership is not proved. However, we are satisfied that $70,410.51 of the Bachman debt was charged against the capital shares of the Barneson partners in 1931 when the Bachman accounts were written down to $27,641.
*889 The Bachman accounts were transferred to the new partnership in 1930 and we believe that any loss from these accounts would be a loss *374 to the new partnership. The questions presented here are, first, whether petitioner participated in any loss in the Bachman accounts under the terms of the partnership agreement, particularly under paragraph 12 thereof; and, second, what the amount of the loss to the partnership was in the taxable year in the event any part of that loss fell on petitioner. There is also the question whether there was ascertainment and charge-off of the alleged loss in 1933 under the provisions of section 23(j) of the Revenue Act of 1932. It is our opinion that no part of the Bachman loss was such partnership loss as petitioner could participate in under paragraph 12. Arriving at this conclusion, it is unnecessary to consider the other questions. However, so far as petitioner is concerned, his petition to this Board raised a claim that the partnership suffered a loss in an amount of $76,891.15 in 1933, part of which he claims as a deduction in his individual return. The burden of proof on petitioner is to prove that the partnership suffered a loss*890 in the amount claimed in the pleadings and that the loss is within the provisions of section 23(j) of the Revenue Act of 1932. We shall therefore consider the second question.
The basis for gain or loss to the new partnership on the Bachman debt is the value thereof at the date of contribution to the partnership. ; . What was the basic value? The value of this account in December 1930 may have been less than the debit balance shown in the account. Petitioner leaves us in doubt as to what was the value of the Bachman account as a contribution to partnership capital. In one argument petitioner contends that the October 1931 adjustments in capital were made pursuant to paragraph 7 of the partnership agreement. It would follow that the Bachman accounts were contributed to partnership capital at a value of $27,641. However, this is a value as of August 31, 1931, and not December 15, 1930. Petitioner passes over any recognition that under this argument the basis to the partnership for gain or loss on the Bachman accounts would be $27,641. The difficulty with this argument*891 is that the write-downs in October 1931 were as of August 31, 1931, whereas the date of contribution to capital of accounts from old partnerships is December 15, 1930. Even so, the value arrived at as of August 31, 1931, is indicative that the Bachman accounts were contributed to the partnership at a value of less than the debit balances on December 15, 1930.
Petitioner takes as the basis for gain or loss to the partnership the amount of the November 1931 note of Bachman, $94,462. He claims a loss on that basis. He appears to believe that the charge-off of approximately $70,000 in 1931 has no bearing on the matter of what is the basis for gain or loss on the debt in question, and passes over the question of value at the date of contribution. In the last analysis the *375 petitioner makes only arguments and has failed to offer proof as to what the basis to the partnership is for the alleged loss. We hold that petitioner has failed to sustain the burden of proof upon him on this point.
It becomes unnecessary to consider another subsidiary question, namely, whether the Bachman debt was ascertained to be partially worthless and charged off in 1933 under the requirements*892 of section 23(j). We can not reach this point without proof of the basis for the alleged loss.
Not only is there failure of proof on the point of basis for loss to the partnership, but the evidence we do have indicates that the basis would be around $27,641 and not $94,462. It is a fair inference (although we believe it should not be necessary for us to make inferences) from the record, that the Bachman account was worth no more in December 1930 than it was in October 1931. The Bachmans did not furnish extra security for their debts in either October or November 1931. Prior to November 1931 the new partnership had already charged off on its books against the capital shares of the Barneson partners a loss of $70,410.51. Thereafter, in the agreement of November 30, 1931, the partnership agreed to accept, at any time within two years, one-half of $94,462, the debit balance of the account in the doubtful accounts ledger, in full payment of all claims. Finally, in December 1933 the partnership agreed with the Bachmans to cancel its claim to at least $70,986.67 of the debit balance of the memorandum account, approximately the same amount as had been charged off the general ledger*893 in 1931. These debit balances in the ledger of doubtful accounts are not material. As far as we can judge, that ledger was a customer's ledger and the partnership for its own reasons had not told the Bachmans of the charge-off of about $70,000 of the debt in 1931 on the firm's general ledger. There appears to have been some trouble with the Bachmans as it appears that, even though the Bachman accounts had been taken out of the firm's assets in 1931 at least to the extent of about $70,000, the partnership still did not inform the Bachmans of this action. There is no evidence contrary to the above. Cf. .
We do not know how the Barneson partners reported in their returns in 1931, if they did, the charge-offs made against their capital in 1931. Their loss may have been one related to their capital contributions that could not have been determined until final liquidation of the new partnership, cf. , or they may have been entitled to a loss deduction in 1931. Cf. *894 . In any event, these questions are not before us for determination and, lacking better evidence, we can not find *376 as a fact what the basic value of the Bachman accounts for the purpose of gain or loss is. We do believe it evident, however, that petitioner's claim that a loss of about $76,800 was ascertained in 1933 involves a claim that would result in a double deduction, which may not be taken. See ; . We believe that the alleged loss in 1933 to the partnership could not be more than $4,165.33 ($27,641 less $14,850, new note, less payments on account of $8,625.67) although we do not decide the question whether a debt was ascertained to be partially worthless and charged off in 1933.
The chief question, whether Kenneth Walsh is entitled to deduct any part of the alleged Bachman debt loss, turns upon construction of paragraph 12 of the partnership agreement. The Bachman account was one covered by the indemnity of the Barneson partners to the partnership, Kenneth Walsh, and others. Counsel for petitioner argues*895 that the indemnities in paragraph 12 were limited to adjustments in partners' capital contributions which might be made in accordance with paragraph 7 of the partnership agreement. There is nothing in the terms of the partnership agreement before us to support this argument. Whatever the capital contributions of each partner may have been under paragraph 7 (which we do not know), the terms of paragraph 12, which is not amended or changed, clearly cover any and all losses which the partnership might suffer from the described accounts contributed to the new partnership. If there was any loss in 1933 from the Bachman debt it was a loss to be borne by the Barneson partners under the terms of the indemnity set forth in paragraph 12.
The adjustments in capital made in 1931 may have been made pursuant to paragraph 7. They may have been made pursuant to paragraph 12. But we do think they could have been made under both paragraphs. Paragraph 7 relates to the capital contribution of each partner. Contributed capital consisted in part, at least, of accounts transferred from the old partnerships. Whatever was determined to be capital contribution under paragraph 7 would affect basis*896 for gain or loss and therefore would affect the extent of losses to be borne by the respective partners under the indemnity provisions in paragraph 12. We believe paragraph 12 relates to losses from accounts after contribution and on the basis of contribution. We conclude that any loss that may have been sustained in 1933 from the Bachman accounts that were covered by the indemnity provision would fall on the Barneson partners and not on Kenneth Walsh, petitioner, to whom the indemnity ran. Petitioner has not introduced any evidence to show that, in spite of the indemnity provisions, any of the alleged loss would fall on him; i.e., he has not shown that the *377 Barneson partners were insolvent or that their capital shares in the partnership had been exhausted.
In the matter of sharing in profits and losses of a partnership, the partnership agreement is controlling. We are not referred to any local law to the contrary. See Petitioner's counsel contend that petitioner is entitled to share in the alleged Bachman loss to the extent of 26.28 percent. That rate may be his share of losses from accounts not covered by the indemnity*897 provision. But, under the terms of paragraph 12, petitioner was not entitled to deduct any part of the losses on the Bachman accounts, since he would never have to pay any part of those losses. See . We hold that petitioner is not entitled to the partial bad debt deduction claimed in the petition to this Board.
Decision will be entered for the respondent.
Footnotes
1. ART. 604. Readjustment of partnership interests.↩ - * * * Whenever a new partner is admitted to a partnership, or any existing partnership is reorganized, the facts as to such change or reorganization should be fully set forth in the next return of income, in order that the Commissioner may determine whether any gain or loss has been realized by any partner.