*232 Decision will be entered under Rule 50.
The taxpayer and his brother and sister acquired by their mother's will securities and rented buildings which they held as partners from 1928 until 1940. The taxpayer, acting as manager, operated the properties at a constant loss, and individually advanced funds for operation and conservation, which were credited to his account and charged against the three partners. In 1939 the brother and sister demanded an accounting, which disclosed insolvency and indicated substantial amounts due from them; the taxpayer had a credit balance. The brother and sister rejected the accounting, and in 1940 the three made a settlement agreement whereby the taxpayer received less than his credit balance, and the other partners were relieved of liabilities and received some assets. Held:
(1) As the taxpayer's credit balance was not established as a debt due him, the amount relinquished in the agreement is not deductible as a bad debt.
(2) As the taxpayer's advances exceeded the amount of his credit balance relinquished in the agreement and were made for the conduct of a business and preservation of property, the amount relinquished is deductible as a*233 loss under section 23 (e), Internal Revenue Code.
*790 The Commissioner determined a deficiency of $ 7,388.47 in income tax for 1940, in part by disallowing the deduction of $ 38,927.91 claimed as a bad debt. Petitioner contends that this amount, *234 representing the part of a partnership credit balance relinquished by him in a settlement agreement with his brother and sister, is deductible either as a bad debt or as a loss, since he had individually advanced funds reflected in the credit balance for the conduct of the partnership's business and conservation of its property.
FINDINGS OF FACT.
Petitioners, husband and wife, residing in New York, New York, filed a joint income tax return for 1940 with the collector of internal revenue for the second district of New York. Charles S. Guggenheimer (hereinafter called the petitioner) is engaged in the practice of law in New York City, and prior to the death of his mother, Eliza Guggenheimer, in December 1927, he managed her properties, comprising improved real estate and securities. By will his mother bequeathed and devised to her three children, petitioner, H. Randolph Guggenheimer, and Adele G. Lewisohn, certain securities and the following real estate: A twelve-story building known as 715-27 Broadway, a building on Lexington Avenue, and a residence known as 923 Fifth Avenue, all in New York City; and unimproved beach property at Drexel, New Jersey, and a half interest in contiguous*235 beach property, improved with a cottage. The other half interest in the last item was owned by Adele G. Lewisohn.
After the estate's administration was closed in 1929, the three distributees under the will deemed it expedient to keep the properties under single management, and to this end they formed a partnership called Estate of Eliza Guggenheimer. A joint account was maintained for its records, and petitioner served as manager, with the acquiescence of his brother and sister. Because of the economic depression which began late in 1929 rents from the real estate dropped almost by half, and, as the properties were encumbered by mortgage debts aggregating about $ 1,340,000, income was often inadequate for interest, taxes, and operating expenses. Petitioner, being in a better financial position than his brother and sister, advanced amounts needed, sometimes as much as $ 25,000 at a time, and these advances were partly repaid and *791 partly credited to him in the joint account. Petitioner expected that the assets of the partnership would increase in value and would produce more income; his own participating percentage of interest was not changed by the advances. Separate*236 accounts were kept for each of the three partners, and credits and debits were made therein from time to time in accordance with their interests. Statements were annually rendered to each, and each reported his proportionate part of the partnership's gain or loss on his income tax return. Since 1930 there has constantly been a loss.
In 1930 the partnership sold the Broadway building, but after a default by the purchaser the partnership reacquired it the next year and incurred considerable expense in repairs and reconditioning. In 1931 the building was transferred to a corporation, which issued all its shares to the partnership in exchange therefor. Later the partnership transferred the Lexington Avenue building to a second corporation for all the latter's shares. The mortgagees acquired the two buildings by foreclosure in 1936 and 1944, respectively, leaving the corporations without assets. In 1937 petitioner individually purchased from the partnership the residence at 923 Fifth Avenue for $ 225,000, a price which his brother and sister considered fair. The property was mortgaged for $ 140,000, and the remaining $ 85,000 was entered as a debit in petitioner's account with the*237 partnership. Petitioner sold this residence in 1945 for $ 125,000.
Although petitioner's brother and sister had ready access to the partnership's records, they never examined them. In 1939 they requested of petitioner a general settlement of the account. As of December 31, 1939, the partnership's books indicated a credit balance of $ 86,203.72 as due to petitioner, a debit balance of $ 17,439.50 as due from H. Randolph Guggenheimer, and a debit balance of $ 160,628.90 as due from Adele G. Lewisohn. These balances resulted from numerous debits and credits over the years, and reflected cash advances which petitioner had made as and when needs arose. Without questioning the integrity of the entries, the brother and sister complained that petitioner had made decisions and incurred expenses without consulting them and that his substantial advances for the Broadway and Lexington Avenue properties should have been charged to the respective corporations, not to the partnership; and they disputed their liability for a third part of the advances and, hence, the balances indicated by the books.
There was a bona fide dispute between the petitioner, on the one hand, and his brother and sister, *238 on the other, as to the amount due petitioner in the partnership. Petitioner was of the opinion that he could not collect the amount due him without a lawsuit. Petitioner's sister, *792 Adele G. Lewisohn, then had no assets, and petitioner's brother, H. Randolph Guggenheimer, was not in good financial condition.
This dispute was settled on January 30, 1940, by an agreement of the three parties in which they referred to the balances as shown in the joint account and to the contention of the brother and sister that certain of petitioner's advances were not made to the account, but "to various corporations and to others, and that many items appearing in such Account * * * are erroneous." They then agreed that the sister should transfer to each brother a one-sixth interest in the Drexel cottage, so that all would then own a one-third interest in it; that the securities of the partnership be divided on a basis of 50 per cent to petitioner, 30 per cent to the brother and 20 per cent to the sister, and that any remaining assets be divided one-third for each party.
Pursuant to this settlement agreement, petitioner received property of a value of $ 47,275.81 and renounced his claim *239 of $ 86,203.72, computed to reflect the advances made by him. On his income tax return for 1940 he deducted the difference of $ 38,927.91 as a bad debt. The Commissioner disallowed the deduction.
OPINION.
Petitioner assails the Commissioner's disallowance of $ 38,927.91 claimed as a bad debt deduction on his 1940 income tax return. He contends that the amount represents the ascertained worthlessness of debts created by his advances to the partnership, or, in the alternative, that it is deductible as a loss under section 23 (e) (2), Internal Revenue Code.
Petitioner, his brother Randolph Guggenheimer, and his sister Adele G. Lewisohn, having acquired securities and improved real estate under the will of their mother, held and operated these properties under the form of a partnership in which each held a one-third participating interest. Petitioner had charge of the properties during his mother's lifetime, and after her death in 1927 he continued to act as manager, with the assent and knowledge of his brother and sister. The latter had ready access to the records kept as a joint account, but in fact never examined them. The real estate consisted of a large rented building on Broadway, *240 another on Lexington Avenue, a residence on Fifth Avenue, New York, and a beach cottage with adjoining lots at Drexel, New Jersey. The city properties were encumbered with mortgages aggregating about $ 1,340,000. They were profitably rented when acquired, but after 1929 the economic depression caused a rapid decline in their rents and market value, and current income was often insufficient to cover interest, expenses, and carrying charges. *793 As a consequence petitioner was repeatedly obliged to advance funds -- on some occasions as much as $ 25,000 at a time. These advances were credited to him on his account with the partnership and were charged equally against the three partners. In 1930 petitioner sold the Broadway building, but the purchaser turned it back the next year, and petitioner thereafter formed two corporations which held title to that and the Lexington Avenue building, respectively, while the partnership held all the shares. The Broadway building was lost by foreclosure in 1936, and the Lexington Avenue building in 1944. Petitioner individually purchased the Fifth Avenue residence in 1937, selling it in 1945 at a loss of $ 100,000. Despite petitioner's*241 efforts and constant advances of funds, the net worth of the partnership's assets steadily declined, so that by the end of 1939, or shortly before petitioner's settlement agreement with his brother and sister, the books indicated insolvency. But as petitioner had made advances which were credited to him, his account showed a credit balance, while those of his brother and sister indicated large deficits.
In seeking to deduct the $ 38,927.91 as a bad debt, the petitioner does not allege any total of unpaid loans or advances due to him from the partnership, but presents rather the result of a general accounting computation in which his unitemized advances are reflected together with all other partnership receipts and disbursements from the beginning. The $ 86,203.72 appearing in the joint account as his credit balance can not, therefore, be deemed to represent specifically debts or advances, but reflects rather his computed share of the partnership assets or liabilities. Since the establishment of a bona fide debt, certain in amount, is a prerequisite to the deduction sought, Milton Bradley Co. v. United States, 146 Fed. (2d) 541; J. S. Cullinan, 19 B. T. A. 930,*242 petitioner has failed to meet a required burden of proof. It is true, however, that the same computation indicated that petitioner's brother owed the partnership $ 17,439.50 and that his sister owed it $ 160,628.90, and it might be inferred that these large deficits resulted from attributing to the brother and sister proportionate liability for petitioner's unspecified advances, which exceed the total of petitioner's credit balance. We are not disposed to make this inference, but, even if we were, petitioner would be in no stronger position. While true that, under New York law, a partnership must indemnify a partner for payments personally made by him for the conduct of its business or the preservation of its property, McKenney's Consolidated Laws of New York, vol. 38, sec. 40, such partner's right of action accrues only by virtue of an accounting or final settlement in which the partnership's indebtedness to him is recognized, Knapp v. First Nat. Bank & Trust Co., 154 Fed. (2d) 395; Herrick v. Guild, 257 App. Div. 341; *794 13 N. Y. S. (2d) 115; Lasky v. Coverdale, 84 Misc. 34">84 Misc. 34;*243 145 N. Y. S. 994; Vickery v. Stemm, 140 N. Y. S. 1007. Here the brother and sister affirmatively contested any such liability, alleging that petitioner had made decisions and loaned and used funds in substantial amounts without consulting them, and they refused to pay the liabilities with which they were charged or to recognize as correct the amount which appeared to petitioner's credit on the books. It is not necessary and on the record it is not possible for this Court to decide the question of their liability. For present purposes it is sufficient that the contention was made and is at least colorable. Under petitioner's management the interest of the other two partners was converted into a substantial liability, which apparently had been increasing over the years. Petitioner had, therefore, not a recognized, bona fide debt for collection, but rather a disputed claim, and his failure to collect the full amount of that claim does not support a bad debt deduction. Milton Bradley Co. v. United States, supra;Howell v. Commissioner, 69 Fed. (2d) 447; *244 certiorari denied, 292 U.S. 654">292 U.S. 654; Park v. Commissioner, 58 Fed. (2d) 965; certiorari denied, 287 U.S. 645">287 U.S. 645.
Petitioner's alternative contention is based on section 23 (e), Internal Revenue Code, which permits the deduction of losses incurred in trade or business or in any transaction entered into for profit, though not connected with trade or business. The partnership was engaged in the business of renting and conserving property, and, as managing partner, petitioner devoted his time and attention to that business, and risked in it the property acquired from his mother and the funds advanced by him individually. He testified, and we are convinced, that he made the advances to hold and conserve the properties in the expectation that they would increase in value. He was disappointed in that expectation, it is true, but he and his brother testified, and we have no reason to doubt, that the books were accurately kept as to amounts, and that the brother and sister felt aggrieved by reason of his error in judgment.
Respondent suggests that in making a settlement whereby the brother and sister were relieved*245 of their indicated indebtedness to the partnership and together received about one-half of the remaining assets, petitioner was acting generously with members of his family and is to be treated as "forgiving" the debt. From the testimony and the background of the settlement, we are not convinced that this was so. As managing partner, petitioner acted with great independence and, although the partnership regularly sustained losses after 1930, petitioner never called on the other partners for a settlement or a contribution and, as they never examined the books, they inferentially did not know of the liabilities accumulating against *795 them. Under their mother's will, petitioner's brother and sister had received property of great value and as result of petitioner's management over the years losses had wiped out their entire interests, leaving each of them with substantial deficits to pay, which they refused to do and disputed the correctness of petitioner's claim. It is not unreasonable to suppose that they expected distribution of some property upon a liquidation of assets, or that a court of equity under the circumstances shown might have sustained their claim. We are of*246 opinion, therefore, that the motive which prompted petitioner to make the settlement was not a forgiveness of the debt or a generosity to his relatives, but because he believed that it was to his best financial interest to do so, as he could not hope to receive any larger amount without litigation, and as a lawyer he knew that this might be prolonged, the result fraught with uncertainty, and a court judgment, if any, of doubtful value. By the settlement he relinquished a claim against the partnership for which the brother and sister were ostensibly liable to make contributions, and he sustained a loss which is measured by the difference between the value of his share of partnership assets as shown by the books and the value of what he received as a result of the settlement.
In so holding, we assume that petitioner's advances exceeded the amount of the claimed loss of $ 38,927.91, despite the lack of precise evidence on this point. But such assumption seems abundantly supported by the magnitude of the other partners' liabilities, by petitioner's testimony that on two occasions he made advances of $ 25,000 each, and by the fact that, after he had furnished carrying and operating expenses*247 during years of successive losses, the partnership's book liabilities were substantially in excess of the value of its assets. On this background the partnership had no net assets to liquidate, and, hence, those which petitioner received are not to be regarded as a liquidating distribution, but rather as given in reimbursement of his advances. These advances were, we believe, made by him primarily for the purpose of operating and conserving property used in a trade or business, and, to the extent that he failed to make recovery, he sustained a deductible loss in the year of settlement.
Decision will be entered under Rule 50.