1931 BTA LEXIS 1973">*1973 DEDUCTION - BAD DEBT. - In 1918 the decedent loaned his wife $100,000 to be used as collateral and she gave him her note in that amount payable to him on demand with 6 per cent interest. In 1920, when she lost her entire assets and resources, the decedent charged off said amount as a bad debt. Held, that decedent was entitled to a bad debt deduction of said amount in 1920, pursuant to section 214(a)(7) of the Revenue Act of 1918.
22 B.T.A. 1291">*1291 This proceeding was instituted on May 13, 1927, by William M. Fleitmann, deceased, for a redetermination of the deficiencies in his income and surtaxes as asserted by the respondent in amount of $18,798.99 and $28,246.60 for the calendar years 1918 and 1920, respectively. The said petitioner died March 24, 1929, and the Member presiding at the hearing granted a motion that the above named executors of the estate of William M. Fleitmann, deceased, be substituted as the petitioners in this proceeding, which motion was concurred in by counsel for the respondent.
1931 BTA LEXIS 1973">*1974 At the hearing the Member also granted the petitioners' motion that the petition be amended so as to leave one assignment of error in the respondent's determination, namely, that the respondent disallowed as a deduction from the gross income of William M. Fleitmann, deceased, for the year 1920, an alleged loss in the amount of $101,849.77.
FINDINGS OF FACT.
The parties hereto have submitted the following stipulation of facts:
1. William M. Fleitmann, a resident of the City of New York, State of New York, Petitioner in this proceeding, was for the period from January 1, 1918, to May 23, 1918, both dates inclusive, a member of the partnership of Fleitmann & Company.
2. Pursuant to the terms of a certain agreement dated April 30, 1918 the business of the aforesaid partnership was, on May 24, 1918, taken over by Fleitmann & Company, a corporation duly organized and incorporated under the laws of the State of New York.
22 B.T.A. 1291">*1292 3. On March 15, 1919 petitioner filed his separate tax return for the full calendar year 1918 on the cash receipts and disbursements basis of reporting taxable net income, treating the partnership of Fleitmann & Company as if it was incorporated1931 BTA LEXIS 1973">*1975 from January 1, 1918, and accordingly reported such dividends as were declared by Fleitmann & Company, Inc., during the year 1918 as having been declared, in part, out of the paid-in-surplus of Fleitmann & Company, Inc., and accordingly not taxable.
4. The distributive share of the profits of the partnership of Fleitmann & Company to the petitioner for the period from January 1, 1918 to May 23, 1918, both dates inclusive, was 25%, and on this basis the profits of the partnership are taxable to the petitioner.
5. Petitioner received from Fleitmann & Company, Inc., on July 3, 1918 dividends in the amount of $5,700.00, which amount was 2% on 2,850 shares of common stock held by the petitioner, and on December 23, 1918 he received from Fleitmann & Company, Inc., dividends in the amount of $27,650.00 which amount was 7% on 3,950 shares of common stock held by petitioner.
6. On March 15, 1921 petitioner filed a joint return for himself and his wife, Lida M. Fleitmann, for the full taxable year 1920 on the cash receipts and disbursements basis of reporting taxable net income.
7. Petitioner received from Fleitmann & Company, Inc., on March 12, 1920 dividends in the amount of1931 BTA LEXIS 1973">*1976 $35,000.00, which amount was 7% on 5,000 shares of common stock held by the petitioner.
8. The aforesaid dividend payments for the years 1918 and 1920 are taxable to the petitioner at effective surtax rates.
9. On the aforesaid statement of facts the petitioner abandons the assignments of error in paragraphs (a), (b), (c), (d), (e), (f) and (g) of the petition filed May 13, 1927.
10. In 1918 a judgment of $218,664.44 was rendered against Lida M. Fleitmann, wife of the petitioner, executrix of her brother's estate, for moneys alleged to be due from her to certain creditors of her brother's estate. Mrs. Fleitmann desired and was advised to appeal from this judgment to the higher courts. In order to make this appeal it was necessary for her to put up a bond in the amount of the judgment plus interest and costs. To write the bond the Surety Company required collateral to the amount of the bond. Mrs. Fleitmann did not have sufficient money or securities or properties to deposit with the Surety Company and requested the taxpayer, her husband, the advance the amount of her deficiency. The taxpayer advanced to his wife at that time the sum of $101,849.77. A note in the1931 BTA LEXIS 1973">*1977 sum of $100,000.00 was at that time made out by Lida M. Fleitmann, his wife, and delivered to the taxpayer, said note being offered in evidence as Petitioner's Exhibit No. 1. In 1920 the judgment of the lower court was affirmed and all the cash and securities delivered by Mrs. Fleitmann to the Surety Company were sold in order to pay the judgment.
11. Mrs. Fleitmann's entire assets and resources had been wiped out by payment of the judgment, and the taxpayer, during the year 1920, charged off the sum of $100,000.00 advanced by him to his wife in the year 1918. The petitioner in his joint tax return for the year 1920 claimed a business loss of $100,000.00 on this transaction.
Lida M. Fleitmann's note in the sum of $100,000, referred to in the stipulation of facts, is dated February 7, 1918, and is made payable to the order of William M. Fleitmann on demand, with interest at the rate of 6 per cent.
22 B.T.A. 1291">*1293 In his return for the year 1920, William M. Fleitmann took a deduction of $100,000 as a bad debt listed under Schedule K4 and explained as follows: "Amount loaned in 1918 on note. Debtor in 1920 lost all assets in law suit."
In denying the claimed deduction the1931 BTA LEXIS 1973">*1978 respondent determined that (as set forth in his deficiency notice) "the transaction out of which this loss arose was not one entered into for pecuniary profit and did not involve either a taxable profit or a deductible loss."
OPINION.
TRUSSELL: The respondent contends that although the amount of $100,000 was deducted on the decedent's return as a bad debt, the deduction is now claimed as a loss; that no evidence has been adduced to establish that the decedent was in the business of loaning money, and therefore the claimed deduction may not be allowed as a loss incurred in trade or business under section 214(a)(4) of the Revenue Act of 1918; and, further, that the claimed deduction may not be allowed as a loss incurred in a transaction entered into for profit under section 214(a)(5) of said act, for the reason that the risk was so hazardous, as compared with the possibility of a gain of 6 per cent interest, that the transaction was not entered into for profit, but constituted merely a generous advancement from a husband to his wife.
In 1918 a judgment in the amount of $218,664.44 was rendered against the decedent's wife for moneys alleged to be due certain creditors of her brother's1931 BTA LEXIS 1973">*1979 estate, of which she was executrix. She was advised to take an appeal and to do so required the filing of a bond in the amount of the judgment plus interest and costs. The surety company required collateral to the amount of the bond and she found it necessary to borrow a portion of the funds which she needed. On February 7, 1918, the decedent advanced to his wife the sum of $101,849.77, the major portion of which was evidenced by her note for $100,000, payable on demand to the order of the decedent and bearing interest at the rate of 6 per cent. Clearly, the total advancement was a loan and not a gift and the decedent's wife became indebted to him in the amount of $101,849.77. The marriage relationship of the parties was immaterial, for the laws of the State of New York recognize contracts and agreements between husband and wife as legal and binding on both parties. Section 51, chapter 19, of the Domestic Relations Law, 1909, of New York, provides:
A married woman has all the rights in respect to property, real or personal, and the acquisition, use, enjoyment and disposition thereof, and to make contracts in respect thereto with any person, including her husband, and to carry1931 BTA LEXIS 1973">*1980 22 B.T.A. 1291">*1294 on any business, trade, or occupation, and to exercise all rights in respect thereto and in respect to her contracts and be liable on such contracts, as if she were unmarried * * *. All sums that may be recovered in actions or special proceedings by a married woman to recover damages to her person, estate or character shall be the separate property of the wife. Judgment for or against a married woman may be rendered, and enforced, in a court of record, or not of record, as if she was single * * *.
We are of the opinion that the record establishes that Lida M. Fleitmann became indebted to the decedent in 1918 in the amount of $101,849.77; that such debt became worthless in 1920 when she lost her entire assets and resources; that in the year 1920 the decedent charged off $100,000 as a bad debt; and further, we are of the opinion that the decedent was entitled to a deduction of $100,000 from his gross income for 1920, as a bad debt pursuant to section 214(a)(7) of the Revenue Act of 1918.
Judgment will be entered pursuant to Rule 50.