*235 Decisions will be entered under Rule 50.
In determining their community income for 1948, in separate returns filed by them, H. L. McBride and his wife, Janet, claimed a business bad debt deduction of $ 24,064.10 from McBride Oil Company, a corporation formed to exploit certain oil leases and in which McBride owned 25 per cent of the stock.
Held: 1. Of the claimed debt of $ 24,064.10, (a) $ 2,535.50 was not advanced by McBride to the Oil Company until 1949, and (b) $ 12,847, which McBride Refining Company loaned to the Oil Company and on which McBride was a guarantor, did not represent a debt due McBride in 1948 because he made no payment on his guaranty prior to the end of that year.
2. The balance of the claimed bad debt, $ 8,681.60, was in fact a debt having resulted from advances made by McBride to the Oil Company, which were loans and not capital contributions; but deduction therefore is denied because that debt did not become worthless during 1948.
*927 These proceedings have been consolidated.
In reporting their community income for 1948, petitioners*236 H. L. McBride and his wife, Janet McBride, deducted $ 24,064.10 as a business bad debt due from the McBride Oil Company. The Commissioner disallowed that deduction contending (a) that the advances made by H. L. McBride which gave rise to the claimed deduction were capital contributions, not loans; (b) that, if they were loans, they did not become worthless during 1948; (c) that, if they were loans which became worthless in 1948, they represented nonbusiness bad debts deductible as short-term capital losses under section 23 (k) (4) of the Internal Revenue Code of 1939, rather than business bad debts deductible in full under section 23 (k) (1); and (d) that, in any event, the net amount at the close of 1948 of H. L. McBride's advances for which a deduction, if any, is allowable was not in excess of $ 8,681.60.
By appropriate assignments of error petitioners H. L. and Janet McBride contest the Commissioner's disallowance of the alleged bad debt deduction. Other adjustments made by the Commissioner are not contested and will be given effect in a recomputation under Rule 50.
FINDINGS OF FACT.
Some of the facts have been stipulated and are hereby found as stipulated and are incorporated*237 herein by this reference.
Petitioner H. L. McBride, hereinafter sometimes referred to as McBride, is an individual whose principal office at all times here material was located at San Antonio, Texas. He filed a separate income tax return on a community property basis for 1948 with the collector of internal revenue for the first district of Texas.
Petitioner Janet McBride married McBride in 1948 and was married to him at the time of the hearing in this case. She filed a separate income tax return for 1948 with the collector of internal revenue for the first district of Texas. She is involved in these proceedings only because a portion of McBride's income for 1948 is attributable to her under the community property laws of Texas.
*928 Prior to October 31, 1947, Roswell Wardlaw, Coy E. Dillard, and Louis Babb acquired from Wardlaw's father oil and gas leases covering 9,000 acres of land. To validate the leases they were required to drill one well to a depth of 500 feet on each two sections (1,280 acres) of land. It was understood that Babb and Dillard would finance the drilling and development costs. Subsequently, a Mr. Wilburn acquired a 25 per cent interest in the leases. *238 No original capital or cash was invested in the venture. Each of the three original leaseholders supplied materials or funds for operations as needed but those advances were informal and were not treated as loans or credited as additional capital contributions from the particular contributor.
The original leaseholders needed someone to join them who had more knowledge of the oil business and who would be able to assist in financing the operations. McBride, who was an experienced oilman, became interested in the venture at the time the initial well was being drilled. Since the prospects for success then appeared very favorable McBride purchased Wilburn's 25 per cent interest in the leases for $ 10,000.
On October 31, 1947, McBride, Wardlaw, Dillard, and Babb incorporated the McBride Oil Company, hereinafter sometimes referred to as the Oil Company, with stated capital stock of $ 30,000. Each of them received 25 per cent of the stock in exchange for their interests in the leases. No cash was invested in the Oil Company at that time, it being expected that McBride would handle the financing of operations.
McBride furnished cash to the Oil Company from time to time, as evidenced*239 by the following accounts payable ledger maintained by the Oil Company in McBride's name:
| Date | Item | Debit | Credit | Balance |
| 1947 | ||||
| October 31 | Cash advance | $ 1,500.00 | ||
| November 14 | Cash advance | 1,000.00 | $ 2,500.00 | |
| December 8 | Cash advance | 15,000.00 | 17,500.00 | |
| 1948 | ||||
| January 16 | Cash advance | 5,000.00 | 22,500.00 | |
| January 22 | $ 15,000.00 | 7,500.00 | ||
| July 28 | Cash advance | 1,000.00 | 8,500.00 | |
| October 31 | Cash advance | 1,790.48 | 10,290.48 | |
| December 16 | Proceeds from sale of | 2,608.88 | ||
| pipe -- paid directly | ||||
| to McBride. | ||||
| December 24 | Cash advance | 1,000.00 | 8,681.60 | |
| 1949 | ||||
| October 31 | Cash advance | 2,535.50 | 11,217.10 |
On December 5, 1947, McBride borrowed $ 15,000 on his own note from the Hidalgo County Bank & Trust Company, Mercedes, Texas, and advanced it to the Oil Company on December 8, 1947, as evidenced by the credit entry in the above accounts payable ledger for *929 that latter date. On January 2, 1948, the Oil Company executed a $ 25,000 note to the bank which note replaced both McBride's $ 15,000 note and $ 10,000 in principal and interest which the Oil Company owed the bank on a prior note of its own. The $ 25,000 note was signed for the Oil Company*240 by McBride and also was endorsed personally by McBride, Babb, and Dillard. The January 22, 1948, debit entry in the accounts payable ledger recorded, as regards McBride, replacement of his $ 15,000 note by the Oil Company's $ 25,000 note.
Approximately 30 shallow wells were drilled by the Oil Company and 9 of those, all located on a single 100-acre tract of land, were producers. Those 9 wells have kept alive the leases covering 2 sections of land, but the leases on the remainder of the 9,000 acres expired in 1948 due to the Oil Company's failure to drill the required wells validating those leases. The production record of the 9 wells, from December 1947 through January 1950, was as follows:
| Period | Number of | Price per | Net receipts |
| barrels | barrel | ||
| December 1947 | 486.30 | $ 2.30 | $ 1,071.44 |
| Calendar year 1948 | 6,087.03 | 2.30 | 13,411.25 |
| Calendar year 1949 | 3,375.68 | 1.60 | 5,173.95 |
| January 1950 | 103.50 | 1.60 | 158.58 |
It appears from the evidence that there was some production from those wells at the time of the hearing of this case in 1954.
The balance sheets of the Oil Company at the indicated dates reveal the following:
| Oct. 31, | Oct. 31, | Oct. 31, | Mar. 31, | ||
| 1947 | 1948 | 1949 | 1950 | ||
| Assets | |||||
| Cash | ($ 13.89) | $ 77.59 | $ 77.59 | ||
| Leases | $ 34,029.10 | 30,230.36 | 30,230.36 | 30,230.36 | |
| Well equipment | 470.90 | 7,690.67 | 10,095.20 | 10,095.20 | |
| Pipe | 7,442.48 | 2,224.73 | 1,483.15 | ||
| Accounts receivable: | |||||
| McBride Refining Company | 841.52 | ||||
| D. V. Hill | 100.00 | ||||
| Babb and Dillard | 2,056.89 | 2,056.89 | |||
| Social security tax | 9.66 | ||||
| Organization expense | 300.00 | 300.00 | 300.00 | ||
| Total assets | $ 34,500.00 | $ 46,491.14 | $ 45,094.43 | $ 44,243.19 | |
| Liabilities and capital | |||||
| Accounts payable: | |||||
| H. L. McBride | $ 10,290.48 | $ 11,217.10 | $ 11,217.10 | ||
| Louis Babb | 750.00 | 790.00 | 790.00 | ||
| Coy Dillard | 2,400.00 | 2,450.00 | 2,450.00 | ||
| Other accounts | 381.31 | 239.80 | |||
| McBride Refining Company | 12,289.01 | 12,847.60 | |||
| Notes payable: | |||||
| Hidalgo County Bank & | 15,800.00 | 4,500.00 | 3,500.00 | ||
| Trust Company | |||||
| Peoples State Bank | 3,500.00 | ||||
| Chemical Process Company | 2,570.00 | 220.00 | |||
| Cen-Tex Supply Company | 1,335.53 | 1,085.53 | |||
| Schreiner Bank | $ 4,500.00 | ||||
| Depreciation reserves | 440.50 | 1,249.57 | 1,670.20 | ||
| Capital | 30,000.00 | 30,000.00 | 30,000.00 | 30,000.00 | |
| Surplus -- (deficit) | (19,641.15) | (19,196.58) | (19,317.24) | ||
| Total liabilities | |||||
| and capital | $ 34,500.00 | $ 46,491.14 | $ 45,094.43 | $ 44,243.19 |
*241 *930 On March 31, 1950, all of the Oil Company's assets as of that date were assigned to McBride, and McBride assumed the company's then remaining liabilities. In connection with such assignment the net liability of the Oil Company to Babb and Dillard, arising from the difference between the accounts payable due to them and the accounts receivable owed by them, was settled by McBride's assuming a $ 1,000 liability to Dillard. McBride assumed the liabilities of the Oil Company because he was interested in protecting his name, which the company bore, and his credit rating.
It appears that McBride individually made some of the payments on the $ 25,000 note, dated January 2, 1948, which the Oil Company gave to the Hidalgo County Bank & Trust Company but the amount of those payments is not determinable from the record. Moreover, the Oil Company books show no debt due to McBride as a result of the payments by him. Although the co-endorsers of the note were McBride, Babb, and Dillard, the bank made no attempt to collect from the latter two. Nor did McBride obtain any reimbursement from Babb and Dillard for his satisfaction of the note. It does not appear that either Babb or Dillard*242 was, during any time here material, insolvent or unable to contribute at least some portion, however slight, of the funds necessary to satisfy the $ 25,000 note.
For a number of years McBride has been engaged in various ventures relating to farming and the oil business. These ventures have been either partnerships, closed corporations, or semiclosed corporations. During 1948, McBride borrowed $ 215,000 from various banks and advanced money to five business organizations (in addition to the Oil Company) in which he had controlling interests. The repayments from two of those organizations during 1948 exceeded McBride's advances to them and McBride reported salary or partnership income for 1948 from three of those organizations. McBride testified that it was his practice for the years prior to 1948 to finance and lend money to such business organizations in the same manner as he did in 1948. It has been McBride's experience that the ability of his closed and semi-closed corporations to borrow from banks was usually limited by the financial ability and stability of their principal officers. In fact, one bank's loans to the McBride interests subsequent to June 1, 1948, were predicated*243 entirely upon McBride's personal guaranty of those loans.
In determining their community income for 1948, McBride and his wife, Janet, deducted $ 24,064.10 as a bad debt due from the Oil Company. That sum was composed of (a) the $ 11,217.10 balance shown as due McBride in the Oil Company's accounts payable ledger, supra, as of October 31, 1949, and (b) $ 12,847 of the $ 12,847.60 liability shown as due McBride Refining Company on the Oil Company's March 31, 1950, balance sheet, supra. 1 The accounts payable ledger *931 reveals that McBride had advanced the Oil Company, for which he had not been repaid, only $ 8,681.60 as of the close of 1948; an additional $ 2,535.50 (bringing the total advances up to $ 11,217.10) was not advanced by him until 1949. It is also noted that although the liability of $ 12,847.60 is listed as owed McBride Refining Company on the Oil Company's March 31, 1950, balance sheet, no such liability was listed on the Oil Company's October 31, 1948, balance sheet, and the October 31, 1949, balance sheet lists a liability due the Refining Company in the lesser amount of $ 12,289.01.
*244 McBride never collected any part of the $ 26,064.10 from Wardlaw, Dillard, or Babb, the other stockholders in the Oil Company. McBride testified that after a series of conferences with those stockholders he was convinced they could not pay, or repay, any part of the aforementioned sum. It appears that those conferences were held, and that conclusion reached, after the close of 1948.
At the close of 1948 the Oil Company was indebted to McBride in an amount of $ 8,681.60. That debt did not become worthless during 1948.
OPINION.
In determining their community income for 1948, McBride and his wife, Janet, deducted $ 24,064.10 as a bad debt due from McBride Oil Company. It is clear from the evidence, however, that the debt due McBride at the close of 1948 was no greater than $ 8,681.60, which was the final balance for the 1948 calendar year recorded as due him on the Oil Company's accounts payable ledger.
McBride and Janet included an additional $ 2,535.50 in the claimed deduction, but the accounts payable ledger reveals that that sum was not advanced by McBride to the Oil Company until 1949. They also included in the claimed deduction $ 12,847 of the liability shown as due McBride*245 Refining Company on the Oil Company's March 31, 1950, balance sheet, asserting that McBride was personally liable to repay that sum to the Refining Company. It is first noted that the record by no means clearly establishes that the Refining Company loaned the $ 12,847 to the Oil Company before the close of 1948. Even if we assume, however, that the Refining Company loaned the Oil Company $ 12,847 in 1948, McBride and Janet could not take a deduction for that sum since McBride had not in fact repaid it to the Refining Company before the end of 1948 and no debt runs to the guarantor (McBride) from the principal debtor (Oil Company) until the guarantor makes payment on the guaranty. Kate Baker Sherman, 18 T. C. 746, 751; George Aftergood, 21 T. C. 60; Peter Stamos, 22 T. C. 885. Consequently, the only sum we have here to consider is the $ 8,681.60.
*932 Respondent contends that the advances made by McBride to the Oil Company were not loans, but capital contributions. This is a question of fact as to the true intent of the parties, and our determination must be based upon consideration*246 of the entire record. Sam Schnitzer, 13 T. C. 43, affirmed per curiam (C. A. 9) 183 F. 2d 70, certiorari denied 340 U.S. 911">340 U.S. 911.
The Oil Company was capitalized at $ 30,000, which represented the estimated value of the oil leases held. That this capitalization was honestly arrived at seems clear from the fact that McBride, just prior to the company's incorporation, had paid $ 10,000 for a 25 per cent interest in those leases. The company's debts at the close of its first fiscal year, October 31, 1948, totaled $ 35,691.79, just slightly in excess of its capitalization. We think that the appraisal of the company's prospects were bona fide, though erroneous, and that its total debt structure was not unreasonable compared to its capitalization as based upon that appraisal.
As for the advances made by McBride personally, the balance thereof never, except for one short period, exceeded $ 10,290.48 (as of October 31, 1948) and was reduced to $ 8,681.60 by the close of 1948. At the beginning of 1948, the company did owe McBride $ 22,500, but $ 15,000 thereof represented funds McBride had borrowed from a*247 bank on his note dated December 5, 1947, which note was replaced on January 2, 1948, by that of the Oil Company. McBride was only a minority stockholder in the Oil Company, his interest being 25 per cent, and was not entitled to any greater share of profits as a result of his advances. It appears that his financing function was not primarily to personally lend money to the Oil Company but to obtain funds from banks. The fact that he was a guarantor of some of those bank loans is irrelevant under the circumstances of this case.
We conclude, after considering the above and other facts of record, that the $ 8,681.60 represented the balance of advances which were intended by McBride, and understood by the Oil Company, to be not capital contributions but loans. On this phase of the issue we hold for petitioners.
Respondent next contends that McBride is not entitled to either a business or nonbusiness bad debt deduction 2 in 1948 because the debt due him by the Oil Company (which we have heretofore determined to be $ 8,681.60) did not become worthless in that year. This is a question of fact, the burden of proving which rests upon petitioner. Redman v. Commissioner, (C. A. 1) 155 F. 2d 319.*248
The Oil Company's balance sheets as of October 31, 1948 and 1949, show a surplus deficit of over $ 19,000. But the fact that its capital was impaired is of no controlling significance and a bad debt deduction *933 is not allowable if its assets exceeded its liabilities exclusive of proprietorship. Earl V. Perry, 22 T. C. 968. Those balance sheets, although evidentiary only, indicate that assets were in excess of liabilities on the indicated dates.
McBride maintains, however, that the Oil Company's leases were worthless at the close of 1948, and that the company's pipe inventory was of a value less than the amount stated on the October 31, 1948, balance sheet. Although the oil leases may not have been worth the $ 30,230.36 value assigned them on the 1948 and 1949 balance sheets, we certainly do not regard them as being worthless at the close of 1948 in view of the fact that some wells drilled thereon were still producing at the time of the*249 hearing of this case in 1954. But even if they were worthless at the close of 1948, and the pipe inventory was of a lesser value than reported, there were still assets available from which the company's debts could be satisfied, at least in part.
Other facts also indicate that the company's debt to McBride was not totally worthless at the close of 1948, to wit: McBride advanced the Oil Company an additional $ 2,535.50 on October 31, 1949, New York Water Service Corporation, 12 T. C. 780, 792; the October 31, 1949, balance sheet indicates that an unrelated third party, the Cen-Tex Supply Company apparently advanced the company $ 1,335.53 in 1949; the company remained in business until March 31, 1950, and its deficit was slightly lower on that date and on October 31, 1949, than on October 31, 1948. These circumstances are all inconsistent with an allegation of total worthlessness in 1948.
We conclude that, determined by objective standards, the Oil Company's debt to McBride was not actually worthless at the close of 1948, Earl V. Perry, supra, and that McBride and Janet are not entitled to deductions therefor in that year. *250 In view of this holding, it is unnecessary for us to consider whether the debt was a business or nonbusiness debt.
Uncontested adjustments by respondent in the returns of petitioners in each of the dockets before us require Rule 50 computations.
Decisions will be entered under Rule 50.