1930 BTA LEXIS 2149">*2149 The payment involved was a capital transaction upon which the petitioner sustained no deductible loss during the taxable year.
20 B.T.A. 359">*359 This is a proceeding for the redetermination of a deficiency in income tax for the year 1923 in the amount of $1,015.36. At the hearing another proceeding brought by the same petitioner under Docket No. 33388, involving the year 1924, and which had been consolidated with the instant appeal for hearing, was finally determined by appropriate order upon stipulation of the parties that there was no deficiency for the year therein involved.
The sole error alleged is based on the respondent's denial of a deduction for an alleged bad debt ascertained to be worthless and charged off in the taxable year, or a loss.
FINDINGS OF FACT.
The petitioner is a resident of Morse, Parish of Acadia, La. For approximately 25 years he has been engaged as a farmer and in the general merchandise business at Morse.
Sometime prior to 1920 petitioner acquired 10 shares of the $100 par value capital stock and1930 BTA LEXIS 2149">*2150 became a director of the First National Bank of Acadia Parish at Crowley, La., hereafter termed the Crowley Bank. Crowley is located about 12 miles from petitioner's home at Morse. During 1920 the total capital stock of the Crowley Bank was $100,000, and the surplus was $50,000.
The chief occupation of residents in the vicinity of Crowley was rice farming. In 1919 the sale price of rice was from $10 to $12 per barrel, with the result that the rice farmers were exceedingly prosperous and highly optimistic respecting the future market for their crops.
The chief stockholder of the Crowley Bank was P. L. Lawrence, its president and owner of approximately 80 per cent of the capital stock. Lawrence shared the confidence of the community in the future prosperity of the neighboring farmers. During 1919 he conceived a plan to have the Crowley Bank erect a new building for its use with office space on the upper floors for rental purposes.
The directors of the Crowley Bank held several meetings to consider the matter and finally decided upon the erection of the new 20 B.T.A. 359">*360 building. It was understood by the directors that a building erected according to plans and specifications1930 BTA LEXIS 2149">*2151 approved by them would cost about $350,000. The Crowley Bank did not contract to have the building erected for a definite sum, but it engaged a contractor who proceeded with the work and who was paid by the bank from time to time. The building was completed in 1920 or 1921 at a cost of more than $450,000. It was a seven-story structure. Upon its completion the Crowley Bank occupied the ground floor and offered the upper floors for rent as office space. The building has proven to be too large for the town, with the result that it has never been profitably operated. In 1923 the actual value of this building in Crowley was about $100,000.
When the 1919 rice crop was selling at $10 to $12 per barrel many of the farmers decided to hold a portion of their crop for higher prices, it being the opinion at that time that the price would later range from $12 to $15 per barrel. The chief business of the Crowley Bank was in the financing of rice farmers, and when a large portion of the 1919 crop was warehoused, in the fall of 1919, in anticipation of better prices in 1920, the Bank was carrying paper and warehouse receipts representing a large amount of loans on rice. The Crowley Bank1930 BTA LEXIS 2149">*2152 rediscounted the paper with the New Orleans Branch of the Federal Reserve Bank of Atlanta, hereafter termed the Federal Reserve Bank.
In 1920 the rice market collapsed and the price eventually fell to as low as $1.50 per barrel. The crop which had been carried over from 1919, and the 1920 crop, had cost the farmers about $7 or $8 per barrel to produce.
Some time in June, 1920, President Lawrence called certain of the directors of the Crowley Bank into conference and informed them that the Federal Reserve Bank was demanding additional security for loans it had granted as rediscounts. Lawrence requested the directors present to execute a guaranty to the Federal Reserve Bank. Upon the assurances of Lawrence and the cashier of the bank that the bank's difficulties were temporary and that part of the warehoused rice would be sold within the next thirty days and the proceeds applied to make good the guaranty, four of the directors executed such an instrument. Additional factors influencing the acquiescence of the other directors in the proposal made by Lawrence were that refusal to execute the guaranty might result in the failure of the bank, which would bring further distress1930 BTA LEXIS 2149">*2153 to the community and a loss of their stockholdings to the directors. On June 23, 1920, petitioner and three other stockholders and directors of the Crowley Bank executed the following quoted instrument:
20 B.T.A. 359">*361 CONTINUING GUARANTY
In consideration of the New Orleans Branch Federal Reserve Bank of Atlanta at my request giving or extending additional time of credit to the First National Bank of Acadia Parish, Crowley, La., hereinafter called debtor, I hereby give this continuing guaranty to the said New Orleans Branch Federal Reserve Bank of Atlanta, its transferees or assigns, for the payment in full together with all interest, fees and charges of whatsoever nature and kind, of any indebtedness, direct or contingent, of said debtor to said New Orleans Branch Federal Reserve Bank of Atlanta, up to the amount of One Hundred Fifty Thousand Dollars, whether due or to become due and whether now existing or hereafter arising; and I hereby bind and obligate myself, my heirs and assigns, in solido with said debtor, for the payment of the said indebtedness precisely as if the same had been contracted and was due or owing by me in person, hereby agreeing to, and binding myself, my heirs1930 BTA LEXIS 2149">*2154 and assigns, by all the terms and conditions contained in any note or notes signed or to be signed by said debtor, making myself a party thereto; and, waiving all notice and all pleas of discussion and division, I agree to pay upon demand at any time to said Bank, its transferees or assigns, the full amount of said indebtedness up to the amount of this guaranty, together with interest, fees, and charges, as above set forth, becoming subrogated in the event of payment in full to me to the claim of said Bank, its transferees or assigns, together with whatever security it or they may hold against said indebtedness. The Bank may extend any obligation of the debtor one or more times and may surrender any securities held by it without notice or consent from me, and I shall remain at all times bound hereby, notwithstanding such extensions and/or surrender.
It is expressly agreed that this continuing guaranty is absolute and complete, and that acceptance and notice of acceptance thereof by the Bank are therefore unnecessary and they are hereby expressly waived.
In faith whereof, I have hereunto signed my name on this the 23d day of July 1920.
(Signed) P. L. Lawrence
T. T. Attebury
1930 BTA LEXIS 2149">*2155 P. J. Chappuis J. S. MaubaulesThe rice market continued to decline. Instead of being relieved of his liability on the guaranty of June 23, 1920, within thirty days of its execution, petitioner was called upon to execute, and did execute, during 1920, a number of other continuing guaranties, all in the form of that set out above, and aggregating the amount of $800,000.
Sometime between 1920 and 1923 the capital stock of the Crowley Bank was increased from $150,000 to $250,000, and the petitioner during the same period increased his stockholdings from 10 shares to 45 shares. Petitioner purchased the additional stock to help increase the capital of the bank and not because he considered such stock as a good investment.
From 1920 and through 1923 the Crowley Bank made strenuous efforts to liquidate the notes it held from the farmers. Petitioner was 20 B.T.A. 359">*362 appointed a liquidator by the bank and, with a representative of the Federal Reserve Bank detailed to Crowley for that purpose, he canvassed the debtors, attempting to secure payments on their notes or additional collateral security. Payments secured as a result of their efforts were not enough to cover the expense1930 BTA LEXIS 2149">*2156 involved.
In March, 1923, the Federal Reserve Bank, after many conferences between its directors and the directors of the Crowley Bank, demanded that the persons who had executed the guaranty of June 23, 1920, and certain subsequent guaranties as above detailed, pay into the Crowley Bank $250,000 in cash, specifying that the amount so paid should be credited to the building account and applied to reduction of loans from the Federal Reserve Bank. The demand of the Federal Reserve Bank was complied with, the petitioner, as one of the guarantors, paying in $17,333.32. The payments by the various guarantors were not in proportion to their respective stockholdings, but were made with regard to the financial ability of each of them. Stockholders and directors who had not executed guaranties made no payments. When he made the payment petitioner had no expectation of recovering it from the Crowley Bank, whose directors at that time were considering its dissolution.
A statement of the condition of the Crowley Bank as of the approximate date of petitioner's payment as above detailed, follows:
Statement of the condition of the First National Bank of Acadia Parish at Crowley, La,. 1930 BTA LEXIS 2149">*2157 at the close of business March 29th, 1923
| Resources | Liabilities |
| Loans and Discounts | $ 1,583,071.86 |
| Overdrafts | 1,573.06 |
| United States bonds to secure circulation | 150,000.00 |
| Real estate owned | 58,707.17 |
| Chash on hand and in banks | 125,924.73 |
| Interest earned but not collected | 4,202.33 |
| Bank building | 225,674.67 |
| Redemption fund with U.S. Treasury | 7,500.00 |
| U.S. Liberty bonds | 18,258.12 |
| Other stocks and bonds | 118,256.00 |
| 2,293,167.94 | |
| Liabilities | |
| Capital stock | $250,000.00 |
| Surplus | 125,000.00 |
| Undivided profits | 15,565.71 |
| Rediscounts with Federal Reserve Bank | 912,770.25 |
| Bills payable | 100,000.00 |
| Circulation | 150,000.00 |
| Deposits | 739,831.98 |
| 2,293,167.94 |
"Loans and Discounts" in the amount of $1,583,071.86 represent principally advances to rice farmers, secured by crop liens and warehouse receipts. The Federal Reserve Bank held substantially all the paper above described, together with the collateral relating to it, as security for the rediscounts, which amounted to $912,770.25. The actual value of the notes at the time mentioned was not more than 20 or 25 per cent of their face value.
20 B.T.A. 359">*363 The value of the bank building shown among1930 BTA LEXIS 2149">*2158 the resources as $225,674.67 has been adjusted to reflect the $250,000 payment made by the stockholders.
The payment in the amount of $17,333.32, made by petitioner during 1923, was charged off his books during that year and was claimed as a deduction for a bad debt in his income-tax return. The respondent determined that the payment was a capital transaction in the nature of the payment of an assessment on the petitioner's stock and accordingly the deduction was denied.
In this proceeding petitioner contends that by reason of the payment above described he is entitled to a deduction of the amount paid either as a bad debt ascertained to be worthless and charged off, or as a loss sustained during 1923.
OPINION.
LOVE: Briefly stated, petitioner asserts that by reason of a guaranty given by him to the Federal Reserve Bank to insure the payment of the indebtedness owing to that institution by the Crowley Bank, he was obliged to pay the Federal Reserve Bank during the taxable year involved the amount of $17,333.32, and that the amount so paid is deductible as a bad debt in the year of its payment. Petitioner contends that the debt was worthless because liabilities of the1930 BTA LEXIS 2149">*2159 Crowley Bank in 1923 were equal to approximately twice the actual value of its assets at that time.
The respondent determined that the payment was an assessment, or in the nature of an assessment, on the petitioner's stock in the Crowley Bank, and he accordingly denied the deduction claimed. The Board has held that an assessment on the stock of a national bank is an additional investment of capital and not a loss. ; ; ; .
The petitioner's case has been presented upon the theory that the $17,333.32 payment made by him during 1923 was a payment under the guaranty of July 23, 1920, and the series of like instruments executed by him, or in other words, that it was a payment upon the debt of the Crowley Bank required of him by reason of his liability under the contract of guaranty of the debt of that bank to the Federal Reserve Bank. We think the facts adduced present a substantially different transaction. It appears that during 1923 the Federal Reserve Bank required the Crowley Bank to reduce its indebtedness1930 BTA LEXIS 2149">*2160 by the amount of $250,000. It does not appear that the persons who were obligated by the guaranty contract were 20 B.T.A. 359">*364 called upon as such guarantors to make the payment required by the Federal Reserve Bank. They were called upon to pay $250,000 into the Crowley Bank, and at the suggestion or demand of the Federal Reserve Bank this sum was credited to the building account of the Crowley Bank and applied to reduce its debt to the Federal Reserve Bank.
From the point of view of the Federal Reserve Bank it was more advantageous to adopt this method of reducing its rediscounts to the Crowley Bank than it would have been to call upon the guarantors to make good as such, because by this method the rediscounts were reduced and the Federal Reserve Bank retained all the collateral, while if the reduction had been effected by requiring the guarantors to make payments, the guarantors would have been subrogated to claims and collateral security to the amount of their payments.
Presumably, if the payment mentioned had not been made the Crowley Bank would have been called upon by the Federal Reserve Bank for reduction or complete liquidation of its rediscounts, and, accepting the petitioner's1930 BTA LEXIS 2149">*2161 theory that it was then in fact insolvent, this would have precipitated its failure. Upon failure of the Crowley Bank or its financial embarrassment to the extent of being unable to take up its rediscounts, the petitioner and his coguarantors would have had to make good their guaranties and it is probable would have had to pay for more than $250,000. By satisfying the requirements of the Federal Reserve Bank in the manner detailed, petitioner and his coguarantors not only reduced their liabilities or obligations under the guaranty contracts, but also protected the Crowley Bank against possible failure, a protection necessarily reflected in their own stockholdings. The Board has frequently held that a payment to protect an investment does not constitute a deductible loss. ; ; ; .
We think the petitioner's payment was in form and substance a capital expenditure creating no relation of debtor and creditor, and that in the taxable year involved he sustained not deductible loss1930 BTA LEXIS 2149">*2162 by reason of that payment.
It may be pointed out that even if it appeared that the relation of debtor and creditor had been created between the Crowley Bank and petitioner by reason of the payment involved, i.e., even if the payment had in fact been a payment under the guaranty contracts, it is doubtful that we could afford the petitioner relief upon the record before us, since by the terms of the guaranty contracts petitioner 20 B.T.A. 359">*365 would have been subrogated to the claims and to some parts of the collateral security held by the Federal Reserve Bank. This would make it necessary for petitioner to establish the value, if any, of the specific collateral security he would acquire. The evidence is that the notes and collateral held by the Federal Reserve Bank, amounting to approximately $1,583,071.86, and to part of which petitioner would have been subrogated if he made a payment under the guaranty contract, had a market value equal to approximately 20 per cent of their face value. Something more definite than this would be required to show a loss by petitioner had a payment under the guaranty contracts resulted in his being subrogated to a portion of the claims and collateral1930 BTA LEXIS 2149">*2163 security held by the Federal Reserve Bank. See .
Judgment will be entered for the respondent.