*697 A deduction for bad debt is allowable to an individual shareholder who, pursuant to prior endorsements and guaranties of the corporation's notes and obligations, pays the corporation's obligations and thus becomes its creditor and the debt is immediately ascertained to be worthless and charged off, the evidence disproving intent to increase capital investment or make a gift.
*539 The Commissioner determined deficiencies of $8,704.98, $4,127.88, and $2,903.56 in petitioner's income taxes for 1932, 1933, and 1934, respectively. Petitioner assails the disallowance of deductions claimed on account of debts alleged to have become worthless in the several years, and in the alternative seeks the deductions of alleged losses on stock become worthless.
*540 FINDINGS OF FACT.
Petitioner, a resident of Philadelphia, Pennsylvania, was the owner of 4,800 preferred and 4,800 common shares of stock in the Atlantic Mercantile Co., which he purchased on March 9, 1923, for $480,000 and $24,000, respectively. This company was a corporation engaged*698 in the business of investing in securities. Substantially all of its shares were owned by petitioner and his three brothers, Charles, Ellis, and Louis. On November 1, 1929, the company retired one-half of its preferred shares, pursuant to a resolution of August 28, previous, and petitioner received $240,000 for 2,400 shares. At the time of such redemption, Louis was negotiating with his brothers for their acquisition of all of his holdings in the company, and when he received the company's check for $240,000 he returned it. The company kept the returned check in its files. After the retirement, the company had outstanding 20,050 common and 10,025 preferred shares of the respective par values of $5 and $100. Of these the petitioner and Charles and Louis each owned 4,800 common and 2,400 preferred, Ellis owned 4,900 common and 2,450 preferred, and the remaining 750 common and 375 preferred were owned in small lots by four other individuals.
Louis Gimbel died on January 2, 1930, and his executors thereafter sued the company for the $240,000. It was unable to make payment because its securities had been pledged as collateral for loans. The executors also sued Charles and Ellis*699 for breach of an alleged promise by them to buy two-thirds of Louis' stock in the company. These actions were settled and the company paid $40,000 in cash to the estate and executed nine notes, dated February 11, 1931, each for $22,222.22, with interest at 4 1/2 percent. Of these notes, petitioner endorsed three, payable on February 13, 1933, 1934, and 1935, respectively, and Charles and Ellis each endorsed three. As the notes were presented for payment at maturity, the company was unable to meet them, and petitioner, as endorser, paid $22,222.22 on February 14, 1933, and a like amount on March 7, 1934. Each time he made demand upon the company and received a reply acknowledging the indebtedness, and a statement that the company could not comply with his demand and saw no prospect of ever being able to do so.
During 1930 the company was called upon for further collateral, and was unable to furnish it. The three brothers believed that there was a possibility of realizing something on their investments in the preferred shares, and each loaned to the company 2,000 common shares of Gimbel Brothers stock on April 28, 1930, 3,000 on June 28, and 2,000 on November 10, all of which*700 the company pledged as collateral. In October 1930 further collateral was demanded of the company, and, still believing that something might be realized on *541 their investments in the company's stock, they each, on October 24, 1930, guaranteed to the obligee the prompt payment at maturity of $100,000 of the company's indebtedness. Towards the close of 1931 they declined to give further guaranties or to pledge additional collateral for the company's loans. On January 5, 1932, they extended the guaranties to December 31, 1932.
On June 13, 1932, petitioner paid $50,000 on account of his guaranty; and, in consideration of the extension of time for his payment of the remaining $50,000, he executed a new instrument, guaranteeing the payment of the company's debt to the extent of $50,000 and waiving "demand of payment from the maker of said advances" and notice of nonpayment, and also deposited United States Treasury bonds of a par value of $60,000 as security, and received a full release from his prior guaranty. On January 3, 1933, he paid $50,000 under the second guaranty. He made written demand upon the company for reimbursement of each payment, and was advised that it*701 could not pay and had no prospect of ever being able to do so. On its books the company recorded, as debts due to petitioner, the amounts so paid by him on the notes and on the guaranties.
The company's shares were not listed on any stock exchange, and no sales occurred during the years 1930 to 1934, inclusive. The excess of its liabilities (exclusive of capital stock liability) over the fair market value of its assets was as follows:
| Dec. 31, 1930 | $479,310.49 |
| Jan. 2, 1932 | 998,272.57 |
| Dec. 31, 1932 | 1,197,502.89 |
| Dec. 31, 1933 | 1,040,007.34 |
| Dec. 31, 1934 | $886,120.67 |
| Dec. 31, 1935 | 873,874.41 |
| Dec. 31, 1936 | 851,880.41 |
In 1935 most of the collateral was sold, including most of the loaned stock, and the proceeds applied to the company's loans. The proceeds were insufficient to cover all the loans, and in the case of one loan there was a shortage of half a million dollars. The company's present assets are worth about $50,000, which is less than the amount of a claim by the Government for a deficiency in tax for 1929. A bank account of $4,000 has been attached by the Commissioner. The company's board of directors has not met since May 1935. The question*702 of liquidation was first discussed in 1934, but, because of the company's condition and the attendant expense, it was then decided not to liquidate.
Petitioner has never kept any books of account; he files his income tax returns on the basis of cash receipts and disbursements.
OPINION.
STERNHAGEN: The deduction in 1932 of the $50,000 paid on account of the guaranty; the deduction in 1933 of the additional $50,000 *542 paid on account of the guaranties and the $22,222.22 paid on account of the endorsement of the company's note; and the deduction in 1934 of $22,222.22 paid on account of the endorsement, were all disallowed by the Commissioner, on the grounds, stated in the deficiency notices, that the payment by a shareholder of a corporation's indebtedness represents additional cost of his shares and that at the time of the endorsements the corporation was insolvent, with no prospect of ever being able to repay. Neither ground supports the determination.
There is no general rule that a payment by a shareholder to his corporation or to one of its obligees to relieve it of an existing obligation is per se a contribution by him to its capital which augments the*703 cost of his shares. The question is controlled by the circumstances in which the payment is made. If there is intent that the payment shall enlarge the stock investment, the shareholder may not for tax purposes treat it otherwise to support a loss or a bad debt deduction. Whether there is such intent, actual or to be implied, is determinable upon evidence which may vary in different cases. Cf. ; .
The evidence here is clear. When petitioner made his payments, both on his endorsements and his guaranties, he had no illusions about the condition of the corporation and no intention to invest more capital. He paid only because he was legally obligated to do so, and the obligation was not an incident of his being a shareholder but was incurred with the intention of creating a potential debtor and creditor relation. To attribute to him an intention to invest more money in the corporation's shares is contrary to the express evidence and not a fair inference from the circumstances. And it is equally clear that there was no intention to make a gift.
*704 The petitioner made his return on the basis of actual receipts and disbursements, and his deductions are therefore available in the year of payment and not in a prior year of accrual, . At the time of his payments, his prior endorsements and guaranties operated to make him immediately a creditor and the corporation his debtor. Hence the fact of his payment gave rise to no deduction. A loan never does. Instanter it became worthless and was ascertained to be so and charged off, and thus the statutory deduction was literally met, , and is no less available to petitioner because he was a shareholder than if he were an unrelated money lender.
The deductions were all properly taken, and the Commissioner's determination is reversed.
Judgment will be entered under Rule 50.