1929 BTA LEXIS 2577">*2577 The decedent, majority stockholder in a bank, guaranteed stockholders and depositors against loss due to loans made by the bank. Under such guaranty agreements, he, in 1922, 1923, and 1924 paid the bank amounts due on various notes and took the notes over. Held that in the absence of evidence of the value of the notes no deduction is allowable under section 214 of the Revenue Acts of 1921 and 1924.
16 B.T.A. 459">*459 These are proceedings, duly consolidated for hearing and decision, for the redetermination of deficiencies in income taxes for the calendar years 1922, 1923, and 1924 in the respective amounts of $1,545.48, $1,798.33, and $277.20.
It is alleged that the respondent erred in failing to allow as deductions a loss of $35,133.58 in 1922, a loss of $8,752.61 in the year 1923, and a loss of $9,239.30 in the year 1924.
The petition in Docket No. 36662 also states that the respondent erred in failing to allow, as a deduction from income in 1923, a net loss in 1922 in the amount of $15,267.22.
FINDINGS OF FACT.
The petitioners are the executors1929 BTA LEXIS 2577">*2578 of the estate of J. W. Blair, deceased, and have their principal office at Deer Lodge, Mont.
For many years prior to his death, which occurred on September 23, 1926, J. W. Blair was connected with Blair & Co. State Bank of Helmville, Mont. During the taxable years in controversy he was also engaged as an individual in the business of lending money. He was a man of considerable means. In 1912 or 1914 it was generally understood that he was worth about $850,000.
16 B.T.A. 459">*460 During 1921 and throughout the years in controversy the bank had an outstanding capital stock of 250 shares of a par value of $100 per share. Early in 1921 the Day & Hansen Security Co. of Spokane, Wash., which owned a majority of the bank's stock, went into receivership, being at that time heavily indebted to J. W. Blair. Blair, in order to save the bank, purchased the stock held by Day & Hansen. He also acquired 90 shares in 1921 and 70 shares in 1922 which increased his stockholdings to 210 shares. He continued to own this amount of stock until the bank was dissolved in 1925.
The winter of 1919 and 1920 was severe and the necessity for buying hay for their cattle and sheep imposed a heavy financial1929 BTA LEXIS 2577">*2579 burden upon the farmers in the vicinity of Helmville. This condition made it hard to sell bank stock.
On February 3, 1921, Blair entered into the following agreement:
Sale of Stock Agreement
This Agreement, made and entered into at Helmville, Mont., on this 3rd day of February, 1921, Witnesseth:
That J. W. Blair, of Helmville, Mont., does by these presents bargain, sell and convey unto Thomas Geary, of Helmville, Mont., and said Thomas Geary does by these presents purchase and take from J. W. Blair, aforesaid, Ten (10) shares of the Capital Stock of Blair & Co. State Bank, of Helmville, Mont., of the par value of $100 per share, for and in consideration of One Thousand Dollars ($1,000.00) in hand paid to said J. W. Blair, receipt of which is hereby acknowledged, and the further covenants of this agreement, to-wit:
It is further understood and agreed between the parties hereto that it shall be optional, at the expiration of one year from date, with said Thomas Geary to return to J. W. Blair, the said ten shares of the capital stock of Blair & Co. State Bank, aforesaid, and to receive back from said J. W. Blair the sum of One Thousand Dollars ($1,000.00); and in event1929 BTA LEXIS 2577">*2580 of such return of said stock said J. W. Blair agrees to refund One Thousand Dollars ($1,000.00) to said Thomas Geary.
(Signed) THOS. GEARY.
J. W. BLAIR.On the same day Blair entered into a similar agreement with Hugh Wales and Tom Wales, and on February 8, 1921, he entered into a similar agreement with P. D. Twohy. The Wales agreement was extended to April 3, 1922.
On April 8, 1922, Blair entered into the following agreement:
SALE OF STOCK AGREEMENT
This agreement made and entered into at Helmville, Montana, this 8th day of April, 1922, witnesseth;
That J. W. Blair having sold to H. J. Wales ten (10) shares of the capital stock of Blair & Company State Bank, Helmville, Montana, at the par value of $100.00 per share, the receipt of One Thousand Dollars hereby acknowledged, does agree with the parties hereto, that he will in the event of any loss, on, or, in connection with any and all notes now held by this bank, at this date during the year 1922, stand such loss.
16 B.T.A. 459">*461 It being the intention of Mr. Blair, that the said H. J. Wales, Stockholder and Director, should stand no loss in connection therewith.
(Signed) J. W. BLAIR.
H. J. WALES.On the1929 BTA LEXIS 2577">*2581 same day he entered into a similar agreement with Thomas Geary, and on June 19, 1922, he entered into a similar agreement with P. D. Twohy.
Under the Wales agreement Blair took back Wales' stock and refunded the $1,000.
Blair made oral promises to depositors of the bank that he would repay them for any loss they might suffer by reason of their depositing money in the bank.
During 1922, 1923, and 1924 certain notes held by the bank were considered of little or no value by the directors of the bank and Blair paid the bank the face value of each and took over the notes. He thereupon became the owner of the notes.
The following is a statement showing the date and amount of various notes, the date and amount paid by Blair to the bank, and the amount later collected by Blair.
| Name of maker | Dated | Amount | Date paid by Blair |
| (1922) | |||
| Brown, R.E. and Vivian | Sept. 20, 1917 | $118.69 | Mar. 20, 1922 |
| Cook, Lloyd A | Dec. 20, 1919 | 1,500.00 | do |
| Hamilton, Mrs. Clara | Nov. 9, 1920 | 2,500.00 | do |
| Long, N.J. and W.K | Jan. 4, 1921 | 13,126.08 | do |
| Long, W.K | Aug. 23, 1921 | 150.00 | do |
| Long, N.J. and W.K | Jan. 4, 1921 | 2,000.00 | do |
| Madison, Ben D | Oct. 29, 1920 | 2,500.00 | do |
| Morris, E.F | Nov. 10, 1920 | 1,730.51 | do |
| Schwab, A.B. and E | Sept. 11, 1920 | 2,500.00 | do |
| Shoemaker Bros | Mar. 21, 1921 | 500.00 | do |
| Do | Nov. 1, 1920 | 1,482.00 | do |
| Do | Oct. 6, 1920 | 2,500.00 | do |
| Do | do | 4,750.00 | do |
| Do | do | 3,000.00 | do |
| Total | 38,357.28 | ||
| (1923) | |||
| Lund, Andrew | 6,758.87 | May 1, 1923 | |
| Brown, Addie and W.G | Sept. 9, 1921 | 3,590.00 | Oct. 4, 1922 |
| Clark & Eaton | Nov. 1, 1920 | 1,600.00 | do |
| Do | do | 260.21 | do |
| Hausen, H.P. | Oct. 27, 1920 | 215.76 | do |
| Mattie, E | Oct. 14, 1920 | 1,276.84 | do |
| Morris, E.F | Apr. 6, 1920 | 500.00 | Mar. 23, 1922 |
| Total | 14,201.68 | ||
| (1924) | |||
| Lynch, T.J | Nov. 1, 1921 | 4,687.00 | Nov. 5, 1921 |
| Do | do | 1,033.33 | do |
| Do | do | 5,634.83 | Dec. 4, 1923 |
| Finnister, Alfred | May 11, 1922 | 2,076.85 | do |
| Schmidt, W.H | May 12, 1924 | 8,500.00 | Aug. 6, 1924 |
| Schmidt, W.H. o/d | 296.75 | do | |
| Total | 22,228.76 | ||
| SUMMARY | |||
| 1922 | 38,357.28 | ||
| 1923 | 14,201.68 | 10,801.01 | |
| 1924 | 22,228.76 | ||
| Total | 74,787.72 |
| Name of maker | Amount paid | Amount collected | Balance |
| by Blair | by Blair | ||
| Brown, R.E. and Vivian | $118.69 | $118.69 | |
| Cook, Lloyd A | 1,279.38 | 1,279.38 | |
| Hamilton, Mrs. Clara | 2,500.00 | 2,500.00 | |
| Long, N.J. and W.K | 10,492.16 | 10,492.16 | |
| Long, W.K | 150.00 | 150.00 | |
| Long, N.J. and W.K | 2,000.00 | 2,000.00 | |
| Madison, Ben D | 2,500.00 | 2,500.00 | |
| Morris, E.F | 1,411.90 | 1,411.90 | |
| Schwab, A.B. and E | 2,500.00 | 2,500.00 | |
| Shoemaker Bros | 449.45 | 449.45 | |
| Do | 1,482.00 | 1,482.00 | |
| Do | 2,500.00 | 2,500.00 | |
| Do | 4,750.00 | 4,750.00 | |
| Do | 3,000.00 | 3,000.00 | |
| Total | 35,133.58 | 35,133.58 | |
| Lund, Andrew | 6,758.87 | 6,758.87 | |
| Brown, Addie and W.G | 1,488.76 | $336.50 | 1,152.26 |
| Clark & Eaton | 1,600.00 | ||
| Do | 111.90 | ||
| Hausen, H.P. | 18.10 | 18.10 | |
| Mattie, E | 411.42 | 411.42 | |
| Morris, E.F | 411.96 | 411.96 | |
| Total | 10,801.01 | 336.50 | 8,752.61 |
| Lynch, T.J | 4,300.00 | 2,410.63 | 1,889.37 |
| Do | 1,000.00 | 1,000.00 | |
| Do | 3,220.62 | 2,244.25 | 976.37 |
| Finnister, Alfred | 906.61 | 93.18 | 813.43 |
| Schmidt, W.H | 8,500.00 | 1,050.50 | 7,449.50 |
| Schmidt, W.H. o/d | 296.75 | 296.75 | |
| Total | 18,223.98 | 7,095.31 | 11,128.67 |
| SUMMARY | |||
| 1922 | 35,133.58 | 35,133.58 | |
| 1923 | 336.50 | 8,752.61 | |
| 1924 | 18,223.98 | 7,095.31 | 11,128.67 |
| Total | 64,158.57 | 7,431.81 | 55,014.86 |
1929 BTA LEXIS 2577">*2583 16 B.T.A. 459">*462 No interest was ever collected on any of these notes by Blair even in cases where there was recovery of part of the principal.
Some of the notes are still in the hands of a collecting agency in Omaha, Nebr., and efforts are being made to collect them. Efforts to collect the amounts due have been continuously made since the liquidation of the bank in 1925, and particularly since Blair's death.
At liquidation of the bank the depositors received all the money they had deposited and the stockholders received $115 per share in liquidation of their stock. If Blair had not assumed the notes the bank would have been insolvent and the stockholders would not have received par value for their stock.
Blair returned his income on the cash receipts and disbursements basis. His income-tax return for the year 1922 showed a net loss of $16,951.57. The gross income shown therein was $21,753.37 and the deductions claimed amounted to $38,704.94, including the amount of $35,133.58 paid by Blair to the bank on account of the notes. The respondent disallowed the claimed deduction of $35,133.58.
In his return for 1923 Blair showed gross income of $28,045.42, but no net income, 1929 BTA LEXIS 2577">*2584 since deductions totaling $28,045.42 were claimed. The claimed deductions included the amount of $9,987.11 which he paid the bank on account of the notes, and an amount of $15,267.22, a part of the claimed net loss of 1922.
The respondent disallowed the claimed net loss deduction and $8,752.61 on account of bad debts claimed.
The return for 1924 showed gross income of $20,509.08, but showed no net income. Included in the claimed deductions was the amount of $11,128.67 paid by Blair to the bank on account of the notes, and an amount of $1,344.32, a part of the claimed net loss in 1922. The respondent disallowed as a deduction an amount of $9,239.30 as bad debts.
OPINION.
SIEFKIN: J. W. Blair, in order to encourage the business of the bank in which he was the majority stockholder, guaranteed that no depositor in his bank should suffer a loss by reason thereof and that no stockholder of the bank should lose money as a result of his ownership of the stock. The evidence discloses that in 1922 Blair paid the bank $35,133.58 for notes which the directors of the bank considered of little value. In the same manner Blair paid the bank $10,801.01 in 1923 and $18,223.98 in 1924. 1929 BTA LEXIS 2577">*2585 Blair took the notes over and efforts have been continuously made since that time to the present to collect upon them. No amount was recovered upon the notes taken over in 1922 but there has been recovered $336.50 upon notes taken over in 1923 and $7,095.31 on notes taken over in 1924. The evidence discloses that a collection agency still has some of the notes and 16 B.T.A. 459">*463 efforts are being made to collect them. Petitioners contend that the amounts paid by Blair to the bank, less the amount recovered, constitutes a deductible item in the year in which such payment was made.
Petitioners depend upon section 214 of the Revenue Acts of 1921 and 1924, which provides in part as follows:
(a) In computing the net income there shall be allowed as deductions:
* * *
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;
(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *.
However, the petitioners have not shown that the notes were ascertained by1929 BTA LEXIS 2577">*2586 Blair to be worthless in the years in which the deductions are sought to be taken or that they were in fact worthless in those years. There was some testimony tending to indicate that they were worthless in part, but the extent of the worthlessness was not shown. This being true, the petitioners have failed to prove any deductible losses.
It is unnecessary to consider the second assignment of error, since the disallowance of the deduction of $35,135.58 for the year 1922 results in a net income to Blair in that year instead of a net loss.
Judgment will be entered for the respondent.