*1717 Loss resulting from making good s guarantee of credit extended to a bank was not a capital loss.
*1385 The Commissioner determined the following deficiencies:
| 1922 | $120.26 |
| 1923 | 3,359.18 |
| 1925 | 1,180.79 |
| 1926 | 8,371.27 |
The only error assigned by the petitioner is that the Commissioner erred in treating a loss for 1925 as a capital loss instead of an ordinary loss. The respondent alleges that, should the Board hold that he erred in applying section 208 of the Revenue Act of 1926, then part of the alleged loss of $95,055 did not result from a transaction entered into for profit.
FINDINGS OF FACT.
The parties filed a stipulation which is as follows:
The petitioner is an individual residing at Glendora, Mississippi.
Prior to 1922 the petitioner purchased 273 shares of the capital stock of the Peoples Bank of Sumner, Mississippi, for $13,650.00. The petitioner was vice-president and a director of the said bank.
In February, 1922, the chairman of the Board of Bank Examiners*1718 of the State of Mississippi advised the bank that its capital of $50,000 was totally impaired and directed that a stock assessment of 100 per cent be made upon the stockholders. Certain of the other stockholders were unable to meet the call so that petitioner and another stockholder, Mr. T. C. Buford, on March 16, 1922, each paid the bank $25,000,00. At this time, to wit on or about March 16, 1922, Stockholders holding Peoples Bank of Sumner stock of a par value of $6,400 assigned such stock to the petitioner and Mr. Buford, of which one-half, or $3,200.00, was assigned to the petitioner. In addition to the above, and in addition to the stock referred to in Par. II owned outright by the petitioner, the petitioner at this time held the personal note of the one Rowe Hays in the amount of $2,500.00 secured by $2,500.00 par value of stock of the Peoples Bank of Sumner, which stock petitioner had sold to said Rowe Hays. Two minority stockholders, to wit J. W. McLarty and S. B. Hervey refused to assign their Peoples Bank of Sumner stock having par value of $3,000.00 to the petitioner and Mr. Buford but on February 21, 1922, entered into the following agreement:
In consideration of*1719 M. P. Sturdivant and T. C. Buford paying the sum of three thousand dollars ($3,000.00), to the capital account of the Peoples *1386 Bank at Sumner, Mississippi, in accordance with the demands of the Bank Examiners of the State of Mississippi, we, the undersigned who each own $1,500.00 par value of the capital stock of said Peoples Bank, do hereby set over, transfer, and assign to the said M. P. Sturdivant and T. C. Buford, all dividends earned on said stock until such times as said dividends so earned are sufficient to repay to the said M. P. Sturdivant and T. C. Buford the sum of $3,000.00 above mentioned with six per cent. interest per annum thereon from this date.
Witness our signatures, this 21 day of February A.D. 1922.
(Signed) J. W. MCLARTY
S. B. HERVEYOn the same day the bank transferred and assigned to the petitioner and Mr. Buford certain notes totalling $48,478.27 face value which the Board of Bank Examiners had held to be worthless. However, collections were subsequently made on such notes in the amount of $1,571,00, which was reported by petitioner and Mr. Buford in the year received by them.
After March 16, 1922, the bank continued to do business, *1720 but in May, 1922, it was decided to liquidate the bank under the direction of State Bank Examiner S. W. Wardlaw. Mr. Wardlaw determined that the Grenada Bank of Grenada, Mississippi, was willing to move its branch located at Woodland, Mississippi, to Sumner, and to purchase certain of the assets of the Peoples Bank of Sumner. Accordingly, the Grenada Bank assumed the liability of the Peoples Bank of Sumner to its depositors, and in consideration therefor became the owner of the building, furniture and fixtures of the Peoples Bank, valued at $12,764.00, certain notes due the Peoples Bank valued at $143,236.00, and sufficient cash of the Peoples Bank to make up the amount of the deposits. A certified copy of the order of the Chancery Court, Second Court District, Tallahatchie County, Mississippi, dated May 31, 1922, authorizing the above-mentioned transaction is attached hereto, marked Exhibit "A," and made a part of this stipulation by reference.
At the time of the Court's order referred to in Paragraph IV, to-wit, May 31, 1922, the Peoples Bank of Sumner owed approximately $220,000.00 to certain city banks on its notes secured by certain collateral, which notes the Peoples Bank*1721 of Sumner was unable to meet.
Mr. Buford and the petitioner were men of large business interests in the neighborhood of Sumner and expected to continue to live there; for a great many years they had been the active officers of the Peoples Bank of Sumner and many of the persons and banks with whom the bank did business did so because of the reputation of Mr. Buford and the petitioner. Mr. Buford and the petitioner agreed to pay, and did pay, $110,000.00 each to the bank to enable the bank to meet the said liabilities. The petitioner and T. C. Buford by paying $110,000.00 each on June 15, 1922, had assigned to them the said notes of the Peoples Bank of Sumner secured by all the said collateral. Subsequently, to-wit, on December 20, 1922, the petitioner issued a check to one J. C. Coker for the account of the Peoples Bank of Sumner in the amount of $400.00, bringing the total of his advances to $110,400.00. Against the above-mentioned advances of $110,400.00, the petitioner received cash payments as follows:
| December 16, 1922, Cash | $17,500.00 |
| August 1, 1923, Cash | 5,000.00 |
| January 26, 1925, Cash | 10,000,00 |
| August 5, 1925, Cash | $3,995.00 |
| December 1, 1925, Cash balance from final sale of People's Bank of Sumner assets | 17,500.00 |
| Total | 53,995.00 |
*1722 *1387 In 1925, it appeared advisable to finally wind up the affairs of the Peoples Bank of Sumner. Accordingly, the remaining assets were sold for $35,000.00 and the liquidating agent discharged. A certified copy of the order of the Chancery Court, second Court District, Tallahatchie County, Mississippi, dated November 12, 1925, is attached hereto, marked Exhibit "B," and made a part of this stipulation by reference.
For the year 1925 the respondent allowed a capital net loss of $95,055.00 computed as follows:
| Cost of stock prior to 1922 | $13,650.00 | |
| Amount paid in 1922 as explained in Paragraph III herein | 25,000.00 | |
| 38,650.00 | ||
| Cash advanced as explained in Paragraph V Herein | $110,400.00 | |
| Less payments received from liquidator (Paragraph V) | 53,995.00 | |
| 56,405.00 | ||
| Total | 95,055.00 |
The petitioner is and has been engaged in banking, farming, milling cotton seed, and the mercantile business. He is a director of the Federal Reserve Bank at St. Louis, and consequently is no longer a director of the Bank of Sumner. His banking experience began about 1904 or 1905 with the People's Bank of Sumner, Miss. Since then he has been interested*1723 in other banks. For about eight years prior to 1913 he owned all but a few qualifying shares of stock of the Sumner Savings Bank. He used this bank to take care of the excess of loans which the People's Bank could not make. T. C. Buford, who was president of the People's Bank and in charge of the conduct of its business, was the petitioner's brother-in-law. These two men had received considerable income from their banking activities in and about Sumner. Although Buford began with very little money, he was well to do financially during the latter years of his life. The petitioner's income from dividends from the People's Bank and the Sumner Savings Bank amounted to $30,000 or $40,000 a year.
Buford was absent from the People's Bank for the greater part of 1920, due to an injury. During his absence, Ben Rowland, then cashier, loaned a great deal of the bank's money unwisely. The petitioner and Buford, late in 1920, realized that Rowland was mismanaging the bank and stopped him from lending more of the bank's money. When Buford returned to the bank in November, 1920, he found some irregularities and arranged for a conference with Rowland on December 4, 1920. Rowland committed*1724 suicide before the time for the conference. Thereafter, it was found that *1388 he had misappropriated certain funds of the bank in excess of $29,000.
At different times prior to 1920, the petitioner and Buford had given certain city banks their personal continuing guarantee for credit extended from time to time to the People's Bank. Without these guarantees, the credit would not have been extended. In the latter part of December, 1920, the People's Bank owed the city banks about $220,000, which it could not pay. At a meeting of the creditor banks in December, 1920, the petitioner and Buford reduced all their guarantees to writing and the banks continued to extend the credit.
Business conditions in and about Sumner in 1921 were not good. The petitioner believed that he and Buford would recover something from the notes of the face value of $48,478.27 which were assigned to them. He believed that he and Buford would have to put up the $50,000 called for by the bank examiner or the bank would fail and they would be forced into bankruptcy on their guarantees. But he believed the bank would be able to succeed in its business with the $50,000. Between that time and the*1725 liquidation in May, 1922, Buford became ill. His illness was diagnosed as malignant, and doctors predicted that he would not live long. He was no longer able to attend to the affairs of the bank, and, as the petitioner did not have time to conduct the business personally, he allowed it to be taken over by the Grenada Bank.
In March, 1922, the petitioner wanted to continue the banking business in Sumner and cause as little flurry as possible. He believed that he and Buford would have to furnish the money necessary to continue the bank, because they were the principal persons interested in it, the only ones able to furnish additional money at that time, and, as directors and guarantors, they had already made themselves liable for any shortages. Having decided to put up the $50,000, they wrote the stockholders that they would take care of the double liability on the stock if the stock were turned over to them.
The petitioner paid the $110,000 on June 15, 1922, in order to satisfy the correspondent banks and liquidate the People's Bank. He then believed he would get some of this money back, but how much he did not know.
OPINION.
MURDOCK: There is no issue relating to the*1726 years 1922, 1923, or 1926, and the deficiencies determined for those years are approved. The parties agree as to the amount of the loss and as to the year in which it was sustained. Counsel for the petitioner admitted at the hearing that $13,650, the cost of the original 273 shares of stock purchased *1389 by the petitioner prior to 1922, was a capital loss. In his brief he argues that, since capital loss means a loss resulting from "the sale or exchange" of the assets, there was no such loss in the present case because the stock was not sold or exchanged, but was determined to be worthless in 1925. He cites a number of Board cases holding that the cost of worthless stock is an allowable deduction, and he cites also I.T. 2149, C.B. IV-1, p. 36, for holding that it is not a capital loss. This argument, if sound - a question which we do not determine, would not benefit the petitioner. In computing the loss, allowed as a capital net loss in 1925, the Commissioner has included the original cost of the 273 shares of stock owned by the petitioner prior to 1920. He has not asked the Board to disallow the cost of this stock as a loss in 1925 or to increase the deficiency in any*1727 way. But if the cost of this stock is to be allowed as a loss when the stock actually became worthless, it is not a loss in 1925, for the stock became worthless prior to that year.
At the time the petitioner paid the $25,000, he already owned more than half of the outstanding stock of this bank. It is stipulated that the bank examiner directed that a stock assessment of 100 per cent be made upon the stockholders, and in order to meet this demand the petitioner and Buford each paid $25,000. This $25,000 seems to us to represent additional cost of the stock already owned so far as this petitioner is concerned and as to that the petitioner is not entitled to any relief in this proceeding.
Under the circumstances, we think the only real issue in the case is whether $56,405, the remainder of the loss allowed by the Commissioner as a capital net loss, was or was not a capital net loss within the meaning of section 208 of the Revenue Act of 1926 which provides, "The term 'capital loss' means deductible loss resulting from the sale or exchange of capital assets" and "the term 'capital assets' means property held by the taxpayer for more than two years." In 1922 the petitioner advanced*1728 $110,400 to the bank so that the bank might pay the amounts owed to city correspondents and liquidate. One good and sufficient reason for the petitioner making this payment was that he had guaranteed, both orally and in writing, the credit advanced by the city banks to the People's Bank. His reasons for making the guarantee are fully set forth in our findings of fact. This was a transaction entered into for profit. The loss which resulted, in the amount of $56,405, was an ordinary loss under section 214 as opposed to a capital loss under section 208.
Judgment will be entered under Rule 50.