*2678 Deductions for losses alleged to have been sustained during the taxable year allowed in part and denied in part.
*31 In this proceeding the petitioner seeks a redetermination of his income tax for the taxable year 1920, for which year the Commissioner determined a deficiency in the amount of $6,025.49.
*32 The petitioner is seeking to deduct as "bad debts" certain notes which he acquired under the terms of a guaranty agreement.
FINDINGS OF FACT.
The petitioner is an individual residing at Panhandle, Tex. From 1914 to 1920 he was the active vice president and a director of the Drumright State Bank of Drumright, Okla. In the conduct of the affairs of the bank, the discount committee and directors required the petitioner to guarantee personally certain loans. In 1920, the state bank examiner, at an examination of the bank, directed that certain designated loans either be charged off or removed from the bank files. Among these criticized loans were the loans which the petitioner had guaranteed. In order to make good his guarantee he*2679 was compelled to sell his stock in the bank. The stock which was acquired in 1914 at a cost of $10,500, was sold to John W. Gilliland, the principal stockholder, for $45,000, and the petitioner in his 1920 income-tax return reported a gain on this transaction of $34,500. With the proceeds of this sale, the petitioner took over from the bank the following notes guaranteed by him:
| Logue-Thompson Drilling Co | $17,634.38 |
| E. O. McCullough | 13,505.41 |
| L. F. Messman | 7,234.73 |
The petitioner sought to take as a deduction on his 1920 incometax return the amount expended in taking up the notes of the Logue-Thompson Drilling Co. and E. O. McCullough, and by his amended petition now seeks to deduct in addition the L. F. Messman note of $7,234.73.
The Logue-Thompson Drilling Co. was a corporation in which the petitioner owned one-third of the stock. The corporation was indebted to the Drumright State Bank in the amount of $17,634.38 in 1920, at the time when the bank examiner insisted that the bank either charge off the notes or cause them to be removed from the assets of the bank. The petitioner, according to the terms of his guarantee, took up these notes. At the time*2680 the transfer was made to the petitioner, the corporation was still in existence but not doing business and no steps had been taken to force it into bankruptcy or a receivership. In 1920, after the petitioner acquired the notes, the corporation, by resolution of its board of directors, sold all its assets and applied the proceeds to the payment of indebtedness other than that of the petitioner.
The petitioner and one E. O. McCullough were copartners in the automobile business, which was first conducted in Oklahoma City and later moved to Albuquerque, N.M. Thirteen thousand five hundred and five dollars and forty-one cents was advanced by the *33 Drumright State Bank to the partnership. The notes were signed individually by E. O. McCullough, and the petitioner, while he did not sign or endorse, was responsible to the bank on the guarantee given to the board of directors. The petitioner paid the interest on the indebtedness and renewed the same from time to time. Mr. McCullough died in February, 1920, with no estate except life insurance which was payable to his family.
In regard to the L. F. Messman note of $7,234.73, it appears that while the petitioner was neither*2681 a maker nor endorser of this note, he received the proceeds and for this reason the bank compelled him to take it up under the terms of its guarantee. The record shows that the petitioner instituted suit against the maker of the note. In 1920 he was hopeful of a recovery and in 1921 the maker of the note confessed judgment and a partial recovery of $2,500 was made.
OPINION.
GREEN: The petitioner is here seeking to take as a deduction for "bad debts" losses alleged to have occurred in the year 1920. The petitioner was the active vice president of the Drumright State Bank of Drumright, Okla., from 1914 until the fall of 1920. In his management of the affairs of this institution, he was required by the discount committee and board of directors to personally guarantee some of the loans which were made under his direction. The bank had a critical examination by the state authorities in the fall of 1920, as a result of which certain of the loans had to be removed from the assets of the bank. The bank called upon him to take up the above-mentioned notes in accordance with his guarantee. The petitioner in his return for the taxable year 1920 claimed as a deduction for "bad debts" *2682 the amount expended in taking up the Logue-Thompson Drilling Co. and the E. O. McCullough notes and by his amended petition seeks to deduct the amount of the L. F. Messman note.
The question before this Board is one entirely of fact, and the three items will be discussed in the order in which they are listed above.
The loan of the Logue-Thompson Drilling Co. was acquired by the petitioner, who was the owner of one-third of the stock in the corporation, in the fall of 1920. Subsequently, in the same year, by vote of the board of directors, all the assets were sold and the proceeds applied to liquidate indebtedness other than that of the petitioner, making his note absolutely worthless. Under this state of facts, the petitioner sustained a loss which was properly deductible under section 214(a)(4) of the Revenue Act of 1918.
The evidence in regard to the E. O. McCullough transaction is extremely vague. McCullough and the petitioner were partners in *34 the automobile business. The loan made by the bank was made in the name of McCullough and the petitioner neither signed nor endorsed it; however, the proceeds went entirely to the partnership. There is no evidence*2683 as to the date the loan was made nor as to whether losses arising from the partnership were deducted in prior income-tax returns. The record is also lacking as to the amount of this loan which was contributed by McCullough for the benefit of the partnership. The payment of an obligation of his own on the part of the petitioner does not represent a loss. In the absence of any evidence as to the amount that was paid on behalf of McCullough, the finding of the Commissioner should be sustained.
As to the loss claimed in connection with the L. F. Messman note, the evidence is extremely vague. The petitioner received the proceeds of the note and also during the taxable year was prosecuting a suit against the maker of the note upon which he expected to recover and did make a recovery of $2,500 in the subsequent year. The evidence presented does not disclose a loss which may be deducted during the year 1920.
Judgment will be entered on 15 days' notice, under Rule 50.
Considered by STERNHAGEN, LANDSON, and ARUNDELL.