*2656 A payment made by a guarantor for relief from liability, past and future, under a guarantee contract held a deductible loss.
*177 This proceeding results from respondent's determination of a deficiency in income tax for the year 1921 in the amount of $3,752.42, all of which is in controversy. Error is alleged in respondent's disallowance of a loss deduction claimed in the amount of $28,000, which amount was paid by petitioner in 1921 to the Sterling National Bank on account of a contract guaranteeing certain if the stockholders of said bank against loss on paper which was taken over from another bank in which petitioner held stock at the time the Sterling National Bank was organized. Respondent takes the position that such payment was a capital investment in the Sterling National Bank rather than a deductible loss.
FINDINGS OF FACT.
Petitioner is an individual residing in Sterling, Colo. In the fall of 1920, the Farmers National Bank at Sterling, in which petitioner was a stockholder and director, was closed by order of the United States*2657 bank examiner. At the time of closing petitioner, together with other directors, was obligated as guarantor on about $300,000 of the bank's indebtedness. Reorganization plans contemplated the formation of another bank corporation, to be known as the Sterling National Bank, to take over the liabilities and assets of the defunct Farmers National Bank. A bank examiner assisted in the reorganization. At his instance, about $200,000 of the paper held by the old bank was taken out as worthless at the time of reorganization. The remainder of the paper was considered good and was taken over by the Sterling National Bank.
Prior to the completion of the reorganization, several individuals, L. C. Burns, D. C. Heflebower and A. M. Rex, who were engaged in *178 the banking business outside of Sterling, were approached to take stock in the proposed bank and to assume active management of its affairs. These men agreed to go into the new enterprise, provided the directors of the old bank would guarantee them against further loss to the extent of $100,000 should it occur in the assets taken over from the Farmers National Bank. In compliance with this condition, a contract was entered*2658 into as follows:
THIS AGREEMENT made and entered into this 2 day of April A.D., 1921, by and between L. C. Burns of Hoyt, Kansas and D. C. Heflebower of Kansas City, Missouri, parties of the first part, and J. P. Dillon, M. W. Hohl, W. E. Patterson, W. C. Propst, F. W. Rieke, W. E. Whittier, of Sterling, Colorado, and E. C. Withrow of Denver, Colorado, parties of the second part:
WITNESSETH: Whereas, there is now a movement for the incorporation of a banking company, to be known as THE STERLING NATIONAL BANK, to be located at Sterling, Colorado, and
WHEREAS, the organizers of THE STERLING NATIONAL BANK, afore-mentioned, are desirous that the said bank shall take over, when the Charter is issued to said bank, certain assets of THE FARMERS NATIONAL BANK, of Sterling, Colorado, in the nature of notes, bonds and other securities to the amount of the liabilities of the said THE FARMERS NATIONAL BANK of Sterling Colorado, existing at the time the said transfer is made, at which time a contract shall be entered into between the two banks as aforesaid which shall enumerate in detail said assets and liabilities.
WHEREAS, the parties of the second part are interested in, and stockholders*2659 of, THE FARMERS NATIONAL BANK, of Sterling, Colorado, and are likewise desirous that the said THE STERLING NATIONAL BANK shall take over said assets, and,
WHEREAS, the said parties of the first part desire to purchase stock in the corporation now being organized, namely THE STERLING NATIONAL BANK, of Sterling, Colorado, and,
WHEREAS, the said parties of the second part are equally desirous that said parties shall purchase stock in the said THE STERLING NATIONAL BANK, of Sterling, Colorado, now being organized, and,
WHEREAS, the parties of the second part are likewise desirous of purchasing stock in the said THE STERLING NATIONAL BANK, of Sterling, Colorado, when organized,
NOW, THEREFORE, for and in consideration of the said first parties agreeing to purchase stock in THE STERLING NATIONAL BANK, of Sterling Colorado, when said organization is completed, and the Charter issued for said bank, and for the further consideration of the said the first parties becoming residents of the city of Sterling, State of Colorado, and assuming active management of the said THE STERLING NATIONAL BANK, of Sterling, Colorado, and for a further consideration of One Dollar and other valuable considerations, *2660 paid by said first parties to said second parties, the parties of the second part, individually and collectively, for themselves, their heirs, administrators, executors, and assigns, hereby agree to guarantee to the said parties of the first part, their heirs, administrators, executors and assigns, 3 1/2 twentieths of the payment in full of any and all assets, namely, all notes, bonds and other securities, together with interest upon same, which may be taken over by THE STERLING NATIONAL BANK, of Sterling, Colorado, from THE FARMERS NATIONAL BANK, of Sterling, Colorado, for a period of one year from the date such assets are taken over; and that in *179 event that any of the said assets above named, namely, notes, bonds and other securities, with accured interest thereon, remain unpaid upon the date of maturity thereof, or are not renewed at maturity or thereafter in the regular course of Banking Business, the said parties of the second part, individually and collectively, for themselves, their heirs, administrators, executors and assigns, agree to pay any and all amounts remaining unpaid of said 3 1/2 twentieths of said assets at maturity thereof, unless the same may be renewed*2661 or extended as aforesaid.
In consideration of the guaranty of parties of second part, as aforesaid, parties of the first part hereby agree to purchase and pay for in cash 350 shares of stock in THE STERLING NATIONAL BANK of sterling, Colorado. at $120.00 per share, upon the organization of said bank if same is effected; to assume the active management of the said THE STERLING NATIONAL BANK of Sterling, Colorado, and to give their best efforts to promote the welfare of the said bank during the time that it may be under their management.
WITNESS the hands and seals of the parties the day and year above written.
A similar contract was entered into with A. M. Rex by which he agreed to purchase 150 shares of stock.
Many of the stockholders of the Farmers National Bank purchased stock in the Sterling National Bank, which was organized sometime in April, 1921. Petitioner purchased, for cash, 100 shares of the stock in the new bank at $120 per share, each share having a par value of $100 per share. A little later he took over five additional shares which another party had purchased with money advanced by him.
The Sterling National Bank began business in May, 1921. In the*2662 following September the bank Examiner declared approximately $100,000 of the paper received from the Farmers National Bank to be worthless and ordered its removal from the bank's assets. Such removal was alternative to the suspension of business. The new managers and stockholders were unwilling to put additional capital in the business, and were likewise unwilling to close the bank. Instead, an agreement was reached by them and the guarantors under the guaranty contracts above set out, that the guarantors were to pay $100,000 into the bank and the objectionable paper was to be turned over to Rex as trustee for the bank, in consideration that they release the guarantors from any liability under the guaranty contract. Of this $100,000 payment to the bank under this agreement, petitioner's share as one of the guarantors was $28,000. On September 20, 1921, he paid the bank $1,000 in cash and gave his note for $27,000. The note was paid in full in October of the same year. Some collections were subsequently made on the paper thus removed from the bank's assets. Petitioner has never received any portion of the amount thus collected.
The bank continued in business during the remainder*2663 of 1921. During the course of the ensuing year, another $100,000 of the paper acquired from the old Farmers National Bank was ordered removed. Later, in the same year, the Sterling National Bank closed its doors.
*180 OPINION.
SIEFKIN: The sole issue in controversy is whether the $28,000 payment by petitioner to the bank represents a deductible loss. The rights and liabilities of the respective parties under the guaranty contracts are not determinative of the question presented, as petitioner was released from those contracts by the agreement under which payment was made. This latter agreement provided for the payment to the bank, the placing of the questionable paper in trust for the bank, and the release of the guarantors from liability under the written guaranty contracts, set out in full in the findings of fact.
Respondent urges that the payment in question might have saved petitioner's investment in the bank's stock and was, therefore, a capital investment. We grant the possibility, but the conclusion that other considerations prompted the payment in question is inescapable. When the $100,000 was ordered withdrawn from the bank's assets, the stockholders*2664 protected by the guaranty contract were unwilling to stand a stock assessment and were likewise unwilling to see the bank closed. Instead, they agreed to release the guarantors from further liability on the guaranty contract in return for the guarantor's payment of $100,000 to the bank. We are of the opinion that the principal consideration moving the guarantors to make the payment in question was the offer to release them from liability under the guaranty contracts.
The cases cited by the respondent are not in point as they involve questions of advances of stockholders to corporations, or with guarantors of stock values. Under such facts, losses are not realized until the corporation becomes insolvent or the stock worthless. The question at bar is essentially different. Though the bank was solvent and continued to function throughout the year, petitioner contracted to stand an immediate loss of $28,000 in consideration of a release from a probable future loss of an uncertain amount. Nor is the question in any wise affected by the value of the paper placed in trust as the bank, and not the guarantors, was the beneficiary under the trust. Accordingly, petitioner was not entitled*2665 to any portion of the amounts collected by the trustee. In this respect petitioner's position differs from that of a guarantor who, upon having to make good his guaranty, is subrogated to the rights of the bank as was the case in . A guarantor's loss depends upon whether the obligations guaranteed proved to be worthless in whole or in part. No such contingency exists in the case at bar.
Reviewed by the Board.
Judgment will be entered for the petitioner.