*813 Petitioner J. M. Bennett, without consideration, delivered by endorsement certain notes to a trust created by him for the benefit of his children. The notes in question later became worthless. On the assumption that he was personally liable by reason of his endorsement, he substituted in lieu thereof securities having a cost basis in excess of the face amount of the notes taken up. Held, as the trust was not a holder for value and there was no consideration for the endorsement, the worthless notes did not give rise to a bad debt deduction by petitioner; held, further, petitioners are not entitled to a deduction for interest paid on one of the notes; and held, further, the difference between the face amount of the notes and the cost basis of securities substituted therefor is not deductible as a loss.
*745 The respondent determined deficiencies in income tax against each of the petitioners for the year 1935 in the amount of $3,019.33. The deficiencies resulted from the disallowance of deductions for interest, bad debts, and an alleged*814 loss from the sale or exchange of capital assets claimed by the petitioners in their returns.
The proceedings were consolidated and the facts were partially stipulated.
FINDINGS OF FACT.
Petitioners are husband and wife, and during the calendar year 1935 resided in San Antonio, Texas.
On June 10, 1930, petitioner J. M. Bennett executed a trust indenture wherein "for and in consideration of the sum of Ten Dollars ($10.00), the receipt whereof is hereby acknowledged, and for the further consideration of the trusts and purposes hereinafter set out", irrevocably transferred to the Standard Trust Co., a private Texas corporation, as trustee, certain notes aggregating about $80,000 in principal due, 607 shares of various preferred stocks, and certain bonds in the face amount of $54,700. No consideration was paid for the transfer of these properties to the trust. The trustee was given full power to manage, control, and dispose of the trust property, to invest and reinvest the proceeds, and to make distributions to the beneficiaries in accordance with the terms of the trust. The stated purpose of the trust, which had a term of 15 years, was "to provide *746 a competence*815 for each of my said children, without reference to the success or failure of business ventures upon which I may now or may hereafter be engaged * * *." Section 5 of the trust instrument reads in parts as follows:
The trustee shall receive as full compensation for services herein two per cent on all the income paid out by it, and, as further benefit accruing to said trustee, I hereby consent that in making loans for said trust, it may charge the borrower a reasonable commission for its services, and the receipt and acceptance of such commission shall not be considered as in any way a violation or breach of its duties as such trustee. * * *
J. M. Bennett was president and controlling stockholder of the Standard Trust Co. As president he noted on the instrument the acceptance of the trust by the trustee on June 10, 1930. The trust was known as "Standard Trust Company, Trustee #1945."
Among the assets transferred to the trust "were five notes dated August 1, 1929 and due September 1, 1930, executed by L. A. Casey and the General Investment Company, by L. A. Casey, President." 1 At the date of transfer the remaining unpaid principal of the five notes was $29,535.91. A payment*816 of $436.31 was made January 1, 1931, leaving a balance of $29,099.60. No further payments on the principal of the notes and no renewals thereof were made by the makers. No interest was ever paid on the notes by the makers. These notes represented direct loans by J. M. Bennett to the makers.
During 1934 J. M. Bennett transferred certain other properties to the trustee in exchange for four of the aforementioned notes in the total principal amount of $15,602.26. The remaining note in the hands of the trustee was one executed by Casey and the General Investment Co. and was in the principal sum of $41,397.74, on which payments on principal had been made and credited as follows:
| September 18, 1929 | $120.00 |
| October 30, 1929 | 24,000.00 |
| December 4, 1929 | 3,344.09 |
| January 1, 1931 | 436.31 |
*817 After the foregoing payments the balance due on the note remaining in the hands of the trustee was $13,497.34.
Also, among the assets transferred to the trustee was a note in the principal sum of $20,000, the original of which was executed by one Lane Taylor on September 1, 1927, for a period of one year, payable to the Standard Trust Co. Two hundred shares of stock of the Travis-St. Mary's Co., a building corporation, were pledged as security. The note was purchased at face value by J. M. Bennett from *747 the Standard Trust Co. in 1928. It was renewed each year up to and including September 1, 1932. The last payment of interest was on October 22, 1932, which paid the interest to September 1 of that year.
The Lane Taylor note bore on the reverse side thereof the following:
This note belongs to Standard Trust Co.,
Trustee, #1945.
[Signed] J. M. BENNETT.
The $41,397.74 note aforementioned was indorsed in blank by J. M. Bennett. Written above his signature appears the following:
Property of Standard Trust Company., Trustee, No. 1945.
Efforts were made without success to collect these two notes in 1934 and 1935 by personal appeal to the makers, but*818 no proceeding at law was instituted for that purpose.
No buyer could be found for the 200 shares of Travis-St. Mary's Co. stock, which company paid no dividends and was in default of payment of principal and interest on its bonds and on its state and local taxes. In 1937 the stock was sold for a nominal consideration of $1, on advice that it was necessary to dispose of the stock to establish loss. This stock became worthless prior to the taxable year.
During the year 1935 J. M. Bennett paid to the Standard Trust Co., trustee, $476.58 representing accrued interest on the Lane Taylor note.
Later in the year 1935, on the advice of counsel that he was personally liable by reason of his endorsement of the Casey and Taylor notes, J. M. Bennett transferred to the trustee securities having a basis in his hands of $53,232, and received from the trust company the Casey and Taylor notes. The total face value of these two notes was $33,497.34. The notes were worthless when taken up by J. M. Bennett.
Petitioners in their returns for 1935 each deducted one-half of the interest payment ($476.58) to the trustee, one-half of the total of the two notes ($33,497.34) as bad debts, and*819 one-half the difference between the basis of the securities transferred to the trustee in 1935 ($53,232), and the total face value of the two notes received from the trustee ($33,497.34) as a capital loss subject to the limitation. The respondent disallowed the deductions.
OPINION.
ARNOLD: Petitioners assign as errors (a) the disallowance to each by the Commissioner of a deduction of $238.29 representing one-half of the payment made to the Standard Trust Co., trustee, for *748 interest accrued on the Lane Taylor note, (b) the disallowance to each of a bad debt deduction of $16,748.67 representing one-half of the worthless notes of Casey and Taylor, (c) failure to allow an additional deduction of $9,867.33 each for loss on the Casey and Taylor notes, or, in the alternative, (d) failure to allow to each an additional deduction of $6,149.38 representing loss from the sale of capital assets. Petitioners in their reply brief expressly abandon (d).
An analysis of (a), (b), and (c), supra, shows that each turns upon the legal effect of J. M. Bennett's endorsement and delivery of the Casey and Taylor notes to the trustee. The deficiency letter shows that respondent denied*820 the deductions for interest and bad debts upon the theory that the notes had been transferred without consideration and that no liability resulted from the endorsement. Petitioners contend that liability resulted and that, the liability having been satisfied during the taxable year, the right to the deductions arose.
It has been held that the endorsement of a promissory note "is substantially the drawing of a new note in the terms of the old", , and Chief Justice Marshall said in , "the endorsement of a bill is understood to be not simply a transfer of the paper but a new substantive contract." Like any other contract an endorsement requires consideration, and where there is a lack of consideration no personal liability is incurred by the endorser to one not a holder in due course, ; ; , and authorities cited; *821 ; .
Under petitioner's theory the trustee must be a holder in due course to render J. M. Bennett liable upon his endorsement. A holder in due course under the Texas Negotiable Instruments Act, Title 98, Vernon's Annotated Taxas Statutes, is one who has taken the note in good faith and for value, art. 5935. J. M. Bennett testified in this proceeding, and the trust instrument recites, that his purpose in creating the trust and in transferring the property to it was to provide a competence for each of his children, without reference to the success or failure of his business ventures. He further testified that nothing whatever was paid for the transfer of these notes to the trust. His children were the natural objects of his bounty and, in the absence of any consideration for the transfer, the transfer was a gift in trust, and no liability resulted from Bennett's endorsement of the Casey and Taylor notes.
Bennett's transfer of certain securities to the trust in 1935 in exchange for the worthless notes maintained the trust corpus*822 at the level originally deemed necessary to provide a competence for his *749 children. That this was his motive is further demonstrated by the exchange in 1934 of certain properties for the other four Casey notes in the total principal amount of $15,602.26. His original intention was to make a gift to his children and he incurred no liability by his endorsement of notes constituting a part of the corpus of the gift. Cf. ; .
If he was not liable by reason of his endorsement, then the amount paid as interest on the Taylor note would not be deductible. ; ; affd., ; certiorari denied, . Neither would petitioners be entitled to a deduction by reason of J. M. Bennett's having taken up the Casey and Taylor notes if he was not legally bound to pay them, as the voluntary assumption of obligations does not justify a loss deduction. *823 .
Petitioners contend that the duties and the obligations imposed upon the trustee by the trust instrument supplied the necessary element of consideration to constitute the trust a holder for value and make J. M. Bennett liable on his endorsement. With this contention we do not agree. Section 5 of the trust instrument provided that the trustee was to receive as "full compensation for services" in connection with the management and control of the trust corpus, "two per cent of the income paid by it", and as a further benefit it was permitted to charge the borrower a reasonable commission for its services on loans made. The parties having agreed that the amount so stipulated was to be full compensation for the services imposed on the trustee by the trust instrument, we do not think such duties and obligations constituted a consideration for the transfer.
We do not think there was any consideration, either by way of benefit to the promisor or detriment to the promisee, as contended by the petitioners, which made J. M. Bennett liable for the payment of the notes by reason of his endorsement.
The United States District*824 Court for the Western District of Texas handed down a decision on May 26, 1939, in the case of Bennett v.United States, Fed.Supp. , involving a suit for the refund of taxes paid by these petitioners in the prior year. One of the Casey notes which J. M. Bennett had endorsed was taken up from the trust by the transfer of other assets on the assumption that by his endorsement he was legally liable to pay the amount due on the note. The court held that the assumption of the duties and liabilities imposed on the trustee was a detriment to the trustee and, therefore, a valuable consideration for the endorsement of the note. The loss was allowed as a bad debt deduction. We are unable to concur in this conclusion and do not feel bound by that decision.
*750 In our opinion the trustee was to be fully compensated for such duties and liabilities as were imposed upon it by the trust instrument and the trustee recognized that it would receive "full compensation" for its services when it noted the acceptance of the trust. Such services so to be performed and paid for could not be construed as a detriment to the trustee constituting a consideration for the transfer of the*825 notes to the trust.
The Commissioner's determination will be approved.
Reviewed by the Board.
Decision will be entered for the respondent.
Footnotes
1. The trust instrument, attached to and made a part of the stipulated facts, recites a transfer of two notes executed by L. A. Casey and the General Investment Co.; two notes executed by L. A. Casey, individually; and one note executed by L. A. Casey and the Alamo Investment Co. One of the notes executed by Casey individually is dated July 30, 1929, instead of August 1, 1929, as stipulated. ↩