*18 Decision will be entered for the respondent.
In 1928 petitioner and 3 other corporations organized a new corporation (Export) for the principal purpose of engaging in export trade. Petitioner and the 3 other corporations subscribed and paid for all the common stock of Export, consisting of 100 shares of the par value of $ 1 per share. In 1929 Export's charter was amended, authorizing it to issue 770,000 shares of preferred stock of the par value of $ 100 per share. This preferred stock was used to acquire all the stock of a foreign corporation (Anglo). As an inducement to the stockholders of Anglo to make this exchange, petitioner and the 3 other corporations jointly and severally guaranteed in a continuing guaranty to the holders of Export's preferred stock the face value of the shares on liquidation and the payment of dividends thereon. During the taxable year 1936 petitioner was called upon to make good on its guaranty of the payment of dividends on Export's preferred stock. Held, petitioner had a right under an implied agreement on the part of Export to reimbursement from Export for the amount paid by petitioner under its guaranty and, Export being solvent, petitioner*19 was not entitled to deduct in the taxable year any part of the amount so paid as either an ordinary and necessary business expense or as a loss.
*1310 This proceeding involves a deficiency in income tax for the taxable year ended December 31, 1936, in the amount of $ 182,654.21. The deficiency is due to an adjustment in net income which, in the statement attached to the deficiency notice, is captioned "(a) Payment of guaranteed dividends $ 764,914.24" and explained by the respondent as follows:
(a) It is held that the payment, pursuant to your guarantee, in respect of dividends on Standard Oil Export Corporation 5% preferred shares does not constitute an allowable deduction under any of the provisions of*20 section 23 of the Revenue Act of 1936.
*1311 By an appropriate assignment of error petitioner contests this adjustment. There were several other adjustments made by the Commissioner in the net income of petitioner as reported on its return for 1936. These other adjustments were agreed to by petitioner and the additional tax due thereto has been assessed and paid and is not in controversy here. The facts were presented by stipulation and evidence adduced at the hearing. Those facts hereinafter appearing which are not from the stipulation are facts otherwise found from the record.
FINDINGS OF FACT.
We adopt the stipulation as a part of our findings and it is incorporated herein by reference.
Standard Oil Co. of New Jersey, the petitioner herein, was incorporated in 1927 under the laws of the State of Delaware. It has its principal office in New York City. Its return for the calendar year 1936 was filed with the collector for the second district of New York.
Standard Oil Co., organized in 1882 under the laws of the State of New Jersey, formed petitioner, to which it transferred in 1927 various United States oil-refining and marketing assets it then owned in a number of states*21 on the eastern seaboard. These assets, which had been acquired over many years and had a book value on the transferor's books of approximately $ 500,000,000 at the time of transfer, were turned over to petitioner in exchange for its entire issued and outstanding stock. During the entire period from 1927 through the year 1936 Standard Oil Co. was the sole stockholder of petitioner.
From the date of its organization through the year 1936, petitioner carried on its refining and marketing business, which it continuously sought to expand in the United States and in various foreign countries. During this period petitioner owned total assets in excess of a book value of $ 500,000,000, and its approximate gross sales were as follows:
| 1928 | $ 542,246,000 |
| 1929 | 552,741,000 |
| 1930 | 473,044,000 |
| 1931 | 308,894,000 |
| 1932 | 298,104,000 |
| 1933 | $ 302,611,000 |
| 1934 | 280,709,000 |
| 1935 | 301,411,000 |
| 1936 | 337,450,000 |
Standard Oil Export Corporation, hereinafter sometimes referred to as "Export," was organized under the laws of the State of Delaware on November 26, 1928, with a capitalization of 100 shares of no par value common stock, which were issued shortly after the date of organization to the *22 following four corporations for $ 1 per share:
| Petitioner | 40 shares |
| Standard Oil Co. of Louisiana | 25 shares |
| Carter Oil Co | 5 shares |
| Humble Oil & Refining Co | 30 shares |
*1312 The first two of these corporations were fully owned by Standard Oil Co. The Carter Oil Co. was fully owned by petitioner. Approximately 62 per cent of all outstanding stock of Humble Oil & Refining Co. was owned by Standard Oil Co. on November 26, 1928. None of the remaining 38 per cent of Humble Oil & Refining Co. was owned by any corporation affiliated with Standard Oil Co. At no time prior to the year 1937 did Standard Oil Co. own or control in excess of 72.1038 per cent of the total outstanding stock of Humble Oil & Refining Co.
The certificate of incorporation of Export states, among other things, that the nature of the business and the objects or purposes to be transacted, promoted, or carried on are to engage solely in "export trade" as that term is defined in the Webb Act, approved April 10, 1918, and to do any and all things necessary or incidental thereto, including, among many things, the right: "7. To acquire by purchase, subscription, exchange or otherwise" shares of the capital*23 stock of any corporation or corporations organized under the laws of any state, country, nation or government "and to issue in exchange therefor, in the manner permitted by law, shares of the capital stock, bonds, or other obligations" of Export, and "8. To promote or to aid in any manner, financially or otherwise, any corporation" of which any stocks, bonds or other securities and obligations are held or in any manner guaranteed directly or indirectly by Export.
Export was originally formed to be a member of an association to be organized under the Export Trade Act of April 10, 1918, to comprise Export and other persons, firms, or corporations engaged in export trade in petroleum or its products. The larger association, however, did not materialize.
As part of the original organization and purpose of Export, an agreement dated December 14, 1928, was executed by petitioner (therein called Member Company) and Export (therein called Corporation). Export entered into identical agreements, except for names, with Standard Oil Co. of Louisiana, Carter Oil Co., and Humble Oil & Refining Co. In these agreements it was recited that the member companies desired to avail themselves of the*24 benefits of the act of Congress entitled "An Act to promote export trade, and for other purposes," approved April 10, 1918, commonly known as the "Webb Act," and that the corporation had been organized "to effectuate the purposes of these agreements, and to engage solely in export trade as defined in the Webb Act." In the third paragraph of these agreements, the parties agreed as follows:
Third: The Corporation's organization and operating expenses shall be assessed by the Corporation against the Member Companies in proportion to the quantities of products allotted by the Corporation and exported or sold for export by the *1313 respective Member Companies. All other expenses and indebtedness of the Corporation shall be assessed by the Corporation against the Member Companies in accordance with the number of shares of the capital stock of the Corporation held by the respective Member Companies. All assessments made by the Corporation shall be paid by the Member Company within five (5) days of the date of the assessment.
In an application to the New York Stock Exchange dated January 17, 1930, for the listing of its preferred shares hereinafter described, its was stated by Export:
*25 The Company controls the export business of its aforesaid Common shareholders and consequently all the export business of the said Common shareholders is handled in accordance with the directions of the Company.
The Company is operating exclusively as a service organization and not for profit. Its operating expenses are borne by its Common shareholders in proportion to the quantities of products exported or sold for export by such shareholders. All other expenses and indebtedness of the Company are assessed against the Common shareholders in accordance with the number of shares of the Capital Stock of the Company held by each.
As a practical and current method of carrying out the arrangement provided for in the agreement of December 14, 1928, Export was paid a commission by petitioner, beginning with the year 1929 and continuing through 1934, equal to 2 per cent of the value of all business handled by Export, which Export took into its income; and it bore its own expenses. The method by which Export operated and derived its commission is more fully explained later in these findings. During 1935 and the first six months of 1936 no commission was paid to Export, nor were any payments*26 made to it under the agreement of December 14, 1928, since petitioner took the position that the revenues of Export for this period exceeded its expenses and therefore that Export should not receive any payments.
On December 16, 1929, the directors of Export approved an amendment of the charter of Export to authorize 750,000 shares of nonvoting $ 100 par value stock preferred as to principal and a 5 per cent cumulative dividend. The stockholders of Export approved this amendment on December 30, 1929, and the amendment became effective shortly thereafter. On May 21, 1930, the directors of Export approved an amendment of the charter of Export to increase the authorized preferred stock to 770,000 shares, and the stockholders approved on May 23, 1930. This amendment became effective shortly thereafter. Under the charter as thus amended the preferred dividend was payable on June 30 and December 31 of each year, the first dividend to be paid on June 30, 1930; also "The preferred stock shall be subject to redemption and may be redeemed as an entirety or in part, at the option of the corporation, on December 31, 1935, or on any semiannual dividend payment date thereafter, by payment of*27 One hundred and ten dollars ($ 110.00) for each share of stock so to *1314 be redeemed, and in addition thereto, of all dividends accrued and unpaid thereon."
On November 6, 1929, the president of Export made an offer to the directors of Anglo-American Oil Co., Ltd., of London, England, hereinafter sometimes referred to as "Anglo." This was an offer to acquire the shares, both voting and nonvoting, of Anglo on the basis of 1 share of Export 5 per cent nonvoting preferred, $ 100 par value, for each 5 5/9 shares of Anglo, # 1 par value, which was equivalent to $ 18 par value of Export preferred for each # 1 share of Anglo. The offer stated that the "Export Corporation 5% Preferred Shares are guaranteed as to dividends, and as to principal (par) in the event of liquidation, jointly and severally by:
"Standard Oil Company of New Jersey (a Delaware Corporation),
Standard Oil Company of Louisiana,
The Carter Oil Company,
Humble Oil & Refining Company."
On November 25, 1929, the directors of Anglo transmitted the above offer to the shareholders of Anglo and advised the shareholders, in part, as follows:
Your Directors, therefore, consider that it would be to the shareholders' *28 interest to exchange their Anglo shares for guaranteed shares in a Company closely associated with powerful producers and refiners and have no hesitation in strongly recommending them to accept this offer.
The shareholders will note that both principal and interest of the security offered are guaranteed by the owners of the Standard Oil Export Corporation.
The offer made by the president of Export was formally approved by the directors of Export at a meeting held December 16, 1929, and by the stockholders of Export at a meeting held December 30, 1929.
On November 6, 1929, petitioner and the three other holders of common stock of Export executed the following instrument (Exhibit 8 of the stipulation and set out in full herein except for the signatures and the attestations):
November 6, 1929.
To the
Shareholders of Anglo-American Oil Co. Ltd., and to all record or subsequent holders of Guaranteed 5% Non-Voting Preferred Shares of the Standard Oil Export Corporation exchanged in accordance with the offer herein mentioned:
In consideration of the exchange of shares of Anglo-American Oil Company, Limited, for the 5% Preferred Shares of the Standard Oil Export Corporation, on the*29 basis set forth in said corporation's offer of even date herewith, and for value received, we, the undersigned, hereby, jointly and severally guarantee and undertake that in event of said corporation, upon liquidation, making default in the payment of the principal (at par $ 100) of said 5% Preferred Shares, we will pay to each and every the record or subsequent holders of said 5% Preferred Shares received in exchange for said Anglo-American Oil Company, Limited, shares, upon demand, the principal (at par $ 100) of said 5% Preferred Shares, *1315 or so much thereof as said corporation shall fail to pay. And we further jointly and severally, hereby guarantee and undertake, that in event of said corporation making default in the payment of the 5% yearly dividend on said Preferred Shares, as and when the same becomes payable, we will pay to each and every the record or subsequent holders, as aforesaid, upon demand, the dividend or dividends, or so much thereof as said corporation shall fail to pay.
The first dividend payment on such Preferred Shares as may be issued will be made on June 30, 1930.
The guaranty hereby given shall be deemed a continuing guaranty.
On December 30, 1929, *30 the board of directors of petitioner met and approved, ratified, and confirmed, as the act of petitioner, the action of the officers of petitioner in executing the above guaranty.
On various dates between November 25 and December 31, 1929, similar action was taken by the board of directors of Standard Oil Co. of Louisiana, Carter Oil Co. and Humble Oil & Refining Co.
Anglo was incorporated in England in 1888, to engage in a general petroleum business, in which it has been engaged continuously since its organization. During the latter part of 1929 Anglo was distributing and selling petroleum products in Great Britain and Ireland, in which area it was supplying about 25 per cent of all such products. At that time it owned and operated distributing stations and ocean receiving stations, with facilities for storing full cargoes from ocean tankers. It also owned ocean-going tankers, coastwise steamers, railroad tank cars, and other facilities for the transaction of a petroleum marketing business. At the end of 1929 the book value of the total assets of Anglo was approximately # 17,249,000 and for the year 1929 its gross receipts from sales were approximately # 19,588,000. At this *31 time Anglo did not own or control any oil production and had only negligible manufacturing facilities, and it thus had to purchase its requirements from outside suppliers.
For many years prior to November 1929 Anglo had purchased a large part of its requirements of gasoline and other petroleum products from petitioner, and from petitioner's predecessor, Standard Oil Co., prior to the organization of petitioner. From January 1, 1929, to June 30, 1936, all purchases by Anglo from petitioner were received by Export, which it turned over to petitioner. Petitioner filled these orders either from its own refineries or by purchase from Humble Oil & Refining Co., Standard Oil Co. of Louisiana, and others, for which petitioner was billed by these suppliers. The commission paid by petitioner to Export came from the profit derived by petitioner from these orders. Export handled all correspondence with Anglo and prepared invoices for all of these products in the name of petitioner.
Throughout the period January 1, 1929, to June 30, 1936, the purchases of Anglo constituted approximately 25 per cent of the business of Export as herein described.
*1316 The Carter Oil Co. was only a producer*32 of crude oil and did not refine any products. Consequently, its position on these sales was indirect, through sale of crude oil to affiliated companies.
In addition to the products purchased from petitioner or its predecessor, Anglo purchased directly from petroleum refiners not affiliated with Standard Oil Co. a small part of its total requirements.
By November 1929 the officers of petitioner and the three other holders of common stock of Export had concluded that if the market furnished for their products through Anglo was to be retained it was essential that the stock of Anglo be acquired.
During the first half of the year 1930 Export issued (or the equivalent thereof in instances where the former Anglo stock was not yet physically surrendered) 764,935 shares of its 5 per cent cumulative, nonvoting $ 100 par value preferred stock in exchange for all the outstanding stock of Anglo. These preferred shares were duly registered and listed that year on the New York Stock Exchange, where they were continuously listed and traded in until redeemed in June 1936. Neither petitioner nor Standard Oil Co. ever owned or controlled any of the preferred stock of Export.
The annual dividend *33 requirement on 764,935 shares of preferred stock of Export was $ 3,824,675.
The following dividend resolution providing for the dividend on Export's preferred stock for the period January 1 to June 30, 1936, was adopted by the board of directors of Export:
The President stated to the Board that the Corporation may or may not have earnings or surplus from its usual business out of which to pay the June 30, 1936, dividend on its Five Percent Cumulative Non-Voting Guaranteed Preferred Stock, depending upon the amount of dividend which Anglo-American Oil Company, Limited, will pay before June 30. He further stated that the guarantors (Standard Oil Company (New Jersey) in the place of Humble Oil & Refining Company) are aware of the situation and have agreed to supply the Corporation with sufficient surplus, if the Anglo dividend is inadequate for the purpose, to meet the dividend rather than to have the Corporation default in the payment thereof and the shareholders call on them for payment of the dividend.
The President then advised the Board that as the Corporation is assured of surplus available for the payment of the full dividend on its preferred stock on June 30, 1936, it is in order*34 for the Board to pass the usual dividend resolution.
Upon motion duly made, seconded and unanimously adopted, it was
Resolved, That a dividend for the six months' period beginning January 1, 1936 and ending June 30, 1936, in the amount of $ 2.50 per share on the Five Percent Cumulative Non-Voting Guaranteed Preferred Stock of this Corporation is hereby declared payable June 30, 1936, to stockholders of record at the close of business June 9, 1936.
Upon motion duly made, seconded and unanimously adopted, it was
Resolved, That the Treasurer be and he hereby is instructed and directed to carry out the arrangement with the guarantors (Standard Oil Company (New Jersey) in the place of Humble Oil & Refining Company) to furnish this Corporation *1317 with such funds as it may be necessary for them to supply in order to meet the aforesaid dividend.
The dividend of $ 1,912,285.60 which was due the preferred stockholders of Export on June 30, 1936, was furnished by the respective guarantors as follows:
| Petitioner | $ 764,914.24 |
| Standard Oil Co. | 573,685.68 |
| Standard Oil Co. of Louisiana | 478,071.40 |
| Carter Oil Co. | 95,614.28 |
| 1,912,285.60 |
On December 26, 1934, Humble Oil & Refining*35 Co. paid $ 3,600,000 to Standard Oil Co. for which payment Standard Oil Co. undertook to pay any and all payments thereafter required of Humble Oil & Refining Co. under its guaranty of November 6, 1929. On June 28, 1935, Standard Oil Co. acquired from Humble Oil & Refining Co. its entire holding of common stock in Export (30 shares) for $ 1 per share. On June 28, 1935, Standard Oil Co. executed a contract identical in terms to those above mentioned between Export and the member companies dated December 14, 1928.
On May 19, 1936, Standard Oil Co. acquired from petitioner its entire holding of common stock in Export (40 shares) for $ 1 per share. Petitioner did not record any loss from this disposition on its books, nor was any loss deducted on account of this disposition on its Federal income tax return for that year. Standard Oil Co. did not assume the above mentioned guaranty of petitioner that was executed on November 6, 1929.
On May 19, 1936, Standard Oil Co. acquired from Standard Oil Co. of Louisiana its entire holding of common stock in Export (25 shares) for $ 1 per share.
On May 19, 1936, Standard Oil Co. acquired from Carter Oil Co. its entire holding of common stock *36 in Export (5 shares) for $ 1 per share.
On or about June 5, 1936, at which time Standard Oil Co. was the sole common shareholder of Export, Standard Oil Co. turned over to Export $ 84,142,850, which was used by Export on June 30, 1936, to redeem its preferred stock. This sum was obtained by Standard Oil Co. by the public sale of its 25-year 3 per cent debentures dated June 1, 1936, which are still outstanding.
Beginning sometime about February 1936, the officers of Export were considering the advisability of liquidating Export. On June 18, 1936, the board of directors of Export met and resolved to liquidate and dissolve the corporation. On June 18, 1936, a stockholders' meeting approved the liquidation and dissolution. Such liquidation and dissolution was actually effected on June 30, 1936. At the time of *1318 Export's dissolution and liquidation, its principal asset was the capital stock of Anglo, which it carried on its books at a cost of $ 73,589,105.89. Its liabilities were small.
Export filed Federal income tax returns for all years 1929 through 1936. It also filed Federal capital stock tax returns for the years 1933, 1934, 1935, and 1936.
Export corporation, during*37 the entire period of its ownership of Anglo-American stock, received $ 11,377,774.36 in dividends from that corporation. Of this sum, $ 4,578,327.69 was credited as earnings to the surplus of Export Corporation. The balance, $ 6,799,446.67, paid out of Anglo's surplus on hand December 31, 1929, was required sometime in 1934 by independent auditors to be, and it was, credited to the investment account of Export Corporation in Anglo-American stock as representing a return of its investment in that stock. All of the earnings of Export Corporation for the entire period of its existence, including the earnings derived from Anglo-American dividends, were fully paid out by Export Corporation as dividends on its preferred stock after payment of its operating expenses.
As of December 31, 1934, and December 31, 1935, Export was required to file certain financial statements, particularly balance sheets, with the Securities and Exchange Commission. These statements had to be accompanied by a certificate of an independent public or independent certified public accountant. It was at that time that Export was advised to change its accounting relative to the dividends it had received or would*38 receive from Anglo out of surplus on hand at December 31, 1929. Up to that time Export had been accounting for such dividends as income. The advice of the accountants was that such distributions by Anglo out of surplus on hand at December 31, 1929, should be treated by Export as a return of capital and not as income. The certified balance sheets that were filed with the Securities and Exchange Commission were prepared on the basis recommended by the accountants, and the books of Export were revised accordingly.
On June 30, 1936, petitioner turned over $ 764,914.24 to Export for payment to the preferred shareholders of Export under its guaranty agreement dated November 6, 1929. Petitioner advised Export that it paid this money under its obligation as guarantor; and petitioner booked this payment as made under such agreement. This payment was made through the agency of Export upon advice of counsel that a direct payment to the preferred shareholders of Export might still leave open a claim by such stockholders against Export for payment of any default in the dividend of Export.
Respondent has not allowed any deduction to petitioner in any year by reason of payments made under the*39 guaranty agreement. Petitioner, however, has consistently claimed all payments under the *1319 guaranty of November 6, 1929, to be ordinary and necessary business expenses and not capital expenditures. Petitioner's tax years prior to the year now before us are closed.
OPINION.
Petitioner contends that it is entitled to deduct from its gross income for the calendar year 1936 the amount of $ 764,914.24 paid in connection with its guaranty contract dated November 6, 1929, either as an ordinary and necessary business expense or as a loss. The applicable statute is the Revenue Act of 1936, and the material provisions thereof are set forth in the margin. 1
*40 The respondent contends that the payment of $ 764,914.24 was a capital investment or something in the nature thereof and, therefore, not deductible by petitioner. In the alternative, he contends that if any amount is deductible by petitioner either as an ordinary and necessary business expense or as a loss, the amount so deductible should be limited to $ 350,139.21. Briefly, he arrives at this amount by further contending that $ 6,799,446.67 of the distributions received from Anglo as dividends was income to Export available for dividends instead of a return of capital, as petitioner maintains, and that, therefore, on December 31, 1935, Export had a balance of earnings on hand available for dividends of $ 115,233.29, which, added to its earnings for the first 6 months of 1936 of $ 921,704.29, gave a total of $ 1,036,937.58 available for the payment of the dividend on June 30, 1936, of $ 1,912,285.60, thus leaving $ 875,348.02 ($ 1,912,285.60 minus $ 1,036,937.58) as the amount to be made up by the guarantors, of which petitioner's share was 40 per cent or $ 350,139.21.
For many years prior to 1929 petitioner and its predecessor, the Standard Oil Co., had been selling a large amount*41 of petroluem products to Anglo. In order to retain this market and other export business petitioner and 3 other interested corporations (Standard Oil Co. of Louisiana, Carter Oil Co., and Humble Oil & Refining Co.) organized Export under the provisions of the "Webb Act," which was a Congressional Act designed to promote export trade. Export was organized November 26, 1928. In November 1929 an offer was made to the stockholders of Anglo to acquire their stock in Anglo in exchange for preferred stock of Export, which latter stock was to be guaranteed by petitioner and the 3 other interested corporations as to both its par *1320 value in case of liquidation and an annual dividend of 5 per cent. The offer was accepted and Export thus acquired all the stock of Anglo. Petitioner and the 3 other interested corporations, which owned all the common stock of Export, jointly and severally guaranteed to the holders of the preferred stock of Export the face value of the shares on liquidation and the payment of the dividends thereon. In 1934 the Standard Oil Co. assumed the guaranty obligations of Humble Oil & Refining Co. in consideration of a payment by that company to Standard Oil*42 Co. of $ 3,600,000. In 1935 the Standard Oil Co. acquired from Humble Oil & Refining Co. the 30 shares of common stock of Export, and in 1936 the Standard Oil Co. acquired from petitioner, Standard Oil Co. of Louisiana, and Carter Oil Co. all of the remaining shares of the common stock of Export, but it did not assume the guaranty obligations of these companies. Petitioner, although no longer a stockholder of Export, still remained liable under its guaranty contract dated November 6, 1929. During the period from January 1, 1930, to June 30, 1936, inclusive, the preferred stockholders of Export were paid dividends of $ 24,860,118.30. Of this amount $ 21,271,525.37 was paid by the guarantors, and of the amount paid by the guarantors petitioner paid 40 per cent or $ 8,508,610.15. Only $ 764,914.24 of the amount paid by petitioner is involved in this proceeding. The years in which such other amounts were paid are now closed. The amount of $ 764,914.24 represents 40 per cent of the final dividend of $ 1,912,285.60 paid on the preferred stock of Export for the first 6 months of 1936. The amount was paid by petitioner on June 30, 1936, after it had ceased on May 19, 1936, to be a*43 stockholder of Export.
The respondent, in contending that the payment by petitioner of $ 764,914.24 was a capital investment or at least was one which is not deductible under any provision of section 23, Revenue Act of 1936, argues that the payment of the final dividend on June 30, 1936, of $ 1,912,285.60 was a primary obligation of Export; that petitioner and the other guarantors were only secondarily liable; that their liability could only have been enforced upon default by Export; and that "It is a principle of general law that payment by one secondarily liable creates an obligation on the part of the primary obligor to reimburse the guarantor making the payment. 24 Am. Jur. 955-956." Petitioner argues in rebuttal as follows:
Respondent seems certain that Petitioner acquired a right of recoupment from Export Corporation when it made its payment under the guaranty on June 30, 1936. What the Respondent overlooks is that Petitioner's guaranty (Stipulation, Exhibit 8) ran solely and exclusively to the shareholders of Anglo American, the eventual Preferred shareholders of Export Corporation. This obligation was a primary one, rather than secondary, and was created to induce the Anglo*44 shareholders to turn over their Anglo shares as a step by Petitioner in achieving the preservation of its English market. Export Corporation was not a party to the *1321 guaranty agreement and had no part in it. Any payment under the agreement made by Petitioner was solely a matter between it and the Anglo American shareholders.
We are unable to agree with petitioner. The agreement itself states that "The guaranty hereby given shall be deemed a continuing guaranty." Guaranty is defined in 38 C. J. S. 1129 as follows:
A "guaranty" or "guarantee" may be generally defined as a collateral promise or undertaking by one person to answer for the payment of some debt or the performance of some contract or duty in case of the default of another person, who in the first instance is liable for such payment or performance; a collateral promise or undertaking to pay a debt owing by a third person in case the latter does not pay.
"A guaranty may be one of various kinds, such as an absolute or conditional guaranty, a guaranty of payment or of collection, a general, special, continuing, or unlimited guaranty, or a letter of credit." 38 C. J. S. 1139. In the instant proceeding, as noted above, *45 the agreement of November 6, 1929, states that the guaranty thereby given shall be deemed "a continuing guaranty." In 38 C. J. S. 1142, "A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked."
In 38 C. J. S. 1130, it is stated:
A guaranty in its technical and legal sense has relation to some other contract or obligation with reference to which it is a collateral undertaking; it is a secondary and not a primary obligation.
Numerous authorities are cited in the footnote for the above proposition, including Howell v. Commissioner, 69 Fed. (2d) 447. In that case the Circuit Court of Appeals, Eighth Circuit, among other things said:
That in the case of suretyship or guaranty there is an implied agreement on the part of the principal debtor to reimburse his surety or guarantor is unquestioned. See Melletee Farmers' Elevator Co. v. H. Poehler Co., (D. C.) 18 F. (2d) 430; In re Dailey et al (D. C.) 19 F. (2d) 95; United States Fidelity & Guaranty Co. v. Centropolis Bank of Kansas City, Mo., (C. C. A. 8) 17 F. (2d) 913, 917, 53 A. L. R. 295;*46 National Surety Co. v. Salt Lake County (C. C. A. 8) 5 F. (2d) 34; (compare Jenkins v. National Surety Co., 277 U.S. 258">277 U.S. 258, 48 S. Ct. 445">48 S. Ct. 445, 72 L. Ed. 874">72 L. Ed. 874); 28 C. J. 1037.
We think the above authorities are clearly contrary to petitioner's above quoted argument in rebuttal. As we view the question, petitioner's argument would be meritorious only if the agreement of November 6, 1929, were in fact an original undertaking instead of a guaranty. Of course the mere fact that agreement itself recites that it shall be deemed "a continuing guaranty" would not make it so if all the other provisions of the agreement clearly indicated that the agreement *1322 was in fact an original undertaking. Cf. Coe v. American Fruit Growers, Inc., 100 Pac. (2d) 234. In 38 C. J. S. 1131, it is stated:
Although a contract is in form to answer for the debt or default of another, if its leading purpose is to secure some benefit to the promisor or to promote his interest, it will be regarded as an original undertaking. The use of the word "guaranty" or "guarantee" does not*47 necessarily import a guaranty contract, for these words are often used in the sense of promise or agreement importing an original obligation on the part of a person executing such contract; but that construction is put on it only when it is plain that such was the intent of the parties.
In the instant proceeding we do not think it is plain from a reading of the entire agreement that an original undertaking "was the intent of the parties." Petitioner and the other guarantors only obligated themselves to pay so much of the principal upon liquidation or so much of the semiannual dividend "as said corporation [Export] shall fail to pay." This we think made the agreement a continuing guaranty; made petitioner's obligation secondary and not primary; and entitled petitioner to reimbursement from Export for all payments made by petitioner under the agreement of November 6, 1929. 38 C. J. S. 1130, supra; Howell v. Commissioner, supra. That petitioner and the other guarantors made no effort to enforce any obligation to repay, over against Export, is without controlling significance we think. The important point is that it seems to us they had a legal right*48 to be reimbursed, at least on final liquidation of Export, and their failure to endeavor to secure reimbursement for reasons satisfactory to themselves can not give rise to a deduction under section 23.
In Glendinning, McLeish & Co., 24 B. T. A. 518; affd. 61 Fed. (2d) 950, we said:
* * * It is well settled by the decisions of this Board that, where the taxpayer makes expenditures under an agreement that he will be reimbursed therefor, such expenditures are in the nature of loans or advancements and are not deductible as business expenses. * * *
In that case the petitioner before us had entered into an agreement with a foreign corporation, referred to as the Belfast company, to purchase that company's American business, and as a part of the consideration agreed, among other things, to guarantee upon request by the Belfast company the payment of all or any part of the 5 per cent cumulative dividends upon the outstanding preferred stock of the Belfast company to an amount not exceeding the sum of 5,000 pounds yearly. Belfast company agreed to reimburse the petitioner there "for any expenditures which you may make, pursuant*49 to this clause of this agreement * * *." During the taxable years there involved the petitioner paid to the Belfast company certain amounts in accordance with its agreement to guarantee the dividends on the preferred stock *1323 of that company and sought to deduct such payments as ordinary and necessary business expenses. We held that the payments were not so deductible, and in affirming our decision, the Circuit Court of Appeals, Second Circuit, said in part:
* * * Perhaps it would be going far to call these advances loans in the ordinary sense, but there is no occasion to define them precisely, for we are now concerned only with their deductibility for the computation of the net income for purposes of taxation, and it is enough to determine negatively only that in none of the taxable years was the payment made in that year an expense of the business. The agreement for reimbursement made them at least advances on the credit of the Belfast company, and requires that they be so treated in computing the net income of the petitioner. As such they were not deductible. Cohan v. Commissioner (C. C. A.) 39 F. (2d) 540; Island Petroleum Co. v. Commissioner (C. C. A.) 57 F. (2d) 992.*50
In the instant proceeding there was no express agreement on the part of Export to reimburse petitioner, as there was in the Glendinning case. This, however, in view of all the evidence, we think is not material. Island Petroleum Co. v. Commissioner, 57 Fed. (2d) 992; certiorari denied, 287 U.S. 646">287 U.S. 646. 2 There was an implied agreement to reimburse, Howell v. Commissioner, supra, and that is sufficient to hold the payment in question nondeductible as an ordinary and necessary business expense or as a loss. Island Petroleum Co. v. Commissioner, supra. Cf. A. Giurlani & Bro., Inc. v. Commissioner, 119 Fed. (2d) 852.
*51 Petitioner, in contending that the payment of the amount of $ 764,914.24 is deductible as an ordinary and necessary expense, relies principally upon Camp Manufacturing Co., 3 T. C. 467. In that case the petitioner was a corporation engaged in manufacturing lumber. It subscribed to 50 per cent of the capital stock of a new company which proposed to build a paper mill and to become one of its customers. This subscription having somewhat depleted Camp's working capital, Camp decided to market some of the preferred stock of the new company. To do so it was necessary to guarantee the payment of dividends on this stock and its redemption at par. Four years later Camp paid the sum of $ 12,463 to the holders of such preferred stock in consideration *1324 for the cancellation and release of the guaranty. We held that the sum so paid was deductible by the petitioner there as an ordinary and necessary business expense. That case is distinguishable from the instant proceeding on its facts. There was involved in the Camp case no question of a right to reimbursement of the sum paid by Camp. The new company had not defaulted on the payment of any dividends*52 and Camp had not been called upon to make any payment under its guaranty as such. The amount paid by Camp was made merely to secure a release from the obligation of guaranty. It was the payment of an original undertaking made solely for Camp's benefit, and after making the payment Camp had no right to reimbursement from anyone, either express or implied.
It seems to us that the only way that petitioner would be entitled to a deduction for the $ 764,914.24 which it paid in the taxable year on account of its guaranty of dividends on Export's preferred stock would be to show that Export was insolvent and petitioner's claim for reimbursement was worthless. Petitioner makes no claim that it could make such a showing. At the time of the dissolution of Export in 1936 it owned all the stock of Anglo, which it carried on its books at a cost of more than $ 73,000,000, and was clearly solvent. That the guarantors, including petitioner, made no effort to be reimbursed can not, as we have already said, give them the benefit of the deduction which they claim.
We hold, therefore, that petitioner is not entitled to deduct from its gross income for the calendar year 1936 the amount of $ 764,914.24*53 paid in connection with its guaranty contract dated November 6, 1929, either as an ordinary and necessary business expense or as a loss. Since we agree with the respondent's principal contention, it becomes unnecessary to consider his alternative contention, involving as it does the effect of the distribution by Anglo of the $ 6,799,446.67 set out in our findings.
Decision will be entered for the respondent.
Footnotes
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) Expenses. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *
* * * *
(f) Losses by Corporations. -- In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.↩
2. In this case the court said in part: "It is immaterial that there was no express agreement on the part of the Texas corporations to repay the moneys advanced. Not only was such agreement implied in the agreement that only the net profits of the various enterprises were to be divided among the stockholders, but a promise to repay moneys laid out and expended for the use and benefit of another and at his request is implied in law. 2 R. C. L. 776, 777; Scott et al. v. Norton Hardware Co. (C. C. A. 4th) 54 F. (2d) 1047; Emery v. Hobson, 62 Me. 578">62 Me. 578, 16 Am. Rep. 513">16 Am. Rep. 513↩. Here the expenditures were made for the use and benefit of the Texas corporations and upon an agreement made in their behalf. And it makes no difference in the result, if we construe the agreement as requiring repayment by the Texas corporations only in the event that their operations should prove successful. A loan is no less a loan because its repayment is made contingent; and a taxpayer has no right to treat it as a loss until the contingency has occurred or its worthlessness has been otherwise determined."