*1077 Petitioner paid in 1933 an amount of $24,506.46 on certain indebtedness of his son which he had guaranteed when the latter was solvent in order to prevent the sale of stock held by the creditor as collateral. Held, petitioner is entitled to a deduction in 1933 for the amounts so paid as a debt ascertained to be worthless and charged off in that year.
*1261 In this proceeding the petitioner seeks redetermination of an income tax deficiency for the calendar year 1933 in the amount of $2,590.77, which results from the respondent's disallowance of a deduction of $24,506.46 claimed by the petitioner for a debt which was ascertained to be worthless during the year in question. The issue presented here is whether the amount paid by the petitioner on his guarantee of a certain indebtedness of his son is either (1) a contribution *1262 to the cost of certain stock held by the petitioner, (2) a gift to the petitioner's son, as claimed in the alternative by the respondent, or (3) was an advance on behalf of petitioner's son, which the son obligated*1078 himself to repay, as claimed by the petitioner, and is thus deductible in the year 1933 as a bad debt.
FINDINGS OF FACT.
Petitioner is an individual, with his principal place of business at 224 I. N. Van Nuys Building, Los Angeles, California.
On September 4, 1930, and continuing down through the year in question, the petitioner was a director of the Pacific Finance Corporation and owned 5,000 shares of its common stock. He was one of the organizers and an executive vice president of the Pacific American Fire Co. and owned 2,500 shares of its stock.
The petitioner's son, D. W. Pierce, Jr., was, on September 4, 1930, indebted to the Farmers & Merchants National Bank in Los Angeles in the amount of $53,500. As security for that debt the following stocks and bonds were on deposit as collateral with the creditor bank at all times from September 4, 1930, to June 1, 1933, having a market value on the material dates as indicated:
| Market value | ||||
| Securities | Sept. 4, 1930 | Sept. 29, 1930 | Jan. 22, 1931 | Dec. 28, 1931 |
| 1,545 shares Pacific Finance Corporation (com.) | $33,990.00 | $27,810.00 | $20,085.00 | $8,497.50 |
| 500 shares Pacific American Fire | 19,875.00 | 17,500.00 | 12,437.50 | 10,500.00 |
| 100 shares Consolidated Steel (pfd.) | 1,900.00 | 1,700.00 | 1,200.00 | 255.00 |
| 100 shares Consolidated Steel (com.) | 700.00 | 500.00 | 350.00 | 25.00 |
| 3 units Consolidated Rock | 51.00 | 51.00 | 51.00 | 51.00 |
| 1 bond, Wilshire Lodge Building Corporation | 600.00 | 600.00 | 600.00 | 600.00 |
| Total | 57,116.00 | 48,161.00 | 34,723.50 | 19,928.50 |
*1079 In addition the collateral held by the bank included 1,545 shares of Los Angeles Industries stock which had an aggregate market value on September 4, 1930, of $3,090.
The petitioner on September 4, 1930, at the request of his son, who was at that time being pressed by the bank for additional collateral, guaranteed the indebtedness of D. W. Pierce, Jr., to the Farmers & Merchants National Bank of Los Angeles to the extent of $12,000. This guarantee was increased by petitioner to $24,000 on September 29, 1930.
During the month of October 1930 the petitioner guaranteed the indebtedness of J. C. Howard, which was also secured by stocks of the Pacific Finance Corporation and the Pacific American Fire Co.
On January 22, 1931, the petitioner's guarantee of the indebtedness was increased to $35,000, and on December 28, 1931, to $40,000. On the last named date the indebtedness of D. W. Pierce, Jr., to the bank, *1263 which had remained at all times during the period thus far described at $53,500, was increased to $54,700.
The primary object of the petitioner in making the guarantees described was to prevent the sale of the securities held as collateral and thereby to*1080 protect the market price of the stock of the Pacific Finance Corporation and the Pacific American Fire Co.
During the month of June 1933 the loan which petitioner had guaranteed was satisfied at the request of the bank by the sale of the collateral which was marketable and the payment by the petitioner of the deficiency. Petitioner's net deficiency, after giving his son credit for the remaining securities which petitioner took over, was $24,506.46.
On July 27, 1933, petitioner's son executed to the petitioner a five-year promissory note in the amount of $20,000, payable six months from date of execution, as partial evidence of his indebtedness.
The petitioner's son had a net worth of $19,287.10 and $10,038.04 on September 4 and September 29, 1930, respectively, and was insolvent to the extent of $2,376.67 and $21,186.60 on January 31 and December 31, 1931, respectively. His income from salary, commissions, and stock dealings was approximately $17,000 in 1929 and $14,500 in 1930, and his salary was $12,000 and $10,000 in 1931 and 1932, respectively. Petitioner made demand on his son during 1933 for the payment of his indebtedness but the son, because of his reduced income, *1081 was unable to pay any part of the debt. The petitioner deducted the amount of his son's indebtedness in his income tax return for 1933 as a debt ascertained to be worthless and charged off in that year.
No payments of interest or principal have been made by petitioner's son on the note given his father.
OPINION.
HILL: We are called on to decide here whether the petitioner's payment of $24,506.46 on his guarantee of the indebtedness of his son is (1) a contribution to the capital cost of stock held by the petitioner which he sought to protect by his guarantee, (2) a gift to his son made when the business affairs of the son did not warrant a prudent loan, or (3) a loan made to his son, ascertained by the petitioner to be worthless in 1933 and charged off at that time.
The first position we consider untenable here. The amounts paid out on his guarantees by the petitioner did not go into the corporations to which it is contended capital contributions were made, cf. ; ; certiorari denied, *1082 ; ; certiorari denied, , nor were they applied to the discharge of corporate obligations. See ; ; ; affd., ; certiorari denied, . *1264 Expenditures other than for these purposes which may in some indirect way improve the position of the petitioner's investment can not be held contributions to capital under ordinary circumstances. ; .
In ; affd., , the stockholders of a corporation, among whom was the taxpayer, surrendered 50 percent of their stock holdings to the company's bankers pursuant to a plan by which the bankers agreed to refrain from placing the corporation in bankruptcy if one-half of the shares were surrendered to them to be paid over as compensation to the new management which they*1083 had secured for the company. We held that the value of the stock surrendered could not by virtue of the indirect benefit which came to taxpayer's remaining investment be labeled a contribution to capital and allowed its deduction as a loss. On largely similar facts we reached the same conclusion in . See also ; . Cf. .
These holdings point to the conclusion that outlays made by an owner-investor may not be considered capital contributions when they are paid to outsiders and engender only a secondary or indirect benefit for the capital invested. As we said in :
We believe that the situation here is that petitioner, impelled by the untoward exigencies confronting it, surrendered 32 1/2 shares of its stock * * * for which it received no direct compensation, and if any benefit of any kind inured to it, it was only the indirect benefit, as a stockholder, of having the corporation put in a more*1084 strategic position * * *
The petitioner has testified that beside the more immediate objective of protecting the position of his son, he hoped by his guarantees to prevent the sale of the stock held as collateral in order to protect the price of similar securities held by him. Under the cases cited we think it plain that this benefit to petitioner's investment flowing indirectly from these outlays is not sufficient to render them contributions to capital.
The respondent must fail also in his alternative contention, that the funds paid out by the petitioner may not be regarded as loans, but were gifts made to his son. Respondent's argument is based on his allegation that the financial position of the petitioner's son during the period of the first guarantee and the subsequent increases was so insecure as to render any advances imprudent from a business standpoint and more in the nature of gifts. He assigns the close relation between the petitioner and his son as the reason for the advances and a further basis for branding the outlays as gifts. The evidence, *1265 however, is clear that the petitioner's son was solvent by a safe margin at the time of the original guarantee*1085 and the increase on September 29, and that petitioner felt assured during the entire period from September 4, 1930, through December 28, 1931, that the position of his son if protected at those times by petitioner's guarantees would ultimately be saved by the later increased value of the collateral. The petitioner, as an officer of the corporations the stock of which was held as collateral, was in favorable position to pass judgment as to the fair value of the stock so held and its future prospects, and he has stated his opinion that it was worth at least double its market value in September 1930. While we do not accept this testimony as conclusive of the value of the stock, we think it sheds light on the petitioner's intentions and objects in making the guarantees. See . The petitioner regarded these dealings as sound from a business standpoint and this regardless of the personal relationship which obtained between him and the debtor, his son. The guarantee which petitioner made in October 1930 of the indebtedness of one J. C. Howard, a legal stranger, we think strengthens this impression.
The petitioner was prompted to make the*1086 guarantees for an additional reason which we think furnishes valid basis for holding that these advances were not gifts. The primary objective, as we have noted, of the guarantees was to protect the market value of securities held by the petitioner. Advances made for such purposes are closely related to business expenses and when intended to be in the form of a loan are clearly deductible when the resultant debt becomes worthless.
Here, the evidence points conclusively to the fact that the petitioner intended to hold his son as a debtor in whatever amount he was required to pay on the guarantees. This intent is made plainer by the execution of the note in the amount of $20,000. We do not take this latter fact, however, as an indication that the additional $4,506.46 was meant as a gift. The entire amount must be reckoned as a single transaction. It seems clear, further, that D. W. Pierce, Jr., was hopelessly insolvent at the time the petitioner made his payments and that the debt became worthless as soon as it came into being. Whether the $4,506.46 difference between the debt and the note is properly explained, as the petitioner alleges, by the fact that when the note was*1087 signed the exact amount of the guarantee payment had not been ascertained or by some other fact, the entire debt was ascertained to be worthless immediately after the payments in June 1933, and it is thus a proper deduction in the year. ; ;
Decision will be entered for the petitioner.