*92 Decision will be entered for the respondent.
The petitioner, a director, depositor, and shareholder in a trust company, loaned money to the trust company along with other "contracting stockholders" for the purpose of remedying an impairment of capital in the trust company. The loan became worthless in 1946. The petitioner, who was an officer and director in The Berwind-White Coal Mining Company, its subsidiaries, and affiliated companies, including the trust company, claimed a deduction in 1946 for the worthless debt as a loss incurred in his trade or business of being an officer and director of Berwind-White, its subsidiaries, and affiliates under section 23 (e) (1), as a business bad debt under section 23 (k) (1), or as a loss resulting from a transaction entered into for profit under section 23 (e) (2). Held, the transaction from which the worthless debt was derived created a debtor-creditor relationship between the petitioner and the trust company and the loss is deductible only under section 23 (k) (4) as a nonbusiness bad debt, for the petitioner was not engaged in a trade or business of his own to which the debt was proximately related.
*808 The respondent determined a deficiency of $ 20,939.21 in the income tax of the petitioner for the year 1946. The issue for our decision is whether a loss in the amount of $ 24,250 sustained by the petitioner in*94 1946 is deductible in full under either of sections 23 (e) (1), 23 (e) (2), or 23 (k) (1) of the Internal Revenue Code, as contended by the petitioner, or as a nonbusiness bad debt under the provisions of section 23 (k) (4), as determined by the respondent.
FINDINGS OF FACT.
The facts stipulated by the parties are found accordingly.
The petitioner is an individual residing in Paoli, Pennsylvania, and filed his income tax return for the calendar year 1946 with the collector of internal revenue for the first district of Pennsylvania.
The petitioner has been active as an employee or officer of The Berwind-White Coal Mining Company (hereinafter referred to as Berwind-White). He has also been an officer, director, and shareholder of numerous other mining, financial, and industrial enterprises, particularly Berwind-White, its subsidiaries, and affiliates. In 1931 he was a shareholder in 62 companies, a director of 23 companies, and president or vice president of 18 companies. In 1946 his wife, Ellen McMichael Berwind, was a shareholder in 50 companies. The petitioner made a large gift of securities to his wife in *809 1945. In 1946 the petitioner owned shares in 25 companies, *95 was president or vice president of 9 companies, and a director in 18 companies. In 1931 the petitioner received salaries and director's fees of $ 33,774.94 from the companies with which he was connected. In 1946 he received $ 66,640 in salaries and director's fees.
The Penn Colony Trust Company (hereinafter referred to as the Company) was incorporated as a bank and trust company on November 3, 1926, under the laws of the Commonwealth of Pennsylvania. The Company was organized by Edward B. Creighton and Thomas Fisher, business associates of petitioner's father and officers of Berwind-White. At the instigation of petitioner's father, the petitioner became interested in the Company.
The petitioner was named a director of the Company in the certificate of incorporation and was at all times hereinafter mentioned a director of the Company until its liquidation and dissolution in 1946. The petitioner was never an officer or employee of the Company nor had he ever received any salary from the Company.
On November 17, 1926, the petitioner purchased 100 shares of the common stock of the Company out of a total issue of 2,000 shares and paid the Company for such stock $ 12,500. On September*96 27, 1928, the petitioner sold 50 of the shares at a price of $ 140 per share, or a total consideration of $ 7,000. The profit on such sale was reported for income tax purposes on petitioner's 1928 income tax return. On January 22, 1929, the petitioner purchased 20 shares of the common stock of the Company at $ 140 per share, or a total consideration of $ 2,800. From January 22, 1929, until the date of dissolution of the Company in 1946, the petitioner has owned 70 shares of the common stock of the Company.
On July 15, 1931, the First Deputy Secretary of Banking for the Commonwealth of Pennsylvania notified the Company of an impairment of its capital in the amount of $ 136,568.58 and allowed the Company 15 days in which to eliminate the impairment.
On September 22, 1931, the board of directors of the Company ratified the sale of certain specified stock in various companies at cost to Edward B. Creighton, acting for himself and others, including the petitioner. The cost of these securities was greatly in excess of the market value at the time of the sale. The circumstances of the sale, the reasons for it, and its ultimate tax consequences to the petitioner are detailed in the Findings*97 of Fact in the case of Charles G. Berwind, 8 T.C. 1112">8 T. C. 1112, and incorporated herein by this reference.
An audit disclosed that the capital of the Company was further impaired in the amount of $ 200,000 at the close of business on December 5, 1931, and on December 8, 1931, the board of directors of the Company adopted a resolution to close the affairs of the Company on *810 December 14, 1931. At a meeting on December 14, 1931, the stockholders of the Company adopted a resolution closing the affairs of the Company on that date and agreeing to its liquidation. They also ratified an agreement dated December 8, 1931 (hereinafter referred to as the agreement).
The parties to the agreement were the Company, the "Berwind companies," certain parties termed therein "deferred depositors," certain parties termed therein "contracting stockholders" (all "deferred depositors" and "contracting stockholders" were members of the Berwind family or companies or persons closely connected with Berwind-White, its subsidiaries or affiliates), and The Berwind-White Coal Mining Company. The petitioner was both a "deferred depositor" and a "contracting stockholder" as the*98 terms are used in the agreement.
The agreement recited that the capital of the Company was further impaired as of the close of business on December 5, 1931, in the amount of $ 200,000 and that it was the intention and the desire of the parties to the agreement that the impairment of the capital of the Company should be immediately repaired and that the claims of all depositors and creditors of the Company, other than the Berwind companies and the deferred depositors, be paid in full. The agreement further provided in part:
WHEREAS, each of the Contracting Stockholders has severally agreed to contribute to the Trust Company [the Company] in cash the amount set opposite his name in Schedule B attached hereto and made a part hereof, totalling in the aggregate the sum of $ 200,000, for the purpose of repairing said impairment of capital and aiding in the liquidation of the Trust Company pursuant to this Agreement; and
* * * *
FIRST: As a condition precedent to this Agreement becoming binding and effective upon the Berwind Companies and the Company, the Trust Company and/or the Deferred Depositors and/or the Contracting Stockholders shall accomplish the following steps subject to the *99 approval of the Company [Berwind-White]:
* * * *
(2) The Contracting Stockholders shall each severally pay to and deposit with the Trust Company prior to the special meeting of the stockholders hereinabove referred to and on or before December 8th, 1931, in cash the amount set opposite their names in Schedule B hereto, totalling in the aggregate $ 200,000, such aggregate sum to be utilized to repair the existing impairment of the capital of the Trust Company, and to be treated as assets of the Trust Company for the purpose of the liquidation contemplated pursuant to the provisions of this Agreement.
* * * *
SECOND: Upon full completion of the steps set forth in Article First hereof to the satisfaction of the Company and upon the closing of the Trust Company in accordance therewith the parties hereto agree that the assets, business, and affairs of the Trust Company shall be liquidated in the following manner;
* * * *
*811 (6) Upon payments being made to Preferred Depositors or funds reserved for that purpose, all as provided in subparagraph (1) of this Article Second, and at the request of the Company, the proceeds of the remaining assets of the Trust Company whether or*100 not realized by the Trustees in liquidation or by the Company acting as in this Agreement provided, including income, if any, shall be delivered over to the Company together with any realization thereon by reason of appreciation in value or by way of interest or dividends or otherwise, after deducting any loss due to depreciation in value, and shall be applied by the Company in its uncontrolled discretion as to time and method of application in the following manner and order or priority;
A. to the payment of the amount, if any, remaining due on the loan from the Philadelphia National Bank, and further to the payment at their respective maturities of the Mortgage Participation Certificates issued and guaranteed by the Trust Company; the Company being free to provide the sums necessary for such purpose either from the liquidation of the Mortgages against which such participation certificates were issued or from other sources, treating such Mortgages as part of the general assets of the Trust Company;
B. to the payment of all expenses of liquidation, which expenses shall include (a) the expenses and reasonable compensation, if any, of the Trustees in liquidation and the Company and their*101 agents, attorneys, etc., in carrying out the provisions of this Agreement (all such compensation, if any, to be subject to the approval of the Company; (b) transfer taxes; (c) charges of auditors including those provided in Articles First and Third, and (d) all other expenses whatsoever;
C. to the payment of such sums as may have been advanced by the Company in order to pay the claims of Preferred Depositors or Participation Certificate holders, or otherwise, all as provided in this Agreement, and all other sums advanced by the Company under this Agreement, together with interest on such advances of the Company to the date of payment at the rediscount rate in the Philadelphia Federal Reserve District provided that such interest in no event shall be less than at the rate of 3% nor more than at the rate of 5% per annum;
D. to the payment pro rata of the amounts due from the Trust Company to the Berwind Companies and the Deferred Depositors as set forth in the audit hereinbefore referred to, together with interest thereon to the date of payment at the rate of the rediscount rate in the Philadelphia Federal Reserve District, which interest in no event shall exceed 5%;
E. the balance remaining, *102 if any, to the Contracting Stockholders pro rata in proportion to the amounts set forth in Schedule B which they shall have paid in order to repair the impairment of capital of the Trust Company, together with interest thereon to the date of payment at the rediscount rate in the Philadelphia Federal Reserve District, which interest in no event shall exceed 5%;
F. the balance, if any, remaining to and among all of the stockholders of the Trust Company as set forth in Schedule E hereto.
The contracting stockholders and the amount of their contributions are set out below:
Eureka Casualty Company, Berwind Exchange, Walter J. Fallows, Edward B. Creighton, D. Vincent Johnston, Charles G. Berwind, Thomas Fisher, Edward J. Newbaker, Harry A. Berwind, Harry C. Middleton, William W. Wharton, Charles E. Dunlap and Theodore J. Grayson. *812
| Amount of | |
| Signatures | Contribution |
| Eureka Casualty Company | $ 34,500 |
| By M. J. Broderick, Secretary | |
| Berwind Exchange | 34,500 |
| By Edward B. Creighton, Atty. in Fact | |
| Charles G. Berwind | 24,250 |
| Thomas Fisher | 24,250 |
| Edward B. Creighton | 54,500 |
| H. A. Berwind | 6,000 |
| Charles E. Dunlap | 6,000 |
| D. V. Johnston | 10,000 |
| Edward J. Newbaker | 1,000 |
| Theodore J. Grayson | 5,000 |
*103 A supplemental agreement dated August 10, 1937, supplementing and amending the agreement, provided in part as follows:
WHEREAS, it is impossible under the limitations and conditions imposed by the Banking Laws of the Commonwealth of Pennsylvania, to liquidate the remaining assets of the Trust Company to the best advantage of those still interested therein; and for the purpose of permitting the liquidation of the assets of the Trust Company to proceed free of such limitations and conditions, it is proposed to have the Trust Company surrender its banking, title insurance and trust powers, change its corporate title from Penn Colony Trust Company to Penn Colony Company, limit its corporate powers to the acquiring, holding and disposing of real estate, ground rents, mortgages and shares of stock, bonds and other obligations of corporations, and reduce the number of directors from six to five; * * *
On August 27, 1937, the articles of incorporation of the Company were amended to change the name of the Company to Penn Colony Company and limit its corporate powers to the acquiring, holding, and disposing of real estate, ground rents, mortgages, shares of stock, bonds, and other corporate*104 obligations.
The total deposits in the Company on May 29, 1931, amounted to $ 1,388,958. On December 5, 1931, the total deposits amounted to $ 1,048,750.14. On December 5, 1931, the parties to the agreement had on deposit with the Company the amount of $ 729,093.68. The parties to the agreement were paid by the Company 91 1/2 per cent of the amount of their deposits. The amount received by the petitioner on his deposit was $ 20,669.34. The last assets of the Company were sold in 1946, and the last payment was made in that year to the parties to the agreement as depositors.
The petitioner was never repaid any portion of the $ 24,250 loaned by him to the Company as a contracting stockholder. The debt resulting from the loan of that amount became worthless in 1946, and the loss resulting from the loan was not incurred in or proximately related to any trade or business of the petitioner.
*813 OPINION.
The petitioner contends that his business both in 1931 and 1946 was being an officer and director in Berwind-White, its subsidiaries, and affiliated companies. He pleads and argues alternatively that the amount here in controversy is deductible as a loss, under the provisions*105 of section 23 (e) (1) or 23 (e) (2) of the Internal Revenue Code, or as a worthless business debt under section 23 (k) (1). In opposition to the position taken by the petitioner, the respondent has determined that the amount of $ 24,250 is deductible only under section 23 (k) (4) as a nonbusiness bad debt to be treated for tax purposes as a short-term capital loss.
The petitioner relies heavily upon the Findings of Fact and Opinion in Charles G. Berwind, supra, evidently under the assumption that they are controlling in this case. We do not deem it necessary to discuss that case here. It is sufficient to say that both the facts and the law involved are different from that with which we are presently concerned. Even a cursory examination of the case makes this clear. However, in passing it may be pointed out that the finding on which the petitioner relies,
Petitioner's purpose in signing his contract [not here involved] was the protection of his business and investments. He was a member of Berwind-White. Its good name was affected. The Trust Co. [the Company here] was known as the Berwind Bank.
was followed in the opinion by the following language:
*106 When petitioner and his associates entered into the agreement which dealt with the funds advanced by Berwind-White to the insolvent trust company, and provided that the securities being purchased at a cost greatly in excess of their market value were to be liquidated, that the proceeds were to go to Berwind-White to be applied against its advance, that profits from the sale were to belong to petitioner and his associates, and that loss on the whole transaction was to be made good by them to Berwind-White, they were embarking on a financial transaction, the terms of which were designed to meet the requirements of a business situation and not to fall neatly into the terms of an accepted legal definition. And when for prior years the liability of petitioner and his associates to taxation upon current profits on the disposition of the securities involved was considered by the Board of Tax Appeals and upon review in the Circuit Court, 1 it is not strange that they were for purposes of that proceeding referred to as "equitable owners." It was sufficient in the circumstances to decide there that, since they were entitled to the profits on the sales, they were subject to taxation*107 in that capacity and to that extent were and should be treated as the owners of the securities. [Emphasis added.]
Since the transaction was deemed closed in the year 1940, the opinion went on to hold that the petitioner was entitled to deduct the amount *814 in controversy there as a loss resulting from a transaction entered into for profit.
Sections 23 (e) and 23 (k) of the Code are mutually exclusive. See Spring City Foundry Co. v. Commissioner, 292 U.S. 182">292 U.S. 182. The distinction between deductions permitted with respect to losses and those permitted with respect to worthless debts has taken on new significance since the addition to the Internal Revenue Code of section 23 (k) (4) by section 124 of the Revenue Act of 1942, which provides that the loss resulting from a nonbusiness bad debt shall be considered a loss from the sale or exchange during the taxable year of a capital asset*108 held for not more than 6 months.
Examination of the transaction out of which the amount here in controversy arises indicates clearly that a debtor-creditor relationship was created between the Company and the petitioner in 1931 when the petitioner, as a "contracting stockholder," advanced the sum of $ 24,250 to the Company. This is true notwithstanding the fact that the Company was to be immediately liquidated and that the payment of the sum was subordinated to the claims of creditors, preferred stockholders, and others. Therefore, the loss amounting to $ 24,250 which resulted from the transaction can be deducted only under the provisions of section 23 (k), for nothing occurred subsequent to the date on which the debt was created to convert the transaction into a loss as that term is used in section 23 (e). This leaves only the petitioner's argument with respect to section 23 (k) (1) to be considered.
The revenue laws contain only the negative definition of what constitutes a business bad debt, found in section 23 (k) (4), where it is said that "The term 'non-business debt' means a debt other than a debt evidenced by a security as defined in paragraph (3) and other than a debt *109 the loss from the worthlessness of which is incurred in the taxpayer's trade or business."
However, H. Rept. No. 2333, 77th Cong., 2d Sess., page 76, provided:
The question whether a debt is one, the loss from the worthlessness of which is incurred in the taxpayer's trade or business, is a question of fact in each particular case, and the determination is substantially the same as that which is made for the purpose of ascertaining whether a loss from the type of transaction covered by section 23 (e) is "incurred in trade or business" under paragraph (1) of that section. The character of the debt for this purpose is not controlled by the circumstances attending its creation or its subsequent acquisition by the taxpayer or by the use to which the borrowed funds are put by the recipient, but is to be determined rather by the relation which the loss resulting from the debt's becoming worthless bears to the trade or business of the taxpayer. If that relation is a proximate one in the conduct of the trade or business in which the taxpayer is engaged at the time the debt becomes worthless, the debt is not a nonbusiness debt for the purposes of this amendment.
*815 This language has*110 been incorporated in Regulations 111, section 29.23 (k)-6, and applied by the courts. Thus the petitioner's contention in this proceeding with respect to section 23 (k) (1) presents the narrow question of whether or not he was engaged in a trade or business of his own in 1946 to which the debt in question was proximately related. Robert Cluett, 3rd, 8 T. C. 1178; Jan G. J. Boissevain, 17 T.C. 325">17 T. C. 325.
As noted above, the petitioner argues that he was engaged in the trade or business of being an officer and director of Berwind-White, its subsidiaries, and affiliated companies. He does not contend that he was in the trade or business of promoting, organizing, financing, or lending money to corporations, only that his trade or business is being an officer and director in various corporations. But the conclusion that the business of Berwind-White, its subsidiaries, and affiliated corporations was not the business of the petitioner follows as a matter of necessity under such decisions as Burnet v. Clark, 287 U.S. 410">287 U.S. 410; Estate of William P. Palmer, Jr., 17 T. C. 702;*111 Fred A. Bihlmaier, 17 T. C. 620; Jan G. J. Boissevain, supra.The cases on which the petitioner relies are not in point. The authority contained in such cases as Weldon D. Smith, 135">17 T. C. 135, revd. 203 F. 2d 310, Henry E. Sage, 15 T.C. 299">15 T. C. 299, and Vincent C. Campbell, 11 T. C. 510, is applicable only to the exceptional situations where the taxpayer's activities in promoting, financing, managing, and making loans to a number of corporations have been regarded as so extensive as to constitute a business separate and distinct from the business carried on by the corporations themselves. Whether the petitioner is employed as a director or officer in 1 corporation or 20 corporations, he was no more than an employee or manager conducting the business of the various corporations. If the corporate form of doing business carries with it tax blessings, it also has disadvantages; so far as the petitioner is concerned, this case points up one of the corporate form's disadvantages. The petitioner can not appropriate*112 unto himself the business of the various corporations for which he works.
Robert Cluett, 3rd, supra, involved a taxpayer who, as a member of the New York Stock Exchange, sold a fractional interest in his membership in the Exchange and received as part of the consideration therefor a note which became worthless in part in 1943. There we said:
The debt here in question was not the result of a loan by the petitioner to a friend or relative or an isolated transaction which bore no relation whatsoever to the business in which he was engaged, but, on the contrary, was closely related to the business of owning and using a stock exchange membership for the production of income, in which business the petitioner was engaged not only in *816 1929, when the debt was created, but also in 1943, when it became worthless. * * *
The case of Frank B. Ingersoll, 7 T. C. 34, is not in point. In that case, which involved a taxable year prior to the enactment of section 23 (k) (4), we specifically held that there was not a debtor-creditor relationship, since there was no debt, and allowed the deduction claimed as a loss.
In the vernacular*113 of the business world the petitioner may well be engaged in the business of being an officer and director of Berwind-White, its subsidiaries, and affiliated companies. However, we deal with tax concepts and the term "trade or business" used in sections 23 (e) (1) and 23 (k) (4) of the Code bears a restricted meaning. Higgins v. Commissioner, 312 U.S. 212">312 U.S. 212; Burnet v. Clark, supra.
The activities of the petitioner insofar as they have been presented to us do not constitute a trade or business within the meaning of the applicable revenue laws. Therefore, we must sustain the determination of the respondent that the petitioner is entitled only to a deduction for a nonbusiness bad debt under the provisions of section 23 (k) (4) of the Code.
Decision will be entered for the respondent.
Footnotes
1. Berwind v. Commissioner↩ (C. A., 3d Cir.), 137 Fed. (2d) 451.