*111 Decision will be entered under Rule 50.
Petitioner was an officer of L Corporation in which he had a substantial proprietary interest by virtue of his ownership of 45 percent of the stock of C Corporation which in turn owned 66 percent of the stock of L Corporation. His duties included raising cash and obtaining financing for L Corporation. Petitioner individually endorsed the obligations of the corporation. After the corporation filed a voluntary petition in bankruptcy, petitioner incurred losses by paying one corporate obligation to which he thereby became subrogated and settling others, upon which latter obligations the creditors retained the right to proceed against the bankruptcy estate of the corporation. Held, petitioner's losses on the corporate obligation which he paid and to which he became subrogated are not deductible as business bad debts. Trent v. Commissioner, 291 F. 2d 669, reversing 34 T.C. 910">34 T.C. 910, distinguished. Held, further, petitioner obtained no right of subrogation on those obligations which were settled, and his losses resulting therefrom are deductible under section 23(e)(2), 1939*112 Code, and section 165(c)(2), 1954 Code. Held, further, reimbursement received by petitioner from his employer for alleged entertainment expenditures on behalf of the employer constitutes taxable income to petitioner.
*443 Respondent determined deficiencies in petitioners' Federal income taxes for the years and in the amounts as follows: *444
| Year: | Deficiency |
| 1953 | $ 33,432.16 |
| 1954 | 5,979.12 |
| 1955 | 11,473.29 |
| 1956 | 19,302.45 |
The petitioners dispute these determinations and claim an overpayment of income tax for the year 1955 in the amount of $ 504.39.
The principal issue presented for our decision is whether certain payments made by petitioners in the years 1953 through 1956 give rise to deductions for losses incurred in a trade*114 or business; losses incurred in a transaction entered into for profit, though not connected with a trade or business; expenses paid or incurred for the production of income; or deductions for bad debts and, if the latter, whether the bad debts constituted business bad debts or nonbusiness bad debts. We must also decide whether the sum of $ 13,300 received by petitioner Eugene H. Rietzke in the year 1956 from his employer for alleged reimbursement of entertainment expenses constituted taxable income to him.
FINDINGS OF FACT
Some of the facts have been stipulated and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein and made a part of our findings by this reference.
Petitioners are husband and wife presently residing at McLean, Va. They timely filed their joint Federal income tax return for the calendar year 1953 with the district director of internal revenue at Baltimore, Md. Their returns for the years 1954, 1955, and 1956 were timely filed with the district director of internal revenue at Richmond, Va. Eugene H. Rietzke hereinafter will be referred to as the petitioner.
Issue 1During the years 1953 through 1956 petitioner was president*115 of Capitol Radio Engineering Institute, Inc., hereinafter referred to as Capitol Radio, a Delaware corporation engaged in Washington, D.C., in the business of operating an international correspondence school in the fields of radio, television, and related electronics. Petitioner during the years 1953 through 1956 owned approximately 45 percent of the outstanding common stock of Capitol Radio.
During the calendar year 1953 petitioner was chairman of the board of Lacy's, Inc., hereinafter referred to as Lacy's, a Delaware corporation engaged in the business of retailing television sets and other electronic appliances in Washington, D.C., and the adjacent area. Capitol Radio owned two-thirds of the common stock of Lacy's and all of the preferred stock. The remainder of the common stock of Lacy's was owned by William Warsaw, hereinafter referred to *445 as Warsaw, who became the merchandising manager of Lacy's. Petitioner individually owned no stock in Lacy's.
Lacy's was formed in or about 1945 by Capitol Radio with an investment of $ 75,000. As a result of Warsaw's efforts, Lacy's purchased merchandise from factories in carload lots at prices lower than those obtainable if *116 merchandise were purchased in lesser quantities. Lacy's ability to purchase at low prices enabled it to sell at low prices, and, on this basis, it expanded during the years 1945 through 1953 from a one-store venture into a nine-store and large-warehouse operation.
It was necessary for Lacy's to pay cash for the merchandise as it was delivered. Petitioner was the general business manager of Lacy's. His duties were primarily financial, which consisted of the responsibility of raising cash to pay for merchandise shipments as received. Such financing was obtained from banks on short-term loans, usually 90-day notes which petitioner regularly endorsed individually. From 1945 through 1953 petitioner's endorsements on loans made by Lacy's aggregated over $ 1 million. From time to time Lacy's made efforts to obtain further financial commitments from Capitol Radio. However, Capitol Radio, through its board of directors, refused to commit itself beyond its original investment, and it refused to itself guarantee any of the obligations of Lacy's.
Prior to 1949 the merchandise sold by Lacy's was in short supply and its retail sales were made primarily on a cash basis. In 1949 television*117 sets and electronic appliances became plentiful, and, in order to compete with similar chain organizations in the Washington, D.C., area, Lacy's was compelled to sell on a time-payment contract basis or on the installment basis. Such sale contracts contained a general assignment clause permitting them to be assigned to a financial institution.
Lacy's did not have the capital with which to support a large-scale financing business. On June 28, 1949, Lacy's entered into an agreement for the purpose of discounting its time-payment contracts with the Commerce Investment Company of Newark, N.J., hereinafter referred to as Commerce. The agreement was entitled "Non-Recourse Dealer Agreement" and provided, in pertinent part, that Commerce would purchase from Lacy's the time-payment contracts of those makers whose credit Commerce approved in its sole discretion. Commerce had the sole responsibility of making the collections from the makers. Lacy's agreed to repurchase from Commerce any merchandise which Commerce repossessed upon default of the makers.
On June 28, 1949, contemporaneous with the "Non-Recourse Dealer Agreement," Lacy's, petitioner, and two other employees of Lacy's entered*118 into a supplemental agreement with Commerce pursuant to which petitioner and the other employees agreed to personally endorse *446 the time-payment contracts purchased by Commerce from Lacy's, and, if the makers of the time-payment obligations defaulted, Lacy's, petitioner, and the two other employees would be jointly and severally liable for the repurchase of the contracts from Commerce for the balance remaining due.
Subsequent to the execution of the above-mentioned contracts and prior to the year 1953 other agreements were executed from time to time between the various parties mentioned above, the terms and conditions of which were, in all respects material to the instant proceeding, identical with the terms and conditions of the above-mentioned contracts.
Petitioner did not sign any of the time-payment contracts which Lacy's discounted with Commerce. The agreements executed on June 28, 1949, and subsequently thereto constituted blanket endorsements by petitioner of all contracts transferred to Commerce. Such endorsements by petitioner enabled Lacy's to carry on its business and to grow successfully. Petitioner's salary from Lacy's grew from $ 10,000 a year in 1947 to $ *119 25,000 in 1950, and then to $ 40,000 in 1951. During the period prior to 1953 dividend payments by Lacy's to Capitol Radio totaled $ 129,000. Petitioner's salary from Capitol Radio consisted of $ 9,000 a year and additional compensation pursuant to a management agreement which varied between $ 20,000 and $ 30,000 a year.
By early 1953 Lacy's was discounting a very large volume of its time-payment contracts with Commerce. On April 28, 1953, Lacy's and petitioner's contingent liability for the repurchase from Commerce of such discounted contracts totaled $ 775,657.71.
At about this time manufacturers began producing television sets that sold at retail at prices appreciably less than had been previously the case. In many instances Lacy's customers could buy new and better television sets for amounts less than the outstanding balances on their time-payment contracts. In many of these cases the customers would stop paying on their obligations, allow their old television sets to be repossessed, and then purchase new television sets at lower prices. Further, Commerce approved purchasers who were poor credit risks, and it was inefficient in enforcing collections and making repossessions. *120 Lacy's was therefore compelled to repurchase from Commerce large amounts of repossessed merchandise pursuant to its agreements. Since much of this merchandise had been in the hands of the purchasers for several months, it was practically worthless when returned to Lacy's.
Lacy's business, nevertheless, continued to be good. However, the business was in need of cash in order to purchase new merchandise and to repurchase the repossessed merchandise and time-payment contracts in default. Therefore, on May 26, 1953, Lacy's borrowed *447 $ 25,000 from Fidelity Union Trust Co. of Newark, N.J., hereinafter referred to as Fidelity, and gave in return a demand note in the amount of $ 25,000, endorsed by Lacy's, Inc., by Warsaw as president, and also by petitioner and Warsaw individually. On July 30, 1953, Lacy's borrowed an additional $ 75,000 from Fidelity and gave in return three $ 25,000 promissory notes due on October 30, November 30, and December 30, 1953, which were signed by Lacy's, Inc., by petitioner as chairman of the board and Warsaw as president, and also by petitioner and Warsaw individually. Lacy's also borrowed $ 50,000 from the National Bank of Washington, hereinafter*121 referred to as National Bank, and gave in return a promissory note which petitioner and Warsaw personally endorsed.
In an attempt to strengthen its financial position, Lacy's arranged to close several of its stores over a period of time and made cutbacks in its personnel. In September 1953, when the first of the notes evidencing the obligation to Fidelity became due, Lacy's did not have the cash to pay the note and Fidelity agreed to extend the note. Also, in September Warsaw became hospitalized and withdrew from the business, thus leaving Lacy's without the services of a capable merchandise manager.
Due to the foregoing events culminating in September 1953 -- the resignation of Warsaw from the business, the need for cash to purchase repossessed merchandise and defaulted time-payment contracts, and the need for cash to purchase new merchandise -- coupled with pressure from Lacy's creditors to meet its obligations and the inability of Lacy's to obtain additional capital, petitioner decided to put Lacy's into bankruptcy. A voluntary petition in bankruptcy was filed by Lacy's on or about October 7, 1953.
As of the date of the filing of the petition in bankruptcy, Commerce claimed *122 that Lacy's owed it $ 100,000 and possibly an additional $ 200,000 if the purchasers of merchandise defaulted on their obligations. Fidelity and National Bank claimed $ 100,000 and $ 50,000, respectively, plus interest, on loans they made to the business.
Shortly after the filing of the petition in bankruptcy, Fidelity and Commerce, affiliated corporations, demanded payment from petitioner pursuant to the aforementioned contracts and endorsements, and went so far as to cause an appraisal of Capitol Radio. On December 28, 1953, petitioner on the one hand and Fidelity and Commerce on the other entered into a settlement agreement in New Jersey, whereby Commerce and Fidelity covenanted not to enforce their claims against petitioner, and in return petitioner covenanted not to enforce any claim for damages against Commerce for its alleged negligence in passing on credit and in handling the collections on the time-payment contracts. Petitioner also agreed to pay a total of $ 100,000 as follows: $ 65,000 to Fidelity on the contract date, December 28, 1953; $ 20,000 *448 without interest to Commerce on January 15, 1954; and $ 15,000 without interest to Commerce on January 15, 1955. *123 The terms of the agreement between petitioner and Fidelity, in pertinent part, were as follows:
Fidelity hereby acknowledges receipt from Rietzke of the sum of $ 65,000, and Fidelity hereby covenants and agrees not to sue Rietzke and to refrain from instituting, pressing or collecting, or in any way aiding or proceeding upon any and all claims, demands, causes of action, suits, proceedings or adjudications whatsoever which Fidelity ever had, now has or may have against Rietzke, Reitzke's estate or any of Rietzke's legal representatives arising out of the endorsing or guaranteeing by Rietzke to Fidelity of obligations of Lacy's or in any manner whatsoever heretofore or hereafter arising out of any matter, cause or thing whatsoever from the beginning of the world to and including the date hereof.
It is expressly understood and agreed that these presents may be pleaded by Rietzke, only, in bar of all suits or other proceedings whatsoever hereafter pending against Rietzke by Fidelity.
It is hereby expressly understood and agreed that this is not intended as a release or discharge of, nor as an accord and satisfaction with Rietzke, but only as a covenant not to sue and to the effect that*124 Rietzke hereby purchases peace, and is hereby given peace, upon any and all claims and matters whatsoever which have been or may be made against Reitzke by Fidelity; and that Rietzke, in making payment of said considerations for this covenant has done so solely to obtain such peace, and does not thereby admit full liability on account of any of said claims or matters.
The agreement contained substantially identical language with respect to the covenants between the petitioner and Commerce. Petitioner did not obtain any rights against Lacy's pursuant to the agreement, which specifically provided that "any dividends which are paid on the claims of Fidelity and Commerce filed or to be filed in the bankruptcy proceedings of Lacy's shall be the sole and absolute property of Fidelity and Commerce respectively without any right therein by Rietzke, notwithstanding that Rietzke has paid the aforesaid amounts to Fidelity and Commerce." Petitioner did not file a claim against Lacy's in the bankruptcy proceedings although Commerce and Fidelity filed claims and specifically reserved their rights to proceed against petitioner as endorser of the obligations of Lacy's.
In 1955, after petitioner *125 had made partial payment on the $ 50,000 obligation to National Bank, Fidelity purchased the remainder of the note from National Bank. Petitioner's payments to Commerce and Fidelity, pursuant to the agreement of December 28, 1953, and on the $ 50,000 National Bank obligation, were to the payees and in the years as follows:
| Payee | 1953 | 1954 | 1955 | 1956 |
| Fidelity | $ 65,000 | $ 5,000.00 | $ 19,629.40 | |
| Commerce | $ 20,000 | 15,000.00 | ||
| National Bank | 14,539.37 | 78.00 | ||
| 65,000 | 20,000 | 34,539.37 | 19,707.40 |
*449 Petitioner deducted the above amounts on his Federal income tax returns in the applicable years as losses. Respondent determined that such amounts may be deducted only as nonbusiness bad debts, subject to the limitation on capital losses.
Issue 2Petitioner was required to and did use his home in McLean, Va., for the purpose of public relations work and entertaining on behalf of Capitol Radio and its subsidiaries. On certain occasions parties at petitioner's home were given for the employees of Capitol Radio and their families, and were attended by as many as 750 persons at a time. In each of the income tax returns filed by petitioner for the years 1953*126 through 1956 deductions were claimed for the use of his home for business entertainment and other purposes on behalf of Capitol Radio. The amounts claimed as deductions by petitioner on advice of his accountant were based on an allocation made of a portion of the yearly operating cost of petitioner's home. For the years 1953 and 1954 petitioner claimed a deduction of $ 2,000 on each of his Federal income tax returns. He also claimed a deduction of $ 900 for each of the years 1955 and 1956 on the returns for those years. The respondent allowed petitioner deductions for such business expenses in the amount of $ 900 for each of the years 1953 through 1956. Petitioner has not assigned error to the reduction of the entertainment expenses to $ 900 in each of the years 1953 and 1954.
Petitioner submitted a memorandum to Capitol Radio for his expenditures allegedly incurred on behalf of Capitol Radio in the amount of $ 13,300, which Capitol Radio's board of directors approved for payment in 1956. Capitol Radio did not approve an allowance to petitioner for similar expenditures prior to the years in issue because such expenditures were paid or incurred in part on behalf of Lacy's.
The*127 sum of $ 13,300 received by petitioner in 1956 from Capitol Radio constituted taxable income to petitioner.
OPINION
Issue 1The primary question to be decided is whether the payments made by petitioner to Commerce, Fidelity, and National Bank give rise to deductions for losses incurred in a trade or business or losses incurred in a transaction entered into for profit though not connected with a trade or business, 1 or expenses incurred for the production of income. 2*450 or whether they constitute business bad debt deductions, or are deductible only as nonbusiness bad debts. 3
Respondent contends that the payments give rise to bad debt deductions instead of losses deductible under other provisions of the internal revenue laws. Respondent further contends that the bad debts are deductible*128 only as nonbusiness bad debts and therefore must be treated as a loss from the sale of a capital asset held for not more than 6 months.
Petitioner concedes that by the payments made pursuant to his endorsement of Lacy's obligation to National Bank he became subrogated to National Bank's creditor rights against Lacy's and that such payments could only be deducted under the bad debt provisions of the Internal Revenue Code of 1954. It is argued, however, that the losses sustained on the National Bank note are deductible as business bad debts incurred in petitioner's trade or business. With respect to the losses sustained on the payments to Fidelity and Commerce under the settlement agreement of December 28, 1953, petitioner's primary contention is that the losses are deductible under the provisions of section 23(e) of the Internal Revenue Code of 1939 and section 165(c) of the Internal Revenue Code of 1954. In the alternative, petitioner contends that, if respondent properly determined that petitioner's losses upon the payments made to Fidelity and Commerce constituted bad debts, then such bad debts are deductible as ordinary losses as business bad debts incurred in petitioner's trade*129 or business.
We shall first consider the losses sustained with respect to the payments made on the National Bank note. Petitioner contends that his activities as an employee in securing financing for Lacy's and endorsing its obligations constituted his trade or business and that, consequently, the bad debts resulting from his subrogation to these obligations constituted debts "incurred in the taxpayer's trade or business" and were deductible in full.
Petitioner in his argument relies heavily on Trent v. Commissioner, 291 F. 2d 669, reversing 34 T.C. 910">34 T.C. 910.
In the recent case of Whipple v. Commissioner, 373 U.S. 193">373 U.S. 193, the Supreme Court expressly refrained from either approving or disapproving the Trent case, but in its opinion it indicated that it considered the Trent case to be inapplicable where "there is no proof * * * that the loan [giving rise to the claimed business bad debt] was necessary to keep his [the employee's] job or was otherwise proximately related to maintaining his trade or business as an employee." (Emphasis supplied.)
On the record before us we are unable to*130 conclude that the petitioner, upon whom the burden of proof rests herein, has proved that he was required to guarantee these loans in order to keep his job or to maintain*451 his trade or business as an employee. There is no proof that the guaranteeing of corporate loans was a required duty of petitioner as chairman of the board or that Lacy's took corporate action requesting him to do so. There is only the broad testimony that as chairman he was charged with the responsibility of arranging for the financing of Lacy's.
We point out that petitioner had for all practical purposes a considerable proprietary interest in Lacy's by reason of his stockholding in Capitol Radio, and was substantially, even though indirectly, the beneficiary of dividend payments in the amount of $ 129,000 paid by Lacy's to Capitol Radio. We are unable to conclude that petitioner has successfully borne his burden of proving that this proprietary interest did not provide the dominant motive in his making the guarantees here in question. See George P. Weddle, 39 T.C. 493">39 T.C. 493, 498.
We shall next consider the losses sustained with respect to the payments made to Fidelity*131 and Commerce pursuant to the contract executed on December 28, 1953. It is well settled that deductions for bad debts are governed by sections 23(k) and 166 of the Internal Revenue Codes of 1939 and 1954, respectively. If a taxpayer's loss results from the worthlessness of a debt then other provisions of the internal revenue laws relating to deductions for ordinary losses are not applicable. Spring City Foundry Co. v. Commissioner, 292 U.S. 182">292 U.S. 182.
In Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82, the Supreme Court held that a loss sustained in discharge of an obligation as guarantor was a nonbusiness bad debt to be given short-term capital loss treatment. In so holding, the Court stated at page 85:
The familiar rule is that, instanter upon the payment by the guarantor of the debt, the debtor's obligation to the creditor becomes an obligation to the guarantor, not a new debt, but, by subrogation, the result of the shift of the original debt from the creditor to the guarantor who steps into the creditor's shoes.
It may also be stated as a general rule that a person is not entitled to be subrogated to the rights of a creditor*132 until the claim of the creditor against the debtor has been paid in full. American Surety Co. v. Electric Co., 296 U.S. 133">296 U.S. 133. This rule obtains in New Jersey, the State in which the contract of December 28, 1953, was executed. See Daily v. Somberg, 28 N.J. 372">28 N.J. 372, 146 A.2d 676">146 A. 2d 676. The rationale of this rule protects the creditor so that he may obtain full satisfaction of the debt. If the guarantor who made a partial payment were subrogated pro tanto he would hold a position of equality with the holder of the debt for which the guarantor is bound, and the loss may then fall equally upon the creditor and the guarantor. Accordingly, a guarantor liable only for part of a debt does not become subrogated to remedies available to a creditor unless he pays the whole debt or it *452 is otherwise satisfied. See United States v. National Surety Co., 254 U.S. 73">254 U.S. 73.
Thus petitioner could obtain no right of subrogation against Lacy's until the claims of the creditors, Fidelity and Commerce, were satisfied. Pursuant to the contract of December 28, 1953, between petitioner*133 on the one hand and Fidelity and Commerce on the other, petitioner only paid $ 100,000 in settlement of claims of the banks which aggregated $ 200,000 and possibly more if the purchasers of merchandise defaulted on their obligations. In addition to the $ 100,000 received by the banks, they obtained a covenant from petitioner whereby he would not enforce his claim for damages against Commerce for its alleged negligence in passing on credit and in handling collections from purchasers of merchandise, and they retained the right to pursue their claims against Lacy's in the bankruptcy proceeding. The contract specifically provided that any dividends paid in the bankruptcy proceeding on the claims of Fidelity and Commerce would be their sole and absolute property without any right therein by petitioner. Under these circumstances it is clear that petitioner did not acquire a right of subrogation and therefore there was no debt owed to him.
Respondent argues that the payments were made as a direct result of petitioner's guaranteeing the corporate obligations, and therefore such payments must be deducted under the bad debt provisions of the internal revenue laws. In the case of Estate of Dominick F. Pachella, 37 T.C. 347">37 T.C. 347,*134 affd. 310 F.2d 815">310 F. 2d 815, we held that a loss sustained by a guarantor of a corporate obligation was a loss from the worthlessness of a debt. We noted, however, "that the deduction is allowed not because of the payment but because the payment gives rise to a claim which if worthless constitutes a bad debt." Inasmuch as there was less than full payment of the debts owed to Fidelity and Commerce in the instant case, and since petitioner obtained no right of subrogation in law or by contract, the payments he made pursuant to the contract of December 28, 1953, do not fall within the ambit of the bad debt provisions of the internal revenue laws.
We believe that petitioner's losses are deductible under the provisions of section 23(e)(2) of the Internal Revenue Code of 1939 and section 165(c)(2) of the Internal Revenue Code of 1954. These sections provide that an individual may deduct losses incurred in a transaction entered into for profit, though not connected with a trade or business. Petitioner gave his endorsements and lent his credit to Lacy's with the expectation that Lacy's use of the funds provided by his guarantees would increase his receipts from the corporation*135 in the form of salary and the value of the proprietary interest which he had in Lacy's by virtue of his stockholding in Capitol Radio. We have held that such activities constitute transactions entered into for profit, *453 J. J. Shea, 36 T.C. 577">36 T.C. 577, 582, on appeal (C.A. 5, 1961); Harry Horner, 35 T.C. 231">35 T.C. 231, 236, and we so hold here.
Issue 2In 1956 petitioner was paid $ 13,300 by Capitol Radio, based on petitioner's claim for reimbursement for the costs of entertaining employees and their families in his home and also doing public relations work for the company. The issue before us is whether the sum of $ 13,300 constitutes taxable income to petitioner.
Respondent contends that petitioner has been allowed deductions on his returns for the years 1953 through 1956 in the amounts to which he substantiated his expenditures on behalf of Capital Radio. Therefore any reimbursements from the company are required to be included in petitioner's gross income, and the excess of reimbursements over proven and allowable expenditures constitutes taxable income.
It is petitioner's contention that the sum of $ 13,300 was expended*136 by him on behalf of Capitol Radio. Petitioner argues that in effect he advanced money to Capitol Radio which it paid back in 1956. The payment made by Capitol Radio to petitioner was therefore no more than the liquidation of a debt due petitioner from which no income was realized.
We agree with respondent. Petitioner must include in his gross income the reimbursements he received from his employer. Sec. 61(a), I.R.C. 1954. Only amounts received from an employer which are actually expended for the employer's business or for the business purposes designated by the employer may be deducted from the gross income of the employee. Sec. 62, 1954 Code. The burden of proving such expenditures and the amounts thereof is of course on petitioner. Petitioner here seeks to exclude the $ 13,300 received from gross income by alleging the sum constituted the liquidation of an advancement. The petitioner relies on the fact that the company's board of directors paid the amount claimed when it refused to pay similar claims in the past, and on the testimony of a corporate officer who did not know the amount petitioner spent for entertainment on behalf of Capitol Radio to the effect that he thought*137 that the claim for $ 13,300 was reasonable. This evidence is not sufficient to warrant a finding that petitioner spent $ 13,300 on behalf of Capitol Radio in addition to the amounts which he has already deducted. In this connection we note that petitioner has acquiesced in the respondent's determination that he was entitled to deductions of only $ 900 in each of the years 1953 through 1956. We conclude that petitioner has not proved that the amount received by him from Capitol Radio did not exceed his expenditures on behalf of the company and that such excess does not constitute taxable income to petitioner. Williams v. United States, 245 F. 2d 559; Walter I. Geer, 28 T.C. 994">28 T.C. 994.
Decision will be entered under Rule 50.