*1281 DEDUCTION. - BAD DEBT. The amount advanced by petitioner to her son and nephew for the purpose of facilitating liquidation of the latter's partnership business, held, on the record, not to be a deductible bad debt.
*622 The income-tax deficiency involved in this proceeding is in the amount of $2,439.81 for the year 1924. The petitioner assigns as error in the determination of such deficiency by the Commissioner, the disallowance of a deduction in the amount of $50,000 as a bad debt.
FINDINGS OF FACT.
For several years prior to May, 1924, Sidney E. Wolff and his cousin, Alvin A. Wolff, were engaged as copartners, under the firm name of A. L. Wolff and Company, as dealers and brokers in cotton, with offices at New York, New York, and Dallas, Texas. The business had been established in 1881 and carried on under that firm name until 1915 by the petitioner's husband, the father of Sidney E. Wolff, and that firm name was known in the cotton business in all parts of the world.
Early in 1924 the partnership became involved in financial difficulties, *1282 due to losses of approximately a quarter of a million dollars. Counsel for the partnership and also Sidney E. Wolff's father-in-law, who was called in on consultations for possible financial assistance, insisted that the partnership was insolvent. The petitioner, who took great pride in the firm name, and others interested in the partnership insisted upon the liquidation of the business, and the principal reason therefor was the preservation of the firm name of A. L. Wolff and Company unmarred by failure. In May, 1924, Sidney E. Wolff, active head of the business, agreed to the liquidation, although it was his opinion that the firm could be worked out of its financial difficulties. The trial balance sheets as of April 30, 1924, of the New York and Dallas offices showed the partnership's net assets to be $53,127.90. The books of the partnership were complicated, due to the involved operations of its cotton business, and required specially trained accountants to audit them because ot the necessity of estimating profits on certain transactions covered by hedges and the fact that after deliveries had been made the firm never knew what claims would be made against it for loss of weight*1283 of cotton shipped, and other technicalities. *623 At or about the time Sidney E. Wolff agreed to liquidate the business he determined that about $100,000 in cash would be needed, over and above the partnership's assets, to satisfy the firm's creditors.
For the specific purpose of rendering financial assistance to enable said partners to liquidate the business promptly, advantageously and expeditiously, an agreement was entered into on May 15, 1924, between Sidney E. Wolff and Alvin A. Wolff, parties of the first part, and Helen V. Wolff (Sidney's sister), Helen B. Wolff (Sidney's wife) and Hattie Wolff (Sidney's mother), parties of the second, third and fourth parts respectively, whereby, in consideration of one dollar and their mutual promises, Helen V. Wolff agreed to surrender Sidney E. Wolff's note for $50,000, representing the balance due under a contract executed prior to the firm's financial difficulties, for his purchase of the interest of his sister and her husband in the business; Helen B. Wolff agreed to release and surrender certain collateral belonging to the partnership and deposited as security for a loan of $50,000 which she had theretofore made to Sidney*1284 E. Wolff; and Hattie Wolff, the petitioner, agreed "to advance by way of loan to * * * such co-partners" the sum of $50,000 to be evidenced by the 6 per cent demand promissory note of Sidney E. and Alvin A. Wolff. All three of the said women agreed that their claims should be postponed and subordinated to the payment of all debts and liabilities of the partnership, after which the surplus remaining should be distributed, first, to Helen B. Wolff, $50,000, with 6 per cent interest; secondly, to Helen V. Wolff, $50,000, with 6 per cent interest; and, lastly, to Hattie Wolff, $50,000, with 6 per cent interest. It was further agreed that as additional security for the repayment of the amounts due Helen V., Helen B., and Hattie Wolff, the said parties would cause to be assigned to Benjamin F. Feiner, Esq., as trustee, the right, title and interest to and in a certain claim against the British Government for the seizure of cotton in 1915. Furthermore, the parties agreed that if Sidney E. and Alvin A. Wolff performed the covenants and conditions of the agreement and the proceeds of the liquidation of the business and also the claim against the British Government should prove insufficient*1285 wholly to pay and discharge the amounts due Helen V., Helen B., and Hattie Wolff, they each released and discharged Sidney E. and Alvin A. Wolff from any and all liability on account thereof and the said partners agreed not to engage in business under the firm name of A. L. Wolff or A. L. Wolff and Company without written consent from Hattie Wolff, which consent would be given to Sidney E. Wolff upon repayment of her loan of $50,000.
*624 The petitioner's attorney in fact, Joseph Weissenbach, who was in New York at the time in connection with the affairs of A. L. Wolff and Company, wrote to her on May 7, 1924, concerning the $50,000 advance and the agreements to be executed. Joseph Weissenbach was familiar with all of the facts and circumstances surrounding the transaction and executed all the agreements for petitioner, who advanced the sum of $50,000 as agreed and received from Sidney E. and Alvin A. Wolff their 6 per cent promissory note for that amount. The claim against the British Government was duly assigned as agreed and a separate agreement was entered into on May 15, 1924, by all parties in interest as to the distribution of any amounts recovered thereon. Pursuant*1286 to that agreement Benjamin Feiner was to get 33 1/3 per cent of the proceeds recovered for his services and also expenses incurred and Alvin A. Wolff was to get 15 per cent for his interest in the claim and the balance was to be distributed, first, to Helen V. and Helen B. Wolff and, lastly, to Hattie Wolff. Also on May 15, 1924, Sidney E. and Alvin A. Wolff entered into a dissolution agreement, setting forth their respective rights in the partnership assets and, further, that Alvin A. Wolff assigned to Sidney E. Wolff all his right and title to any surplus and assets of the partnership remaining after the payment of all debts and liabilities and that Sidney E. Wolff assumed and agreed to pay and to hold Alvin A. Wolff free and harmless from any liability for any and all debts and liabilities of the partnership business.
During 1924 the said partners liquidated their business without going into the hands of a receiver or through bankruptcy proceedings, and after paying all of the partnership's debts and liabilities and also the claims of Helen V. and Helen B. Wolff, the partnership not only had no remaining assets, but Sidney E. Wolff had used some of his own personal funds in*1287 satisfying such claims. No part of the said $50,000 advanced by petitioner was repaid during 1924 and neither Sidney E. nor Alvin A. Wolff, individually, have made any payments to petitioner on account of the said advance. At the time of the hearing on this proceeding the note executed by Sidney E. and Alvin A. Wolff in the amount of $50,000 in favor of petitioner had either been lost or destroyed.
The claim against the British Government which was assigned to a trustee as additional security for the advances and/or claims of Helen V., Helen B., and Hattie Wolff, was one which grew out of a seizure in 1915 of 10,856 bales of cotton being shipped to a neutral foreign port. The British Government paid for the seized cotton at the rate of 8 cents per pound and expenses, while the claim made was on the basis of 16 cents per pound. That claim for an additional *625 8 cents per pound was prosecuted without success during the years prior to 1924, but it was never carried on the partnership books as an asset. The claim was prosecuted after the said assignment as collateral, but was finally rejected by the British Government during 1924.
OPINION.
LEECH: Petitioner seeks*1288 to deduct from income for the taxable year as "a debt ascertained to be worthless," $50,000 advanced "by way of loan" to her son and nephew, as copartners in the firm of A. L. Wolff and Company. Section 241(a)(7), Revenue Act of 1924.
The rebuttable presumption is that this transaction constituted a gift or advance not to be accounted for. .
The evidence here does not rebut, but rather strengthens that presumption. The old partnership, bearing the name of petitioner's deceased husband, which he created and conducted successfully, was threatened with failure and the resulting stigma on the name. The partners needed $100,000 cash to liquidate and satisfy the creditors. Petitioner furnished $50,000 of the stated amount to "promptly, advantageously and expeditiously" liquidate the firm and preserve the heritage of financial integrity her husband left upon his death, epitomized in the name of his firm. Cf. . That the taxpayer treated the transaction more as a gift than as a loan is further indicated strongly by the fact that in the contract providing for the "advance*1289 by way of loan" to the copartners, her son and nephew, she specifically released both copartners from personal liability, provided the covenants of the contract were kept; that is to say, if the firm were liquidated promptly, expeditiously and advantageously, which meant, under the circumstances, without financial failure and the resulting family financial dishonor she sought to prevent. .
Petitioner was given a note signed by the copartners for the sum advanced, as provided by the written agreement, but this fact does not affect the legal deductibility for tax purposes of the amount involved. In , where a taxpayer sought to charge off as worthless an alleged debt of his son-in-law, evidenced by a note, the Board said:
* * * But a gift may not be claimed as a deduction for tax purposes by the device of taking a note for the amount of the gift. And this we deem so, even though the note may be legally enforcible, if there is no intent to enforce the note or reason to believe when taken that it can not be collected.
Also see *1290
*626 However, we are of opinion that the record under no possible reasonable construction establishes a legally deductible debt existing at any time. At most, we find only the obligation to pay upon the happening of one or more contingencies, namely, the liquidation of the partnership with a surplus of assets sufficient to pay all other creditors and petitioner, a successful prosecution of the doubtful British claim with resulting funds sufficient to pay all creditors and petitioner, and/or failure on the part of the copartners to "promptly, advantageously and expeditiously" liquidate the partnership. As we held in , "The debts which the statute permits to be charged off when ascertained to be worthless are debts where there is an obligation of the debtor to pay and a right of the creditor to receive and enforce payment." The sine qua non of a debts is the obligation to pay. . And this means not a contingent obligation, but at all events. *1291 In re Philadelphia Co., 18 Pa.Dist. 805, 85 Pa.Co. 442; ; ; ; ; ; ; ; ; .
The legal status of the transaction in controversy and its consequences for tax purposes was fixed by the contract in evidence, the terms of which were fulfilled according to the evidence presented. It was provided therein that no sum of money was payable to the taxpayer at all events, but only upon the happening of one or more contingencies. The contract created not a debt, but a liability, which could become a debt only upon the occurrence of a specified contingency. The evidence as to the*1292 failure of all these contingencies established not the worthlessness of a debt, but its nonexistence, which necessarily precludes the asserted deduction. ; ;
Judgment will be entered for the respondent.