1931 BTA LEXIS 2257">*2257 The petitioners were members of a partnership which settled some of the debts of one member. These debts were created before the partnership was formed, and had no relation to the business of the firm. The settlement was made for the purpose of relieving the debtor partner from worry and annoyance. Held, the amount of the settlement is not deductible, either as a loss or as an ordinary and necessary business expense.
21 B.T.A. 1087">*1087 These proceedings, which were consolidated for hearing and decision, are for the redetermination of deficiencies in income taxes asserted by the respondent for the year 1923 as follows: Willard W. White, $1,745.72; Arthur P. Pollard, $1,761.67. The petitioners allege that the respondent erred in disallowing a deduction of $21,475.73 taken by the partnership of White & Pollard, of which they were members, in its return for 1923, and increasing accordingly their reported distributive share of the partnership income for that year.
FINDINGS OF FACT.
In 1919 the petitioner Willard W. White1931 BTA LEXIS 2257">*2258 and his then partner, one A. F. Page, arranged with the Bank of Willows, California, to advance them, as the partnership of Page & White, such amounts of money as they might need for the operation of a ranch they then owned. To secure the payments of the promissory notes then given, or to be given for such loans, they executed a chattel mortgage to the bank covering property on the ranch. On the security of said chattel mortgage, Page & White borrowed from the Bank of Willows a total of $60,534 between November 29, 1919, and May 19, 1921, no part of which had been repaid on the latter date. On May 19, 1921, the Bank of Willows assigned to the F. D. Cornell Co., for a recited consideration of $25,000, the said chattel martgage notes in the amount of $22,800 secured thereby. The remaining notes secured by said mortgage, amounting to $60,534, were retained by the bank. Page & White were not consulted by the bank with respect to the assignment of said mortgage and knew nothing about it until after it had been made.
F. D. Cornell & Co., as the assignee of said chattel mortgage and of certain of the promissory notes secured by said mortgage, took 21 B.T.A. 1087">*1088 possession of, and removed1931 BTA LEXIS 2257">*2259 from the ranch owned by Page & White, the property covered by the mortgage, without any foreclosure proceedings. This loss of their property, which included equipment used on the ranch, made it impossible for Page & White further to operate the ranch. Page & White dissolved partnership in 1921, and by the agreement of dissolution White assumed and agreed to pay certain specified indebtedness, not including the notes of Page & White still held by the Bank of Willows. The agreement of dissolution also contained the following provision:
It is agreed that in respect to firm indebtednesses or joint indebtednesses of Page & White not specifically assumed and agreed to be paid by Willard W. White under the foregoing, that each of the parties hereto shall continue as heretofore jointly liable as individuals but not as copartners and that this agreement constitutes a full satisfaction and adjustment of all existing claims and liabilities of the parties hereto, both as copartners and individuals, one to the other.
In February, 1922, the petitioners Willard W. White and Arthur P. Pollard formed a partnership under the firm name and style of While & Pollard, for the purpose of engaging1931 BTA LEXIS 2257">*2260 in and carrying on the business of real estate, insurance and general brokerage business at Oakland, Calif. At the time he entered into the partnership with White, pollard had knowledge of the notes of Page & White held by the Bank of Willows. The articles of partnership executed by the petitioners White and Pollard contained, among other things, the following provision:
Neither of the parties hereto are contributing anything to the assets of this copartnership, save and except that Willard W. White is permitting the copartnership to use such office furniture he may have available for that use, and Arthur P. Pollard is permitting the copartnership as sub-tenant of said Arthur P. Pollard to occupy such portion of the premises at 13th and Webster Streets, as he holds as sub-tenant of Willard W. White.
It is further understood that the partnership does not assume any of the obligations of Willard W. White or the former obligations of Page & White, except the obligations specifically assumed by Willard W. White upon the dissolution of his copartnership with Alva F. Page, and does not assume any of the indebtedness to the Bank of Willows, save and except in the event that a satisfaction1931 BTA LEXIS 2257">*2261 of all obligations of Willard W. White to the Bank of Willows can be obtained so as to cost the partnership not to exceed Ten Thousand ($10,000) Dollars, in which event the partnership shall be beholden therefor.
Throughout the year 1922 the Bank of Willows continually demanded that the petitioner White pay the remainder of the Page & White notes, aggregating $60,534, and threatened to sue White on said notes. No suit was begun, however, and White's attorneys advised him that he had a complete defense against any that might be brought against him by the bank on said notes. However, the demands and threats of the bank so harrassed and worried White 21 B.T.A. 1087">*1089 that he was unable properly to attend to and assist in carrying on the partnership business. In order to obviate the possibility of litigation with respect to said notes and to avoid further worry and annoyance to White, the partnership of White & Pollard effected a settlement with the Bank of Willows in February, 1923, in the following terms:
WHEREAS W. W. White and Alva F. Page heretofore executed to this bank various promissory notes, and
WHEREAS Carlos G. White desires to secure a release and discharge from this1931 BTA LEXIS 2257">*2262 bank of all liability of W. W. White thereof without discharging or releasing the liability of Alva F. Page in respect thereto,
NOW THEREFORE in consideration of the sum of Ten Thousand ($10,000.00) Dollars in hand paid by Carlos G. White and in consideration of the execution and delivery to said bank by W. W. White and A. P. Pollard of a promisory note in the sum of Ten Thousand ($10,000.00) Dollars and other valuable consideration, the receipt whereof is hereby acknowledged, the Bank of Willows does hereby release W. W. White from all liability upon each and every such note and upon each and every note heretofore executed to this bank, either in the name of Page & White, or in the name of Alva F. Page and W. W. White, or by W. W. White individually, or otherwise with W. W. White as one of the parties thereto, and the Bank of Willows does hereby agree to save said W. W. White harmless from all other claims therefrom, and from any further claim or claims which may hereafter be made against him by virtue of his having executed any of the aforesaid notes, but it is distinctly understood and agreed that this shall not operate the discharge nor to extinguish the obligation of Alva F. 1931 BTA LEXIS 2257">*2263 Page or of any other persons who may have united with said W. W. White in the execution of any of the foregoing notes, but that the Bank of Willows will save said W. W. White harmless and free from all claims for contribution that may hereafter be made against W. W. White by reason of his having been united with any other person on any obligation to this bank.
It is understood and agreed that this agreement does not refer to certain notes heretofore executed by said Page and White to said Bank of Willows aggregating the sum of Twenty-five Thousand ($25,000.00) Dollars, which said notes aggregating Twenty-five Thousand ($25,000.00) Dollars were on or about May 20th, 1921, assigned to the F. D. Cornell Company or to some nominee of F. D. Cornell or F. D. Cornell Company, pursuant to an agreement that such assignee should look only to the personal property securing the payment of such notes and not to the makers of said notes in the sum of Twenty-five Thousand ($25,000.00) Dollars for any part of the recovery thereon. (Other than to the extent of said indebtedness as would be satisfied by a sale of a foreclosure and sale of the chattel mortgage securing said notes) which said notes1931 BTA LEXIS 2257">*2264 aggregating Twenty-five Thousand ($25,000.00) Dollars or thereabouts passed out of the possession and control of said bank on or about May 20th, 1921, pursuant to written authorization of said Page & White and Alva F. Page and W. W. White.
During the year 1923 the partnership of White & Pollard paid $1,000 upon the principal of said joint note executed by the petitioners and mentioned in said settlement agreement. The remainder of said note was paid during the years 1924 to 1927, inclusive.
21 B.T.A. 1087">*1090 In the year 1922 the partnership of White & Pollard paid bills amounting to $1,475.73 for ranch supplies purchased by the partnership of Page & White.
The petitioners and the partnership of White & Pollard kept their books of account and made their returns of income upon the basis of cash receipts and disbursements.
The partnership of White & Pollard filed a return of income for the year 1923. From the gross income shown on said return there was deducted the amount of $21,475.73, the amount of said settlement made by the partnership with the Bank of Willows, together with said bills for ranch supplies paid by the partnership of White & Pollard in 1922 for the former partnership1931 BTA LEXIS 2257">*2265 of Page & White. Each of the petitioners included in his individual income-tax return for 1923 the one-half of the income of the partnership of White & Pollard so computed. The respondent disallowed said deduction of $21,475.73, and added to the reported income of each of the petitioners for 1923, one-half of the amount of such deduction, to wit, $10,737.86, and determined deficiencies in tax as above set forth.
OPINION.
MARQUETTE: The petitioners contend that the partnership of White & Pollard is entitled to a deduction for the year 1923, either as a loss or as an ordinary and necessary business expense, in the amount of $21,475.73 on account of payments made on the debts of the partnership of Page & White. The Revenue Act of 1921 provides that:
SEC. 214. (a) That in computing net income there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *
* * *
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business.
The evidence shows that the payment by White & Pollard of $1,475.73 on account1931 BTA LEXIS 2257">*2266 of ranch supplies purchased by Page & White occurred in 1922, and since both the partnership and the petitioners were on the cash receipts and disbursements basis, they are not entitled to deduct that item in their returns for 1923. The evidence also shows that only $11,000 of the $20,000 settlement made with the Bank of Willows was paid in 1923, the remainder being represented by a promissory note of White & Pollard which was paid in 1924 and thereafter; and of the $11,000, it appears from the agreement of settlement that $10,000 was paid by one Carlos G. White, of whose connection with the petitioners or the partnership of White & Pollard 21 B.T.A. 1087">*1091 we are not apprised. It thus appears that only $1,000 was clearly and indisputably paid by White & Pollard to the Bank of Willows in 1923. In this situation it may well be questioned on other grounds whether the petitioner is entitled to deduct $19,000 of the amount claimed, but we prefer to rest our decision on the broad ground that no part of the deduction taken is allowable because it does not represent either a loss to, or an ordinary and necessary business expense of, the partnership of White & Pollard.
1931 BTA LEXIS 2257">*2267 The evidence shows that the payment of $20,000 to the Bank of Willows was made, or promised, in settlement of a separate, individual debt of the petitioner Willard W. White, a debt not created by the firm of White & Pollard and in no way connected with, or growing out of the business of that firm. The debt thus adjusted and settled was created two or three years before the partnership of White & Pollard was organized. The only relation between the partnership business and the settlement with the bank was that one member of the firm became relieved of worry and annoyance, and possibly avoided a law suit. This mental relief to one member may have conferred some benefit upon the partnership, and, if so, it may have been expedient for the firm to incur the expense of the settlement. But not every expedient expenditure falls within the statutory provisions of "ordinary and necessary expenses paid or incurred in carrying on a trade or business." To be deductible as a business expense, the expenditure "must have in a direct sense some reasonable relation to the taxpayer's business." 1931 BTA LEXIS 2257">*2268 ; .
The petitioners have cited several decisions of this Board in support of their argument. An examination of them shows in each instance a much closer relation between the payments and the businesses involved than exists in the present proceedings. Thus, in , a deduction was allowed for the amount paid to compromise a claim and avoid litigation. The threatened and imminent litigation grew out of certain acts of the taxpayer in the conduct of its business. In the case before us, however, the partnership made a settlement of a debt which did not grow out of its business, which the partnership did not owe, upon which litigation, though threatened, was very improbable, and to which the debtor had a complete defense. The Superheater Co., case is so different in its facts from the facts we have here that it can not be considered an authority in this proceeding. Similar distinctions are found in the other decisions cited by the petitioners. In our opinion the settlement in question did not bear such relation to the partnership1931 BTA LEXIS 2257">*2269 business of these petitioners as to justify a deduction in its account as a business expense within the meaning of the statute.
21 B.T.A. 1087">*1092 Nor do we think the deduction can be allowed as a loss. In Webster's dictionary, loss is defined as the "act or fact of suffering deprivation; especially, unintentional parting with something." Here, the settlement which it is claimed caused deprivation to the firm of White & Pollard was not inadvertent nor unintentional, but was willing, voluntary, and deliberately intended. It does not fall within the meaning of a loss, as contemplated by the Revenue Act.
Judgement will be entered for the respondent.