*932 The decedent guaranteed the notes of a corporation of which he was a stockholder and director. Demand having been made of decedent's estate, payment of such notes was made by it in the periods under consideration. Held, the decedent having guaranteed such notes in such manner and under such circumstances as to constitute him, in practical effect, the primary and sole obligor thereof, a debt did not spring into existence by such payment upon the theory of Shiman v. Commissioner, 60 Fed.(2d) 65, and the amount thereof is not deductible as a debt found to be worthless and charged off within the taxable year in the computation of net taxable income of the estate.
*522 These duly consolidated proceedings are for the redetermination of deficiencies in income tax of $8,915.43 and $8,550.56 for the period November 11 to December 31, 1930, and the calendar year 1931, respectively, both of which present the sole question of whether or not the respondent erroneously refused to permit*933 deductions from the *523 gross income of the estate of an indebtedness ascertained to be worthless and charged off, part in the first stated taxable period and the remainder in the latter.
FINDINGS OF FACT.
The petitioners are the duly appointed and acting executors of the estate of Henry Lang, deceased, who died on November 10, 1930, while a resident of Montclair, New Jersey.
On November 10, 1930, the date of the decedent's death, the American Hair & Bristle Co., a New York corporation, owed the Corn Exchange Bank Trust Co. of New York, New York, the sum of $237,000 represented by its promissory notes held by the bank as follows:
| Note made | Due | Amount |
| July 14, 1930 | Nov. 14, 1930 | $27,500 |
| July 25, 1930 | Nov. 25, 1930 | 29,500 |
| July 28, 1930 | Nov. 28, 1930 | 45,000 |
| Sept. 19, 1930 | Jan. 19, 1931 | 15,000 |
| Sept. 23, 1930 | Jan. 23, 1931 | 25,000 |
| Oct. 3, 1930 | Feb. 3, 1931 | $35,000 |
| Oct. 14, 1930 | Feb. 16, 1931 | 25,000 |
| Oct, 25, 1930 | Feb. 25, 1931 | 35,000 |
| Total | 237.000 |
The assets of the American Hair & Bristle Co. were completely liquidated in 1929 and on the dates of the notes listed above it had no assets and was carrying on no business whatsoever, *934 and such facts were known to decedent. The notes listed above were renewal notes representing the unpaid portion of an original loan made by the said bank to the American Hair & Bristle Co., which, on May 26, 1927, amounted to $725,000. From time to time the loan was reduced and on November 10, 1930, it amounted to $237,000. The unpaid portion of the loan was periodically renewed until the death of the decedent. In accepting such renewal notes, the Corn Exchange Bank Trust Co. relied upon the guaranty of decedent and the pledge of 4,000 shares of Ingersoll-Rand Co. common stock, hereinafter mentioned, rather than upon the financial responsibility of the American Hair & Bristle Co. The legal existence of that company was continued until March 21, 1932, when the corporation was dissolved. The original loan and the renewals thereof were personally guaranteed by the decedent, who was a stockholder, director, and officer of the American Hair & Bristle Co., and also of the Lang-Kidde Co.
On November 10, 1930, the date of the death of the decedent, the Corn Exchange Bank Trust Co. held, as security for the decedent's guaranty of the indebtedness of the American Hair & Bristle Co. *935 , and as security for his guaranty of the indebtedness of the Lang-Kidde Co., 4,000 shares of Ingersoll-Rand Co. common stock which had been pledged by the decedent with the said bank on December 3, 1929.
*524 In the Federal estate tax return filed by the estate of the decedent the 4,000 shares of Ingersoll-Rand Co. common stock above mentioned were included in schedule B of the gross estate, with the statement that such stock was pledged with the Corn Exchange Bank Trust Co., and there were also included 4,000 additional shares of said stock with the statement that such shares were pledged with the Chase National Bank of New York City, and 1,000 shares of such stock with the statement that such shares were pledged with the Bank of America. The 9,000 shares of Ingersoll-Rand Co. common stock were entered in schedule B of the gross estate at market value on the date of the death of the decedent, November 10, 1930, namely, $151.625 per share, total $1,364,625, of which amount $606,500 represented the value of the 4,000 shares pledged at the corn Exchange Bank Trust Co. In entering the 9,000 shares of Ingersoll-Rand Co. common stock in schedule B, reference was made to schedule*936 I of the return, and it was stated that at the time of the death of the decedent there were existing certain instruments of guaranty signed by him guaranteeing to the banks named therein the payment of certain obligations of corporations referred to therein. Included in such obligations were the above mentioned $237,000 of notes of the American Hair & Bristle Co. It was stated in said schedule I of the estate tax return that the estate had made a total payment of $813,874.62 to the said banks under these guaranties, which payment included the $237,900 indebtedness of the American Hair & Bristle Co. to the Corn Exchange Bank Trust Co. The amounts paid by the estate of the decedent upon the guaranteed debts mentioned in schedule I were taken as deductions from the gross estate in arriving at the value of the net estate. In respondent's final determination of the net taxable estate, the amounts paid by the estate upon the guaranteed debts were reduced by the amount of reimbursement received by the estate in connection with the guaranteed debts, with the result that the amount finally allowed as a deduction on account of the guaranteed debts amounted to $714,803.96, which is made up*937 of (1) $237,000 paid to the Corn Exchange Bank Trust Co., being the amount of the obligations of the American Hair & Bristle Co. held by that bank and covered by the guaranty of decedent, no part of which payment has been reimbursed to the estate; and (2) $477,803.96 paid to the Chase National Bank, the Bank of America, and the Corn Exchange Bank Trust Co., being the amount of the obligations of Lang-Kidde Co., Monmouth Chemical Corporation, and Rendrock Powder Co. held by the Chase National Bank, the Bank of America and the Corn Exchange Bank Trust Co. and covered by the guaranties of the decedent, after deducting the amounts received in reimbursement as above stated.
*525 After the death of Lang, the bank notified his estate of the amount of the unpaid guaranteed notes of the American Hair & Bristle Co., and of the Lang-Kidde Co., and requested payment. The notes were retired by the estate, payments being made on the American Hair & Bristle Co. notes as stated below. These payments were all made out of the proceeds of sales of Ingersoll-Rand Co. common stock held by the said bank as collateral.
| Dec. 10, 1930 | $27,500.00 |
| Dec. 10, 1930 | 29,500.00 |
| Dec. 10, 1930 | 10,403.00 |
| Dec. 31, 1930 | 17,471.00 |
| Jan. 2, 1931 | 17,126.00 |
| Jan. 6, 1931 | 14,063.46 |
| Jan. 8, 1931 | 17,853.19 |
| Feb. 11, 1931 | 8,083.35 |
| Feb. 16, 1931 | 979.69 |
| Mar. 2, 1931 | 16,958.50 |
| Mar. 3, 1931 | $16,671.00 |
| Mar. 12, 1931 | 390.81 |
| Mar. 12, 1931 | 24,643.56 |
| Mar. 13, 1931 | 1,691.46 |
| Mar. 16, 1931 | 8,373.00 |
| Apr. 10, 1931 | 16,671.00 |
| Apr. 13, 1931 | 8,620.98 |
| Total | 237,000.00 |
*938 The payments listed as having been made from December 10, to December 31, 1930, both dates inclusive, total $84,874, and those listed as having been made from January 2, 1931, to April 13, 1931, both dates inclusive, total $152,126.
When the assets of American Hair & Bristle Co. were liquidated they were applied on account of its indebtedness to the Corn Exchange Bank Trust Co.
The American Hair & Bristle Co. had no assets with which to reimburse the estate for the payments it made between December 1930 and April 1931.
The executors of the estate charged off to "bad debts" $85,070.01 in the income tax return of the estate for the period ended December 31, 1930, and $152,776.43 for the year ended December 31, 1931, as uncollectible, being the amounts paid, plus interest and protest fees, upon the decedent's guaranty hereinbefore referred to. The payments made by the executors upon the guaranty of the American Hair & Bristle Co., were recorded upon the books of the estate in an account entitled "Corn Exchange Bank Trust Company - American Hair & Bristle Co., Inc., Guaranteed Debt", and appropriate corresponding credit entries were made to the Ingersoll-Rand stock account, *939 the pledged stock being released by the bank for the purpose of sale and the proceeds were remitted by the brokers to the bank.
The 4,000 shares of Ingersoll-Rand Co. common stock pledged with the Corn Exchange Bank Trust Co. as above stated and also the 4,000 shares pledged with the Chase National Bank and the 1,000 shares pledged with the Bank of America as above stated, were recorded on the books of the estate as assets of the estate. No accounts were set up and no entries were made upon the books of the estate in *526 respect of the guaranteed debts above mentioned until payments were made upon such guaranteed debts, at which time the entries hereinbefore referred to were made.
Both the decedent's books for the period prior to his death and the books of his estate for the period November 11, 1930, to December 31, 1931, were kept on a "Cash Receipts and Disbursements Basis", not on an "Accrual Basis."
The respondent disallowed the claimed deductions of $85,070.01 and $152,776.43 and found the deficiencies hereinbefore stated.
OPINION.
MORRIS: The question for our determination is whether, when the estate responded to the demands of the Corn Exchange Bank Trust*940 Co. and paid the notes of the American Hair & Bristle Co., upon which the decedent was guarantor, the estate should be permitted to deduct the amounts so paid as debts ascertained to be worthless and charged off under sections 162 and 23(j) of the Revenue Act of 1928, the American Hair & Bristle Co. being then liquidated, insolvent, and incapable of responding in apyment itself or of reimbursing the estate for the amounts which it paid. Said sections of the act provide, in part, as follows:
SEC. 162. NET INCOME.
The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual * * *.
SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * *
(j) Bad Debts. - Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition in part, the Commissioner may allow such debt to be charged off in part. in part, theCommissioner may allow such debt to be charged off in part.
Though the decedent was, in a purely technical sense, a mere guarantor of the obligations of the American Hair*941 & Bristle Co., he was, in the practical sense, the primary and sole obligor, having stepped into the shoes and taken the place of the American Hair & Bristle Co., with full knowledge at the time of its inability to respond in payment. The Corn Exchange Bank Trust Co. did not renew those notes upon the strength of any credit standing of American Hair & Bristle Co. upon its promise to pay, nor upon any property it owned or posted as collateral for the payment thereof. In accepting such renewal notes the bank relied exclusively upon the promise of the decedent and upon his pledge of 4,000 shares of Ingersoll-Rand Co. common stock, not upon the financial responsibility of the American Hair & Bristle Co.
*527 That is the only consistent position that can be adopted in this proceeding if, as the petitioner claims the right to do in a separate estate tax proceeding before us, we are to permit the deduction of the amount of these notes in the computation of the net taxable estate of the decedent. If the decedent should be considered a mere guarantor or secondary obligor, in this proceeding, hence, required to respond in payment only upon default of the primary obligor and after*942 notice and demand of the payee, the decedent's estate would be in no position to deduct the amount of said notes from the gross estate in the computation of the net taxable estate, as the estate would not be primarily liable for the payment thereof. The more reasonable view under the circumstances is that the decedent's obligation was greater than this. At the time of the renewal of the notes the American Hair & Bristle Co. had no assets and was carrying on no business. The decedent was the only one to whom the bank could look for payment, and, rather than respond when the notes fell due, he had them renewed.
Being primarily liable, the estate can not now claim that it was a mere secondary obligor; that when demand was made upon it a debtor-creditor relationship sprang into existence; and that upon failure to obtain reimbursement it was entitled to take a deduction of $237,000 as a bad debt upon the theory of , and at the same time contend that the decedent's obligation was of such nature as to constitute a deductible claim against the estate at the time of his death. The two are inconsistent and irreconcilable.
*943 Reviewed by the Board.
Judgment will be entered for the respondent.