Document: 352 U.S. 82 77 S.Ct. 175 1 L.Ed.2d 144 Max PUTNAM and Elizabeth Putnam, Petitioners,v.COMMISSIONER OF INTERNAL REVENUE. No. 25. Argued Oct. 17, 1956. Decided Dec. 3, Mr. Richard E. Williams, Des Moines, Iowa, for petitioners. Philip Elman, Washington, D.C., respondent. Justice BRENNAN delivered the opinion of Court. The petitioner, in December 1948, paid $9,005.21 to a bank discharge his obligation as guarantor notes Whitehouse Publishing Company. That corporation still had corporate existence at time payment but ceased doing business disposed its assets eighteen months earlier. question decision is whether, joint income tax return filed by Putnam wife Putnam's loss fully deductible 'incurred (a) transaction * profit, though not connected with (his) trade or business' within meaning § 23(e)(2) Internal Revenue Code 1939,1 whether it nonbusiness bad debt 23(k)(4) Code,2 therefore only short-term capital loss. 2 Commissioner determined that was be given treatment. Tax Court3 Court Appeals4 Eighth Circuit sustained determination. Because an alleged conflict decisions Courts Appeals other circuits,5 we granted certiorari.6 3 Moines lawyer who 1945, venture law practice,7 organized Company two others, newspaperman labor leader, publish newspaper. Each incorporator received one-third issued stock, supplied property cash which company started business. He also financed operations, short business, through advances guarantees salaries debts. Just before abandoned, acquired shares held fellow stockholders July 1947, sole stockholder, wound up affairs liquidated assets. proceeds sale were insufficient pay full amount due on guaranteed moneys borrowed August 1946 March 1947. 4 familiar rule that, instanter upon debt, debtor's creditor becomes guarantor, new but, subrogation, result shift original from steps into creditor's shoes.8 Thus, unable recover debtor very nature worthlessness debt. This has been consistently recognized administrative judicial construction laws9 which, until below, have always treated guarantors' losses losses.10 Congress recently confirmed this treatment 1954 providing noncorporate taxpayer certain obligations 'shall debt.'11 5 There is, then, no justification basis consideration under general provisions 23(e)(2), i.e., ordinary entered profit. legislated specially matter deductions losses, such virtue special limitation contained 23(k)(4). Spring City Foundry Co. v. Commissioner, 292 182, 54 644, 78 L.Ed. 1200, apposite controlling. excluded deduction 234(a)(5) Act 1918 regarded 234(a)(4). Chief Hughes said Court: 6 'Petitioner claims right section 234(a)(4) 'losses during taxable year compensated insurance otherwise.' We agree below subdivision following (5) relating debts are mutually exclusive. so assumed, without deciding point, Lewellyn Electric Reduction Co., 275 243, 246, 48 63 (64), 72 262. making specific provision indicates these considered class falling preceding provision. What cannot allowed (4). If (4) could ambiguous respect, followed enactment statute—that did refer debts—would entitled great weight. see reason disturbing construction.' page 189, 647. 7 Here statutory scheme understood attributable shall loss, all. 8 turn erroneous premises.12 It involuntarily acquires worthless position different voluntarily known him worthless. latter having valid all.13 situations analogous comparable. buys knowledge he will rightly made gratuity. In contrast pays compliance raised contract guaranty. His arises because gift reimburse him. 9 Next least Allen case, favor creditor. From premise argued 'become' origin, outside scope 23(k). misconceives doctrine apart fact if true worthless, nevertheless would 23(e). supra. Under seen, creating extinguishing preserving merely substituting reality situation asset value hands backed usually able cases lost instant But when obscure 'becomes' hands. 10 Finally, found support their view language taken Eckert Burnet, 283 140, 51 373, 75 911: 11 'The petitioner deduct half sum 'ascertained charged off year' 1926, c. 27, 214(a)(7), 44 Stat. 9, 27. 12 'It seems us sufficiently answered contention remarking acquired. nothing charge off. treats case one investment later turns out bad. satisfaction existing petitioners, having, may be, consequence momentary transfer old order they might destroyed. plain think words statute include kind.' 141, 374. (Emphasis added.) 13 statement imply determination guarantor's debt.14 faced Eckert. point decided reporting discharging guaranty, payment, giving promissory note payable subsequent year, gave note. significance quoted although 'the acquired', 'charged off' year.15 14 objectives sought achieved non-business persuasive applies losses. part comprehensive program enacted 1942 increase national revenue further prosecution war then engaged.16 means minimizing fraudulent practices taxpayers relatives friends gifts disguised loans.17 Equally, however, plan suited put investments form loans footing investments. proposal originated Treasury Department, whose spokesman championed 'to insure fairer reflection income.'18 House Ways Means Committee Report stated objective remove inequities improve procedure bad-debt taken.'19 consider light revealed purposes. publishing field practice. stock became well directly corporation, receive treatment; 1939 provides both evidenced security.20 clearly 'fairer reflection' 1948 treat similarly. real economic difference between direct loan indirectly loan. consequences should all same, accomplished 23(k) (4).21 judgment 15 Affirmed. 16 HARLAN, dissenting. 17 Being unreconciled Court's decision, settles among thus impact beyond confines particular I must regretfully dissent. 18 approval Commissioner's petitioner's arising 'nonbusiness debt,' instead incurred 'transaction profit,' 23(e)(2),2 rests what my opinion, strained application equitable subrogation. No contends Company's lending Bank agreement guaranteeing indebtedness. Rather, Government's basic argument, brief, this: 19 principle established, generally State Iowa (where guaranty executed performed), required make succeeds rights implies promise principal Accordingly, while entering thereunder puts himself where sustain if, extent subrogation actually sustains contract, debtor, suffers follows, therefore, any wholly dependent attributed loss.' 20 Government adds footnote: 'So long solvent insolvency obviously does render Consequently, necessarily rather than creditor.' 21 Upon analysis, argument comes down honored offset acquisition Bank's against indebtedness; those worth value, since indebtedness secured guaranty; longer secured. 22 substance insolvent fulfilled; hands, hence when, here, meets obligation, defies attribute anything obligation. To requires conceive moment acquisition, withering touches it. same millisecond can antagonistic characteristics me, too esoteric concept carry legal consequences, even taxation. 23 departure first led Second reject theory, applied widow her husband's brokerage account she called honor after death winding estate. Fox 190 F.2d 101, 39 A.L.R.2d 873. court, referring 'illusory character' claim held, late husband went say, pages 103, 104: 24 'She (the widow) argues court's theory estate amounts forced her, contrary spirit doctrine, yield utterly liability. (W)e persuasive. Clearly (guaranty) involving alone give rise favor. Nor ten years create something less proverbial stone. unrealistic expectation recovery over collection. Actually fulfillment contractual earlier date. application; straining erect here disembodied dead debtor.' 25 differentiate nonexistent individual existent, insolvent, Appeals, present case,3 reasoning guaranties existence, honored. Pollak 209 57;4 Edwards Allen, 216 794;5 Cudlip 220 565;6 Ansley 217 252.7 rationale four more convincing approved holding taxpayer's regarding debt' subject 26 either circumstances 1942, 166(f) 1954,8 opposite conclusion. Section created category namely, thenceforth theretofore accorded them.9 finds 'objectives Congress,' section, 'persuasive losses,' 'section revenue,' connection World War II, 'was investments.' me bill shows aimed narrow objective, reducing 'family' 'friendly' gifts. states: 27 'C. Nonbusiness Bad Debts. 28 gives transactions allows An example unrepaid friend relative, arise course liberal allowance suffered considerable abuse do expect repaid. practice particularly prevalent persons respect whom credit dependents. presented serious difficulties requirement proof. 29 effect take account, allow used reduce gains. Like $1,000 5-year carryover applies.'10 30 am find this, legislative history refers, clear intimation broad policy analogize types forms investment,11 section.12 31 Likewise reliance misplaced. becoming year,' 'in borrower,' (b) payment.13 says enacting treating far concerned. agree, again limited purpose, thrust now section. think, simply permit payments Code. Payments need 'trade business,' nor 'entered profit.' They deductible, seem, some being repaid—so long, words, gift. prior 'business' debts, (1),14 23(e) (2), 'nonbusiness' 23(k)(4), line 'debts.' However, again, concerned fending type fictitious guaranties. Hence unwilling guarantors borrowings. Considering purposes free infirmities, attempted obviate limiting 'were borrower.' 32 congressional strains read broadly confirming losses.15 presumably knew cases, supra, refused 'debt' Senate stated: 'If requirements met, will, law, taxwise whatever applicable factual situation.'16 included therein debt'; person claiming show owned become 'worthless year'—the deductibility 23(k)(1) (4)—since 'for section' 166(f), 'treated as' 'becoming occurs. assimilated none attributes deductible. primary s kinds drawing definitive characterization 'debts' involves misplacing emphasis. 33 Of greater full. This, consistent intend disturb Fox, obligations, confirms Congress' intent partially Otherwise anomalous better imposed 34 short, together, quite evident intended complement Appeals,17 override them. 35 suggests structure, since, argued, comparable investments, Codes.18 Even so, Congress. Our duty reverse. '§ 23. Deductions gross income. 'In computing net there deductions: '(e) Losses individuals. individual, otherwise— '(2) business; *.' 53 13, U.S.C. U.S.C.A. 23(e)(2). '(k) '(4) Non-business taxpayer, resulting therefrom exchange, months. term 'non-business evidence security defined paragraph (3) business.' 56 820, CCH TC Mem.Dec. 458. 224 947. Cir., 57; 794; 565. 350 964, 76 438. Petitioners abandoned alternative 23(k)(1). United States Munsey Trust 332 234, 242, 67 1599, 1603, 91 2022; Aetna Life Ins. Town Middleport, 124 534, 548, 625, 629, 537; Howell 69 447, 450; Scott Norton Hardware 1047; Brandt, Suretyship, and, Guaranty, (3d ed.), 324; 38 C.J.S., 111; Am.Jur., 125. follows rule. Randell Fellers, 218 1005, 252 N.W. 787; American Surety New York & Sav. Bank, 1, 254 338. involved state federal Cf. Watson 345 544, 73 848, 97 1232; Lyeth Hoey, 305 188, 59 155, 83 119; Burnet Hamel, 287 74, 199. Acts 214(a)(7) 1921, 42 239; 1924, 43 269; 26; 23(j) 1928, 45 799; 1932, 47 179; 1934, 688; 1936, 49 1658; 1938, 52 460; 1939, 12. See, e.g., Cum.Bull. 137; 146; III—1 158; 166; Shiman 60 65; Hamlen Welch, 116 413; Gimbel 36 B.T.A. 539; Roberts 549; Sharp Hovey P—H B.T.A.Men.Dec. 39,081; Pierce 41 1261; Whitcher F.Supp. 763. Similar rendered include: Ortiz 173, reversed another ground, sub nom. Helvering Wilmington 156, (without discussion point), 316 164, 62 984, 86 1352; Burnett B.T.A.Mem.Dec. 42,528; Ritter 46,237; Greenhouse 54,250; Estate Rosset 54,346; T.C. 569; Sherman 746; Aftergood 60; Stamos 885. 166. '(f) Guarantor obligations.—A (other corporation) endorser, indemnitor borrower (except subsection (d) apply), regard endorsement, indemnity) payment.' 68A 50, 166(f). And 65 Yale L.J. 247. See 5, Reading 132 306; W. F. Young, Inc., Cigar 120 159; 66 425. came explained court 65, 67, follows: 'Though brokers, once soon arose; verbally rate difficulty. impute purpose except cases; unavoidable season. analogy 204(b) apt. ground 911, our 158. situation. Eckert, accommodation endorser insolvent. When instead, year. deduction, keeping books basis, intimated succeed; done change Yet enough defeat acquired,' objection ought good paid; suggested. thrown authoritative bound.' Price, 309 409, 673, 84 836. superseded 124(a), 'becomes year.' Chairman Doughton opened hearings statement: '* meeting committee morning step consideration, preparation, perhaps largest ever responsibility report. 'We needs magnitude unthought modern times, realize necessary raise every dollar additional seriously shattering economy.' Hearings Revision 77th Cong., 2d Sess. 1. argue construed loans. context segment discussing petitioners' argument. H.R.Rep. 2333, 45: Debts carry-over applies.' 90. 44. 23(g)(2) stock. 23(k)(2, 3) As Judge Stewart pointed dissenting 572: 'Had conventional subscribing failure 23(g)(2), I.R.C. Had instrument bearing interest coupons, likewise 23(k)(2), I.R.C., Smith, supra (2 1953, 203 310). 'Because happened risk money corporation's loans, holds viewpoint, precisely lent corporation. reached significantly unrealistic.' 873, shortterm despite nonexistence '(§ 23(k)) Third Circuit. Fifth Sixth 166) (f) Certain Noncorporate Obligations.—A I.R.C.1939, 23(k)(1), U.S.C.(1940 ed.) 45. subjecting dealing securities. 23(g)(2—4) 1939. left undisturbed 'any subsequently re-enacted, unchanged, 165(c)(2) 1954, 165(c)(2). 8, '(1) General 'Debts *. apply subsection.' 'Your provided available (or indemnitor) another, other's (and collect debtor). represents person's Your believes most relationships.' S.Rep. 1622, 83d 24—25. 200. (Italics supplied.) 183, 23(g)(2—4), 23(g)(2—4); I.R.C.1954, 165(g), 165(g).

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