Court Opinion

ID: 4476799
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:12:12.355552+00
Date Added: 2024-06-11T14:53:54.325473
License: Public Domain

BRUCE, ¡7., dissenting: As I view all of the facts and circumstances of this case, petitioner sustained a loss of $22,222.51 in 1945, which is deductible to the extent permitted by section 23 (k) (4) of the Internal Revenue Code. Petitioner paid the creditors of her deceased husband’s estate an aggregate of $48,635.56 and received assignments from them of their claims against the estate. Being then the sole creditor of the estate she received in payment thereof $3,923.05 in cash and certain shares of stock representing minority holdings in small closely held corporations, comprising all the assets of the estate subject to the claims of creditors. These stocks had a fair market value on August 3, 1945, the date she acquired them, aggregating $22,490, having increased in value somewhat between February 17,1942, and August 3, 1945. The majority have held petitioner is not entitled to deduct as a nonbusiness bad debt any part of the amount of her claims against the estate on the ground that, to the extent that she did not recover the consideration paid by her for such claims, said claims were worthless at the time she acquired them. The claims acquired by petitioner fall into two categories. One set, consisting of a number of unsecured debts owed by the estate, as to which petitioner had no personal liability, petitioner acquired by purchase and assignment. The other and larger claims as to which petitioner had a personal liability, were acquired through subrogation by operation of law. The latter claims were acquired by petitioner prior to her purchase of the former, and while there is no direct testimony as to her reasons for purchasing the former, it is, in my opinion, fairly to be inferred that she purchased all the other oustanding claims in order that she might acquire the assets consisting of minority holdings in small closed corporations, preclude a forced sale thereof, and through orderly disposition reduce or possibly recoup entirely her greater over-all loss, including the loss on the claims acquired by operation of law. The majority have seen fit to consider first the problem in relation to the other claims, as to which petitioner had no personal relation, purchased by her for $15,440.65, and to apply the principles announced in relation thereto, by analogy, to the claims arising out of the debts as to which she had a personal liability and which were acquired by her by operation of law. In my opinion the latter should be considered first. I agree that in general a debt voluntarily created which is worthless when created or acquired, in the sense that it then has no value, may not then or subsequently be deducted as a bad debt. In other words, a taxpayer may not create for himself a right to a deduction by making an advance or payment without reasonable expectation of repayment. Under such circumstances the advances or payments are generally considered as gifts or contributions to capital and not debts. We do not have here, however, mere volunteer payments. In my opinion, the foregoing rule does not apply where the debt is one which was created involuntarily, or, as in the instant case, is one to which the taxpayer became subrogated by operation of law. The $33,194.91 claim arose out of three promissory notes to a trust company executed by petitioner and her former husband as co-makers. The notes were secured by two policies of insurance on the life of the husband and in favor of petitioner as sole beneficiary. The proceeds had been received by petitioner’s husband and the debts were his. Petitioner was an accommodation party. McKinney’s Consolidated Laws of New York, Book 37, sec. 55; George Aftergood, 21 T. C. 60. By changing the obligation, which was originally an insurance company loan, to a bank loan, decedent indicated not only an intention that the insurance benefits to his wife should not be diminished but an intention on his part to repay the loan. When therefore the debt to the Trust Company was paid by petitioner, directly or indirectly out of the proceeds of the insurance policies, she became subrogated to the Trust Company’s claim against the estate. In re Cummings' Estate, 105 N. Y. S. 2d 104, 106; Chamberlain v. First Trust & Deposit Co., 15 N. Y. S. 2d 168; In re Jones’ Estate, 81 N. Y. S. 2d 386. To the extent the debt arising out of said payment became worthless, upon the settlement of her claims against the estate, the loss, in my opinion, was deductible as a nonbusiness bad debt. Sec. 23 (k) (4), I. R. C. Cf. Kate Baker Sherman, 18 T. C. 746; Shiman v. Commissioner, 60 F. 2d 65. The loss resulting from the incumbrance of the insurance policies was as real to petitioner as the loss to the taxpayer in Kate Baker Sherman, supra, resulting from the incumbrance of the pledged securities. And the fact that the indebtedness was worthless when acquired, not having been voluntarily acquired or created by her, should not deprive petitioner of the right of deduction to the extent allowed by the statute, such a deduction being one of the lawful incidents of an indebtedness. Cf. Warren Leslie, Sr., 6 T. C. 488; D. W. Pierce, 41 B.T. A. 1261. The loss, if any, to petitioner on the amount paid to other creditors for their claims is also deductible, even though petitioner was not obligated to purchase these claims. She had theretofore become a creditor, of her husband’s estate in the amount of $33,194.91 by operation of law. By purchasing all other claims against the estate for $15,440.65 she precluded a forced sale of the stock held by the estate for which (see Estate of Irene de Guebriant, 14 T. C. 611, 619, reversed on another point, 186 F. 2d 307) there was no ready market. This substantially mitigated petitioner’s over-all bad debt loss. Also, there was a substantial increase in the value of the stock between the time the claims were acquired and the time the stock was distributed in payment, thereof. Cf. Kessler Oil & Gas Co., 41 B. T. A. 31. The purchase of these claims was not “in the nature of a gift”; nor were the claims purchased without expectation of repayment. Cf. Mather v. Commissioner, 149 F. 2d 393. The loss on a debt purchased under these circumstances, in my opinion, is deductible. Houk v. Commissioner, (C. A. 5, 1949) 173 F. 2d 821, is, in my opinion, particularly applicable. In that case a trust created by deceased-settlor acquired notes and judgment by assignments and sales under Texas law for the purpose of conserving the settlor’s estate for repayment of the settlor’s indebtedness to the trust and to protect liens and properties owned by the trust and subject to some of the estate obligations. The Fifth Circuit Court of Appeals held that the acquisition by the trust of such notes and judgments was not a voluntary assumption without consideration, as contended by the Commissioner and as has been held in a Memorandum Opinion of this Court, but was a purchase and that the obligations represented by the notes and judgments could be considered by the trust in computing bad debt deductions for income tax purposes. The majority opinion quotes at length from the opinion in the Houk case in an effort to distinguish that case from the present one. Attention is called, however, to latter portions of the opinion, appearing at page 825, wherein the Fifth Circuit Court of Appeals said: It is not disputed that McFaddin or his estate was indebted to the original holders of the judgments and notes. By purchasing and receiving assignments of them, the Trust became a creditor of McFaddin or his estate, at least in the amount paid by the Trust for them, and, as an assignee, the Trust stands in the same position as its assignor had stood. Lount v. Mosher, 10 Cir., 115 F. 2d 903, certiorari denied 313 U. S. 581, 61 S. Ct. 1097, 85 L. Ed 1537; and Westgate v. Maryland Casualty Co., 6 Cir., 147 F. 2d 177. The purchase by the Trust of the judgments and notes did not extinguish them as debts due by McPaddin’s estate but merely transferred them to the Trust, which thereupon had the same rights against the estate as the original holders. * * * That the Commissioner of Internal Revenue has, under §23 (k) (1) of the Internal Revenue Code, as amended, discretion to determine what debts have become worthless or recoverable only in part is not disputed: but he may not treat as voluntarily “assumed and paid” obligations that have been purchased and assigned in order to protect equities that may be used and applied against an existing indebtedness. * * * American Cigar Co. v. Commissioner, 66 F. 2d 425, and Hoyt v. Commissioner, 145 F. 2d 634, would support the majority’s holding that petitioner did not sustain a bad debt loss on the claims purchased by her for $15,440.65 only if no other claim was involved. The fact remains, however, that she acquired the $33,194.91 claim by operation of law, prior to the purchase of the claims for $15,440.65. It was necessary that she purchase all other outstanding claims to prevent a forced sale of the stock held by the estate. Ordinarily, where a claim is purchased for more than its value, the difference represents a gift and the loss upon the liquidation of the claim is not deductible, but where the purchase of the claims bars the sacrifice of assets representing the only fund for the payment of a claim already held by the taxpayer there is no gift nor any reason to disallow the deduction of the loss. It is to be borne in mind that the true value of the stock acquired by petitioner was a matter for conjecture. This is demonstrated by the fact that petitioner received $17,849.29 for the stock in one of the companies which the majority have found had a value of $7,350 when acquired by petitioner the preceding year. It is also to be borne in mind that the stocks in some of the other companies increased in value during the period February 17, 1942, to August 3, 1945. Therefore, there is no basis for holding that petitioner had no reasonable hope of realizing value at the time she acquired the claims. For the foregoing reasons I respectfully dissent from the majority opinion.'