Court Opinion

ID: 4592508
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:08:07.007731+00
Date Added: 2024-06-11T07:50:52.590400
License: Public Domain

ELMER A. CLARK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Clark v. CommissionerDocket No. 13315.United States Board of Tax Appeals14 B.T.A. 65; 1928 BTA LEXIS 3034; November 7, 1928, Promulgated *3034  Amounts sought to be deducted as bad debts or losses disallowed.  James B. Suhr, Esq., for the petitioner.  Henry LeRoy Jones, Esq., for the respondent.  ARUNDELL*65  The petitioner seeks the redetermination of a deficiency of $2,344.61 in income tax for the year 1921.  The deficiency results from the disallowance as deductions from gross income, of (1) a fee paid for auditing the books of a corporation in which the petitioner held stock, (2) a sum alleged to have been paid to make good an endorsement on a note, and (3) a loss on a stock transaction.  At the hearing the respondent admitted error in connection with the first disallowance.  FINDINGS OF FACT.  The petitioner, in 1921, was an officer and stockholder of the Wilcox Tire & Supply Co., a corporation having an agency in Cleveland, Ohio, for Firestone automobile tires.  *66  The petitioner was the endorser of a promissory note executed by the Supply Company on August 11, 1920, in the amount of $13,291.27, to the order of Mrs. K. L. Fontius, payable on demand and bearing interest at the rate of 6 per cent per annum.  In December, 1920, or in 1921, prior to April 1, the Supply*3035  Company paid the sum of $2,300 on the principal of the note.  On April 1, 1921, the petitioner, because of the financial inability of the maker of the note to meet a demand of the payee thereof for the balance due, its liabilities at that time being several thousand dollars in excess of its assets, and in order to make good his endorsement on the instrument, gave Mrs. Fontius his noninterest-bearing promissory notes for $5,991.27 and $5,000, maturing March 31, 1925, and March 31, 1926, respectively, the total of the obligations being the unpaid balance on the Supply Company note.  No security was given for the payment of the notes and no payments have been made on the instruments.  In 1921, prior to the time the stock was transferred to the corporation as hereinafter mentioned, the petitioner acquired 60 shares of the corporation's stock from B. W. Brill in connection with which he gave Brill two notes, one for $2,000 maturing in 1923, and the other for $4,000 maturing in 1926.  This stock had been purchased by Brill at the request and solicitation of the petitioner.  Petitioner has not made any payments on the principal of the notes.  Some time in 1921, probably about the first*3036  of April, the stockholders of the Supply Company were of the opinion that they would not realize anything on their investment if they placed the corporation in the hands of a receiver and several of them, in order to enable some of the other stockholders, including W. B. LaMar and a Mr. Stevens, to continue the operation of the business, and to afford LaMar and Stevens an opportunity to recover the money they had invested in their stock holdings, donated their stock to the corporation.  At or about the same time, petitioner transferred all of his stock, including the 60 shares he acquired from Brill to the Supply Company, and in settlement of the "whole situation" received a note of the Supply Company or W. B. LaMar for an undisclosed amount and released the corporation of all liability to him.  The note has been paid in full.  At the time these transactions occurred Mrs. Fontius and petitioner were the principal creditors of the corporation.  Several years after 1921, Stevens and LaMar had the name of the Supply Company changed to the Stevens-LaMar Co.  The corporation has never been in receivership or liquidated.  The petitioner did not maintain books to record his income and*3037  disbursements.  He had always reported his income on the cash receipts and disbursements basis.  *67  In his return for the year 1921, the petitioner deducted from gross income the sum of $16,991.27 as a loss sustained as the endorser of the Supply Company's note, and as a loss sustained on the Brill stock transaction.  The claimed deductions were disallowed by the respondent.  OPINION.  ARUNDELL: The petitioner is contending that the amount of the two notes he gave Mrs. Fontius to satisfy his liability as the endorser of the Supply Company note, is deductible from gross income as a loss sustained in a transaction entered into for profit or as a bad debt, and that the other item is deductible as a loss sustained in the fulfillment of a moral obligation to save Brill harmless under his purchase of the stock at the request of the petitioner.  The depositions taken by the petitioner of Mrs. Fontius, D. E. Wilcox, president of the corporation during 1920, and himself, which, with the admissions made by the respondent in his answer, constitute all of the evidence before us, do not show when all of the several transactions mentioned in our findings of fact occurred, but it*3038  appears that most, if not all of them, happened on or about April 1, 1921.  At that time the corporation was in financial difficulties and all of its stockholders were of the opinion that no benefit would be derived from placing the corporation in receivership.  For that reason, and also to give several of the other stockholders a chance to recover their investment, some of the stockholders donated their stock to the corporation.  Concerning the transfer to the corporation of the stock held by the petitioner and the giving of a release for all claims he had against it, the petitioner testified on direct examination as follows: Q.  And was there any other agreement made between you and the Wilcox Truck, Tire and Supply Company at that time?  A.  Yes; there was an arrangement made at that time of what we would probably term the sale of the Wilcox Truck, Tire and Supply Company whereby I turned - all stockholders turned in all their stock.  I took a loss on all of the stock of the Wilcox Truck, Tire and Supply Company, with the exception of a payment in notes that I received from the Wilcox Tire Company, which was the entire liquidation of the Company.  Q.  Upon receipt of these*3039  notes did you release the Truck, Tire Company from any of your claims?  A.  I released it from all claims.  On cross-examination, petitioner testified, in substance, that the note he received from the Supply Company or W. B. LaMar was accepted in full settlement of the "whole situation." As we understand this and other evidence associated with it, petitioner received a consideration from either the Supply Company or W. B. LaMar, not only for the stock transferred, but for his *68  assumption of the corporation's liability as maker of the note held by Mrs. Fontius.  Without knowing the details of the settlement and without knowing the amount of the note given to petitioner, which note was subsequently paid, we can not find that petitioner in fact sustained a loss in the amount sought to be deducted and there is no course open to us but to sustain the respondent's determination.  If, however, we are mistaken as to the purport of the testimony concerning the transaction the petitioner had with the Supply Company, the items in dispute could not be allowed as deductions from gross income, since the petitioner was on the cash receipts and disbursements basis in the taxable*3040  year and it is clear from the evidence that he did not make any payments under the several obligations during 1921.  , and . Judgment will be entered under Rule 50.