Court Opinion

ID: 4481406
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:52.82604+00
Date Added: 2024-06-11T14:54:00.809614
License: Public Domain

SteREEtt, /., dissenting: Petitioner Meredith Siple paid the First National Bank of Nevada $150,000 in 1963 and $145,000 in 1964 and deducted said payments as ordinary losses on his tax returns for those years. We must consider why such payments were made to determine whether this asserted tax treatment was correct. The payments were made after the bank stated in writing to petitioner that “Demand is made upon you in accordance with the indemnity agreement you signed on October 22, 1959.” Pursuant solely to this demand the payments in question were made. It then becomes appropriate to consider why petitioners entered into the October 22,1959, indemnification agreement which caused the payments. Cf. Arrowsmith v. Commissioner, 344 U.S. 6 (1952). Petitioners’ participation in the aforenoted October 22,1959, agreement was the direct result of their contract of the same date with the Mizners pursuant to which they agreed to invest in King’s Beach. They agreed to make a substantial equity commitment, which through the exercise of certain options could have amounted to a 49-percent interest, and to make a $50,000 direct loan to King’s Beach. Any losses suffered by petitioners through these investments were, of course, capital in nature. Secs. 165 (f) and 166 (d). In this same agreement with the Mizners the petitioners further agreed to post collateral for a bank loan to King’s Beach. They did supply such collateral and a loan was made. As stated above, some 4 and 5 years later petitioners were required to make good under the indemnification agreement. The reasonable interpretation of the petitioners’ agreement with the Mizners would seem to be that the petitioners desired to limit their capital investment in King’s Beach to the equity and direct loan commitments which were specifically spelled out. If they had intended to make a further capital investment in King’s Beach through the use of collateral, it would have been a simple matter for them to have borrowed the money themselves, thus incurring personal liability, and to have then reloaned the money to the corporation. By eschewing this obvious possibility, they were limiting their capital investment. It does not seem to me to be a fair reading of the Mizner-Siple agreement to conclude that the Mizners required the Siples to agree to post the collateral as a prerequisite to the purchase of stock. Certainly there is nothing outside the agreement to support such a conclusion. A reasonable assumption then is that, through the means of supplying collateral for a corporate loan, they sought to enhance their prospects for a profitable investment. If this be so, they are entitled to an ordinary loss arising from a transaction entered into for profit under the provisions of section 165 (c) (2), and I would so hold. This simplistic1 approach to the problem finds much support in decisions of this Court. In J. J. Shea, 36 T.C. 577, 582 (1961), affirmed per curiam 327 F. 2d 1002 (C.A. 5, 1964), we said the following with respect to that petitioner’s purpose in entering into a guaranty:2  When the petitioner entered into the guaranty here involved, the business of the subsidiaries of Bupe, Inc., was being developed and expanded, and in entering into the guaranty the petitioner had reason to heMeve that the corporations’ use of the funds provided by the guaranty would enhance the value of his stoclc in Bupe, Inc. * * * [Italics supplied.] There the petitioner was seeking to realize a profit on only a 10-percent equity interest. In Marjorie Fleming Lloyd-Smith, 40 B.T.A. 214, 222 (1939), affd. 116 F. 2d 642 (C.A. 2, 1941), certiorari denied 313 U.S. 588 (1941), we reached the same result with respect to the payment under a guaranty by the beneficial owner of a 37½ percent. Therein we said: the stock had become worthless by the close of 1982. The payments in connection with the guaranty were not made until 1988. Obviously, when petitioner thus made them, it was not with the idea of protecting or adding to- her stoclc investment in the company. These expenditures occurred for the sole purpose of reducing her liability under the guaranty. As such, they are deductible as losses on a traMsaction entered into for profit. ⅜ ⅜ * [Italics supplied.] It will be recalled that at the time of the payments to the bank the Siples held no interest of any kind in King’s Beach, so this decision seems particularly in point.3  Eugene H. Rietzke, 40 T.C. 443 (1963), is a further example of our finding of a profit-making motive to the guaranty by a shareholder (45-percent interest) of the; indebtedness of his corporation. 'Significantly tbe majority opinion cites no cases in direct support of its holding that a capital transaction was involved. Instead it seeks, on what are in my judgment invalid grounds, to distinguish two of the foregoing cases and makes no mention of the third. The precedent value of these decisions is seriously undermined. The majority stresses the fact that in Rietzfce and Shea the guaranties were subsequent to, and independent of, the acquisition of the original investment by the taxpayer. Thus, the clear implication is that these holdings may no longer be cited with any confidence to justify a section 165(c) (2) loss where it is claimed with respect to a loss that occurred at the same time as an original investment. The maj ority’s approach to the problem is indicated in its statement that “Under such circumstances, it would have been difficult to hold the payments were part of the cost of acquisition of that investment.” All outlays made at the outset are now likely to be lumped together. It would seem to be unduly restricting congressional intent in enacting the forerunner of section 165(c) (2). Further, I do not find decisions of other courts such as Ansley v. Commissioner, 217 F. 2d 252 (C.A. 3, 1954), and Hoffman v. United States, 266 F. Supp. 884 (D. Oreg. 1967), distinguishable as does the majority. I agree with the majority that the “debt” issue, see Putnam v. Commissioner, 352 U.S. 82 (1956), may be passed over, and note as my reasons that (1) an indemnitor who makes good a loss is not subrogated to the rights of the indemnitee, see Howell v. Commissioner, 69 F. 2d 447 (C.A. 8, 1934), (2) the May 23, 1963, agreement cut off whatever right the petitioners had against King’s Beach by virtue of the 1959 agreement which right would have to be founded upon a breach of contract as distinguished from an action on a debt, and (3) Nevada case law concerning subrogation as set forth in Stephens v. Mc-Cormack, 50 Nev. 383 (1928). It follows from the foregoing discussion that I respectfully dissent from the majority opinion. Withey, FORRESTER, Scott, and FeatheRston, JJ., agree with this dissent.   It was once said that “Some casos task the anxious diligence of a court, not by their difficulty, but their simplicity.” Wells v. Savannah, 87 Ga. 397, 398 (1891).   “Despite the fact that this term surely has more capital overtones than the term “indemnification.” See Putnam v. Commissioner, 352 U.S. 82 (1956).    The majority gives footnote attention of the agreement of May 23, 1963, between the Siples and Mizner, president of King’s Beach, which completely terminated the Siples’ interest in King’s Beach, and to a suggestion that the agreement resulted in a capital transaction. The suggestion that the Arrowsmith doctrine then requires that the subsequent payment of $295,000 also be accorded capital treatment is, in my view, ill-founded for that payment was not in any sense an outgrowth of the May 23, 1963, agreement.