Court Opinion

ID: 4624014
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:54:16.804157+00
Date Added: 2024-06-11T07:56:27.927769
License: Public Domain

NATIONAL BANK OF COMMERCE OF SAN ANTONIO, TEXAS, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.National Bank of Commerce v. CommissionerDocket No. 93164.United States Board of Tax Appeals40 B.T.A. 471; 1939 BTA LEXIS 848; August 18, 1939, Promulgated *848  Petitioner bank, engaged in the general banking business, made loans to an estate secured by property of the estate and in 1931 received the property in trust, under an agreement to look only to the property for payment of the amount then due and any advancements thereafter made, with general powers of control and disposition.  In 1935 the property had so depreciated in value that the aggregate of the loans made was greatly in excess of the fair market value of the property and the owner of the property, without consideration, conveyed her interest to the bank.  Held, the difference between the fair market value of the property and the aggregate of the bank's loans secured by the property was deductible in 1935 as a bad debt, and the bank's loss is not a capital loss limited by the provisions of section 117(d) of the Revenue Act of 1934.  Robert S. Durno, Esq., for the petitioner.  R. P. Hertzog, Esq., and F. B. Schlosser, Esq., for the respondent.  ARNOLD *471  This proceeding involves a deficiency of $3,797.76 in income tax for 1935.  The deficiency results entirely from respondent's disallowance of a deduction claimed as a bad debt in*849  the amount of $30,701.04.  The respondent determined that the $30,701.04 item represented a capital net loss, the deduction for which is limited to $2,000 in accordance with the provisions of section 117(d) of the Revenue Act of 1934.  By its appeal this petitioner challenges respondent's determination and claims the right to the deduction either as a bad debt or as an ordinary loss.  The parties are agreed as to certain facts, which were set forth in a written stipulation filed at the hearing.  FINDINGS OF FACT.  The petitioner is a national bank, incorporated under the national banking laws of the United States, with its principal office and place of business in San Antonio, Bexar County, Texas.  It is engaged in the general banking business for profit, receiving deposits, making loans, and conducting a trust department.  It made the several loans *472  and advancements of money involved herein in the due course of its business and for profit.  In November 1930 the petitioner loaned $38,000 to the trustees of the estate of Van A. Webster, deceased.  The loan was evidenced by three notes, two for $10,000 each and one for $18,000, and was secured by a deed of trust on*850  certain warehouse properties.  From time to time thereafter this indebtedness was renewed, extended, and enlarged by the petitioner as hereinafter more fully set forth.  At all times material hereto the widow of Van A. Webster, who had remarried, was a resident of California.  In an effort to adjust and settle the affairs of the estate of Van A. Webster, deceased, the petitioner agreed with the widow, Marie Carter Sturges, that if she could get title to the property of the estate, petitioner would take over the property and act as trustee in the management thereof.  At some time undisclosed by the record, but prior to June 2, 1931, title to the property was vested in Marie Carter Sturges by a judgment of a Federal court.  By deed dated June 2, 1931, Marie Carter Sturges and her husband, conveyed and transferred to the petitioner, as trustee, the properties therein described, all lying and being situate in Bexar County, Texas.  The conveyance was primarily for the purpose of better securing all indebtedness of the trust estate to petitioner, and it was provided in the said deed that the petitioner, as trustee, should have the right to sell and dispose of all properties conveyed*851  and to mortgage and encumber all or any part of the properties upon such terms, provisions, and conditions as the petitioner should deem advisable, but that petitioner should not be liable or bound for any indebtedness incurred, and that the property "only shall be bound and obligated for such indebtedness or indebtednesses as may be secured thereby." The parties have stipulated that: * * * The full terms of the Trust were not set forth in said deed, and that it was under, through and by virtue of said deed that the National Bank of Commerce of San Antonio acted AS TRUSTEE in borrowing money from the National Bank of Commerce of San Antonio, and in the carrying on of said transactions and borrowing money, ALL - except overdrafts - being evidenced by notes signed Trust Account No. 20 Marie Carter Sturges, by S. A. Chapman, Assistant Trust Officer, the Trust Account being carried on the Bank's books, in Trust Department, under the name and style of "Trust Account No. 20, Marie Carter Sturges".  On December 17, 1932, the existing indebtedness of the trust estate amounted to $39,052.21.  On that day the petitioner loaned the trust estate an additional $12,486.32, making a total of*852  $51,538.53, of which $138.53 was repaid.  Thereafter further advances were made by petitioner on June 15, 1933, June 25, 1934, and July 2, 1934, which advances, together with those previously made and renewed from time to time, aggregated $58,500.  The various notes representing the aggregate *473  indebtedness were merged in one note dated July 2, 1934, and maturing January 3, 1935.  By a note dated November 2, 1934, the $58,500 note and indebtedness was renewed and extended to May 2, 1935.  On December 15, 1934, the petitioner made an additional loan and advancement to the trust estate, which was evidenced by a note of even date, maturing January 3, 1935, for $5,895.85.  This note was renewed and extended by a note in like amount dated January 3, 1935, due May 2, 1935.  On January 26, 1935, the petitioner, under instructions and directions of a national bank examiner, charged off this $5,895.85 note to profit and loss.  The property securing the indebtedness to the petitioner having depreciated in value, Marie Carter Sturges, who was the owner thereof, subject to the rights of petitioner, offered to convey, release, and relinquish to the petitioner all of her right, title, *853  interest, and claim in and to the property held in trust, in satisfaction and settlement of all the indebtedness of trust account No. 20 and the trust estate.  Under date of May 18, 1935, Marie Carter Sturges, together with her husband, executed a deed conveying her interest in accordance with her offer.  The petitioner accepted the conveyance on May 28, 1935, and acquired thereby all outstanding interest in all the properties that had previously been conveyed to it, as trustee, except two leasehold interests which had terminated prior to May 28, 1935.  At the time of the delivery to and acceptance by petitioner of the deed of May 18, 1935, it was carrying an indebtedness upon its books against the trust estate in the amount of $62,305.19, consisting of the note of November 2, 1934, for $58,500, an overdraft of $3,131.69, and expenses of $673.50.  Upon acceptance of the deed of May 28, 1935, the petitioner credited its real estate account with $37,500, which was the fair market value of the properties acquired, and charged off $24,805.19 to profit and loss.  The notes for $5,895.85 and $58,500 were marked "CANCELLED" but were retained by and are still in petitioner's possession. *854  The trust estate and "Trust Account No. 20, Marie Carter Sturges", were insolvent on May 28, 1935.  At no time was Marie Carter Sturges or her husband personally liable for the indebtedness.  OPINION.  ARNOLD: This proceeding requires a classification of the loss sustained by the petitioner in connection with the making of loans over a period of years.  During the taxable year the petitioner took over the property securing the total loans at a time when the agreed value of the property was $30,701.04 less than the indebtedness secured thereby.  The respondent contends that the petitioner had a capital *474  net loss, and is limited by section 117(d) of the Revenue Act of 1934 to a deduction of $2,000.  The petitioner contends that the $30,701.04 is deductible either as (1) a bad debt, or (2) an ordinary loss.  It has been stipulated that the loans were made by petitioner in the ordinary course of its banking business and that the loans were made for profit.  The facts here distinguish this proceeding from the decided cases involving the purchase or sale of real estate and the giving or taking back of a mortgage or deed of trust to secure the unpaid balance.  See *855 ; affirmed by the Ninth Circuit in , which involved a purchase of real property, and the subsequent conveyance of the property back to the vendor in consideration of release from liability and the cancellation and surrender of the note for the unpaid balance; and , on appeal to the Second Circuit, which involved the sale of real property for cash and notes secured by a mortgage, and upon default the reacquisition of the real property at a value less than the amount of the notes. The debtor of the petitioner was successively the estate of Van A. Webster, deceased, and the trust estate created by the deed of June 2, 1931.  The notes renewed after June 2, 1931, were executed by a trust officer of the petitioner, who was acting for and in behalf of the petitioner bank in its fiduciary capacity.  In other words the bank in its own right was lending money to itself in its capacity as trustee, and the petitioner bank had agreed that it would look only to the property securing the indebtedness for recovery of the sums loaned.  Marie Carter*856  Sturges was not personally liable for the payment of the amount due petitioner.  It was not her indebtedness.  She neither executed the notes nor did she make herself personally responsible in any way for the payment thereof.  The deed, dated May 18, 1935, indicates that the petitioner had advanced from time to time after June 2, 1931, further and additional sums to the trust estate for the upkeep, maintenance, and payment of taxes upon the real property securing the total indebtedness.  The deed was executed to the petitioner in its own right "in payment and full satisfaction of all the said indebtedness" owing petitioner, "and in satisfaction, release and settlement of all obligations, duties and liabilities agreed to be performed and/or assumed by" petitioner, as trustee.  At the time Marie Carter Sturges executed the deed of May 18, 1935, to the petitioner and at the time petitioner accepted the conveyance, the trust estate was insolvent, and her rights therein, which were subject to petitioner's rights, were of no value whatsoever.  In so far as Marie Carter Sturges was concerned, therefore, she parted with nothing of value by her last conveyance, and was relieved of no obligation*857  thereby.  *475  In our opinion this proceeding is governed by the same principle as that applied in ; , and . The interest of Marie Carter Sturges in the property securing the notes was conveyed to the petitioner in settlement and satisfaction of the indebtedness of the trust estate.  To the extent that the security failed to extinguish the indebtedness the loans of the petitioner represented worthless debts.  Since there is no question about the charge-off of the remainder of the debts in the taxable year, the deduction claimed should have been allowed.  Some of the decided cases have held that the compromise of notes for less than their face value results in an ordinary loss.  ; , affirming ; ; *858 . Much of the language used in these decisions would be applicable here if we should rest our decision upon a determination that an ordinary loss as distinguished from a capital loss resulted.  But we prefer to rest our decision upon the classification of this deduction as a bad debt.  For the foregoing reasons it is our opinion that no sale or exchange within the meaning of section 117 occurred, and the deduction claimed should be allowed as a bad debt ascertained to be worthless and charged off in the taxable year.  Decision will be entered under Rule 50.