Court Opinion

ID: 4590527
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:03:49.10923+00
Date Added: 2024-06-11T07:50:29.470441
License: Public Domain

WILLIAM G. PARK, EXECUTOR OF THE ESTATE OF ANGUS PARK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Park v. CommissionerDocket No. 41357.United States Board of Tax Appeals22 B.T.A. 1263; 1931 BTA LEXIS 1974; April 22, 1931, Promulgated *1974  Petitioner's decedent, while president and director of a bank, paid in a substantial sum to prevent the closing of the bank following embezzlement by the treasurer.  Held that the amount paid is not deductible either as a loss or bad debt.  B. Estes Vaughan,17 B.T.A. 620">17 B.T.A. 620, followed.  Frederick L. Pearce, Esq., and George M. Morris, Esq., for the petitioner.  Harold Allen, Esq., for the respondent.  ARUNDELL*1263  The petitioner herein was filed in the lifetime of Angus Park for a redetermination of a deficiency of $27,926.09 in income tax for the year 1924.  Park died on September 17, 1929, and on motion of his counsel at the hearing, William G. Park, executor of his estate, was substituted as the petitioner.  The issue is whether respondent erred in disallowing a claimed deduction of $100,000 which was part of an amount paid in to the bank of which the decedent was president and director, the payment being made to cover the embezzlement by the bank's treasurer and in order to prevent the bank's closing following discovery of the shortage.  FINDINGS OF FACT.  The Bankers Trust Company of Norwich, Conn., was organized*1975  in 1921.  At that time there were three national banks in Norwich, which the business men thought were being managed too narrowly to be of proper aid to the growth of the community, and so it was decided to organize a state bank, the Bankers Trust Company, hereinafter called the bank.  The sale of stock in the bank progressed rather slowly at first and the organizers decided that in order to carry the project through it would be necessary to secure outstanding men in the community to head the bank.  With this idea in mind, they asked Angus Park to *1264  become president and a director of the bank, and he accepted.  Park was the principal owner of three woolen mills in the vicinity of Norwich; he had served in the State legislature; he was a prominent and public spirited citizen, interested in the growth of the community and in charitable organizations, and was a large employer of labor.  When it became known that Park was to become president of the bank there was no trouble in selling the stock and getting directors.  About fifty employees of Park, or of his mills, opened accounts the first day the bank was open, and many of the employees of his mills in neighboring towns*1976  became depositors.  Some of Park's business acquaintances, both in and outside of Norwich, opened accounts.  The depositors included the Salvation Army, a number of civic organizations, and the woolen mills managed by Park.  During the year 1924 Park owned 300 shares of stock in the bank of the par value of $100 each, and the other directors owned 188 shares.  The total outstanding stock of the bank amounted to 1,000 shares.  The first treasurer of the bank, George A. Finn, was personally selected by Park for the office with the approval of the directors, and upon recommendation of the State bank commissioner.  Finn had active and complete charge of running the bank.  Park gave but little time to the affairs of the bank, his time being fully occupied with his other business interests.  There was no system of internal check over the treasurer nor any regular system of checking either loans unauthorized by the directors, or overdrafts that Finn failed to report.  At a directors' meeting held on Friday afternoon, October 24, 1924, the directors learned that the bank held overdrafts amounting to about $40,000, which Finn had permitted one G. C. Berker to make.  The directors had*1977  never authorized any loans to either Berker or to the brokerage company, which he operated with offices in the bank building.  Upon discovery of the overdraft the directors immediately called upon the State bank commissioner to come and investigate, and the commissioner with an assistant arrived at the bank about five o'clock of the same afternoon.  An examination of the books very shortly disclosed a shortage in the loan account of about $85,000, and overdrafts of about $40,000.  The bank commissioner, as soon as the shortage was discovered, charged Finn with it.  He admitted it.  The shortage resulted from Finn's appropriation of funds for use in speculation either through or with Berker.  At the bank commissioner's request the directors met at 7 o'clock that evening to hear the commissioner's report.  The report presented to them estimated Finn's defalcation at over $125,000, and the bank commissioner told the directors that he would have to close the bank in the morning unless some provision was made for putting in at *1265  least $100,000 in cash.  The bank commissioner also pointed out the possibility of suit by depositors against the president and directors for failing*1978  to exercise reasonable supervision over the treasurer.  After making his report the bank commissioner withdrew, and the directors proceeded to discuss the situation.  All of the directors, except Park, were at a loss as to how to proceed.  They did not see where it was possible to raise the money to replace the embezzled funds; to them it seemed that liquidation of the bank must ensue.  Had the bank been liquidated at that time the stockholders would have received nothing, and the depositors only 50 to 60 per cent of their deposits.  The stock carried no liability in addition to the sums originally paid in, and consequently no assessment against the stockholders was possible.  Park was in favor of trying to raise the necessary money to keep the bank open.  He stated that he would personally put up the needed funds.  He felt his own responsibility in connection with the bank very keenly.  He stated that he would not have any depositor lose in a bank with which he was connected.  He felt particularly concerned because many of the employees of his mills, and his business acquaintances had become depositors through his connection with the bank.  The bank commissioner returned to the*1979  directors' meeting and Park agreed to put up $100,000, and asked that the commissioner accept a bond running to the bank signed by himself and the other directors.  The commissioner agreed to the proposition and agreed to allow the bank to reopen provided $100,000 was in the bank in cash by the following noon.  Park also gave the bank commissioner verbal assurance that he would stand good for any additional shortage that might be discovered.  The following morning, Saturday, October 25, Park went to Hartford, Conn., and secured $100,000 in cash by pledging his own personal securities.  This sum he brought back to Norwich and paid over to the bank before noon of that day.  Upon completion of the examination of the bank records the total misuse of funds by the treasurer was determined to be $147,795.69.  The treasurer was bonded for $25,000, and this sum was collected from the bonding company.  In November, 1924, Park paid to the bank the further sum of $22,745.69.  Before completion of the examination recoveries amounting to $1,581 were effected, and this sum was turned over to Park, making $121,164.69, the net sum paid by him to the bank on account of the defalcation.  On November 3, 1924, the*1980  bank assigned to Park the claims it held against Berker, his brokerage company, and the treasurer in accordance with the provision of the bond previously executed by Park and the other directors.  The treasurer at that time held some options on coal lands which he was holding against Berker's overdrafts.  He believed *1266  that the options were of substantial value, but negotiations carried on by the directors disclosed before the close of 1924 that they were worthless.  Berker fled the State and refused to return, and no recoveries have been made from him except the amount of $1,581 above mentioned.  In 1928, $7,574.35 was recovered from Finn's assigned property.  After January 1, 1925, other directors, owning 128 shares of the stock, paid to Park amounts aggregating $21,406.77.  No stockholder who was not also a director has made payment to Park.  In his Federal income tax return for the years subsequent to 1924 Park returned as income the amounts paid to him by the other directors in the years in which paid.  Four of the directors claiming nonliability refused to make any payments to Park.  In his income tax return for the year 1924 Park claimed as a deduction the sum*1981  of $100,000, being a part of the sum paid to the bank in that year.  The respondent disallowed the claim and restored that amount to the net income.  In its income tax return for 1924 the bank claimed deduction of $121,164.69 as a loss growing out of the misappropriation of its funds by Finn, and the deduction was allowed by the respondent.  OPINION.  ARUNDELL: A number of errors are alleged in the petition, but the substance of them is that the respondent erred in refusing to allow a deduction of $100,000 either as a loss sustained or a debt ascertained to be partially worthless in 1924.  It is obvious from the facts in this case, and it is not denied by the respondent, that at the end of 1924 Park was out of pocket something over $100,000.  This, however, does not establish that he is entitled to a deduction.  For tax purposes only those losses are allowable that are specified by statute and are, in the order set out in section 214(a) of the Revenue Act of 1924, losses incurred in trade or business, losses incurred in transactions entered into for profit, and losses arising from casualties.  It is plain that the loss was not the result of a casualty as contemplated by the*1982  statute, and no claim is made that it was such a loss.  It is almost equally evident that a loss of this kind is not one incurred in trade or business, as it is not a part of the trade or business of the president and directors of a corporation to make good the latter's losses.  "A director of a corporation is not engaged in the business of the corporation." . The principal claim of petitioner is that the loss was incurred in a transaction entered into for profit.  We can agree with the argument that when a business man becomes president and director of a bank it is probably with an eye to the profit that will inure to him *1267  from the successful operation of the bank.  But it does not follow that every expenditure he makes while president and director can be considered a loss because somehow connected with the office he holds.  And so with Park.  His putting up a substantial sum to make whole the capital of the bank, while commendable as an effort to keep the doors of the bank open and save the depositors from loss, can not be regarded as a transaction entered into for profit. *1983  It was entirely outside the scope of his duties as president and director.  It may be, as argued, that if the bank closed Park faced a possible loss of business reputation and suit for failure to properly supervise the activities of the embezzling treasurer, but this still would not stamp his payment as a transaction entered into for profit.  We had an almost exactly similar situation in , and , in which the president of a national bank, following the defalcation of the assistant cashier, turned over to the bank securities having a cost and value of something over three times the par value of his stock in addition to paying his pro rata share of an assessment levied on stockholders.  A loss deduction was claimed by reason of the payment of the securities into the bank in order to prevent its being closed.  We held: Petitioner might have taken his loss by permitting the bank to be liquidated.  In that case he would have been permitted his deduction.  He chose instead to put more funds into the venture, giving it new life.  This new investment can scarcely be termed a loss as the term is used in the revenue act, *1984  despite the compelling circumstances under which the funds were paid over to the corporation.  While these funds left the hands of petitioner, they went to enrich a corporation in which he was a substantial stockholder.  Until the result of his investment in this stock is determined by a sale or liquidation of the corporation, it can not be known whether there will be gain or loss.  About the only distinction between the facts in the two cases is that in the Vaughan case there was a double liability on the part of stockholders, and here there was none.  But, as pointed out above, Vaughan met this liability and in addition paid in a substantial sum in securities, and so this attempted distinction vanishes.  We think this case is ruled by the decision in the Vaughan case, and on authority of that case we hold that Park sustained no deductible loss by reason of his payment to the bank in 1924.  We are also of the opinion that the claim for a bad debt deduction can not be allowed.  This deduction is sought on the ground that the bank's claims against Berker and Finn which were assigned to Park turned out to be partially bad before the close of the year, a comparatively small*1985  amount having been collected within the year.  The answer to this is that the money put up by Park was not a loan and there was no "debt," in the sense used in the Revenue Act, owing to him.  Decision will be entered for the respondent.