1931 BTA LEXIS 2163 | B.T.A. | 1931
Lead Opinion
In their contract these stockholders severally agreed “ to indemnify the Company * * * against loss, if any ” that it might thereafter sustain on account of nonpayment of the loans listed in the schedule attached. The gross indemnity was fixed at $200,000, but the prorated share for which each indemnitor was bound was limited to the ratio his stock ownership bore to the total outstanding stock of the bank on April 25, 1922. The amount which the petitioner was bound to pay was $23,480; and it is his contention that when that amount was paid over to the bank in December, 1922, he ipso facto became subrogated, in part, to the rights of the bank as creditor of the several makers of the uncollected notes.
Petitioner’s contentions are summarized in his brief thus:
(1) By the payment of $23,480 made by the petitioner under his obligation as guarantor of the several notes, the makers of said notes became and were indebted to the petitioner in said amount.
(2) That each of the debts so owed to the petitioner by the several makers of said notes were worthless in December, 1922, and were so ascertained and determined by said petitioner to be worthless in said year, by reason and virtue of which petitioner charged the same of£ as a deduction for bad debts in said year and was, accordingly, entitled to take credit for the same as a deduction for bad debts in his income tax return for the year 1922.
It is obvious that the petitioner’s basic error lies in the assumption that his contract made him liable as guarantor of the several unpaid notes; also, that by reason of his having, in part, paid them, the makers became indebted to him by the amount of the payment. Without attempting the impossible task of determining which, if any, or how many of these notes the petitioner acquired an interest in, in December, 1922, we think it clear that he was never, at any time, guarantor of any of them; neither did his liability to the bank depend upon the payment, either in part or in full, of any of them. The petitioner’s contract was one of indemnity and no liability attached, except and until an actual, loss had been sustained by the bank. It was, therefore, an original undertaking upon which the petitioner became primarily liable upon the occurrence of the conditions set forth therein. This condition was one of actual loss to the bank, and could not occur, except, and until it had failed to realize enough from the liquidation of the notes to cover its cash outlay on account of them. It had nothing whatever to do with their payment; and, since we do not know the rate of discount, or their cost, we are unable to say whether the bank ever sustained such a loss as
A number of authorities, including cases decided by the courts and by this Board, have been cited by the petitioner, which he argues support his contentions, but, with the exception of John P. Dillon, 9 B. T. A. 177, none of the supporting facts in the cases cited bear any semblance of analogy to these presented here. In the Dillon appeal, supra, a few of the stockholders of a reorganized bank, who, prior thereto, had guaranteed it against loss in taking over certain assets from an absorbed bank, later, upon pressure from the other stockholders, who refused to share in a prospective loss, effected a compromise in which, by paying into the bank the sum of $100,000 they were released from further obligations under their contract. This loss, being in no way shared by the other stockholders, this Board denied the contention of the Commissioner that it constituted a capital investment and allowed Dillon credit against gross income for the amount he paid, not as a bad debt, but as a loss sustained in the taxable year for which he was not otherwise compensated. In Morris Sass, 7 B. T. A. 557, cited by petitioner, the taxpayer had negotiated loans from a bank upon notes which he guaranteed in advance with the knowledge of the several makers. Being later obliged to pay these notes in full, this Board held that the debts survived in favor of the guarantor. In that case, as in all others cited, the doctrine of subrogation was recognized and applied to facts wherein the payor of the debt was the party secondarily liable and in which he had paid the debt of another in full. E. B. Stephenson, 13 B. T. A. 311, cited by both parties, involved facts essentially different than these. In that case the stockholders purchased the notes upon which the loss was claimed from the bank and took them out. The ownership of the bad debts was not in issue.
The contention of the petitioner in respect to such claim is opposed to the basic theory of subrogation, which, in short, means substitution, or, the elimination of the original creditor and the substitution in his place of the payor of the debt. This, of course, can be done only when the whole of the debt is paid, since there can be no partial substitution of creditors, or Pro tanto subrogation. Hubhard v. Le Barron, 110 Ia. 443; 81 N. W. 681; Knew v. Duvall, 45 Md. 501; McDermott v. Mitchell, 53 Cal. 616; Fender v. Fender (Ga.), 117 S. E. 676; Olsness v. Baird, 52 N. D. 1; 201 N. W. 993; Ames v. Huse, 55 Mo. App. 422; Henry v. Safford, 211 Mo. App. 308; 241 S. W. 951; Fisher v. Columbia Building & Loan Association, 59 Mo. App. 430; Sheldon on Subrogation, 118, 25 R. C. L. 1319; McGrath v. Carnegie T. Co. (N. Y.), 221 N. Y. 92; Pa. Co. v. Philadelphia Co., 266 Fed. 1; Peoples v. Peoples Bros., 254 Fed. 489; U. S. Fidelity & Guaranty Co. v. Union Bank & T. Co., 228 Fed. 448; National Surety Co. v. Salt Lake Co., 5 Fed. (2d) 34; United States v. National Surety Co. (Mo.), 254 U. S. 73. Subrogation as to a part of a debt payable in installments has been allowed, since each installment, when due, constitutes a separate debt, capable of assignment or release.
Aside from the question of subrogation, or bad debts, the real issue which must control our decision turns upon the question whether, after all, the $23,480 paid by the petitioner to the bank represents a deductible loss. The respondent contends that under
The doctrine of subrogation is a pure unmixed equity having its foundation in the principles of natural justice, and from its very nature never could have been intended for the relief of those who were in any condition in which they were at liberty to elect whether they would not be bound; and, so far as X have been able to learn its history, it never has been so applied. If one with the perfect knowledge of the facts will part with his money, or bind himself by his contract in a sufficient consideration, any rule of Taw which would restore him his money or absolve him from his contract would subvert the rules of social order. (Italics supplied.)
The foregoing pronouncement of that doctrine was approved by the Supreme Court of the United States in Aetna Life Insurance Co. v.
At the time the stockholders’ fund of $200,000 was turned over to the bank in December, 1922, there was a determined loss to it in that amount, caused by shrinkage in value of capital assets. This payment repaired that loss and, at the same time, increased the value, pro rata, of every share of its capital stock. It would seem, therefore, that in repairing this loss the petitioner’s stock in the Peoples Trust Company was enhanced in value by the exact amount he paid into the fund and it is difficult to see wherein he sustained any loss in the transaction. Snider B. Ward, 18 B. T. A. 326. The fact that these stockholders chose to make their contributions under an agreement, rather than in response to formal assessments against themselves, as was done in the John C. Paxton case, 7 B. T. A. 92, does not change the character of their transaction, nor their legal status in the premises. Since we have previously decided that a director of a corporation is not engaged in the business of the corporation (Margaret B. McLaughlin, Executrix, 12 B. T. A. 19), there is no basis for allowing the deduction here claimed as a loss sustained in a trade or business. We are of opinion that the respondent correctly rejected the claimed deduction and his action is therefore approved.
Decision will be entered for the respondent.