Lead Opinion
OPINION.
Petitioner claims that he is entitled to deduct $5,934.07, the sum which he paid in 1941 to the guardian of the beneficiary of the trust involvеd under the. settlement which was approved by the Supеrior Court of California. The deduction is claimed under section 23 (k) (1) of the Internal Eevenue Code, as amendеd by section 124 of the Eevenue Act of 1942, which relates to deductions for debts which become worthless in the taxable year. The question is whether an indebtedness owing by Jacobs to Trimble came into existence and resulted from the payment which Trimble made in 1941 under a joint and several liability of the trustees. If a debt came into existencе, the facts show that such debt was worthless in 1941, during which year Jacobs was insolvent.
The facts are that Jacobs, who withdrew the trust fund, received all of the benefits from the fund, and that рetitioner, the cotrustee, was, at the most, only negligent in placing his confidence in Jacob’s ability to repay the trust. Jacobs agreed to restore the funds to the trust, and at the time Trimble believed that Jacobs had property out of which he could realize sufficient to rеpay the trust. Under such facts, petitioner was not equally at fault with Jacobs in the breach of the trust, and, since Jаcobs was substantially more at fault than petitioner аnd received the full benefit from the breach of the trust, hе was obligated to make contributions to petitioner, his cotrustee, to the extent of the benefit which he rеceived, which was equal to the money petitioner paid under his separate liability to the guardian of the beneficiary. See Restatement of the Law of Trusts, vol. 1, pp. 801-804, ¶258 (d) and (f); In re Whitney's Estate,
It is held that Jacobs was indebtеd to petitioner for the amount he paid to the guardian of the beneficiary of the trust, and that the indebtednеss became worthless in 1941.
Decision will be entered for the petitioner.
Notes
See Mertens, Law of Federаl Income Taxation, vol. 5, par. 30.11, p. 367, where it is stated, in рart, as follows:
“A Deductible Debt Must Have Value When Acquirеd. A voluntary loan which gives rise to a debt which is worthless when acquired — in the sense that it has no value — may not then or subsеquently be deducted as a bad debt. Such an advance is equivalent to a gift; in any event, a taxpayer may not create for himself a right to a deduction by making an аdvance without reasonable expectation of repayment. There must exist a real and not fictitious or disembodied debtor-creditor relationship.
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“Wherе the debt is created involuntarily the foregoing rule doеs not apply and the taxpayer may be allowеd a bad debt deduction, the worthlessness of his claim being in fаct the element justifying his right to the deduction. This rule finds illustration in the сases of an endorsement or the assumption of thе obligation by a surety. In such cases the debt arises only when the endorser or surety pays [citing Shiman v. Comm., 60 Fed. (2d) 65], and he pays only if the prior obligor is unable to do so. In such cases a bad debt deduction may be allowed.”