Ward v. Commissioner

*326 The respondent has asserted a deficiency in income tax for the year 1922 in the amount of $818.37. The petitioner asserts that the respondent erred in disallowing as a deduction from his gross income in the taxable year a certain amount claimed to have been paid on account of his liability for sundry bad loans made by a national bank of which he was a director. The parties have filed a stipulation of the facts which the Board accepts and adopts as its findings of fact.

FINDINGS OF FACT.

During the year 1922 petitioner was a resident of St. Louis, Mo., and filed his Federal income-tax return for the calendar year 1922 with the collector of internal revenue at St. Louis, Mo.

Prior to and during the*2077 calendar year 1922 petitioner was a stockholder and director of the Republic National Bank of St. Louis, Mo., hereinafter called the bank.

While the taxpayer was a director of said bank, certain loans were made by it on notes secured by land in Florida, and also certain notes were purchased by it through Smith and Ricker, brokers located in the Livestock Exchange Building, Kansas City, Mo., the said notes amounting to $200,000.

During the year 1922 the books of the said bank were examined by a national bank examiner, who notified the officers and directors of the bank that the aforesaid notes were not approved as assets of the bank, and that same should be disposed of and replaced with money or other good assets.

The petitioner, together with other directors of the bank, thereupon upon sought to induce one J. A. Lewis to accept the office of president of the bank.

As a condition precedent to accepting the presidency of the bank, the said J. A. Lewis required petitioner and other directors of the *327 bank to give him a written guaranty that petitioner and other directors would, before December 31, 1922, replace the said $200,000 of notes with good assets.

The*2078 petitioner and other directors of the bank thereupon executed an agreement in writing, guaranteeing to withdraw the said $200,000 of notes and, pursuant to said guaranty agreement, withdrew from the bank during the year 1922 the aforesaid notes and replaced same with cash and Liberty bonds equal in amount to the face value of said notes.

The aforesaid notes, amounting to $200,000, were known by petitioner and other directors of the bank to be worthless at the time of executing the aforesaid agreement of guaranty.

There were 10,000 shares of capital stock of the bank outstanding, of which 5,879 were held by the directors of the bank. The balance of its capital stock was held by other stockholders who were not directors, and who were not called upon the replace any part of said worthless notes, and no money was paid in or bad paper replaced by any of the stockholders who were not directors of the bank.

The petitioner and other directors who were parties to the said agreement of guaranty turned said worthless notes over to J. A. Lewis as trustee for the benefit of petitioner and said directors.

Said trustee has not been able to collect and return any money to petitioner and*2079 the other directors who were parties to the said agreement of guaranty.

Pursuant to the said agreement of guaranty petitioner paid in cash to the bank the sum of $6,715, this amount representing his pro rata share of the said worthless notes assumed by him in accordance with the said agreement of guaranty, petitioner's share being determined upon the number of shares of capital stock of the bank held by him.

In his return filed with the collector of internal revenue at St. Louis, Mo., for the calendar year 1922, petitioner deducted the said sum of $6,715 as a loss on payments made to the bank.

In determining the deficiency set forth in the deficiency letter dated March 9, 1927, a copy of which is attached to and made a part of the petition filed by petitioner with the Board, respondent disallowed the said sum of $6,715 as a loss, holding that the said sum of $6,715 represented a contribution to the capital of the bank.

OPINION.

LANSDON: The petitioner seeks to deduct from his gross income the amount of $6,715, paid to a national bank of which he was a director, in the circumstances set forth in our findings of fact, as a *328 loss sustained in the taxable year*2080 in the operation of a trade or business and not compensated for by insurance or otherwise, as provided in section 214(a)(4) of the Revenue Act of 1921. He contends that he made the payment in question on account of his liability as a director, for bad loans made by the bank, that he received no benefits from such payment, and that no part of the same has ever been repaid to him. The Commissioner disallowed the deduction claimed on the theory that the payment was in effect an assessment on the stock of the bank owned by the petitioner and therefore must be regarded as an additional capital investment in such stock and in support of his position relies on his regulations and our decision in , and .

The Revenue Act of 1921 provides for the deduction from gross income of losses sustained in a taxable year, as follows:

SEC. 214. (a) That in computing net income [of individuals] there shall be allowed as deductions:

* * *

(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;

(5) Losses sustained during the taxable*2081 year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *

Since the deduction here in question is claimed as a business loss sustained in the taxable year, it can be allowed only if it comes within one or the other of the statutory provisions cited above. We have hitherto held that a director of a corporation is not engaged in the business of the corporation. , and cases cited thereunder. Upon authority of that decision we conclude that the loss claimed herein was not sustained in the trade or business of the petitioner. The evidence indicates that the notes that were taken out of the bank and trusteed for the benefit of the petitioner and his fellow directors were regarded as worthless at the time of the transaction, that no collections have ever been made on such notes, and that the petitioner was aware that he was getting nothing of value in exchange for his contributions of cash and Liberty bonds. It is obvious therefore, that the purchase of the notes was not for profit. If said purchase were to protect*2082 his investment, no loss has as yet been sustained. Cf. ; .

Reviewed by the Board.

Decision will be entered for the respondent.