Putnam v. Commissioner of Internal Revenue
Decision Date | 03 December 1956 |
Docket Number | No. 25,25 |
Citation | 352 U.S. 82,77 S.Ct. 175,1 L.Ed.2d 144 |
Parties | Max PUTNAM and Elizabeth Putnam, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE |
Court | U.S. Supreme Court |
Mr. Richard E. Williams, Des Moines, Iowa, for petitioners.
Mr. Philip Elman, Washington, D.C., for respondent.
The petitioner, Max Putnam, in December 1948, paid $9,005.21 to a Des Moines, Iowa, bank in discharge of his obligation as guarantor of the notes of Whitehouse Publishing Company. That corporation still had a corporate existence at the time of the payment but had ceased doing business and had disposed of its assets eighteen months earlier. The question for decision is whether, in the joint income tax return filed by Putnam and his wife for 1948, Putnam's loss is fully deductible as a loss 'incurred in (a) transaction * * * for profit, though not connected with (his) trade or business' within the meaning of § 23(e)(2) of the Internal Revenue Code of 1939,1 or whether it is nonbusiness bad debt within the meaning of § 23(k)(4) of the Code,2 and therefore deductible only as a short-term capital loss.
The Commissioner determined that the loss was a nonbusiness bad debt to be given short-term capital loss treatment. The Tax Court3 and the Court of Appeals4 for the Eighth Circuit sustained his determination. Because of an alleged conflict with decisions of the Courts Appeals of other circuits,5 we granted certiorari.6
Putnam is a Des Moines lawyer who in 1945, in a venture not connected with his law practice,7 organized Whitehouse Publishing Company with two others, a newspaperman and a labor leader, to publish a labor newspaper. Each incorporator received one-third of the issued capital stock, but Putnam supplied the property and cash with which the company started business. He also financed its operations, for the short time it was in business, through advances and guarantees of payment of salaries and debts. Just before the venture was abandoned, Putnam acquired the shares held by his fellow stockholders and in July 1947, as sole stockholder, wound up its affairs and liquidated its assets. The proceeds of sale were insufficient to pay the full amount due to the Des Moines bank on two notes given by the corporation and guaranteed by Putnam for moneys borrowed in August 1946 and March 1947.
The familiar rule is that, instanter upon the payment by the guarantor of the debt, the debtor's obligation to the creditor becomes an obligation to the guarantor, not a new debt, but, by subrogation, the result of the shift of the original debt from the creditor to the guarantor who steps into the creditor's shoes.8 Thus, the loss sustained by the guarantor unable to recover from the debtor is by its very nature a loss from the worthlessness of a debt. This has been consistently recognized in the administrative and the judicial construction of the Internal Revenue laws9 which, until the decisions of the Courts of Appeals in conflict with the decision below, have always treated guarantors' losses as bad debt losses.10 The Congress recently confirmed this treatment in the Internal Revenue Code of 1954 by providing that a payment by a noncorporate taxpayer in discharge of his obligation as guarantor of certain noncorporate obligations 'shall be treated as a debt.'11 There is, then, no justification or basis for consideration of Putnam's loss under the general loss provisions of § 23(e)(2), i.e., as an ordinary nonbusiness loss sustained in a transaction entered into for profit. Congress has legislated specially in the matter of deductions of nonbusiness bad debt losses, i.e., such a loss is deductible only as a short-term capital loss by virtue of the special limitation provisions contained in § 23(k)(4). The decision of this Court in Spring City Foundry Co. v. Commissioner, 292 U.S. 182, 54 S.Ct. 644, 78 L.Ed. 1200, is apposite and controlling. There it was held that a debt excluded from deduction under § 234(a)(5) of the Revenue Act of 1918 was not to be regarded as a loss deductible under § 234(a)(4). Chief Justice Hughes said for the Court:
292 U.S. at page 189, 54 S.Ct. at page 647.
Here also the statutory scheme is to be understood as meaning that a loss attributable to the worthlessness of a debt shall be regarded as a bad debt loss, deductible as such or not at all.
The decisions of the Courts of Appeals in conflict with the decision below turn upon erroneous premises.12 It is said that the guarantor taxpayer who involuntarily acquires a worthless debt is in a position no different from the taxpayer who voluntarily acquires a debt known by him to be worthless. The latter is treated as having acquired no valid debt at all.13 The situations are not analogous or comparable. The taxpayer who voluntarily buys a debt with knowledge that he will not be paid is rightly considered not to have acquired a debt but to have made a gratuity. In contrast the guarantor pays the creditor in compliance with the obligation raised by the law from his contract of guaranty. His loss arises not because he is making a gift to the debtor but because the latter is unable to reimburse him.
Next it is assumed, at least in the Allen case, that a new obligation arises in favor of the guarantor upon his payment to the creditor. From that premise it is argued that such a debt cannot 'become' worthless but is worthless from its origin, and so outside the scope of § 23(k). This misconceives the basis of the doctrine of subrogation, apart from the fact that, if it were true that the debt did not 'become' worthless, the debt nevertheless would not be regarded as an ordinary loss under § 23(e). Spring City Foundry Co. v. Commissioner, supra. Under the doctrine of subrogation, payment by the guarantor, as we have seen, is treated not as creating a new debt and extinguishing the original debt, but as preserving the original debt and merely substituting the guarantor for the creditor. The reality of the situation is that the debt is an asset of full value in the creditor's hands because backed by the guaranty. The debtor is usually not able to reimburse the guarantor and in such cases that value is lost at the instant that the guarantor pays the creditor. But that this instant is also the instant when the guarantor acquires the debt cannot obscure the fact that the debt 'becomes' worthless in his hands.
Finally, the Courts of Appeals found support for their view in the following language taken from the opinion of this Court in Eckert v. Burnet, 283 U.S. 140, 51 S.Ct. 373, 75 L.Ed. 911:
'The petitioner claims the right to deduct half that sum as a debt 'ascertained to be worthless and charged off within the taxable year' under the Revenue Act of 1926, c. 27, § 214(a)(7), 44 Stat. 9, 27.
283 U.S. at page 141, 51 S.Ct. at page 374. (Emphasis added.)
To continue reading
Request your trial-
Santa Monica Pictures, LLC, v. Commissioner, Dkt. No. 6163-03.
...have, such as, importantly, a right of subrogation against a revitalized New MGM.178 Cf. Putnam v. Commissioner [57-1 USTC ¶ 9200], 352 U.S. 82, 89 (1956); In re Enron Corp., 307 Bankr. 372, 379 (S.D.N.Y. 2004); Restatement (Third) of Suretyship and Guaranty, sec. 27 Petitioner suggests tha......
-
United States v. Generes 8212 28
...a deduction assertable against ordinary income. In each he was unsuccessful in this quest: 1. In Putnam v. Commissioner of Internal Revenue, 352 U.S. 82, 77 S.Ct. 175, 1 L.Ed.2d 144 (1956), the taxpayer was a practicing lawyer who had guaranteed obligations of a labor newspaper corporation ......
-
Acker v. Commissioner of Internal Revenue
...sustained respondent's determinations. We agree. Treasury Regulation 111 § 29.23(k)-6, 26 C.F.R. (1949); Putnam v. Commissioner, 1956, 352 U.S. 82, 92-93, 77 S.Ct. 175, 1 L.Ed.2d 144; Wheeler v. Commissioner, 2 Cir., 1957, 241 F.2d 883; Commissioner of Internal Revenue v. Schaefer, 2 Cir., ......
-
F.D.I.C. v. Hiatt
...of the original debt from the creditor to the guarantor who steps into the creditor's shoes.' " (quoting Putnam v. Commissioner, 352 U.S. 82, 85, 77 S.Ct. 175, 176, 1 L.Ed.2d 144 (1956))). See also State Farm Mut. Auto. Ins. Co. v. Foundation Reserve Ins. Co., 78 N.M. 359, 363, 431 P.2d 737......
-
Arguing the case for a business bad debt deduction.
...at the time the obligation was entered into, the shareholder-guarantor's payment is construed as a contribution to capital. (9) Max Putnam, 352 US 82 (1956)(50 AFTR 502, 57-1 USTC [paragraph]9200), aff'g 224 F2d 947 (8th Cir. 19551(47 AFTR 1562, 55-2 USTC [paragraph]19604), aff'g TC Memo 19......
-
Troubled Waters: Navigating the Tax Issues of Llcs With Bridge Debt
...where taxpayer made fifty-five separate loans over ten years, and devoted substantial time to lending activity).22. See Putnam v. Comm'r, 352 U.S. 82 (1956); Eberhart v. Comm'r, 36 T.C.M. 660 (1977).23. 136 T.C. 263 (2011).24. See Butler v. Comm'r, 36 T.C. 1097 (1961) (acq.); Stanchfield v.......
-
Postliquidation payment on loans guaranteed by a shareholder.
...debt becomes the guarantor's obligation. Thus, the loss the guarantor sustains is a loss from the worthlessness of the debt; see Putnam, 352 US 82 A payment under a loan guaranty is treated as a worthless debt under Regs. Sec. 1.166-9(d) if the agreement: Was entered into in the course of t......