Ellisberg v. Comm'r of Internal Revenue, Docket No. 10060.

• Decision Date: 26 September 1947
• Docket Number: Docket No. 10060.
• Citation: 9 T.C. 463
• Parties: E. J. ELLISBERG, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

9 T.C. 463

E. J. ELLISBERG, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 10060.

Tax Court of the United States.

Promulgated September 26, 1947.

In 1937 petitioner's son, who was at that time unemployed and without resources, went into the retail business. Petitioner furnished to him both credit and capital. Shortly thereafter the son borrowed additional capital from a bank and obtained petitioner's endorsement on notes given for such loans. Petitioner knew nothing of the condition of his son's business except that it was not good. He endorsed the notes only because he wanted to see his son stay in business. In January 1939 the notes became due and the son was unable to pay them. Thereupon petitioner gave his own note to the bank in payment of the son's notes. Later in 1939 the son went into bankruptcy and was discharged. The son did not list any debt owing to petitioner arising by reason of petitioner's payment of the son's notes as part of his liabilities, nor did the petitioner file any claim on account thereof. In 1941 petitioner paid the note given by him to the bank in 1939, and claimed a bad debt deduction in the amount of such payment in 1941. Held, petitioner is not entitled to the bad debt deduction claimed. Norman Block, Esq., for the petitioner.

George J. LeBlanc, Esq., for the respondent.

The Commissioner determined a deficiency in petitioner's income tax for the taxable year ended December 31, 1941, in the amount of $1,972.90. The only question presented is whether the Commissioner erred in disallowing a deduction claimed for a bad debt loss.

FINDINGS OF FACT.

Petitioner is a resident of Raleigh, North Carolina, who filed his income tax return for the year 1941 with the collector of internal revenue for the district of North Carolina. The income of petitioner from his principal business, which is reflected in his return, is computed by use of inventories, while his income from other sources having no relation to that business is reported on a cash receipts and disbursements basis.

Petitioner's business is that of operating a ladies' ready-to-wear store in Raleigh, in which he has been engaged since 1914. The deduction which is involved in this proceeding, however, did not arise from and has no connection with that business.

In 1937 petitioner's son, Bernard, then about 25 years old, decided to open a ladies' ready-to-wear store of his own in Charlottesville, Virginia. At that time he was unemployed. He had studied law, but had given up the practice. Thereafter, and prior to 1937, he had been employed by chain stores and had had other jobs. When he decided to enter business in Charlottesville he had no property and no credit. He borrowed from his father approximately $6,700, which he used to prepare and open the store, and he gave his father demand notes therefor. These are not the notes involved here. Bernard's original stock was purchased by him in 1937 upon the credit of his father, the petitioner, who guaranteed, either orally or in writing, Bernard's accounts. A large part of Bernard's later purchases were made either on the strength of petitioner's guarantee of Bernard's accounts or because the vendors knew that Bernard was petitioner's son. Later on he needed additional capital, which he arranged to borrow from the Peoples National Bank in Charlottesville, which agreed to make the loans only if Bernard could secure an acceptable endorser of the notes. He requested his father to endorse his notes and his father did so. Petitioner knew little about Bernard's business during 1937 and 1938 except that Bernard ‘always needed more money.‘ In the early part of 1939 he withdrew his written guarantees of Bernard's accounts. In January of 1939, when Bernard's notes matured, the bank indicated to petitioner, the endorser, and to his son, the maker, that it would not extend these notes, but would accept notes of petitioner, endorsed by petitioner's wife, in lieu of Bernard's notes, endorsed by petitioner. Otherwise it would require payment of the loans. The amount then due was $8,000. Petitioner thereupon gave the bank his note, endorsed by his wife, in the face amount of $8,000. On the same date Bernard gave to petitioner herein his note payable on demand for $8,000.

Bernard's business declined rapidly during 1939, and in December of that year he filed a voluntary petition in bankruptcy and later received his discharge as a bankrupt. His schedule of assets and liabilities filed in the bankruptcy proceeding listed liabilities in the total amount of $38,673.03 and assets in the total amount of $17,730.98. The liabilities thus scheduled did not include any liability to petitioner by reason of petitioner's endorsement or payment of Bernard's notes to the bank.

Petitioner knew of the bankruptcy proceeding, but did not file a claim therein for the amounts of money owed him by Bernard. However, petitioner concedes that had he filed such a claim he would have received a dividend amounting to $1,641.20 on a claim of $8,000. He, therefore, has reduced his claim for a deduction in this case to that extent.

In August 1939 Bernard submitted a financial statement to another Charlottesville bank in connection with his application for a loan. He did not include in his liabilities therein listed any liability to petitioner by reason of petitioner's payment of Bernard's notes.

Petitioner paid $7,053.24 on his note to the bank in 1941 and claims a deduction by reason thereof in the amount of $6,358.80 ($8,000-$1,641.20).

At the time when petitioner endorsed Bernard's notes in 1937, Bernard was without resources and was likely never to have any. There is no proof that Bernard was ever solvent. Petitioner never endorsed any notes except the notes of Bernard here in question. He endorsed these because Bernard was his son and petitioner waned to help him stay in business.

OPINION.

KERN, Judge:

The respondent disallowed the deduction of the bad debt involved here from petitioner's 1941 gross income with the explanation attached to the notice of deficiency that the payments made by petitioner on his...