Helvering v. Price

• Decision Date: 25 March 1940
• Docket Number: No. 559,559
• Citation: 309 U.S. 409,84 L.Ed. 836,60 S.Ct. 673
• Parties: HELVERING, Commissioner of Internal Revenue, v. PRICE
• Court: U.S. Supreme Court

309 U.S. 409

60 S.Ct. 673

84 L.Ed. 836

HELVERING, Commissioner of Internal Revenue,

v PRICE.

No. 559.

Argued March 5, 6, 1940.

Decided March 25, 1940.

Messrs. Robert H. Jackson, Atty. Gen., and Richard H. Demuth, of New York City, for petitioner.

Mr. George D. Brabson, of Washington, D.C., for respondent.

Mr. Chief Justice HUGHES delivered the opinion of the Court.

Respondent in his income tax return lor 1932 claimed a deduction for a loss upon a contract of guaranty. The Board of Tax Appeals sustained the Commissioner in refusing to allow the deduction, and the Circuit Court of Appeals reversed. 4 Cir., 106 F.2d 336. Because of an alleged conflict with Eckert v. Burnet, 283 U.S. 140, 51 S.Ct. 373, 75 L.Ed. 911; Jenkins v. Bitgood, 2 Cir., 101 F.2d 17, and Ferris v. Commissioner, 2 Cir., 102 F.2d 985, we granted certiorari, January 15, 1940, 308 U.S. 548, 60 S.Ct. 385, 84 L.Ed. —-.

The facts as found may be thus summarized: In 1929 the Atlantic Bank and Trust Company of Greensboro, North Carolina, was merged with the North Carolina Bank and Trust Company. The latter accepted conditionally certain assets of the Atlantic Bank called 'A' assets, and certain other assets, called 'B' assets, were pledged to that Bank with authority to charge against them any losses which might be established in realizing upon the 'A' assets. Respondent and three other stockholders of the Atlantic Bank executed an agreement of guaranty, to the effect that if the North Carolina Bank failed to realize a certain sum from the 'A' assets within two years they would make up the deficiency in an amount not exceeding $500,000. The agreement provided that any sum realized from the 'B' assets were to be applied first to any losses occurring in the 'A' assets and then to the reimbursement of the four guarantors. The period for realizing upon the 'A' assets was extended until September, 1932.

In June, 1931, the North Carolina Bank advised the guarantors that the 'B' assets were not in such shape that the Bank could use them to the extent necessary for banking purposes and requested the guarantors to put their guaranty into a bankable form so that it could be used by the Bank to obtain credit. Respondent accordingly gave to the Bank his note for $125,000 and endorsed the note of C. W. Gold, another guarantor, for a like amount and assigned certain securities to the Bank as collateral for the payment of his guaranty. The Bank agreed that respondent's ultimate liability should not exceed $250,000. At the end of 1931, the guaranty agreement was still in effect. The 'B' assets were still in the process of collection. No demand had been made upon respondent. While it was known that there would be some loss to the guarantors, it was not definitely known in 1931 what the loss would be, and the guarantors had reason to believe that there would be a substantial reimbursement from the 'B' assets of any losses.

In the early part of 1932, financial conditions being worse, the Bank concluded that it would have to collect upon the guaranty and called upon respondent to make a final settlement of his obligations. Accordingly, in March, 1932, respondent made his note to the Bank for $250,000 and received back the two notes. The Board of Tax Appeals found that both respondent and the Bank considered this to be a final payment of the two notes which had been given under the guaranty. The Bank retained the same collateral for the $250,000 note that it had previously held, and in December, 1932, respondent substituted therefor certain securities of his own.

Respondent claimed a loss in 1932 in the amount of $125,000, that is, for his one-half of the guaranty. He did not then claim a loss on the other one-half because he still had a claim against the estate of Gold (who had died in 1932) for reimbursement. For that one-half, representing Gold's part of the guaranty, respondent claimed a loss in 1933 and that deduction is not here involved.

Respondent kept his accounts upon a cash basis. The Board of Tax Appeals ruled that respondent was not entitled to the deduction of $125,000 in 1932, upon the ground that 'he made no outlay of cash' in the purported payment; he had satisfied his liability as guarantor 'by a shifting of the form of his liability'. His loss would be deductible 'in the year in which he pays the note'.

Respondent insists initially that the transaction in 1932 was considered by the parties as constituting a payment of respondent's liability under the guaranty, and that this payment is a fact found by the Board of Tax Appeals and is not open to review. But the findings of the Board disclose the entire transaction, and...