Howell v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 16 February 1931 |
| Docket Number | Docket No. 30097. |
| Parties | CHARLES M. HOWELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Daniel V. Howell, Esq., and Charles M. Howell, Esq., for the petitioner.
L. A. Luce, Esq., for the respondent.
The respondent has asserted a deficiency of $6,595.85 in income tax against the petitioner for the calendar year 1922, which this appeal seeks to review. As ground for the relief sought the petitioner alleges that the respondent committed error in disallowing a claimed deduction from his gross income of $21,120, for loss sustained in that year on account of bad debts. The petitioner also alleges that his claim of $21,120, taken in his return on account of these alleged bad debts, is $2,360 less than his actual loss on such account and, therefore, asks that his gross income for 1922 be reduced by the full sum of $23,480 in recomputing his tax liability for that year.
FINDINGS OF FACT.
The petitioner is an individual residing at Kansas City, Mo., and engaged in the general practice of law. In the taxable year he was attorney, stockholder and director of the Peoples Trust Company, a banking institution of that city that had been organized prior thereto by interests controlled by the firm of Smith & Ricker, cattle-loan brokers. The firm of Smith & Ricker was a copartnership composed of G. M. Smith and George E. Ricker, both of whom were stockholders and directors of the Peoples Trust Company on March 14, 1922. G. M. Smith was also prominently connected with the Commonwealth National Bank of Kansas City, Mo., which failed in the early part of 1922. Coincident with the failure of the Commonwealth National Bank, or immediately prior thereto, in January, 1922, Smith & Ricker became financially embarrassed and assigned all of its assets to a trustee in liquidation. At the time of such assignment it was believed by the petitioner and his associates in the Peoples Trust Company that G. M. Smith personally was financially responsible to meet all the obligations of that firm, without regard to his copartner, Ricker.
In the early part of 1922, the Peoples Trust Company was the holder of more than $400,000 worth of cattle-loan paper which had been negotiated through the firm of Smith & Ricker and discounted by it in prior years. Much of this paper had been previously renewed and was either then overdue or in such condition that further renewals were required. In part it was secured by mortgages on cattle, sheep, horses or real estate, and all was endorsed by Smith & Ricker as partners and as individuals. On March 14, 1922, a meeting of the board of directors of the Peoples Trust Company was held in which the financial difficulties of Smith and Ricker were discussed. At this meeting the president of the Trust Company stated that in view of the difficulties that Smith and Ricker were in, there might be some trouble for the bank on account of their close connection with it. Also, that in view of the bank's holdings of more than $400,000 of loan paper discounted through that firm, it might "serve a useful purpose and ease public opinion" in respect to the bank if the board of directors and stockholders would guarantee the bank against loss on certain specific notes. He also suggested that, in his opinion, the best interests of the bank would be served if both Smith and Ricker would sell their stockholding in the Peoples Trust Company to other stockholders and retire from the board of directors. Minutes of this meeting are recorded in the books of the Peoples Trust Company, in recitals which, so far as pertinent here, are as follows:
The regular monthly meeting of the directors of the Peoples Trust Company was held at its banking rooms March 14th, 1922. Those members present:
W. T. Grant J. J. Lynn C. M. Howell E. T. Richards T. H. Mastin G. M. Payne Wilson D. Wood Aldridge Corder R. P. Combs O. F. Mehornay Chas. S. Alves
Mr. Chas. M. Howell presided.
The minutes of the last monthly meeting were read and approved.
The President stated that he would like to acquaint the Board fully with reference to the Smith and Ricker paper and read a letter summarizing the information obtained up to this time, a copy of which is spread on these minutes.
On motion of Mr. W. T. Grant after some discussion the President was authorized to sign the agreement formulated by the Committee holding the personal assets of G. M. Smith and George E. Ricker which was formally carried. Mr. Howell stated that in his opinion we gave up no rights in signing this agreement and it had a tendency to preserve the assets and keep them in liable hands, and that our signing it would have a moral influence on keeping the matter out of the bankrupt court.
On April 11, following, the minutes of the Peoples Trust Company show a further meeting of its board of directors, at which the following recorded action was taken:
The regular monthly meeting of the Board of Directors of the Peoples Trust Company was held at its banking rooms April 11th, 1922. Those present were:
W. T. Grant Aldridge Corder Chas. M. Howell Wilson D. Wood T. H. Mastin G. M. Payne R. P. Combs J. J. Lynn Chas. S. Alves
Mr. W. T. Grant presided.
* * * * * * *
The contract drawn by Mr. Howell providing for the guaranty of $200,000 against the paper from the office of Smith and Ricker and the pledging of the money and securities to protect that guaranty was read and Mr. Howell stated that he would have it in a permanent form within a few days. A committee composed of Mr. Howell, Mr. Garvey and Mr. Alves was appointed to serve in caring for and carrying out that agreement.
At some time after the first above-mentioned meeting, on April 25th following, Smith and Ricker sold their stock holdings in the Peoples Trust Company to other stockholders, and on said last mentioned date an agreement was entered into between said trust company and its stockholders, in words and figures as follows:
INDEMNITY AGREEMENT
THIS AGREEMENT by and between the PEOPLES TRUST COMPANY of Kansas City, Missouri, a corporation engaged in the banking business (herein designated "Company") First Party, and the undersigned, Chas. S. Alves, Wilson D. Wood, J. T. Duncan, R. P. Combs, Aldridge Corder, Helene Corder, J. C. Davis, E. T. Richards, Bruce Dodson, J. W. Garvey, W. T. Grant, George T. Cook, Ethel B. Cook, R. L. Mehornay, O. F. Mehornay, R. B. Garvey, Chas. M. Howell, T. H. Mastin, U. S. Epperson, J. J. Lynn, H. E. Minty, G. M. Payne, W. F. Waller, F. L. Zahner, E. F. Swinney, Jno. A. Siemon, (herein designated "Indemnitors") Second Parties, WITNESSETH:
(1) That for and in consideration of the payment of One Dollar ($1.00) to the Indemnitors by the Company, the receipt of which is hereby acknowledged, and other valuable consideration, the Indemnitors hereby agree to severally indemnify the Company in the maximum amount of Two Hundred Thousand Dollars ($200,000.00) against loss, if any, which may be hereafter sustained on account of non-payment of certain loans now held by the Company in its assets and commonly designated as the Smith and Ricker loans. For identification, a Schedule of said loans is hereto attached and marked "Exhibit A".
(2) The indemnification herein provided for shall be several and not joint and no joint liability as between the Indemnitors is intended to be created by this instrument. Each Indemnitor hereby assumes and agrees to pay as and when same occur any loss or losses not exceeding in total Two Hundred Thousand Dollars ($200,000.00) resulting to the Company on account of said loans to the extent and in the proportion only that the stock held by him in said Company at the time of the execution of this agreement bears to the total of all the capital stock of said company then outstanding.
(3) For the purpose of securing the payment by each Indemnitor of any sums which he may be obligated to pay under this agreement, each Indemnitor agrees to deposit within ten (10) days after the execution of this agreement in cash or in bonds of the United States Government, an amount equal to that proportion of Two Hundred Thousand Dollars ($200,000.00) which the stock owned by said Indemnitor bears to the total of all of the stock of the company. Said cash or securities shall be deposited with a committee composed of J. W. Garvey, Chas. S. Alves, and Chas. M. Howell. Said committee shall have full power and authority to dispose of any or all of the securities belonging to any Indemnitor, in the event said Indemnitor does not meet the payments required of him, as herein provided, and to use the proceeds of any such sale for the purpose of liquidating the obligations of any such Indemnitor created by this agreement as they may appear.
(4) It is intended and agreed that as and when losses on said loans shall occur, each Indemnitor will pay his respective portion to the Company in cash and that upon such payment a proportionate part of the securities deposited by each Indemnitor respectively shall be returned to him by the committee hereinbefore provided for.
(5) Subject to the obligations imposed by this agreement, the cash or securities deposited by the Indemnitors shall be and remain the property of the Indemnitor respectively depositing same and all interest accruing on said securities shall accrue to and be paid to such Indemnitor.
(6) When all of the loans referred to herein and specified in "Exhibit A" have either been paid or the loss, if any, on account of non-payment of any of them shall have been determined and the indemnity thereon paid to the company, as herein provided for, the committee named in Section Three shall make a written accounting to each Indemnitor and shall return to each the cash or bonds deposited by him, less any deductions made therefrom in accordance with the provisions of Sections Three and Four hereof. Said committee is hereby empowered and authorized to do any and all...
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