Shiman v. Commissioner

DAVID SHIMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Shiman v. Commissioner Docket No. 41139. United States Board of Tax Appeals 21 B.T.A. 288; 1930 BTA LEXIS 1873; November 12, 1930, Promulgated *1873 Held that in the absence of evidence of a bona fide indebtedness claimed as a debt ascertained to be worthless, the deduction is not allowable. Albert I. Coe, C.P.A., for the petitioner. W. F. Gibbs, Esq., for the respondent. TRAMMELL *288 This is a proceeding for the redetermination of a deficiency in income tax for 1924 in the amount of $1,159.29. The deficiency arises from the action of the respondent in disallowing a deduction claimed as a bad debt by the petitioner on account of the payment by him during the year to brokers pursuant to his guarantee of an account of another person. FINDINGS OF FACT. The petitioner is an individual residing in New York City. Some time prior to July 1, 1920, one Morris Oppenheim, a brother-in-law of the petitioner, had been trading in stocks and bonds through a margin account which was carried by Halle & Stieglitz of New York, who were brokers and members of the New York Stock Exchange. Oppenheim had four accounts in his name. One of them belonged to the petitioner, and he had a fourth interest in another account. The first account started was the Morris Oppenheim Loan Account. The other*1874 accounts were started about the time the letter of guarantee was written by the petitioner. Oppenheim's account was not in good condition. He had securities but the brokers wanted more and asked Oppenheim to get a letter from Shiman, the petitioner, who was a wealthy man, guaranteeing his account. These accounts were started at different times. On July 1, 1920, the petitioner guaranteed in writing that he would be responsible for the four accounts. On that date Oppenheim was solvent, and was employed by Shiman on a salary basis, and among other things was attending to the firm's banking business, but Oppenheim left Shiman's firm in December, 1921, and went with the New York Buttons Works in which he had invested about $32,000, which concern failed in 1924. This resulted in Oppenheim's loss and caused him financial embarrassment. In October, 1924, the brokers called for the payment of $10,000 additional margin. Oppenheim was unable to respond and the petitioner, pursuant to his guarantee, paid this amount of $10,000 on October 28, 1924, for Oppenheim to satisfy the brokers. At that *289 time the particular account, however, included certain securities belonging to*1875 the petitioner and after the payment dividends which were paid were sent to Oppenheim, who had the matter "rectified" to give the petitioner credit therefor. The securities were then, at Oppenheim's suggestion, sold out by the brokers, leaving a balance due the brokers of something in excess of $26,000 and Oppenheim without assets of any material value. He was then sixty-four years of age and without a position until he secured employment as set out below. Immediately thereafter the petitioner made inquiry of Oppenheim as to his financial condition and found that he had sustained business losses aside from this particular transaction and was unable to pay anything. After the payment of $10,000 by petitioner on October 28, 1924, the petitioner subsequently was required to pay the balance due the brokers in excess of $26,000. In 1924 Oppenheim secured a position at $75 a week and in 1925 secured another position at $100 a week. Oppenheim had other indebtedness aside from that in connection with the payment by the petitioner of the guarantee to the brokers. The petitioner claimed a deduction on account of the payment aforesaid as a debt ascertained to be worthless and charged*1876 off. The respondent disallowed the deduction and asserted the deficiency. OPINION. TRAMMELL: The respondent denied the deduction of $10,000 claimed in this case apparently upon the ground that the petitioner voluntarily forgave the debt, and in his argument he takes the position that no debt is shown to have existed, that the payment by the petitioner constituted a gift, but in any event if this was a debt it was forgiven by the petitioner. It is alleged in the petition that the petitioner believed that any losses that might be sustained on account of the transaction would be paid by Oppenheim. This allegation in the petition was denied in the answer, and there is no testimony on this point. There is no testimony that Oppenheim ever agreed to repay the petitioner any of the amounts which might have been advanced or paid by him, either in writing or orally. There is no testimony that the petitioner ever asked Oppenheim to pay. He did ask Oppenheim what his financial condition was. When the burden of proof is upon the petitioner to show a bona fide indebtedness, which the petitioner expected would be repaid, there should be some evidence on this question aside from the*1877 evidence of the payment and the financial condition of the debtor. Oppenheim was the petitioner's *290 brother-in-law and it appears that the petitioner himself had some interest in one or more of the accounts which he had guaranteed. The letter of guarantee was for four accounts and at least one of the accounts carried in the name of Oppenheim was the petitioner's account. In the Oppenheim loan account, which is the particular account on which petitioner paid the $10,000 on October 28, 1924, which gives rise to this controversy, it appears that there were certain securities belonging to the petitioner placed in the account before the aforesaid payment was made. After the payment by the petitioner on the account of Oppenheim, dividends were paid to Oppenheim on securities included in the account. Oppenheim returned these dividends and had them made payable to the petitioner, to whom the securities belonged. The petitioner did not testify in this case and offered no testimony as to whether the considered that the transaction gave rise to a debt or on the question of forgiveness. The fact that the petitioner paid out the money and the testimony as to the financial condition*1878 of Oppenheim are not sufficient on these points. We do not think that the fact that the payment by the petitioner was pursuant to his written guarantee is sufficient under the facts and circumstances of the case to show the creation of the relationship of debtor and creditor or that if any indebtedness were created that it was not forgiven, even if it be conceded that an implied contract to repay any amounts paid out by the petitioner would have arisen between parties dealing at arm's length. It was doubtless the relationship between the parties which was the principal basis for the Commissioner's determination in this case. This petitioner should have introduced some evidence to overcome the presumption of the Commissioner's determination. From the testimony in this case it may well be that there was a gift made by the petitioner to Oppenheim or that the petitioner voluntarily forgave the indebtedness if one existed. While the petitioner does not contend in this case that he is entitled to a deduction on account of a loss sustained otherwise than as a bad debt, we do not think that there is any merit in this theory. The only other basis on which he would be entitled to a deductible*1879 loss would be on account of a loss incurred in trade or business or in a transaction entered into for profit not connected with his trade or business. It is clear that any loss sustained in this transaction was not in connection with the petitioner's trade or business, nor do we think that it arose from any transaction entered into for profit. Reviewed by the Board. Judgment will be entered under Rule 50.