Summary
In Hoyt v. Commissioner, (C. A. 2) 145 F. 2d 634, the same court held that where a mother guaranteed her daughter's brokerage account knowing that it was probable that the daughter could not pay any loss or deficit for which taxpayer might become liable because of the guarantee, the loss sustained by taxpayer was not deductible as a debt which became worthless.
Summary of this case from Thompson v. Comm'r of Internal RevenueOpinion
No. 63.
November 20, 1944.
Petition for Review of a Decision of the Tax Court of the United States.
Petition by Cornelia B. Hoyt for review of a decision of the Tax Court of the United States redetermining deficiency in income tax determined by the Commissioner of Internal Revenue.
Affirmed.
All the facts considered by the Tax Court were stipulated by the parties as follows:
"In the year 1929 Isabel H. Sloane, daughter of petitioner, opened a margin account with the brokerage firm of Jas. B. Colgate Co., 44 Wall Street, New York, New York. On March 31, 1938, the petitioner, at the request of her daughter, Isabel H. Sloane, obligated herself in writing, to pay any and all losses that the said Jas. B. Colgate Co. might sustain, by reason of the margin account of Isabel H. Sloane. At the time petitioner executed the guaranty agreement she knew that the probability was that Isabel H. Sloane could not repay any loss or deficit for which this petitioner might become liable as a result of the execution of said guaranty agreement. At the time of the execution of said guaranty agreement the said Isabel H. Sloane had no assets of her own that she could deposit as additional collateral for the said margin account, or any other assets out of which a judgment could be satisfied. After the execution of said guaranty agreement, the said petitioner had no control over the brokerage account guaranteed as aforesaid, and received no notices of any transactions which took place in said account. On September 16, 1940, the margin account of Isabel H. Sloane with the firm of Jas. B. Colgate Co. was liquidated with a deficit of $4,564.16. This unpaid balance in the margin account of the said Isabel H. Sloane was paid by transfer of petitioner's cash held by Jas. B. Colgate Co. and for which unpaid balance petitioner was liable under the aforesaid guaranty. Throughout the periods mentioned herein and even prior and subsequent thereto, petitioner has been compelled to contribute to the support of the said Isabel H. Sloane and her family. The amount of $4,564.16, which was transferred from petitioner's account by Jas. B. Colgate Co. for the purpose of satisfying the deficit in the margin account of Isabel H. Sloane has not been repaid."
Attached to, and made a part of, the stipulation is the written guaranty of March 31, 1938, by which the taxpayer in substance agreed to hold the brokerage house harmless from and to pay on demand, any losses on the account carried by the daughter; taxpayer gave the brokerage house a lien upon any securities or equities they might hold in her own account as collateral security for the daughter's account; and waived notice of all transactions in her daughter's account. Also attached to, and made a part of, the stipulation is a statement showing, inter alia, that when the taxpayer executed the guaranty, the daughter owed the brokerage house $7,437.64 secured by securities with a market value of $8,904, leaving an "equity" of but $1,466.36.
The guaranty reads as follows:
"Messrs. Jas. B. Colgate Co., 44 Wall Street, New York, N Y
"Dear Sirs:
"In consideration of your carrying the account of Isabel H. Sloane or of your opening any new account or accounts for the said Isabel H. Sloane under such terms and conditions as you may deem best, I hereby agree to guarantee and hold you harmless from and to promptly pay you on demand any debit balance now or hereafter due thereon and any and all losses now existing on said account or accounts or hereafter arising thereon or therefrom.
"I hereby expressly waive demand and notice of default, as well as of all notices concerning said account or accounts and changes therein from time to time, or of the manner of conducting or closing the same, or of notice of the acceptance of this guaranty. I also waive any requirement of legal proceedings on your part against said Isabel H. Sloane.
"I agree that you shall have a lien on and may hold as collateral security for said account or accounts any and all securities and equities you may hold or have in any account for me at any time and I agree that the assertion or enforcement by you of said lien shall not release me as guarantor or otherwise affect this guaranty or my liability for any debit balance or losses on said account or accounts. I further agree that any demand that I perform this guaranty or any action or proceeding brought to enforce the same or my liability hereunder shall not release or otherwise affect said lien, and that you shall at all times have both of said remedies to protect and compensate you against any loss or debit balance due on said account or accounts.
"I also agree that this guaranty is a continuing one and shall cover the period of existence of said account or accounts and I expressly consent that said account or accounts may be changed by Isabel H. Sloane from time to time by the purchase and sale of securities or other property and/or by payment and/or deliveries of securities or other property to Isabel H. Sloane without notice to me.
"Cornelia B. Hoyt"
In her tax return for the taxable year 1940, the taxpayer deducted $4,564.16 from her gross income as a debt "which became worthless within the taxable year," pursuant to § 23(k)(1) of the Internal Revenue Code as amended, 26 U.S.C.A.Int.Rev. Code § 23(k)(1). The Commissioner determined that this was an improper deduction and assessed a deficiency accordingly. The Tax Court sustained the Commissioner, saying in part: "Where, as here, the guaranty was for a daughter, it was incumbent upon the petitioner to prove an agreement with her daughter constituting a debt. Not only is there no such proof, but the record in general negatives the idea of any expectation of collection by the petitioner upon a debt. The daughter had at the time of the guaranty no assets and her mother knew that probably she would lose if the account took a loss. The daughter was already to some degree a charge upon her mother. No effort was made by the petitioner to control the account; on the contrary, she waived, in the guaranty signed by her, all notice of transactions in the account; in other words, it was no part of petitioner's business operations. * * * The petitioner has failed to demonstrate a transaction of debt, or one other than one with donative intent, and has, therefore, not demonstrated error on the part of the Commissioner in the determination of deficiency."
Jesse Hoyt, of New York City, for petitioner.
Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Robert N. Anderson, and S. Dee Hanson, Sp. Assts. to the Atty. Gen., for respondent.
Before SWAN, AUGUSTUS N. HAND, and FRANK, Circuit Judges.
Whatever our own independent opinion might be, we cannot disturb a factual inference made by the Tax Court unless it is unreasonable. Accordingly we must here accept the Tax Court's finding which, in effect, is that the taxpayer, when she executed the guaranty, had no intention of ever asserting a claim against her daughter should taxpayer be compelled to pay the broker under the guaranty. For we cannot say that such a finding as to taxpayer's intention cannot reasonably be inferred from these facts: The taxpayer knew that the probability was that her daughter could not pay any loss or deficit for which taxpayer might become liable because of the guaranty; the daughter had no assets of her own that she could deposit as additional collateral or any other assets out of which a judgment could be satisfied; the daughter was financially dependent upon the taxpayer; the margin for the debt due to the broker, when the guaranty was executed, was small.
The smallness of the margin was doubtless the reason the broker asked for the guaranty.
Shinman v. Commissioner, 2 Cir., 60 F.2d 65, is urged upon us by the taxpayer as compelling reversal here. But what we said in that case serves rather to sustain the Tax Court's decision. There the taxpayer guaranteed the brokerage account of a brother-in-law, so that the close family relationship we have in the instant case was there absent; moreover, there was no showing of dependence such as we have here, and no showing that, at the time when the guaranty was made, the brother-in-law (who was insolvent when the taxpayer was called upon to pay the broker under the guaranty) was not in such financial condition that there then was little probability that he could not repay any amount which taxpayer might later be called upon to pay the broker. In our decision in that case, we said (page 66 of 60 F.2d): "At least, the taxpayer, who has the burden, must show that it is not a gift, and this Shiman failed to do. No doubt a man may pay money for another's use, from which a promise to repay is normally inferred, without in fact meaning to create a debt. The relations of the parties may show that it was a gift, just as they may show that any expressions which ordinarily import a contract, are understod by both sides not to create one. New York Trust Co. v. Island Oil Transport Corp., 2 Cir., 34 F.2d 655; Williston § 21. Indeed, if the putative lender knows that the borrower is without resources and likely never to have any, it may be reasonable with nothing further, to assume that he merely means to give the money. The conduct of neither party would in that case have its usual implication, and no contract would result." The facts of the instant case sufficiently resemble those of the Shiman case to render reasonable the Tax Court's finding here. In American Cigar Co. v. Commissioner, 2 Cir., 66 F.2d 425, 427, we cited with approval the above quoted discussion in the Shiman case in support of our holding that notes taken on account of advances by a taxpayer who believes at that time that the notes are worthless and uncollectible cannot be deducted as bad debts because they are in the nature of gifts. See also W.F. Young, Inc. v. Commissioner, 1 Cir., 120 F.2d 159, 164-166; cf. 5 Mertens, Federal Income Taxation, §§ 28.46, 30.09.
Affirmed.