Andrew v. Commissioner , 54 T.C. 239 ( 1970 )

Giffin Andrew and Pauline Andrew, Petitioners v. Commissioner of Internal Revenue, Respondent

Andrew v. Commissioner

Docket No. 2725-68

United States Tax Court

54 T.C. 239; 1970 U.S. Tax Ct. LEXIS 215;

February 11, 1970, Filed

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Decision will be entered under Rule 50.

Petitioners' son-in-law, Boyd, operated a livestock auction barn. A State statute required that a bond be posted to assure that Boyd would promptly account for and pay over the proceeds of all livestock consigned to him for sale. The surety would execute a bond only if petitioners would agree to indemnify it for any payments it might be required to make under the bond. Petitioners executed such an indemnity, and the surety simultaneously executed the bond. Petitioners advanced $ 8,500 to Boyd to aid him in the business. Subsequently, the business collapsed, and petitioners advanced $ 10,000 to discharge the claims of creditors against the auction barn. Held, the advance of $ 8,500 is deductible under sec. 166(d), I.R.C. 1954, as a loss from a worthless nonbusiness debt. Held, further, the advance of $ 10,000 is deductible under sec. 166(f), I.R.C. 1954.

Fremont Meyers, for the petitioners.

Roy S. Fischbeck, for the respondent.

Featherston, Judge.

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FEATHERSTON

Respondent determined deficiencies in petitioners' income tax and an addition to the tax as follows:

		Addition to the
Year	Deficiencies	tax, sec. 6653(a) 1965	$ 4,061.02	$ 203.05
1966	627.01

All of the issues raised by the pleadings have been settled except the following:

(1) Whether petitioners are entitled to a deduction for a loss from a worthless nonbusiness debt under section 166(d), in respect of advances made to their son-in-law, William G. Boyd.

(2) Whether petitioners are entitled to a deduction for a worthless business debt by virtue of section 166(f) or, alternatively, a deduction for a loss from a worthless nonbusiness debt under section 166(d), in respect of advances made to liquidate claims against a livestock auction business operated by Boyd.

FINDINGS OF FACT

At the time their petition was filed petitioners, husband and wife, were legal residents of Osceola, Iowa. They filed their joint Federal income tax returns for 1965 and 1966 with the district director of internal revenue, Des Moines, Iowa. Giffin Andrew is referred to herein as petitioner.

William G. Boyd, petitioners' son-in-law, was 24 years of age in 1965. From 1959 to the spring of 1965 he operated a farm in Iowa. During that time he accumulated assets with an estimated value of $ 24,000, but they were subject to a Federal loan and lien in the amount of $ 19,000.

Jerry Andrew, petitioners' son, was 27 years of age in 1965. Until early 1965 he was employed as a farm laborer, at which time he left that employment and accepted a position as an insurance salesman.

For several years Boyd had been interested in operating a livestock auction barn. In early 1965 he had about $ 1,500 of capital, and he consulted with petitioner concerning the leasing and operation of a barn in Chillicothe, Mo. In April of that year Boyd signed a lease on the barn, calling for rent based on commissions earned from livestock sales, and shortly thereafter began operation of the barn.

Boyd's livestock auction business consisted of sales of consigned cattle; for his services he received a percentage of the sales proceeds. As a prerequisite to commencement of the business he was required to provide a bond (see Mo. Ann. Stat. sec. 277.080 (1963)) in the amount of $ 20,000 to assure his faithful and prompt accounting of all livestock funds received by him (an obligation imposed by Mo. Ann. Stat. sec. 277.070 (1963)). On learning that he was unable, due to his financial condition, to qualify for a bond, he consulted petitioner, who consented to execute an agreement to indemnify the bonding company on behalf of Boyd.

On April 10, 1965, Hartford Accident & Indemnity Co., as surety, and Boyd, as principal, executed a General Live Stock Bond, binding themselves to the extent of $ 20,000 for Boyd's faithful and prompt accounting and payment of the proceeds of all livestock sales transacted by him. The pertinent provisions of the bond were as follows:

Now, Therefore, the Condition of this Bond is such that:

(1) If the said Principal shall safely keep and faithfully and promptly account for and pay to the owners or their duly authorized agents the proceeds of sales of all live stock received for sale on a commission basis by the said Principal;

* * * *

then this bond shall be null and void, otherwise to remain in full force and virtue. Subject, however, to the following conditions, the performance of each of which is a condition precedent to any right of action hereon and also to the following limitations:

* * * *

(b) The liability of the Surety under this bond shall not exceed TWENTY THOUSAND AND NO/100 Dollars ($ 20,000.00), and when the Surety shall have paid that amount whether in one payment or the aggregate of several payments for, upon or by reason of one or several breaches of any condition hereof, the liability of the Surety shall immediately cease and determine.

(c) Any person damaged by the breach of any condition hereof may maintain an action on this bond in his own name to recover his damages, after first giving written notice to the Trustee herein; or the Trustee herein may maintain an action in his own name, the recovery to be made for the use of the persons damaged, and both Principal and Surety herein hereby waive every defense, if any there might be, based upon the fact that any person damaged or in whose name the suit shall be brought is not party or privy to this bond.

Simultaneously, a General Indemnity Agreement was executed by petitioners and Boyd and his wife (referred to in the agreement as the undersigned) and Hartford Accident & Indemnity Co. (referred to in the agreement and hereinafter as the surety), in which petitioners and the Boyds agreed to indemnify the surety for any loss sustained by it on the livestock bond. The pertinent provisions of the indemnity agreement were as follows:

First: That the Undersigned will indemnify and save harmless the Surety and any other Surety Company which the Surety may procure to act as Surety or Cosurety in any of said instruments, from and against any and all demands, liability, loss, costs, damage or expense of whatever nature or kind, including counsel fees, which the Surety shall or may, at any time, for any cause, incur, sustain or be put to, for or by reason or in consequence of the execution of any such instruments, and that the Undersigned will pay over, reimburse and make good to the Surety all sums and amounts of money which the Surety shall pay or cause to be paid or become liable to pay under any such instruments, or as charges and expenses of whatever nature or kind, including counsel fees, by reason of the execution of said instruments or in connection with any litigation, investigation or other matters connected therewith, such payments to be made to the Surety as soon as it shall have become liable therefor, whether it shall have paid out any such sums or any part thereof or not. That in any accounting which may be had between the Undersigned and the Surety, the Surety shall be entitled to charge for any and all disbursements in and about the matters herein contemplated made by it in good faith, under the belief that it is or was liable for the sums and amounts so disbursed, or that it was necessary or expedient to make such disbursements, whether or not such liability, necessity or expediency existed. That this obligation shall be for the benefit of any person, company or companies that may join with the Company as co-surety or co-sureties upon said bond or bonds, or any of them, or that may issue reinsurance in favor of the Company, or, at the request of the Company, shall execute said bond or bonds or any of them.

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Fourth: That upon the commencement of any suit, action or proceeding growing out of or relating to any such instruments, the Undersigned will immediately deposit with the Surety, if requested, cash or collateral security, satisfactory to the Surety, in an amount sufficient to indemnify it up to the full amount of recovery demanded in the complaint, and to defray any costs, charges or expenses which may be incurred in the prosecution or defense of such suit, action or proceeding, and if the Undersigned shall fail to deposit with the Surety, upon request, cash or collateral security, satisfactory to the Surety, the Surety may, if it so elects, place the matter in the hands of its attorneys and shall have the right to handle it as it may deem best. In such event it is agreed that the Surety may, if it sees fit, settle the case at any stage, or pay any judgment, whereupon the Undersigned agrees forthwith to repay to the Surety the amount of such judgment or settlement and any and all costs, charges and expenses of whatever kind or nature, including counsel fees, together with legal interest thereon from the date of payment to the date of such repayment. That the Undersigned will not ask or require the Surety to remove or join in any application for the removal of any action or proceeding from the State to the Federal Court in any State where such action would in any way affect the Surety's license or right to transact business.

Boyd established two bank accounts for the business, one a general account and the other a custodial account. In the latter he deposited the proceeds from livestock sales and drew checks thereon to compensate owners who had consigned their livestock to him for sale. He soon learned that his original capital of $ 1,500 was inadequate, because checks given him by livestock purchasers did not clear promptly or they proved to be bad; as a consequence the custodial account was depleted.

In order to correct the situation Boyd spoke to petitioners and on May 4, 1965, borrowed $ 2,500 from them for a period of 90 days, agreeing to pay them interest at the customary bank rate. Petitioners and Boyd expected that the loan could be repaid within the 3-month period from income derived from the business. The proceeds of this loan were put into the business, and the barn continued to operate.

Boyd immediately discovered that he needed additional funds to cover checks drawn on the custodial account, and on May 7, 1965, and again on June 16, 1965, petitioners made loans in the respective amounts of $ 1,000 and $ 5,000, on the same repayment terms as the loan of May 4, 1965.

Each of the three checks whereby petitioners advanced these funds was marked "Loan" on its face, but no promissory notes or other similar instruments were executed and no collateral security was provided.

In the latter part of July 1965 Jerry abandoned his position as an insurance salesman and moved from Iowa to Chillicothe, with plans to operate a real estate office near Boyd's auction barn. By this time Boyd realized that he needed help with the barn, and he agreed that Jerry could have a half interest in the business in return for a contribution thereto of $ 3,690; this amount reflected their estimate of the value of half of the business at that time. They considered reorganizing the business as a partnership, but discovered that this would require a new license and a new bond. They therefore decided to leave the business in Boyd's name as if it were an individual proprietorship, subject to the understanding that Jerry owned 50 percent of the business and was entitled to 50 percent of the profits.

The business improved somewhat in September, but in October an order buyer, i.e., one who represents feed lots or supermarkets and purchases livestock without charging the owners a commission, established a business near the barn. This buyer took a major portion of the auction barn's business and plunged it into deeper financial trouble.

Boyd and Jerry began using funds in the custodial account to pay some of the overhead expenses, which approximated $ 2,000 per month. They became indebted to Earl McCleave in the amount of $ 4,800 for cattle delivered to them for sale, and he agreed that they might postpone paying him this sum for a period of 30 days. The price of cattle was falling and their losses were growing.

The pressure finally became too much for Boyd, and on a disappointing trip to Kansas City to sell some livestock he disappeared for 4 days. Jerry, being left with a business which was in serious financial trouble, debts which could not be paid, and a partner who could not be found, went to his father for advice. They examined the barn's financial situation, including the debt to McCleave, and decided that the business should be liquidated.

Upon reviewing the barn's finances petitioner and Jerry decided that $ 10,000 to $ 12,000 was needed to cover outstanding claims. Petitioner concluded that, as a result of the indemnity agreement, he personally would be required to make good all claims against the custodial account to the extent of a maximum of $ 20,000. He realized that if he allowed the surety first to settle the debts, he would be obligated to pay the additional expenses of that company. He decided, therefore, to settle the accounts with his own funds, thus bypassing the surety, and to close the auction barn.

Petitioners issued two checks to Jerry on November 29, 1965. One, in the amount of $ 4,800, was to cover McCleave's debt, and the other, in the amount of $ 5,200, was to cover other claims. Jerry deposited the $ 5,200 check in the custodial account and the $ 4,800 in his own account, subsequently writing his own personal check to McCleave. The moneys deposited in the custodial account were used to pay other outstanding claims.

After the barn closed Boyd held an auction at his farm and disposed of his livestock and farming assets. Upon paying the Government loan he had only $ 300 to $ 400 remaining. His only other assets consisted of a 1965 Chevrolet automobile, on which he owed $ 1,500, and his household furniture. He was married and had three children. He had no special employment skills; he tried to obtain work in the stockyards at Kansas City, but was unsuccessful. He finally obtained a job as a laborer in an Army ammunition plant in Sunflower, Kans., at a wage of about $ 120 per week. By June 1966, when he left this job, he was earning $ 180 per week. He then accepted work in the construction business, in which he earned $ 100 to $ 300 per week depending on weather conditions.

In December 1965 Jerry owned a 1965 Rambler automobile, a pickup truck on which he owed $ 1,500, a bank account of less than $ 100, and his household furnishings. He withdrew the cash surrender value of an insurance policy of some $ 2,200 to move his family from Chillicothe back to Iowa. From December 1965 to March 1966 he was employed as a mechanic, earning about $ 100 weekly. In March 1966 he obtained a job as a farm manager, which paid him $ 5,400 per annum plus commissions.

ULTIMATE FINDINGS OF FACT

The advances totaling $ 8,500, which petitioners made to Boyd, created bona fide debts which became worthless in 1965.

The sums represented by the deficit in the custodial account were used in the business of Boyd and Jerry. Petitioners advanced the $ 10,000 covering the McCleave debt and the other unpaid claims against the custodial account to discharge their liability under the indemnity agreement with the surety. At the time of this advance the debts of Boyd and Jerry to their customers were worthless.

OPINION

Respondent concedes that petitioners expended $ 18,500 in 1965, all of which was lost in the operation of the livestock auction barn. The question is whether the losses fall within the confines of section 166, thus entitling petitioners to treat the $ 8,500 advanced to Boyd as a loss from a worthless nonbusiness debt and to treat the $ 10,000 expended to liquidate the amounts due customers of the barn as a worthless business debt or, alternatively, as a loss from a worthless nonbusiness debt.

First, as to the $ 8,500, section 166(a) allows as a deduction "any debt which becomes worthless within the taxable year." The loss from a worthless "nonbusiness debt," however, is not deductible under section 166(a), but is considered under section 166(d) as a loss from the sale or exchange of a capital asset held for not more than 6 months. A "nonbusiness debt" is defined, in general terms, as a debt other than a debt created or acquired in connection with a trade or business of the taxpayer or a debt the loss from the worthlessness of which is incurred in the taxpayer's business. Sec. 166(d)(2).

To qualify for a deduction for a worthless debt a taxpayer must show that he and his alleged debtor intended to create a debtor-creditor relationship, that a genuine debt in fact existed, and that the debt became worthless within the tax year. Sec. 1.166-1(c), Income Tax Regs.; Evans Clark, 18 T.C. 780">18 T.C. 780, 783 (1952), affirmed per curiam 205 F. 2d 353 (C.A. 2, 1953); Estate of Carr V. Van Anda, 12 T.C. 1158">12 T.C. 1158, 1162 (1949), affirmed per curiam 192 F. 2d 391 (C.A. 2, 1951). Intrafamily transactions are subject to special scrutiny. The taxpayer must show that there existed at the time of the transaction a real expectation of repayment and an intent to enforce collection of the indebtedness. Id.

Respondent challenges petitioners' claim to a loss from a worthless nonbusiness debt for the $ 8,500 advanced to Boyd on the grounds that (1) the parties did not intend to create a debtor-creditor relationship; (2) the obligation to repay the advances was not unconditional but was contingent; and (3) the debt, if one existed, was not shown to have become worthless in 1965. We disagree.

The record does not reveal any indication that a gift was either intended by petitioners or imagined by Boyd. To the contrary, the notations on the three checks comprising the advances that they were loans, coupled with the undisputed, credible testimony that the parties agreed that repayment would be made within 90 days, show the requisite intent to establish a debtor-creditor relationship. Furthermore, we do not interpret the testimony as showing only a contingent obligation to repay -- an obligation dependent on the financial success of the livestock auction business. Instead, a fairer interpretation of the testimony is that Boyd expected to be able to repay the loans from income derived from the livestock auction business -- this was his only source of income at that time -- not that he was obligated to make repayments only from that source.

Nor does the evidence fail to show that petitioners' debt claim against Boyd became worthless in 1965. After liquidating his heavily mortgaged livestock farming operation on December 20, 1965, Boyd had only $ 300 to $ 400 remaining. His only other property was a 1965 Chevrolet automobile, on which he owed $ 1,500, and his household furniture. Thus his only substantial asset was his earning power, and he had no special skills. He had accepted a job in Kansas City as a laborer, receiving $ 3.25 per hour or about $ 120 per week, and had to pay the cost of moving his family, consisting of his wife and three children, and of supporting them in the new location. He had no other source of income.

At that time the debt of $ 8,500 had no commercial value and could not have been collected even if petitioner had forced Boyd into bankruptcy. The expected source of repayment, the auction business, had terminated in failure, and his farming venture had been liquidated, leaving a negligible surplus. Although petitioner made no formal demands for repayment of the loans, he testified that he had kept fully informed of Boyd's financial condition and that he could not have collected the debt even if Boyd had "sold his clothes." While failure to demand payment is significant in some circumstances, it is not important here, where the debtor was completely insolvent: the law does not require a taxpayer "to do a useless act." Kate Baker Sherman, 18 T.C. 746">18 T.C. 746, 752 (1952); cf. sec. 1.166-2(b), Income Tax Regs. The $ 8,500 is allowable under section 166(d) as a loss from a nonbusiness debt.

Petitioners contend that the $ 10,000 advance is deductible by reason of section 166(f). ^{section 166(f) does not apply to petitioners' payment of the $ 10,000. He points out that petitioners' obligation ran only to the surety; that no claim by the surety ever actually arose; and, consequently, that petitioners' payment was made voluntarily rather than as a "guarantor, endorser, or indemnitor."}

Respondent's argument requires a decision as to the bounds of section 166(f). The surety executed a General Live Stock Bond guaranteeing Boyd's obligation to account for and pay the proceeds of livestock sales. Petitioners and Boyd simultaneously executed the general indemnity agreement, obligating themselves to indemnify the surety against "any and all demands, liability, loss, costs, damage or expense of whatever nature or kind, including counsel fees," which might be incurred under the bond.

On learning that Boyd and Jerry had depleted their custodial account and owed $ 10,000 to $ 12,000 to various customers, including McCleave, petitioners had two alternatives: (1) To wait and allow the surety to replenish the account and then, when called upon to do so, to indemnify the surety for its payments, or (2) immediately to pay off the customers' claims directly, thereby limiting their losses by avoiding the necessity of reimbursing the surety for all its expenses and costs, including counsel fees. Assuming the worthlessness of the customers' claims against Boyd and Jerry, respondent does not argue that section 166(f) would not apply had petitioners followed the former course, but contends that by pursuing the latter course, petitioners do not come within the section because they had no legal obligation to pay anyone until the surety first paid the customers.

We think respondent reads section 166(f) too narrowly. Petitioners were satisfied, and the evidence confirms, that they would have been required to make good on their indemnity. Although in form petitioners' obligation ran to the surety, as long as petitioners were solvent the surety essentially had no liability and was only a conduit. To be sure, the surety executed the General Live Stock Bond, a requirement imposed by State law. Mo. Ann. Stat. sec. 277.080 (1963). But, because of petitioners' agreement to indemnify the surety for all payments it may make under the bond, petitioners, not the surety, were the real guarantors of Boyd's obligation to his customers. By paying the customers directly, they merely telescoped the transaction, and thereby avoided additional expenditures ("all demands, liability," etc.) that would have arisen had the surety first been called upon to liquidate the customers' claims. In a variety of other situations the tax laws frequently telescope business transactions -- thus eliminating intermediate steps which have no economic significance -- in order to reflect their true substance. We find nothing in section 166(f) limiting its benefits only to those situations in which the charade is played to the end. A taxpayer is not required "to throw good money after bad" or await "the judgment of a court" in order to cause a "sheriff to demonstrate a fact he already knows." Thom v. Burnet, 55 F. 2d 1039, 1040 (C.A.D.C. 1932).

Respondent's argument would have greater weight if the deduction under section 166(f) depended upon the creation of a disembodied, already worthless, debt through subrogation or contribution or some similar doctrine. Cf. Putnam v. Commissioner, 352 U.S. 82 (1956). It does not. The section concerns itself with the worthlessness of the original obligation (in this case, the obligations of Boyd and Jerry to their customers) rather than the worthlessness of the guarantor's or indemnitor's claim against the principal obligor. S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess., pp. 24-25, 200 (1954). See Propp, "What To Do About Bad Debts," 13th Ann. N.Y.U. Tax Inst. 109, 129 (1955). Nor are petitioners precluded from a deduction under section 166(f) merely because their undertaking of the indemnity obligation may have been motivated by their personal relationship with the principal, Boyd. See Surrey, "The Congress And The Tax Lobbyist -- How Special Tax Provisions Get Enacted," 70 Harv. L. Rev. 1145">70 Harv. L. Rev. 1145, 1147 fn 4 (par. (g)) (1957).

Having decided that section 166(f) is broad enough to cover the facts of this case, we must now determine whether petitioners have satisfied the requirements of that section. Those requirements are four in number: (1) The taxpayer-payor is not a corporation; (2) the principal is not a corporation; (3) the proceeds of the original obligation were used in the trade or business of the borrower; and (4) the principal's obligation is worthless to the payee(s) at the time of the payment, without regard to the guaranty, endorsement, or indemnity. Sec. 1.166-8(a)(1), Income Tax Regs.; 5 Mertens, Law of Federal Income Taxation, sec. 30.03a at 20-21 (1969 rev.).

There is no question as to the first two requirements, since, of course, neither the payors (petitioners) nor the primary obligors (Boyd and Jerry) were a corporation. The third requirement is also satisfied, since the original obligation was that Boyd would promptly account for and pay to the owners the proceeds of the sales of livestock consigned to him; and these proceeds (including the amount owed to McCleave), kept in the custodial account, were used to defray normal operating expenses of the auction barn.

Respondent argues, however, that petitioners have not satisfied the fourth requirement in that they have failed to prove that the obligations of Boyd and Jerry to McCleave and the other creditors ^{*239 As to Jerry, his only assets were household furniture, a Rambler automobile, a pickup truck on which he owed $ 1,500, an insurance policy with a cash surrender value of $ 2,200, and less than $ 100 in the bank. He withdrew the cash surrender value of his insurance to finance the return of his family -- his wife and two children -- to Iowa. He had held four jobs in 1965: As a farm laborer, an insurance salesman, a participant in the livestock auction business, and a mechanic, making $ 2 per hour or about $ 100 per week -- hardly a record suggesting substantial future earnings. His liability as a partner in the auction barn had obviously rendered him insolvent.}

A creditor is not required to be an "incorrigible optimist" in determining whether a debt is without value in a particular year. United States v. White Dental Co., 274 U.S. 398">274 U.S. 398, 403 (1927). The decision must be made in the exercise of sound business judgment, based upon as complete information as is reasonably obtainable. Blair v. Commissioner, 91 F. 2d 992, 994 (C.A. 2, 1937). Respondent emphasizes the youth of both Boyd and Jerry and argues that they might some day recoup their losses and be in a position to reimburse petitioners. But "value cannot be based on hope alone." Denver & Rio Grande Western Railroad Co. v. Commissioner, 279 F. 2d 368, 375 (C.A. 10, 1960), affirming 32 T.C. 43">32 T.C. 43 (1959). A bare hope that some recovery might be made in the future does not constitute a sound reason for postponing the time for taking a deduction for a worthless debt: a taxpayer need not "wait until some turn of the wheel of fortune may bring the debtor into affluence." Minneapolis, St. Paul Railroad Co., et al. v. United States, 164 Ct. Cl. 226">164 Ct. Cl. 226, 241 (1964). ^{*241 See Kate Baker Sherman, supra at 752-753. section 166(a) for the $ 10,000 advance can readily be seen by the following interpolation of the facts of this case into the provisions of section 166(f):}

A payment by the taxpayer (other than a corporation) [petitioners] in discharge of part or all of his [their] obligation as a guarantor, endorser, or indemnitor [petitioners' obligation under the general indemnity agreement, when read in conjunction with General Live Stock Bond] of a noncorporate obligation [the obligation of Boyd, and later Jerry, to account to their customers for the proceeds of sales of livestock] the proceeds of which were used in the trade or business of the borrower [the proceeds of the livestock sales were used to defray the operating expenses of the auction barn] shall be treated as a debt becoming worthless within such taxable year * * *, but only if the obligation of the borrower to the person to whom such payment was made was worthless (without regard to such guaranty, endorsement, or indemnity) [both Boyd and Jerry were without assets and had limited earning potential] at the time of such payment.

Decision will be entered under Rule 50.

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Footnotes

• 1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted.↩

• 2. SEC. 166. BAD DEBTS.

  (f) Guarantor of Certain Noncorporate Obligations. -- A payment by the taxpayer (other than a corporation) in discharge of part or all of his obligation as a guarantor, endorser, or indemnitor of a noncorporate obligation the proceeds of which were used in the trade or business of the borrower shall be treated as a debt becoming worthless within such taxable year for purposes of this section (except that subsection (d) [nonbusiness debts] shall not apply), but only if the obligation of the borrower to the person to whom such payment was made was worthless (without regard to such guaranty, endorsement, or indemnity) at the time of such payment.↩

• 3. Respondent does not argue that any part of the claims discharged by petitioners' payment of $ 10,000 was not covered by the bond or subject to the indemnity agreement. Thus, we treat the $ 10,000 as having been advanced by petitioners in connection with their obligation as indemnitors.↩

• 4. The taxability of bad debt recoveries, sec. 111, guards against windfalls attributable to the premature allowance of deductions.↩

• 5. Having decided that the deduction is allowable by reason of sec. 166(f), we do not reach petitioners' alternative argument that the $ 10,000 should be treated as a worthless nonbusiness debt under sec. 166(d)↩. We note, however, that both petitioner and Jerry frankly admitted at the trial that neither regarded the $ 10,000 as a loan, but that the payment was made because petitioners would be liable for it under the indemnity agreement. Jerry's testimony in this connection, that he had "no way of making up this money," is consistent with our finding that his and Boyd's debts to their customers were worthless.