White v. Commissioner

C. H. WHITE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

J. R. ELLISON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

White v. Commissioner

Docket Nos. 30308, 30309.

United States Board of Tax Appeals

15 B.T.A. 1375; 1929 BTA LEXIS 2665;

April 12, 1929, Promulgated

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">*2665 1. Where within the taxable year certain stockholders assumed a debt due the corporation and where such debt was worthless when so assumed, held that such debt is not deductible from the gross income of such stockholders for said year as a debt ascertained to be worthless and charged off within the taxable year.

2. Where two stockholders incorporated the business in which they had been engaged for years and where these individuals advanced money to the corporation at a time when it was insolvent and when there was no hope of its ever becoming solvent, and where the advances were made for the purpose of protecting the business prestige of the stockholders and with the view of closing out the business of the corporation in such a way as to enable the lending stockholders to engage again in the same business, held that such advancements are deductible as losses incurred in business.

Charles E. McCulloch, Esq., for the petitioners.

Eugene Meacham, Esq., for the respondent.

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MILLIKEN

">*1375 These proceedings were consolidated for hearing and decision and involve the redetermination of deficiencies in income taxes for the years 1922 and">*2666 1923. In the proceeding of C. H. White, the deficiencies are $3,098.80 for 1922 and $863.43 for 1923, and in that of J. R. Ellison, $3,039.93 for 1922 and $691.33 for 1923. It is alleged in behalf of each petitioner that respondent erred (1) in disallowing the sum of $46,206.67, representing the worthless obligation of the Elwin Concert Bureau, Inc., determined to be worthless and charged off by petitioners in the calendar year 1922; (2) in disallowing a deduction of $702.53, representing a loss sustained during the year 1922 upon an obligation of the Elwin Concert Bureau, Inc., which account was guaranteed by petitioners and required to be paid by ">*1376 them under such guarantee during the year 1922, and which obligation of the Elwin Concert Bureau, Inc., was charged off by petitioners as a worthless debt during said year; and (3) in disallowing as a deduction from petitioners' gross income for the year 1923 the net loss sustained by petitioners during 1922 from the operation of their trade or business regularly carried on and which net loss occurred by reason of the disallowance by respondent of the above deductions. At the hearing petitioners amended their respective petitions">*2667 and alleged as an alternative that they were entitled to take as a deduction as operating losses the amounts advanced by them in conducting the business of the Bureau during the years 1922 and 1923.

FINDINGS OF FACT.

Petitioners are individuals residing at Portland, Oreg., and have been associated in the conduct of the lyceum, chautauqua, and concert business since the year 1910. During the years prior to 1920 petitioners had carried on their lyceum and chautauqua business, their conservatory, and their musical and concert business as copartnerships. During 1920 petitioners organized a corporation known as the Ellison-White Lyceum & Chautauqua Association, hereafter referred to as the Association, to take over and handle their chautauqua and lyceum work. In June, 1920, petitioners organized under the laws of Oregon the Elwin Concert Bureau, Inc., hereinafter referred to as the Bureau, with a capital stock of $30,000, for the purpose of taking over the musical and concert business formerly carried on by the Ellison-White Musical Bureau, a copartnership. This stock was issued and paid for with the contracts and good will of the Ellison-White Musical Bureau. The officers of">*2668 the corporation were the petitioners and Oliver O. Young. Subsequent to its organization, the Bureau had no formal stockholders' or directors' meetings. The separate businesses were incorporated in order that the businesses might be properly segregated and because of a new method of carrying on the chautauqua and lyceum work. All the stock of the Bureau was issued to petitioners, share and share alike. In June, 1920, petitioners entered into an agreement with Oliver O. Young, whereby it was agreed that said Young was to receive one-third of the capital stock of the Bureau in the event that that corporation under his management should make up a deficit of $15,949.61, which then existed in the business of Ellison-White Musical Bureau, which he had been managing. The deficit was never made up and Young never received any part of the stock and, subject only to this agreement with Young, the stock was at all times held by petitioners in equal shares. Young left the employ of the Bureau in February, 1922, and relinquished his rights to said stock. Up to March 10, ">*1377 1922, the Bureau had been a losing venture. During the period from the organization of the Bureau to March 10, 1922, the">*2669 Association advanced to said Bureau the net amount of $92,413.35. Of this amount the sum of $73,163.35 was advanced prior to January 1, 1922. In March, 1922, the Bureau had been sued by one creditor for $15,000 and had unfulfilled contracts and deficits aggregating about $37,000 in addition to the said amount of $92,413.35, owing to the Association. In March, 1922, the only assets of the Bureau consisted of a desk, some chairs, a typewriter, and certain unperformed contracts which possessed little, if any, value. At said time, petitioners seriously considered putting the Bureau into voluntary bankruptcy and discussed this matter with their attorneys and their bankers, but determined that in view of the fact that a large part of the contracts then outstanding and unfulfilled had been guaranteed by them in their individual and partnership capacities, the bankruptcy of the Bureau would cost them much more than if the corporation was continued until such time as its business might be transferred to another corporation or gradually wound up. During March, 1922, the Association determined that the indebtedness of the Bureau to it, amounting to $92,413.35, was worthless and uncollectible">*2670 and that such accounts should no longer be carried by it. In this determination petitioners concurred. Said debt was then worthless. They directed the Association's head bookkeeper to charge off the entire sum of the unpaid advances, namely $92,413.35, and charge same to their personal accounts, share and share alike. Following such instructions an entry was made in the books of account of the Association on April 27, 1922, by which the personal account of the petitioner, J. R. Ellison, was charged with $46,206.67, and the account of the petitioner, C. H. White, was charged with the sum of $46,206.68. The journal entry by which this was accomplished is as follows:

March 14/22.
J. R. Ellison	per $46,206.67
C. H. White	per 46,206.68
To notes Receivable		92,413.35

To transfer to J. R. Ellison's and C. H. White's personal accounts, advances made to Elwin Concert Bureau and charged to Notes receivable as shown above. This was done at the request of J. R. Ellison March 14, 1922.

No part of the sum of $92,413.35 charged off by the Association during 1922 was ever recovered by or paid to petitioners. No further advances were made to the Bureau">*2671 by the Association.

The Bureau entered into a contract with the Beggar's Opera Co. for the season 1921-1922, wherein certain guarantees of dates and receipts were made by the Bureau. The manager of the Opera Company refused to enter into the contract unless it was guaranteed by petitioners, individually, and petitioners did make such guarantee. ">*1378 The Bureau was not able to perform its contract in full and petitioners under their guarantee paid to the Opera Company in 1922 the sum of $1,405.05. This sum was paid in equal amounts by petitioners.

The business of the Bureau was to engage artists, to sell musical courses, and in some instances to run tours of concert and opera companies. From the date of its incorporation to and including a part of the year 1924 its accounts were kept and its contracts made in the corporate name. About one-half of the persons entering into such contracts with the Bureau demanded and received the personal guaranty of petitioners and the other half were willing to take the obligation of the Bureau alone, knowing that petitioners were its sole stockholders. About the time when the charge-off of the indebtedness of the Bureau to the Association">*2672 was made, as above set forth, petitioners determined that the Bureau was in such a financial condition that its continued operation would result in incurring still greater losses and they then resolved to close up its affairs as soon as that could be accomplished with the least loss to the Bureau, to them, and to their standing in the operatic world. Petitioners were confronted by the fact that the Bureau had unexpired contracts with its booking agents and other employees, with unexpired terms of two or three years, and contracts with artists which had not been fulfilled. The Bureau had not met all its contractual obligations and it was the custom to guarantee artists dates for the following season or seasons, instead of paying them the guaranteed amounts for contract dates which the Bureau had not been able to fulfill. The unexpired contracts were insufficient to sell a complete course of artists or attractions and it became necessary to contract with other artists or attractions to complete such courses and thus protect the business integrity of the Bureau and of petitioners, who were known to be its only stockholders. The alternative was to cancel the outstanding contracts and">*2673 make payments of the amounts guaranteed, which would have resulted, as the petitioners believed, in greater losses than would be incurred if the business was carried on until such time as its business could be turned over to some larger corporation or more influential persons. The Bureau not having assets with which to make such payments, the result would have been that petitioners would have been compelled to pay such amounts or forfeit their standing in the operatic world. It was petitioners' purpose to close up the affairs of the Bureau in such a way as to obtain for themselves, as individuals, the opportunity to successfully continue in this line of business.

With this end in view, petitioners advanced to the Bureau the amounts hereinafter set forth and the Bureau continued in business, with results hereinafter shown. Shortly after March, 1922, petitioners, through a Mr. McFadden, who had succeeded Young as manager of the Bureau, began to negotiate with certain eastern managers ">*1379 to take over the business of the Bureau. McFadden first negotiated an agreement dated November 1, 1922, between "The Elwin Concert Bureau, a corporation" and certain managers and the">*2674 Associated Bureaus of America, a corporation. This contract provided for the continuance of the Bureau and was rejected by petitioners because of that fact. Thereupon, McFadden entered into negotiations with A. F. Adams, who was the sole owner of the Wolfsohn Musical Bureau, the largest concert organization in the United States. Adams in November or December, 1922, made a trip to the Pacific Coast and discussed the situation with petitioners. At this time the Bureau had committed itself to contracts for the season of 1922-1923, some of the commitments having been made by Young. It was agreed between petitioners and Adams that the Wolfsohn Musical Bureau would take over certain of the contracts of the Bureau, but that the Bureau should fulfill certain other contracts. Petitioners and the other operating officers of the Bureau were to become and did become employees of the Wolfsohn Musical Bureau, as of January 1, 1923. All business that was not taken over by the Wolfsohn Musical Bureau was completed by the Bureau as soon as the contracts made were fulfilled. An agreement in writing dated August 28, 1923, was entered into between the Wolfsohn Musical Bureau, petitioners, and">*2675 other parties, which provided for the organization, under the laws of Delaware, of a corporation known as the Wolfsohn Musical Bureau, Inc. Under this contract petitioners were to become stockholders and employees in the new corporation, which was to be the distributor of the companies and attractions which were to perform in the territory of the various parties thereto. This corporation was duly organized and the Bureau went out of business and was not operated as a corporation after June 30, 1924.

The following statements show the loss and gain of the Bureau for the fiscal years ending June 30, 1922, 1923, and 1924, and the attraction and course loss and gain for the fiscal year ending June 30, 1924:

Fiscal year ending June 30, 1922
Overhead		Attractions	Loss	Gain
Managers' salary	$2,208.77	Sundelius	$288.84
Clerical	1,071.25	Zerola	1,041.67
Managers' traveling expense	610.51	Van Gordon		$366.39
Office supplies	129.70	Gentle	22.83
General advertising	830.84	Rubenstein	10.43
New York office	708.78	Althouse	711.18
Postage	25.03	G. Group	3,757.76
Telephone and telegraph	388.97	Middleton	585.50
Donations	100.00	Parlow	1,309.18
Miscellaneous expense	280.05	Salvi	1,845.05
Rent	337.15	Beggars Opera	22,716.08
Interest	55.51		32,288.52
Ledger adjustment	3.06		366.39
Depreciation	70.90
	6,820.52	Net loss	31,922.13

">*2676

Fiscal year ending June 30, 1922 - Continued
Promotion		Course
G. Emery	$200.00	Portland	$4,147.69
Salary commission	5,371.93	Great Falls	499.10
Transportation	1,762.57	Spokane	1,448.78
Hotel expense	969.92
Miscellaneous expense	351.65
	8,656.07		6,095.57

Summary
Overhead	$6,820.52
Promotion	8,656.07
Loss on attractions	31,922.13
Loss on courses	6,095.57
Net loss, 1921-22	53,494.29

Fiscal year ending June 30, 1923
Overhead		Attraction	Loss	Gain
Managers' salary	$1,841.61	Van Gordon	$1,221.18
Secretary and clerical	1,407.45	Evelyn Scotney	102.40
Traveling expense - Manager	410.52	Arthur Middleton		$770.87
Office supplies	198.61	Alfred Mirovitch	147.30
General advertising	131.44	Reed Millers	503.34
Telephone and telegraph	179.00	Thurlow Lieurance	280.38
Depreciation	120.23	Paul Althouse	221.94
Miscellaneous expense	622.64	Irish Band	1,372.14
Rent	225.00	Cosi fan tutte		1,016.17
		Alberto Salvi		70.25
		San Carlo Opera		14,818.51
	5,136.50		3,848.68	16,675.80
		Net gain on attractions		12,827.12

Promotion		Course
Salary and commission	$4,079.85	Portland		$227.28
Transportation	755.59	Great Falls	$600.76
Hotel and miscellaneous expense	954.21	Salem		314.21
	5,789.65		600.76	541.49
		Net loss on course		59.27

">*2677

Summary
Gain on attraction		$12,827.12
Loss on course	$59.27
Promotion cost	5,789.65
Overhead cost	5,136.50
Total loss		10,985.42
Net gain		1,841.70

Fiscal year ending June 30, 1924
Overhead		Attractions	Loss	Gain
Manager's salary	$918.33	Cosi fan tutte	$3,686.96
Secretary and clerical	1,537.75	San Carlo Company		$5,107.54
Office supplies	64.82	Heifetz		834.80
General advertising	2.50	Impresario	2,669.99
Telegraph and telephone	131.18	Matsenauer	976.48
Miscellaneous expense	66.53	Rosenblatt	1,755.86
Depreciation	80.15	Braslau	29.25
Rent	389.00	Claire Dux	5.60
		New York String		91.71
			9,124.14	6,034.05
	3,190.26	Net loss on attractions		3,090.09

Promotion		Course
Miscellaneous	$141.63	Los Angeles	$1,142.34
		Portland		$98.20
		San Francisco	10,029.93
		Seattle	1,102.00
			12,274.27
		Net loss on course		12,176.07

Summary
Overhead	$3,190.26
Promotion	141.63
Attraction loss	3,090.09
Course loss	12,176.07
Net loss	18,598.05

">*1381 The following statement shows moneys">*2678 advanced by petitioners to the Bureau after March 14, 1922, and the amounts repaid by the Bureau to petitioners:

	Dr.	Cr.
Mar. 16, 1922		$500.00
Mar. 20		200.00
Mar. 21		200.00
Apr. 4		50.00
Apr. 7		50.00
Apr. 8, J. R. Ellison		100.00
Apr. 12		100.00
Apr. 14		100.00
Apr. 17		300.00
Apr. 20		400.00
Apr. 21		400.00
Apr. 28		400.00
May 1		400.00
May 3		300.00
May 5		300.00
May 9		1,500.00
Do		26.25
May 10		175.00
May 12		250.00
May 15		225.00
May 17		100.00
May 20		200.00
May 24		200.00
May 22, J. R. Ellison	$100.00
May 29		250.00
June 1		200.00
June 6		$100.00
June 8		1,017.50
June 12		200.00
June 15		200.00
June 21		200.00
June 29		800.00
July 5		700.00
July 11		200.00
July 19		200.00
July 31		200.00
Aug. 9		200.00
Aug. 15		200.00
Aug. 26		200.00
Aug. 31		150.22
Sept. 8	$1,500.00
Oct. 3		1,000.00
Oct. 18		300.00
Do		5,000.00
Do		600.00
Nov. 2		1,000.00
Nov. 20		1,200.00
Nov. 29		800.00
Dec. 11		700.00
Dec. 30		700.00
Total, 1922	1,600.00	22,693.97

	Dr.	Cr.		Dr.	Cr.
Jan. 5, 1923		$250.00	Jan. 5, 1924		$3,400.00
Jan. 11		500.00	Jan. 19		5,000.00
Jan. 24		2,250.00	Feb. 6		1,400.00
Jan. 26		500.00	Feb. 8	$3,000.00
Feb. 2		8,000.00	Feb. 5		1,000.00
Feb. 15		600.00	Feb. 7		700.00
Feb. 19	$5,000.00		Feb. 13		500.00
Feb. 28	5,000.00		Feb. 15		500.00
Mar. 14	1,200.00	1,500.00	Feb. 19	7,000.00
Mar. 20	5,000.00	5,000.00	Feb. 27	1,000.00
Mar. 29		5,000.00	Feb. 27	1,000.00
Apr. 10	6,000.00		Mar. 31		500.00
May 21	5,000.00		Apr. 8		400.00
June 4		1,000.00	Apr. 14		1,000.00
June 26		1,000.00	Apr. 15		700.00
July 5		2,000.00	Apr. 19	6,000.00
July 31		2,000.00	Apr. 21	2,000.00
Aug. 6		500.00	May 3		600.00
Aug. 11		200.00	May 5		200.00
Aug. 18		500.00	May 7		500.00
Sept. 10		10,000.00	May 15		800.00
Sept. 27	1,000.00		May 21		300.00
Sept. 28	1,000.00		May 23		100.00
Oct. 2	4,000.00		May 27		200.00
Oct. 13		1,000.00	May 30		600.00
Oct. 15		3,000.00	June 2		500.00
Nov. 1		300.00	June 10		500.00
Nov. 3		1,000.00	June 18		500.00
Nov. 5		5,400.00	June 23		500.00
Nov. 10		500.00	July 5		1,300.00
Nov. 20		4,500.00	July 15		450.00
Nov. 24		2,000.00	July 28		300.00
Dec. 2		1,500.00	Aug. 11		100.00
Dec. 20		1,400.00	Aug. 13		100.00
Dec. 22		1,400.00		54,800.00	1 108,643.97
Dec. 24		500.00
Total, 1923	33,200.00	63,300.00

">*2679

">*1382 The following statement shows expenditures for attractions, courses, overhead, promotions, and total expenditures made by the Bureau from March 14, 1922, to January, 1924:

Month	Attractions	Courses	Overhead	Promotions	Total expenditures
1922
March	$2,356.98	$736.67	$490.22	$918.59	$4,502.46
April	213.13	348.95	233.07	833.71	1,628.86
May	1,679.65	1,098.58	252.09	968.07	3,998.39
June	72,592.07	1,592.18	(561.91)	1,019.70	74,642.04
July	211.52	61.02	427.84	4,321.12	5,021.50
August	4.42	161.60	164.07	280.54	610.63
September	34.37	1,260.81	587.80	202.29	2,085.27
October	3,059.80	4,130.30	572.41	273.35	8,035.86
November	3,275.58	830.06	916.54	161.09	5,183.27
December	76.14	1,030.54	568.91	128.36	1,803.95
Total					107,512.23
1923
January	11,178.13	2,515.11	680.49	41.25	14,414.98
February	8,062.25	2,721.08	223.15	7.90	11,014.38
March	22,267.54	2,517.38	740.42		25,525.34
April	5,019.26	1,288.08	596.75	141.25	7,045.34
May	1,879.10	47.87	186.85	10.00	2,123.82
June	75,399.97	2,184.48	467.59	222.50	78,274.54
July	180.82	460.12	241.11	1,240.43	2,122.48
August	4.76	244.80	83.75	57.70	391.01
September	320.66	1,626.25	391.58	36.33	2,374.82
October	11,882.00	5,268.63	199.31	48.10	17,398.04
November	5,534.31	5,382.84	238.84	215.30	11,371.29
December	4,729.40	5,224.89	337.56	7.63	10,299.48
Total					182,355.22
1924
January	$25,211.12	$7,145.22	$63.25	($1,530.07)	$30,889.52
February	88,756.30	4,616.99	180.90	264.40	93,818.59
March	1,532.47	3,083.52	657.54	104.63	5,378.16
April	105.62	1,692.42	196.06	337.00	2,331.10
May	834.35	408.13	76.76	50.00	1,369.24
June	13,872.46	40,850.32	523.60	46.00	55,292.38
Total					189,078.99
Total	360,274.18	98,528.84	9,736.55	10,407.17	478,946.74

">*2680 ">*1383 Petitioners kept no personal books of account, except check stubs and such memoranda as reflected their income and disbursements. Respondent determined that the gross and net income of petitioners was as follows:

	Year	Gross income	Net income	Net taxable income subject
				to normal tax
White	1922	$39,108.80	$32,230.59	$28,630.59
White	1923	28,787.07	22,976.66	19,376.66
Ellison	1922	39,172.76	31,972.25	24,372.25
Ellison	1923	30,783.76	22,208.57	17,814.71

OPINION.

MILLIKEN: We are met at the outset with two contentions of petitioners, the first of which is that after February, 1922, they disregarded the corporate entity of the Bureau and carried on its business as partners, and the second is that they had, previous to that date, guaranteed the debt of the Bureau to the Association. Counsel for the petitioners in his brief filed in these proceedings thus states the first point: "The petitioners after the departure of Mr. Young in February, 1922, actually carried on the business of the Elwin Bureau as a partnership venture, merely using the corporate name for convenience." In support of this statement, he refers">*2681 us to the following testimony of the petitioner Ellison:

Q. After Mr. Young left, how did you treat the business of the Elwin Concert Bureau?

A. We took it over just as any other department of our partnership.

A careful reading of the testimony as a whole does not disclose that the business of the Bureau was operated after March, 1922, in any way different from the method in which it had been operated prior to that date. From its organization there had been no formal directors' or stockholders' meetings, except, perhaps, when the officers were elected. Yet, it is not contended that the Bureau was not a full ">*1384 fledged corporation from the date of its organization down to March, 1922. If during this early period the business of the Bureau was carried on as a partnership, which is not claimed, then there can be no claim that advances to it by the Association constituted a worthless debt, for the reason that the petitioners, if partners, were amply able to pay the debt so far as the record discloses. After that date the Bureau continued to make contracts and kept its accounts in its corporate name. Those who dealt with it treated it as a corporation. About one-half">*2682 of its contracts were guaranteed by petitioners in their individual capacities. If they were operating as individuals and not as a corporation, it is obvious that there was no necessity for such individual guaranties. The only difference between the operation of the Bureau before and after March, 1922, that is disclosed by the record, is that prior to that date the Association advanced the money needed by the Bureau and subsequent to that date such money was advanced by petitioners. The mere fact that petitioners were the only stockholders and dealt informally with the affairs of the corporation is not exceptional in such closely held corporations, and in and of itself does not disclose an abandonment of the corporate entity. We find no merit in this contention.

It is true that each petitioner in his petition alleged that advances by the Association to the Bureau were made "upon the express understanding and agreement that the payment of said advances was guaranteed" by petitioners "in their respective individual capacities." These allegations were denied in the answers of respondent and no evidence was adduced to substantiate these allegations. It may be said, in passing, ">*2683 that such an obligation was "void" under section 808, Oregon Laws, vol. I, unless made in writing subscribed by petitioners or their lawfully authorized agents. The nearest approach to a showing of such prior guaranty is the testimony of the petitioner White, which is as follows:

Q. What agreement, if any, did you have with respect to the notes that were being carried as assets of Ellison-White Lyceum & Chautauqua Association?

The Witness. I want to get clear the notes you referred to.

By Mr. McCulloch:

Q. The notes receivable of the Ellison-White Lyceum & Chautauqua Association. What agreement did you have with Mr. Ellison with respect to charging them to your personal accounts?

A. We agreed mutually they would be charged to us and therefore paid by us personally.

Q. At the time this was done were these accounts collectible or were they known losses?

Mr. Meacham. That is objected to as calling for a conclusion of the witness.

The Member. I think Mr. Ellison has testified to practically all that Mr. White has testified. He stated he heard Mr. Ellison's testimony and it was his best judgment that he stated truthfully the facts as he understood them.

">*2684 ">*1385 Mr. McCulloch. I am not trying to go over the entire ground that Mr. Ellison covered, but I do want to specifically, and not by one blanket question, have Mr. White give his understanding of the situation.

By Mr. McCulloch:

Q. You heard Mr. Ellison's testimony with respect to his beliefs that these notes were uncollectible at that time. Was that also your belief at the time?

A. Yes.

It is to be noted that the agreement to pay the indebtedness was made "at the time" the charge-off was made in March, 1922.

It thus appears that by the voluntary act of petitioners, they in March, 1922, assumed or attempted to assume (section 808, Oregon Laws) without any previous individual liability, the debt of the Bureau to the Association, and for the first time came into ownership of the notes representing that debt. At that very time this debt was worthless. It is therefore petitioners' contention that they had the right to charge off a debt as worthless which was worthless when they acquired it.

The fact is that petitioners have mistaken the nature of their deduction. What in reality occurred was that petitioners in March, 1922, for the first time assumed or">*2685 attempted to assume the debt due from the Bureau to the Association, and for the first time acquired or thought that they acquired the ownership of a worthless debt. They then became or thought they became liable to the Association for this debt and if they had kept their accounts on an accrual basis, it may be that they then incurred a deductible loss. Since their only books of account were their check stubs and memoranda showing their income and disbursements, they were on a cash receipts and disbursements basis. Being on a cash basis, petitioners could incur no deductible loss until they made payments to the Association on account of the debt of the Bureau and then only to the extent of the amounts so paid during the years 1922 and 1923, the years now before us. This is true, even if petitioners had by binding contract agreed to guarantee the debts of the Bureau when incurred. See , and . Petitioners have not shown and do not claim that they have made any such payments during said years or at any other time. So that even if petitioners had claimed a deductible loss with respect to this">*2686 transaction, which they have not, they would not be entitled to take such loss in the taxable year. Petitioners are not entitled to deduct the sum of $92,413.35 or any part thereof from their gross income for the year 1922 as a worthless debt or for any other reason.

Petitioners, having guaranteed the contract of the Beggar's Opera Co., and having been compelled to pay to that company on their guaranty, in the year 1922, the sum of $1,405.05, are each entitled to deduct from their gross income for that year one-half of said amount.

">*1386 Petitioners at the hearing amended their petitions and claimed as alternatives to the errors asserted in their original petitions that they should be allowed deductions as operating losses in the net amounts advanced by them to the Bureau in the years 1922 and 1923. The record discloses that petitioners advanced to the Bureau during the year 1922 and subsequent to March 15 of that year the sum of $22,693.97 and were repaid by the Bureau in the amount of $1,600, leaving a balance of $21,093.97, and that they advanced to the Bureau during the year 1923 the sum of $63,300 and received back $33,200, leaving a balance of $30,100, or a balance">*2687 due them for both years in the amount of $51,193.97. Taking into consideration also the year 1924, which was the last year during which the Bureau was operating as a corporation, the total advances made amounted to $108,643.97, and the total amount of repayments amounted to $54,800, leaving a total still owing them of $53,843.97. It is apparent that petitioners have actually lost the above amount and that no part of such amount will ever be recouped.

The business of the Bureau prior to its incorporation had been petitioners' individual business and this businesses in connection with their chautauqua and lyceum work had for years been their individual vocations. Petitioners assert that to have abandoned this line of business would have resulted in rendering of no avail all their previous experience and training; that under these circumstance it was good business policy to continue the work of the Bureau until such time as they could transfer their efforts to a larger and more efficient organization, and that the only alternative to this was a disastrous bankruptcy which would entail upon them a much larger loss if they came to the rescue, or the loss of their business prestige">*2688 if they did not. They point out that by pursuing this course they eventually attained their goal. It is further asserted that no new business was contracted and no new artists or attractions engaged, except for the purpose of completing and filling our saleable courses and attractions, using as the nucleus the artists with whom contracts had already been made. Finally, it is contended that petitioners knew they were advancing their money to an insolvent and progressively losing enterprise, without hope of recovery of all that they advanced. Each year found them in deeper and deeper, with the final result above shown, a result which petitioners largely anticipated from the time they began to make the advancements.

The vital question presented is, Did these advancements constitute debts which were deductible only if ascertained to be worthless and charged off during the taxable year, or were they losses sustained during the taxable year which were incurred in trade or business? (Section 214(a)(4), (7) of the Revenue Act of 1921.) It is not ">*1387 claimed by petitioners in their pleadings, nor by their counsel in his brief, that these advancements constitute bad debts, and">*2689 therefore we do not consider this character of deduction.

It is true that the Bureau was legally obligated to return the advances, but the fact remains that it did not and could not fulfill its obligations except to a limited extent. The term "debt" not only implies a legal obligation, but to a large extent also implies the expectancy on the part of the creditor to receive payment. See . In the instant proceedings, petitioners were well aware of the fact that although a part of their advancements might be returned, a large part thereof would never be recovered. They knew at the time they would lose a large part of every dollar advanced. They knew in March, 1922, that the Bureau owed over $92,000, plus other indebtedness of at least $37,000, and was practically without assets. They saw it continue burdened with this initial liability and without acquiring new assets of value. They knew that as they went along the indebtedness would increase. The indebtedness did increase. It is clear that petitioners were not loaning money to the Bureau in any hope of receiving any return thereon and with no expectation of getting all of it back. ">*2690 What they were attempting to do was to keep alive a business which, although a separate entity, was vitally essential to the success of their personal vocations. Their individual success or failure was wrapt up in the corporation; their business reputations, their future business hopes and expectations could be maintained and realized only through the operation of the Bureau. They hoped in this way that they could in the end abandon the corporation with honor and use their business experience and good will in a new and profitable organization. These hopes they realized. In our opinion the advancements made under the circumstances above detailed, although made to a corporation, were in fact losses sustained. Each petitioner is entitled to take as a deduction for the years 1922 and 1923, as a loss incurred in business, one-half of the net amount advanced by them to the Bureau in each of said years. Since this and the deduction for the loss on the Beggar's Opera Co. contract will leave each petitioner taxable income for each year, it becomes unnecessary to consider the question of net losses for the year 1922.

Reviewed by the Board.

Judgment will be entered under Rule 50.">*2691

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Footnotes

• 1. Net advances to date of dissolution and final return $53,843.97. ↩