Crawford v. Commissioner , 11 B.T.A. 1299 ( 1928 )

EDWIN R. CRAWFORD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Crawford v. Commissioner

Docket Nos. 6045, 6933.

United States Board of Tax Appeals

11 B.T.A. 1299; 1928 BTA LEXIS 3638;

May 11, 1928, Promulgated

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The repayment during the taxable years of monies borrowed on behalf of petitioner in prior years for expanding and carrying on his business, held not to constitute deductible losses.

S. Leo Ruslander, Esq., for the petitioner.

A. H. Murray, Esq., and Stanley H. Pierson, Esq., for the respondent.

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TRAMMELL

This is a proceeding for the redetermination of deficiencies in income taxes for 1918 in the amount of $5,984.76, and for 1919 in the amount of $9,823.97. The deficiencies arise from the action of the respondent in decreasing the losses from the liquidation of Crawford & Eberman claimed by the petitioner in his return for the respective years.

FINDINGS OF FACT.

The petitioner is a citizen of the United States, residing at Duquesne, Pa. Prior to June, 1909, Crawford & Eberman was a partnership composed of John W. Crawford and John S. Eberman, and doing a brokerage business in the city of Pittsburgh, Pa. This partnership continued in existence until June, 1909, when it was dissolved by the death of John W. Crawford. Thereafter, in 1909, Eberman withdrew from the partnership stocks aggregating approximately $100,000. The petitioner thereupon assumed the remaining assets and liabilies of the partnership and continued the brokerage business as an individual under the name of Crawford & Eberman. The petitioner paid nothing for his deceased partner's interest in the partnership other than the assumption of his liabilities. The petitioner continued to operate the business as sole proprietor until the date of its liquidation in 1917. The petitioner, however, maintained no active supervision over the affairs of the business of Crawford & Eberman. All transactions of Crawford & Eberman, including the borrowing of money, were negotiated and carried on by petitioner's brother, James S. Crawford, and John S. Eberman. After Eberman retired as a member of the firm he continued in the employ of the petitioner and had active management of the business.

At various times large sums of money were borrowed for and in behalf of the brokerage business of Crawford & Eberman and used in that business. The money so borrowed was represented by notes in the following amounts: $3,775.00, $13,172.00, $20,000, $8,000, $15,000, $890, $10,000, $4,900, $5,000, $10,000, $5,000.

All of the notes, except one for $10,000, were executed either by petitioner's brother or by employees of the brokerage business of Crawford & Eberman, but the money was all borrowed for and in behalf of the business and used therein. The last-mentioned note for $10,000 was executed by the petitioner and the money used in the brokerage business. The notes were executed in this manner in order to evade the limitation upon banks with respect to excessive loans to individuals and firms. The petitioner personally guaranteed the payment of all of the notes. The notes covering monies borrowed for and in behalf of the business and represented by the five last-mentioned notes, aggregating $34,900, were paid by the petitioner in 1918. The remaining notes, aggregating $61,337, were paid by the petitioner in 1919. The proceeds of all of the notes were used to enable the business to continue in a larger capacity. None of the proceeds of the notes were used to satisfy any debts of Crawford & Eberman.

All of the notes here involved were renewal notes and represented monies which had been borrowed over the years from 1911 up to 1916, inclusive. No note was given during the taxable years, either as a renewal or as an original note.

At the time the petitioner acquired his interest in the brokerage business, the business was solvent and was producing income. In 1914, however, the funds of the business became exhausted and the petitioner was called upon from time to time for additional funds. During 1915 the business suffered losses and in 1916 it was in a precarious condition. In 1917 it became necessary for Eberman to call upon the petitioner for additional funds in order to continue operations. The petitioner did not realize the fact that the business was insolvent until November, 1917, when Eberman called upon him for the additional funds. He immediately issued orders to liquidate the business. Subsequent to November, 1917, Crawford & Eberman did no business. No additional money was borrowed for and in behalf of the partnership after that date.

In determining the deficiency in controversy for 1918, the respondent refused to allow as a deduction the losses claimed in the amount of $34,900 represented by notes which were paid by the petitioner in that year, and in determining the deficiency for 1919, the respondent refused to allow as a deduction the losses claimed in the amount of $61,337, represented by notes which were paid by the petitioner during that year.

The petitioner kept his books and filed returns upon the basis of cash receipts and disbursements.

OPINION.

TRAMMELL: The question here involved is whether the petitioner is entitled to deductions on account of notes paid in connection with the liquidation of Crawford & Eberman in 1918 and 1919, he being on a cash receipts and disbursements basis, or whether the losses were sustained in prior years.

The monies represented by the notes were secured in years prior to the taxable years, invested in the business and were lost, in any event, when the business ceased operations in 1917 if not prior thereto. None of the monies secured by the notes was used to pay debts or obligations of the firm but these monies were used for enlarging the business and to enable it to expand, more money being required to carry on the enterprise. The proceeds of the notes representing monies borrowed from banks for use in the business and the payment thereof in the taxable years represented merely repayment of borrowed money.

Deductions are not permitted on account of the repayment of loans. If such deductions were permitted, the petitioner would have two deductions represented by the same losses. That is, he would have a deduction when the borrowed money was lost and again when he repaid the borrowed money. This case is distinguishable from the case of . In that case the taxpayer guaranteed the payment of a loss of a partner. The mere guarantee of payment did not constitute a loss. The actual payment constituted the loss. Here the petitioner had not assumed the losses of any other person. He did not guarantee the repayment of money borrowed by others and was not, in any true sense, a guarantor of the notes which he was compelled to pay. The persons borrowing the money acted as agents for the petitioner and borrowed the money in his behalf. It was, in fact, his own personal obligation.

From a consideration of the evidence in the case and the applicable provisions of the statute, it is our opinion that the petitioner is not entitled to the deductions claimed during the taxable years involved.

Reviewed by the Board.

Judgment will be entered for the respondent.