These proceedings have been consolidated for hearing and disposition. They involve income tax deficiencies for 1943 as follows: Abraham Greenspon, $3,379.85, and Louis Greenspon, $4,825.04.
The year 1942 is also involved in the computation of both deficiencies pursuant to the Current Tax Payment Act of 1943.
The issues concern the deductibility either as bad debts under section 23 (k) of the Internal Revenue Code, or as losses under section 23 (e), of certain sums paid out by the petitioners on the cash basis in 1942 and 1943.
Some of the facts have been stipulated and are so adopted. Other facts are found from the testimony and documentary evidence.
FINDINGS OF FACT.
Petitioners Abraham and Louis Greenspon are brothers, residing in St. Louis, Missouri. Their income tax returns for the years involved were filed with the collector of internal revenue for the first district of Missouri.
During and prior to 1931 Abraham owned 35 per cent and Louis owned 65 per cent of the stock of Jos. Greenspon's Sons Iron & Steel Co., a Missouri corporation engaged in the pipe business in St. Louis. Louis was president and Abraham was vice president of the corporation.
In 1928, 1930, and 1931 loans were made to the corporation by Isador Kronick, a brother-in-law of the petitioners, who in most instances received the corporation's short term notes, signed by Louis as president. In addition, certain accounts and notes receivable of the corporation were pledged to Kronick as collateral. His loans to the corporation during these years aggregated $31,833.34, all of which was orally guaranteed to Kronick by both the petitioners.
In January 1931 the Missouri Bag Co. loaned $4,500 to the Iron & Steel Co., as evidenced by the latter's note dated January 13, 1931, and due October 22, 1931, signed by Louis as president and personally endorsed by him. Abraham also orally guaranteed to the bag company the repayment of this loan.
Receivership proceedings were subsequently instituted against Jos. Greenspon's Sons Iron & Steel Co. in the District Court of the United States for the Eastern District of Missouri, and a receiver was duly appointed in October of 1931. Kronick filed no claims with the receiver, but the receiver's report listed, among other liabilities of the corporation, certain notes payable to Kronick in an aggregate principal sum of $14,500, on which the unpaid principal was $13,700, to secure which, notes receivable totaling $10,570.18 were pledged as collateral. Creditors of the corporation received no money on their claims from the receiver and the company was completely liquidated some time in 1938.
Meanwhile, in 1932 petitioners organized a new Missouri corporation under the name of Jos. Greenspon's Sons Pipe Corporation, which has since been engaged in the pipe business. The corporation commenced business with a paid-in capital of $1,000, which had been advanced to petitioners by Kronick. Thereafter from time to time Kronick made loans to the new corporation, guaranteed by petitioners, in the aggregate amount of approximately $35,000. The new corporation later repaid these loans and they are not in issue.
On April 14, 1937, Abraham filed a voluntary petition in bankruptcy, listing liabilities in excess of $1,000,000 and assets of $229. In
On May 19, 1941, the Missouri Bag Co. commenced a suit against Louis for the principal sum of $4,500, together with interest, on his endorsement of the note given to the bag company by the old corporation. Subsequently, and while that suit was pending, Louis and Abraham began to make periodic payments on the note in the respective ratios of 65 per cent and 35 per cent, the percentages of their stockholdings in the old corporation. The entire amount of principal and interest having been paid by February 5, 1945, the suit was on that date dismissed upon the plaintiff's motion.
Of the total amount of loans which he made to the old corporation, Kronick received about $2,200 in payments on the notes and realized approximately $8,800 on the collateral prior to February 1942. After crediting these sums against the indebtedness, the balance due him was $20,815. On February 3, 1942, petitioners entered into a written agreement with Kronick to pay off the balance of the indebtedness at the rate of $1,000 a month, $650 from Louis and $350 from Abraham.
In the taxable year 1942 Abraham paid $3,850 to Kronick and $735 to the Missouri Bag Co. In 1943 he paid $3,435.25 to Kronick and $420 to the bag company. Deductions were claimed in these amounts
Louis paid Kronick $7,150 in 1942 and $6,379.75 in 1943. He also paid his pro rata share of the payments of the Missouri Bag Co. and claimed deductions therefor, which have been allowed by the respondent. Respondent, however, disallowed the payments made to Kronick on the ground that they were "not deductible as bad debts under the provisions of Section 23 (k) of the Internal Revenue Code."
Abraham also claimed in his return for 1943 a deduction in the amount of $268 which the respondent disallowed for lack of substantiation. This item was paid by Abraham in settlement of a judgment recovered against him by the Cross Refining Co. for the negligence of his employee. Abraham owned some oil property at Dupo, Illinois, which he decided to abandon. He sent one of his men to move the equipment and supplies from the property, and by mistake the employee removed a valve from an oil tank belonging to the Cross Refining Co., causing it to lose its oil. The refining company sued petitioner and recovered judgment for the damages.
With respect to the payments to Kronick, the respondent contends that neither petitioner in the taxable years could have been legally compelled to pay the debts owed to Kronick by the Jos. Greenspon's Sons Iron & Steel Co. and that, therefore, the payments were not deductible either as bad debts or as losses. The reason advanced is that the petitioners had two valid legal defenses, namely, that their oral guarantees were within the Missouri statute of frauds (Mo. R. S. A., sec. 3354) and that the Missouri statute of limitations (Mo. R. S. A., secs. 1012-1014) had run.
The Missouri statute of frauds, however, does not make an oral guaranty void, but only voidable. It merely gives the guarantor a personal defense, which he may waive. Feldman v. Levinson, 93 S.W.2d 31; Major v. St. Louis Union Trust Co., 64 S.W.2d 296; Cash v. Wysocki, 229 S. W. 428; cf. Joseph Rubin, 9 B. T. A. 1183. So, too, the statute of limitations does not destroy the obligation, but merely bars the remedy, Baron v. Kurn, 349 Mo. 1202; 164 S.W.2d 310, and gives a personal defense which may be waived, Hickey v. Sigillito, 162 S.W.2d 638. And, if a taxpayer chooses to waive his personal defenses and perform a contract, the Commissioner can not object. Francis M. Camp, 21 B. T. A. 962.
So far as Abraham's discharge in bankruptcy is concerned, the same principle applies. It, too, is a personal defense which may be waived by the bankrupt, and a new promise will revive the debt. Zavelo v. Reeves, 227 U.S. 625; Farmers' & Merchants' Bank v. Richards, 119 Mo. App. 18; 95 S. W. 290; Boone County Milling & Elevator Co. v. Lowery, 248 S. W. 623; Carl Hess, 7 T.C. 333. See Williston on Contracts, Rev. Ed., sec. 158. If a new promise will revive the debt, certainly where the obligation is completely performed and the contract executed, the Commissioner has no ground to object.
Moreover, even if the obligation, springing as it did from a business transaction, were only a moral obligation, we do not understand that that fact of itself would preclude a deduction. See Herschel v. Jones, 1 B. T. A. 1226; cf. Flood v. United States, 133 Fed. (2d) 173, with respect to the deductibility of business expenses.
We do not think, however, that the petitioners' claims for deductions as bad debts are well taken. Doubtless upon satisfaction of their obligations as guarantors the petitioners would have recourse to the principal debtor, the old corporation, if it were then in existence; and, if the latter were unable to pay, deductions as bad debts might properly be allowable. See Joseph Rubin, supra. But, when the petitioners paid out these sums the old corporation had ceased to exist,
The payments made by the petitioners to Kronick, however, are deductible as losses under section 23 (e) of the code.
What we have said with respect to the Kronick payments is likewise dispositive of the payments made by Abraham to the Missouri Bag Co. Respondent allowed the payments made by Louis on the ground that he was an endorser of the note. The evidence of record, however, clearly establishes the fact that Abraham likewise orally guaranteed this loan; that the suit against Louis on his endorsement was not prosecuted to final judgment because both petitioners began making payments on the note; that Abraham paid 35 per cent of the amount due and Louis 65 per cent; and that the bag company dismissed the suit when the entire amount had been paid. In these circumstances, it can not be said that Abraham was a mere volunteer or that he paid the debt of another. We think there is as much reason for allowing Abraham to deduct his payments as there is for allowing Louis to deduct his. We therefore hold that the payments made by Abraham to the bag company are deductible as losses incurred in a transaction entered into for profit.
With respect to the $268 paid by Abraham in settlement of the judgment recovered against him by the Cross Refining Co. and claimed as a deduction by him in 1943, we think the evidence likewise warrants the allowance thereof as a loss under section 23 (e).
Decisions will be entered under Rule 50.
In computing net income there shall be allowed as deductions:
* * * * * * *
(e) LOSSES BY INDIVIDUALS.—In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
(1) if incurred in trade or business; or
(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *