PUTNAM V. COMMISSIONER, 352 U. S. 82 (1956)

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U.S. Supreme Court

Putnam v. Commissioner, 352 U.S. 82 (1956)

Putnam v. Commissioner of Internal Revenue

No. 25

Argued October 17, 1956

Decided December 3, 1956

352 U.S. 82


In a business venture not connected with his law practice, petitioner, a lawyer, organized a corporation, supplied its capital, and financed its operations through advances and guaranties of its debts. He wound up the corporation's affairs and liquidated its assets, but did not terminate its corporate existence. Its assets were insufficient to pay its debts, and petitioner paid $9,005 of its debts in discharge of his obligation as guarantor.

Held: in computing petitioner's income tax, this $9,005 loss was a nonbusiness bad debt loss to be given short-term capital loss treatment under § 23(k)(4) of the Internal Revenue Code of 1939, and it was not fully deductible under § 23(e)(2) as a loss "incurred in [a] transaction . . . for profit, though not connected with [his] trade or business." Pp. 352 U. S. 83-93.

1. The loss sustained by a guarantor unable to recover from the debtor is by its very nature a loss from a bad debt to which the guarantor becomes subrogated upon discharging his liability as guarantor. Pp. 352 U. S. 85-86.

2. There is no justification for consideration of petitioner's loss under § 23(e)(2) as an ordinary nonbusiness loss sustained in a transaction entered into for profit. As a loss attributable to a bad debt, it must be regarded as a bad debt loss, deductible as such or not at all. Spring City Co. v. Commissioner, 292 U. S. 182. Pp. 352 U. S. 87-88.

3. Pollak v. Commissioner, 209 F.2d 57, Edwards v. Allen, 216 F.2d 794, and Cudlip v. Commissioner, 220 F.2d 565, turn upon erroneous premises. Pp. 352 U. S. 88-90.

(a) A guarantor who pays a creditor in discharge of his obligation as guarantor of the debt of an insolvent does not voluntarily acquire a debt known by him to be worthless; he involuntarily suffers a loss on a bad debt. P. 352 U. S. 88.

(b) A worthless new obligation does not arise in favor of a guarantor upon his payment to a creditor of an insolvent; he is subrogated to an existing debt which "becomes" worthless in his hands within the meaning of § 23(k). Pp. 352 U. S. 88-89.

(c) Eckert v. Burnet, 283 U. S. 140, distinguished. Pp. 352 U. S. 89-90.

Page 352 U. S. 83

4. Application of § 23(k)(4) to the loss here involved is in accordance with the objectives sought to be achieved by Congress in providing short-term capital loss treatment for nonbusiness bad debts. Pp. 352 U. S. 90-93.

224 F.2d 947 affirmed.

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