A taxpayer, keeping accounts upon a cash basis, is not entitled
to deduct, as a loss sustained during the taxable year, Revenue
Act, 1932, § 23(e), a payment made in discharge of his liability to
a bank on a guaranty, but made by substituting his new note to the
bank for his earlier one, of the same amount. P. 309 U. S.
106 F.2d 336 reversed.
Certiorari, 308 U.S. 548, to review the reversal of a decision
of the Board of Tax Appeals sustaining a deficiency assessment.
Page 309 U. S. 410
MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.
Respondent, in his income tax return for 1932, claimed a
deduction for a loss upon a contract of guaranty. The Board of Tax
Appeals sustained the Commissioner in refusing to allow the
deduction, and the Circuit Court of Appeals reversed. 106 F.2d 336.
Because of an alleged conflict with Eckert v. Burnet,
283 U. S. 140
Jenkins v. Bitgood,
101 F.2d 17, and Ferris v.
102 F.2d 985, we granted certiorari, 308 U.S.
The facts as found may be thus summarized: in 1929, the Atlantic
Bank and Trust Company of Greensboro, North Carolina, was merged
with the North Carolina Bank and Trust Company. The latter accepted
conditionally certain assets of the Atlantic Bank called "A"
assets, and certain other assets, called "B" assets, were pledged
to that Bank with authority to charge against them any losses which
might be established in realizing upon the "A" assets. Respondent
and three other stockholders of the Atlantic Bank executed an
agreement of guaranty to the effect that, if the North Carolina
Bank failed to realize a certain sum from the "A" assets within two
years, they would make up the deficiency in an amount not exceeding
$500,000. The agreement provided that any sum realized from the "B"
assets were to be applied first to any losses occurring in the "A"
assets and then to the reimbursement of the four guarantors. The
period for realizing upon the "A" assets was extended until
Page 309 U. S. 411
In June, 1931, the North Carolina Bank advised the guarantors
that the "B" assets were not in such shape that the Bank could use
them to the extent necessary for banking purposes, and requested
the guarantors to put their guaranty into a bankable form so that
it could be used by the Bank to obtain credit. Respondent
accordingly gave to the Bank his note for $125,000 and endorsed the
note of C. W. Gold, another guarantor, for a like amount and
assigned certain securities to the Bank as collateral for the
payment of his guaranty. The Bank agreed that respondent's ultimate
liability should not exceed $250,000. At the end of 1931, the
guaranty agreement was still in effect. The "B" assets were still
in the process of collection. No demand had been made upon
respondent. While it was known that there would be some loss to the
guarantors, it was not definitely known in 1931 what the loss would
be, and the guarantors had reason to believe that there would be a
substantial reimbursement from the "B" assets of any losses.
In the early part of 1932, financial conditions being worse, the
Bank concluded that it would have to collect upon the guaranty, and
called upon respondent to make a final settlement of his
obligations. Accordingly, in March, 1932, respondent made his note
to the Bank for $250,000, and received back the two notes. The
Board of Tax Appeals found that both respondent and the Bank
considered this to be a final payment of the two notes which had
been given under the guaranty. The Bank retained the same
collateral for the $250,000 note that it had previously held, and,
in December, 1932, respondent substituted therefor certain
securities of his own.
Respondent claimed a loss in 1932 in the amount of $125,000 --
that is, for his one-half of the guaranty. He did not then claim a
loss on the other one-half, because he still had a claim against
the estate of Gold (who had died in 1932) for reimbursement. For
that one-half, representing Gold's part of the guaranty,
Page 309 U. S. 412
claimed a loss in 1933, and that deduction is not here
Respondent kept his accounts upon a cash basis. The Board of Tax
Appeals ruled that respondent was not entitled to the deduction of
$125,000 in 1932, upon the ground that "he made no outlay of cash"
in the purported payment; he had satisfied his liability as
guarantor "by a shifting of the form of his liability." His loss
would be deductible "in the year in which he pays the note."
Respondent insists initially that the transaction in 1932 was
considered by the parties as constituting a payment of respondent's
liability under the guaranty, and that this payment is a fact found
by the Board of Tax Appeals, and is not open to review. But the
findings of the Board disclose the entire transaction, and its
legal effect in the application of § 23(e) of the Revenue Act of
1932, as to the deduction of losses sustained during the taxable
year, was reviewable by the Circuit Court of Appeals. Its decision
on that point is reviewable here.
Both the Commissioner and the Board of Tax Appeals relied upon
our decision in Eckert v. Burnet, supra.
In that case, the
taxpayer's return was on the cash basis, and the question was as to
a claim of deduction for the year 1925. The taxpayer and his
partner were joint endorsers of notes issued by a corporation they
had formed. In 1925, in settlement of their liability for an
ascertained amount, they made a joint note for the amount due to
the bank that held the corporation's paper, "received the old
notes, marked paid, and destroyed them." We affirmed the ruling
that the deduction should not be allowed.
The court below considered that decision as definite authority
only for the holding that a loss of the sort set forth was not
deductible under the "bad debt" provision of the statute. That
indeed was stated in the opinion as
Page 309 U. S. 413
the taxpayer's claim. But the taxpayer had also presented here,
as an alternative ground, the theory of a loss sustained during the
taxable year, a ground which the Board of Tax Appeals had
considered and held to be untenable. Eckert v. Commissioner of
Int.Rev. 17 B.T.A. 263, 265, 266. And the Government argued both
questions. The Government did not contend that the taxpayer might
not at some time be entitled to a deduction "either on account of a
bad debt or for a business loss;" the
"sole question in dispute was whether he was entitled to the
deduction in 1925, the year in which his note was given, or in the
later year in which the taxpayer's liability on the note is
actually liquidated by payment."
The reasoning of this Court was broad enough to cover both
aspects of the case. We said:
"For the purpose of a return upon a cash basis, there was no
loss in 1925. As happily stated by the Board of Tax Appeals, the
"merely exchanged his note under which he was primarily liable
for the corporation's notes under which he was secondarily liable,
without any outlay of cash or property having a cash value."
"A deduction may be permissible in the taxable year in which the
petitioner pays cash. The petitioner says that it was definitely
ascertained in 1925 that the petitioner would sustain the losses in
question. So it was, if the petitioner ultimately pays his
We think that this decision is controlling in the instant case.
As the return was on the cash basis, there could be no deduction in
the year 1932 unless the substitution of respondent's note in that
year constituted a payment in cash or its equivalent. There was no
cash payment, and, under the doctrine of the Eckert
the giving of the taxpayer's own note was not the equivalent of
cash to entitle the taxpayer to the deduction.
Respondent urges that his note was secured, but the collateral
was not payment. It was given to secure respondent's
Page 309 U. S. 414
promise to pay, and if that promise to pay was not sufficient to
warrant the deduction until the promise was made good by actual
payment, the giving of security for performance did not transform
the promise into the payment required to constitute a deductible
loss in the taxable year. See Jenkins v. Bitgood,
The judgment of the Circuit Court of Appeals is reversed, and
the decision of the Board of Tax Appeals is affirmed.
MR. JUSTICE McREYNOLDS took no part in the decision of this