The opinion
MOORMAN, Circuit Judge
(dissenting).
In December of 1921 petitioners were holders of “overdue notes” of the Smith Gas Engineering Company aggregating $293,970. They held also “additional” notes of' the company in the sum of $99,030, were indorsers on its notes in bank aggregating $195,000, and two of them, Colonel Deeds and Kettering, were holders of its capital stock for which they had paid $154,600. At that time the books of the company showed assets in excess of liabilities, exclusive of capital stock. In this state of the company’s affairs, petitioners surrendered and canceled the “overdue notes,” and in their income tax returns for the year 1921 claimed deductions therefor “as debts ascertained to be worthless.” The Commissioner and Board of Tax Appeals disallowed the claim. The majority opinion allows it upon the theory that, as the engineering company was “insolvent in the commercial sense” that it did not have and could not borrow the money to pay its overdue notes, was indebted to petitioners on other notes in the sum of $99,030, and to the bank op notes which the petitioners were in-dorsers in the sum of $195,000, it was a “reasonable conclusion” that “losses were inevitable” and had “been sustained,” was to the “best interest” of the petitioners, in avoiding further losses on the bank indebtedness and the “additional” notes, to cancel the overdue debts, and that having been done, the debts became “worthless” and were deductible from ineome. I cannot agree that this is the correct basis for the deductibility of a debt.
The statute provides for the deduction of debts “ascertained to he worthless.” It does not say who is to make the ascertainment, but for practical reasons it ought to be, it would seem, in the first instance, the taxpayer. I assume that it is, but, however that he, it is obviously true that the determination is one of fact, and, unless the fact exists, it cannot be ascertained. So the ultimate question in every such case is and must be,, it seems to me, not what the taxpayer thought was to his interest nor what he honestly believed after investigation, but, Was the debt worthless? I admit, of course, that liquidation of the debtor is not in every ease a prerequisite to the ascertainment, but even so the fact must exist before it can be ascertained. It is not enough, in my opinion, that’the taxpayer believed it to exist or that there was “commercial insolvency” in the sense the majority opinion finds in this ease. In the White Dental Company Case, 274 U. S. 398 , 47 S. Ct. 598, 600 , 71 L. Ed. 1120 , the identifiable circumstance was the sequestration of the property of the debtor by an enemy country which left the corporation “without property or assets of any kind.” In the present case no such occurrence happened; the company had assets in excess of its debts; it continued business until 1927; and the petitioners continued to advance money to it and guarantee its loans. It was not even shown in this case that the company could' not pay. What was *699 shown was that it could not do so without selling some of its assets. Thus, although it did not have and could not borrow the money to pay, it nevertheless had assets subject to its debts, and, if forced into liquidation, could have paid a substantial part if not all of the debts here in question.
It is said in the opinion, however, that, after the cancellation of the notes, there “could be no doubt of the uneolleetibility and resulting worthlessness” of the debts. If it is meant by this, as indeed there can be no doubt, that, although the debts were valuable immediately before they were canceled, upon their cancellation they became uncollectible in an action at law or in equity, and hence on December 31, ten days later, were “worthless” within the meaning of thé statutes, I certainly cannot agree. This point of view which the opinion advances does not seem to have occurred to counsel for petitioners. I think it is utterly unsound. In the first place, I should doubt that the surrendering of the notes had the effect of extinguishing the liability — certainly it could not to the prejudice of petitioners’ creditors. I do not, however, think it necessary to consider the effect of. such action as between debtor and creditor, for in my opinion a creditor cannot voluntarily surrender a debt having value, even if the effect be to make it uncollectible, and then claim that it is “worthless” and deductible from income. Surely he ought not to be permitted to do so if he surrendered it, not because it was worthless, but to put the debtor company in a better financial condition to continue business, expecting that his stock holdings therein would become more valuable. The test, in my opinion, as I have said, is, Was the debt for which the deduction is claimed worthless? In this case the petitioners limited their claims for losses on debts to those represented by the overdue notes. The sole question therefore was, Were those debts, the ones for which the deduction is claimed, worthless? I think the Commissioner rightly decided that they were not.
Whether a part of the overdue debts should have been charged off as nonrecoverable is a question that the majority of the court, in view of its decision on the main question, did not find it necessary to decide. As I differ from the opinion on the point decided, I feel I should say that, in m,y view, a court would not be justified in overruling the Commissioner’s action in disallowing a charge off in part. There is abundant evidence in the record to show that petitioners expected, by surrendering the notes, to put the company in position where it would ultimately become successful. If it had, they would have been the chief beneficiaries, for they owned all of the company’s preferred and a large part of its common stock. The company was a going concern. It continued business for six years, and during that time the petitioners evidenced their faith in it by making advances to it and guaranteeing its loans in bank. We have construed the statute as giving the Commissioner a wider discretion in dealing with debts “recoverable only in part” than is given him with reference to deductions of debts ascertained to be worthless in their entirety. Stranahan v. Commissioner (C. C. A.) 42 F.(2d) 729 . I do not think his action on that aspect of this case was arbitrary or unreasonable.
I have not observed from the arguments in the case that there has been an abandonment of the claim for a deduction on account of the stock, and, although I do not think petitioners were entitled to such deduction, I have difficulty in seeing why they were not if they were entitled to a deduction of the overdue notes. A deduction of the notes would have to be based, in my view of the law, upon the fact of worthlessness. If they were worthless, and they could be worthless only if the company had no assets to pay and was foredoomed to failure, it would seem inevitable that the stock was worthless too, for liability for debts takes precedence over distribution to stock. It was not necessary that the affairs of the company be wound up in order that a loss be sustained on the stock [White Dental Company Case, supra, and De Loss v. Commissioner (C. C. A.) 28 F. (2d) 803], and, unless the test is'insolvency in a “commercial sense,” an hypothesis that I cannot accept, there is, in my opinion, no ground to distinguish the deduction claimed on account of stock from that claimed because of the debts.