Putnam v. Commissioner of Internal Revenue

RESPONDENT: Commissioner of Internal Revenue
LOCATION: The United States District Court for the Western District of Texas

DECIDED BY: Warren Court (1956-1957)
LOWER COURT: United States Court of Appeals for the Eighth Circuit

CITATION: 352 US 82 (1956)
ARGUED: Oct 17, 1956
DECIDED: Dec 03, 1956

Facts of the case


Media for Putnam v. Commissioner of Internal Revenue

Audio Transcription for Oral Argument - October 17, 1956 in Putnam v. Commissioner of Internal Revenue

Earl Warren:

Number 25, Max Putnam and Elizabeth Putnam, Petitioners versus Commissioner of Internal Revenue.

Richard E. Williams:

May it please the Court.

Earl Warren:

Mr. Williams.

Richard E. Williams:

This matter is before this Court on certiorari to the Court of Appeals for the Eight Circuit which Court affirmed the decision of the United States Tax Court.

The facts in this matter are relatively simple.

The taxpayer petitioner, Max Putnam together with two other individual persons caused to be formulated a corporation known as Whitehouse Publishing Company for the purpose of engaging in the printing business.

Each of those three individuals, including the petitioner, acquired one-third of the capital stock of Whitehouse Publishing Company.

Shortly after the incorporation and after the acquisition by the corporation of the necessary fixed assets for its operations, it became necessary for it to have the short-term use of some additional operating funds.

Those funds were procured by borrowing from a bank.

And the petitioner Putnam personally guaranteed the borrowings of the corporation from the bank.

The corporate operation proved unsuccessful.

Its assets were fully liquidated, applied to the corporate obligations and after all of its assets had been so consumed, there remained an outstanding liability of the corporation to the bank with reference to which the petitioner had executed his guaranty.

There is no question here with reference to the actuality and reality of the petitioner's loss.

The only issue is this, is the loss suffered by the petitioner, a loss resulting from a transaction entered into for profit and consequently deductible in full under Section 23 (e) (2) of the 1939 Internal Revenue Code.

Or was this loss so suffered by the petitioner, a loss resulting from the worthlessness or the fact of becoming worthless of a nonbusiness bad debts.

Now, in the lower courts, the issue has narrowed down to just that.

It is also recognized by the parties here that these Sections are mutually exclusive, that even though, and I believe it is conceited by the respondent that it is a fact that the loss did result from a transaction entered into for profit.

But even though the loss so resulted, it is not deductible under 23 (e) (2) if it is deductible under 23 (k) (4), which is the code Section relating to the deductibility of nonbusiness bad debts.

The tax -- the taxpayer's argument as set forth in its written brief is also relatively simple.

That -- doesn't mean that it's only a question of whether it's a capital loss or --

Richard E. Williams:

Yes, sir.


Richard E. Williams:

If it is a loss within the purview of 23 (k) (4), then it is deduct -- deductible only as a short-term capital loss.

Whereas, if the loss does not fall within the purview of that Section, then it does fall within the purview of 23 (e) (2) and is deductible in full.

The taxpayer's argument has set forth in its written brief is also relevantly simple.

And it is predicated on a series of decisions, which are cited in petitioners brief.

The cases there principally are the Pollak case, and the Cudlip case, and the Allen versus Edwards case, and the Ansley case, in which cases -- and the Fox case, in which cases the so-called no debt theory was established and some several times followed by various Circuits.

The no debt theory in turn is founded upon a decision of this Court in Eckert versus Burnet, 283 U.S. 140, a case decided in 1931.

Now it's true as the respondent points out in his brief that Eckert versus Burnet involved a different statute than the one with which we're concerned here.

The statute then did not distinguish between business and nonbusiness bad debts, but it did provide that a loss, as a consequence of a bad debt, could be deducted provided it was ascertained to be worthless, and provided that it was charged of during the year.