The Managers agree to pay the following:

(1) Office Rent

(2) All underwriting expenses, except commissions to agents and any other cost of field acquisition

(3) Salaries and expenses, except expenses above agreed to be paid by the Company

(4) Clerical office help

(5) Postage, telephone, and telegraph

(6) General accounting expenses

3. The Company retains the right to determine the classes of business written outside the State of Texas for other than fire, tornado, automobile, and plate glass lines. For all other business the Managers have complete supervision.

4. The Managers are hereby granted the privilege of selling or assigning this contract any time that they desire, upon the approval of the Company.

5. This contract shall commence on the date hereof, June 1, 1952, and shall continue until this contract is mutually cancelled by the parties hereto or by the Company in accordance with the provisions of the succeeding paragraph No. 6 hereof.

6. It is agreed that the Company may cancel this contract at any time after the first year from date hereof by paying to Managers for such privilege and as a 1960 U.S. Tax Ct. LEXIS 98">*103 penalty therefor, in addition to the sums that may then be due to Managers by the terms hereof, a sum equivalent to Fifteen Percent (15%) of all 34 T.C. 819">*822 business written by the Company during the previous full twelve months prior to the time of such cancellation.

7. In case of the death of either the said C. B. Erwin or William O. Erwin, this agreement and contract shall continue and remain in full force and effect between the survivor of them and the Company.

8. This agreement shall be binding on the successors and assigns of General American Casualty Company.

The management contract between General American and the partnership was similar to many other such management contracts in use in Texas and elsewhere. While such an arrangement was more typically employed in the mutual assessment life insurance industry in Texas, it was not unknown in the stock casualty insurance industry, and some of the State's largest stock casualty companies had such arrangements. Throughout the insurance industry, management, or general agency contracts are considered to establish separate businesses.

Erwin was also president of General American. He began negotiations with petitioner, George Cowden, 1960 U.S. Tax Ct. LEXIS 98">*104 and D. J. Schwarz to secure financing for the management contract. In October 1952, the four reached agreement as to the respective interests each would have in the contract. Several draft agreements were drawn but none were executed because they did not represent the true intention of the parties.

On or about November 21, 1952, a loan was obtained from Republic National Bank, Dallas, Texas, in the amount of $ 399,000 for the benefit of General American. Petitioner, Schwarz, George Cowden, and Erwin personally guaranteed this loan.

On January 1, 1953, the partnership executed an assignment of interests and shares in the profits of the management contract to petitioner and others, as follows:

These interests and shares were assignable only with the consent of all other parties to the agreement. It was the intent of petitioner, Schwarz, George Cowden, and Erwin thus to create a business association in which Erwin was to act as manager of the business operations under the management contract in which they 1960 U.S. Tax Ct. LEXIS 98">*105 were partners.

During 1953, General American made payments to Republic National Bank on the loan with the result that in December 1953 the balance of the loan outstanding was approximately $ 208,784. On December 23, 1953, a new loan of $ 750,000 was obtained from the bank for the benefit of General American, the proceeds of which 34 T.C. 819">*823 were first used to pay the balance due on the previous loan, and the residue in the amount of approximately $ 541,000 was received in cash. Petitioner and the other guarantors of the previous loan guaranteed the new loan.

General American gave its checks in payment of the expenses incurred by the partnership and debited these sums against the commissions earned by the partnership. Thus, the proceeds of the loans to General American were used by it to pay expenses incurred by the partnership in expanding its sales operations into new States, and were repaid out of the partnership's management commissions.

For economy the partnership and General American shared the same general offices, bookkeeper, and accounting records. The partnership rented offices in various cities, selected agents, hired supervisory personnel, and appointed general agents1960 U.S. Tax Ct. LEXIS 98">*106 in cities in which it did not establish offices.

At the close of 1952 and 1953, the guarantors of the loans, members of their immediate families, and a partnership composed of petitioner, Erwin, George Cowden, and several others held shares of stock in General American as follows:

General American held controlling stock interest in Southwest Investment Company which held 18,558 shares of stock in General American.

The number of shares of General American's common stock issued and outstanding at the close of 1952 and 1953 was as follows:

Petitioner's stock interest in General American arose from conversion of his investor's interest in the predecessor, General Lloyds Fire and1960 U.S. Tax Ct. LEXIS 98">*107 Casualty Company; the actual cost of his stock in General American was $ 57,000. Petitioner was a director of General American.

Petitioner frequently consulted with Erwin and the other guarantors as to matters affecting the success of their venture; he aided in 34 T.C. 819">*824 the selection of agents to sell General American's insurance policies in west Texas and part of New Mexico; and he provided the business with information helpful to expansion of operations.

The partnership did not withdraw any of the net amounts due under the management contract, except that it was agreed by the four guarantors at the time of the second loan that each would receive $ 1,000 per month. During the first 3 months of 1954 petitioner received $ 1,000 per month from General American, denominated as "Management fees."

The management contract between General American and the partnership was terminated in April 1954. At that time new management was secured for General American, and the guarantors of General American's earlier loans made a loan to General American in the amount of $ 450,000.

On July 8, 1954, the 126th District Court of Travis County, Texas, declared General American a hopeless insolvent, 1960 U.S. Tax Ct. LEXIS 98">*108 canceled its charter and placed it in receivership. At that time unwithdrawn commissions on the management contract between General American and the partnership exceeded $ 400,000.

During 1955, petitioner made payments of principal as guarantor of the $ 750,000 note to the bank in the total amount of $ 130,000. As of the close of 1955, petitioner could not expect to be reimbursed for the payments totaling $ 130,000, and the debt was wholly worthless at the end of such year.

The payments during 1955 in the total amount of $ 130,000 made by petitioner gave rise to business bad debt losses.

OPINION.

Although respondent, in the statutory notice, determined that payments made by petitioner during 1955 in the total amount of $ 130,000 constituted an addition to the cost basis of his stock in General American deductible as capital loss, and alternatively that the payments gave rise to nonbusiness bad debt losses, he has abandoned the first ground on brief and now requests that we find that the payments gave rise to nonbusiness bad debts, deductible only as short-term capital loss under section 166(d) of the Code. ³34 T.C. 819">*825 Petitioner, however, contends that his payments on the guaranty1960 U.S. Tax Ct. LEXIS 98">*109 gave rise to business bad debts deductible under section 166(a). ⁴

1960 U.S. Tax Ct. LEXIS 98">*110 Respondent does not deny that petitioner did, in fact, make payments on the guaranty of General American's note, nor that the debts of General American to which petitioner thus became subrogated were actually worthless at the end of the taxable year 1955. The sole issue is whether payments on the guaranty gave rise to business or nonbusiness bad debt losses.

Petitioner contends that he was in business with Erwin, Schwarz, and George Cowden under the management contract and that his guaranty of General American's note was in furtherance of that business by extending his credit on behalf of General American that increased commissions might be realized under the management contract. Respondent contends that operations under the management contract did not constitute a business separate and apart from General American; and that even if we should conclude that it did constitute a separate business, petitioner was not actively engaged therein, but merely passively extended his credit for the purpose of corporate expansion.

Uncontradicted testimony was to the effect that General American entered into the management contract with C. B. Erwin & Company; that such management contracts are1960 U.S. Tax Ct. LEXIS 98">*111 not unusual in the industry and are considered to establish separate businesses; that the partnership opened offices, selected agents, hired supervisory personnel, and contracted with local general agents to sell General American's insurance. While General American and the partnership shared the same general offices, bookkeeper, and accounting records, we are satisfied that operations under the management contract constituted a business activity separate and apart from General American.

Petitioner, Schwarz, and George Cowden acquired interests in the partnership contract in return for their extension of credit by way of guaranteeing the notes of General American. It appears that the guarantors always envisaged that Erwin would manage the operations of the business. Petitioner's contribution to the business was not limited to the mere extension of his credit. He interviewed or checked upon some of the prospective agents hired under the management contract; he consulted with Erwin and the others as to expansion of activities into new territories; and he provided such 34 T.C. 819">*826 information as he had which might be helpful in expanding the business. We conclude that petitioner was1960 U.S. Tax Ct. LEXIS 98">*112 engaged in such a business operation under the management contract as would support deduction of a business bad debt. Cf. Montell Davis, 11 T.C. 538">11 T.C. 538.

The money borrowed by General American on notes guaranteed by petitioner was used to permit General American to expand its business capabilities. It was the reasonable expectation of the guarantors that as General American prospered, so they would reap increased profits under the management contract. Such a situation, it seems to us, clearly establishes a proximate relationship between the guaranties of the notes and the business operations under the management contract. Cf. J. T. Dorminey, 26 T.C. 940">26 T.C. 940.

That petitioner was a minority shareholder in General American does not prevent the debt from being business incurred. Cf. Stuart Bart, 21 T.C. 880">21 T.C. 880. Respondent's contention that petitioner guaranteed the note of General American to the extent of $ 750,000 in protection of a $ 57,000 capital investment is unsupported by the record. Neither do we conclude that petitioner's position as a director of General American prevents the deduction here1960 U.S. Tax Ct. LEXIS 98">*113 sought, for he was under no duty to extend his credit on behalf of the corporation, and that he did so was clearly attributable to his interest in the management contract.

Respondent maintains that Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82, affirming 224 F.2d 947, affirming a Memorandum Opinion of this Court, is dispositive of the issue herein. In that case the issue presented was whether payment of certain guaranties of corporate obligations by the taxpayer was fully deductible as a loss incurred in a transaction entered into for profit, though not connected with a trade or business, or properly treated as a nonbusiness bad debt. The Supreme Court there decided that "the loss sustained by the guarantor unable to recover from the debtor is by its very nature a loss from the worthlessness of a debt." The taxpayer in the Putnam case was a lawyer whose relationship to the corporation, the notes of which he guaranteed, was that of organizer and stockholder. The instant case is thus factually different from the Putnam case in that petitioner was not alone a shareholder and director of General American, he was the holder1960 U.S. Tax Ct. LEXIS 98">*114 of a substantial interest in a separate business, the agency contract, the prosperity of which was dependent upon the success of the corporation. No such situation existed in the Putnam case.

We conclude, therefore, that petitioner incurred losses in 1955 in the amount of $ 130,000 deductible as business bad debts.

Decisions will be entered under Rule 50.