William J. Brennan, Jr.

“ Under the doctrine of subrogation, payment by the guarantor, as we have seen, is treated not as creating a new debt and extinguishing the original debt, but as preserving the original debt and merely substituting the guarantor for the creditor. The reality of the situation is that the debt is an asset of full value in the creditor's hands because backed by the guaranty. The debtor is usually not able to reimburse the guarantor and in such cases that value is lost at the instant that the guarantor pays the creditor. ”

“ There it was held that a debt excluded from deduction under § 234 (a) (5) of the Revenue Act of 1918 was not to be regarded as a loss deductible under § 234 (a) (4) . Chief Justice Hughes said for the Court:
'Petitioner also claims the right of deduction under section 234 (a) (4) of the Revenue Act of 1918 providing for the deduction of 'losses sustained during the taxable year and not compensated for by insurance or otherwise.' We agree with the decision below that this subdivision and the following subdivision (5) relating to debts are mutually exclusive. ”

“ The loss he sustained when his stock became worthless, as well as the losses from the worthlessness of the loans he made directly to the corporation, would receive capital loss treatment; the 1939 Code so provides as to nonbusiness losses both from worthless stock investments and from loans to a corporation, whether or not the loans are evidenced by a security. [20] It is clearly a 'fairer reflection' of Putnam's 1948 taxable income to treat the instant loss similarly. ”