OPINION.
Duennen, Judge:
Respondent determined a deficiency in petitioner’s income tax for the taxable year 1957 in the amount of $2,417.33. The only issue for decision is whether petitioner is entitled to a deduction under section 166(f) of the Internal Revenue Code of 1954 as the result of a loss sustained by petitioner as guarantor of a noncorporate obligation.
All of the facts have been stipulated, are so found and are incorporated herein by reference. Those necessary to an understanding of our inquiry are recited below.
Petitioner lived in Ohio in 1957 and filed his income tax return for the calendar year 1957 on the cash basis of accounting with the district director of internal revenue at Cleveland, Ohio.
In 1948 petitioner and Stanford S. Cammer formed a partnership for the purpose of operating a cafe in Santa Barbara, California. Cammer was the active partner and operated the business. Petitioner, living in Ohio, did not actively participate in the operation of the cafe.
Due to differences which arose between petitioner and Cammer, petitioner notified the latter that unless he would agree to purchase petitioner’s interest in the partnership, petitioner wouid institute an action for an accounting and for dissolution of the partnership. Cammer decided to purchase petitioner’s interest in the partnership and borrowed the sum of $7,500 from the Lake Shore Finance Corporation, an Ohio corporation, hereinafter referred to as the finance company. Cammer delivered to the finance company his promissory note in the amount of $7,500. The funds received from the finance company were used by Cammer to purchase petitioner’s interest in the partnership.
Petitioner, who owned approximately 10 percent of the nonvoting stock of the finance company, executed a separate instrument wherein petitioner became a guarantor for the payment of Cammer’s note to the finance company.
By September 1957 Cammer had reduced the principal balance of the loan to $6,088.50. However, shortly thereafter, Cammer defaulted in payment of the note, and the finance company demanded payment of the balance by petitioner as guarantor of the loan. Petitioner paid the finance company the sum of $6,088.50 in 1957. On his 1957 tax return, petitioner claimed a bad debt deduction under section 166(f), I.B..C. 1954, in the amount of $6,088.50. [Respondent determined that the loss was not deductible under section 166(f) and disallowed the claimed deduction.
Section 166(f) provides:
A payment by the taxpayer (other than a corporation) in discharge of part or all of his obligation as a guarantor, endorser, or indemnitor of a noncor-porate obligation the proceeds of which were used in the trade or business of the borrower shall be treated as a debt becoming worthless within such taxable year for purposes of this section (except that subsection (d) shall not apply), but only if the obligation of the borrower to the person to whom such payment was made was worthless * ⅜ * at the time of such payment.
Respondent concedes that petitioner paid the sum of $6,088.50 in discharge of his obligation as a guarantor, that the debt was a non-corporate obligation, and that the obligation of Cammer to the finance company was worthless at the time of payment. But respondent contends that inasmuch as the proceeds of the loan were used by Cammer to acquire an additional capital interest, they were not used in the borrower’s trade or business within the meaning of section 166(f). Petitioner argues conversely that the borrowed, funds were utilized in tbe borrower’s trade or business since tbe proceeds of tbe loan were used to acquire petitioner’s interest in tbe partnership, which acquisition was undertaken in order to prevent a dissolution of tbe business. Tbe issue to be decided is thus reduced to whether or not tbe proceeds of tbe loan were used in Cammer’s trade or business within tbe meaning of section 166 (f).
The provision contained in section 166(f) was first written into tbe law as part of tbe Internal Revenue Code of 1954;1 and appears to have originated in tbe Senate Finance Committee.2 The phrase “used in trade or business of tbe borrower” is not explained in either section 166(f) of the Code or tbe regulations relating thereto (sec. 1.166-8, Income Tax Regs.) ; nor is any real light shed on tbe meaning of tbe phrase or tbe purpose of the provision by the Senate Finance Committee in its report.3 And it would be of little help in deciding this issue whether the purpose of Congress in enacting section 166(f) was to confirm the administrative and judicial construction of the internal revenue laws that treated guarantors’ losses as bad debt losses, as suggested by the majority opinion of the Supreme Court in Putnam v. Commissioner, 352 U.S. 82 (1956), or was simply to permit deduction of certain guaranty payments that were not deductible at all under the 1939 Code, as suggested by the dissenting opinion in the Putnam case.4 So we must approach the problem unaided by any clearly defined legislative intent or any prior judicial construction.5 Under such circumstances, we assume the statutory words were used in their ordinary and usual sense with the meaning commonly attributable to tliem. DeGanay v. Lederer, 250 U.S. 376, 381 (1919).
In our opinion, the phrase “used in the trade or business of the borrower” (emphasis supplied) in section 166(f) of the 1954 Code requires that the borrowed funds be directly employed in carrying on the borrower’s trade or business, and that the use of the borrowed funds by Cammer to purchase petitioner’s partnership interest does not meet that requirement. The borrowed funds were never available for use in the operation of the cafe nor to acquire assets for use in the business. They were used to acquire a capital asset, an interest in the partnership, for the borrower, not in the conduct or operation of his cafe business, and we do not think the stipulated facts support a conclusion that Cammer was in the business of dealing in business interests.
Furthermore, even if we could agree with petitioner that the borrowed funds could be said to have been used to prevent dissolution of the borrower’s business, we do not think such a purpose under these circumstances could be considered a use in the business within the meaning of the statute. Rather than being a debt “incurred because of business relationships,” as mentioned in the committee report (footnote 3), this was a debt incurred to sever a business relationship, and the guarantor, rather than the business, received the proceeds of the loan.
We believe our conclusion is the more logical application of the section to the facts in this case. The Supreme Court decided in Putnam v. Commissioner, supra, that a guarantor’s loss is deductible, if at all, as a bad debt.
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OPINION.
Duennen, Judge:
Respondent determined a deficiency in petitioner’s income tax for the taxable year 1957 in the amount of $2,417.33. The only issue for decision is whether petitioner is entitled to a deduction under section 166(f) of the Internal Revenue Code of 1954 as the result of a loss sustained by petitioner as guarantor of a noncorporate obligation.
All of the facts have been stipulated, are so found and are incorporated herein by reference. Those necessary to an understanding of our inquiry are recited below.
Petitioner lived in Ohio in 1957 and filed his income tax return for the calendar year 1957 on the cash basis of accounting with the district director of internal revenue at Cleveland, Ohio.
In 1948 petitioner and Stanford S. Cammer formed a partnership for the purpose of operating a cafe in Santa Barbara, California. Cammer was the active partner and operated the business. Petitioner, living in Ohio, did not actively participate in the operation of the cafe.
Due to differences which arose between petitioner and Cammer, petitioner notified the latter that unless he would agree to purchase petitioner’s interest in the partnership, petitioner wouid institute an action for an accounting and for dissolution of the partnership. Cammer decided to purchase petitioner’s interest in the partnership and borrowed the sum of $7,500 from the Lake Shore Finance Corporation, an Ohio corporation, hereinafter referred to as the finance company. Cammer delivered to the finance company his promissory note in the amount of $7,500. The funds received from the finance company were used by Cammer to purchase petitioner’s interest in the partnership.
Petitioner, who owned approximately 10 percent of the nonvoting stock of the finance company, executed a separate instrument wherein petitioner became a guarantor for the payment of Cammer’s note to the finance company.
By September 1957 Cammer had reduced the principal balance of the loan to $6,088.50. However, shortly thereafter, Cammer defaulted in payment of the note, and the finance company demanded payment of the balance by petitioner as guarantor of the loan. Petitioner paid the finance company the sum of $6,088.50 in 1957. On his 1957 tax return, petitioner claimed a bad debt deduction under section 166(f), I.B..C. 1954, in the amount of $6,088.50. [Respondent determined that the loss was not deductible under section 166(f) and disallowed the claimed deduction.
Section 166(f) provides:
A payment by the taxpayer (other than a corporation) in discharge of part or all of his obligation as a guarantor, endorser, or indemnitor of a noncor-porate obligation the proceeds of which were used in the trade or business of the borrower shall be treated as a debt becoming worthless within such taxable year for purposes of this section (except that subsection (d) shall not apply), but only if the obligation of the borrower to the person to whom such payment was made was worthless * ⅜ * at the time of such payment.
Respondent concedes that petitioner paid the sum of $6,088.50 in discharge of his obligation as a guarantor, that the debt was a non-corporate obligation, and that the obligation of Cammer to the finance company was worthless at the time of payment. But respondent contends that inasmuch as the proceeds of the loan were used by Cammer to acquire an additional capital interest, they were not used in the borrower’s trade or business within the meaning of section 166(f). Petitioner argues conversely that the borrowed, funds were utilized in tbe borrower’s trade or business since tbe proceeds of tbe loan were used to acquire petitioner’s interest in tbe partnership, which acquisition was undertaken in order to prevent a dissolution of tbe business. Tbe issue to be decided is thus reduced to whether or not tbe proceeds of tbe loan were used in Cammer’s trade or business within tbe meaning of section 166 (f).
The provision contained in section 166(f) was first written into tbe law as part of tbe Internal Revenue Code of 1954;1 and appears to have originated in tbe Senate Finance Committee.2 The phrase “used in trade or business of tbe borrower” is not explained in either section 166(f) of the Code or tbe regulations relating thereto (sec. 1.166-8, Income Tax Regs.) ; nor is any real light shed on tbe meaning of tbe phrase or tbe purpose of the provision by the Senate Finance Committee in its report.3 And it would be of little help in deciding this issue whether the purpose of Congress in enacting section 166(f) was to confirm the administrative and judicial construction of the internal revenue laws that treated guarantors’ losses as bad debt losses, as suggested by the majority opinion of the Supreme Court in Putnam v. Commissioner, 352 U.S. 82 (1956), or was simply to permit deduction of certain guaranty payments that were not deductible at all under the 1939 Code, as suggested by the dissenting opinion in the Putnam case.4 So we must approach the problem unaided by any clearly defined legislative intent or any prior judicial construction.5 Under such circumstances, we assume the statutory words were used in their ordinary and usual sense with the meaning commonly attributable to tliem. DeGanay v. Lederer, 250 U.S. 376, 381 (1919).
In our opinion, the phrase “used in the trade or business of the borrower” (emphasis supplied) in section 166(f) of the 1954 Code requires that the borrowed funds be directly employed in carrying on the borrower’s trade or business, and that the use of the borrowed funds by Cammer to purchase petitioner’s partnership interest does not meet that requirement. The borrowed funds were never available for use in the operation of the cafe nor to acquire assets for use in the business. They were used to acquire a capital asset, an interest in the partnership, for the borrower, not in the conduct or operation of his cafe business, and we do not think the stipulated facts support a conclusion that Cammer was in the business of dealing in business interests.
Furthermore, even if we could agree with petitioner that the borrowed funds could be said to have been used to prevent dissolution of the borrower’s business, we do not think such a purpose under these circumstances could be considered a use in the business within the meaning of the statute. Rather than being a debt “incurred because of business relationships,” as mentioned in the committee report (footnote 3), this was a debt incurred to sever a business relationship, and the guarantor, rather than the business, received the proceeds of the loan.
We believe our conclusion is the more logical application of the section to the facts in this case. The Supreme Court decided in Putnam v. Commissioner, supra, that a guarantor’s loss is deductible, if at all, as a bad debt. Section 166 of the 1954 Code provides for the deduction of bad debts, and under section 166(d) this debt, not having been created or acquired in connection with a trade or business of the taxpayer nor incurred in his trade or business, would be a non-business bad debt and the loss would be considered a short-term capital loss, unless recognized as a bad debt deductible to the full extent thereof under section 166(a) by reason of section 166(f). If, by enacting the exception to section 166(d) contained in section 166(f) in the case of the guaranty by a noncorporate taxpayer of a noncorporate obligation, Congress intended to encourage small businesses by making it easier for them to borrow money, it would seem that the limit of its inducement to the guarantor of small business borrowings would be to place the guarantor in the same position taxwise with respect to the deductibility of his loss as would be the borrower himself. If the borrower used the borrowed money directly in the operation of his trade or business and lost it, his loss would be deductible in full. But Cammer did not use the borrowed money directly in the operation of his trade or business; he used it to acquire for himself petitioner’s interest in the partnership. Cammer’s acquisition of petitioner’s partnership interest was an investment in a capital asset, Peter P. Risko, 26 T.C. 485 (1956), Frank L. Newburger, Jr., 13 T.C. 232 (1949), and we assume his loss on the sale or other disposition thereof would have been a capital loss. Sec. 741,I.B.C. 1954; compare Bev. Bui. 55-68, 1955-1 C.B. 372. To apply section 166(f) of the 1954 Code to give this petitioner, the guarantor, a full deduction for a bad debt would seem to extend that section beyond reason.
Beviewed by the Court.
Decision will be entered for the respondent.