*168 Decision will be entered under Rule 50.
As an accommodation to him, petitioner loaned securities to her husband, to be used as security for his personal brokerage account. When further security was required the petitioner declined to loan other securities, but signed a guaranty of the account. Later her husband died and his account was closed, leaving a substantial debit balance. His estate was insufficient to meet his obligations and petitioner was required to make good her guaranty. In the taxable year she made a payment of $ 15,000 thereon. Held, on the facts, that in the taxable year and upon the payment of the $ 15,000 petitioner sustained a nonbusiness bad debt loss which, subject to the limitations of section 23 (k) (4) of the Internal Revenue Code, is an allowable deduction.
*1160 The respondent determined a deficiency of $ 5,287.45 in the petitioner's income tax for 1944. The question for determination is the deductibility of $ 15,000 paid by her under her guaranty of her deceased husband's brokerage account. By an amended answer the respondent has moved to increase the deficiency on the ground that in determining the deficiency he erred in allowing as a deduction for a nonbusiness bad debt $ 1,156.25 of the amount in question.
FINDINGS OF FACT.
Some of the facts were stipulated and are found accordingly.
The petitioner's 1944 income tax return was prepared on the cash receipts and disbursements basis and was filed with the collector for the third district of New York.
In 1932 the petitioner's husband, William J. Fox, had a brokerage account with the stock brokerage firm of Hilson & Neuberger. The securities in that account were held by the brokerage firm as security for an indebtedness which Fox owed to*170 the firm. In the first half of 1932 Fox told the petitioner that the account was in need of additional collateral and asked her to loan him some of her securities for use as additional collateral. Fox promised to return the securities to her, but there was no discussion or agreement to the effect that petitioner was to share in any profits that Fox might realize from the transaction. The understanding between them merely was that he would return the *1161 securities if he did not lose them. On June 13, 1932, the petitioner transferred to the said brokerage account securities owned by her as follows: 55 shares of stock in Guaranty Trust Co. of New York, 300 shares of common stock in General Baking Co., and 300 shares of common stock in R. H. Macy & Co. Immediately prior to the transfer the account showed a debit balance of $ 64,009.81. For some reason not disclosed by the record, a further debit of $ 18,000 was made to the account simultaneously with the transfer thereto of the above mentioned securities, so that immediately after the transfer the debit balance of the account was $ 82,009.81.
The petitioner had other securities than those loaned to Fox. Thereafter she and*171 Fox had arguments because she would not lend other securities to him.
In December, 1932, the account of Fox with Hilson & Neuberger was transferred from that firm (which liquidated and discontinued business by December 31, 1932) to the stock brokerage firm of Wertheim & Co.
Prior to the transfer of his account from Hilson & Neuberger, Fox told the petitioner that that firm was going out of business, that he was transferring his account to another broker, and that because the new broker wanted additional collateral it would be necessary for her to supply him with more securities. He stated that he had to have additional securities or else those securities which were already collateral for the account would be sold by the brokers and that if this were done he would lose his securities and petitioner would lose some of those she had loaned him. She refused to lend him any more securities because she felt she had already put up enough. Fox then asked her to execute a guaranty. On December 16, 1932, she executed an instrument addressed to Wertheim & Co. which recited that in consideration of that company opening, or continuing, an account or accounts with or otherwise giving credit*172 to Fox on such terms as that company might deem best, the petitioner unconditionally promised to pay the company on demand any debit balance or balances, and all losses, then, or which might thereafter be owing to the company by reason of said account or accounts. The instrument further provided that the guaranty therein was a continuing one and should cover the period of existence of said account or accounts, and that said account or accounts might be changed from time to time by the purchase or sale of securities or other property or by payments or deliveries of securities or other property to Fox without notice to the petitioner. The petitioner executed the guaranty because she did not want to lend any more securities to Fox and because she thought she would protect the securities she had theretofore loaned him.
*1162 At the time of the execution of the guaranty the debit balance of Fox's account was $ 91,043.52. The value at that time of the securities held in the account was $ 71,633, of which $ 33,263 represented the value of the securities loaned by the petitioner to Fox.
Prior to August 16, 1935, Fox told the petitioner that he was planning to transfer his account *173 from Wertheim & Co. to the stock brokerage firm of Engel & Co. for the purpose of saving interest. He also told her that Engel & Co. wanted the same kind of guaranty as she had executed to Wertheim & Co. and asked that she execute a similar guaranty running to Engel & Co. On August 16, 1935, the petitioner executed to Engel & Co. an instrument similar in terms to that executed by her to Wertheim & Co. on December 16, 1932. On the same day, August 16, 1935, Fox's brokerage account was transferred to Engel & Co. The debit balance of the account at the time of the transfer was $ 152,357.04.
There was no agreement that petitioner was to share in any profits realized by Fox in connection with either the guaranty executed by her on December 16, 1932, or that executed on August 16, 1935.
Fox sometimes talked with the petitioner about his account when he was in the mood. She did not know in what stocks he was investing, nor could she govern his choice of the brokerage firm with which he did business.
Fox died on October 19, 1937. In the administration of his estate the corpus thereof was insufficient to pay his debts, among which was the indebtedness to Engel & Co. which was guaranteed*174 by the petitioner as set out above. At the date of his death his indebtedness to that company on his brokerage account was $ 155,478.17. After reducing that amount by the proceeds from the sale of the securities pledged in the account, namely, $ 14,212.03, the indebtedness due from his estate on the account amounted to $ 141,266.14. The executors of Fox's estate were discharged in 1940.
The petitioner made payments to Engel & Co. and its successors under the aforesaid guaranty during the years and in the amounts as follows:
| 1937 | $ 17,268.44 |
| 1938 | 19,001.06 |
| 1939 | 10,000.00 |
| 1940 | 15,000.00 |
| 1941 | 15,000 |
| 1942 | 15,000 |
| 1943 | 15,000 |
| 1944 | 15,000 |
In reporting her income for 1944 the $ 15,000 paid by petitioner to Engel & Co. during that year was deducted in full. It was not characterized on her return as a loss or bad debt, but was entered as a "Miscellaneous" deduction and described as "Payment on guaranty -- Wm. J. Fox brokerage a/c." In his determination of the deficiency the respondent treated the $ 15,000 deduction as having been claimed as a *1163 bad debt deduction, concluding that it was a nonbusiness bad debt, the deduction of which was governed by section*175 23 (k) (4) of the Internal Revenue Code. 1 By reason of the provisions of that section he determined that the deduction allowable was limited in amount to $ 1,156.25.
OPINION.
As to the exact nature and character of petitioner's claim, her petition is indefinite. Her allegations of error are, first, that the respondent erred in determining a deficiency against her for 1944 and, second, in adding back to net income $ *176 15,000 disallowed as a "bad debt." In her allegations of fact she generally recited the circumstances of the loan of securities and of the guaranty of her husband's account, the payments made by her under her guaranty prior to the taxable year, and the payment of the $ 15,000 here in question. She alleged that she "gave that guaranty because she had confidence in the trading ability of said Wm. J. Fox and believed that she would realize a substantial profit from his management of his account." In her prayer she has asked that the Court hear the proceedings and determine that the "item of $ 15,000 claimed in the return was properly allowable under section 23 of the Internal Revenue Code." There is no allegation as to the subsection of section 23 under which it is claimed the deduction is allowable. Upon brief petitioner now takes the position that the amount in question constituted a loss incurred in a transaction entered into for profit; that it should be allowed in full under section 23 (e) (2) of the Internal Revenue Code2 and should not be limited as a nonbusiness bad debt under section 23 (k) (4), supra. She no longer claims, as was alleged in her petition, that she gave*177 the guaranty because of her confidence in the trading ability of Fox and *1164 believed that she would realize substantial profit from his management of the account, but now argues that the giving of the guaranty was a transaction entered into for profit in that it was given to prevent the loss by her of the securities previously loaned to her husband.
The respondent takes the position that the loaning of the securities by petitioner to her husband in the first instance and the later guaranteeing of his account were gratuitous acts of a wife in behalf of her husband and negative any thought or idea*178 of a transaction entered into for profit, and on the basis of allegations in an amended answer further contends that in such circumstances there was no resulting indebtedness to her on the part of her husband and consequently no amount is allowable as a bad debt deduction.
At the outset it may be noted that we do not have in this case any claim for the deduction of a loss sustained by petitioner on the shares of stock loaned by her to her husband. If she has at any time claimed such a deduction, that claim was made in some prior year and we are given no facts or information with respect thereto.
Any claim that the securities were furnished by petitioner to her husband without intent that he should return them to her is, we think, without merit. Neither do we think that she intended that any amounts she might have to pay under the guaranty should be regarded as gifts. Petitioner was not making a gift to her husband, but rather was making him a loan of some of her securities and through the guaranty of his account a loan of her credit. There was a definite agreement for the return of the securities and, whether expressed in words or not, there was a legally implied obligation to*179 reimburse her for any sums she might be required to pay under her guaranty. That the law implies a promise on the part of a principal debtor to reimburse his guarantor where the guarantor is forced to pay his debt or make good his default does not in our opinion require elaboration. For a full discussion of that legal principle see Howell v. Commissioner, 69 Fed. (2d) 447. See also Thomas Watson, 8 T. C. 569; Alice du Pont Ortiz, 42 B. T. A. 173; D. W. Pierce, 41 B. T. A. 1261; and Daniel Gimbel, 36 B. T. A. 539.
The tenor of petitioner's argument seems to be that the loss could not be a bad debt loss because there was no debt, and there was no debt because the debtor died some seven years prior to the payment by her under her guaranty of the particular $ 15,000 here in question, and not only was the debtor dead, but at the time of his death he was insolvent. The argument made goes to the worth and not to the existence of the debt or liability. Exactly the same argument was made by the Government in Barnhardt-Morrow Consolidated, 47 B. T. A. 590.*180 The only difference is that in that case the debtor had been dead two years, while in this case he had been dead some seven years before the guarantor made the payment in question. We there pointed out *1165 that no authority had been cited by the respondent for his claim that the obligation of the debtor was discharged by death and further that we were unable to find authority for such proposition. We also pointed out that the obligation was not one which adhered to the person and was incapable of being performed by another, but that, on the contrary, it was an obligation which survived and for which the estate of the debtor was liable, citing Elliot v. Garvin, 166 Fed. (2d) 278; Brownfield v. Holland, 63 Wash. 86">63 Wash. 86; 114 Pac. 890. We took note of the fact that the estate was insolvent at the time the debt came into existence, namely, at the time the payment was actually made under the guaranty, and that when it did come into existence it was at that time worthless. We held that the petitioner was entitled to deduct the amount in controversy as a bad debt in the year in which the*181 guaranty payment was made. See also Thomas Watson, supra;Alice du Pont Ortiz, supra; and D. W. Pierce, supra.As in Barnhardt-Morrow Consolidated, supra, the loss here was a bad debt loss.
Prior to the enactment of section 23 (k), limiting as to amount deductions for bad debts where the debts were nonbusiness debts, a taxpayer in a case such as we have here would not have been greatly concerned whether the loss be held to be a bad debt loss or a loss in a transaction entered into for profit. In either case he would have been entitled to deduct the full amount of his loss. Section 23 (k) (4) has been enacted, however, and by its provisions nonbusiness debts which have become worthless are not deductible in full, but are subject to the same limitations as in the case of a loss resulting from the sale or exchange of a capital asset held for not more than six months. It is the petitioner's contention not only that the loss here can not be a bad debt loss for the reasons argued and rejected by us above, but further that the loss is a loss incurred in a transaction*182 entered into for profit and is deductible under section 23 (e) (2), supra, because the payment in question was made under a guaranty given by petitioner in the hope of eventually recovering the securities she had loaned to her husband, from which securities she hoped to receive and realize profits in the nature of dividends. In that connection it might be pointed out that some losses which admittedly are bad debt losses are much more readily seen to be the result or culmination of transactions entered into for profit than the transaction here, but that does not make them losses deductible under section 23 (e) (2) rather than under section 23 (k). Loans made for the sole purpose of earning interest might be suggested in contrast to the instant case, where the original loan was a loan of securities solely for the accommodation of her husband and there was no thought or intention on petitioner's part of receiving anything in return except the securities she had loaned. *1166 Discussion also might be indulged in as to whether or not the fact that petitioner's original acquisition of the securities loaned would determine that any guaranty thereafter made which was designed *183 to protect her interest would be a transaction entered into for profit because the original purchase or acquisition of the securities was for the purpose of making a profit and dominated the guaranty in that respect even though the loan of the securities themselves had no profit motive attached to it at all other than such satisfaction as she might receive from helping her husband. Cf. R. W. Hale, 32 B. T. A. 356. See, however, Burdan v. Commissioner, 106 Fed. (2d) 207, and Evans v. Rothensies, 114 Fed. (2d) 958, the court in the latter case pointing out that the purpose which motivated a transaction originally may change to the end that one which was entered into for profit might later become one not for profit, just as one which was not for profit originally might become a transaction for profit. Regardless of such considerations, however, we think that the answer is definitely indicated by the pattern of the statute. In section 23 (e)Congress made provision generally for the deduction of losses incurred in a trade or business and in transactions entered into for profit, whereas*184 in section 23 (k) it has legislated particularly with respect to bad debt losses. In Spring City Foundry Co. v. Commissioner, 292 U.S. 182">292 U.S. 182, the Supreme Court pointed out and held that the provisions allowing deductions for losses and those governing the deduction of bad debts were mutually exclusive and that a worthless debt was not deductible under the loss provisions of the statute. We have already shown that the loss here was a bad debt loss and the petitioner herself makes no claim that the liability under her guaranty of her husband's account was a liability incurred in a trade or business. See and compare Tecla M. Straub, 13 T. C. 288, and Vincent C. Campbell, 11 T.C. 510">11 T. C. 510. The debt was a nonbusiness debt and, being worthless when it arose, see and compare Eckert v. Burnet, 283 U.S. 140">283 U.S. 140, it was deductible by petitioner, subject to the limitations of section 23 (k) (4), supra.
To support her claim that the loss here was a transaction entered into for profit within the meaning of section 23 (e) (2) and not a bad debt loss under section 23 (k)*185 (4), petitioner, among other cases, cites and relies on Abraham Greenspon, 8 T. C. 431; Carl Hess, 7 T. C. 333; and R. W. Hale, supra. The Hale and Hess cases are different and are distinguishable from the instant case in that the payments in those cases were part and parcel of contracts for the sale of stocks. In the Greenspon case there was a guaranty on the part of officer-stockholders of certain corporate debts and the items involved in the proceedings before us were payments made pursuant to those guaranties. We concluded that the losses there were not bad debt losses, but losses incurred within the meaning of section 23 (e). Our conclusions there *1167 that on the facts in the case the losses were incurred in a trade or business or in transactions entered into for profit are not in question here. In view, however, of petitioner's reliance upon the Greenspon case and in the light of the conclusions reached in the instant case that the loss here is a bad debt loss and our reasons therefor, it should be noted that nothing said in the Greenspon case as the basis*186 for the conclusion that the losses there were not bad debt losses is regarded as controlling here. Nor do the facts or what was said in Frank B. Ingersoll, 7 T. C. 34, suggest or indicate that we should here reach a contrary conclusion.
Decision will be entered under Rule 50.
Arundell, J., dissenting: There would appear to be no dispute that petitioner sustained an out-of-pocket loss of $ 15,000 when she made payment under her obligation as a guarantor. To be deductible, this out-of-pocket loss must not be compensated for by insurance or otherwise and must be (1) incurred in trade or business, or (2) incurred in a transaction entered into for profit, or (3) the result of a casualty or theft. Sec. 23 (e), I. R. C.
In effect, the majority opinion translates petitioner's loss into a nonbusiness bad debt by holding that petitioner was compensated for her loss by the claim that she then had over against the principal debtor, the estate of her deceased husband. Until petitioner made the payment in question, she possessed no right to reimbursement. Cf. Eckert v. Burnet, 283 U.S. 140">283 U.S. 140. When payment *187 was made, her husband had been dead for seven years, his estate had been found insolvent, and the executors of his estate had been discharged. It seems to me highly specious to hold that she then received a theoretical claim against his estate which "compensated" her for her loss. A similar problem was before us in Abraham Greenspon, 8 T. C. 431, where the guarantors were permitted to deduct the loss sustained on paying their obligations as guarantors, since the principal debtor was an insolvent defunct corporation from which recourse was impossible. The Greenspon decision does not appear to me to be satisfactorily distinguished by the majority opinion here.
If petitioner's payment is characterized as a loss for the reasons set forth above rather than as a bad debt, as the majority holds, the deductibility of the payment must depend upon whether the loss was incurred in a "transaction entered into for profit." This question has not been squarely met in the majority opinion.
Footnotes
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
* * * *
(k) Bad Debts. --
* * * *
(4) Non-business debts. -- In the case of a taxpayer, other than a corporation, if a non-business debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 6 months. The term "non-business debt" means a debt other than a debt evidenced by a security as defined in paragraph (3) and other than a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business.↩
2. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * * *
(e) Losses by Individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise --
(1) if incurred in trade or business; or
(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *↩