*902 1. Petitioners are husband and wife and for the taxable years 1932 and 1933 filed separate income tax returns. During the taxable years petitioners each sold securities through a broker at market prices, which were less than cost basis, and claimed deductions for capital net losses. Each petitioner purchased on the same date and at the same price some but not all of the securities sold by the other. Thereafter, during periods varying from approximately 30 days to 6 months, each petitioner sold some of the securities so purchased, and the other repurchased at market some but not all of the securities originally held. Each petitioner paid for all purchases with his or her separate funds, and each received the proceeds of his or her sales. Held, the transactions constituted bona fide sales, and petitioners are entitled to the deductions claimed.
2. In 1930 petitioner H. Rodney Sharp guaranteed a stock-trading account for a friend by posting collateral with the broker. The owner of the account had no assets other than his equity in the securities held therein. In 1932 the account was closed out, and petitioner pursuant to his guarantee paid the broker $80,602.17, the net*903 amount due on the account. Thereupon, petitioner set up such amount on his books as an obligation owing to him by the former owner of the trading account, and charged off the same as a bad debt. Held, the amount constitutes an allowable deduction from gross income.
*167 These are consolidated proceedings for the redetermination of deficiencies in income tax as follows:
| Petitioner | Docket. No. | Year | Deficiency |
| H. Rodney Sharp | 84260 | 1933 | $5,413.83 |
| Do | 86704 | 1932 | 47,653.08 |
| Isabella du Pont Sharp | 84259 | 1933 | 1,530.03 |
| Do | 86705 | 1932 | 4,152.68 |
The issues are (1) whether respondent erred in disallowing deductions claimed by petitioners on account of capital net losses alleged to have been sustained in the taxable years; and (2) whether respondent erred in disallowing a deduction for the year 1932 in the amount of $80,602.17 claimed by petitioner H. Rodney Sharp on account of an alleged bad debt.
FINDINGS OF FACT.
The petitioners are and have been husband*904 and wife for a period of over 30 years. In the latter part of 1931 the petitioner, H. Rodney Sharp (hereinafter called Sharp - the petitioner Isabella du Pont Sharp will be called Mrs. Sharp) knew that many people were selling securities on which the sale price was lower than the cost price and thereby effecting losses which could be considered in the computation of net income for the purpose of reducing taxes. He knew that the loss was legal and allowable if no agreement was entered into to repurchase the securities sold within a period of 30 days before or after the sale and if no actual repurchase of the securities sold was made within a period of 30 days from the date of the sale. He believed that after a period of 30 days the seller could repurchase the securities without affecting his right to take the loss on his income tax return if he chose to do so.
Accordingly, in 1931, Sharp reviewed the securities contained in his and Mrs. Sharp's portfolios and selected certain securities in each portfolio on which the owner had suffered a decline in value from the cost basis. He discussed with Mrs. Sharp the matter of selling these securities, explaining to her the purpose of*905 the sale and further explaining to her that after a period of 30 days they could repurchase the securities sold by them if they so chose, provided there was no agreement to repurchase such securities during *168 the intervening 30-day period. Sharp also explained to Mrs. Sharp that when he sold certain securities it was legal for her to purchase similar securities; and, vice versa, when she sold certain securities, he could purchase similar securities.
Mrs. Sharp agreed with the ideas presented by her husband and authorized him to act for her in the matter. In December 1931 each sold certain securities and simultaneously the other bought the same amounts of similar securities. There never was any agreement within 30 days before or after these transactions that the securities sold and purchased would be resold and repurchased - at any time, at any price, or under any combination of circumstances. After 30 days had elapsed, petitioners discussed selling and purchasing the securities that each had previously bought and sold, and agreed that it would be advisable for each to sell the stocks so purchased and to purchase the stocks so sold during the latter part of 1931. In*906 the early part of 1932 Sharp made such purchases and sales for his own account and acted as Mrs. Sharp's agent in giving orders to the brokers for such purchases and sales for her account.
Under similar circumstances and considerations, the petitioners in 1932, 1933, and 1934 made sales and purchases of securities as follows:
(Table omitted)
(Table omitted)
*171 All sales material to the issues were made through E. W. Clark & Co., brokers, of Philadelphia, through their Wilmington office. There never were any direct sales between the petitioners. The separate funds of each petitioner were used for each purchase. All sales and purchases were made at prices which represented the fair market value of the securities sold or purchased. The proceeds of each sale were deposited to the separate bank account of each seller and there never has been any transfer of funds, or cash, from Sharp to Mrs. Sharp, or vice versa. Each petitioner, during all the pertinent times in question in this case, always had sufficient separate cash funds on deposit to pay for all stocks purchased, and all stocks purchased were paid for in cash out of the bank account of the respective purchaser.
*907 Sharp, ever since his marriage to Mrs. Sharp (more than 30 years ago) has acted as her agent in financial matters. For 30 years he has had a power of attorney to sign checks for her and all of the checks issued for the purchases by her of stock described above were signed "Isabella du Pont Sharp by H. Rodney Sharp, agent." As an invariable practice Sharp discussed financial matters with his wife before taking any steps on her behalf and secured her permission before acting. He never had authority to endorse stock certificates or powers of attorney involved in the transfer of her securities and he "never signed any of her powers of attorney for the transfer of stock", nor has he "ever signed any stock certificates in her name." She always endorsed any certificates of stock or other securities that she was selling.
The stock losses sustained by petitioners during 1932 and 1933 resulted from bona fide sales and were allowable deductions in computing the Federal income taxes of the petitioners for those years.
One Baron de Vaux had been a very good friend of the petitioners for about 20 years prior to 1932. He was engaged in a small interior decorating business in New York. *908 The interior decorating business carried on by de Vaux was done largely on a commission basis and he owned little or no assets of the business. In addition to his interior decorating business de Vaux speculated in the stock market. He had done this for quite some time prior to the 1929 panic. When the panic came he was threatened with the loss of his equity in the securities he was carrying. De Vaux came to Sharp in the fall of 1929 and asked him to guarantee his stock margin account and post collateral to back up the guarantee in an endeavor to save his remaining equities. Sharp agreed to the request of his friend and guaranteed his account and posted collateral. In the spring of 1930, when the stock market went up, de Vaux was able to pay off his debt and Sharp was released from his guarantee and his collateral was returned to him. Later, in the summer of 1930, de Vaux's *172 brokerage account again became undermargined - due to a further recession in the market - and he again asked Sharp to help him out, which Sharp did by guaranteeing his account and posting collateral. As time went on and the market further receded, de Vaux was called upon to post further collateral*909 to protect his account. Having no further collateral, he found it necessary from time to time to call upon his friend, Sharp, to help him and to have Sharp post additional collateral for him. Sharp posted such additional collateral in order to protect the large amounts of collateral that he had theretofore posted to guarantee the account. At one time during the existence of the loan, de Vaux's indebtedness to the brokers, guaranteed by Sharp, amounted to over $212,000 and eventually when it was closed out it amounted to $104,286.75. Finally, in the spring of 1932, Sharp, after talking to counsel and friends, decided that the best thing for him to do was to close the transaction and take his loss. This he effected by paying off de Vaux's indebtedness in the amount of $104,286.75 and taking over his securities at their then market value of $23,684.58. This left a difference of $80,602.17 as a debt owing from de Vaux to Sharp and he instructed his secretary to set up such an amount on his books as a debt from de Vaux and to write it off as uncollectible and worthless. His secretary carried out his instructions.
Sharp had known de Vaux intimately for a good many years and had*910 frequently discussed de Vaux's financial position with him. Sharp knew in the spring of 1932 when he closed out de Vaux's margin account that de Vaux had no other worthwhile assets from which he could hope to collect money in payment of de Vaux's debt. De Vaux had a small villa in France, which Sharp had visited, from which de Vaux received no income. Sharp believed that the expense involved in reducing his claim against de Vaux to judgment and then suing on it in the French courts in order to foreclose on de Vaux's small place in France would be more costly than the amount that would thereby be collected. Sharp knew that by December 1930 de Vaux's financial condition had become so precarious that he did not have enough income on which to live. He established a small revocable trust in which he provided that the income from 500 shares of the stock of General Motors Corporation should be paid over to de Vaux. This trust produced $593.75 of income in 1932, the income tax on which amount was paid by Sharp. Sharp did not revoke this trust when he took over de Vaux's stocks because he had the right to revoke it in any event and de Vaux needed the money to obtain necessities.
*911 Sharp studied de Vaux's loan account from time to time after he guaranteed the account during the summer of 1930. He insisted that no sales or purchases of securities should be made for de Vaux's *173 account without obtaining his (Sharp's) approval. When he bought antiques and objects of art from de Vaux he insisted that the moneys received by de Vaux from him should be applied to reduce de Vaux's debt.
Sharp did not expect to sustain a loss when he guaranteed de Vaux's loan account during the summer of 1930. If de Vaux had had substantial assets other than his security holdings, Sharp would have attempted to collect against these as he would have from a stranger.
The deduction which Sharp took on his 1932 return in the amount of $80,602.17 represented a debt owing from de Vaux to Sharp which was worthless and was charged off on the books of Sharp during 1932.
OPINION.
HILL: Petitioners' first assignment of error relates to the action of respondent in denying deductions to the extent of $140,412.13 claimed by them on account of capital net losses alleged to have been sustained during the taxable years in the circumstances set out in our findings of fact hereinabove. *912 This issue is involved in all four of the consolidated proceedings.
Because of the fact that petitioners are husband and wife, and each purchased on the same date and at the same market price substantially the same securities sold by the other spouse at less than cost basis in order to claim a deductible loss for tax purposes, and after 30 days the securities were resold and in some instances reacquired by the original owner, respondent contends that the transactions did not constitute bona fide sales, and therefore the alleged losses are not allowable deductions.
Petitioners readily admit that the purpose of these transactions was to reduce their income taxes. However, such purpose does not defeat allowance of the deductions claimed, if bona fide sales were made and actual losses sustained. .
Respondent suggests that transactions between a husband and wife are to be subject to the closest scrutiny, citing ; ; *913 ; . While this is true, it does not mean that any different or harsher rule is to be applied in the instant case than would be applicable if the transactions had occurred between parties other than husband and wife. In substance, the question presented here is whether the stock transactions above set forth constituted bona fide sales, or whether they were merely sham or pretended sales entered into for the sole *174 purpose of reducing tax liability through the medium of the claimed loss deductions.
Where the result of a transaction is to restore the status quo ante under circumstances indicating that the taxpayer never intended to make a bona fide sale, the Board has consistently denied the deduction of alleged losses, whether or not the transaction was between husband and wife.
In ; affd., ; certiorari denied, , cited by respondent on brief, the facts show that in October 1921, prior to his death, Niels Esperson sold through a broker*914 certain shares of stock, and caused the broker to purchase on the same date and at the same price a like number of shares of the same stock ostensibly for his secretary and brother-in-law, to whom Esperson loaned the money to pay for the stock. The stock certificates were endorsed and turned over to Esperson as collateral security for the alleged loan. In 1923, after Esperson's death, the charges against his secretary and brother-in-law were canceled. The Board held there was no bona fide sale by Esperson; that he attempted to create a deductible loss and at the same time retain his stock.
In , also cited in respondent's brief, the taxpayer, on December 30, 1927, purportedly sold for $50 to a close business associate 500 shares of corporate stock, which he repurchased from his associate on April 6, 1928, for $50. On December 27, 1928, the petitioner again purported to make a sale of 500 shares of stock of the same corporation to the same business associate for $50, and repurchased the stock in April 1929 at the same price. The Board denied the deductions claimed on account of alleged losses resulting from such transactions.
*915 In ; affd., ; certiorari denied, , cited by respondent, the taxpayer gave instructions to a broker to sell certain personally owned stocks and at the same time instructed the broker to buy identical quantities of the same stocks on behalf of a corporation of which petitioner was president and in complete control. Upon the expiration of 30 days the corporation transferred the stocks to petitioner in his personal capacity. On the evidence, the Board concluded that the corporation was for all practical purposes an alter ego of the taxpayer, being entirely dominated by him; and since the whole transaction showed a persisting intention by the taxpayer to hold title and dominion over the stocks, it did not amount to a bona fide sale.
The present proceedings, in our opinion, are clearly distinguishable from the cited cases. Here there were no direct sales between the petitioners; all sales and purchases were made through a broker at *175 prices which represented the fair market value of the securities sold or purchased. The proceeds of each sale were deposited in the*916 separate bank account of the seller, and there has been no transfer of funds or cash from either petitioner to the other. Each petitioner had sufficient separate cash funds on deposit to pay for all stocks purchased, and all stocks purchased were paid for in cash out of the bank account of the respective purchasers. At the time of the transactions there was no agreement between petitioners, express or implied, for the resale or reacquisition of any of the stocks involved.
The status quo ante of petitioners was not restored after consummation of the transactions in controversy, either in respect of their financial positions or the securities held by them. On December 19, 1932, petitioner H. Rodney Sharp sold thirteen items of securities, of which six items were never repurchased by him. On December 20, 1932, the same petitioner sold two items of securities, one of which was never repurchased. Of the securities sold by the husband on December 19, 1932, the wife purchased eleven items of like securities, but did not purchase either item sold by the husband on December 20. Of the securities purchased by the wife on December 19, 1932, three of the items were not thereafter*917 sold by her but were retained in her portfolio. Likewise, the securities originally held and sold by the wife were not all purchased by the husband, and such securities as were sold by the one spouse and purchased by the other, were not all resold by the purchasing spouse upon the expiration of 30 days, but such resales as were made occurred during periods extending from slightly more than 30 days to more than 6 months after purchase, during which intervening periods there were substantial changes in the market values of the securities. Thus, the stocks owned and held by the petitioners, respectively, prior and subsequent to the transactions in controversy, were materially different. Nor did their financial positions remain unchanged. This is apparent from an examination of the schedule of sales and purchases set out in our findings of fact above. Reference to a single item will illustrate this point sufficiently. On December 19, 1932, Mrs. Sharp sold 70 shares of B. & O. common for $654.15, and on the same date her husband purchased the same number of shares of the same stock for $670.31. He sold this stock on June 21, 1933, for $1,578.85, thus realizing a profit in excess*918 of $900 on his investment of $670.31, and on the same date Mrs. Sharp repurchased at a cost of $1,601.31.
In the light of the facts above set forth, we can not say that the transactions in question were not bona fide sales, merely because one petitioner saw fit to purchase at market prices with his or her separate funds securities similar to those sold by the other, or because at some later date a portion of the securities so sold was reacquired by the *176 original seller at market with separate funds, where there is no evidence of any agreement so to reacquire. To hold otherwise would be to deny ownership by petitioners of their separate funds and properties, since unrestricted control and dominion is a primary indicium of ownership.
On the first issue respondent's action is reversed.
The second issue involves a bad debt deduction claimed in his return for the year 1932 by petitioner H. Rodney Sharp in the amount of $80,602.17, which was disallowed by respondent. Briefly summarized, the facts relating to this issue show that one de Vaux and petitioner had been very good friends for about 20 years prior to the taxable year. De Vaux operated a small interior decorating*919 business in New York, and also speculated in the stock market. He had little or no assets other than his equity in certain securities he was carrying on margin. In 1929 de Vaux requested petitioner to guarantee his account with the brokers, which petitioner did by posting collateral. In the spring of 1930 the market went up and petitioner was released from his guarantee and his collateral was returned to him. Later in the same year de Vaux's brokerage account again became undermargined, and petitioner again guaranteed the account by posting collateral. As the market declined petitioner put up additional collateral from time to time. Finally petitioner caused the account to be closed out in the spring of 1932, at which time pursuant to his guarantee petitioner paid de Vaux's indebtedness to the brokers in the amount of $104,286.75 and took over his securities at their market value of $23,684.58. The difference of $80,602.17 petitioner set up on his books as a debt owing to him from de Vaux and wrote off the amount as worthless. That the indebtedness was then in fact worthless is not in question here.
Respondent asserts that the deduction claimed is not allowable for two reasons. *920 First, he says that the relationship of debtor and creditor never arose between de Vaux and petitioner; that the transaction constituted a gift of the amount in controversy by petitioner to his old friend, de Vaux. Without repeating the detailed circumstances set out in our findings of fact, it is sufficient to say that we have carefully considered all of the evidence and find nothing to indicate a donative intent on the part of petitioner.
Respondent's second contention is that, if a debtor-creditor relationship ever existed between the parties, the obligation was worthless at the time it arose, which respondent says was prior to the taxable year. Apparently respondent proceeds upon the theory that if de Vaux became indebted to petitioner at all, it was in 1930 when the petitioner guaranteed his friend's brokerage account. We think this view is erroneous. Petitioner at that time assumed only a secondary *177 liability. If the market had advanced instead of declined, petitioner's guarantee again would have been canceled and his collateral released, as it was in the first instance, and if the account had then been closed de Vaux would never have become indebted to petitioner*921 in that connection in any amount.
We think it is plain, under the facts of this case, that de Vaux did not become indebted to petitioner until 1932, when petitioner paid de Vaux's obligations to the brokers by reason of the guarantee given in 1930. Petitioner's agreement was to guarantee the account with the brokers; it was not an agreement to indemnify the brokers. Having paid de Vaux's indebtedness to the brokers pursuant to such guarantee, petitioner thereupon became subrogated to the claim of the brokers against de Vaux, and, this claim being worthless at that time, petitioner is entitled to the deduction claimed. See , and authorities cited.
On the second issue, respondent's action is reversed.
Judgments will be entered under Rule 50.