*1040 1. Petitioner Alice duPont Ortiz maintained certain long and short accounts with her brokers through which she bought and sold securities. The shares were held by the brokers in street names. Shares sold were cleared through the short account, and where petitioner had sufficient shares in her long account to cover, the brokers made delivery and reduced the number of shares in her long account accordingly. Dividends declared on the shares in the long account were credited to petitioner and those in the short account were charged to her. Held, under the circumstances the sales so made were ordinary sales and not short sales; held, further, petitioner is chargeable with dividend income only to the extent the dividends credited to the long account exceeded those charged to the short account.
2. Petitioner was engaged in the business of buying and selling securities. Held, commissions paid to brokers on sales of stock and commodities constituted ordinary and necessary business expenses.
3. Petitioner guaranteed certain brokerage accounts of her husband, who was trading in securities. During 1934 she was forced to respond under her guaranty and make good a deficit*1041 in his accounts. The husband had no earning capacity and such property as he had was taken by the wife in reduction of the amount paid under her contract of guaranty. Held, under the facts petitioner is entitled to deduct the difference between the amount paid under the guaranty and the value of the property taken from her husband, as a debt ascertained to be worthless and charged off.
*174 The respondent determined deficiencies in income tax of the petitioners of $122,568.88 for the year 1934 and $12,923.33 for the year 1935. The proceeding involves only the income and deductions of petitioner Alice duPont Ortiz. The questions presented are (1) whether sales of certain shares of stock made through a brokerage account of the petitioner designated as a "short" account, were short sales; (2) whether the petitioner is entitled to deduct, as ordinary and necessary business expenses, commissions paid to brokers on sales of stocks and commodities; and (3) whether the petitioner is entitled to deduct as a bad debt the*1042 unrecovered portion of an amount charged to her under a guarantee of brokerage accounts of her husband. The petitioner contends that the sales involved in issue (1) were not short sales, and that in determining her correct dividend income she is therefore entitled to offset dividends credited to her long accounts by dividends charged against her short account; but that, if the sales be held to be short sales, she is entitled to deduct the dividends charged to her short account as ordinary and necessary business expenses. The case was heard on a stipulation of facts and oral testimony. All facts contained in the stipulation not set out herein are incorporated in our findings of fact by this reference.
FINDINGS OF FACT.
The petitioners are husband and wife and residents of Greenville, Delaware. They filed joint income tax returns for the years 1934 and 1935, which were made on the cash receipts and disbursements basis. Julien Ortiz had allowable deductions in excess of his gross income for 1934 and no income or deductions for 1935.
Alice duPont Ortiz, hereinafter referred to as the petitioner, from 1925 to October 1, 1932, maintained brokerage accounts with Laird, Bissell*1043 & Meeds at their Wilmington, Delaware, office. In 1929 these accounts were set up as three separate accounts under the designations "Alice duPont Ortiz", "Alice duPont Ortiz, Special", and "Alice duPont Ortiz, Short", which are hereinafter referred to, respectively, as the regular, special, and short accounts. The brokerage firm of Laird & Co. was organized on October 1, 1932, with offices at Wilmington, and as of that date the petitioner transferred the three accounts to Laird & Co., who restated them on their books in the same manner, and in the same amounts, as they stood on the books of Laird, Bissell & Meeds. Thereafter, the petitioner opened three additional accounts with Laird & Co. designated, respectively, as "trading", "commodity", and "spot" accounts. All of these accounts were carried with Laird & Co. during the taxable years. On October 18, 1932, the petitioner notified Laird & Co. in writing that the regular, special, and short accounts were one and the same and were merely kept separate for her convenience and that she was the only person who had any interest therein. This notice was later amended to include the trading account.
*175 During the years*1044 1932 and 1933 the petitioner held in her regular and special accounts stocks and bonds of various corporations, including common stocks of the following:
E. I. duPont de Nemours & Co.McKeesport Tin Plate Co.
Phillips Petroleum Co.
Equitable Office Building Co.
Continental Diamond Fibre Co.
From time to time during the period January 1 to October 1, 1932, the petitioner directed Laird, Bissell & Meeds to sell for her short account stocks of various corporations when at the same time similar stocks were held in her regular and special accounts. Upon receipt of instructions to sell the stocks for the short account, Laird, Bissell & Meeds transmitted the order by telephone or telegraph to their New York office, which in turn instructed their floor broker to make the sale in the regular way on the floor of the New York Stock Exchange, that is, for delivery on the full business day following the contract. Delivery was made by Laird, Bissell & Meeds to the purchasing broker for the petitioner's short account in accordance with her agreement with Laird, Bissell & Meeds. None of the shares of stock specified above and held in the petitioner's regular and special accounts*1045 were registered in her name. They were in the form of street certificates, none of which were in any way designated as belonging to the petitioner. The proceeds were credited to the petitioner's short account. Thereafter, Laird, Bissell & Meeds debited the petitioner's short account with amounts equal to any dividend paid on the number of shares shown in such short account on the dividend dates; and they credited interest on the entire credit balance in such short account at the same rate of interest as petitioner's debit balance in her long account was charged.
When the regular, special, and short accounts were transferred to Laird & Co., the position of those shares having a long and those having a short status, as set up on the books of Laird & Co. as of October 1, 1932, were as follows:
| Longs | Shorts | Net | |
| Shares | Shares | Shares | |
| DuPont DeNemours & Co | 37,000 | 9,100 | 27,900 |
| McKeesport Tin Plate Co | 15,050 | 8,850 | 6,200 |
| American Ice Co | 2,500 | 300 | 2,200 |
| Baltimore & Ohio R.R. Co | 900 | 500 | 400 |
| Continental Diamond Fibre Co | 3,100 | 3,000 | 100 |
The net number of shares, as indicated above, were received by Laird & Co. and their correspondent*1046 New York brokers from Laird, Bissell & Meeds for the account of the petitioner.
*176 From time to time during the period October 1, 1932, to December 31, 1935, the petitioner directed Laird & Co. to sell in her short account stocks of various corporations where at the same time like shares of stock were held in her regular and special accounts. Upon receipt of instructions to sell stocks in the petitioner's short account, where at the same time like shares were held in her regular and special accounts, Laird & Co. transmitted the order by telephone to their New York correspondent broker with instructions to make the sale in the regular way on the floor of the New York Stock Exchange, that is, for delivery on the full business day following the contract. Delivery was made to the purchasing broker by Laird & Co. through their New York correspondent with shares of stock in street names held for the account of Laird & Co. by their New York correspondent, and the latter thereupon credited the account of Laird & Co. with the proceeds of the sale of the stock and reduced the number of shares of the particular stock held in street names for Laird & Co. by the number of shares sold. *1047 Laird & Co. thereupon credited the petitioner's short account with the proceeds of the sale, and also allowed interest on the account. None of the shares of like stock shown as in long positions in the petitioner's regular and special accounts were registered in her name. They were in the form of street certificates, none of which were in any way designated as belonging to the petitioner.
During the years 1934 and 1935 the petitioner's regular and special accounts were credited and her short account was charged with amounts designated as dividends, on the respective dividend dates, as follows:
| Year 1934. | |||||
| Date | Security | Shares long acct. | Shares short acct. | Credited as dividends | Charged as dividends |
| 3/15/34 | duPont | 39,356 | 39,356 | $19,678.00 | $19,678.00 |
| 6/15/34 | do | 39,356 | 39,356 | 25,581.40 | 25,581.40 |
| 9/15/34 | do | 39,356 | 39,356 | 45,259.40 | 45,259.40 |
| 12/15/34 | do | 39,356 | 39,756 | 31,484.80 | 31,804.80 |
| 122,003.60 | 122,323.60 | ||||
| 1/2/34 | McKees, T.P | 6,650 | 6,650 | 6,317.50 | 6,317.50 |
| 4/2/34 | do | 6,650 | 6,650 | 6,650.00 | 6,650.00 |
| 7/2/34 | do | 6,650 | 6,650 | 6,650.00 | 6,650.00 |
| 19,617.50 | 19,617.50 | ||||
| 2/15/34 | Phillips Pet | 5,000 | 4,800 | 1,250.00 | 1,200.00 |
| 5/14/34 | do | 5,000 | 4,800 | 1,250.00 | 1,200.00 |
| 9/1/34 | do | 5,000 | 4,800 | 1,250.00 | 1,200.00 |
| 3,750.00 | 3,600.00 | ||||
| 1/2/34 | Eq. Of. Bldg | 1,100 | 200 | 261.25 | 47.50 |
| 4/2/34 | do | 1,100 | 200 | 275.00 | 50.00 |
| 7/2/34 | do | 1,100 | 200 | 110.00 | 20.00 |
| 646.25 | 117.50 | ||||
| 9/12/34 | Gen. Motors | 200 | 150.00 | ||
| 12/12/34 | do | 300 | 75.00 | ||
| 9/15/34 | Calif. Packing | 200 | 75.00 | ||
| Total | 146,017.35 | 145,958.60 |
| Year 1935. | |||||
| Date | Security | Shares long acct. | Shares short acct. | Credited as dividends | Charged as dividends |
| 3/15/35 | duPont | 5,100 | 4,700 | $3,315.00 | $3,055.00 |
| 6/15/35 | do | 5,100 | 5,200 | 3,315.00 | 3,380.00 |
| 9/14/35 | do | 5,100 | 5,100 | 6,375.00 | 6,375.00 |
| 12/13/35 | do | 5,100 | 5,000 | 4,590.00 | 4,500.00 |
| 12/27/35 | Gen. Mts. div | 92 40/55 | 90 50/55 | 5,227.50 | 5,125.00 |
| 22,822.50 | 22,435.00 | ||||
| 3/29/35 | Con'l Dia. Fibre | 2,000 | 2,000 | 300.00 | 300.00 |
| 6/28/35 | do | 2,000 | 2,000 | 300.00 | 300.00 |
| 9/30/35 | do | 2,000 | 2,000 | 500.00 | 500.00 |
| 1,100.00 | 1,100.00 | ||||
| 3/12/35 | Gen. Motors | 300 | 75.00 | ||
| 7/15/35 | Amer. Tel. & Tel | 400 | 900.00 | ||
| 10/15/35 | do | 275 | 618.75 | ||
| Total | 23,922.50 | 25,128.75 |
*177 In the case of sales made through the short account, none of the sales tickets bore the words "short sale" nor did they contain any direction not to deliver any of the petitioner's stock. Pursuant to the authority granted to treat all the accounts as a unit, Laird & Co., in all cases where the petitioner held in her long accounts shares in excess of those being sold through the short account, did not require any margin and made*1049 delivery out of the long accounts against the sale made through the short account, crediting the petitioner with the cash proceeds of the sale. At the time of the sale the delivery of the shares was recorded on the short account and the position in the long accounts was reduced by the number of shares sold. In those cases where the long accounts did not contain shares in excess of the number sold through the short account, Laird & Co. charged the petitioner the regular marginal requirement for a short sale, borrowed the stock for the purpose of delivery, and charged the petitioner with the Federal short sale tax. The proceeds of the sale were carried as a credit in her account until such time as she delivered the stock. It was what is known as a fictitious credit, since the cash was retained by Laird & Co. for the protection of the purchaser or the broker from whom the stock was borrowed. Where the petitioner's long position exceeded her short position, her brokerage account was credited with interest.
The amounts credited by Laird & Co. a dividends on the regular and special accounts during 1934 and 1935 were reported by them to the Treasury Department on Form 1087 ad dividends*1050 received on stocks owned by the petitioner. While Laird & Co. credited the full amount of dividends on shares in the long accounts and charged the amount of dividends on shares in the short account, they actually received directly or through their correspondents dividends on the net amount of shares held by them, and the cash dividends received and held for *178 the petitioner were those on the number of shares in the long accounts in excess of the number in her short account.
On October 3, 1934, a journal entry was made on the books of Laird & Co. as of September 10, 1934, and posted in the petitioner's accounts, showing delivery of 6,650 shares of McKeesport Tin Plate Co. from the petitioner's special account, and the receipt of 6,650 shares of that stock in the petitioner's short account. Laird & Co. did not have physical possession of any McKeesport Tin Plate Co. stock on October 3, 1934. The shares of McKeesport Tin Plate Co. stock held for customers were being held by the New York correspondent brokers of Laird & Co. The accounts of such correspondent brokers and the number of shares held by them were not affected in any manner by the said journal entry. The total*1051 number of shares of McKeesport Tin Plate Co. stock held by such correspondent brokers were held for customers of Laird & Co. who did not have a short position with the latter and the said shares were in safe keeping.
In the income tax returns for 1934 and 1935 the petitioner did not report any of the dividends credited to her long accounts. The respondent, in determining the deficiencies, held that the sales made through the short account were short sales, and that the dividends charged to the short account represented additional cost of stock purchased to cover the short sales and could not be offset against the dividends credited to the long accounts or deducted as interest or as an ordinary and necessary business expense. He accordingly increased the dividend income of the petitioner by the amounts of $146,008.60 for 1934 and $23,922.50 for 1935. The parties have stipulated that the correct amount credited for 1934 is $146,017.35.
The petitioner was a housewife and had income from certain trusts and other sources. During the period 1925 to 1935 she purchased and sold securities and commodities through her brokerage accounts with Laird, Bissell & Meeds and Laird & Co. and*1052 had no other business activity. She received 39,000 shares of duPont stock in 1931 which were later placed in her accounts with Laird, Bissell & Meeds. During 1932 to 1935 she regularly and continuously purchased and sold securities in large volume. The securities dealt in varied in kind and many transactions were handled in the course of a single day. Many of the purchases were in lots of from 100 to 500 shares. During 1932 she purchased over 148,000 and sold over 190,000 shares at a total cost and selling price of over $6,000,000. During 1933 the volume of purchases declined to 35,000 shares at a total cost of over $1,200,000, and the volume of sales declined to 66,000 shares at a total selling price of $1,900,000. The total number of shares purchased and sold during the taxable years, and the cost and selling prices, were as follows:
| Year | Shares purchased | Shares sold | Cost | Selling price |
| 1934 | 15,510 | 18,125 | $622,331.08 | $568,700.25 |
| 1935 | 25,175 | 27,925 | 1,216,829.52 | 1,247,113.06 |
*179 In addition the petitioner purchased and sold some commodities in 1935. The petitioner paid commissions on the sales made in the amount of $2,378.75*1053 during 1934 and $4,827.25 during 1935.
The petitioner entered into these transactions for the purpose of profit. She was not a member of a brokerage firm and did not subscribe to stock market or stock ticker services. She informed herself of market conditions through market reports and periodicals and relied principally for advice upon R. W. Ellis, and after his death upon George Weymouth and Russell Jones. Ellis and Weymouth were experienced brokers. The former was a customer's man with Laird, Bissell & Meeds and a member of the firm of Liard & Co. until his death in March 1933. Weymouth was a member and Jones was an employee of the firm of Laird & Co. In 1929, when the petitioner went abroad for several months, she gave Ellis written authority, effective until revoked, to buy, sell, and trade in her accounts and to withdraw moneys and securities. At that time he caused the regular, special, and short accounts to be set up, and, under the authority given, he operated them after her return and until his death. The transactions entered into through these and other accounts were entered into by him with and without specific instructions from the petitioner, but the more important*1054 ones were made after consultation and at the petitioner's direction. The petitioner visited the brokerage offices, and consulted Ellis at her home and over the telephone. These consultations took place regularly, and Ellis was at the petitioner's home on business matters almost every day. After his death the petitioner took a more active part in the direction of purchases and sales made through Weymouth. However, in minor transactions he acted without first consulting her. Ellis kept the petitioner's books at his office. They contained accounts reflecting the petitioner's holdings and dealings in stocks and bonds, and her receipts from interest and dividends. After his death the accounts were transferred to the petitioner's home, where they were kept by Jones. Jones was employed by her as secretary and spent a part of each day at her home keeping records and conferring with her on market transactions. The petitioner maintained an office at her home, where she kept such records and held conferences with Ellis, Weymouth, and Jones. Ellis and Weymouth usually determined the account through which any particular transaction was handled. The petitioner devoted approximately an*1055 hour a day, on the average, to her stock market activities. *180 Petitioner was regularly engaged in the business of buying and selling securities and commodities.
The petitioner's husband, Julien Ortiz, maintained brokerage accounts with Laird, Bissell & Meeds, and later with Laird & Co., during the years 1929 to 1934, and prior thereto. His only business activity during the period 1929 through 1934, other than his transactions in said accounts, consisted of experimental work in chemistry from which he derived no income. Except for an equity in his brokerage accounts, he had no assets or property other than a summer residence at Spring Lake, New Jersey, of the value of $25,000. His brokerage accounts were operated by Ellis under a written trading authorization similar to that granted to Ellis by petitioner.
Prior to the stock market crash in 1929 Julien Ortiz's brokerage accounts had been successfully operated, but on December 6, 1929, they were in need of support. His accounts then had a debit balance of $299,807.65 and the securities therein had a market value of $316,191.25, leaving an equity of $16,383.60. On December 6, 1929, the petitioner entered into a written*1056 contract with Laird, Bissell & Meeds guaranteeing her husband's accounts. His accounts were transferred to Laird & Co. as of October 1, 1932, and on that date she entered into a similar contract with Laird & Co. The debit balance in the accounts on October 1, 1932, exceeded the value of the securities therein by $77,249.36.
By the terms of the guarantee the petitioner, for the period of the existence of the accounts, agreed to guarantee and to pay on demand any debit balance then or thereafter due and any losses then existing or thereafter arising on said accounts, and further agreed that the brokers should have a lien on the securities and equities in her own accounts. Both guarantees were made at the request of her husband. Her accounts were at all times sufficient to cover the deficits existing in her husband's accounts. When the guarantees were executed, the petitioner was assured by her husband and by Ellis that market conditions would improve and that she would not lose anything.
On December 27, 1934, the petitioner decided to withdraw her guarantee and notified Laird & Co. to that effect. All the securities in her husband's accounts were sold, except 10 shares of*1057 Kendall preferred stock and 50 shares of Investment Co. of Florida. The securities sold were posted to the brokers' ledger accounts of the husband on December 31, 1934, and the balances were charged and credited to the regular account of the petitioner. The 10 shares of Kendall stock, which then had a fair market value of $890, and the 50 shares of Investment Co. of Florida, which then had no value, were transferred to the regular account of the petitioner.
*181 As of December 31, 1934, the petitioner set up in her ledger an account designated "Loss - Bad Debts", in which she credited the net deficit of her husband's accounts in the amount of $163,781.83, without adjustment for the stocks transferred to her regular account. She claimed that amount as a deduction for a bad debt in the joint return for the year 1934, and the deduction was disallowed by the respondent. At the time of claiming the deduction the petitioner believed that the summer residence belonged to her. Her husband conveyed it to her some time in 1936.
OPINION.
ARNOLD: The first question presented for determination is the nature of sales of stock made through the short account at times when the*1058 petitioner held an equal or greater number of shares of the same kind in her long accounts. The respondent included in the dividend income for 1934 and 1935 the amounts credited as dividends to the petitioner's long accounts during those years. 1 The petitioner concedes that, as a general rule, dividends so credited constitute taxable income. She contends that the sales made through the short account are ordinary sales, that the dividend credits are mere book entries and do not represent dividends, and that they should be reduced by the amounts charged as dividends to the short account in order to determine the actual dividend income. 2 She further contends that she was engaged in the business of buying and selling securities and commodities, and that, should we hold the sales in question to be short sales, she should be permitted to deduct all of the dividends charged to her short account as ordinary and necessary expenses of that business. 3 The respondent contends that the sales were short sales, that the petitioner was not engaged in the business of buying and selling securities, and that the dividends charged to the short account constitute additions to the cost or other*1059 basis of the stock to be used in computing gain or loss upon the covering of the short sales.
The effect of a short sale is to create a debt in terms of goods (stock). The chief difference between a regular sale and a short sale is that, in the former the seller delivers his own shares to the purchaser and thus closes the transaction, while in the latter he delivers borrowed shares and the transaction is not closed so far as *182 the seller is concerned until he delivers shares to repay the "loan." If the shares sold are not furnished by the seller at the time of sale but are supplied by the broker, the transaction is a short sale. *1060 .
The respondent argues that the present case is controlled by the Farr case and by ; certiorari denied, ; and ; affd., . Each of those cases clearly shows that the broker executed the order as a short sale, and an obligation was created to deliver stock in repayment of stock used or borrowed by the brokers, and such obligation was discharged by the delivery or transfer at a later date of like shares which, at the time of the sale, were in the possession of the seller or held in his long accounts. If, as the respondent says, delivery to the purchasers in this case was made from shares belonging to the brokers or their customers or from shares borrowed from other brokers, the sales clearly would be short sales. However, the facts are otherwise.
The orders were executed in the exchange in the regular way and delivery to the purchasers was made on the next full business day from certificates in street names held by the New York correspondents for Laird & *1061 Co. It is true that the shares so delivered were not identifiable by certificates as shares belonging to the petitioner, but they necessarily included shares held by the brokers for the petitioner. The understanding between the petitioner and the brokers, the mode of operation, and the manner in which the transactions were reflected on the brokers' records demonstrate that the deliveries were in effect deliveries from the petitioner's long accounts. None of the sales orders were labeled as short sales. It was the practice of the brokers, whenever the petitioner's long accounts contained no shares of the kind sold, to execute the sale as a short sale, with the usual marginal requirement, the charge for the short sale tax, and the delivery from borrowed stock. The proceeds were credited in such cases but were held by the brokers for the protection of the lender. The petitioner concedes that such transactions appeared in the short account and were short sales, but they are not here involved. We are here dealing with shares where those in the long account exceeded those in the short account. In every instance where the long accounts contained shares equal to or greater in number*1062 than those sold, it was the practice of the brokers, acting under authority to treat all accounts as a unit, to treat the sales made through the short account as sales of the petitioner's long shares. They required no margin and charged no short sale tax. They credited the short account with the proceeds, made an entry therein showing delivery of the shares, and made entries in the *183 long accounts reducing the number of shares held therein by the number sold through the short account. All of this was done at the time of the execution of the sale to the purchaser. Interest was allowed on the proceeds. That delivery from the long account was made at the time of the sale is established by the testimony of two employees of Laird & Co. who handled the stock records and dividend collections, and it is further corroborated by what was done when Laird & Co. took over the petitioner's accounts on October 1, 1932. Laird, Bissell & Meeds did not transfer to Laird & Co. the total shares in the long accounts and an outstanding obligation to repay the shares having a short status, but merely delivered the net number of shares. The witnesses further testified that in every case where*1063 the long position exceeded the short position the broker did not borrow any stock from other brokers or other customers for the purpose of delivery.
The evidence further shows that the brokers collected dividends only on the number of shares actually held for their customers, which consisted of the difference between the shares appearing on their books in long accounts and the shares appearing in the short accounts. They credited the petitioner with dividends on the number of shares shown in her long accounts and charged her with dividends on the number shown in her short account, but in those instances where her long position equaled her short position no dividends were collected or available for the petitioner. We think that the sales in question were intended to be and were actually executed as ordinary sales, or sales of shares held in the petitioner's long accounts. See ; ; affd., ; ; affd., *1064 ; ; affd., . Cf. . The true dividend income, therefore, should be determined by offsetting against the dividend credits the amounts of $145,338.60 for 1934 and $23,470 for 1935.
As indicated above, the petitioner urges that the entire amounts charged as short dividends constitute ordinary and necessary business expenses. She claims a deduction of those amounts only in the event of a holding that the sales in question were short sales. In considering the second issue herein, we have concluded upon the evidence that the petitioner was engaged in the buying and selling of securities as a business. By reason of that fact, the petitioner would be entitled to deduct the short dividends as ordinary and necessary business expenses. , and the rule requiring that they be treated as additions to the cost or other basis of the stock sold, as set forth in *1065 ; *184 affd., ; , would not apply. Cf. . Therefore, if we are in error in failing to hold the sales to be short sales, the petitioner's alternative claim would be valid.
The second question presented for determination is whether the petitioner is entitled to deductions of the amounts paid to her brokers as commissions on sales of securities and commodities. The Circuit Court of Appeals for the Second Circuit held in , that commissions paid on purchases and sales of securities are deductible under section 23(a) of the Revenue Act of 1932, provided the taxpayer was engaged in purchasing and selling securities as a business. That case was taken to the Supreme Court on the sole question of the deductibility of commissions on purchases, and it was held that such commissions are not deductible even by a trade, . 4 The Circuit Court of Appeals thereafter announced its adherence to its decision in the Winmill*1066 case in so far as it involved commissions on sales. . If the petitioner's activities constituted a trade or business, she is entitled under the authority of the Winmill and Neuberger cases to deduct commissions.
An investor may be considered to be carrying on a business "if the transactions concerning his investments are substantial and frequent as distinguished from occasional or isolated." . Whether his activity constitutes a trade or business has been variously answered under various circumstances, and must be viewed in the light of the facts involved in each case. We have pointed out that the decisions turn upon whether the taxpayer's activities are those of what is styled a "passive investor", doing only what is necessary from an investment point of view, or whether they go beyond that point and involve active association in the enterprises in which he is financially interested or devotion of a substantial part of*1067 his time to such work as a matter of business. ; affd., . In the recent case of , we said that the extent of the market operations may be an important factor in determining whether or not the taxpayer is merely a passive investor, but beyond that point the extent of such activities tends only to define the difference between a large and a small trade or business, and that a factor or more decisive importance than the volume of transactions lies in whether or not the market activities consisted in dealing for speculative purposes or for investment purposes. In some cases emphasis *185 is placed upon the amount of time devoted to the business. In others it is said to be a factor but not conclusive. In many of them the factor of time is not mentioned and the conclusions are rested entirely on the volume and number of transactions entered into during the year.
The facts herein show that petitioner was a housewife and had income from trusts and other sources. Her business activity was confined exclusively to the purchase*1068 and sale of stocks and commodities through her brokerage accounts. It was not limited to doing merely what was necessary from an investment point of view. The transactions were substantial and frequent rather than occasional or isolated. They were not limited in number or confined to a single security, as in the Henry F. duPont and Terbell cases. The purchases and sales ranged from 15,000 to 190,000 shares annually, involving a total cost or selling price of from $500,000 to $6,0000,000, and the petitioner's books and those of the broker reflect dealings in a variety of securities and the handling of many transactions in the course of a single day. They show purchases and sales, in most instances, in lots of from 100 to 500 shares, made regularly and continuously throughout the taxable years.
The petitioner's purpose, as indicated by the transactions reflected on the brokers' records, and as testified to by her, was to buy and sell for profit. She was an active trader and made many short sales. She gave active attention to all purchases and sales. She consulted Ellis, Weymouth, and Jones and relied to a large extent upon their advice. She studied market reports*1069 and financial periodicals. The less important transactions were entered into without first consulting her, but they were afterwards brought to her attention and approved. In most instances, and particularly during the taxable years, she directed the purchases and sales to be made. She spent time at the brokers' offices, and regularly held consultations with her agents at her home and by telephone every day, except for brief periods when she was abroad. While these matters required but an hour or two each day, we think this is unimportant in view of the extent and purpose of her operations. The petitioner's activities constituted the carrying on of a trade or business within the meaning of section 23(a) of the Revenue Act of 1934. ; ; ; ; ; affd., ; ; *1070 ; ; ; ; ; modified and affirmed, ; *186 ;; ;;; ; .
The final question is whether the petitioner is entitled to any deduction as a result of the satisfaction of the deficit existing in her husband's brokerage accounts at the end of the year 1934. The petitioner claimed a deduction in her return of $163,781.83 for a debt ascertained to be worthless and charged off in that year. She now concedes that this amount should be reduced by the value of the summer residence conveyed to her ($25,000) and the value of the Kendall stock transferred*1071 to her regular account ( $890), which leaves a balance of $137,891.83.
We understand respondent's argument to be that the satisfaction of the deficit in Julien Ortiz's accounts under the contract of guaranty did not create a debt. He denies the existence of a debt because, he says, under the evidence a gift was intended. On the contrary, we think the evidence establishes the lack of any donative intent. Prior to the market crash Julien Ortiz's stock market transactions had been profitable, and his wife believed that profitable operations in his accounts would be resumed. Before executing the contract of guaranty she consulted with her financial adviser and her husband, who assured her that she would suffer no loss under the guaranty. Each of them believed that the market would go up and there would be no occasion to respond under the contract of guaranty. If the wife had been motivated by a donative intent, there would have been no hesitancy. She would have been ready and willing to give her husband any necessary funds. That no such donative intent existed is demonstrated by her act in taking over the security remaining in his accounts and requiring him to convey to her*1072 the real property in his name. These acts are inconsistent with donative intent. Cf. ; ; appeal dismissed, ; ; .
Furthermore, respondent's argument ignores the legal consequences that flow from the contract of guaranty. Where a guarantor is forced to answer for the debt or default of another the law implies a promise on the part of the principal debtor to reimburse his guarantor. , and cases cited; certiorari denied, . When Alice duPont Ortiz was forced to respond under her guaranty, the law implied a promise by Julien Ortiz to reimburse her. The guarantor's payment did not extinguish the debt; it merely substituted the guarantor for the *187 creditor, and thereafter she was entitled to assert any rights that the creditor may have had against the principal debtor of against any security held for the debt, 24 American Jurisprudence 955; *1073 60 Corpus Juris 740, and the facts show that she exercised the rights so acquired against the principal debtor and against the security held for the debt. As a matter of law, therefore, a debtor-creditor relationship existed between husband and wife immediately upon her payment of the deficit in his accounts pursuant to her contract of guaranty.
The facts and circumstances under which this debt was created are so similar to the facts and circumstances existing in , and the arguments advanced in the two cases are so alike, that a detailed analysis of the Circuit Court's decision will be helpful in disposing of the present issue. In July 1920 Shiman guaranteed a brokerage account of his brother-in-law, Oppenheim, who was speculating in stocks. At the time Shiman guaranteed the account Oppenheim was solvent, but thereafter he fell into financial straits and became insolvent. In October 1924 the brokers forced Shiman to pay $10,000 into the account under his guaranty in order to keep the account open for the balance of the year. In 1925 the account was closed out and Shiman had to pay an additional sum of more than $26,000*1074 under his guaranty. In his 1924 return Shiman claimed the $10,000 payment as a loss, or a worthless debt, but the Commissioner and this Board denied the deduction. The Circuit Court, however, reversed. The Commissioner's argument, that the payment created no debt because it was a gift, was rejected, as was the argument that in any event Shiman was entitled to no deduction because the debt was worthless the moment it arose, as Oppenheim was then insolvent and known to be. The court likewise rejected the argument that until the account was closed out the debt was not ascertained to be worthless, and the argument that the charge-off was insufficient.
The respondent relies upon our decisions in , and , as controlling in the present issue. In the Davidson case we considered the Shiman case, supra, and distinguished it upon the ground that a substantially different situation was presented by the latter case. Factually, the instant proceeding is much nearer the Shiman case than the Davidson case. The Lang decision is distinguishable*1075 on its facts and is not, in our opinion, applicable.
The present facts are more nearly comparable to the situations which existed in ; ; ; and the Shiman case, supra. These cases hold that a taxpayer is entitled to deduct *188 as a worthless debt an amount paid under a guaranty where the principal debtor was unable to reimburse the guarantor. The principal debtor here was clearly unable to reimburse the guarantor except in the amounts shown, and in view of the cited authorities we hold that respondent erred in disallowing the deduction to the extent of the reduced amount thereof.
Reviewed by the Board.
Decision will be entered under Rule 50.
MURDOCK, concurring: The petitioner's brokerage accounts were combined in such a way that the sales involved in the first issue were not accounted for as short sales. Those sales were not made as short sales have to be made on the Exchange. It follows that they were not short sales. It is immaterial here than they were partially accounted for in*1076 an account called a short account.
MELLOTT concurs in the above.
Footnotes
1. The respondent included $146,008.60 in the income for 1934 and $23,922.50 in the income for 1935. It is stipulated that the correct amount of the credits for 1934 is $146,017.35. ↩
2. The petitioner claims that of the dividends charged the amounts to be used as offsets are $145,338.60 for 1934 and $23,470 for 1935. ↩
3. The amounts charged to the short account were $145,958.60 for 1934 and $25,128.75 for 1935. ↩
4. The petitioner is the present case accordingly has abandoned her claim to a deduction of commissions paid on purchases. ↩