Ortiz v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 21 June 1940 |
| Docket Number | Docket No. 93159. |
| Citation | 42 BTA 173 |
| Parties | ALICE duPONT ORTIZ AND JULIEN ORTIZ, HUSBAND AND WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Simon F. McHugh, Esq., and William L. Hennessy, Esq., for the petitioners.
R. P. Hertzog, Esq., for the respondent.
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 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 & 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.
During the years 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 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:
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| Longs | Shorts | Net
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| 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
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The net number of shares, as indicated above, were received by Laird & Co. and their correspondent New York brokers from Laird, Bissell & Meeds for the account of the petitioner.
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. 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:
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