This case comes on appeal by the Government from a judgment of the District Court1 awarding $5,532 plus interest to a taxpayer in an action for refund of overpayment of federal income tax. Because we hold that on the disputed item taxpayer was entitled to take a deduction, for a loss on a transaction entered into for profit, we affirm.

On April 12, 1962, Mrs. Ruby Smith Stahl, a widowed musician and music teacher, turned securities with a market value of approximately $210,000 over to Balogh & Co., a Washington securities firm. Under an agreement between Mrs. Stahl and the firm, the securities were to be used by the firm as part of its capital so that the firm could satisfy certain SEC requirements. The securities were to be returned to her on May 12, 1963, subject, however, to the claims of all of the firm's creditors, present and future. In return Mrs. Stahl received one percent of the value of the securities per quarter, in addition to the dividend and interest income. She also became a member of the board of directors of the firm but attended only one meeting and never received notice of the others.

A subsequent agreement between the taxpayer and the firm provided that one half of the securities would be returned to her on December 15, 1963, and the other half on September 15, 1964. On October 31, 1963, however, the firm sold the securities for $257,078.90. In August, 1964, the firm filed a petition in bankruptcy. The petition showed that its liabilities exceeded its assets by more than $300,000. The bankruptcy proceedings were still pending before the District Court when it entered judgment in the case at bar.

The taxpayer claimed an ordinary loss of $87,146 (based on the $127,012 of the securities less an expected 'recovery' in bankruptcy of $39,866) on her amended tax return for 1963. The Internal Revenue Service disallowed the deduction on the ground that the loss was not an ordinary loss but a capital loss in the nature of a nonbusiness bad debt. Furthermore, treatment of the loss as a nonbusiness bad debt was disallowed for 1963 since the debt was not wholly worthless at the end of that year.2 The taxpayer paid the additional assessment and brought this suit for refund.

The taxpayer and the Government agree that the loss is deductible in some manner at some point in time; the dispute is over the proper characterization of the loss and hence its proper tax treatment. The District Court, agreeing with the taxpayer, held that the agreement between the taxpayer and the securities firm created not a debtor-creditor relationship but a bailment, and that the loss was consequently deductible under section 165(c) of the Internal Revenue Code, which allows deductions for losses incurred in a trade or business and losses incurred in a transaction entered for profit.3 The Government adheres to its contention that the loss was deductible under section 166(d) of the Code as a nonbusiness bad debt.

A 166(d) loss, as contended by the Government, is subject to limitations disadvantageous to the taxpayer. A 165(c) loss is deductible from ordinary income. In contrast a 166(d) loss is treated like a short-term capital loss,4 and as such is first applied so as to reduce low-taxed long-term capital gains (under 1201). Any excess of loss over capital gains is deductible from ordinary income only to the extent of $1000 (under 1211). The limitations of 166 would be applicable even though profits earned from the transaction were taxable at ordinary income rates-- rates actually paid by the taxpayer in the case at bar on profits earned in 1962. The consequence is that a taxpayer with a stand-off-- because an earlier profit of, say, $10,000 was followed by a loss of equal amount,-- would be subject to an overall increase in taxes.5 This result was mandated by Congress where the ensuing deductions fell into the category of nonbusiness bad debts. We must consider whether Congress intended it to apply in a case like the one before us.

Section 166 of the Internal Revenue Code is captioned 'Bad Debts.' The section is applicable,-- Whether what is involved are business bad debts governed by (a), or nonbusiness bad debts governed by (d),-- only in case 'of a bona fide debt.'6 Carrying forward the concept of bona fide debt, Treasury Regulation 1.166-1(c), 26 C.F.R. 1.66-1(c) (1970), provides:

Only a bona fide debt qualifies for purposes of section 166. A bona fide debt is a debt which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money. A gift or contribution to capital shall not be considered a debt for purposes of section 166.

A. Debt Not Established by Taxpayer's Loan of Securities to Corporation.

The District Court found no 'debtorcreditor relationship' in this case. The Government leans on the recurrent use of the words 'loan' and 'indebtedness' in the agreement between Mrs. Stahl and Balogh and Company. But 'the decisive factor is not what the payments are called but what, in fact, they are, and that depends upon the real intention of the parties.' Byerlite Corporation v. Williams, 286 F.2d 285, 290 (6th Cir. 1960). This 'real intention' is to be deduced from the 'substance of a transaction,' upon which the incidence of taxation depends. Comm'r of Internal Revenue v. Court Holding Co., 324 U.S. 331, 334, 65 S. Ct. 707, 89 L. Ed. 981 (1945). Professed intentions and labeling must give way if the court finds on supporting evidence that in reality the transaction was something other than a debt. Diamond Bros. Company v. Comm'r, 322 F.2d 725, 731 (3d Cir. 1963).

The Government argues that 'when securities are delivered in order to provide capital for another, and subject to the use of another, it is reasonable to assume that their 'return' can be satisfied by return of equivalent securities or cash,' so that in substance, as well as label, this transaction was a loan and its consequence a debt.

The case presents an issue of the meaning of the statute, involving an ascertainment of Congressional intent, and also an issue of the understanding of the parties. Since the Government wishes to establish a general rule that the loan of securities gives rise to a debt, by reference to a putative reasonable assumption that the parties mean the obligation to be dischargeable by a return of securities or cash equivalent, it would doubtless concede the argument to be inapplicable if in a particular case that is not at all what the parties contemplated or agreed. Both as a general rule, and as to the parties before us, we cannot 'assume' that the obligation to return securities in kind may fairly be taken as including a general option to return the cash equivalent. The point is simple: The return of a cash equivalent presumes a decision to sell. When to sell is an investment decision. Indeed timing is of the essence of the art of investment, both in buying and selling. There is no basis for 'assuming' an intent to give the bailee free dominion to make this investment decision for the bailor. What is more fairly intended to be conveyed was the power to sell upon the appearance of the need and occasion contemplated by the agreement, the unfulfilled demands of the firm's creditors. The power to sell, by fair implication, is a power conveyed for response to a contingency. The conditional nature of this authority is underscored by the consideration that its exercise involves for the bailor not only an investment decision but tax consequences-- of current liability for taxes on otherwise unrealized gains.

The conditional nature of any obligation to pay money is of significance in view of the rule that the bad debt deduction provisions are applicable only in case of an unconditional obligation of the debtor to pay the creditor. Milton Bradley Co. v. United States, 146 F.2d 541, 542 (1st Cir. 1944). And perhaps enen more important than the contingent nature of any 'obligation to pay a fixed or determinable sum of money,' as set forth in the Treasury regulation, is the fact that even the obligation of the brokerage firm to return the securities loaned to it was subject to a condition. Mrs. Stahl expressly agreed to subordinate her right to return of the securities to the claims of all creditors of Balogh, agreed that they would be 'subject to the risks of Balogh's business,' and in P5, agreed that--

Neither the loan of the aforesaid securities, nor this agreement may be terminated, rescinded, or modified by mutual consent or otherwise, if the effect thereof would be inconsistent with the conditions of Rule X-15 C3-1 issued by the Securities and Exchange Commission pursuant to the Securities Exchange Act, or to reduce the net capital of Balogh below the amount required by said rule. (JA 44-45)

Balogh was thus under no absolute liability to pay, a sine qua non of the debtor-creditor relationship required to satisfy Section 166.7 In United States v. Henderson, 375 F.2d 36, 40 (5th Cir. 1967), cert. denied 389 U.S. 953, 88 S. Ct. 335, 19 L. Ed. 2d 362 (1967), the taxpayer made advances to a corporation controlled by her grandson-in-law. Her advances were subordinated to the corporation's indebtedness to other creditors and it was generally understood that repayment was contingent upon the success of the business. The court held that there was no 'genuine indebtedness' created within the meaning and scope of the Internal Revenue Code.

In our view the corporation's undertaking to taxpayer was not a 'debt.' The transaction is too substantial a departure from the essence of the concept of 'debt,' both the classic concept and the concept set forth in the Treasury's regulations. Cf. Gilbert v. Comm'r, 248 F.2d 399, 402-403 (2d Cir. 1957). The authorities discussed above have generally been concerned with the problem whether a transaction is more accurately to be termed a debt or a capital contribution. We think the same core concept is applicable in this case, where we conclude that what is involved constitutes neither a debt nor a capital contribution but is a bailment transaction entered into for profit but with risk of loss.

B. Debt Not Established by Sale of Securities Loaned to Corporation In Which Taxpayer Had No Prior Interest.

An alternative contention by the government is that even if no 'debt' was created by the bailment agreement, such a debt came into being when Balogh sold the securities, under the rule of Putnam v. Comm'r, 352 U.S. 82, 77 S. Ct. 175, 1 L. Ed. 2d 144 (1956). Putnam held that the loss resulting from an individual's guaranty of corporate obligations is a nonbusiness bad debt and thus deductible only as a short-term capital loss. The decision was based upon the 'familiar rule' that, 'instanter upon the payment by the guarantor of the the debtor's obligation to the creditor becomes an obligation to the guarantor, not a new debt, but, by subrogation, the result of the shift of the original debt from the creditor to the guarantor who steps into the creditor's shoes. Thus, the loss sustained by the guarantor unable to recover from the debtor is by its very nature a loss from the worthlessness of a debt.' 352 U.S. at 85, 77 S.Ct. at 176.

The theory of Putnam rests on the determination by the Court that what was involved was a pre-existing debt by the corporation,-- 'not a new debt', the Court noted; that this debt came into the hands of the taxpayer by subrogation; and that the corporation's inability to pay the debt made applicable the bad debt deduction provision, in that case the provision for nonbusiness bad debts.

The taxpayer here did not guarantee Balogh's debts; she gave that company securities for its use in satisfaction of the S.E.C. capital requirements, in the expectation of a 1% Per quarter return (over and above the dividends and interest received from the securities). When taxpayer's securities were sold by Balogh she suffered a loss. She was not subrogated to any pre-existing debt of the corporation to its creditors. The base of the Putnam decision is missing.

When Putnam issued, critics objected that its reasoning made tax consequences dependent on arrangements and forms of no practical consequence, requiring that distinctions be drawn between contracts of indemnity (which do not involve subrogation and succession to a debt) and contracts of guaranty. Recent opinions have declared that the Putnam principle is applicable, whether or not there is technical subrogation to a debt, in all cases where a taxpayer holding stock in a corporation has made an undertaking (whether or not involving subrogation) in order to protect or enhance his proprietary interest in a corporation. These cases hold that the 'essence' of Putnam is to protect 'the statutory scheme for a common tax treatment of all losses suffered by a corporate stockholder in providing his corporation with financing.' Stratmore v. United States, 420 F.2d 461, 465 (3d Cir.) cert. denied 398 U.S. 951, 90 S. Ct. 1870, 26 L. Ed. 2d 291 (1970), followed in United States v. Hoffman, 423 F.2d 1217 (9th Cir. 1970).8

We assume, at least for present purposes, that Putnam bears a broad 'economic' reading in situations where the transaction represents financing provided to a corporation by a taxpayer-stockholder to protect his pre-existing investment. In that situation, it may be noted, the betterment sought by the taxpayer from the transaction would include increases in value of his investment, which would be taxable when realized only at capital gain rates, and hence there is reason for restriction to capital loss treatment of a transaction that fares badly. But in the case before us, taxpayer was not a shareholder in the corporation to which she gave her securities. Hence there is no room for a contention that what is involved is only a transaction relating to an outstanding capital investment. Where that capital hus does not color the transaction, the 'nonbusiness bad debt' treatment of Putnam is not applicable when the relationship involves no 'debt' in existence prior to the loss, not even a succession, as by subrogation, to the corporation's debt to another. Comm'r of Internal Revenue v. Condit, 333 F.2d 585, 586 (10th Cir. 1964).

III. Loss Deductible as Sustained on a Transaction Entered Into for Profit

The only intention of taxpayer here was the expectation of compensation received directly, as payment for the availability of taxpayer's securities. This transaction was plainly one entered into for profit.9

Any citation of judicial precedent should make reference to Ansley v. Comm'r, 217 F.2d 252 (3d Cir. 1954), because there is some similarity on the facts10 and the reasoning in the opinion parallels ours.11 The difficulty with Ansley's weight as authority is that it preceded Putnam and the Government argues that it does not survive Putnam. A recent Tax Court opinion contains a reference, in passing, that expresses doubts as to the continuing vitality of Ansley in the wake of Putnam.12 On its own facts the vitality of Ansley is doubtful,-- impaired by Stratmore, supra,-- for the taxpayer was a stockholder, and indeed had majority stock ownership, in the corporation whose finances he protected. However, insofar as a loan agreement not referable to any existing debt or investment is concerned we think the reasoning of Ansley has merit and survives Putnam for the reasons we have already stated. That reasoning establishes the deductibility of the loss before us as one sustained on a transaction entered into for profit.

We do not believe that our ruling ignores the legislative purposes underlying 166. Congress limited what had been the general deductibility of 'bad debts,' at least in part because of abuses by taxpayers in situations that were structured as 'debts' but in reality were in the nature of gifts.13 There is no indication that bailment transactions, which may, as in this case, be entered into for profit, lend themselves to this kind of abuse. In any event the only abuse which Congress reached was in the domain of bad debts. In other transactions the taxpayer remained under the burden of establishing that the loss was incurred, e.g., in a transaction entered into for profit.

It may well be that in the interests of consistency a rule could be devised providing that any action by an individual taxpayer which either gives credit or facilitates the obtaining of credit by a corporation, be it guaranty, loan, indemnity or bailment, should be given capital loss treatment if financially unsuccessful. But the Congress has not so provided and the Supreme Court did not purport to speak so broadly in Putnam. In the absence of a clear indication, either by Congress or the Supreme Court, that 166(d) is to be given such a broad reading, we think it sound to apply Putnam in accordance with its expressed reasoning of subrogation, at least where the taxpayer has no prior stake in the corporation.14

Taxpayer's loss is not deductible under 165(c)(1) since it bore no proximate relationship to her trade or business, that of a music teacher. Whipple v. Comm'r, 373 U.S. 193, 201, 83 S. Ct. 1168, 10 L. Ed. 2d 288 (1963). However, it is cognizable under 165(c)(2) as a loss incurred in a 'transaction entered into for profit, though not connected with a trade or business.'

Affirmed.