Source: https://caselaw.findlaw.com/us-supreme-court/295/134.html
Timestamp: 2019-04-19 19:19:25+00:00

Document:
[295 U.S. 134, 135] Mr. Henry M. Ward, of Washington, D.C., for petitioner.
This case presents further questions regarding the application to marginal transactions on the stock exchange of Article 58 of regulations No. 74, as well as some of those already considered in Helvering v. Rankin, 295 U.S. 123 , 55 S.Ct. 732, 79 L.Ed. --, decided this day.
First. Snyder contends, in the alternative, that his intention to sell the last acquired stock first, constituted sufficient identification to make the 'First-in, first-out' rule inapplicable; or else that the regulation as applied to marginal transactions on the stock exchange is invalid, because there is no possible means, other than the trader's intentions, of identifying the shares sold. What has already been said in Helvering v. Rankin is enough to dispose of both of these contentions. It is there determined that shares traded on margin are capable of identification for the purposes of the regulation; but that the mere intention of the trader to sell particular shares, without further designation, does not constitute sufficient identification.
Second. Snyder contends that the 'First-in, first-out' regulation may not, consistently with the provisions of the Revenue Act of 1928, be applied to the facts of this case. The argument is that his market operations constituted a trade or business as those terms are used in section 22(a) of the act (26 USCA 2022(a); that according to that section, and the applicable decisions of this Court, Burnet v. Sanford & Brooks Co., 282 U.S. 359 , 51 S.Ct. 150, Woolford Realty Co. v. Rose, 286 U.S. 319 , 52 S.Ct. 568, gross income from such business, as well as net in- [295 U.S. 134, 138] come under section 23 of the act (26 USCA 2023), must be computed entirely with respect to transactions within the taxable year; and that sections 111-113 (26 USCA 2111-2113), upon which the government relies, are not applicable because they relate only to 'sales of property, including securities, held for investment,' and have no application to sales made in the course of a 'business of trading on the stock exchange.' On this assumption, Snyder argues that the income realized during the taxable year from his stock transactions is not the aggregate of the gains and losses on each sale of securities, measured by the difference between the sale and cost prices of the securities sold, but the profit or loss realized as a result of all market operations, purchases as well as sales, made during the taxable year. Such profit or loss, he now suggests, must be computed 'by taking the difference between the purchase price and the sales price of shares bought and sold during the year, deducting expenses, such as commissions, taxes and interest.' Thus computed, he concludes, his market operations resulted in a gross income of $43,692; and adding his salary, insurance commissions and dividends, and deducting the expenses of his stock operations (interest paid brokers) his net taxable income was $ 39,682, and his total tax $1,897.77.
Fifth. Moreover, Snyder suggests no other practicable method of accounting which would reflect income for the year more fairly than the method adopted by the Commissioner. 5 He concedes that he is not a dealer in securities, in the sense of one who buys securities for the purpose of resale to customers; and that consequently, he is not entitled to compute income on an inventory basis. 6 Compare Lucas v. Kansas City Structural Steel Co., 281 U.S. 264, 268 , 50 S.Ct. 263; United States Cartridge Co. v. United States, 284 U.S. 511, 520 , 52 S.Ct. 243. His suggestion that gross income from trading be computed by deducting purchase prices from sale prices during the year would offer a feasible substitute only if it could be assumed that the number of purchases and sales would be approximately equal [295 U.S. 134, 142] each year and that any differences would be averaged out in the course of a number of years. That assumption is unwarranted, particularly in view of Snyder's professed object 'to accumulate as many shares of U.G.I. as he could.' 7 His alternative suggestion, that, since purchases in fact exceeded sales during 1928, the 'First-in, first-out' rule, if applied at all, should be confined to purchases and sales in the course of the year, adds nothing to the contentions that have already been considered in this case or in Helvering v. Rankin.
[ Footnote * ] Rehearing denied 295 U.S. 769 , 55 S.Ct. 913, 79 L.Ed. --.
[ Footnote 1 ] The answer of the Commissioner denied that the 'brokerage accounts ... constituted a trade or business within the meaning of any provision of the Revenue Act of 1928.' The Board of Tax Appeals made no specific finding on this issue; but the Court of Appeals assumed that the Board meant to find against the taxpayer, and concluded that the assumed finding was supported by the evidence.
[ Footnote 2 ] I.T. 1818, II-2 C.B. 39; Schwinn v. Com'r of Internal Revenue, 9 B. T.A. 1304; Elliott v. Com'r of Internal Revenue, 15 B.T.A. 494; Hodgson v. Com'r of Internal Revenue, 24 B.T.A. 256; Schermerhorn v. Com'r of Internal Revenue, 26 B.T.A. 1031. Compare Black v. Bolen (D.C.) 268 F. 427; Rogers v. United States (Ct. Cl.) 41 F.(2d) 865; Kunau v. Com'r of Internal Revenue, 27 B.T.A. 509; Thiele v. Com'r of Internal Revenue, 32 B. T.A. 134, decided February 26, 1935.
[ Footnote 3 ] Compare Hutton v. Com'r of Internal Revenue (C.C.A.) 39 F.(2d) 459, where the deduction of brokers' commissions on purchases of securities, as business expenses, was disallowed. The Board found that the taxpayer was 'engaged in the business of buying, holding and selling realty securities,' etc.; but regarded the commissions as 'capital expenditures.' Id., 12 B.T. A. 265. Compare Vaughan v. Com'r of Internal Revenue, 31 B.T.A. 548; Keeney v. Com'r of Internal Revenue, 17 B.T.A. 560.
[ Footnote 4 ] Proceeds from sales in the regular course of business constitute gross income of the business only to the extent that they exceed the cost of the goods sold. See Spring City Foundry Co. v. Commissioner of Internal Revenue, 292 U.S. 182, 185 , 54 S.Ct. 644; compare Washington Land Co. v. Com'r of Internal Revenue, 10 B.T.A. 503; Atlantic Coast Realty Co. v. Com'r of Internal Revenue, 11 B.T.A. 416; Stern v. Com'r of Internal Revenue, 14 B.T.A. 838. See Art. 55, Regulations 74, Revenue Act of 1928.
[ Footnote 5 ] Snyder does not attempt to bring himself within the general rule of section 41 of the 1928 Act (26 USCA 2041), to the effect that 'net income shall be computed upon the basis of the taxpayer's annual accounting period ... in accordance with the method of accounting regularly employed in keeping the books of such taxpayer.' Neither does he state that the method he now suggests was followed in his return.
[ Footnote 6 ] Article 105 of Regulations No. 74, permits dealers in securities to make returns on inventory basis. A dealer is defined as a 'merchant of securities, ... with an established place of business, regularly engaged in the purchase of securities and their resale to customers.' Compare Harriman National Bank v. Com'r of Internal Revenue (C.C.A.) 43 F.(2d) 950; Pan-American Bank & Trust Co. v. Com'r of Internal Revenue, 5 B.T.A. 839; Adirondack Securities Corporation v. Com'r of Internal Revenue, 23 B.T.A. 61; Northeastern Surety Co. v. Com'r of Internal Revenue, 29 B.T.A. 297; Lowell v. Com'r of Internal Revenue, 30 B.T.A. 1297; Fried v. Com'r of Internal Revenue, 31 B.T.A. 638; Brendle v. Com'r of Internal Revenue, 31 B.T.A. 1188.
[ Footnote 7 ] In Snyder's computation, although he purports to take 'the difference between the purchase price and sale price of shares bought and sold during the year,' the cost of the last 1,500 shares bought in one of his two brokerage accounts during the year is deducted from the total cost of purchases in that account, because purchases exceeded sales by 1,500 shares.

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