Source: https://supreme.justia.com/cases/federal/us/295/134/
Timestamp: 2019-04-18 14:22:03+00:00

Document:
1. Shares traded in on margin are capable of identification for the purposes of the "first-in, first-out" rule of the Treasury (Reg. No. 74, Art. 58) but the mere intention of the trader to sell particular shares, without further designation, does not constitute sufficient identification. Helvering v. Rankin, ante, p. 295 U. S. 123. P. 295 U. S. 137.
2. A person who devotes no substantial part of his business day to stock transactions, who is not a trader on the exchange making a living in buying and selling securities, but who deals merely with the object of increasing, as far as his margin will permit, his holdings of a particular stock carried for his account by his brokers, is not engaged in market operations as a trade or business within the meaning of § 22 of the Revenue Act of 1928. P. 295 U. S. 137.
3. Gain realized from sales of property purchased in previous years, measured, as prescribed by §§ 111-113 of the 1928 Act, by the excess of proceeds of sale over cost, constitute income taxable in the year in which the sales are made. P. 295 U. S. 140.
4. Assuming that this rule is applicable only to the sale of capital assets, and not to sales made in the course of a business of trading on the stock exchange, it applies to a taxpayer who has failed to establish that the securities sold were held primarily for sale in the regular course of business. P. 295 U. S. 140.
5. The Court rejects the contention in this case that the taxpayer's income realized during the taxable year from his stock transaction should not be measured by the difference between the sale and cost prices of securities sold, but by the result of all his market operations, purchases as well as sale, during the year -- i.e., by taking the difference between the purchase price and the sales price of shares bought and sold during the year and deducting expenses, such a commissions, taxes, and interest. P. 295 U. S. 141.
Certiorari, 294 U.S. 701, to review the affirmance of a decision of the Board of Tax Appeals, 29 B.T.A. 39, which sustained an income tax assessment.
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, ante, p. 295 U. S. 123.
"in each case where a sale was made, it was his intention to sell the last acquired stock first and shortly thereafter to buy back an equivalent amount in order to increase his margin and acquire additional shares of the stock."
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.
"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.
provisions of the Revenue Acts, and that, in addition to other business activities, one may be "regularly engaged in the business of buying and selling corporate stocks." Compare Dalton v. Bowers, 287 U. S. 404; Burnet v. Clark, 287 U. S. 410; Washburn v. Commissioner, 51 F.2d 949. It is also true that the Department has ruled, and the Board has held, that a taxpayer who, for the purpose of making a livelihood, devotes the major portion of his time to speculating on the stock exchange may treat losses thus incurred as having been sustained in the course of a trade or business. [Footnote 2] Snyder, however, did not allege or attempt to prove that he had devoted the major part, or any substantial part, of his business day to his stock transactions. Nor were there any facts adduced to show that he might properly be characterized as a "trader on an exchange, who makes a living in buying and selling securities." Bedell v. Commissioner, 30 F.2d 622, 624; compare Mente v. Eisner, 266 F. 161. Indeed, according to his petition, his intention throughout the year 1928, was, by "taking advantage of the turns of the market," not to draw out cash profits from his operations, but "to increase the holdings of U.G.I. stock carried for his account by [his] brokers to as great an extent as the margin of his account permitted." There is no substantial evidence in the record to sustain a finding by the Board, had there been one, to the effect that Snyder's market operations constituted a trade or business within the meaning of § 22 of the Revenue Act of 1928.
"insistent upon the point that the operations constitute a trade or business or transaction entered into for profit, not in order to deduct losses, but to emphasize the controlling rule that the law requires the tax to be computed on the segregated transactions of the year."
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." [Footnote 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.
MR. JUSTICE STONE concurs in the result, but thinks that the petitioner failed to show that the particular shares sold were capable of identification with respect to the date of their purchase, and that they could not be identified merely by the taxpayer's designation of them to the broker as the shares to be sold.
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.
I.T. 1818, II-2 C.B. 39; Schwinn v. Commissioner, 9 B.T.A. 1304; Elliott v. Commissioner, 15 B.T.A. 494; Hodgson v. Commissioner, 24 B.T.A. 256; Schermerhorn v. Commissioner, 26 B.T.A. 1031. Compare Black v. Bolen, 268 F. 427; Rogers v. United States, 41 F.2d 865; Kunau v. Commissioner, 27 B.T.A. 509; Thiele v. Commissioner, 32 B.T.A. 134.
Compare Hutton v. Commissioner, 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." 12 B.T.A. 265. Compare Vaughan v. Commissioner, 31 B.T.A. 548; Keeney v. Commissioner, 17 B.T.A. 560.
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, 292 U. S. 182, 292 U. S. 185; compare Washington Land Co. v. Commissioner, 10 B.T.A. 503; Atlantic Coast Realty Co. v. Commissioner, 11 B.T.A. 416; Stern v. Commissioner, 14 B.T.A. 838. See Art. 55, Regulations 74, Revenue Act of 1928.
"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.
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. Commissioner, 43 F.2d 950; Pan-American Bank & Trust Co. v. Commissioner, 5 B.T.A. 839; Adirondack Securities Corp. v. Commissioner, 23 B.T.A. 61; Northeastern Surety Co. v. Commissioner, 29 B.T.A. 297; Lowell v. Commissioner, 30 B.T.A. 1297; Fried v. Commissioner, 31 B.T.A. 638; Brendle v. Commissioner, 31 B.T.A. 1188.
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.

References: Art. 58
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 Art. 55
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