Source: https://www.scribd.com/document/310819433/Helvering-v-Rankin-295-U-S-123-1935
Timestamp: 2018-12-18 21:09:23
Document Index: 2177630

Matched Legal Cases: ['§ 22', '§\n2022', 'Art. 4', 'Art. 39', 'Art. 58', 'Art. 4']

Helvering v. Rankin, 295 U.S. 123 (1935) | Stocks | Supreme Court Of The United States
Filed: 1935-04-29 Precedential Status: Precedential Citations: 295 U.S. 123 Docket: 582
WILLIAM DEPPERMAN AKA THE DIAPERMAN
za-mirzu
Henry G. Bartsch, T/a Airport Dispatching Service v. Frederick J. Clarke, Chairman, 293 F.2d 283, 4th Cir. (1961)
Dennis Flores v. Jim Long, Agent Paul Sena, Deputy Sheriff A.E. Archibeque Edward Apodaca, Patrolman Dudley Lloyd Richard C. De Baca, Individually and in Their Official Capacities Department of Public Safety, New Mexico State Police, 110 F.3d 730, 10th Cir. (1997)
The Attorney General and Mr. Frank J. Wideman, Asst. Atty. Gen., for
The Revenue Act of 1928 (chapter 852, §§ 22, 111, 112, 113 (26 USCA §§
2022, 2111, 2112, 2113)) provides, as had earlier Revenue Acts, that in
computing income from sales of property purchased after February 28, 1913,
any excess of the amount realized over cost shall be gain and that any excess of
the cost over the amount realized shall be loss. When gain or loss is to be
determined on the sale of stock owned outright as an investment, the
identification of the shares sold with those purchased ordinarily presents no
difficulty. But when the taxpayer has engaged in marginal transactions on a
stock exchange, the identification of sales and purchases is frequently
impossible. It was, perhaps, primarily to deal with such cases that the Treasury
adopted, in 1819,1 the so-called 'First-in, first-out' rule. That rule appears in
Article 58 of Regulations No. 74, under Revenue Act of 1928, as follows:
'When shares of stock in a corporation are sold from lots purchased at different
dates and at different prices and the identity of the lots can not be determined,
the stock sold shall be charged against the earliest purchases of such stock. The
excess of the amount realized on the sale over cost or other basis of the stock
will constitute gain.'
Applying this rule, the Commissioner of Internal Revenue assessed against
Richard B. Turner for the year 1928 a deficiency tax of $11,173.05 on account
of gains from his operations on the stock exchange in United Gas Improvement
Company stock. Upon a redetermination by the Board of Tax Appeals, the
Commissioner's action was sustained. 26 B.T.A. 1204. The Circuit Court of
Appeals reversed the Board's decision and directed it to enter a new order in
conformity with the court's opinion. 73 F.(2d) 9, 11. Turner having died during
the litigation, his executor, Rankin, was substituted. Writs of certiorari were
granted in this case, and in Snyder v. Commissioner of Internal Revenue, 295
U.S. 134, 55 S.Ct. 737, 79 L.Ed. —-, decided this day, in order to determine
questions concerning the effect, validity, and applicability of the regulation.
294 U.S. 700, 55 S.Ct. 506, 79 L.Ed. —-. The facts found by the Board were
In 1926, Turner received in distribution of his father's estate $20,000 in bonds.
Wishing to change his inheritance into stock, he opened a marginal account
with a stock broker; sold the bonds; and, with the proceeds as margin,
purchased, from time to time during that year, an aggregate of 1,200 shares of
United Gas Improvement Company stock at a cost of $117,202.50. On this
stock the broker received for him, later in 1926, 300 shares as a dividend. There
were no further operations in 1926 or in 1927. His marginal account became
active in 1928. At the beginning of the year he was long 1,500 shares of this
stock; in May he sold 300 shares for $44,619 net; in June he bought 1,000
shares for $143,225; in October he sold 500 shares for $73,865; and in
November 500 shares for $74,115. Thus, at the close of the year, he was long
1,200 shares.
In none of these transactions did the broker deliver to Turner, or Turner to the
broker, any stock certificate. No specific certificate of stock was ever bought or
sold by the broker for Turner; and none was earmarked or allocated for him in
any manner. The purchases and sales affecting his account were made through
the medium of street certificates handled by the broker; and the transactions
were evidenced solely by debits and credits in his account on the broker's
books. Turner first learned these facts after the deficiency assessment. He had
always Intended to retain ownership on margin of 1,200 shares of the stock,
since he had faith in the company and desired to hold them in lieu of the bonds
which he had received from the estate of his father. To his business associates,
who acted for him in giving orders to the broker, he had made it plain that the
1,200 shares were in the nature of a permanent commitment on his part. An
employee of the broker understood that the decedent desired to retain 1,200
shares of the stock to take the place of the bonds which he had received from
On the above facts the Board concluded, as had the Commissioner, that it was
impossible to determine the identity of the lots purchased and sold; and that,
consequently, the 'First-in, first-out' regulation should be applied. In reversing
that order the Court of Appeals said:
'We think the petitioner's (Turner's) communication to his broker of his
intention to hold the 1200 shares first purchased as an investment was in effect
an order to his broker not to sell those shares, and when, two years later, he
ordered the broker to make two sales in lots of 500 shares each, they were,
conformably with the original instructions, the 1000 shares last purchased. The
petitioner's instructions excluding from sale the shares first purchased were in
effect an identification of the shares later sold as those last purchased.
'While the petitioner, in identifying his shares, might have been more specific in
his instructions to his broker, those he gave stand uncontradicted; indeed, they
have not been questioned. We think they were enough to take the case out of
the rule and that, in consequence, the deficiency tax in issue is invalid to the
extent that it is based on gains made in sales of U.G.I. shares reckoned on the
purchase price of the original 1200 shares.'
First. The Commissioner contends that Turner's communication to his broker of
his intention to keep 1,200 shares of United Gas Improvement Company stock
was ineffective to identify the shares to be sold, because, from the very nature
of these marginal operations, the shares were incapable of identification by the
broker or anyone else. The basis for this contention are the facts that in such
transactions no certificate is issued in the name of the customer, or earmarked
for or otherwise allocated to him; that all certificates are in the name of the
broker or street names; and that all certificates for stock of the same kind are
commingled and held by the broker for the common benefit of all dealing in
that particular stock. The fallacy of this argument lies in the assumption that
shares of stock can be identified only through stock certificates. It is true that
certificates provide the ordinary means of identification. But it is not true that
they are the only possible means. Compare Richardson v. Shaw, 209 U.S. 365,
28 S.Ct. 512, 52 L.Ed. 835, 14 Ann.Cas. 981; Gorman v. Littlefield, 229 U.S.
19, 33 S.Ct. 690, 57 L.Ed. 1047; Duel v. Hollins, 241 U.S. 523, 36 S.Ct. 615,
60 L.Ed. 1143. Particularly is this so when, as here, the thing to be established
is the allocation of lots sold to lots purchased at different dates and different
prices.2 The required identification is satisfied, if the margin trader has, through
his broker, designated the securities to be sold as those purchased on a
particular date and at a particular price. It is only when such a designation was
not made at the time of the sale, or is not shown, that the 'First-in, first-out' rule
is to be applied.3
Second. The validity of the regulation, thus construed, cannot seriously be
questioned. The contention advanced by the taxpayers, both here and in the
companion case of snyder v. Helvering, Commissioner of Internal Revenue,
295 U.S. 135, 55 S.Ct. 737, 79 L.Ed. —-, that the regulation, as applied to
marginal transactions, is invalid under the Fifth Amendment, because it creates
a conclusive presumption, must rest wholly on the assumption that the shares
traded on margin are incapable of identification. Since that assumption is
erroneous, it is clear that no conclusive presumption is established. It is, at
most, the burden of proof that is affected. For the margin trader, while being
required to establish the identity of the shares in order to avoid the 'First-in,
first-out' rule, is left free to introduce any relevant evidence. Nor is he
arbitrarily deprived of any of the important attributes of ownership, such as the
'right to decide which stock he is going to sell.' Indeed it is conceded, at least by
the taxpayer in this case, that the regulation, as we now interpret it, 'provides a
useful and reasonable rule for ascertaining what stock was sold in cases where
there is no proof, or lack of satisfactory proof, of the fact.'
Third. If the facts found by the Board of Tax Appeals had been what the Court
of Appeals assumed them to be, there would have been such an identification of
shares sold with shares purchased as to preclude the Commissioner from
applying the 'First-in, first-out' rule. The Court of Appeals assumed that, 'What
Turner did in this case, acting and speaking through his attorney, was to
communicate to his broker his intention to hold for investment the shares of
U.G.I. he originally purchased.' The facts found by the Board of Tax Appeals
do not bear out this assumption of the court. The Board's findings were that,
'The decedent (Turner) always intended to retain the ownership on margin of
1,200 shares of the United Gas Improvement Company stock'; and that, 'an
employee of the broker understood * * * that the decedent desired to retain
1,200 shares to take the place of the bonds which he had received from his
father.' The difference between the Board's findings and the court's statement of
the facts is obviously vital. The court held that Turner's communication of his
intention 'was in effect an order to his broker not to sell those shares'; that
'when, two years later, he ordered the broker to make two sales in lots of 500
shares each, they were, conformably with the original instructions, the 1,000
shares last purchased.' But if the employee was told, as the Board found, merely
that Turner 'desired to retain 1,200 shares (of the U.G.I. stock) to take the place
of the bonds which he had received from his father,' he would naturally believe
that so long as any 1,200 shares of the stock were retained, it was immaterial to
which of the lots the sales in 1928 were attributed; and hence there was no
identification. Thus it was only by departing from the facts as found by the
Board of Tax Appeals that the court found justification for reversing the
Fourth. The Court of Appeals is without power, on review of proceedings of the
Board of Tax Appeals, to make any findings of fact. 'The Board of Tax Appeals
is not a court. It is an executive or administrative board, upon the decision of
which the parties are given an opportunity to base a petition for review to the
courts after the administrative inquiry of the Board has been had and decided.'
Old Colony Trust Co. v. Commissioner of Internal Revenue, 279 U.S. 716, 725,
49 S.Ct. 499, 502, 73 L.Ed. 918. The function of the court is to decide whether
the correct rule of law was applied to the facts found; and whether there was
substantial evidence before the Board to support the findings made. See Phillips
v. Commissioner of Internal Revenue, 283 U.S. 589, 599, 600, 51 S.Ct. 608, 75
L.Ed. 1289; Burnet v. Leininger, 285 U.S. 136, 138, 52 S.Ct. 345, 76 L.Ed.
665; Old Mission Portland Cement Co. v. Helvering, 293 U.S. 289, 294, 55
S.Ct. 158, 79 L.Ed. 367. 4 Unless the finding of the Board involves a mixed
question of law and fact, the court may not properly substitute its own judgment
for that of the Board.5 If the Board has failed to make an essential finding and
the record on review is insufficient to provide the basis for a final
determination, the proper procedure is to remand the case for further
proceedings before the Board. Compare Helvering v. Taylor, 293 U.S. 507, 55
S.Ct. 287, 79 L.Ed. 623; Murphy Oil Co. v. Burnet, 287 U.S. 299, 308, 53 S.Ct.
161, 77 L.Ed. 318. 6 And the same procedure is appropriate even when the
findings omitted by the Board might be supplied from examination of the
record.7
Fifth. The Court of Appeals did not comment on the difference between the
Board's findings and its own statement of the facts. Apparently it assumed that
there was no difference; and reversed the Board's order, believing that it rested
upon an erroneous ruling of law. For the court said that the Board made its
determination 'on the theory that the U.G.I. stock, which from time to time he
(Turner) purchased on margin and later sold, could be identified only by
certificates; that as no certificates for shares were ever in his name, the shares
sold could not be identified as shares purchased in any particular lot or at any
particular time or price and, accordingly, charged the shares sold against those
earliest purchased within the 'First in, first out' rule.'
There is nothing in the opinion of the Board to indicate that its decision was
based upon the 'theory' stated by the court. There is nothing in the record to
indicate that any such contention had been made by the government before the
Board; and Turner's petition for review by the Court of Appeals did not claim
that the Board had acted upon that 'theory.'8 But even if the Board's decision
had been based on an erroneous rule of law, that would not have justified its
reversal, if the findings of fact, governed by the correct rule of law, were
sufficient to sustain the decision and had substantial support in the evidence.9
Sixth. The Court of Appeals did not explicitly hold that the Board's finding as to
Turner's communication to his broker was without substantial support in the
evidence. The court, in its opinion, does state that, 'The evidence shows
conclusively that Turner was sentimental about keeping the original 1,200
shares as an inheritance from his father; that his 'intention' was to retain as an
investment the shares originally purchased and sell in speculation the shares
more recently acquired.' It does not state that the evidence was equally
conclusive as to the communication to the broker of this exact intention. There
was, it is true, testimony to the effect that 'from the very beginning West &
Company knew Mr. Turner's intentions and knew he was keeping the first
purchase of 1,200 shares'; and the failure of the Board so to find was assigned
as error by the taxpayer in his petition for review. But there was also testimony
showing that Turner, during 1928, traded heavily in 20 other issues of stock.
The Court of Appeals did not consider whether, in view of this and other
evidence, the Board might reasonably have concluded that the testimony as to
the broker's knowledge of Turner's intention was not entirely accurate, and that
the broker's only clear understadning of Turner's intention was that, throughout
his extensive trading, 1,200 shares of United Gas Improvement Company stock
were to remain in his account. Since this question was not considered in the
court below nor argued here, the case must be remanded to the Court of
Appeals for further consideration.
Mr. Justice STONE thinks that the judgment of the Court of Appeals should be
reversed and the order of the Board of Tax Appeals affirmed, on the grounds
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 designating them to the broker as the shares to be sold.
Art. 4, par. 60, Regulations No. 33 (Revised), Revenue Acts of 1916 and 1917;
Art. 39, Regulations Nos. 45, 62, 65, and 69, Acts of 1918, 1921, 1924, and
1926, respectively; Art. 58, Regulations Nos. 74 and 77, Acts of 1928 and
1932, respectively; Act. 22(a)-8, Regulations No. 86, Act of 1934.
The original regulation, Art. 4, par. 60, Regulation No. 33 (Revised), read,
'When stock is sold from lots purchased at different times and at different
prices, and the identity of the lots can not be determined as to the dates of
purchase, the stock sold shall be charged against the earliest purchases of such
stock.' It has been suggested that, 'Under the language quoted from Regulations
33, ('as to the dates of purchase,' omitted in subsequent regulations) it might be
argued that the identification intended could have been accomplished merely by
recording 'the dates of purchase', rather than by requiring physical identification
of the certificates.' Wilkins, Identity of Marginal Transactions, Int. Rev. News,
v. 4, no. 7, p. 5 (1931).
Compare Howbert v. Penrose (C.C.A.) 38 F.(2d) 577, 68 A.L.R. 820; Skinner
v. Eaton (C.C.A.) 45 F.(2d) 568; Snyder v. Com'rs of Internal Revenue
(C.C.A.) 54 F.(2d) 57; Com'r of Internal Revenue v. Merchants' & Mfrs.' Fire
Ins. Co. (C.C.A.) 72 F.(2d) 408.
Compare Tracy v. Com'r of Internal Revenue (C.C.A.) 53 F.(2d) 575, 578, 579;
Slayton v. Com'r of Internal Revenue, 76 F.(2d) 497, decided March 26, 1935,
by the Circuit Court of Appeals for the First Circuit; Heywood Boot & Shoe
Co. v. Com'r of Internal Revenue, 76 F.(2d) 586, decided April 1, 1935, by the
Circuit Court of Appeals for the First Circuit.
Compare Bishoff v. Com'r of Internal Revenue (C.C.A.) 27 F.(2d) 91, 92;
Washburn v. Com'r of Internal Revenue (C.C.A.) 51 F.(2d) 949, 951; Tricou v.
Helvering (C.C.A.) 68 F.(2d) 280, 285.
Compare Royal Packing Co. v. Com'r of Internal Revenue (C.C.A.) 22 F.(2d)
536, 538; Com'r of Internal Revenue v. Langwell Real Estate Corporation
(C.C.A.) 47 F.(2d) 841, 842; Independent I. & C. Storage Co. v. Com'r of
Internal Revenue (C.C.A.) 50 F.(2d) 31, 33; Kansas City Southern Ry. Co. v.
Com'r of Internal Revenue (C.C.A.) 52 F.(2d) 372, 379; Houston v. Com'r of
Internal Revenue (C.C.A.) 53 F.(2d) 445; Underwood v. Com'r of Internal
Revenue (C.C.A.) 56 F.(2d) 67, 73; Eau Clair Book & Stationary Co. v. Com'r
of Internal Revenue (C.C.A.) 65 F.(2d) 125, 126.
Compare Kendrick Coal & Dock Co. v. Com'r of Internal Revenue (C.C.A.) 29
F.(2d) 559, 564; Francisco Sugar Co. v. Com'r of Internal Revenue (C.C.A.) 47
F.(2d) 555, 558; Belridge Oil Co. v. Helvering (C.C.A.) 69 F.(2d) 432.
The Solicitor General stated in his petition to this Court for certiorari, that the
question presented was 'whether shares of stock held on margin are capable of
identification so that a taxpayer selling part of his holdings may select, as his
basis for determining gain or loss, the cost of any particular lot'; and counsel for
the government may have contended in the Court of Appeals, as he did here,
that such identification is impossible. It is also true that the Board of Tax
Appeals in other cases has approved the rule for which the government is now
contending. See Stryker v. Com'r of Internal Revenue, 21 B.T.A. 561; Leng v.
Com'r of Internal Revenue, 22 B.T.A. 149; Seelye v. Com'r of Internal
Revenue, 29 B.T.A. 695; compare Kelchner v. Com'r of Internal Revenue, 31
B.T.A. 262.
Compare Lewis-Hall Iron Works v. Blair, 57 App.D.C. 364, 23 F.(2d) 972,
974, 975; Hurwitz v. Com'r of Internal Revenue (C.C.A.) 45 F.(2d) 780, 781;
Dickey v. Burnet (C.C.A.) 56 F.(2d) 917, 918.
Documents Similar To Helvering v. Rankin, 295 U.S. 123 (1935)
Mirza Covic