Court Opinion

ID: 4610615
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:47:15.905483+00
Date Added: 2024-06-11T07:54:06.074265
License: Public Domain

LEONHARD FELIX RULD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  FLORENTINE M. FULD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.RULD v. COMMISSIONERDocket Nos. 98205, 98206.United States Board of Tax Appeals44 B.T.A. 1268; 1941 BTA LEXIS 1203; August 22, 1941, Promulgated 1941 BTA LEXIS 1203">*1203  Prior to the last quarter of 1930, petitioners were engaged in investing in securities.  On October 9, 1930, they began trading or speculating in securities.  This new policy continued through 1933.  In order to obtain funds to effectuate their new policy, petitioners began selling their securities acquired prior to the beginning of their activities under their new policy.  This disposition continued through 1933.  Held: (1) From October 9, 1930, through 1933, petitioners were engaged in the business of trading in securities; (2) those securities acquired by petitioners subsequent to the advent of their new policy, October 9, 1930, and held for more than two years were being held for sale in 1933 in the course of a trade or business and losses from the sale thereof are not deductible as capital losses within section 101 of the Revenue Act of 1932; (3) those securities held by petitioners for more than two years and acquired by them for investment purposes prior to the advent of their new policy were not being held for sale in 1933 in the course of their new trade or business of trading in securities, and losses from the sale thereof are deductible as capital losses within the1941 BTA LEXIS 1203">*1204  above section of the statute.  O. R. Folsom-Jones, Esq., for the petitioners.  Dean P. Kimball, Esq., for the respondent.  LEECH44 B.T.A. 1268">*1268  These consolidated proceedings involve the redetermination of deficiencies in income tax as follows: PetitionerDocketNo.YearDeficiency1933$27,887.14Leonhard Felix Fuld9820519342,430.05193328,971.57Florentine M. Fuld9820619342,405.5744 B.T.A. 1268">*1269  One of the errors assigned in the petition, viz., the deductibility of expenses incurred in connection with certain rental properties for the years 1933 and 1934, was waived by the petitioners.  The only remaining issue is whether or not securities held for more than two years and sold in the taxable year 1933 were held, in that year, "primarily for sale in the course of a trade or business" and excluded from the definition of "capital assets" under section 101 of the Revenue Act of 1932.  FINDINGS OF FACT.  In 1933, Leonhard Felix Fuld and his sister, Florentine M. Fuld, petitioners, resided at the same residence in Jersey City, New Jersey.  They filed tax returns for the year 1933 with the collector of internal1941 BTA LEXIS 1203">*1205  revenue for the second district of New York.  Upon graduation from college, Leonhard Fuld practiced law for a short while and then became chief examiner of the New York Municipal Civil Service Commission for several years.  Later, he became educational director of a large utility firm in New York.  Since 1915, he devoted most of his time to the investment of securities owned by him, his other activities consisting of teaching a course in investments at the College of the City of New York, which required an average of two hours per week and afforded compensation at the rate of $5 per hour.  He also acted as health director for no compensation on an average of one-half day per week and spent approximately one day per week in attending to rental properties on which he and Florentine Fuld held mortgages and from which neither realized any income.  After graduation from college, Florentine Fuld taught in the elementary schools until 1922.  After 1922, with no previous experience, she began investing in securities.  Up to and including the taxable year 1933, her other activities consisted of acting as housekeeper for her brother, Leonhard, and participating in the social life of her1941 BTA LEXIS 1203">*1206  surrounoing community.  Prior to the last quarter of 1930, petitioners bought securities for investment purposes, the objective being to hold them indefinitely for long term appreciation and, in the meanwhile, receiving dividends and interest.  Accordingly they made few sales prior to that time.  Their numerous purchases were almose entirely in small lots of less than 100 shares, and in most instances they renged from 1 to 20 shares.  Shortly before October 9, 1930, they adopted a new policy and, beginning October 9, 1930, they began purchasing in large lots ranging from 100 to 3,000 shares each.  Under this new trading policy, as distinguished from their investment policy, petitioners purchased fewer securities in large quantities for the purpose 44 B.T.A. 1268">*1270  of making a rapid turnover at a small profit per share.  They bought securities without much regard to returns, the price of which, analysis and information indicated, would quickly rise.  In order to obtain funds to carry out their new policy, petitioners began selling their old holdings acquired under their old investment policy.  To accomplish this, they submitted to their broker almost every week a list of a few to be1941 BTA LEXIS 1203">*1207  analyzed for the purpose of determining whether or not they should be sold.  Generally, they were sold as rapidly as possible, taking into consideration current market conditions and the thousand or more holdings which had to be analyzed.  The petitioners continued this process of disposing of their old securities, during the taxable year 1933.  From 1930 and during 1933 Leonhard Fuld devoted an average of eight hours per day to the study of new texts, reading services, charting prices of securities, conferring with his broker, attending meetings of corporations in which he owned securities, and consulting with corporate executives.  Some of this work also assisted him in connection with the college course which he taught.  He spent about one or two hours per day at the broker's office.  Florentine Fuld had no trade or business other than buying and selling securities.  In this connection she studied the services, read corporation annual reports, charted her own security prices, attended meetings of corporations in which she held securities, and consulted with corporate executives.  It was her policy to buy and sell the same securities as Leonhard Fuld and in the same amounts, 1941 BTA LEXIS 1203">*1208  but in some instances she disagreed with him as to such purchases and sales.  Her decisions in this connection were made independently of Leonhard's.  She never visited the broker's office and had no direct conversations with the broker.  Her orders were placed with the broker through Leonhard Fuld, who acted as agent only in the physical transmission of such orders and the acceptance of deliveries.  The main source of livelihood of both petitioners was from their securities transactions.  They maintained no business office, had no customers to whom they might sell securities, practically never sold securities short, and never advertised or held themselves out to the public as dealers.  However, Leonhard Fuld was registered with the Securities Exchange Commission as a dealer and as an investment counselor and was listed in the stock directories throughout the United States.  Also, he acted for some of his college students in the consummation of security transactions but received no compensation therefor.  Neither of the petitioners was a director, officer, or employee of any of the companies in which they purchased securities in 1930 and thereafter.  The petitioners dealt through1941 BTA LEXIS 1203">*1209  a brokerage firm and records of the transactions were maintained either at their home or at Leonhard's 44 B.T.A. 1268">*1271  college office.  They paid the brokerage firm regular commissions for the services rendered, and the same services were offered the petitioners as were offered to other clients.  Prior to June 12, 1933, the petitioners maintained one combined brokerage account with the same brokerage firm, in which account each had a one-half interest, but thereafter separate accounts were kept.  Neither guaranteed the other's brokerage account.  They did not purchase on margin and paid for their securities separately when acquired.  The shares were registered at the transfer office in their respective names.  Proceeds from sales were paid to them separately.  Some of the securities held by petitioners for more than 2 years and sold in 1933 were acquired prior to the beginning of their new policy, October 9, 1930, and some of such securities were acquired subsequent to that date.  In 1933, Leonhard Fuld made approximately 249 sales of securities held for more than 2 years and approximately 98 held for 2 years or less.  Also, in the same year Florentine Fuld made approximately 2291941 BTA LEXIS 1203">*1210  sales of securities held for more than 2 years and approximately 89 held for 2 years or less.  The sales of both petitioners ranged as high as 1,000 shares per transaction.  Beginning October 9, 1930, through 1933, petitioners were engaged in the business of trading in securities.  Securities purchased by petitioners before October 9, 1930, and sold in 1933 were not sold "in the course of" that business.  Those purchased after October 9, 1930, and sold in 1933 were sold "in the course of" that business.  OPINION.  LEECH: In their tax returns for 1933, petitioners offset losses sustained from the sale of securities held more than two years against profits made from the sale of securities held less than two years, on the ground that all of such securities were being held in 1933 primarily for sale in the course of a trade or business.  Respondent refused to allow the offset, claiming that these losses resulted from the sale of capital assets and were subject to the limitations of section 101 of the Revenue Act of 1932.  Petitioners apparently do not contend that they were engaged in a trade or business prior to their adoption of a new policy in the last quarter of 1930, and even1941 BTA LEXIS 1203">*1211  though such a contention were raised, it would have to be rejected.  ; . Petitioners argue, however, that they adopted a new policy in the last quarter of 1930 and thereafter engaged only in carrying out activities under it which constituted the business of trading in securities.  They argue that all their securities which were acquired prior to as well as after that time were being held in 1933 as part of that business.  the 44 B.T.A. 1268">*1272  respondent contends that the petitioners were not engaged in a trade or business in 1933 and, even if they were, the securities purchased before the advent of their new policy were still being held for sale in 1933, in the course of the orderly liquidation of their investment activities and, as such, were capital assets.  The issue is whether or not the securities held for more than two years and sold in 1933 were being held in that year, primarily for sale in the course of a trade or business.  Some of the securities sold by petitioners in 1933, and held for more than two years, were acquired subsequent to the advent of their1941 BTA LEXIS 1203">*1212  new policy and some were acquired prior to that time.  Undoubtedly the former were being held in 1933 for sale in course of the activities of the petitioners occasioned by their new policy of trading in securities.  Thus, the determination of whether or not these securities were capital assets is dependent upon whether such activities of the petitioner, in 1933, constituted a trade or business.  To determine this has been held to "require an examination of the facts in each case", ; and "a factor of more decisive importance than the volume of transactions lies in whether or not the taxpayer's market activities consisted in dealing in securities for speculative purposes, or for investment purposes." , Despite the investment status of all their activities before, the petitioners maintain that their activities in which they were engaged under their new policy constituted the business of trading or speculating in securities.  We are convinced that they have sustained their burden of establishing this fact.  1941 BTA LEXIS 1203">*1213 ; affd., ; see also . The petitioner's activities were not "limited to doing merely what was necessary from an investment point of view", and their transactions "were substantial and frequent rather than occasional or isolated." . Moreover, besides devoting a large part of their time to their new activities of buying and selling securities for their own accounts, the principal source of their livelihood resulted from such activities.  In our opinion, the petitioners' activities constituted the business of trading in securities in 1933 and those securities acquired subsequent to the advent of their new business, October 9, 1930, were being held, in 1933, for sale in the course of that business, Accordingly, we have so found.  , affirming ; ; 1941 BTA LEXIS 1203">*1214 ; cf. Therefore, we hold that the losses from the sale thereof in 1933 are 44 B.T.A. 1268">*1273  not capital losses within the meaning of section 101 of the Revenue Act of 1932.  With respect to the securities acquired prior to the advent of the petitioners' business of trading, and held more than two years, the situation is different.  On October 9, 1930, the petitioners commenced activities under their newly adopted policy of trading ad distinguished from investing in securities.  It may be that some of the investment stock acquired before that date was appropriated to their trading business, but, if so, this record does not disclose it.  See In fact, the record indicates the opposite.  Under this new policy, they purchased securities, the price of which, analysis and information indicated, would enjoy a quick rise as distinguished from long term appreciation, which was a moving element in their purchases before October 9, 1930.  Before the adoption of the new policy petitioners had purchased securities in "ten, fifteen or twenty1941 BTA LEXIS 1203">*1215  share lots" 1 for long term appreciation and interim returns, but thereafter fewer securities in blocks of 100 to 3,000 shares were bought for quick turnover at a small profit per share.  Returns on the "new" securities were not as important as they had been under their investment policy.  In order to obtain funds to effectuate this new policy, they began disposing of their investment holdings acquired prior to October 9, 1930. 1 This disposition continued through the taxable year 1933.  Thus the question is whether or not the securities acquired for investment purposes prior to the beginning of the petitioners' security trading business, October 9, 1930, were being held for sald in 1933 in the course of that business.  1941 BTA LEXIS 1203">*1216  In our judgment these securities were not so held.  They were being held in 1933 for the same purpose as they were held upon the advent of their new policy in 1930, VIZ., sale to create a fund in order to purchase securities in which to trade under their new policy.  In other words, these securities were being sold in order that the petitioners would have on hand the capital necessary to purchase securities in the course of their business of trading in securities.  Despite the fact that petitioners' security activities before October 9, 44 B.T.A. 1268">*1274  1930, did not constitute a business, the securities then purchased were bought for investment as distinguished from trading purposes.  At the time they were sold in 1933, we do not think that those securities had lost their character as investment securities.  In our opinion they were being held for sale in 1933, not "in the course of" their trading business but, "in the course of" liquidating their investment activities in which they were engaged prior to 1930 and, as such, still remained a part of such activities.  We have so found.  See 1941 BTA LEXIS 1203">*1217 ; ; certiorari denied, ; ; ; and . We conclude that the securities in question which were acquired prior to the advent of the petitioners' new policy, October 9, 1930, were capital assets, and the losses sustained from their sale in 1933 were capital losses subject to the limitations of section 101 of the Revenue Act of 1932.  Since there appears no issue as to the dates on which the securities in question were purchased and their respective costs, Decisions will be entered under Rule 50.Footnotes1. Petitioner Leonhard Fuld testified: "In order to carry out this change in policy it became necessary for me to get the requisite funds by the sale of securities which I had acquired prior to 1930, and I went about it.  It was a task of Hercules, because I had thousands of holdings, and what I did was take, every week, twenty or thirty holdings and sell them and create a fund, and then at the time I thought was opportune, I invested that accumulated fund in a single new security so that while prior to 1930 I had purchased securities in ten or fifteen or twenty share lots, after 1930 I began to purchase securities in thousand or two thousand or three thousand share lots, with the idea of making a quick turnover and getting a profit on that quick turnover, even if the amount of profit was comparatively small.  If I made a single point on s share and I had 3,000 shares, that would be $3,000." ↩