Court Opinion

ID: 4605145
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:35:43.207932+00
Date Added: 2024-06-11T07:53:07.976874
License: Public Domain

CHRISTIAN F. LENG, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Leng v. CommissionerDocket No. 29591.United States Board of Tax Appeals22 B.T.A. 149; 1931 BTA LEXIS 2164; February 16, 1931, Promulgated *2164  Method of computing profit made on sale of margin stock determined.  Frank C. Bowers, Esq., for the petitioner.  Bruce A. Low, Esq., for the respondent.  MATTHEWS *149  In this proceeding the petitioner seeks a redetermination of his income tax for the calendar year 1923, for which year the Commissioner has determined a deficiency of $9,557.96.  The issue is the *150  basis to be used in determining the profit made on the sale in that year of margin stock.  FINDINGS OF FACT.  The petitioner is an individual with offices at 42 Broadway, New York City, and is engaged in trading in stocks and bonds on his own account.  Petitioner began trading in Studebaker common stock in 1919 on margin, through the houses of J. S. Bache & Company and Josephthal & Company.  At the close of 1919, there were 200 shares in the J. S. Bache account.  During 1920, 1,000 shares were purchased and 1,200 shares were sold through Bache, leaving no shares in this account at the end of that year.  During 1921 there were 400 shares purchased and 400 shares sold.  No purchased and sales of Studebaker common were made through Bache during 1922 or 1923.  Petitioner*2165  had 1,000 shares of Studebaker common in his margin account with Josephthal & Company in August, 1919, and thereafter purchased and sold Studebaker common through this firm as follows: 1919BoughtSold100 at 122 3/8Oct. 10500 at 129$64,600.00Oct. 8100 at 124 3/8$24,637.00(Account long 1,300 shares.) 1920200 at 89 1/2Mar. 8100 at 90 5/8$27,007.50200 at 93 1/2Mar. 9200 at 9246,425.00100 at 92 1/2May 8700 stock dividend 33 1/3 per cent.(Account long 2,800 shares.) 1921100 at 56 5/8$5,677.50Jan. 24100 at 57 1/2$5,731.00100 at 57 1/2100 at 57 1/4Jan. 24100 at 57 3/417,295.00Feb. 14100 at 57 3/417,255.50100 at 57 1/4100 at 58 1/8(Account long 2,800 shares.) 1922200 at 135 3/8$27,115.00Apr. 21100 at 122 1/8$12,193.50Oct. 18200 at 13527,040.00June 20100 at 126 1/812,588.50100 at 133 7/826,702.50Oct. 9100 at 136Oct. 19100 at 132 3/4100 at 136 5/827,214.50Oct. 25100 at 128 3/812,857.50Oct. 13100 at 138 1/413,801.00Oct. 14100 at 138 7/813,863.50*2166  (Account long 2,900 shares.) 1923Jan. 3725 stock dividend100 at 118 5/8Feb. 26100 at 119 1/8$11,927.50100 at 119 3/8100 at 105 1/2Feb. 6100 at 119 1/211,931.00June 18100 at 106 1/831,682.50100 at 119 3/4100 at 104 3/4100 at 120 3/812,018.50June 20100 at 103 3/810,352.50100 at 120 1/8100 at 120 3/4100 at 121 1/4Feb. 7100 at 121100 at 121 5/8100 at 122 1/4Feb. 10100 at 119 7/8100 at 120Feb. 23100 at 120 7/8100 at 121 1/2Mar. 5100 at 123 1/2Mar. 14100 at 125 5/8June 21100 at 105 3/8June 25100 at 103 5/810,377.50Aug. 18100 at 106 1/4100 at 104 1/4Aug. 28100 at 107 5/8Sept. 13100 at 103 1/231,045.00Sept. 12,025 Studebaker outright as of June 26100 at 102 1/2(Account long 500 shares.) *151  The above figures are taken from petitioner's books.  The broker's commission for buying is included in the purchase price and his commission for selling has been deducted from the amount for which the stock was sold.  The petitioner took*2167  up 2,025 of the shares held on margin on June 26, 1923, by paying to Josephthal & Company $71,788.87.  This transaction was recorded in the margin account in petitioner's books on September 1, 1923, as a sale as of June 26, 1923, of margin stock at $146,464.51 and in the outright account of Studebaker stock as stock acquired as of June 26, 1923, at $146,464.51.  This makes the average cost of the shares taken up approximately $73 per share.  Petitioner had a private telephone from his office to that of Josephthal and orders to sell were given over this telephone, the broker being instructed to sell the particular stock purchased on a certain date at a certain figure.  From the time petitioner began trading in Studebaker common stock, it was his intention never to let his margin account get below 2,000 shares and eventually to take up at least that many shares of his earliest purchases.  From the middle of the year 1920, petitioner's margin account with Josephthal & Company was never below 2,000 shares until the date the 2,025 shares were taken up.  OPINION.  MATTHEWS: The respondent contends that the profit made on the 2,000 shares of stock sold in 1923 should be computed by*2168  using the cost of the earliest shares purchased, under the following provision of article 39 of Regulations 62: 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.  *152  In applying this rule, the respondent treated the purchases and sales made through Bache & Company and through Josephthal & Company as not being identifiable and has applied the sales made in 1919, 1920, 1921 and 1922 against the earliest purchases and applied the sales made in 1923 against the next earliest purchases.  Necessary adjustments in the cost of stock sold were made to take care of the stock dividends received.  Petitioner contends that he has followed this rule in every case where he was unable to identify the lots sold.  He identified lots sold by directing his broker to sell the particular stock purchased on a certain date at a certain figure.  He further contends that the stock purchased in 1919 and 1920, amounting to 2,100 shares, upon which a 33 1/3 per cent stock dividend was declared in 1920, bringing*2169  the number held to 2,800 shares on January 1, 1921, is the block of stock from which the petitioner took up 2,025 shares in 1923 by outright purchase, and that the Commissioner is in error in using the cost of this stock as the basis for ascertaining the profits on the sales made in 1923.  , is cited by petitioner as authority for his contention. The petitioner's method of identifying the lots of margin stock sold is the same as that followed by the petitioner in the case of . In that case we held that even assuming that the broker sold as directed, the orders to the broker could be given no force as an identification of the stock sold so as to render article 39 of the regulations inapplicable in the determination of the taxable income, since the shares were not specifically owned or possessed by the taxpayer.  We could not find as a fact, therefore, as did the District Court in , that the lots of stock sold were identified as petitioner claimed.  It was further held in the Stryker case that article 39, Regulations 65, prescribing*2170  the method of computing gain on sales of stock made from lots purchased on different dates and at different prices where identity of the lots can not be determined, is reasonable and within the full scope of the administrative regulations contemplated by the statute.  This article is identical with article 39 of Regulations 62.  Petitioner seeks to identify the stock taken up in 1923 as being a part of the block of 2,800 shares acquired in 1919 and 1920 by purchase and by receipt of stock dividends (1) by the continuity of his holding of this many shares in the margin account on January 1, 1921, January 1, 1922, and January 1, 1923; (2) by book entries - the book value as of June 26, 1923, of $146,464.51 or an average price of about $73 a share, he claims is approximately the cost of stock bought in 1919 and 1920; and (3) by his intention eventually to take up earliest purchases.  *153  We do not think that margin stock taken up can be identified any more than can margin stock sold.  In fact, the bookkeeping entry in the margin account, which records the taking up of stock held on margin, is the same as if the stock had been sold.  Whatever may have been the intention of*2171  the petitioner, therefore, the orders to the broker to take up the earliest purchases could be given no force as an identification of the stock taken up.  Neither can the book entries as to the cost of the stock taken up or the balance paid to Josephthal & Company serve to identify the stock taken up in 1923 as being any particular stock acquired in 1919 or 1920.  , affirming District Court decision, . In so far as the sales of stock made prior to June 26, 1923, are concerned, the method followed by the Commissioner is correct.  The shares taken up on June 26 should be applied against the earliest stock then on hand and the sales made after June 26 applied against the earliest purchases still held in the margin account.  We think, however, that the margin stock purchased through Bache & Company can be identified from that purchased through Josephthal.  As all of the stocks purchased through Bache were sold through that firm and as there was no Studebaker common stock left in this account at the close of 1921, and there were no purchases and sales made in 1922 or 1923, the purchases and sales made through*2172 Bache & Company should not be considered in computing the profit derived on the sales made in 1923 through Josephthal & Company.  See ;; ; and . Judgment will be entered under Rule 50.