Court Opinion

ID: 4606220
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:38:02.951843+00
Date Added: 2024-06-11T07:53:20.051984
License: Public Domain

DWIGHT C. WHEELER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wheeler v. CommissionerDocket No. 71338.United States Board of Tax Appeals32 B.T.A. 909; 1935 BTA LEXIS 877; July 9, 1935, Promulgated *877  The sale by the petitioner of certain shares of stock in December 1930 at less than cost, followed by the purchase of a like number of the same shares soon after the expiration of 30 days from the sale, was a bona fide sale resulting in a deductible loss.  J. Gilmer Korner, Jr., Esq., for the petitioner.  De Witt M. Evans, Esq., James K. Polk, Jr., Esq., and John M. Morawski, Esq., for the respondent.  SMITH *909  This proceeding involves a deficiency in petitioner's income tax for 1930 in the amount of $23,285.  The petitioner alleges that the respondent erred in refusing to allow the deduction of a loss in the amount of $99,210.25 resulting from the sale in 1930 of certain shares of stock.  The respondent has determined that the alleged sale was not a bona fide sale giving rise to the loss claimed.  *910  FINDINGS OF FACT.  The petitioner is a resident of Bridgeport, Connecticut.  In 1930 and prior years he did a considerable amount of trading in stocks and securities.  He maintained an active trading account with W. R. Bull & Co., hereinafter referred to as Bull & Co., an investment and banking concern of Bridgeport, through whom*878  most of his stock transactions were conducted.  On February 1, 1930, the petitioner had a cash credit balance with Bull & Co. of $137,880.75.  On that date he gave Bull & Co. an order to purchase for his account 3,350 shares of stock of United Founders Corporation.  The shares were purchased on the same day at $36.25 per share, or at a total cost of $121,437.50.  Certificates for the shares were delivered to the petitioner by Bull & Co. a few days later.  The United Founders Corporation, hereinafter referred to as United Founders, was an investment corporation organized under the laws of Maryland, with large and diversified holdings.  It controlled a large utility group and had extensive holdings in banking, investment, and insurance company stocks.  On March 22, 1930, the petitioner purchased through Bull & Co. 1,000 additional shares of United Founders stock at $37 per share, or at a total cost of $37,000, which he paid by check.  Certificates for those shares were delivered to the petitioner by Bull & Co. on April 4, 1930.  On December 24, 1930, the petitioner instructed Bull & Co. to sell for his account 3,350 shares of United Founders stock and delivered to A. R. Smith, vice*879  president of Bull & Co., for sale certificates for the shares which he had acquired in February of that year.  Under date of December 24, 1930, Bull & Co. sent the petitioner a memorandum showing the sale of 3,350 shares of United Founders stock at $6.75 per share, a credit to petitioner's account of $22,612.50, representing the proceeds of the sale, and debits of $251.25 commissions, and $134 transfer tax.  On December 30, 1930, the petitioner instructed Bull & Co. to sell for his account 1,000 shares of United Founders stock.  Under that date Bull & Co. sent the petitioner a memorandum showing the sale of 1,000 shares of United Founders stock at $6.25 per share, a credit to petitioner's account of $6,250, representing the sale price, and debits of $75 commissions, and $40 tax.  On the dates that the petitioner sold his United Founders shares, as above stated, he instructed Bull & Co. to purchase a like number of shares of Investment Trust Associates, that is, 3,350 shares on December 24, 1930, and 1,000 shares on December 30, 1930.  Investment Trust Associates, hereinafter referred to as I.T.A., was an investment *911  trust organized under the laws of Massachusetts.  United*880  Founders owned 85 percent of its outstanding shares.  It was one of several smaller investment companies in which United Founders owned a majority interest and which it controlled.  Its shares were not listed on any stock exchange, but were traded in "over the counter." The price of its shares generally followed that of United Founders.  The prices for the shares were exactly the same on December 24 and December 30, 1930, so that the cost to the petitioner of the I.T.A. shares purchased on those dates was the same as the selling price of the United Founders shares.  The transactions in the I.T.A. shares were handled in the same manner as were those in the United Founders shares referred to above, and similar book entries were made, except that Bull & Co. did not charge the petitioner any commission on the purchase of the I.T.A. shares.  This was customary in the purchase of unlisted or "over the counter" shares.  In each instance Bull & Co. debited the petitioner's account, in which there was a sufficient cash balance to cover the cost, with the purchase price of the I.T.A. shares.  These I.T.A. shares were never delivered to the petitioner and, in fact, were never acquired by Bull*881  & Co.  The petitioner never called for their delivery.  On January 14, 1931, the petitioner left Bridgeport for an expected three months' visit to Florida.  Before leaving he instructed his office manager and agent to sell his I.T.A. shares on January 26, 1931, and purchase United Founders shares, if not advised to the contrary.  Under date of January 27, 1931, the petitioner, then in Florida, received a letter from his office manager reading in part: In accordance with the memo you left with me, I phoned W. R. Bull & Co. yesterday and told Mr. Smith to sell 3350 shares Invest.  Trust Stock and buy 3350 shares United Founders.  The price was the same for both viz 8 3/4.  I will hold the papers until you return.  The petitioner returned to Bridgeport on February 4, 1931.  On that date, he gave orders to Bull & Co. to sell for his account 1,000 I.T.A. shares and to purchase 1,000 shares of United Founders.  Written confirmation of these transactions furnished the petitioner by Bull & Co. show that the purchases and sales were made by Bull & Co. according to instructions and that in each instance proper debits and credits were made to the petitioner's account.  Commissions were charged*882  on the purchase of the United Founders shares, but not on the sale of the I.T.A. shares.  The purchases and sales were all made at market price, which was the same for both the United Founders and the I.T.A. shares, viz., $8.75 per share on January 26, 1931, and $8.50 per share on February 4, 1931.  Certificates for the 4,350 shares of United Founders stock were delivered to the petitioner by Bull & Co. on February 16, 1931.  These were not the *912  same certificates that had been delivered to Bull & Co. by the petitioner for sale in December 1930.  Bull & Co. had never sold those shares to an outside interest but had conveyed them to its nominee, Trelease & Co.  Trelease & Co. was a partnership composed of officers and employees of Bull & Co.  It conducted no business on its own account and kept no books and records of its own, but acted merely as a holding agent or nominee for Bull & Co.  While the United Founders shares were being held by Trelease & Co., new certificates for those shares were issued by the transfer agent for the corporation.  The petitioner at the time of these transactions did not know of the existence of Trelease & Co. and did not know that the shares of*883  United Founders which he delivered to Bull & Co. for sale were not sold to the public in the regular course of business.  In 1933 the petitioner learned, through a revenue agent who was making an examination of his 1930 income tax return, that a cash dividend of 12 1/2 cents per share had been declared by I.T.A. on February 2, 1931, payable to stockholders of record on January 15, 1931, and that he was entitled to receive such dividend on the 4,350 I.T.A. shares which Bull & Co. was holding for him on the dividend date.  Bull & Co., as above stated, never actually acquired these shares and did not have them in its possession on the dividend date, but, nevertheless, paid the petitioner the amount of his dividend as he had requested.  Between the dates December 9 and December 31, 1930, approximately 95 stockholders of United Founders made sales of their shares to or through Bull & Co. to the amount of approximately 65,000 shares.  On the same dates those stockholders purchased through Bull & Co. approximately 70,000 I.T.A. shares.  The transactions were all handled in the same manner as were those of the petitioner described above.  Practically all of these individuals, shortly after*884  the expiration of 30 days from the sale of their United Founders shares, sold their I.T.A. shares and repurchased a similar amount of United Founders shares at the same price.  None of the I.T.A. shares was ever delivered to Bull & Co. or to its customers.  The book entries in Bull & Co.'s records show that it was "short" approximately 65,000 I.T.A. shares at that time.  The petitioner sold his shares of United Founders stock in December 1930 for the purpose of realizing a loss which he might deduct in his income tax return.  In the prior year 1929 the petitioner claimed a loss in his income tax return of $70,809 on the sale on December 24, 1929, of 3,350 shares of United Founders stock.  On February 3, 1930, he purchased a like number of shares of the same stock at a price of $121,437.50, which was about $20,000 below the *913  then market price.  The purchase was made at this favorable price pursuant to a call which the petitioner had on Bull & Co. for the purchase of the shares good for 40 days from the date of sale.  Also, in his 1929 return the petitioner claimed losses of considerable amounts on the sale of other securities which he repurchased within a short time after*885  the expiration of 30 days from the date of sale.  OPINION.  SMITH: In this proceeding the petitioner claims the deduction of a loss of $99,210.25 on the sale on December 24, 1930, of 3,350 United Founders shares.  He concedes that no deduction is allowable in respect of the 1,000 shares sold on December 30, 1930, for the reason that he repurchased a like number of the same shares within the statutory 30-day period.  The respondent contends that the purported sale of the shares in question was not a bona fide sale and did not result in a deductible loss.  The pertinent provisions of the statute are sections 112(a) and 118 of the Revenue Act of 1928, which read as follows: SEC. 112.  RECOGNITION OF GAIN OR LOSS.  (a) General rule. - Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.  SEC. 118.  LOSS ON SALE OF STOCK OR SECURITIES.  In the case of any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities where it appears that within thirty days before or after the date of such sale or other disposition*886  the taxpayer has acquired (otherwise than by bequest or inheritance) or has entered into a contract or option to acquire substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition, no deduction for the loss shall be allowed under section 23(e)(2) of this title; nor shall such deduction be allowed under section 23(f) unless the claim is made by a corporation, a dealer in stocks or securities, and with respect to a transaction made in the ordinary course of its business.  If such acquisition or the contract or option to acquire is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed.  The respondent questions the bona fides of the sale of the 3,350 United Founders shares on December 24, 1930, on the ground that there was no intention on the part of the petitioner to make a final conveyance of the shares and no intention on the part of Bull & Co. to purchase the shares and that the purported sale was a mere subterfuge by which the petitioner sought to establish a loss for income tax purposes.  The petitioner admits that the sale was*887  made for the purpose of establishing an income tax loss, but strenuously denies that the sale was not in every way bona fide.  *914  As the facts above set forth show, and as the respondent admits, there was a strict compliance on the part of both the petitioner and Bull & Co. with the requisite formalities of a sale of the 3,350 shares of United Founders stock on December 24, 1930.  According to the book entries, the sale was regularly carried out in the manner and form of many other transactions which Bull & Co. handled for the petitioner and other customers.  Prima facie, there was a valid sale by the petitioner of the 3,350 United Founders shares on December 24, 1930.  In his brief the respondent states: * * * The petitioner reacquired the 3,350 shares of United Founders stock on January 26, 1931, without the expenditure of any monies other than brokerage fees and transfer tax.  It is the circumstances and collateral facts occuring between the time of the purported sale and the reacquisition and other collateral facts associated and connected with the transaction that give rise to the inference, conclusions and determination that there was in fact no actual sale. *888  The respondent further submits: * * * It is believed that this cumbersome roundabout method of selling and reacquiring the United Founders stock, together with the fictions employed to make the transaction appear regular on its face, are indicative that at the time of the purported sale on December 24, 1930, there was an understanding - tacit or otherwise - that the petitioner would reacquire the stock without an outlay of money except the commissions and transfer tax, and no sale took place.  * * * The only transaction with which we are directly concerned in this proceeding is the sale of the 3,350 shares of United Founders stock on December 24, 1930.  The petitioner is not claiming any loss on the sale of the I.T.A. shares.  Whether the purchase of the I.T.A. shares in 1930 or their sale in 1931 were fictitious transactions is not material in this proceeding except as to the bearing that those transactions may have on the sale of the United Founders shares.  The same might be said of the petitioner's transactions in United Founders shares in 1929, which year is not before us, and the purchase and sale by other individuals of United Founders and I.T.A. shares in 1930.  Under*889  the taxing statute the petitioner is entitled to deduct from his gross income of 1930 the loss sustained upon the sale of 3,350 shares of United Founders stock, provided the sale was actually made and provided (1) he did not acquire within a period of 30 days from the date of sale "substantially identical property" or (2) he did not within such 30-day period enter "into a contract or option to acquire substantially identical property." The respondent seems to lay stress upon the fact that the shares of United Founders stock claimed to have been sold by the petitioner were acquired by Bull & Co. and not sold by Bull & Co. to *915  outsiders.  The evidence all goes to show that the petitioner believed that when he turned the shares over to Bull & Co., Bull & Co. would sell them to outside parties.  Bull & Co. did not sell the shares to the public, but purchased them for their own account.  We do not see that this fact is prejudicial to the claim of the petitioner that he sold the shares.  He turned them over to Bull & Co. for sale and, so far as the petitioner was concerned, it was immaterial whether Bull & Co. purchased them for its own account or for the account of others. *890  The petitioner sold all of his right, title, and interest in and to the shares when he turned them over to Bull & Co. and received credit on the books of Bull & Co. for the selling price.  So far as the record indicates Bull & Co. were not brokers in the transaction.  They, as private bankers, had the right to acquire the shares for themselves.  The acquisition by the petitioner of a like number of shares of I.T.A. stock was not the acquisition by the petitioner "of substantially identical property." I.T.A. was an investment trust.  It was a small concern in comparison with United Founders Corporation.  There were transactions in its shares.  The fact that the market price of I.T.A. shares generally followed the market price of United Founders shares is immaterial.  As a stockholder of I.T.A. the petitioner held substantially different property from that which he held when he owned United Founders Stock.  The I.T.A. shares might have become valueless in the hands of the petitioner without having substantially affected the price of the United Founders shares.  Whether or not Bull & Co. was in a position to deliver I.T.A. certificates to the petitioner had he demanded them is beside*891  the question, although the evidence shows that Bull & Co. had an arrangement whereby they could at any time have secured I.T.A. certificates to deliver to the petitioner had he made a demand upon Bull & Co. for their delivery.  The respondent contends that there must have been an understanding between Bull & Co. and the petitioner that the petitioner would repurchase the United Founders shares after the expiration of 30 days from the date of sale.  Both the petitioner and officers of Bull & Co. testified unequivocally that there was no agreement, or option, or understanding entered into between Bull & Co., or any of the representatives of that concern, whereby the petitioner would be allowed to acquire United Founders shares in exchange for his I.T.A. shares.  The circumstances under which the transactions were made and the fact that other clients of Bull & Co. established income tax losses for 1930 in the same manner in which the petitioner established his loss on the sale of United Founders shares do not persuade us that there was any agreement, option, or understanding *916  between the petitioner and Bull & Co. for the reacquisition of his United Founders shares.  In *892 , affirming , the court held that this Board was not compelled blindly to accept testimony of the taxpayers that there was no understanding as to repurchase at the time of sales in 1929; that the taxpayers did not sustain the burden resting on them (of establishing that there was no understanding) by mere testimony that there was no understanding, where the facts showed that the officer to whom the sales were made bought the stock for $15, and when he resold for the same amount, it had a value of $6,700.  Cf. , affirming . The facts here are not parallel to those which obtained in the above cited cases.  Here the petitioner sold his United Founders shares at the market price.  The shares were listed on the Boston Stock Exchange and on the New York Curb.  When the petitioner sold his I.T.A. shares in 1931 he realized a profit in excess of $2 per share upon that sale and accounted for the profit in his income tax return.  When he reacquired 3,350 shares of United Founders stock he paid a price for them in*893  excess of the price at which he had sold them.  Clearly, the fact that the petitioner purchased a like number of shares of United Founders stock in 1931 as he had sold in 1930, such purchase having been made more than 30 days after the sale of the shares, is no bar to the petitioner claiming the deduction from his gross income of 1930 of the loss which he sustained upon the sale in 1930.  We reach the conclusion that the petitioner made a bona fide sale of his 3,350 United Founders shares on December 24, 1930, and that the loss represented by the difference between the cost to him of those shares and the selling price is a legal deduction from the petitioner's gross income of 1930.  Reviewed by the Board.  Judgment will be entered under Rule 50.BLACK BLACK, dissenting: For substantially the same reasons as were given by the Board in Harold F. Seymour,27 B.T.A. 403">27 B.T.A. 403, I think the decision in the instant case should be one upholding the determination of the Commissioner that the sales of stock in question were not bona fide and did not result in deductible losses.  I therefore dissent from the majority opinion.  SEAWELL agrees with this dissent. *894