Court Opinion

ID: 4634064
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:15:14.615586+00
Date Added: 2024-06-11T07:59:59.348255
License: Public Domain

JOHN S. GARVAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Garvan v. CommissionerDocket No. 20558.United States Board of Tax Appeals23 B.T.A. 817; 1931 BTA LEXIS 1823; June 19, 1931, Promulgated *1823  1.  A transaction in which stock of one company was disposed of and stock in another company acquired through a stock broker at fixed prices over a period of ten days in order to better the owner's investment, held, on the facts presented, to have been a sale and purchase of stock rather than an exchange.  2.  The Act of March 4, 1923, amending paragraph (1) of subdivision (c) of section 202 of the Revenue Act of 1921, effective January 1, 1923, is not unconstitutional because retroactive.  Brushaber v. Union Pacific R.R. Co.,240 U.S. 1">240 U.S. 1. Edward T. Canfield, Esq., for the petitioner.  J. G. Gibbs, Esq., for the respondent.  ARUNDELL*817  In this proceeding for the redetermination of a deficiency of $10,443.58 in income tax for 1923, petitioner questions the respondent's inclusion in taxable income of $26,157.50 as profit realized from the sale of certain stock.  *818  FINDINGS OF FACT.  In January, 1923, petitioner owned between 7,000 and 8,000 shares of stock of the Consolidated Gas Company of New York.  Being of the opinion that he held too much of such stock and that stock of the Brooklyn Edison Company*1824  would increase in value, he decided to dispose of 3,600 shares of the former stock and acquire in lieu thereof stock of the latter company.  On January 25, 1923, petitioner wrote a letter to Winslow, Day & Stoddard, Inc., investment brokers, New Haven, Conn., parts of which follow: As I stated to you on the wire I really have no reason for this action excepting that I feel that the Brooklyn Edison stock is better and safer for me to hold as a permanent investment than the Consolidated Gas Co. stock.  In this opinion I understand you agree with me.  This will therefore authorize you to proceed with the exchange of these two securities.  As I explained I am in no particular hurry about the matter but will leave it to your judgment based upon market conditions from day to day as to the best time for carrying through the transaction.  Pursuant to this authorization, the brokers sold petitioner's Consolidated Gas Company stock and bought for his account Brooklyn Edison Company stock as follows: SalesPurchasesDateSharesReceivedSharesPaidJan. 29, 1923300$20,475.00200$23,050.00Jan. 29, 192320013,625.0010011,575.00Feb. 6, 192350034,375.0030033,600.00Feb. 7, 192350034,375.0030034,125.00Feb. 10, 19232,100140,175.001,300156,487.50*1825  At the time these sales and purchases were made, the sale and purchase of all of the stock at one time would have affected the market.  To avoid this result the broker bought and sold the stock as shown above.  The orders executed by the brokers fixed the price at which the stock was to be sold and purchased.  The difference resulting from each sale and purchase was charged or credited to petitioner on the broker's books, depending on the outcome of the sales and purchases.  The transaction was handled in such a manner that the brokers did not know the names of the purchasers of petitioner's stock or the sellers of the Brooklyn Edison Company stock.  OPINION.  ARUNDELL: In order for the petitioner to prevail he must establish that the transaction set forth in the findings of fact constituted a nontaxable exchange of stock for stock under the provisions of *819  section 202(c)(1) of the 1921 Act, 1 and, further, that that act and section, as amended on March 4, 1923, 2 effective January 1, 1923, is unconstitutional because of its retroactive feature.  *1826 We think that the constitutional challenge is without merit.  Every income-taxing act, beginning with the Revenue Act of 1913, and including the War Revenue Act of 1918, has provided for the taxation of income realized from transactions that took place before the passage of the act.  The Revenue Act of 1913 was attacked on this very ground and in the case of , the Supreme Court held the contention to be without merit.  See ; ; ; . We think that the petitioner is equally wrong in his construction of the facts.  What has taken place here is an outright sale and purchase and not an exchange.  Petitioner has sold Consolidated Gas and purchased Brooklyn Edison.  The brokerage firm selected the times of the sales and purchases of the stock; determined the quantity to be sold and bought with a view of not disturbing the market, and otherwise handled the transaction as a sale or purchase order would ordinarily*1827  be executed by a stockbroker.  In no case did the firm know the purchaser of petitioner's stock or the seller of the Brooklyn Edison Company stock, and it does not appear that in any instance the owner of any of the Brooklyn Edison Company stock acquired any part of the Consolidated Gas Company stock.  In no case was there any bargaining as to values and boot money, such as is ordinarily done in conducting an exchange of property for property.  The buyers and sellers of the stocks involved here were unknown to each other and for that reason none of them could have honestly entertained the idea that they were a party to an exchange as that word is generally used.  *820  Petitioner characterized the whole transaction as an exchange.  Where the form and substance of a deal is opposed to the term one of the parties thereto saw fit to use to describe it, the terminology used has but little weight.  The case of , relied upon by petitioner, involved different facts and does not control the decision here.  Decision will be entered for the respondent.Footnotes1. (c) For the purposes of this title, on an exchange of property, real personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized - (1) When any such property held for investment, or for productive use in trade or business (not including stock-in-trade or other property held primarily for sale), is exchanged for property of a like kind or use; ↩2. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That paragraph (1) of subdivision (c) of section 202 of the Revenue Act of 1921 is amended, to take effect January 1, 1923, to read as follows: "(1) When any such property held for investment, or for productive use in trade or business (not including stock-in-trade or other property held primarily for sale, and in the case of property held for investment not including stock, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest), is exchanged for property of a like kind or use." ↩