Opinion
No. 42986.
November 1, 1937.
A. Harding Paul, of Washington, D.C., for plaintiffs.
James W. Morris, Asst. Atty. Gen., and Robert N. Anderson, Fred K. Dyar, and J.H. Sheppard, all of Washington, D.C., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Suit by the Chemical Bank Trust Company and another, executors of the estate of William Henry Williams, deceased, against the United States.
Judgment for plaintiffs.
The court, upon the report of a commissioner and the evidence, makes the following special findings of fact:
1. The plaintiffs are the duly appointed executors of the estate of William Henry Williams, who died a resident and citizen of the state of New York on October 14, 1931.
2. On March 16, 1931, the decedent filed his income tax return for the calendar year 1930, which includes under "Schedule D — Capital Net Gain, * * *" the net gain of $60,586.87 on the sale of 1,830 shares of stock of the Pacific Gas Electric Company, which shares had been held by decedent for more than two years. This income tax return discloses a tax liability of $39,934.98, which was paid as follows:
March 16, 1931 .............................. $ 9,983.75 June 15, 1931 ............................... 9,983.75 September 15, 1931 .......................... 9,983.74 December 14, 1931 ........................... 9,983.74 __________ Total .................................. $39,934.98
3. On December 31, 1931, the executors of the estate filed a claim for refund for the year 1930 in the amount of $8,707.08, giving as reasons in support thereof the following:
"Taxpayer originally employed the basis of actual cost to determine the profit derived from the sale of 4,000 shares of the Common Stock of the Pacific Gas Electric Company, upon which Stock Rights were declared and exercised, whereas he should have used the basis set forth in Regulations 74, Article 58, paragraph 2, of the Revenue Act of 1928."
4. Subsequently, an examination of the decedent's books and records and an audit of his income tax return for the year 1930 were made by a revenue agent whose report thereon was submitted to his superior officer on February 11, 1932. In the report the agent recommended that there be allowed an increased cost of stocks of the Pacific Gas Electric Company held by decedent and that the net gain derived from the sale of the 1,830 shares of this stock be taxed as ordinary gain instead of capital gain as reported in decedent's income tax return, which recommendations resulted in an overassessment of $1,960.32.
5. On June 15, 1932, the Commissioner of Internal Revenue addressed a letter to the plaintiffs which reads in part as follows:
"The question at issue was the taxability of a profit as ordinary income realized in 1930 on the sale of 1,830 shares of Pacific Gas and Electric stock which stock was held for more than two years.
"After careful consideration of all evidence and information submitted at the conference the revenue agent's report has been sustained.
"It is noted that during the year 1930 you made 84 separate purchases of various securities and made 80 separate sales. You actually sold 31,811 shares of 21 different stocks, among which 2,170 shares consisted of Pacific Gas and Electric stock. All of these transactions were handled through a brokerage account. The profit realized on the sale of the 1,830 shares of Pacific Gas and Electric stock, which were held more than two years was also part of the brokerage account; these shares were never owned outright by the taxpayer. The volume of trades made during the year 1930 would constitute a business and, therefore, the securities sold during the year would be stock in trade, and would not be subject to the capital gain provision.
"In view of these facts, this office holds that the stock of the Pacific Gas and Electric Company did not constitute a capital asset within the meaning of the statute."
Here follows the computation on the basis outlined in this letter resulting in an overassessment of $1,960.32.
The letter continues:
"Explanation of Changes
"1. Due to the transfer of $60,586.87 reported as capital gain to schedule C, and adjustments in cost of Pacific Gas and Electric Company stock on account of rights allowed for prior purchases, the loss reported in schedule C has been decreased by $22,505.01. The details of these adjustments are set forth in the revenue agent's report dated February 11, 1932, a copy of which was furnished you under date of March 9, 1932.
"2. Taxes were disclosed to have been understated by $52.83.
"3. This item held to be ordinary income and transferred to schedule C. See explanation above.
"A certificate of overassessment for $1,960.32 will be prepared which will reach you in due course through the office of the collector of internal revenue for the district in which the returns were filed."
6. The Commissioner of Internal Revenue sustained the agent's report and issued a certificate of overassessment in favor of the plaintiffs in the amount of $1,960.32, which, together with interest thereon in the amount of $65.34, was refunded to the plaintiffs on November 1, 1932.
7. On June 13, 1932, the plaintiffs filed a second claim for refund for the year 1930 in the amount of $6,757.62, giving as reasons in support thereof the following:
"Taxpayer claims he should be taxed upon the profit of $54,060.16, resulting from the sale of 1,830 shares of the Common Stock of the Pacific Gas Electric Company, which stock had been held more than two years, in accordance with Section 101 of the Revenue Act of 1928 [ 26 U.S.C.A. § 101 note] instead of under Sections 11 and 12 of said Revenue Act [ 26 U.S.C.A. §§ 11, 12 notes] as explained fully in statement attached."
This claim for refund was rejected by the Commissioner of Internal Revenue on a schedule dated June 5, 1934.
8. The decedent in his income tax return of 1930 gave his occupation as "Chairman of Railroads," which had been his occupation for a number of years prior thereto. He was a director or officer of sixtyfour corporations, all of which except four were railroad companies. A number of these railroads were subsidiaries and were owned 100 per cent. by a parent company. His home was at Lyon Mountain, N.Y., where he operated a dairy farm and spent his week-ends unless he was away from New York on a railroad line. His railroad office was in the city of New York. He also maintained an apartment in said city where he lived except at such times that he was at home on the farm or out on a railroad line. When not on his farm or out on a railroad, he worked in the office on an average of eight hours daily, except Sundays and holidays, on railroad matters.
9. The decedent for a number of years prior to and during the year 1930 maintained a margin stock account with Reynolds, Fish Co., stockbrokers, in the city of New York. He became owner of some stocks from sources other than through his brokers, which when acquired were placed to the credit of this account. At various times he had some bonds which he kept in his broker's account. During 1926 to 1930, inclusive, plaintiff through this firm of brokers also bought and sold many shares of various corporate stocks other than the Pacific Gas Electric Company stock. Decedent kept no safety deposit box, and all the stocks he held during this period were left with his brokers.
The decedent's account with his brokers was known as a margin account. A margin account is an account where money is loaned to the customer against securities. The securities in this case were the stocks held by the decedent. Most of the time it was an account with borrowed money against the securities. At times decedent had a credit balance. On December 31, 1929, his credit balance was $55,947.77. December 31, 1930, his debit balance was $58,056.20. During the year of 1930 the highest debit balance was $329,025.30, and the highest credit balance was $175,536.10.
10. Orders during 1930 for the various transactions in the stock account with his brokers were placed by telephone by a vice-president of a railroad (whose chief duty was preparing consolidation work of railroads supervised by decedent) at the direction of decedent. It was decedent's practice to have a list of approximately 30 stocks, showing their market quotations, prepared under the supervision of the vice-president. At first the list was in typewritten form, but during the year 1930 a mimeographed form was prepared for that purpose. The list contained the quotations on some 30 stocks, in a part of which decedent was interested as an officer or director of railroads, and the rest were stocks in which he was interested as an investor. Such list was submitted to him by the vice-president twice and sometimes three times daily when he was in his office. When decedent was on his farm or out on a railroad line such list was not submitted to him. The quotations were obtained from his brokers by a stenographer or a secretary in the office by telephone. The decedent relied upon the vice-president to keep him in touch with the market quotations, and to advise him of any fluctuations of the stocks in which he was interested both as railroad official and as investor.
Fifteen to twenty stocks on the list were railroad stocks, three-fourths of which were those in which decedent was interested as officer or director and one-fourth thereof were stocks of other Class I railroads of a competing character. Quotations of these stocks on the list were submitted to decedent to keep him informed on the financial status of railroads of which he was officer or director and of competing railroads. The other stocks on the list were stocks in which the decedent was interested as an investor, including the Pacific Gas Electric Company stock. To the lists so submitted to him the decedent devoted ten or fifteen minutes of his time daily when in his office.
11. When the various orders given by the decedent to buy or sell stock had been placed with the brokers by the vice-president and the orders had been executed, the vice-president would advise him of that fact and monthly statements rendered by the brokers would be submitted to the decedent.
At times decedent used his brokerage account as a bank account. He directed his brokers to pay income tax out of this account and occasionally checked against it for expenses and cash.
12. For the year 1930 there are in decedent's account with the brokers 91 entries of purchases of stock and 81 entries of sales of stock. There is evidence in the record tending to show that the orders for purchases and the orders for sales were less than the entries of purchases and the entries of sales.
The account frequently shows on the same day more than one entry of purchases or of sales of the same stock. Whether such entries represent that many different orders to purchase or to sell from the decedent through the vice-president to the brokers, or whether such entries represent but one order which the brokers for marketing reasons executed in more than one purchase or more than one sale, the evidence is too indefinite on which to base a finding of fact.
13. The decedent's purchases and sales of stocks of the Pacific Gas Electric Company from 1926 to the date of his death, October 14, 1931, as shown by Plaintiff's Exhibit 8, were as follows:
Transactions in Pacific Gas Electric Stock from 1926 to 1931, Inclusive. -------------------------------------------------------------- Year | Bought | Sold | Amount ---------------------|-------------|--------------|----------- 1926 | | | Jan'y 29 ........... | 100 | ........... | $12,975.00 June 25 ............ | ........... | 100 | 12,971.00 Dec. 21 ............ | 100 | ........... | 13,050.00 Dec. 21 ............ | 100 | ........... | 13,075.00 Dec. 21 ............ | 100 | ........... | 13,075.00 Dec. 21 ............ | 200 | ........... | 26,200.00 Dec. 22 ............ | 200 | ........... | 26,150.00 Dec. 29 ............ | 300 | ........... | 39,300.00 | | | 1927 | | | Jan'y 19 ........... | () | (fn1) | .......... March 1 ............ | () | (fn2) | 10,000.00 May 18 ............. | 200 | ........... | 7,455.00 May 18 ............. | 300 | ........... | 11,257.50 May 19 ............. | 100 | ........... | 3,727.50 May 20 ............. | 200 | ........... | 7,455.00 May 23 ............. | 100 | ........... | 3,727.50 June 1 ............. | 500 | ........... | 19,012.50 June 1 ............. | 200 | ........... | 7,605.00 June 2 ............. | 200 | ........... | 7,755.00 June 2 ............. | 1,000 | ........... | 39,150.00 June 2 ............. | 200 | ........... | 7,830.00 June 2 ............. | 1,800 | ........... | 70,920.00 June 6 ............. | 300 | ........... | 11,670.00 June 6 ............. | 500 | ........... | 19,512.50 Nov. 14 ............ | 400 | ........... | 17,660.00 Nov. 16 ............ | 100 | ........... | 4,415.00 Dec. 23 ............ | () | (fn3) | .......... | | | 1928 | | | Feb. 15 ............ | 100 | ........... | 4,865.00 Feb. 15 ............ | 100 | ........... | 4,865.00 Feb. 16 ............ | 100 | ........... | 4,865.00 Feb. 16 ............ | 100 | ........... | 4,865.00 Feb. 20 ............ | 300 | ........... | 13,995.00 March 23 ........... | () | (fn4) | 30,750.00 May 16 ............. | ........... | 600 | 31,389.00 May 16 ............. | ........... | 200 | 10,438.00 May 17 ............. | ........... | 300 | 15,544.50 May 17 ............. | ........... | 200 | 10,388.00 May 17 ............. | ........... | 800 | 41,452.00 May 18 ............. | ........... | 200 | 10,213.00 May 18 ............. | ........... | 100 | 5,106.50 May 18 ............. | ........... | 200 | 10,213.00 May 18 ............. | ........... | 1,000 | 51,065.00 May 18 ............. | ........... | 100 | 5,106.50 May 22 ............. | ........... | 100 | 5,081.50 May 22 ............. | ........... | 100 | 5,081.50 May 22 ............. | ........... | 400 | 20,426.00 May 22 ............. | ........... | 300 | 15,244.50 | | | 1929 | | | March 20 ........... | () | (fn5) | 22,325.00 Sept. 23 ........... | ........... | 100 | 9,379.00 Sept. 23 ........... | ........... | 100 | 9,354.00 Sept. 23 ........... | ........... | 100 | 9,341.50 Sept. 23 ........... | ........... | 200 | 18,658.00 Sept. 23 ........... | ........... | 200 | 18,558.00 Sept. 23 ........... | ........... | 200 | 18,458.00 Sept. 23 ........... | ........... | 200 | 18,358.00
-------------------------------------------------------------- Year | Bought | Sold | Amount ---------------------|-------------|--------------|----------- 1929 | | | Sept. 23 ........... | ........... | 100 | 9,129.00 Sept. 23 ........... | ........... | 1,100 | 91,040.00 Sept. 23 ........... | ........... | 800 | 72,632.00 Sept. 23 ........... | ........... | 2,000 | 181,580.00 Oct. 23 ............ | 200 | ........... | 13,535.00 Oct. 23 ............ | 200 | ........... | 13,585.00 Oct. 23 ............ | 500 | ........... | 34,087.50 Oct. 23 ............ | 100 | ........... | 6,817.50 Oct. 28 ............ | () | (fn6) | .......... Oct. 29 ............ | ........... | 900 | 54,733.50 Oct. 29 ............ | ........... | 200 | 12,363.00 Oct. 29 ............ | ........... | 400 | 24,726.00 Oct. 29 ............ | ........... | 500 | 30,975.00 Dec. 6 ............. | 13 | ........... | 730.28 Dec. 6 ............. | 200 | ........... | 11,210.00 Dec. 26 ............ | () | (fn7) | .......... | | | 1930 | | |
Jan'y 8 ............ | () | (fn8) | .......... Jan'y 8 ............ | () | (fn9) | .......... Jan'y 8 ............ | () | (fn10) | .......... Feb'y 11 ........... | 600 | ........... | 36,405.00 Feb'y 11 ........... | 400 | ........... | 24,370.00 Feb'y 11 ........... | 500 | ........... | 30,587.50 Feb'y 11 ........... | 500 | ........... | 30,587.50 April 8 ............ | 100 | ........... | 7,067.50 May 8 .............. | ........... | 100 | 6,619.00 May 8 .............. | ........... | 100 | 6,594.00 May 8 .............. | ........... | 1,800 | 118,467.00 Dec. 18 ............ | ........... | 1,000 | 40,840.00 Dec. 18 ............ | ........... | 1,000 | 40,840.00 | | | 1931 | | | Jan. 9 ............. | ........... | 100 | 4,846.50 Jan. 9 ............. | ........... | 100 | 4,834.00 Jan. 9 ............. | ........... | 100 | 4,809.00 Jan. 9 ............. | ........... | 300 | 14,352.00 Jan. 20 ............ | () | (fn11) | () Jan. 26 ............ | ........... | 200 | 9,768.00 Jan. 26 ............ | ........... | 100 | 4,884.00 April 2 ............ | () | (fn13) | .......... June 29 ............ | ........... | 400 | 18,736.00 June 29 ............ | ........... | 600 | 28,104.00 June 30 ............ | ........... | 300 | 14,052.00 June 30 ............ | ........... | 200 | 9,368.00
Exchanged 1,000 shares for 4,000 shares new issue.
Subscribed to 400 shares on rights (delivered April 4, 1927).
Rec'd 1,100 shares (character of price not shown).
Subscribed to 1,230 shares on rights (delivered April 3, 1928).
Subscribed to 893 shares on rights (delivered April 1, 1929).
482 (Received by subscription Oct. 21).
Delivered 100 shares to Wm. Wyer (no selling price shown).
Received 964 shares (character or price not shown).
482 delivered.
482 No. 5 Delivered.
(Delivered) 200.
No price shown.
200 Received by subscription March 11.
At date of death, October 14, 1931, he owned 600 shares.
The sole issue in this case is whether the gain derived by the deceased taxpayer, William Henry Williams, from the sale of 1,830 shares of the common stock of the Pacific Gas Electric Company, during the year 1930, is taxable as a "capital net gain," as contended by the plaintiffs, or as ordinary income, as contended by the defendant. The determination of this issue depends upon the answer to the question as to whether these shares of stock were "capital assets," and this question in turn depends entirely upon the decision of whether or not the decedent was in the trade or business of buying and selling securities, and, if in such trade or business, whether or not the Pacific Gas Electric Company stock was held primarily by him for sale in the course thereof.
The pertinent provisions of law are found in the Revenue Act of 1928 ( 45 Stat. 791) and read:
"Section 101. Capital Net Gains and Losses.
"(a) Tax in Case of Capital Net Gain. — In the case of any taxpayer, other than a corporation, who for any taxable year derives a capital net gain (as hereinafter defined in this section), there shall, at the election of the taxpayer, be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined as follows: A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted and the total tax shall be this amount plus 12½ per centum of the capital net gain. * * *
"(c) Definitions. For the purposes of this title —
"(1) `Capital gain' means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921. * * *
"(5) `Capital net gain' means the excess of the total amount of capital gain over the sum of (A) the capital deductions and capital losses, plus (B) the amount, if any, by which the ordinary deductions exceed the gross income computed without including capital gains. * * *
"(8) `Capital assets' means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business." 26 U.S.C.A. § 101(a), (c) (1, 5, 8) note.
The findings disclose that without question the principal occupation of the decedent was that of directing the policies of numerous railroads. That had been his principal occupation for many years, and during the taxable year 1930 he was a director or officer of 60 roads and was chairman of the board of the Wabash Railroad Company. Since, however, it is well settled that a taxpayer may be engaged in more than one trade or business, Mente v. Eisner (C.C.A.) 266 F. 161, 11 A.L.R. 496; Goldberg v. Commissioner, 59 App. D.C. 147, 36 F.2d 551, the controlling question for decision is whether the activities of the decedent in dealing in stocks in his margin account with Reynolds, Fish, Co., stockbrokers, were sufficient to characterize such activities as a trade or business. If the decedent in addition to his regular and principal occupation of railroad executive was also engaged in the trade or business of dealing in securities, and the Pacific Gas Electric Company stock involved was held by him primarily for sale in the course of such trade or business, the profit derived on the sale of the stock was properly taxable as ordinary income.
During the year 1930, and for many years prior thereto, and up until his death in 1931, the decedent maintained a brokerage stock account with Reynolds, Fish Co., stockbrokers in the city of New York. At various times he had some bonds, also certain stocks acquired from sources other than through his brokers, which when acquired were placed to the credit of the account. While various shares of corporate stock other than the Pacific Gas Electric Company, involved in this suit, were bought and sold by the decedent during this period, the stock of that company, as the defendant says in its brief, "appears to be the prime stock in the decedent's portfolio." Between December 21, 1926, and March 23, 1928, the decedent purchased 14,000 shares of this stock at a cost of more than $470,000. He did not sell a single share of such stock until May 16, 1928, although it greatly increased in value subsequent to its purchase. From December 21, 1926, until his death in October 1931, he owned shares of stock in this company. This circumstance justifies the conclusion that the stock was purchased and held by the decedent purely as an investment and was not held primarily for sale in the course of his trade or business.
The decedent's office was located in the city of New York. He, however, spent considerable of his time in making trips over the lines of the various railroad companies of which he was an officer. He had a country home at Lyon Mountain, N.Y., where he owned and operated a dairy farm, and where he usually spent his week-ends. When in his office, he spent on an average of eight hours daily, except Sundays and holidays, on railroad matters, and spent yet longer hours on railroad matters when making trips over the railroad lines. It was his practice when in his New York office to have the vice-president of one of the railroads supervised by him prepare and submit to him two or three times daily a list of approximately thirty stocks, showing their market quotations. He used this list to keep in touch with market quotations and fluctuations in the stocks in which he was interested as a railroad official or as an investor. Fifteen or twenty of the stocks on the list submitted were stocks of railroads, both those in which he was interested as an officer and stocks of railroads of a competing character. The other stocks on the list were stocks in which he was interested as an investor, including stock of the Pacific Gas Electric Company. To the list thus submitted he devoted ten or fifteen minutes of his time daily when in the office. During such times as his railroad duties took him over various lines of which he had supervision, and the week-ends spent at his country home, no list was prepared or submitted to him. At his direction orders for the purchase and sale of stocks were placed by the vice-president of one of his companies with the brokers. After the orders had been executed, monthly statements would be submitted to him by the brokers. At times he used his brokerage account as a bank account, directing his brokers to pay his income tax out of the same, and occasionally he checked against his brokerage account for expenses and cash.
The record before us will not sustain a holding that the decedent's market operations during the taxable year 1930 constituted a trade or business within the meaning of the statute. The time consumed by him in the purchase and sale of stocks composing his margin account with Reynolds, Fish Co. was practically negligible, being limited to not more than ten or fifteen minutes a day when in his New York office compared to the eight hours a day devoted by him to railroad matters. It does not appear that he at any time bought and sold stocks through any other brokerage concern, and there is no testimony whatever to the effect that he engaged in the purchase and sale of stocks for the purpose of earning a livelihood or that he ever regarded his activities in the purchase of securities as a trade or business. The inference to be drawn from the entire record is that decedent's purchase and sale of stocks was not a part of any business he was carrying on. He received a very large salary for his services as a railroad executive, ranging from $112,666.64 in 1924 to $253,797.66 in 1930. In these circumstances his activities in the purchase and sale of stocks must be regarded as such as might be made by an ordinary business or professional man with surplus capital, and not as constituting a trade or business. These activities, as frequently held, do not constitute carrying on a business or trade. Consequently the securities involved in this case cannot be said to have been held "primarily for sale" in the course of decedent's trade or business. They did not constitute a part of his stock in trade, and the profits made by him on their sale, they having been held by him for more than two years, constituted capital net gains and were taxable as such.
The plaintiffs are entitled to recover. Coulter v. Commissioner, 32 B.T.A. 617; Bedell v. Commissioner (C.C.A.) 30 F.2d 622; Gibbs v. Commissioner, 34 B.T.A. 1028, 1029; Trost v. Commissioner, 34 B.T.A. 24; Weld v. Commissioner, 31 B.T.A. 600.
Judgment is therefore awarded plaintiffs in the sum of $6,757.62, with interest. It is so ordered.