Mills
v.
Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Jul 24, 1964
42 T.C. 769 (U.S.T.C. 1964)

Docket No. 86865.

1964-07-24

MALDEN KNITTING MILLS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Kenneth W. Bergen and Josiah A. Spaulding, for the petitioner. Robert B. Dugan and Albert R. Doyle, for the respondent.


Kenneth W. Bergen and Josiah A. Spaulding, for the petitioner. Robert B. Dugan and Albert R. Doyle, for the respondent.

1. Held: Petitioner's purported purchase on February 14, 1955, of 3,000 shares of certain stock, ‘dividend on,‘ from Keizer & Co., a securities dealer, and purported resale of the 3,000 shares, ‘ex dividend,‘ to Keizer & Co. on February 15, 1955, reversing the transaction, were a sham. Accordingly, petitioner is not entitled to a short-term capital loss deduction in connection with the alleged resale and a dividends-received deduction in respect of an amount received from Keizer & Co. which purported to represent dividends on the 3,000 shares.

2. Held, petitioner may not deduct its so-called out-of-pocket expenses in connection with the foregoing transaction either (i) as a loss upon sale of an ‘option,‘ under sections 1234(a) and 165, I.R.C. 1954, or (ii) as an ordinary and necessary business expense under section 162(a).

The Commissioner determined a deficiency in petitioner's income tax for its fiscal year ended November 30, 1955, in the amount of $65,827.36, part of which is no longer in controversy. The issues remaining for decision are: (1) Whether petitioner realized a short-term capital loss in the amount of $17,805 on February 15, 1955, on its purported sale of 3,000 shares of Chicago, Milwaukee, St. Paul & Pacific Railway Co. preferred stock, ex dividend, which it had purportedly purchased the previous day, and whether petitioner is entitled to a dividends-received deduction in the amount of $12,750 based upon its receipt of $15,000 which purported to represent a dividend on the 3,000 shares of stock; (2) whether, assuming that the foregoing matters are decided against petitioner, it is entitled to deduct its ‘out-of-pocket’ costs in the amount of $2,805, in connection with the above transaction, either as a loss on the sale of an ‘option’ or as an ‘ordinary and necessary’ business expense.

FINDINGS OF FACT

The facts stipulated by the parties and exhibits introduced in evidence are incorporated herein by this reference.

Malden Knitting Mills, hereinafter referred to as Malden, a Massachusetts corporation organized on January 1, 1918, in Malden, Mass., is a manufacturer of sweaters and knitted fabrics. It timely filed its Federal income tax return for its fiscal year ended November 30, 1955, on an accrual basis, with the district director of internal revenue at Boston, Mass.

Samuel C. Feuerstein has been associated with Malden since its inception and has been its president for the past 20 or 25 years.

Gerald Glunts, hereinafter referred to as Glunts, is an attorney and a certified public accountant and a partner in an accounting partnership, James D. Glunts & Co. He has been Malden's auditor for approximately 25 years and has advised Malden in respect of accounting, financial, and tax matters.

J. Benn Keizer, hereinafter referred to as Keizer, is a member of Keizer & Co., Inc., hereinafter referred to as Keizer & Co., a corporate brokerage firm doing business in Boston. He has been in the securities business for approximately 25 years. Neither Keizer & Co. nor its officers and employees were, in 1955, members of a listed stock exchange. However, during 1955 Keizer & Co. was a securities dealer registered with the Securities and Exchange Commission. Keizer & Co. did not employ any salesmen, and Keizer alone handled sales on its behalf.

In 1954 Glunts brought up to Keizer a plan for tax avoidance for the benefit of corporate taxpayers, involving the purchase of stock of another corporation, ‘dividend on,‘ to be followed by a sale of the same stock, ‘ex dividend.’ The purpose of this plan was to take advantage of a corporate tax reduction by utilization of the 85-percent dividend credit in the following manner: Under normal conditions the market price of stock would drop by the amount of the dividend when the stock went ex dividend, but the seller of the stock would remain entitled to receive the dividend; the anticipated tax advantage of Glunts' plan would be that the corporate taxpayer would become entitled to a short-term capital loss deduction in the amount of the loss on the sale, but the offsetting dividend that it would receive would be exempt from tax to the extent of 85 percent thereof in accordance with section 243 of the 1954 Code. Keizer was cognizant of the steps to be taken in order to obtain the desired tax consequences for clients of Glunts. Glunts advised some of his clients to enter into such transactions. These transactions involving Glunts' clients were discussed with Keizer, who arranged to execute them for these clients.

In 1954 or early in 1955, Glunts requested Keizer to advise him of any stocks which were about to pay substantial dividends. In February 1955, Keizer reported to Glunts that a $5 dividend would be paid on the 5-percent noncumulative, Series A, 100 par value preferred stock of the Chicago, Milwaukee, St. Paul & Pacific Railway Co., hereinafter referred to as Railway stock, on March 11, 1955, to stockholders of record on February 19, 1955, and that the stock would go ex dividend on February 15, 1955.

At some time prior to February 14, 1955, Glunts told Feuerstein that Malden could realize a substantial tax benefit from the purchase of Railway stock, dividend on. He explained to him that Malden would receive the dividend and thereby become entitled to a dividends-received deduction in the amount of 85 percent of the dividend received and that if the price of the stock, ex dividend, fell by an amount approximating the amount of dividend, as could usually be expected, Malden could sell the stock and realize a short-term capital loss which could be applied against any capital gains realized by Malden prior to the termination of its fiscal year.

Feuerstein decided that he, in behalf of Malden, would enter into the transaction suggested by Glunts. In so doing, Feuerstein relied heavily on Glunts' advice. Glunts recommended that the transaction be handled through Keizer & Co. and suggested to Feuerstein that he discuss the matter with Keizer. Prior to his entering into this transaction Feuerstein had known Keizer only casually. Glunts also suggested to Keizer that he get in touch with Feuerstein in connection with the proposed transaction.

On either February 13 or 14, 1955, Keizer telephoned Feuerstein and told him that Glunts had ‘asked me to tell * * * (you) * * * that * * * (you) could use 3,000 shares.’ Feuerstein agreed to ‘purchase,‘ in behalf of Malden, the suggested number of Railway shares.

Prior to his purported purchase in behalf of Malden of 3,000 shares of Railway stock, Feuerstein did not make a study of the stock market in respect of the Railway stock, nor did he study the financial history of the Chicago, Milwaukee, St. Paul & Pacific Railway Co.

A confirmation slip of Keizer & Co. bearing the date February 14, 1955, and a settlement date of February 18, 1955, purports to show that Keizer & Co., as principal for its own account, had sold to Malden 3,000 shares of Railway stock, dividend on, for $52 per share; the total amount of the alleged sale was $156,000. Similarly, on February 14, 1955, Keizer & Co. purported to sell as principal to four other clients of Glunts a total of 17,370 shares of Railway stock at the same price of $52 a share, with a settlement date of February 18, 1955. Thus, Keizer & Co.‘s purported sales of Railway stock to Malden and the other four clients of Glunts on February 14, 1955, were in the aggregate amount of 20,370 shares.

Railway stock was traded on the New York Stock Exchange in 1955. On February 14, 1955, the low price for this stock was 51 5/8 and its high was 52 5/8. Approximately 16,600 shares of this stock were traded on the New York Stock Exchange on February 14, 1955.

At the time of its purported sale of the Railway stock to petitioner, Keizer & Co. did not have any Railway stock in its inventory and it did not thereafter acquire any such stock for delivery to petitioner.

On the next day, February 15, 1955, when the Railway stock went ex dividend, Malden and the other four clients of Glunts referred to above, each purported to sell its Railway stock, in the aggregate amount of 20,370 shares, back to Keizer & Co. at 46 1/8. On that day 42,500 shares of Railway stock were traded on the New York Stock Exchange at a price between a low of 45 5/8 and a high of 47. A confirmation slip of Keizer & Co. bearing the date February 15, 1955, and a settlement date of February 21, 1955, purports to show Malden's sale of its 3,000 shares; and the books of Keizer & Co. reflect the same settlement date for the alleged sales by the other four clients of Glunts.

Malden's purported purchase of 3,000 shares of Railway stock on February 14, 1955, was on margin, involving a loan of 40 percent of the market value of the security purchased. Accordingly, on or before February 18, 1955, the settlement date for Malden's alleged purchase, it paid Keizer & Co. $93,600 (60 percent of the total alleged purchase price of $156,000). At approximately the same time, about February 18, 1955, Keizer & Co. sent petitioner a check in the amount of $75,795. This amount represented the difference between the total net purchase price of the 3,000 shares purportedly sold on February 15, 1955 by Malden to Keizer & Co. ($138,195) and the debit balance in Malden's margin account.

The purported purchase price for 3,000 shares at 46 1/8 was $138,375, from which there was subtracted a transfer tax in the amount of $180.

Thereafter, on March 11, 1955, Keizer & Co. sent its check in the amount of $15,000 to Malden, purporting to represent the amount of dividends on the 3,000 shares of Railway stock allegedly purchased by Malden on February 14, 1955.

Malden's sole purpose in entering into the foregoing transaction was to obtain tax benefit.

In its income tax return for the fiscal year ended November 30, 1955, petitioner reported a short-term capital loss in the amount of $17,805 in respect of its purported sale of Railway stock on February 15, 1955; it reported dividends in the amount of $15,000 and claimed a dividends-received deduction in the amount of $12,750. Petitioner applied the foregoing short-term capital loss in the amount of $17,805 against short-term capital gains which were in excess of its purported loss.

The purported purchase and sale of the 3,000 shares of Railway stock by Malden were parts of a sham. Keizer & Co. not only had no such stock to sell, but a reversal of the transaction was contemplated by means of a prompt offsetting ‘resale’ of such stock by Malden to Keizer & Co. The parties did not intend to deal in real shares of Railway stock; the various confirmation slips and bookkeeping entries merely gave the appearance of purchase and sale of stock; Malden sustained no short-term capital loss upon its purported sale of such stock, nor did the $15,000 which it received from Keizer & Co. represent a dividend.

It is customary for securities dealers to sell securities in which they are ‘short,‘ intending to make delivery to the purchaser upon demand either by borrowing or purchasing such securities for that purpose. Prior to such delivery it is customary for dealers to make dividend payments to the purchaser from their own personal funds. It is not unusual for a customer who actually buys securities from a dealer to resell those securities to that dealer; if such resale occurs prior to delivery and while the dealer is still ‘short,‘ it becomes unnecessary for the dealer to carry out his original intention of acquiring the securities for delivery. However, no such original intention existed in the present case.

OPINION

RAUM, Judge:

1. We have found as a fact that Malden's ‘purchase’ and ‘resale’ of the 3,000 shares of Railway stock were merely component parts of a sham. Although there was testimony calculated to lead us to the conclusion that Malden made a bona fide purchase of such shares, we did not believe it. We heard and observed both Feuerstein and Keizer, and the short answer to petitioner's position is that we had no confidence in their testimony in this respect.

It must be remembered that Malden's ‘purchase’ and ‘resale’ of 3,000 shares of Railway stock were parts of a larger picture involving four other clients of Glunts who entered into like transactions. All five of these clients, including Malden, purported to purchase an aggregate of 20,370 shares of Railway stock on February 14, 1955, from Keizer & Co. at the identical price of 52, and all five purported to resell their respective shares to Keizer & Co. at the identical price of 46 1/8 on the very next day when the stock went ex dividend. The 20,370 shares which Keizer & Co. purported to sell to these five clients of Glunts on February 14 were substantially in excess of the total number of shares of that stock that were traded on that day on the New York Stock Exchange, and Keizer & Co. had no such stock in its inventory. We do not believe that Keizer & Co. ever intended to make delivery of the shares it purported to sell, or that it contemplated anything other than a bookkeeping reversal of these sales by means of purported repurchases when the stock went ex dividend. The fact that all five of Glunts' clients, including Malden, promptly ‘resold’ their shares to Keizer & Co. speaks too loudly to be ignored in the context of the record before us. We are satisfied that Malden did not make any bona fide purchase of Railway stock on February 14, that it did not sell any Railway stock on February 15, that it suffered no short-term capital loss on the transaction, that it received no dividend in connection with that transaction entitling it to a deduction in the amount of 85 percent thereof, and that indeed no part of any such alleged dividend should have been included in its gross income in the first instance.

The parties have stipulated that at the time of the ‘sale’ to Malden, Keizer did not have any such stock ‘in its inventory and it did not thereafter acquire any such stock for delivery to petitioner.’ There was some testimony to the effect that although Keizer & Co. was ‘short’ to the extent of the 20,370 shares it purported to sell, it was ‘long’ to the extent of some 5,250 shares that it had bought on that day. However, the evidence further indicates that those 5,250 shares were purportedly purchased from four other clients of Glunts on Feb. 14, and that there were four matching sales by Keizer & Co. in the identical number of shares to four charities on the following day. In view of the fact that there is other evidence before us revealing that one of the variations of Glunts' tax-avoidance device involved the use of charities, we cannot find on the basis of the foregoing skeleton outline that Keizer & Co. in fact had made any bona fide purchases aggregating 5,250 shares or that it was in fact ‘long’ to that extent.

Moreover, although Keizer & Co.‘s purported sales of the 20,370 shares and purported purchase of the 5,250 shares on Feb. 14, referred to in fn. 2, supra, were at a price of 52, its purported repurchases of the 20,370 shares on Feb. 15 were at a price of 46 1/8 (within the range of prices for that day on the New York Stock Exchange) while its purported resales of the 5,250 shares on Feb. 15 were at a price of 47 7/8 in respect of 3,250 shares and at a price of 47 1/8 in respect of 2,000 shares (both prices outside the range of prices for that day on the New York Stock Exchange). It will be seen that, after taking into account the adjustment for the $5 dividend, Keizer & Co.‘s profit on each of the transactions, except the sale of 2,000 shares to one of the charities at a price of 47 1/8, was exactly 7/8 per share. We do not believe that this was sheer coincidence but are convinced that it was the result of a plan or plans that had been prearranged with Keizer.

The situation before us is somewhat comparable to Empire Press, Inc., 35 T.C. 136, which involved another variation of Glunts' basic device and which was similarly executed for the taxpayer therein by Keizer & Co. The result that we reach here is in accord with what we recently referred to in J. George Gold, 41 T.C. 419, 427, and Sammy Cahn, 41 T.C. 858, 874, as ‘an ever lengthening line of decisions reaching like results in a variety of situations comparable to the one before us.’ Eli D. Goodstein, 30 T.C. 1178, affirmed 267 F.2d 127 (C.A. 1); Broome v. United States, 170 F.Supp. 613 (Ct. Cl.); Sonnabend v. Commissioner, 267 F.2d 319 (C.A. 1), affirming per curiam a Memorandum Opinion of this Court; Lynch v. Commissioner, 273 F.2d 867 (C.A. 2), affirming 31 T.C. 990 and Leslie Julian, 31 T.C. 998; Egbert J. Miles, 31 T.C. 1001; Jockmus v. United States 335 F.2d 23 (C.A. 2); Becker v. Commissioner, 227 F.2d 146 (C.A. 2), affirming a Memorandum Opinion of this Court; Gheen v. Commissioner, 331 F.2d 470 (C.A. 6); Rubin v. United States, 304 F.2d 766 (C.A. 7); Lewis v. Commissioner, 328 F.2d 634 (C.A. 7), affirming a Memorandum Opinion of this Court; Morris R. DeWoskin, 35 T.C. 356, appeal dismissed (C.A. 7); Perry A. Nichols, 37 T.C. 772, affirmed 314 F.2d 337 (C.A. 5); MacRae v. Commissioner, 294 F.2d 56 (C.A. 9), affirming in part and remanding in part 34 T.C. 20, certiorari denied 368 U.S. 955; Kaye v. Commissioner, 287 F.2d 40 (C.A. 9), affirming per curiam 33 T.C. 511; Milton Hart, 41 T.C. 131; Carl Shapiro, 40 T.C. 34; cf. Knetsch v. United States, 364 U.S. 361; Amor F. Pierce, 37 T.C. 1039, affirmed 311 F.2d 894 (C.A. 9); A. A. Helwig, 37 T.C. 1046; United States v. Roderick, 290 F.2d 823 (C.A. 5); Bridges v. Commissioner, 325 F.2d 180 (C.A. 4), affirming 39 T.C. 1064; Weller v. Commissioner, 270 F.2d 294 (C.A. 3), affirming 31 T.C. 33 and W. Stuart Emmons, 31 T.C. 26, certiorari denied 364 U.S. 908; William R. Lovett, 37 T.C. 317.

Petitioner's ‘purchase’ and ‘resale’ of 3,000 phantom shares of Railway stock consisted in substance of nothing more than a bucket-shop-type transaction. Although it argues earnestly that, whatever may have been Keizer's intentions, Feuerstein intended to make a bona fide purchase in its behalf, we do not take so generous a view of Feuerstein's intentions. We think that he fully understood that he was entering into a transaction that was to be promptly reversed without any delivery of securities. Moreover, even if his testimony were to be accepted at face, a taxpayer's possible good faith cannot change the nature of what is otherwise a sham transaction. See Bornstein v. Commissioner, 334 F.2d 779 (C.A. 1), affirming a Memorandum Opinion of this Court; Jockmus v. United States, supra; Lynch v. Commissioner, 273 F.2d 867, 872 (C.A. 2); Gheen v. Commissioner, supra; Perry A. Nichols, 37 T.C. 772, 788-789, affirmed 314 F.2d 337, 338 (C.A. 5); MacRae v. Commissioner, 294 F.2d 56, 59 (C.A. 9), certiorari denied 368 U.S. 955. Cf. Sammy Cahn, 41 T.C. 858, 875, fn. 4.

Mass. Gen. Laws ch. 271, sec. 35, defines ‘Bucketing’ or ‘Bucket-shopping’ as follows:SEC. 35. ‘BUCKETING’ OR ‘BUCKET-SHOPPING.’(a) The making of, or offering to make, any contract respecting the purchase or sale, either upon credit or upon margin, of any securities or commodities, wherein both parties thereto intend, or such keeper intends, that such contract shall be, or may be, terminated, closed or settled according to, or upon the basis of, the public market quotations of prices made on any board of trade or exchange upon which said securities or commodities are dealt in, and without a bona fide purchase or sale of the same; or(b) The making of, or offering to make, any contract respecting the purchase or sale, either upon credit or upon margin, of any securities or commodities, wherein both parties intend, or such keeper intends, that such contract shall be, or may be, deemed terminated, closed or settled, when such public market quotations of prices for the securities or commodities named in such contract shall reach a certain figure without a bona fide purchase or sale of the same; or(c) The making of, or offering to make, any contract respecting the purchase or sale, either upon credit or upon margin, of any securities or commodities, wherein both parties do not intend, or such keeper does not intend, the actual or bona fide receipt or delivery of such securities or commodities, but do intend, or such keeper does intend, a settlement of such contract based upon the differences in such public market quotations or prices at which said securities or commodities are, or are asserted to to be, bought and sold.Sec. 36 provides:SEC. 36. PENALTY FOR KEEPING A BUCKET SHOP, AND JURISDICTION TO DISSOLVE SUCH CORPORATION.Whoever makes, or offers to make, any contract of bucketing or bucket-shopping, or who is the keeper of any bucket shop, shall be punished by a fine of nor more than one thousand dollars or by imprisonment for not more than one year. Whoever shall be convicted of a second offence shall be punished by imprisonment for not more than five years. * * *

We do not express any opinion as to whether petitioner would have become entitled to the tax benefits it seeks if it had actually purchased Railway stock dividend on and then sold it ex dividend, all in accord with a preexisting plan. We cannot find on the record before us that it ever purchased any Railway stock, or that Keizer & Co. ever made a bona fide short sale of such stock to petitioner. It is one thing to make a genuine short sale, intending to effect delivery thereafter; it is quite another thing to go through the form of executing a short sale without intending to make delivery. The burden of proof was upon the petitioner, and the testimony offered by it to carry that burden did not ring true.

To the extent that there are actual purchases and sales, the tax advantages sought by petitioner would be defeated for tax years after 1957 by sec. 18 of the Technical Amendments Act of 1958, adding sec. 246(c) to the 1954 Code. These provisions, however, did not impart validity to sham transactions in prior years. Cf. Knetsch v. United States, 364 U.S. 361, 367-369.

Fabreeka Products Co. v. Commissioner, 294 F.2d 876 (C.A. 1), relied upon by petitioner, is therefor not in point, because the court regarded the taxpayers before it as having ‘made actual ‘investments.“ (p. 878.)

2. Petitioner contends alternatively that if the first issue should be decided against it, as was done above, it is nevertheless entitled to deduct its ‘out-of-pocket expenses' in the amount of $2,805. Actually, petitioner did not make any specific expenditure in that amount. That figure reflects its net loss on the transaction and represents the difference between the $93,600 which petitioner paid Keizer & Co. as part of the purported purchase price for the 3,000 shares of Railway stock and the sum of the two amounts which it received from Keizer & Co., namely, $75,795 as the balance in its account upon the alleged resale of those shares and $15,000 as a ‘dividend’ thereon.

Petitioner seeks the $2,805 deduction on either of two grounds: (i) As a short-term capital loss upon the sale of an ‘option’ under sections 1234(a) and 165 of the 1954 Code, or (ii) as an ‘ordinary and necessary’ business expense under section 162(a). We hold that the claimed deduction is not allowable under any of those provisions.

SEC. 1234. OPTIONS TO BUY OR SELL.(a) TREATMENT OF GAIN OR LOSS.— Gain or loss attributable to the sale or exchange of, or loss attributable to failure to exercise, a privilege or option to buy or sell property shall be considered gain or loss from the sale or exchange of property which has the same character as the property to which the option or privilege relates has in the hands of the taxpayer (or would have in the hands of the taxpayer if acquired by him).

SEC. 165. LOSSES.(a) GENERAL RULE.— There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.(f) CAPITAL LOSSES.— Losses from sales or exchanges of capital assets shall be allowed only to the extent allowed in sections 1211 and 1212.

SEC. 162. TRADE OR BUSINESS EXPENSES.(a) IN GENERAL.— There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—

(i) Petitioner argues that it could have demanded delivery from Keizer & Co. of 3,000 shares of Railway stock ‘upon payment of $62,400, the ‘exercise price, “ that on February 15, 1955, it ‘sold the option to Keizer & Co. * * * and suffered a loss,‘ and that such loss upon the ‘sale of the option’ was deductible under sections 1234(a) and 165. Its position in this respect rests upon pure fiction and a strained interpretation of the term ‘option.’

Petitioner did not hold any ‘option’ as that term is ordinarily understood, and it confuses the difference between an option and what purports to be an executed contract of sale. See Lawler v. Commissioner, 78 F.2d 567, 568 (C.A. 9). Pursuant to its arrangement with Keizer & Co., petitioner purported to make an outright purchase of 3,000 shares of Railway stock and then purported to make an outright resale of these shares on the following day. No ‘option’ of any kind was involved, and it would require a judicial tour de force to press this case into the mold of section 1234. The inapplicability of the option loss provisions in situations of this kind was fully spelled out in Morris R. DeWoskin, 35 T.C. 356, appeal dismissed (C.A. &), dealing with the corresponding provisions in section 117(g)(2) of the 1939 Code. And the Court of Appeals for the Seventh Circuit recently reached the same result in Lewis v. Commissioner, 328 F.2d 634. We follow DeWoskin and Lewis here.

The dictum in Goodstein v. Commissioner, 267 F.2c 127, 132 (C.A. 1), relied upon by petitioner, was plainly not concerned with the foregoing considerations. Moreover, Goodstein and the two other cases relied upon by petitioner in respect of this issue (Becker v. Commissioner, 277 F.2d 146 (C.A. 2); MacRae v. Commissioner, 294 F.2d 56 (C.A. 9)) are distinguishable here. In Goodstein (pp. 131, 132), the court found that the taxpayer promised to pay Seaboard $9,929,212.71 at any time he might select and that Seaboard promised to acquire and deliver to the taxpayer, on the date he selects, certain Treasury notes in the face amount of $10 million. Both Becker (p. 148) and MacRae (p. 60) found similar promises on the part of the taxpayer and the purported lender, respectively. There is thus a crucial distinction between the instant case and the three cases relied on by petitioner. Here we have found that it was the understanding and intention of the parties that Keizer & Co. was not to deliver any Railway stock. Petitioner promised to pay $156,000 to Keizer & Co. and Keizer & Co. promised to pay to petitioner $15,000 (the purported dividends on the Railway stock) plus $138,195, which amount represented the selling price of the stock ex dividend, namely, $138,375, less a charge in the amount of $180 for tax on the purported sale. Keizer & Co.‘s promise was to pay money in a bucket-shop-type transaction and not to deliver stock. Simply stated, petitioner incurred a loss because it received less money than it paid out, and the money it received in no way related to any right to require delivery of Railway stock. There was no option to purchase ‘property’ within the meaning of section 1234.

Moreover, in Jockmus v. United States, 335 F.2d 23 (C.A. 2), the court carefully avoided the question whether it should overrule its earlier decisions in Becker in the light of Lewis and DeWoskin.

(ii) Nor is the claimed deduction of $2,805 allowable under section 162(a) as an ordinary and necessary business expense. Petitioner contends, and it is supported by evidence, that it from time to time made short-term investments in securities with funds temporarily not needed in its manufacturing business, that such investment activities were part of its business, and that therefore investment expenses thus incurred are deductible as business expenses. The difficulty with that contention here is that petitioner did not in fact make any bona fide investment in securities in respect of the alleged purchase of 3,000 shares of Railway stock, short term or otherwise, and that in accordance with our finding this transaction was a sham. Any loss which it sustained in connection therewith was not an ‘ordinary and necessary’ expense incurred ‘in carrying on * * * (its) trade or business.’ Cf. Carl Shapiro, 40 T.C. 34, 39-40; MacRae v. Commissioner, 294 F.2d 56, 59 (C.A. 9).

Furthermore, in view of the intention of the parties not to make delivery of the securities in which they purportedly dealt, there appears to have been a violation of the Massachusetts law against bucket-shop transactions. See fn. 4, supra. Accordingly, there may be serious doubt whether losses incurred in any such transaction, in contravention of the clearly defined public policy of the State, are in any event deductible by reason of that circumstance alone. Cr. Tank Truck Rentals v. Commissioner, 356 U.S. 30; Lilly v. Commissioner, 343 U.S. 90, 97.

Decision will be entered under Rule 50.