Stifel, Nicolaus & Co.
v.
Comm'r of Internal Revenue

Tax Court of the United States.Nov 17, 1949
13 T.C. 755 (U.S.T.C. 1949)
13 T.C. 755T.C.

Docket No. 15918.

1949-11-17

STIFEL, NICOLAUS & CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Alfred O. Heitzmann, Esq., and Fred L. Kuhlmann, Esq., for the petitioner. Gene W. Reardon, Esq., and Marvin E. Hagen, Esq., for the respondent.


Gain from the sale of securities purchased and held as an investment and not for sale to customers in petitioner's regular business as dealer and broker, held, taxable as capital gain rather than ordinary income. Alfred O. Heitzmann, Esq., and Fred L. Kuhlmann, Esq., for the petitioner. Gene W. Reardon, Esq., and Marvin E. Hagen, Esq., for the respondent.

This proceeding involves deficiencies of $24,414.81 in income tax and $8,804.12 in excess profits tax for 1945. The petitioner concedes one of the issues raised in the pleading, admitting that it is taxable on the amount of $48,742.62, representing the value of interest coupons on certain bonds. The only issue remaining for our determination is whether the gain from the sale of shares of stock of the Wisconsin Hydro-Electric Co. is taxable as capital gain or as ordinary income.

FINDINGS OF FACT.

Petitioner is a corporation, engaged in the investment banking business. Its principal office is located at St. Louis, Missouri. It filed its returns for 1945 with the collector for the first district of Missouri.

Petitioner's business is buying and selling securities, underwriting securities, and acting as a broker of securities.

Petitioner's permanent books and records are kept at its principal office at St. Louis. It also maintains an office at Chicago, Illinois, where most of its business is transacted. The Chicago transactions are recorded in that office and copies are forwarded daily to the St. Louis office for entry in the permanent books.

On August 18, 1944, petitioner purchased through its Chicago office 1,000 shares of 6 per cent preferred stock of Wisconsin Hydro-Electric Co. from Electric Securities Corporation of New York at $64 per share. It paid a purchase commission of $500 on the transaction. On receiving delivery of the certificates the petitioner deposited them in the Continental Illinois National Bank & Trust Co., of Chicago, as collateral against its general loan account at that bank. It was petitioner's custom to deposit all of its securities at that bank and borrow against the ‘basket‘ whenever it needed funds. Records of the purchase were forwarded to the St. Louis office and posted in the petitioner's books in the same manner as were the records of other routine transactions. The shares were entered in the ‘Miscellaneous Stocks‘ account and were carried in petitioner's inventories for 1944.

The petitioner's first purchase of the Wisconsin Hydro-Electric Co. stock, hereinafter referred to, for convenience, as the Wisconsin shares or stock, was on May 31, 1944, when it purchased five shares at 58 1/2 per share. It continued to buy and sell these shares in small lots throughout 1944 and 1945. These transactions were mostly with other dealers.

For several years preceding the purchase of the 1,000 Wisconsin shares in 1944 the petitioner's president, Joseph D. Murphy, who was in charge of the Chicago office, and his associates had been studying the stock as an investment proposition. They learned that the Securities Exchange Commission had ordered the company to reorganize and that a cooperative was planning to acquire the stock, although probably not before some time in 1945. They also learned through their representative in Madison, Wisconsin, that the Wisconsin Public Service Commission had determined that the company's physical assets were sufficient to pay off its bond indebtedness, as well as its preferred stock and accumulated dividends. They decided on this information that the shares would be a good investment and made an offer to Wisconsin Hydro-Electric Co. of $64 a share for the 1,000 shares which that company was holding and offering for sale at $65 per share. The offer was accepted and the shares were transferred to the petitioner, as stated above, on August 18, 1944. The daily work sheets recording the transaction were forwarded from the Chicago office to the St. Louis office and the transaction was entered in the permanent books in the same manner as other regular transactions.

On August 31, 1944, the petitioner set up a separate ledger account entitled ‘Wisconsin Hydro-Electric 6% Preferred,‘ in which it entered all of its Wisconsin stock then on hand, amounting to 1,114 shares. These included the 1,000 shares of August 18, 1944. All subsequent purchases and sales of the stock were handled through this account.

In December 1944 the petitioner's vice president and treasurer, John J. Niemoeller, on being told by Murphy, petitioner's president, that the 1,000 shares of Wisconsin stock were purchased as an investment and not for trading purposes, advised him that in that case the shares should have been segregated in the books and not carried in the regular account. A special meeting of the petitioner's board of directors was called to discuss the matter on January 3, 1945. The minutes of that meeting read in part as follows:

The Chairman advised that this Corporation holds $84,030 Atlantic City Coupons and 900 shares Wisconsin-Hydro Electric Company 6% Preferred Stock, and that he desired authority of the Board of Directors to hold these coupons and preferred stock as an investment and not to resell to the public in the ordinary course of business. After a discussion, a motion was made, seconded and unanimously carried that,

The $84,030 worth of Atlantic City coupons which Stifel, Nicolaus & Co., Inc. owns at a cost of $61,556 and the 900 shares of Wisconsin-Hydro Electric Company 6% Preferred Stock which Stifel, Nicolaus & Co., Inc., owns at a cost of $58,050 be held as an investment for said Company and not to be reoffered for sale in the usual course of business.

The reason for specifying 900 shares in the resolution instead of 1,000 shares was that in one of the previous transactions involving small lots of the stock the petitioner had sold two shares more than it owned, outside of the 1,000-share lot, and a covering purchase had to be made. It was thought advisable to keep 100 of the shares on hand in the trading account for such contingencies and to avoid any possible dispute as to the investment character of the remaining 900 shares. After this meeting petitioner's treasurer had the bookkeeper in St. Louis set up a new account entitled ‘Wisconsin Hydro Elec. 6% Pfd. Inventory Acct.,‘ in which the 900 shares were entered and carried until their sale in 1945. In the meantime, petitioner did not offer these shares to its customers in the regular course of business and did not list them in any of its circulars or make them available to its salesmen for disposal. It eliminated them from the inventories in which it carried other securities.

Early in July petitioner received an offer from F. J. Young & Co. of New York, New York, to purchase the Wisconsin shares which it then held. That firm was trying to acquire a large block of the stock so as to be in a favorable position to negotiate with the cooperative which was about to acquire the company's assets. A price of $112 per share was agreed upon and on July 16, 1945, the petitioner sold to F. J. Young & Co. all of the stock which it then held, 972 shares. F. J. Young & Co. was not one of petitioner's regular customers. Petitioner reported a profit on the sale of 900 of the shares, amounting to $42,750, as a capital gain. It reported the profit on the sale of the 72 shares as ordinary income. The respondent has determined that the gain on the sale of the entire lot of 972 shares is taxable as ordinary income.

The said 900 shares of Wisconsin stock were capital assets within the meaning of section 117, Internal Revenue Code.

OPINION.

LE MIRE, Judge:

The only issue for our determination here is whether the gain on the sale of 900 shares of Wisconsin stock in 1945 was ordinary income or a capital gain. It was a capital gain if the shares were capital assets within the meaning of section 117(a)(1), Internal Revenue Code.

SEC. 117. CAPITAL GAINS AND LOSSES.(a) DEFINITIONS.— As used in this chapter—(1) CAPITAL ASSETS.— The term ‘capital assets‘ means property held by the taxpayer (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 to customers in the ordinary course of his trade or business * * * .

The evidence convinces us that the petitioner acquired and held the shares in question as a long term investment, rather than for trade in the regular course of its business. It follows, and we have found as a fact, that the shares constituted capital assets.

The facts here are in many respects identical with, and are on the whole indistinguishable from, those in E. Everett Van Tuyl, 12 T.C. 900. We held on the facts in that case that the profit derived from the sale of securities was a capital gain. We said in our opinion:

It is established that a taxpayer may be a dealer as to some securities and he may also hold similar or other securities on his own account for purposes other than for resale to customers. As to the latter, he is not a dealer, he is not entitled to compute income on the inventory method, and securities so purchased are properly recognizable as capital assets within the meaning of section 117(a)(1). Schafer v. Helvering, 299 U.S. 171; Vaughan v. Commissioner (CCA-2), 85 Fed.(2d) 497; certiorari denied, 299 U.S. 606; Hammitt v. Commissioner (CCA-3), 79 Fed.(2d) 494; Francis Shelton Farr, 44 B.T.A. 683; R. O. Holton & Co., 44 B.T.A. 202; and I.T. 3891, C.B. 1948-1, p. 69, which reads as follows:

Where securities are acquired and held by a dealer in securities solely for investment purposes, such securities will be recognized as capital assets, as defined in section 117(a)(1) of the Internal Revenue Code, even though such securities are of the same type or of a similar nature as those ordinarily sold to the dealer's customers.

The respondent argues here that the evidence shows that the entire lot of 1,000 shares of the Wisconsin stock was acquired and continuously held by the petitioner as stock in trade. We can not reach this conclusion without treating the testimony of both of petitioner's witnesses, its president and vice president and treasurer, as well as the bookkeeping entries which were made by petitioner's offices, and, in fact, the petitioner's whole claim in this proceeding, as a ‘belated fabrication,‘ as suggested by the respondent in his brief. There is nothing in the evidence before us that would justify this course. In the absence of contradictory evidence, we have no reason to discredit the testimony of petitioner's president that the Wisconsin shares were purchased for investment purposes rather than as stock in trade for sale to customers in the regular course of business; especially since the whole history of the transaction corroborates this testimony.

The action taken by the petitioner's directors on January 3, 1945, shows unmistakably that the petitioner's officers regarded the 900 shares of Wisconsin stock as an investment. The corporate resolution was for the purpose of correcting the book entries to so show. Physical segregation of the certificates for these shares was not practical because they were then being held by the bank, along with petitioner's other securities, as collateral for a loan. They were segregated in the petitioner's books, however, and were never offered for sale to petitioner's customers.

The respondent argues that, since the petitioner regularly used inventories in making its returns for 1944 and prior years and did not obtain or ask for permission from the Commissioner to change this method, it was required to inventory all of its securities on hand, including the Wisconsin shares, at the close of the taxable year 1944. That would, of course, be true as to all securities which the petitioner held for sale to customers. However, the shares in question, being investment shares, were never properly included in inventory and were correctly taken out of inventory by the entry made January 3, 1945. See R. O. Holton & Co., 44 B.T.A. 202; Vaughan v. Commissioner, 85 Fed.(2d) 497; Hammitt v. Commissioner, 79 Fed.(2d) 494.

The respondent calls attention to the fact that in its petition in this proceeding the petitioner alleges that the 900 shares of Wisconsin stock were purchased ‘for resale to customers in the ordinary course of its trade or business.‘ It is noted, however, that the respondent in his answer denied this allegation. In an amendment to the petition filed at the hearing it is alleged that the 900 shares were held ‘solely for investment.‘ We think that the evidence supports that allegation.

Reviewed by the Court.

Decision will be entered under Rule 50.

DISNEY and OPPER, JJ., dissent.