Scanlon v. Commissioner

M. J. SCANLON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Scanlon v. Commissioner Docket No. 33427. United States Board of Tax Appeals 21 B.T.A. 1120; 1931 BTA LEXIS 2242; January 13, 1931, Promulgated *2242 The petitioner purchased two lots of stock in a corporation, one in 1917 and one in 1923. In 1924 he disposed of 770 shares of this stock. Delivery of 760 shares was made from certificates of stock purchased by the petitioner in 1917. The petitioner contends that, as to 516 of the shares disposed of in 1924, it was his intention to dispose of shares purchased in 1923. Held, that the evidence does not warrant a finding that the shares in question disposed of in 1924 were from the lot purchased in 1923. Charles W. Briggs, Esq., and A. W. Clapp, Esq., for the petitioner. Brooks Fullerton, Esq., for the respondent. SMITH *1120 This is a proceeding for the redetermination of deficiencies in income tax for 1924 and 1925 in the respective amounts of $20,430.71 and $2,622.98. Although the petition filed in this proceeding covers the deficiencies determined for 1924 and 1925, the issue raised relates only to the year 1924. At the hearing counsel for the Commissioner, with the acquiescence of counsel for the petitioner, moved to dismiss the proceeding in so far as it relates to the year 1925, and that the deficiency determined by the*2243 Commissioner for that year be affirmed. The petitioner assigns as error the Commissioner's determination that he had a capital net gain of $48,282.47 for 1924, instead of a capital net gain of $832.50. FINDINGS OF FACT. The petitioner is a resident of Minneapolis, Minn., and for many years has been engaged in the manufacture of lumber and newsprint paper. In 1917 he acquired a large block of stock of a par value of $100 per share in the Brooks-Scanlon Corporation at a cost of $110.25 per share, and since that time has been president of the corporation. *1121 In 1923 the petitioner and his business associate, D. F. Brooks, each agreed to purchase one-half of the number of shares of capital stock of the Brooks-Scanlon Corporation held by the following: Shares Wm. O'Brien [737] Wm. J. O'Brien [736] Robt. J. O'Brien [736] Julia A. O'Brien [736] Alice M. O'Brien [736] Total 3,681 On April 15, 1923, the petitioner and Brooks jointly entered into a separate contract with each of the O'Briens for the purchase of his or her stock. The five contracts are identical as to their terms and upon the execution thereof the petitioner and Brooks acquired the*2244 3,681 shares of stock for a total consideration of $736,200, or at a price of $200 per share. The petitioner and Brooks paid a total of $147,240 in cash, and for the balance of the purchase price executed jointly their promissory notes, which were secured by the said 3,681 shares of stock. Each of the five O'Briens received four promissory notes made payable to his or her order and in the amounts of one-fourth of the balance due him or her. As to each of the O'Briens the said notes became due and payable on or before the 15th day of April of 1924, 1925, 1926, and 1927, respectively, making the total yearly payments by petitioner and Brooks amount to $147,240 plus interest at 5 per cent per annum. Pursuant to the terms of the contracts each of the five O'Briens surrendered his or her stock certificates and the Brooks-Scanlon Corporation issued, to each, four certificates, each certificate being for one-fourth of his or her respective stockholdings and such certificates were endorsed in blank and deposited in the Minneapolis Trust Co. to be held as collateral security for the notes. The contracts further provided that upon the payment of each of the four installments plus interest*2245 due, one-fourth of the stock would be released and delivered to petitioner and Brooks. In each of the promissory notes there was incorporated a statement that it was secured by 184 (except one note which stated 185) shares of the capital stock of the Brooks-Scanlon Corporation of the par value of $100 per share, evidenced by a stock certificate of that corporation therefor deposited with and held by the Minneapolis Trust Co. for that purpose. The said contracts were fully carried out and in April, 1924, upon the payment by petitioner and Brooks of the first installment, the petitioner became entitled to have released to him 460 shares of the said stock held as collateral security. At about this time the petitioner had agreed to sell to the Brooks-Scanlon Lumber Co. and to L. H. Weber about 500 shares of Brooks-Scanlon Corporation stock *1122 and at the petitioner's instance a certificate for 10 shares of this stock was issued to L. H. Weber and a certificate or certificates for 450 shares were issued to Brooks-Scanlon Lumber Co. In April, 1924, the petitioner entered into an agreement with his wife to transfer to her 470 shares of Brooks-Scanlon Corporation stock upon*2246 the basis of its fair market value of $96,350, or at the rate of $205 per share on April 15, 1924. The petitioner made his wife a gift of $50,000 worth of this stock and he sold her the balance of it for $46,350. He consummated the gift and sale by delivering to the transfer clerk of the company certificates for shares purchased by him in 1917. During the summer of 1924, L. H. Weber, who had been an employee of petitioner for about 20 years, asked petitioner to let him have some stock in the Brooks-Scanlon Corporation. The petitioner agreed to sell Weber 50 shares of the stock at $200 per share, the same price at which he and his associate were acquiring stock from the O'Briens. The stock records of the corporation show that a certificate for 10 shares was issued to Weber out of stock acquired by the petitioner from William O'Brien in 1923, and one for 40 shares out of a certificate for 349 shares acquired by the petitioner in 1917. In October, 1924, an old friend of petitioner, one F. A. Chamberlain, sought to purchase some Brooks-Scanlon Corporation stock from petitioner and in November the petitioner wrote to Chamberlain from Florida in part as follows: The last time*2247 I saw you in Minneapolis you said you would like to purchase some additional Brooks-Scanlon Corporation stock. If you are still of the same opinion, I will let you have 250 shares of my last purchase from William O'Brien. I bought this stock on April 15, 1923, at $200 per share, with 5% semi-annual interest, on which I received one dividend at 6% on October 15, 1923, and one of 7% on October 15, 1924. You can have this stock at cost plus carrying charges, less dividends received. * * * Chamberlain accepted the offer and acquired 250 shares at a price of $203.33 per share. The petitioner surrendered certificates for shares of stock standing in his name which had been purchased by him in 1917, and there were then issued to Chamberlain and his nominees three certificates for the 250 shares of stock in question. These certificates were dated December 1, 1924. In his 1924 income-tax return, the petitioner reported a capital net gain of $832.50 from the sale of Brooks-Scanlon Corporation stock in 1924. The record does not disclose whether such gain was computed on the sales in controversy or some other sales made during that year. The respondent has increased the capital net*2248 gain to $48,282.47, due to his determination that the sales involved in this proceeding included 516 shares of stock purchased by petitioner in 1917 at $110.25 per share. The respondent has raised no question which involves the *1123 gift of approximately 244 shares of stock from petitioner to his wife, nor as to the fact that 10 shares of the stock sold to Weber were without profit or loss to the petitioner. OPINION. SMITH: The issue involved in this proceeding is whether 516 shares of stock of the Brooks-Scanlon Corporation sold by the petitioner in 1924 were acquired by him in 1917 at $110.25 per share as contended by the respondent, or in 1923 at $200 per share as contended by the petitioner. In making delivery to the purchaser the petitioner turned over to the stock transfer clerk certificates of stock acquired by him in 1917. He alleges, however, that it was his intention to sell and that he did sell shares of stock acquired by him in 1923. The evidence with respect to the intention of the petitioner as to the shares of stock sold is entirely unsatisfactory. In 1924 it was apparently a matter of no consequence to the petitioner whether he was selling shares*2249 acquired by him in 1917 or shares which he had agreed in 1923 to acquire from the O'Briens. There is no evidence that he had in mind the income-tax consequences of sales from one lot or from the other. Although in his letter to Chamberlain in November, 1924, he said that he would sell to Chamberlain 250 shares of stock which he had purchased from William O'Brien, he apparently had in mind only the fact that the sale would be at the same price which he was paying the O'Briens for an equal amount of stock, namely, $200 per share. There is no evidence that the petitioner made any mistake in turning over to the stock transfer clerk of the Brooks-Scanlon Corporation certificates for shares of stock which he had purchased in 1917 rather than certificates for shares which he had agreed to purchase from the O'Briens. In November, 1924, the petitioner had no certificates for shares of stock which he had acquired from the O'Briens. Certificates for 460 shares of stock formerly belonging to the O'Briens had been released to him in April, 1924, and at his instance a certificate for 10 shares of this stock was issued to L. H. Weber on June 10, 1924, and certificates for 450 shares were issued*2250 to the Brooks-Scanlon Lumber Co. The record conclusively shows that in November, 1924, the petitioner was not a stockholder of record with respect to any shares of stock which he had acquired or was to acquire from the O'Briens. It must be assumed that the petitioner intended to sell in 1924 shares of stock of the Brooks-Scanlon Corporation which he owned and which he could deliver to the purchaser. His delivery to the stock transfer clerk of certificates for shares of stock acquired by him in 1917 tends to disprove the contention of the petitioner that he intended to sell and did sell the 516 shares of stock in question from the lot which he had contracted to purchase from the O'Briens. *1124 The Commissioner is authorized to make needful rules and regulations for the enforcement of the provisions of the taxing statute involved. (Section 1303, Revenue Act of 1921.) Under this authority the Commissioner promulgated article 39 of Regulations 62, which reads in part as follows: Sale of stock and rights. - When shares of stock in a corporation are sold from lots purchased at different dates and at different prices and the identity of the lots can not be determined*2251 the stock sold shall be charged against the earliest purchases of such stock. * * * In , the court upheld the application of the rule that sales of unidentified stock were presumed to have been made from lots of stock first purchased, and that the use of an average cost was not permissible. Oral declarations of the taxpayer as to his intention to sell the more recently purchased stock and to retain his original holdings were insufficient to change the result. It was held that article 39 of Regulations 45, the same in substance as article 39 of Regulations 62, was binding and had the effect of law. In the proceeding at bar we are of the opinion that the petitioner has not established that it was his intention to sell the 516 shares of stock in question from the lot of stock purchased by him from the O'Briens rather than from the lot of stock acquired by him in 1917. The action of the Commissioner in holding that the shares of stock sold in 1924, and involved in this proceeding, were acquired by the petitioner in 1917 at a cost of $110.25 per share is sustained. The deficiency found by the respondent for the year 1925*2252 is affirmed. Reviewed by the Board. Judgment will be entered for the respondent. STERNHAGEN, PHILLIPS, and MURDOCK concur in the result only. TRUSSELL dissents.