Warren Nat'l Bank v. Commissioner

WARREN NATIONAL BANK, EXECUTOR, ESTATE OF H. A. SIGGINS, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Warren Nat'l Bank v. Commissioner Docket No. 38988. United States Board of Tax Appeals 22 B.T.A. 759; 1931 BTA LEXIS 2070; March 17, 1931, Promulgated *2070 1. Held that a certain payment of $25,000 was not the initial payment under the contract of sale here involved and that the sale may not be treated as an installment sale. 2. Held, further, that the sale was not a "short sale." John E. McClure, Esq., for the petitioner. J. L. Backstrom, Esq., for the respondent. VAN FOSSAN *760 This proceeding was brought to redetermine a deficiency in income taxes of H. A. Siggins for the year 1924 in the sum of $19,733.51. During the pendency of the proceeding H. A. Siggins died and by a proper order the Warren National Bank, executor of his estate, was substituted as the petitioner. In the original petition the following errors are alleged: 1. The respondent held that the sales in 1923 of certain stock of the Warren Street Railway Company and the Warren and Jamestown Street Raliway Company were not installment sales. 2. The respondent held that such sales did not, in part, constitute short sales. 3. The profits on the said sales were not taxed on the installment sales basis. 4. The respondent should have taxed part of the said profit in 1925 and not in 1924. In the amended*2071 petition the petitioner assigns the following additional errors: 5. The respondent erred in determining that the original petitioner received property (other than money) with a fair market value during 1924 on the sale of the said stock of the street railway companies. 6. The respondent erred in determining that the original petitioner received property (other than money) with a fair market value of $262,687.50 during 1924 on the sale of the said stock of the street railway companies. 7. The stocks sold during 1924 and 1925 were deemed to have been sold on the dates of their purchase as provided for in article 39 of Regulations 65. FINDINGS OF FACT. The following facts were stipulated: On November 16, 1923, petitioner's decedent, as party of the first part, entered into a contract with H. D. Walbridge & Company, a Delaware corporation, party of the second part (petitioner's Exhibit A attached to the stipulation). The respondent found that petitioner's decedent sold said stock referred to in petitioner's Exhibit A for a total consideration of $787,375. The respondent further found that petitioner's decedent owned on March 1, 1913, 2,496 1/8 shares of the Warren*2072 Street Railway Company, which had a value on that date of $50 a share, a total value of $124,806.25; the respondent further found that the petitioner's decedent on March 1, 1913, held 375 shares of the Warren & Jamestown Street Railway Company, which shares had a value of $100 each on that date, or a total value of $37,500. The *761 respondent further found that petitioner's decedent purchased the balance of the stock referred to in petitioner's Exhibit A for a total consideration of $436,862.78. The respondent further found that petitioner's decedent sustained expenses of selling the stock in 1924 of $15,052.87 and that the net profit resulting from the sale amounted to $173,153.10. A summary of the transaction is as follows: Of the amount of $787,375 which the petitioner received for all of the stock, $196,000 was for the Warren & Jamestown Street Railway Company and the balance of $591,375 was for the Warren Street Railway Company stock. The number of shares of stock of the Warren & Jamestown Street Railway Company was 2,000, of which 375, as stated above, were owned on March 1, 1913, and the balance, 1,625, was purchased at $80 a share. The said Warren & Jamestown Street*2073 Railway Company stock was sold at $98 a share. The number of shares of stock of the Warren Street Railway Company sold by petitioner's decedent was 7,500, of which 2,496 1/8 shares, as stated above, were owned March 1, 1913, and the balance, 5,003 7/8 shares, was bought for a total consideration of $321,915.65, or approximately $64.33 a share. All of the stock of the Warren Street Railway Company was sold at $78.85 a share. As a result of the sale of the stock of the Warren Street Railway Company and the Warren & Jamestown Street Railway Company, petitioner's decedent realized a profit of $173,153.10. In his tax returns, petitioner's decedent reported the said profit of $173,153.10 in the amounts set opposite the years below: [1924] $110,189.45 [1925] 62,963.65 Petitioner's decedent reported the profit as outlined in the paragraph above on the theory that said transaction was a casual sale or other casual disposition of personal property for a price exceeding $1,000. The respondent, in determining the deficiency, included in petitioner's decedent's 1924 income the entire profit of $173,153.10, taxing $101,889.89 at the regular rates and $71,263.21 at the capital*2074 net gain rates of 12 1/2 per cent, the prevailing rates for the year 1924. The payments under the contract, petitioner's Exhibit A, were as follows: November 30, 1923 $25,000 April 10, 1924 237,000 The difference between the total selling price, $787,375, and the payments made on November 30, 1923 and April 10, 1924, or a balance of $525,375, was secured by a serial note dated April 10, 1924, made by Venango Public Service Corporation and endorsed by H. D. Walbridge & Company, Inc., bearing interest at 6 per cent, payable *762 in four equal installments of $131,343.75 in four months, eight months, twelve months, and sixteen months, respectively, from date. Payments were made on said note as follows: August 12, 1924 $262,687.50 April 10, 1925 131,343.75 June 22, 1925 131,343.75 In explanation, the second and fourth payments were anticipated, as shown above. At the time petitioner's decedent entered into the contract of November 16, 1923 (petitioner's Exhibit A), petitioner's decedent did not own all of the stock of the said Warren Street Railway Company and/or the Warren & Jamestown Street Railway Company, but had previously*2075 entered into agreements with the then owners of said stock whereby petitioner's decedent was given the exclusive right or option to purchase at any time within one hundred and eighty days from date thereof the said capital stock from the then owners of the said stock of the Warren Street Railway Company and/or the Warren & Jamestown Street Railway Company. A typical copy of said agreement is petitioner's Exhibit B. The agreements between petitioner's decedent and the then owners of the stock of the Warren Street Railway Company and/or the Warren & Jamestown Street Railway Company was supplemented by contracts, a typical copy of which is petitioner's Exhibit C. As previously stated herein, the respondent found that petitioner's decedent purchased stock in the amount of $436,862.78 to comply with the terms of the agreement, petitioners Exhibit A. Petitioner's decedent paid for said stock under the terms of the contract referred to as petitioner's Exhibit C, and the exact dates of payment are shown by petitioner's Exhibit D. We find the following additional facts: The pertinent portions of Exhibit A, referred to in the stipulated facts, are as follows: 1. The Seller will*2076 endeavor to get together and deposit with the Warren National Bank of Warren, Pennsylvania (hereinafter called the Depositary), within ten (10) days from the date hereof, for delivery to the Buyer under the terms of this agreement, at least seventy-five per cent (75%) of the outstanding shares of capital stock of the Warren Street Railway Company (hereinafter called the Warren Company) and also at least seventy-five per cent (75%) of the outstanding shares of capital stock of the Warren & Jamestown Street Railway Company (hereinafter called the Jamestown Company), and also one hundred per cent (100%) of the outstanding shares of capital stock of Sheffield Electric Light & Power Company, Clarendon Electric Light & Power Company, Carroll Electric Light & Power Company and Pine Grove Electric Light & Power Company (hereinafter called Electric Power Companies), except such of the stock of said Electric Power Companies as is held by said Warren Company or said Jamestown Company, and as much more stock of each of said companies as he may be able to obtain for the *763 said purpose; and in the event that all of the issued and outstanding shares of the said companies are not offered*2077 to him within the said time, he will continue his endeavors to get the remaining shares of each and make delivery under this agreement of such as he may be able to secure. The said shares shall be accompanied by the proper powers of attorney for transfer, duly executed by the stockholders. The requisite State and Federal stamps shall be furnished by the Seller at the time of final settlement. * * * 4. The Seller will also endeavor to deposit with the Depositary, within ten (10) days from the date hereof, the written resignations of all the officers and all but two of the directors of the Warren Company, the Jamestown Company, and of all of the officers and directors of each of the Electric Power Companies. 5. The buyer will purchase the said shares gotten together by the Seller as aforesaid at the price of $78.85 per share for each share of the capital stock (par value $50.) of the Warren Company, and at the price of $98. per share for each share of the capital stock (par value $100.) of the Jamestown Company; the purchase of the foregoing stocks of the Warren and Jamestown Companies being understood to carry with it the purchase of all the outstanding stock of the Electric*2078 Power Companies, in addition to the shares in said Electric Power Companies owned by said Warren and Jamestown Companies, without extra cost to the Buyer. The Seller shall be entitled to receive, in addition to the price for each of the stocks of the Warren and Jamestown Companies above named, accrued dividends at the rate of six per cent (6%) per annum from July 1, 1923 to the date of settlement. The purchase of such shares by the Buyer, as above mentioned, is to be subject to the following conditions: * * * (h) That the shares to be deposited hereunder shall be deposited with the Depositary in trust to make an unconditional delivery to the Buyer or upon its order when there has been deposited with the Depositary, available for the payment of the said shares, a sum equal to the full purchase price per share as provided in paragraph 5 hereof for all the shares deposited hereunder. (i) That at least seventy-five per cent (75%) of the aggregate outstanding shares of capital stock of the Warren Company and the Jamestown Company and one hundred per cent (100%) of the aggregate outstanding shares of capital stock of each of the Electric Power Companies so far as not held by the*2079 Warren Company or the Jamestown Company, together with the resignations of the officers and directors of the Warren Company, the Jamestown Company and of each of the Electric Power Companies, shall be deposited with the Depositary within ten (10) days from the date hereof. * * * (o) That the Buyer shall be satisfied with all contract, franchise or other obligations, other than outstanding promissory securities and instruments securing the same. If, however, the Buyer shall accept the property under this contract, the Seller shall not be liable to the Buyer under paragraph 3 because of anything contained in any contract or franchise which has been submitted to the Buyer in connection with its investigations hereunder. All conditions, subject to which the Buyer agrees to purchase the said shares, shall be considered to have been fully complied with unless the Buyer shall, within thirty (30) days from the date of this agreement, notify the Seller to the contrary, specifying the particulars or irregularities to which the Buyer shall take exception; and upon receipt of such notice the Seller shall remedy or remove every defect, irregularity or omission requisite to *764 *2080 comply with said conditions which either the Seller or said companies or any of them shall be able to remedy or remove; and in case the Seller shall fail to remedy or remove the same within thirty (30) days after the receipt of such notice, the Buyer may elect to terminate this contract by reason thereof. Each such period of thirty (30) days may be extended with the mutual consent of the parties hereto. 6. The Buyer proposes to sell to Penn Public Service Corporation and/or Venango Public Service Corporation, corporations of the State of Pennsylvania, the stocks to be purchased hereunder by it from the Seller, at the same price in the aggregate as that to be paid hereunder to the Seller, and consequently the purchase hereunder by the Buyer is subject to the approval of the Public Service Commission of Pennsylvania and of the Public Service Commission of the State of New York of the purchase of said stocks by said Penn Public Service Corporation and/or Venango Public Service Corporation. The Buyer agrees that it will use every effort and all diligence to obtain such approvals at the earliest possible moment after its examination, both legal and otherwise, of the representations*2081 herein made is completed, or at such earlier time as the parties hereto may agree upon. The Buyer will file, or cause to be filed, a petition or petitions for the approval of the purchase by Penn Public Service Corporation and/or Venango Public Service Corporation under this agreement with the Public Service Commission of Pennsylvania and the Public Service Commission of the State of New York not later than thirty (30) days after the date of this agreement, or the date to which the time may be extended, if any, and will prosecute the said petitions with all reasonable expedition. 7. The Buyer will deposit with the Depositary, to be held under the terms of this agreement, the sum of Twenty-five thousand Dollars ($25,000), within five (5) days after it shall have received notice that at least seventy-five per cent (75%) of the aggregate outstanding shares of capital stock of the Warren Company and of the Jamestown Company and one hundred per cent (100%) of the aggregate outstanding shares of capital stock of each of the Electric Power Companies so far as the same are not held by the Warren Company or the Jamestown Company, and the resignations referred to in section (i) of paragraph*2082 5 hereof, have been deposited with the Depositary; and it will pay the balance of the said purchase money at the time of final settlement, which must be within thirty (30) days after the approval by the Public Service Commission of Pennsylvania and by the Public Service Commission of the State of New York of this purchase by Penn Public Service Corporation and/or Venango Public Service Corporation, as provided for in paragraph 6 hereof. The Buyer shall have the right, at its option, at the date of final settlement herein provided for, to pay for the balance due on the purchase of the stock, instead of all cash as hereinbefore provided, Two hundred and thirty-seven thousand Dollars ($237,000) additional cash (making a total of Two hundred and sixty-two thousand Dollars ($262,000.) cash), and the balance in a serial note of Venango Public Service Corporation, endorsed by the Buyer, with all the stock of the Warren Company and the Jamestown Company and the Carroll Electric Light & Power Company purchased hereunder issued in the name of the Venango Public Service Corporation and by it endorsed in blank and deposited as collateral security for the said note, which note shall be dated as*2083 of the date of final settlement and shall provide for payment thereof in four equal instalments, four (4), eight (8), twelve (12) and sixteen (16) months respectively from the date thereof, with interest at six per cent (6%) per annum, which note, in case such option to give it is exercised, shall be deposited in lieu of cash to the *765 principal amount thereof, and which note shall be in the form shown as Exhibit "H" attached hereto. 8. Upon the deposit of the full purchase price as aforesaid, the Depositary shall deliver all of the shares and resignations deposited with it to the Buyer or on its order, and shall hold the purchase price subject to the order of the Seller. 9. In the event that the Buyer claims that any of the conditions of the purchase by the Seller as hereinbefore set forth are not complied with, and asserts the right to rescind therefor, it shall notify the Seller and the Depositary of such claim within ten (10) days after the expiration of the periods (as extended, if extended) mentioned in the last clause of paragraph 5 of this agreement, and in the event that such claim is acquiesced in by the Seller or legally established by the Buyer, the purchase*2084 money theretofore paid by the Buyer shall be returned to it by the Depositary and the shares and resignations deposited with the Depositary shall be held subject to the order of the Seller. 10. In the event that the Seller claims that the Buyer has violated its obligations as to the purchase of the said stock, and asserts the right to rescind therefor, the Seller shall notify the Buyer of such violation within ten (10) days after the expiration of the periods (as extended, if extended) mentioned in the last clause of paragraph 5 of this agreement, and in the event that such claim is acquiesced in by the Buyer or legally estalished by the Seller, then the Depositary shall hold the money, resignations and shares of stock theretofore deposited with it, subject to the order of the Seller. The omitted portions of the contract relate to the condition of the title to the property, any possible claims against the Warren and the Jamestown companies, their financial condition and other such matters of detail. Exhibit H, made a part of the above contract, is as follows: The undersigned, for value received, does hereby promise and agree to pay to the order of HUGH A. SIGGINS, at the*2085 office of H. D. WALBRIDGE & COMPANY, 14 Wall Street, in the City and State of New York, the following sums and amounts: $ four months from date and interest thereon at six per cent (6%) from the date hereof; $ eight months from date and interest thereon at six per cent (6%) from the date hereof; $ twelve months from date and interest thereon at six per cent (6%) from the date hereof; $ sixteen months from date and interest thereon at six per cent (6%) from the date hereof; and has deposited with Hugh A. Siggins as collateral security for the payment of this note and of the several instalments hereof as the same mature, the following property, namely: shares of the capital stock of the Warren Street Railway Company; shares of the capital stock of the Warren & Jamestown Street Railway Company; shares of the capital stock of the Carroll Electric Light & Power Company; all the foregoing shares being represented by certificates issued in the names of the undersigned, duly endorsed in blank; with full power and authority to the said Hugh A. Siggins, or his assigns, in case of default, or non-payment of any of the liabilities above mentioned at maturity, to sell, assign and*2086 deliver the whole or any part of such securities at any Broker's *766 Board or at public or private sale, at his option, at any time or times thereafter, without advertisement or notice to the undersigned, other than ten days notice by registered mail (addressed to the undersigned care of H. D. Walbridge & Company, 14 Wall Street, New York City) stating the time and place of sale, and with the right to the said Hugh A. Siggins to become purchaser thereof at such sale or sales, freed and discharged of any equity of redemption; and, after deducting all legal and other costs and expenses for collection, sale and delivery, to apply the residue of the proceeds of such sale or sales so made to pay any, either or all of said liabilities as said Hugh A. Siggins shall deem proper, returning the overplus to the undersigned, and the said undersigned will remain liable for any amounts so unpaid. It is further agreed, that in the event of failure to pay any instalment of principal or interest herein provided for at the time or times herein provided, and such default shall continue for a period of two (2) days after presentation and demand for payment, all other instalments shall, without*2087 notice, immediately become due and payable, and the said Hugh A. Siggins may proceed as above provided with reference to such collateral, any other provisions hereof notwithstanding. It is further provided, that the said Hugh A. Siggins, as the holder of such collateral, shall, until this note and all instalments hereof are fully paid, have the right to name and designate two members of the Board of Directors of the said Warren and Jamestown Street Railway Company and of the Warren Street Railway Company, and the undersigned agrees to vote such stock for such members so designated at any annual or special meeting of stockholders of said companies. It is further agreed, that so long as this note or any part hereof remains unpaid, the said Warren & Jamestown Street Railway Company and/or the said Warren Street Railway company and/or the said Carroll Electric Light & Power Company shall not sell or dispose of any portion of its assets except in the due course of ordinary operation; not create, issue or guarantee any bonds, notes or other obligations of said companies, other than for the current operating expenses thereof, nor place any mortgage, deed of trust or other lien upon*2088 the assets of the said companies, nor issue any shares of stock having priority over or a parity with the stock so deposited as collateral; nor enter into any contract or obligation for managerial services, power or supplies, or exchange of facilities with any other corporation, which shall not be terminable at the option of such company upon default in the payment of this note or any instalment thereof. It is further agreed, that upon breach of any of the covenants, herein, and such breach shall continue unremedied for a period of ten (10) days after notice to the undersigned, by registered mail, addressed as aforesaid, this note and all instalments hereof shall immediately become due and payable at the election of the holder, any provision hereof to the contrary notwithstanding, and the holder may resort to the collateral in the manner herein provided. It is, however, understood, that at any time subsequent to the payment of the first instalment hereof, it shall not be deemed a violation hereof if the Sheffield Electric Light & Power Company, the Pine Grove Electric Light & Power Company and the Clarendon Electric Light & Power Company, or any of them, shall be merged with*2089 any other company, or their stock thereof disposed of by said Warren Street Railway Company. The instalments of principal and interest of this note are payable at said office of H. D. Walbridge & Company, 14 Wall Street, New York City, upon presentation of this note and endorsement hereof of the payments of the instalments of principal and interest maturing prior to the maturity date of *767 the last instalment, and upon the surrender of this note and the collateral security therefor, hereinabove described, upon the payment of the last maturing instalment of principal and interest. It is further provided, that the maker of this note shall have the right, at any time, to anticipate any or all of the payments herein provided for. VENANGO PUBLIC SERVICE CORPORATION, By President. ATTEST: Secretary. Exhibit B attached to the stipulation is an agreement between the decedent and the several owners of the stock of the Warren and the Jamestown companies. By it the decedent was given the option to purchase such stock within one hundred and eighty days from the date thereof upon the payment of one-fourth of the purchase price at the time the option was exercised*2090 and the remainder in four equal installments payable in four, eight, twelve, and sixteen months from date, bearing interest and recured by the stock sold. This contract contains the following clauses: In furtherance of this agreement the first party shall on the date hereof deposit in escrow with Warren National Bank, of Warren, Pennsylvania, the certificates representing said shares of stock with assignments thereof and powers of attorney to transfer the same duly executed by the first party. * * * In lieu of the said notes of second party he may provide promissory notes in collateral form payable to the order of first party in the same amounts and for the same terms bearing interest as aforesaid of any other person or corpoation secured by the same amount of stock in said Company as collateral, such notes of third party to be delivered to said depositary by the second party upon exercising said option as aforesaid. Exhibit C attached to the stipulation substituted for the paragraph last above quoted the following: Upon exercising said option and taking said stock from said depositary the second party in lieu of depositing his promissory notes for the deferred payments*2091 in the manner above set forth, may deposit with said bank in addition to the cash payments above provided for, a certificate or declaration of trust made by second party in favor of first party showing first party's proportionate beneficial interest in any serial note in collateral form payable in four equal installments in four, eight, twelve and sixteen months from the date thereof secured by the shares of stock above mentioned and additional shares of stock in said Company and shares of stock in other companies which may be given by any third party, individual or corporation, to the second party as part payment for the stock above mentioned and other shares of stock in said company or other companies, such certificate to indicate the beneficial interest of the first party in said serial note to the extent of the aggregate amount of the deferred payments above referred to payable in four, eight, twelve and sixteen months from the date of exercising said option with interest at six per cent per annum on such deferred payments from such date and showing first party's beneficial interest in the collateral with said *768 serial note to the extent of the number of shares in the*2092 above mentioned company constituting the subject of this option, such certificate to be delivered by said bank to said first party. The Warren National Bank acted as depositary under the agreement between the decedent and H. D. Walbridge & Company, Inc., dated November 16, 1923, and also as depositary under the agreements between the decedent and the several stockholders of the Warren and the Jamestown companies. About December 3, 1923, the bank received a check for $25,000 from H. D. Walbridge & Company, Inc. The payment of $237,000 in cash was made to the decedent on April 10, 1924, pursuant to the terms of the agreement of November 16, 1923, and at that time the Venango Public Service Corporation paid the balance due thereunder in the form of its serial note of $525,375. On or about April 10, 1924, the stock of the Warren and the Jamestown companies was transferred to the Venango Public Service Corporation. The note of the Venango Public Service Corporation for $525,375 was endorsed by H. D. Walbridge & Company, Inc., and was secured by 7,495 shares of the Warren Street Railway Company, 1,989 shares of the Warren & Jamestown Street Railway Company, and 20 shares of the*2093 Carroll Electric Light & Power Company. The collateral was retained until June 15, 1925, the date of the final payment of the note and at that time released to the Venango Public Service Corporation. In accordance with the terms of their options given to the decedent (Exhibits B and C), initial payments were made to the several stockholders of the Warren and Jamestown companies on April 10, 1924, with the exception of one small payment of $195.06 made on April 30, 1924. Those payments were in full, a part or one-third of the purchase price named in the option. In those instances in which a balance remained to be paid, such payments were made in August, 1924, (one small one in October, 1924) and in April and June, 1925. The decedent kept his accounts on the cash receipts and disbursements basis and made his income tax returns for the years 1924 and 1925 on that basis. OPINION. VAN FORSSAN: In order to determine whether or not the transaction between the decedent and H. D. Walbridge & Company was an installment sale, as alleged by the petitioner in his first assignment of error, we must look to the contract of November 16, 1923, and also to the acts of the parties performed*2094 thereunder and subsequent thereto. The petitioner claims that the facts of this case bring it within the provisions of section 212(d) of the Revenue Act of 1926, *769 retroactively applied by section 1208 thereof. Section 212(d) is as follows: Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. In the case (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this subdivision. As used in this subdivision the term "initial payments" means the payments received*2095 in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. The relevant portion of article 42, Regulations 65, is as follows: In the case of a casual sale or other casual disposition of personal property for a price exceeding $1,000, income may be returned on the installment basis provided the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale or other disposition is made do not exceed one-fourth of the purchase price. The petitioner asserts that the payment of $25,000 made on December 3, 1923, was the "initial payment," was less than one-fourth of the purchase price, and that the transaction was a "casual sale or other casual disposition of personal property for a price exceeding $1,000." The respondent maintains that the sale of capital stock by the decedent to Walbridge & Company was made in 1924, that the initial payment was $262,000, or approximately one-third of the purchase price, and that the contract of November 16, 1923 (known as Exhibit A), was merely an agreement to sell the stock contingent*2096 upon certain events which occurred in 1924 and which served as a basis for completing the sale and transferring the title to the purchaser or its designee. We believe that the respondent has correctly construed the contract. The decedent, called the seller, undertook to secure for the buyer all of the shares of stock in the Warren and Jamestown companies. He agreed that he would obtain at least 75 per cent of the capital stock of those companies and all of the outstanding shares of capital stock of the four electric power companies, together with the resignations of officers and directors of all such companies within ten days of the date of contract, and deposit them with the depositary. While the dates of the options for the purchase of this stock of the Warren and Jamestown companies are not shown in the record, yet, judging from the subsequent payments made to the stockholders, we may infer that the seller had *770 secured practically all, if not all, of those options prior to November 16, 1923. It is presumed that the resignations were secured in due course as shown by the letter of the seller dated November 30, 1923, and directed to the depositary. We note that*2097 the options provided that the original owners of the stock should deposit it in escrow with the depositary, with the forms of assignment and power of attorney duly executed by the owners. Thus the physical possession of the certificates of stock was assured when and if they should be required to complete the transaction. A careful study of the agreement of November 16, 1923, discloses that it was executed for the purpose of effecting the sale and transfer of the controlling interest in the capital stock of the Warren and Jamestown companies and the electric power companies if, and when, the stock should be secured by the seller and could be legally sold to the purchaser and the resignations of the officers and directors of the several companies duly obtained. Paragraph six of the agreement states that the buyer intended to sell to the Penn Public Service Corporation without variation in price the stock purchased from the seller and "consequently the purchase * * * by the buyer is subject to the approval of the Public Service Commission of Pennsylvania and of the Public , service Commission of the State of New York." Thus the agreement recognizes that the sale was contingent upon*2098 such approval and that it could not be consummated without it. The pertinent statutes relating to the action by the public service commissions are as follows: Acquisition of control of another public service company. - To purchase, acquire, take or hold, either in absolute ownership or in pledge, or as collateral security, directly or indirectly, any controlling right, title, or interest, legal or equitable, in the capital stock, bonds, trust certificates, or other evidences of indebtedness or other securities, issued by, or other controlling right, title, or interest whatsoever in, any other public service company, conducting business within this Commonwealth, without the consent and approval of the commission; but the purchase, taking and holding, aforesaid, of any right, title, or interest in any such capital stock, bonds, trust certificates, or other evidences of indebtedness or other securities, or of any other right, title, or interest in any other public service company, which shall amount to less than the aforesaid controlling right, title, or interest, of any nature or kind, shall be lawful without the approval of the commission, * * *." (Paragraph 18097 of the Pennsylvania*2099 Statute Law 1920.) No railroad corporation, street railroad corporation, or electrical corporation, domestic or foreign, shall hereafter purchase or acquire, take or hold, any part of the capital stock of any railroad corporation or street railroad corporation or other common carrier organized or existing under or by virtue of the laws of this state, unless authorized so to do by the commission empowered by this act to give such consent; and save where stock shall be transferred or held for the purpose of collateral security only with the consent of the commission empowered by this chapter to give such consent, * * *. Every *771 contract, assignment, transfer or agreement for transfer of any stock by or through any person or corporation to any corporation, in violation of any provision of this chapter, shall be void and of no effect, and no such transfer or assignment shall be made upon the books of any such railroad corporation or street railroad corporation, or shall be recognized as effective for any purpose. The power conferred by this section to approve or disapprove a transaction relating to franchises, rights or stock of any railroad corporation or street railroad*2100 corporation, or other common carrier, shall be exercised by the commission which is authorized by this act to approve the issue of stock by such railroad corporation or street railroad corporation. (Chapter 49, paragraph 54, of Cahills Consolidated Laws of New York, 1923.) The dates of approval by the public service commissions are uncertain, but under paragraph seven of the agreement of November 16, 1923, "the final settlement must be within thirty days after such approval." The stock certificates were assigned to the Venango Public Service Corporation on about April 10, 1924, payments, either partial or in full, were made to the stockholders on that date, and the payment of $237,000 was made by the buyer to the seller at that time. Consequently we may accept April 10, 1924, as the date of the "final settlement" which was described in and contemplated by the agreement as completing the sale and transfer of the stock. The $25,000 payment made into the depositary on December 3, 1923, was for the purpose of evidencing the good faith of the buyer. Various provisions were made for the return of that amount if the sale should not be consummated or if some of the provisions of the*2101 agreement could not be carried out by either the seller or the buyer. In the event that both parties could accomplish the purpose of the agreement that amount was to be considered as an advance payment under the contract. It was a portion of the customary "one-third cash" payment. It might also be considered as a "binder," since the agreement of November 1l, 1923, while under seal, is without specific consideration. We also note that under the agreement of November 16, 1923, the sale originally was to be for cash, but that the buyer was given the option to complete the payment by tendering its serial note of the Venango Public Service Corporation endorsed by the buyer and collaterally secured by the certificates of stock of the Warren and Jamestown companies and the Carroll Electric Light & Power Company. The buyer chose to make settlement in that manner. The petitioner relies upon the case of B. P. Bailey et al.,18 B.T.A. 105. In that case Bailey, a member of an insurance agency firm, sold his interest to one Trimble. The agreement was made and the transaction completed in 1921 and Trimble assumed the position and status formerly held by Bailey. *2102 He participated in the management and conduct of the business. In the year 1922 the formal agreement of sale was executed and a supplemental agreement was *772 entered into and certain details of the transfer were accomplished. In that case the liability of the purchaser to pay arose in 1921. In the case at bar it arose in 1924. In the Bailey case there was no provision for the return of that portion of the purchase price paid in 1921. In the case at bar provision was made for the return of $25,000 under certain contingencies. We are of the opinion that the Bailey case does not affect our decision in this proceeding. In view of the fact that the payment of $237,000 made on April 10, 1924, togehter with the advance payment of $25,000, constituted approximately one-third of the total purchase price, it is obvious that section 212(d) above mentioned does not apply and the profit derived from the sale can not be taxed on the installment basis. The second issue relates to the assertion of the petitioner that the transaction constituted a "short sale," in that the decedent entered into a contract to sell something which he did not own. What is commonly known as*2103 a short sale is well described in S.M. 1179, 1 C.B. 60, as follows: A sells to B 100 shares of stock, executing a memorandum of sale. Under the rules of the exchange the shares have to be delivered and paid for the day following. If the sale is a short sale A applies to C, who has such shares on hand, for a "loan" of them. C being willing to lend them, delivers to A a certificate for 100 shares indorsed in blank on A's agreement to redeliver to him an equivalent number of shares on demand on any business day and the deposit with C by A of the market value of the shares as security for their return. That deposit remains until an equal number of shares are returned, subject to increase from day to day if the market value of the stock rises, and to decrease from day to day if the market value of the stock falls. A makes his delivery under his transaction with B by delivering the certificate which he has borrowed from C for that purpose, thereby completing the transaction between A and B. When A desires to return the shares which he has "borrowed," A goes into the market and buys 100 shares for the purpose of delivering them to C. These shares acquired for delivery*2104 to C he delivers to C and receives the amount he has on deposit with C. The transaction under consideration does not possess the characteristics included in the above definition. The decedent had secured options on all the stock which he had agreed to sell to Walbridge & Company. Not only that, he also had taken the precaution to have the certificates of stock placed in the possession of the depositary ready for immediate delivery upon the payment of the price named in the option. There was no necessity for him to "borrow" stock. There remained for him only the right to exercise the option and to obtain the stock for delivery to the buyer. That the decedent was able to and did do that thing is shown by the fact that the options were exercised, payments made and the certificates of stock transferred on April 10, 1924. Furthermore, the decedent paid the original stockholders in cash and his own obligations, thereby releasing the stock for the purpose of transfer to the Venango Public *773 Service Corporation. That company in turn pledged the same stock as collateral security for its note to the seller. The facts in this case, therefore, are not similar to those set*2105 forth in A. F. Osterloh,13 B.T.A. 713, cited by the petitioner in support of its contention. The third allegation of error was disposed of by our decision on the first issue. The petitioner asserts that because of the fact that the decedent's return was made on the cash receipts and disbursements basis the profit on this transaction should be taxed as the stock was paid for by the decedent. We have held that the sale of the stock specified in the agreement of November 16, 1923, was made on April 10, 1924. At that time the decedent paid cash for some of the shares and part cash in consideration of the purchase of other stock. In the stipulation of facts appears this statement: "Decedent paid for said stock under the terms of the contract referred to as petitioner's Exhibit C, and the exact dates of payment are shown by petitioner's Exhibit D." This statement can not be entirely accurate since Exhibit C merely substitutes a new paragraph relating to the method of securing payment of the deferred portions of the purchase money. The other terms of the option remain as set forth in Exhibit B. The facts as stipulated are confined to the payments made on the*2106 options, their amounts and the dates thereof, but we are without information as to whether or not the decedent actually deposited with the depositary a certificate or declaration of trust showing the beneficial interest of the optionor in any note the decedent might receive from the seller. Exhibit C merely gave the decedent the option of depositing such a certificate in lieu of his own promissory notes. We do not know that he exercised that option. On April 10, 1924, the decedent sold to Walbridge & Company the stock described in the agreement of November 16, 1923, for the sum of $787,375. In payment therefor he received $262,000 in cash and the note of the Venango Public Service Corporation in the amount of $525,375, endorsed by Walbridge & Company, bearing interest at 6 per cent, payable in four equal installments of $131,343.75, in four, eight, twelve, and sixteen months, respectively, from date, and further secured by the assignment of 7,495 shares of the Warren company's stock, 1,989 shares of the Jamestown company's stock, and 20 shares of the Carroll Electric Light & Power Company stock as collateral. So far as the record discloses, there was no encumbrance against that*2107 stock. It was properly assigned as collateral and could have been subjected to sale in the event that the note of the Venange Corporation had not been paid. We have no evidence to show that the stock was not worth its sale price. The Venango Corporation note was endorsed by Walbridge & Company, presumed to be a solvent concern, and the unpaid purchase obligation was approximately *774 two-thirds of the ostensible value of the stock. Under these circumstances we are of the opinion that the fair market value of the Venango Corporation note on April 10, 1924, was its full face value. The sale on April 10, 1924, was a closed transaction for cash and its equivalent. The profit accruing from it was realized on that date and should be taxed in the year 1924. What we have just said disposes of the fifth and sixth allegations of error. In view of our decision above, article 39 of Regulations 65 is not applicable and that issue automatically is decided in favor of the respondent. Decision will be entered for the respondent.