Brochon v. Commissioner

W. E. BROCHON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Brochon v. Commissioner Docket No. 61455. United States Board of Tax Appeals 30 B.T.A. 404; 1934 BTA LEXIS 1332; April 17, 1934, Promulgated *1332 1. Where certain stock purchased on margin by the petitioner was sold in 1929 through his broker, and at the same time a like amount of the same stock was, upon order of petitioner, purchased on margin through the same broker in the name of petitioner's wife; and, the wife having no account with such broker and no funds of her own, the petitioner was required to guarantee her account; and, upon the sale of such stock in 1930, the resultant loss was charged to petitioner's account, held, under all the circumstances, such transaction did not constitute a bona fide sale in 1929 resulting in a deductible loss to petitioner. 2. Held, further, deductions to which either husband or wife filing a joint return is entitled may be made from aggregate income. L. A. Luce, Esq., for the petitioner. Isadore Graff, Esq., for the respondent. MCMAHON *404 This is a proceeding for the redetermination of an asserted deficiency in income tax for the year 1929 in the amount of $849.89. It is alleged in the petition that the respondent erred in disallowing a loss of $12,158.50 suffered by the petitioner during the year 1929 on the sale of 300 shares*1333 of Chicago Corporation stock and in determining that such sale was not a bona fide sale. FINDINGS OF FACT. The petitioner is an individual, residing in Evanston, Illinois. He is general manager of the Central States Freight Service. During the year 1929 he was general eastern manager of the Universal Transcontinental Freight Service. During the years 1928 and 1929 the petitioner carried on marginal trading in stock on the market through brokers. Most of these transactions were made through Morrison & Townsend, but some were made through Eastman & Dillon. On September 10, 1929, the petitioner purchased on margin through Morrison & Townsend 200 shares of stock of the Chicago Corporation at a cost of $11,035. On September 27, 1929, he purchased on margin through the same firm another 100 shares of the same stock at a cost of $5,017.50, or an aggregate purchase price of $16,052.50. At the end of December 1929 the petitioner by telephone directed Morrison & Townsend to sell these 300 shares of stock of the Chicago Corporation. He received under date of December 27, 1929, form Morrison & Townsend a statement in the form of confirmation and notice of sale of such shares*1334 at 13 1/8, or a total of $3,937.50, less *405 $37.50 commission and $6 Federal and state tax, leaving the amount of $3,894 to be credited to his account with the firm. This credit of $3,894 appears, under date of December 30, 1929, on the December 31, 1929, statement of the account of the petitioner with Morrison & Townsend. At the same time the petitioner by telephone directed Morrison & Townsend to sell the above mentioned 300 shares of Chicago Corporation stock, he placed an order with the broker in the name of his wife, Pearl Brochon, for the purchase of 300 shares of the same stock. The statement dated December 31, 1929, showing the account of Pearl Brochon with Morrison & Townsend discloses that her account was charged, under date of December 30, 1929, with the purchase of 300 shares of Chicago Corporation stock at 13 1/8, and under date of December 31, 1929, for "Int & Com" in the amount of 77 cents. The petitioner's wife had no immediate means of her own and therefore the petitioner was required to guarantee her account with Morrison & Townsend. This transaction represents the only stock purchase transaction of petitioner's wife since their marriage. In November*1335 1930 these 300 shares were sold through Morrison & Townsend at 5 1/8, or a total of $1,537.50, less commission of $22.50 and tax of $6, leaving a net debit item of $1,509. The loss, or the difference between the amount charged to her account in December 1929 and the debit item of $1,509, was charged to the account of the petitioner with the broker. In the joint income tax return for the year 1929 of the petitioner and his wife, the petitioner deducted the amount of $12,158.50 as representing a loss as of December 29, 1929, on the sale of 300 shares of Chicago Corporation stock. This deduction the respondent disallowed and in explanation of such disallowance stated in the statement attached to the notice of deficiency mailed to the petitioner as follows: The loss of $12,158.50 claimed on sale of three hundred shares of Chicago Corporation stock has been disallowed, inasmuch as this office holds that the transaction by which you disposed of such stock did not constitute a bona fide sale, in view of the fact that your wife, with whom you filed a joint return, acquired three hundred shares of the same stock at the same price and at practically the same time at which your stock was*1336 sold. See I.T. 1997, Cumulative Bulletin III-1, page 149. OPINION. MCMAHON: The respondent contends that where husband and wife file a joint income tax return they thereby constitute a single taxpayer; that purchases and sales of securities by husband and wife are to be treated as though made by one individual; and that therefore under the provisions of section 118 of the Revenue Act of 1928 *406 a loss from the sale of securities by the husband may not be deducted if within 30 days after such sale the wife acquired substantially identical property, citing I.T. 1997, C.B. III-1, p. 149. As conceded on brief by the respondent, the Board has held to the contrary in Frank B. Gummey,26 B.T.A. 894. To the same effect is Joseph E. Uihlein,30 B.T.A. 399. Upon authority of these cases we are unable to agree with the above contention of the respondent. The respondent further contends that the alleged purchase of the 300 shares of Chicago Corporation stock at the end of December 1929 was actually made by the petitioner and that, therefore, the sale of the same number of shares of the same stock by the petitioner was not a bona fide sale. *1337 The petitioner contends that he actually sold the stock as disclosed by the statements of the brokerage firm and the confirmation of sale; that the sale by the broker was an arm's length transaction upon which he paid both commission and taxes, his account being credited with the amount of $3,894, the net proceeds of such sale; that the statement of the account of Pearl Brochon, his wife, shows that she purchased the stock for $3,975.77, and thus paid on the open market $38.27 more than the petitioner received "gross" in parting with his stock; that she paid considerably more than he received net, after the broker had deducted commission and taxes; that petitioner's wife held the stock for almost a year, until November 1930, before she parted with the same at a loss; and that the respondent offered no testimony whatever to contradict either the clear evidence of the statements of the brokerage firm or the testimony of the petitioner. The petitioner testified that he was prompted in making this transaction in part by a desire to establish a tax loss and in part by the fact that there was a substantial drop in the market and that he did not like the way the stock was acting; that*1338 when he decided to dispose of the 300 shares of Chicago Corporation stock he discussed the matter with his wife; that his wife questioned his judgment in selling the stock, as she thought the stock would go up; that she wanted to buy the stock; that he placed the order to buy the stock for his wife with Morrison & Townsend by telephone; that his wife had no funds of her own; that for that reason some one had to guarantee her account with the broker and he decided that he would rather guarantee it than ask her father or her aunt to do it; that the stock was sold in November 1930 at a loss and such loss was charged to his account because he had guaranteed the account of his wife; and that this was the only stock transaction in which his wife was ever involved as far as he knew. In substance, so far as the purported purchase of stock on margin by the wife is concerned, it was no more than a paper transaction *407 appearing only on the records of the broker. She had no funds and no credit to pledge. She assumed no financial responsibility. Cf. *1339 Benjamin T. Burton,28 B.T.A. 1242. While the stock was charged to her account, when the stock was sold in 1930 the loss reflected in her account was closed into petitioner's account. Apparently the petitioner was deemed primarily liable to the broker. The statement of Morrison & Townsend of the account of the petitioner discloses that the 300 shares were sold at 13 1/8, or a total of $3,937.50. From this item the amount of $37.50 representing commission and the amount of $6 representing Federal and state tax were deducted, leaving a net credit to petitioner's account of $3,894. The statement of Morrison & Townsend of the account of petitioner's wife discloses that the 300 shares were purchased at the same price of 13 1/8. However, there is an apparent error in the extension of the total, which is $3,975, or $37.50 more than $3,937.50, which is the correct amount. Since the statement of the petitioner shows that he was charged a commission of $37.50 on the sale of 300 shares of stock at 13 1/8, it may reasonably be assumed that this item of $37.50 included in the extension on his wife's statement also represents broker's commission. Assuming this to be true, *1340 the only difference in the two transactions as shown by such statements is that the petitioner was charged with a tax of $6, whereas the account of petitioner's wife was charged with an item of 77 cents designated on her statement as the "Int & Com". The purported sale price and purchase price were the same, i.e., 13 1/8. The case of Cole v. Helburn,4 Fed.Supp. 230, cited by the petitioner, is distinguishable from the instant proceeding. In that case the defendant, a collector of internal revenue, made no contention that the sale of stock by the taxpayer was not a bona fide sale, and conceded that the stock was actually sold by the plaintiff and that the same stock was actually bought by plaintiff's son. However, the collector contended that the transaction was within section 118 of the Revenue Act of 1928. The court held that, since the defendant had conceded that the father had actually sold the stock and that the son had actually bought the same, and since the father did not acquire title to his son's stock until long after the expiration of 30 days following the sale of his own stock, section 118 had no application and plaintiff was entitled in his*1341 1929 income tax return to deduct the loss sustained by him in the sale of his radio stock. Under all the circumstances we are of the opinion that the transactions herein did not constitute an actual sale of the stock by the petitioner, but one in form merely, and that therefore the claimed loss is not deductible. Mrs. Niels (Mellie) Esperson, Executrix,13 B.T.A. 596; affd., Esperson v. Commissioner, 49 Fed.(2d) 259; *408 certiorari denied, 284 U.S. 658. See Lulu Tirrill Coombs,30 B.T.A. 35; and Joseph Blumenthal,30 B.T.A. 125. Cf. Joseph E. Uihlein, supra. However, even if the sale by the petitioner were assumed to be an actual sale, we could not regard the purported purchase by the wife as other than a purchase by the petitioner, since she had no funds or credit of her own and he at the outset ordered the same number of shares bought in her name and assumed financial liability therefor and later, in 1930, the loss reflected in the account of his wife was charged to his account. Consequently, under such an assumption and all the other facts and circumstances, the petitioner*1342 having purchased within 30 days after the sale by himself the same number of shares of the same stock sold by him, no deduction on such sale by him could be allowed under section 118, Revenue Act of 1928. Reviewed by the Board. Decision will be entered for the respondent.