Vawter v. Commissioner

GEORGE VAWTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Vawter v. Commissioner Docket No. 74876. United States Board of Tax Appeals 31 B.T.A. 884; 1934 BTA LEXIS 1018; December 14, 1934, Promulgated *1018 The first in, first out rule is properly applicable to the sale by a taxpayer of shares, despite his intention to sell those last acquired, where by reason of his recent acquisition of a stock dividend and his retention of the certificate of the most recently purchased shares, the shares sold can not be identified. Walter A. Bolinger, Esq., for the petitioner. Carroll Walker, Esq., and Francis S. Gettle, Esq., for the respondent. STERNHAGEN *884 The Commissioner determined a deficiency of $2,875.58 in petitioner's income tax for 1930. He disallowed a deduction for alleged loss from the sale of stock, and instead he determined a gain by using the first in, first out rule of Regulations 74, article 58. FINDINGS OF FACT. Petitioner was an employee of the Burroughs Co., and at the beginning of 1929 he owned 500 shares of its stock, which he had from time to time acquired for investment. In May 1929 he learned of a forthcoming stock dividend, and, believing this would boost the price, bought 100 shares for speculation at a cost of $30,540, intending to keep them separate from his earlier investment and make a quick *885 sale of*1019 them at a profit. This purchase was financed by a bank loan, to secure which petitioner deposited as collateral certificates Nos. A-1047 and A-3909 for 100 shares each of his investment stock. On June 13, 1929, he received certificate No. A-5720 for 100 shares "representing the speculative purchase", and put it away separately in an envelope marked "* * * for speculation 100 shares of Burroughs May 1929." On August 1, 1929, he received as a 400 percent stock dividend 24 certificates for 100 shares each, Nos. A-14637 to A-14660, inclusive. He took certificate No. A-5720 from the separate envelope and substituted five certificates, Nos. A-14638 to A-14642, which he had taken at random from the 24 stock dividend certificates. These five certificates he continued to keep in the separate envelope, upon which he wrote, "500 shares Burroughs stock dividend for quick profit out of above purchase." In 1930 he sold 500 shares for $25,642.50 and delivered these 5 certificates, Nos. A-14638 to A-14642, intending thereby to close out his separate speculative venture. OPINION. STERNHAGEN: The petitioner, on his return, took a deduction for a loss amounting to the difference ($4,897.50) *1020 between the cost ($30,540) of the 100 shares bought in 1929 and the sale price ($25,642.50) of the 500 shares sold in 1930, treating the shares purchased and those sold as identical. The respondent disallowed the deduction, and instead determined a profit under the first in, first out rule. He held, as shown by his notice of deficiency, that identification of the dividend shares which petitioner received was not feasible, that the allowcation of dividend certificates to certain existing shares was arbitrary, and hence that the stock sold must be presumed to be part of that received as a dividend upon his earliest purchased stock. The stipulation of the parties provides that, if the first in, first out rule applies, the deficiency is correct, and that if the sale is to be treated as of the shares bought in 1929, the petitioner's return is correct. The first in, first out rule, its validity and applicability, have been repeatedly considered. Towne v. McElligott,274 Fed. 960; Howbert v. Penrose, 38 Fed.(2d) 577; *1021 Skinner v. Eaton, 45 Fed.(2d) 568; Snyder v. Commissioner, 54 Fed.(2d) 57; Horner v. Commissioner, 72 Fed.(2d) 407; Commissioner v. Merchants' & Manufacturers' Fire Insurance Co., 72 Fed.(2d) 408; Snyder v. Commissioner, 73 Fed.(2d) 5; William W. Miller,31 B.T.A. 192; Courtenay D. Allington,31 B.T.A. 421. By its terms, it seems to assume that shares of stock of one class in a corporation owned by a single person through different purchases at different times are susceptible of *886 identification by lots. What may be the means of such identification is not set forth in the regulation and we are not informed as to the means which the Commissioner uses. It is generally when the Commissioner refuses to recognize the identification urged by the taxpayer and determines that the shares can not be identified as those bought at a certain time or price and requires the use of the first in, first out rule that the question comes to the Board or the courts. Then it is that the taxpayer must overcome the determination by affirmatively establishing*1022 the identity of the shares sold. Skinner v. Eaton, supra;Courtenay D. Allington, supra. The rule is one of administrative convenience and necessity, the purposes of which are uniformity of taxation, certainty of determination, and simplicity of computation. Broadly speaking, shares of the same class are fungible, each representing a proportionate interest in the whole and each new acquisition being absorbed into the expanding interest of the shareholder. Richardson v. Shaw,209 U.S. 365; Duel v. Hollins,241 U.S. 523; Howbert v. Penrose, supra; Snyder v. Commissioner, supra; Burdett Stryker,21 B.T.A. 561. In this sense shares defy identification. To what extent the administrative practice departs from this concept or upon what theory the concept is modified so as to recognize an identification is difficult to learn from the cases which have been litigated. But this case presents no reason for overthrowing the Commissioner's determination. Intention alone, it has frequently been held, is not a criterion, *1023 Skinner v. Eaton, supra;Courtenay D. Allington, supra; nor is the taxpayer's mere mental or verbal labeling of the shares sold. The claimed identification must at least be consistent with his actual performance, Horner v. Commissioner, supra;Commissioner v. Merchants' & Manufacturers' Fire Insurance Co., supra;Rankin v. Commissioner, 73 Fed.(2d) 6. Here the petitioner unquestionably intended to sell his newest shares and close out his speculative venture, but his performance was different from his intent. Not only did he receive a stock dividend applicable indiscriminately to all his shares, thus by the terms of the rule precluding identification, Towne v. McElligott, supra;Skinner v. Eaton, supra, but moreover he himself mixed up his certificates and kept the very one (A-5720) which represented the shares he last bought. Thus he makes it impossible for anyone to identify any of the shares sold as those last acquired. Cf. *1024 Rankin v. Commissioner, supra.The first in, first out rule is clearly applicable, and the respondent's determination must therefore be upheld. Judgment will be entered for the respondent.