*770 1. In computing the 15 percent deduction allowable for charitable contributions, capital gains as well as ordinary income should be included in making the computation. Helvering v. Bliss,293 U.S. 144">293 U.S. 144.
2. Where the broker of a taxpayer was in possession of the taxpayer's shares of stock in a corporation bought at different times and for different prices and the taxpayer notified the broker to sell the last shares purchased, but the broker, in making delivery, delivered other certificates representing in part earlier purchases, and the sale was never repudiated, held, that the broker was the taxpayer's agent and that the shares sold were those actually delivered rather than those which the taxpayer intended to sell and deliver.
*304 The respondent has determined deficiencies in income tax for the years 1929 and 1930 in the respective amounts of $18,178.59 and $5,704.89. The issues are whether the respondent has erred (1) in excluding capital net gains in determining the basis for computing the 15 percent deduction allowable for*771 charitable contributions made *305 in 1929, under section 23(n) of the Revenue Act of 1928, and (2) in determining that certain shares of stock sold in 1929 and 1930 were the stock represented by the certificates actually delivered by the decedent's broker rather than shares which decedent had directed his broker to sell.
FINDINGS OF FACT.
The facts have been stipulated and, in view of the second issue to be decided, it is believed best to set forth the stipulation in full, as follows:
During the year 1929 Uzal H. McCarter, and within his lifetime, made contribution to organizations operated exclusively for religious and charitable purposes, no part of the net income of such organizations inured to the benefit of any private shareholder or individual, in the sum of $61,486.81.
It is stipulated and agreed that if it be finally determined that capital net gains are to be included in the basis in computing the 15% limitation for contribution deduction, then the total contribution deduction allowable to petitioner for the year 1929 shall be $61,486.81, but if it be finally determined that capital net gains are to be excluded from the basis in computing said limitation, *772 then the sum allowable as contribution deduction in this case for the year 1929 shall be computed under Rule 50 of the Board's Rules, and in case such computation and deduction shall result in an increased deficiency, the same may be allowed to respondent.
That Uzal H. McCarter, during his lifetime, carried an account with the brokerage firm of Johnson & Wood, 120 Broadway, New York City.
As at July 29, 1929 said Uzal H. McCarter had 3,000 shares of Public Service Corporation common stock "long" in this account, being the only stock in such account, and his credit balance, in addition, with said brokerage firm as of July 29, 1929 was $476,923.62.
These 3,000 shares of Public Service Corporation common stock were acquired by Uzal H. McCarter in the year 1926 and carried a basis of $29.05 1/2 per share.
August 12, 1929, Uzal H. McCarter in this account purchased an additional 2,000 shares of Public Service Corporation common stock, as follows:
1,000 shares at 110 3/4 per share
1,000 shares at 110 per share
Mr. McCarter's account with Johnson & Wood on August 31, 1929 disclosed Mr. McCarter was then "long" in this account 5,000 shares Public Service Corporation common*773 stock, being the only stock then in the account, and at the same time his credit balance in dollars with the broker amounted to $207,991.01.
On September 4, 1929 Mr. McCarter sold 2,000 shares Public Service Corporation common stock in this account for $247,920.00, resulting in a then credit in his account with said Johnson & Wood of $455,911.01.
It is stipulated and agreed that during the years 1929 and 1930 and for several years prior thereto one, John F. Sheehan, was associated with the decedent, Uzal H. McCarter, as a private secretary; that if the said John F. Sheehan were called and gave testimony as a witness in this case he would testify that Mr. McCarter gave instructions to sell on September 4, 1929 the 2,000 shares of Public Service Corporation common stock which he had purchased August 12, 1929; that said John F. Sheehan verbally, by telephone, instructed the brokers Johnson & Wood to sell such 2,000 shares that were acquired by Mr. McCarter August 12, 1929.
*306 It is further stipulated and agreed that if one or more members of the firm of Johnson & Wood were called as withnesses and gave testimony in this case as to the transaction in question he or they*774 would testify that a verbal order was received from Mr. McCarter through his secretary, Mr. Sheehan, and that to the best of his or their recollection the instruction for the sale of the said 2,000 shares was to be a sale of the 2,000 shares of said Public Service Corporation common stock which had been acquired by Mr. McCarter through said brokers, Johnson & Wood, on August 12, 1929.
It is further stipulated and agreed that the delivery clerk in the said brokerage firm of Johnson & Wood in making delivery of certificates in connection with the sale of the 2,000 shares in question made the following delivery:
1,000 shares were delivered from certificates representing a part of the original 3,000 shares in the account as of July 29, 1929 which carried a basis to Mr. McCarter of 29.05 1/2 per share, and 1,000 shares from certificates representing the shares purchased August 12, 1929.
On September 30, 1929 Uzal H. McCarter still carried 3,000 shares Public Service Corporation common stock long in this account, being the only stock in such account, with a then credit balance (after certain cash withdrawals during the month of September) in said account of $391,776.70.
On October 2, 1929 Uzal*775 H. McCarter in this brokerage account purchased 5,000 shares of Public Service Corporation common stock at $120.00 per share.
On October 28, 1929 Uzal H. McCarter purchased another 5,000 shares of Public Service Corporation common stock at $100.00 per share, resulting, as at the close of October 28th, in a long position 13,000 shares and with a debit balance $710,723.30 due said Johnson & Wood.
There were no further security transactions in this account with Johnson & Wood by Mr. McCarter until April 28, 1930, at which time 10,000 shares of Public Service Corporation common stock were sold at $121.00 per share.
It is further stipulated and agreed that if called as a witness in this case the said John F. Sheehan would testify that the taxpayer Mr. McCarter gave instructions for the sale on April 28, 1930 of the 10,000 shares of Public Service Corporation common stock which had been purchased by him on October 2 and October 28, 1929; and that he the said John F. Sheehan, verbally, by telephone, transmitted instructions to the brokerage firm of Johnson & Wood to sell the said 10,000 shares of Public Service Corporation common stock which had been acquired by Mr. McCarter through*776 said firm on October 2 and October 28, 1929.
It is further stipulated that if one or more of the members of said firm of Johnson & Wood were called as witnesses and gave testimony in this case he or they would testify that to the best of his or their recollection the instructions received by them were that they should sell the 10,000 shares which had been acquired by Mr. McCarter on October 2 and October 28, 1929.
It is further stipulated and agreed that the delivery clerk of Johnson & Wood in making delivery of certificates for the said sale of 10,000 shares of Public Service Corporation common stock delivered the following certificates:
400 shares out of the August 12, 1929 purchase,
8,800 shares out of the 10,000 bloc bought, in October 1929,
800 shares from other certificaates not identifiable.
It is further stipulated and agreed that at the time of the sale on April 28, 1930 of 10,000 shares of Public Service Corporation common stock none of the certificates representing shares of stock held in said account stood in the name of Uzal H. McCarter and some of the certificates representing shares of stock held in said account had been loaned by the firm of Johnson & *777 Wood and their identity lost.
*307 It is further stipulated and agreed that the certificates representing the 3,000 shares of Public Service Corporation common stock acquired in 1926, the 2,000 shares acquired August 12, 1929, and the 10,000 shares acquired October 1929 were carried in the name of Johnson & Wood or some name other than Uzal H. McCarter; and that during the years 1926 up to and including April 28, 1930 ,1zal H. McCarter was a director of Public Service Corporation of New Jersey.
In his determination of the deficiencies the Commissioner has treated the stock sold as being identifiable and has determined that the gain or loss should be computed on the basis of the certificates of stock actually delivered rather than from the standpoint of what the taxpayer intended to sell and deliver. On this point the Commissioner said in the statement attached to the deficiency notice:
The action taken by the agent relative to the profit realized on sale of public service stock had been sustained. Inasmuch as the stock sold was identifiable, and the deceased was not operating a margin account, the profit on sale thereof has been determined on the basis of the stock*778 actually sold instead of from the standpoint of what the broker was ordered to sell.
OPINION.
BLACK: Under the decision of the Supreme Court in , the petitioner is entitled to include the capital gains of the decedent in his income for the purpose of computing the 15 percent deduction, under section 23(n) of the Revenue Act of 1928. This should be done in a redetermination of the deficiency under Rule 50.
We will next take up and decide the second issue. On September 4, 1919, the decedent, through his brokers, Johnson & Wood, sold 2,000 shares of Public Service Corporation common stock and on April 28, 1930, he sold through these same brokers 10,000 shares of the same stock. In both cases the brokers had been instructed by the decedent to sell from the later purchases and in both cases in making delivery they partially violated these instructions. The issue is whether the intention of the decedent or the actual deliveries control.
The instant case was submitted and briefs were filed prior to the decision of the Supreme Court in *779 , but, by permission granted, petitioner has filed a supplemental brief and cites the Supreme Court's decision in the Rankin case and urges it as supporting his contention.
In determining the meaning of the Court's decision in the Rankin case and what application it has to the question we have here to determine, we think it is important to bear in mind that Turner, the purchaser and seller of stocks in that case, was dealing entirely on margins. At the outset of its opinion the Court said: "When gain *308 or loss is to be determined on the sale of stock outright as an investment, the identification of the shares sold with those purchased ordinarily presents no difficulty. But when the taxpayer has engaged in marginal transactions on a stock exchange, the identification of sales and purchases is frequently impossible." Again, the Court pointed out in a later paragraph that: "In none of these transactions did the broker deliver to Turner, or Turner to the broker, any stock certificate. No specific certificate of stock was ever bought or sold by the broker for Turner; and none was ever earmarked or allocated to*780 him. The purchases and sales affecting his account were made through the medium of street certificates handled by the broker; and the transactions were evidenced solely by debits and credits to his account on the broker's books."
In the instant case the facts are different in certain material respects from those above quoted. It is not contended here that petitioner's decedent was buying and selling stocks on margin. While the stocks of Public Service Corporation which McCarter carried in his account with the brokerage firm of Johnson & Wood were not issued in his name, they had been earmarked or allocated to him in such a way that the certificates were capable of identification. For example, as to the sale of 2,000 shares which the decedent made on September 4, 1929, it is stipulated that: "the delivery clerk in the said brokerage firm of Johnson & Wood in making delivery of certificates in connection with the sale of the 2,000 shares in question, made the following delivery: 1,000 shares were delivered from certificates representing a part of the original 3,000 shares in the account as of July 29, 1929, which carried a basis to Mr. McCarter of $29.05 1/2 per share and 1,000*781 shares from certificates representing the shares purchased August 12, 1929." A similar stipulation is made as to the 10,000 shares which McCarter sold on April 28, 1930, except it is stipulated that of the 10,000 shares delivered in consummating the sales, 800 shares were not identifiable.
We think these stipulate facts make the instant case distinguishable from the Rankin case, where all the purchases and sales were made on margin. We think that the substance of the Court's opinion in the Rankin case was to hold that, while in margin transactions it is impossible to earmark or allocate any particular shares purchased or sold so as to make the shares of stock identifiable by certificates, nevertheless identification by certificates is not the only means of identification and identification may be made by lots in accordance with the dates purchased, and thatWhere the evidence clearly shows that the owner of stock by purchases or margin gives his broker instructions to sell a particular lot purchased on a given date and at a particular price, he is exercising his right of selection of what property he desires to sell and his right must be recognized and the *309 profit*782 or loss computed on the sale thus made, and that in such a case the so-called first in, first out rule is not applicable.
The Commissioner in the instant case does not seek to apply the first in, first out rule except perhaps as to 800 shares of the 10,000 shares sold April 28, 1930. Of this particular lot of shares sold, it has been stipulated that 800 shares were not identifiable. Presumably as to these 800 shares the Commissioner has used the first in, first out rule, although the stipulation does not enlighten us on that point. As to the remainder of the shares sold, the Commissioner contends that they were identifiable and as a matter of fact the stipulation which has been filed does identify them.
It is true that McCarter did give his broker specific instructions as to what particular lots of stock he should sell for him, and if he had been dealing in stocks on margin, it would seem that this would be sufficient identification according to the rule laid down by the Supreme Court in the Rankin case. But he was not dealing on margin and the parties have stipulated what shares were actually delivered in completion of the sale except 800 shares not identifiable.
*783 In several Board and court cases it has been decided that the vendor's intention to sell certain shares of stock is not determinative where other shares were actually delivered. ; affd., ; certiorari denied, ; , affirming ; ; ; ; , affirming ; . In , this rule was applied to the following state of facts. An executive and finance committee of the board of directors of the insurance company controlled its investments and sales. This was done through the investment department of Corroon & Reynolds, Inc., which managed the company's investment business. The executive committee notified*784 Corroon & Reynolds, Inc., to sell certain stock by marking on a card the stock to be sold. The stock was deposited in a trust company. Corroon & Reynolds, Inc., did not notify the broker as to what stock was to be sold and the trust company made delivery of stock other than that which the executive committee desired to be sold. In deciding that case the court said:
The taxpayer computed its income tax as though it had sold, in each instance, the stock last acquired. The Commissioner held that the stock sold was that represented by the certificates actually delivered rather than the stock which the taxpayer intended to sell, and therefore assessed a deficiency. The Board of Tax Appeals found as a fact that the taxpayer intended to sell the later acquired stock, and sustained the taxpayer's contention that the loss or gain *310 on the sales should have been computed by deducting the cost of the stock, identified by the crossmarks on the director's cards, from the sum which it obtained by the sales of the stock. It thus disregarded the cost of the stock represented by the certificates delivered, and submitted the cost of the stock represented by other certificates, which*785 the taxpayer intended to sell but which were not in fact sold.
We think the test should be that applied by the Board of Tax Appeals in , affirmed by this court on July 26, 1934, ; i.e., what was actually done rather than what was intended to be done. Whatever the intention may have been, the stock actually sold was that first acquired. We think the Board of Tax Appeals erred in giving effect to the intention rather than the fact.
The above case differs from this proceeding in one particular and that is that while the insurance company was careful to notify their subagents, Corroon & Reynolds, Inc., what they desired to be sold, Corroon & Reynolds, Inc., did not so inform the broker. We do not see that this makes any material difference in that in both cases the broker did precisely the same thing, sold stock generally. Besides, in this proceeding Johnson & Wood were the agents of the decedent. Their acts were his acts unless repudiated, which is not the case here. To put it differently, we see no difference between the taxpayer making a mental decision as to what he wished to be sold and*786 confiding that intention to his agent.
It has been argued that a certificate of stock is but an evidence of the shares represented by it, and that under certain circumstances the shares may travel in one direction and the certificate in another. But here, on September 29, 1929, the decedent owned all the shares on deposit with Johnson & Wood and he was entitled to the certificates whenever he demanded them. These certificates represented certain shares of stock, and the delivery of the certificates transferred title to the shares which they represented. Indeed, this is the usual and ordinary way of transferring title to shares of stock. When the certificates were delivered, it mattered not whether in compliance with the directions of the decedent or not, they carried with them the title to the shares which they represented and vested that title in the purchaser. The deliveries, as made, have never been repudiated. Under these circumstances we are of opinion that, since the decedent, through his agent, transferred title to the shares represented by the certificates, it is too late now for him to claim that the title to the shares represented by other certificates passed to*787 the purchaser. Cf. .
Reviewed by the Board.
Decision will be entered under Rule 50.
STERNHAGEN, ARUNDELL, and MATTHEWS dissent on the second point.