*1013 The petitioners specialized in odd lots of a group of stocks traded in on the New York Curb Exchange and also executed, in a limited way, orders received from other brokers for round lots of the same stocks. Held, that the petitioners are not dealers in securities within the meaning of article 105 of Regulations 74.
*1188 These proceedings were consolidated for hearing and report and involve redetermination of the following deficiencies in income taxes:
| Petitioner | Docket No. | Year | Deficiency |
| Frederic H. Brendle | 56394 | 1928 | $7,305.75 |
| Do | 66822 | 1929 | 34,264.96 |
| Nathan Benjamin | 56395 | 1928 | 7,671.33 |
| Do | 66821 | 1929 | 18,137.12 |
| Henry C. Hagen | 56396 | 1928 | 4,360.92 |
| Do | 66824 | 1929 | 8,437.84 |
| F. Sherman Chipman | 56397 | 1928 | 12,968.07 |
| Do | 66823 | 1929 | 42,640.14 |
*1189 The issue is whether the petitioners are entitled to inventory securities for the purpose of determining taxable income.
FINDINGS OF FACT.
The petitioners are members of the*1014 New York Curb Exchange. During the taxable years they operated as specialists in odd lots of certain undisclosed stocks assigned to them by the governing committed of the exchange. The transactions of each petitioner were for their joint account. They had no other business. Trading units of less than 100 shares, and 100 shares and multiples thereof, are known on the exchange as "odd lots" and "round lots", respectively.
The petitioners were allotted posts on the floor of the exchange, where they were stationed from 10 a.m. to 3 p.m. on business days for the purpose of buying and selling, exclusively at such posts, the securities in which they specialized. The stocks in which the petitioners specialized could not be traded in on the floor of the exchange at any post other than the ones to which they were assigned.
The rules of the exchange required the petitioners to maintain a market for the stocks in which they specialized and to accept all offers and bids received by them for odd lots of such stock at a price of from 12 1/2 cents to 25 cents per share, generally the latter, less (if they bought) or more (if they sold) than the selling price for the next sale of a round*1015 lot. They were compelled to sell on such terms, even though they did not have any stock on hand, and could decline to deal at any other prices. The petitioners did not always have their specialties on hand and at times were short. They were forced into short positions when buying was abnormal. Whenever the petitioners could anticipate such a condition they would buy in round lots in order to have stock on hand.
The petitioners dealt only on the floor of the exchange with brokers who were members of the exchange. They did not have accounts with any other than such brokers. They did not receive or pay commissions in connection with their dealings in odd lots of stock. From 75 percent to 80 percent of the business they transacted was in odd lots of stock. On busy days each petitioner made from 400 to 800 transactions.
As the petitioners bought or sold stock in which they specialized they recorded it in duplicate. When an order sheet was filled out the petitioners would send it to a clearing agent, employed by them, to receive or deliver the stock, as the case may be, and make whatever collections or payments were necessary for the account of the petitioners. For this service*1016 the petitioners paid the clearing agent one amount for each transaction. From the records made by the petitioners as they bought or sold stock and reports rendered by the *1190 clearing agent every business day morning by ten o'clock the petitioners were able to determine their position as to each kind of stock in which they specialized. At the close of each month the clearing agent gave the petitioners a transcript of his ledger showing in detail transactions during the month. These were retained by the petitioners as a permanent record. They kept no other books of account.
In 1929 each petitioner received commissions amounting to $6,000 from other brokers on the exchange for buying and selling round lots of stock in which they specialized when the price reached a certain point on the market. The petitioners were compelled to accept such orders, and were held liable if they did not execute the orders when the stock reached the fixed price.
Except for the use of inventories in the amended returns which petitioners Benjamin and Hagen filed for 1929, none of the petitioners employed the inventory method of computing and reporting income. The securities on hand at the*1017 close of 1928 were inventoried by petitioners Benjamin and Hagen on the basis of market value.
OPINION.
SEAWELL: Section 22(c) of the Revenue Act of 1928 provides:
(c) Inventories. - Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.
Pursuant to this legislative grant of authority the Commissioneer, with the approval of the Secretary of the Treasury, promulgated the following respecting the use of inventories by dealers in securities:
A dealer in securities, who in his books of account regularly inventories unsold securities on hand either -
(a) At cost;
(b) At cost or market, whichever is lower; or
(c) At market value, may make his return upon the basis upon which his accounts are kept; provided that a description of the method employed shall be included in or attached to the return, that all the securities*1018 must be inventoried by the same method, and that such method must be adhered to in subsequent years, unless another be authorized by the Commissioner. For the purpose of this rule a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. * * * [Art. 105, Regulations 74.]
The question presented for decision is the narrow one of whether the petitioners were dealers in securities within the meaning of the *1191 quoted regulations. The burden of proof is on the petitioners, wich, as we said in , and reiterated in , is "undoubtedly heavier than that of overthrowing a purely factual determination upon which the ultimate determination must stand."
The petitioners, operating as brokers on the floor of the exchange, dealt in odd lots of an undisclosed number and kind of stocks, and bought*1019 and sold their specialties in round lots for other members of the exchange when the market quotation reached the bid or asking price specified in the order. The income derived by the petitioners form their services was not computed the same way in each of the capacities in which they did business. Due to this fact and other results produced by each class of dealing, the branches of the petitioner's business will be considered separately.
As odd lot dealers the petitioners were compelled to deal, and always dealt, at a figure from one eighth to one quarter of a point under or above the price fixed by the next sale of a round lot, depending upon whether they were buying or selling. This differential constituted the petitioners' commission for handling or other charge for executing orders received from other brokers on the floor of the exchange. It was the same irrespective of the quotation for the stock being dealt in. To what extent the petitioners were able to match orders each day does not appear. They were compelled by the rules of the exchange to maintain a market, which requirement forced them into short and long positions at times, how often and to what extent as to each*1020 kind of stock they specialized in, the record does not disclose. If they anticipated a buying marker or a rise in the market, they would buy in round lots to meet the expected demand. The record is silent as to how frequently such buying was done and nothing is contrary to the fact that the petitioners generally relied upon their ability to match orders. The purchase of round lots in expectation of a rise in the market, as distinguished from a purchase to create a stock of securities to take care of future buying orders in excess of selling orders, is not within the activities of a dealer. See
We think these facts demonstrate the difference between the petitioners and a dealer or merchant in securities. A merchant is under no compulsion to buy or sell his wares at any fixed price, irrespective of market conditions, or limit his dealings to certain individuals. Neither does the ordinary merchant have a monopoly in all of the commodities in which he deals. He can advertise and take other measures to promote sales. Such was not the case with the petitioners. They merely remained at one place and took such orders as the market produced without*1021 effort on their part.
*1192 The other branch of the business of the petitioners was, according to the proof, limited to the purchase and sale, for other members of the exchange, of round lots of the stocks in which they specialized in odd lots, when the market advanced or declined to the figure fixed by the order received for execution. For this service the petitioners were paid 40 percent of the commission received by the broker placing the order. Obviously such methods of earning income did not require the purchase of stock for resale, or involve sales from stocks on hand. There was never any occasion for the petitioners to buy or sell for their own account for any purpose.
We are of the opinion, and so hold, that the petitioners have failed to establish error on the part of the respondent in refusing to classify them as dealers in securities within the meaning of the regulations. See , and , in which the same conclusion was reached respecting specialists in stocks listed on the New York Stock Exchange.
Reviewed by the Board.
Decision will be entered under Rule 50.
MCMAHON*1022 dissents.