*1382 Where petitioner offered through a securities auctioneer to dispose of certain stock, which on December 26, 1929, was bid for and procured by a partnership of which her husband was a member holding a third interest therein, and immediately thereafter the amount paid by the partnership to the auctioneer as purchase price for the stock, less commissions, was deposited by the petitioner to her account with the partnership, and on March 7, 1930, petitioner procured back the same number of shares of such stock from this partnership, held, the transaction did not constitute a bona fide sale resulting in a deductible loss to petitioner, without proof, lacking here, of a mutual intention to transfer absolute ownership without any condition for its later return.
*35 This is a proceeding for the redetermination of an asserted deficiency in income tax for the year 1929 in the amount of $13,227.12.
It is alleged in the petition that the Commissioner erred in failing to allow the amount of $82,089.73 as a deduction representing*1383 a loss claimed to have resulted from the sale of certain shares of stock.
FINDINGS OF FACT.
The petitioner is an individual. During the year 1929 petitioner's husband, James B. Coombs, was a partner of the partnership of L. W. & P. Armstrong, hereinafter referred to as the partnership. The members of and their respective interests in the partnership in 1929 were as follows:
| James B. Coombs | 33 1/3% |
| Frederick S. Armstrong | 33 1/3% |
| John B. Warnock | 8 1/3% |
| James H. Smith | 8 1/3% |
| Theodore Mutter | 8 1/3% |
| John Bass | 8 1/3% |
These members are not related to each other.
The partnership is engaged in business as commission merchants, specializing in sugar.
On or about December 26, 1929, the partnership acquired 1,572 shares of the stock of Fajardo Sugar Co. and 45 shares of stock of the National City Bank through Adrian H. Muller & Son, auctioneers of securities. This stock had been advertised for sale. The partnership made a bid for the stock. Under date of December 30, 1929, the partnership issued its check payable to Adrian H. Muller & Son, signed by John Bass and John B. Warnock, in the amount *36 of $103,815, representing the market price of*1384 the stock on or about December 26, 1929. This stock was the stock of the petitioner. It was delivered to the partnership by the auctioneer in exchange for the above check and was transferred in the name of the partnership. The partnership held the stock until March 7, 1930, at which date it was reacquired by the petitioner as evidenced by "Sales Memorandum" from the partnership to the petitioner, in part as follows:
| WE HAVE THIS DAY SOLD TO YOU - | |
| 1572 shares Fajardo Sugar at 59 5/8 | $93,730.50 |
| 45 shares City Bank at 245 1/4 | 11,036.25 |
| $104,766.75 |
The amounts stated in the "Sales Memorandum" represent the market price on March 7, 1930, of the stock.
The petitioner transacted no business with the partnership except that she kept a large part of her moneys on deposit with it. The partnership paid her the same rate of interest on the moneys so deposited with it as she would have received at a bank. She could withdraw all or any part of her moneys at a moment's notice. Her deposit consisted of moneys derived by her from sales of stock, dividends, and other transactions, and many of the withdrawals were used for the acquisition of stock. The petitioner bought*1385 and sold considerable stock. The partnership at no time made any loans to the petitioner.
The books of account of the partnership disclose that on or about December 26, 1929, the petitioner deposited with the partnership the amount of $103,546.13, which was the amount of the check she received from Adrian H. Muller & Son. This transaction was entered on the partnership's books of account by a debit to cash and a credit to the petitioner's account with the partnership. No note was given to the petitioner at the time she deposited this amount with the partnership covering this item. It was deposited, the same as other deposits made by the petitioner, without limitation or restriction as to withdrawal.
The partnership acts as agent for the Fajardo Sugar Co. One of its principal accounts is with this company, and in 1929 and 1930 this was its largest account. The partnership usually buys and sells the stock of the Fajardo Sugar Co. Prospective buyers or sellers of this stock approached the partnership first, because at times the partnership could give them better quotations. Ordinarily the partnership bought stock either on the Curb or through brokers, but purchases of large*1386 blocks of stock usually are not dealt in either over the counter or on the Curb, where the trading unit is usually 50 shares. The Fajardo Sugar Co. stock was rather difficult to obtain *37 in large blocks. This stock is not listed on the Curb, but is traded in on the Curb.
Toward the end of 1929 the partnership learned that several large stockholders of the Fajardo Sugar Co. were attempting to obtain control of the Fajardo Sugar Co.'s voting stock. There was a contest between several groups or factions as to which one could elect the board of directors of the company at its annual meeting to be held in Porto Rico at the beginning of February 1930. The partnership was therefore interested in acquiring the stock and, in particular, large blocks of it. They voted the 1,572 shares at the annual meeting and were enabled to control the meeting.
OPINION.
MCMAHON: The petitioner on her income tax return for the year 1929 deducted from gross income the amount of $82,089.73 as representing a loss alleged to have been sustained upon the sale at public auction of 1,572 shares of stock of the Fajardo Sugar Co. and 45 shares of stock of the National City Bank of New York, which*1387 deduction was disallowed by the respondent. There is no controversy as to the cost of the stock. The only question before us is whether the transaction on or about December 26, 1929, herein involved constitutes an actual sale.
The only witness in behalf of the petitioner was John Bass, a member of the partnership for approximately ten years last past. He testified that he took no part in the negotiations conducted by the partnership for the purchase of this stock; that he was not present at the auction sale at which the partnership made a bid for the stock; that, although he was positive some representative of the partnership was present at the auction sale, he could not recall who was present; that he did not know "the physical handling of the transaction", but that he did know that the auctioneer "turned over the stock in exchange for the check"; that the partnership was interested in acquiring any stock in the Fajardo Sugar Co. offered for sale because they had learned that several large stockholders of that company were getting ready to "proxify" at the next annual meeting of its stockholders for the purpose of obtaining the control of the company's voting stock.
*1388 In the case of , the Board stated:
* * * While a sale for tax purposes is not to be disregarded because of its motive, on the other hand, a mere gesture without the vital intent to change ownership is not to be recognized as a sale merely because superficially it resembles one. * * * [Emphasis ours.]
*38 James B. Coombs had but a third interest in the partnership and the remaining interest therein was divided among five other members. However, his financial interest does not measure the extent of his influence or control over the other members or the affairs of the partnership. Furthermore, although the partnership paid to the auctioneer the purported purchase price, which apparently was turned over to the petitioner, less the auctioneer's commission, such purported purchase price less commission received by the petitioner was returned to and deposited with the partnership. Thus the purported consideration for the stock found its way back into the possession and control of the partnership. The witness testified that he did not know whether the petitioner made any substantial withdrawals thereafter and, there being*1389 no evidence to the contrary, it may be inferred that the partnership had the use of this money until the stock was returned to the petitioner on March 7, 1930. There is no showing in what manner the payment of the consideration for the purported resale to the petitioner on March 7, 1930, was handled. Her deposit account with the partnership was not produced and it is just as reasonable to assume that the transaction required merely a bookkeeping entry, there being sufficient moneys on deposit and in the possession of the partnership to cover the amount.
The reason advanced for the purported purchase by the partnership of the Fajardo Sugar Co. stock is not very convincing. The witness testified that, having learned toward the end of 1929 that "several large stockholders in the Fajardo Sugar Company" were trying to secure proxies, apparently in an effort to divest the partnership of voting control, the partnership was "not interested in letting any such stocks that may be offered for sale go into other peoples' hands." Upon cross-examination, he testified that the partnership made a practice of buying and selling this stock and that he did not know exactly whether or not the partnership*1390 bought considerable stock at that time -
but they [the partnership] usually buy and sell Fajardo stock in view of the fact that we [the partnership] own most of the stock, and we have a particular interest in this particular security. The people naturally come to us first in order to find out whether we would like to buy or sell, because at times we can give them better quotations. [Emphasis supplied.]
This apparent inconsistency upon the subject of the ownership of the stock is not explained in the record. Furthermore, it seems rather strange that, at a time when the partnership was concerned about maintaining its voting control of the Fajardo Sugar Co., the petitioner should offer her stock for sale through a securities auctioneer, assuming, of course, that she knew, as she undoubtedly did, that her *39 husband had a third interest in the partnership and that the account of the Fajardo Sugar Co. was its largest account at that time.
The witness testified that when the partnership check was issued to the auctioneer the cash account on the partnership's books of account was credited showing cash paid out, and that he did "not know what asset account was*1391 charged but it was charged on the books." Therefore we do not know how this transaction was treated on the books of the partnership.
Furthermore, the evidence is meager and not at all enlightening as to the attitude or actions of the petitioner in this transaction. The witness testified that "we knew that the stock was put up for sale because it was advertised, probably by Mr. Coombs; he knew about it." We must assume that she endorsed the stock certificate in order to have it canceled and transferred to the partnership and that she endorsed the check received from the auctioneer in order to turn it over to the partnership, but even as to this the record is barren. Although the witness was a member of the partnership and the partnership apparently controlled the Fajardo Sugar Co., and although the witness became, some time after the transaction herein involved, vice president of the company, he testified that he was not familiar with the records of the corporation showing the stock transfer as he was not an officer of the corporation at that time. The stock records of the company were not introduced in evidence.
*1392 We are not convinced that the transaction on or about December 26, 1929, was actuated on the part of the petitioner by the intent or purpose of absolutely getting rid of the stock and on the part of the partnership of absolutely acquiring it as its own without any condition covering its later return to the petitioner. . In that case the Board stated:
* * * The payment of a price and the delivery of certificates do not constitute the sole requisite of a valid sale. The parties must make a bona fide transfer as persons dealing at arm's length would do - the seller for the purpose of absolutely getting rid of the stock and the buyer for the purpose of absolutely acquiring it as his own without any condition covering its later return to the seller. Receiving a credit for the price and the mere indicia of ownership without the mutual element of intent on both sides to complete an absolute sale, can not constitute a basis for a deduction for loss under the provisions of the tax law. A loss to be deductible must be a reality. [Emphasis supplied.]
The action of the respondent must therefore be approved.
Reviewed*1393 by the Board.
Decision will be entered for the respondent.