*1499 Where an individual trading on margin deposits with his broker a certificate for a given number of shares of a corporation as additional security, thereafter buys on margin a like number of shares of the same corporation and later sells one half of the shares standing to his credit in the margin account, the basis for the computation of gain or loss upon such sale is the cost of the shares first acquired by the individual even though he instructed his broker to sell the shares last acquired.
*695 This is a proceeding for the redetermination of a deficiency in income tax for 1929 of $9,670.95. The only question in issue for the determination of the Board is the profit realized by the petitioner from the sale of 100 shares of General Electric Co. common stock on January 9, 1929.
FINDINGS OF FACT.
The petitioner is a resident of Springfield, Massachusetts. In 1928 and 1929 he bought and sold securities through Tifft Brothers, brokers of Springfield. He had a margin account with these brokers in both years.
On April 27, 1927, the petitioner purchased*1500 outright 100 shares of General Electric Co. common stock at a cost of $9,882.50. On or about December 8, 1928, he took the certificate to the brokers and told them that he "wished to put it up as collateral with other collateral which I had there, and it was to be used as collateral, and not to be sold," At the time of the deposit of the certificate he endorsed it in blank and subsequent dividends upon the stock were not paid to the petitioner, but the petitioner was given credit for dividends on General Electric stock carried in the margin account. On December 10, 1928, he purchased on margin 100 shares of General Electric Co. common stock for $17,725.
General Electric stock having advanced in price, the petitioner went to his brokers on January 9, 1929, and, after talking with one *696 of the members of the firm, gave an order to sell the 100 shares of General Electric Co. common stock which he had purchased on December 10. The order was executed on January 9, 1929, and the proceeds thereof, $24,066, were placed to his credit upon the books of account of the brokers.
On February 18, 1929, the petitioner purchased 200 shares of General Electric Co. common stock on*1501 margin at a cost of $45,035. On May 13, 1929, he sold 155 shares of General Electric for $41,014.55 and had transferred to three of his children during the month 45 shares. The remaining 100 shares of General Electric carried on margin were sold out by the petitioner in 1930.
In the determination of the deficiency the respondent used $9,882.50 as the cost of the 100 shares of General Electric sold by the petitioner on January 9, 1929, for $24,066.
OPINION.
SMITH: The question in issue in this proceeding is whether the 100 shares of General Electric Co. common stock sold by the petitioner on January 9, 1929, were the 100 shares purchased by him in 1927 at a cost of $9,882.50, or the 100 shares purchased by him on December 10, 1928, for $17,725. The respondent has determined the deficiency upon the basis of article 58 of Regulations 74, which provides, so far as material, as follows:
* * * When shares of stock in a corporation are sold from lots purchased at different dates and at different prices and the identity of the lots can not be determined, the stock sold shall be charged against the earliest purchases of such stock. The excess of the amount realized on the sale*1502 over the cost or other basis of the stock will constitute gain. * * *
It is the contention of the respondent that when, on December 8, 1929, the petitioner deposited with his brokers a certificate for 100 shares of General Electric Co. common stock as collateral to bolster up his margin account the certificate no longer constituted property of the petitioner and that the petitioner had only a claim against the brokers for 100 shares of General Electric Co. common stock which might be satisfied by the broker by the delivery to the petitioner of any certificate for 100 shares of General Electric Co. common stock.
It is the contention of the petitioner that he merely pledged with his brokers the certificate of stock and that the brokers had no right to sell or transfer the certificate delivered without his order to do so; that at the time he deposited the certificate he instructed the brokers not to sell it; furthermore, that when on January 9, 1929, he gave the brokers an order to sell 100 shares of General Electric Co. common stock he instructed them to sell the 100 shares which he had purchased on December 10, 1928.
*697 In his brief counsel for the petitioner states*1503 that the petitioner pledged the certificates -
* * * with his brokers as collateral with distinct orders not to sell it, but with implied aurhority to do so on one condition, namely, if the petitioner should fail to pay his indebtedness to the brokers. That condition never occurred, for he never did fail to pay his indebtedness and he never, during 1929, authorized the sale of that stock. * * *
The evidence with respect to the agreement made by the petitioner with his brokers with respect to the deposit of the certificate of stock is not very definite. The petitioner testified that when he deposited the certificate, "I told them it was to be used as collateral with other stock which I had as collateral, and was not to be sold." The brokers did not testify. At the time the certificate was put up as collateral it was endorsed in blank by the petitioner. Prior to the time that it was deposited with the brokers the petitioner received dividends upon the stock. After its deposit all dividends paid upon shares of stock of the General Electric Co. owned by the petitioner and held by the brokers were received by the brokers and credited upon the petitioner's margin account with them. *1504 The brokers' statement rendered to the petitioner on December 31, 1928, shows that the certificate which he had deposited was placed to his credit in the margin account along with the other 100 shares of General Electric Co. common stock which he had purchased on December 10, 1928. The petitioner was thus apprised by this statement that the certificate that he had deposited with the brokers was treated by them the same as the 100 shares of General Electric Co. common stock purchased by them for his account and risk on December 10, 1928.
We think it was clearly immaterial as to what the petitioner's intention was with respect to the shares of stock to be sold on January 9, 1929. ; ; . There is no evidence that the brokers sold any particular certificate for 100 shares of stock. From the brokers' standpoint it was immaterial what shares were sold.
Where shares of stock are carried on margin it is impossible to earmark the particular shares. In *1505 , the court, referring to the so-called "first in, first out" rule, stated:
Evidently this rule was framed with especial reference to gains and losses in marginal transactions where, as in this case, shares purchased by a customer, while legally "owned" by him, are evidenced by a certificate not in his name but in the name of the broker until the transaction is closed out by sale or payment of the full purchase price. The evidence of the transaction and of the customer's ownership is merely a book entry of a debit of the shares purchased *698 against a credit of the margin paid. The shares are commingled with perhaps many thousand held by the broker for other customers, subject always to be hypothecated by him in raising the difference in money between the customer's margin and the purchase price of the shares, which of course the broker must pay in order to get a certificate. The shares are not delivered or earmarked or allocated to the customer even on the books.
Where shares "are sold from lots purchased at different dates and at different prices" in a marginal account it is clear that, in the absence of something*1506 else, the identity of the lots sold cannot be determined, hence the cited regulation, which is tersely called the "First in, first out" rule. The rule is an arbitrary one, as from the very nature of the case it must be; yet, again from the nature of the case, it is reasonable. * * *
See also ; ); certiorari denied, . The contention of the petitioner upon this point is not sutained.
The dificiency will be recomputed in accordance with other matters stipulated.
Judgment will be entered under Rule 50.