1938 BTA LEXIS 907">*907 The taxpayer completed a gift of cash to his wife and soon afterwards offered to sell to her shares of his stock. She accepted the offer, the shares were transferred to her and the gift money was used in part payment. The sales were bona fide and the losses sustained on them are allowable deductions.
38 B.T.A. 160">*161 The Commissioner determined deficiencies of $85,508.34 and $2,467.10 in petitioner's income taxes for 1931 and 1932, respectively. In respect of 1931, petitioner assails the disallowance of deductions claimed for losses on alleged sales of stock to his wife, which the Commissioner refused to recognize for tax purposes. The disallowance of a deduction for gift taxes, assigned as an error in the determination for 1932, was not pressed.
FINDINGS OF FACT.
Petitioner, a resident of New York, New York, is the husband of Victoria B. Allen, to whom he was married on September 20, 1930. While on a visit to his father-in-law in Milwaukee, Wisconsin, on the first anniversary of his marriage, he orally promised1938 BTA LEXIS 907">*908 to his wife a gift of $350,000 in cash. It was his wish to provide her with an independent fortune and to acquaint her with its management. Petitioner's father had made such a gift to his wife, and a brother had given a like amount to his wife. On September 26, 1931, petitioner returned to New York, where his business interests were, and in fulfillment of his promise, on October 16 he opened with the Bankers Trust Co. a "Special Account" for his wife, in which he deposited on the same date his check for $100,000, on October 20 a second check for $200,000, and on October 22 a third check for $50,000, all drawn against his account with the same company. He promptly advised her of each step, and she signed an account signature card for the bank. These deposits were not made subject to any restrictions or conditions of withdrawal.
On October 21 petitioner consulted an attorney about his right to deduct losses sustained on sales of stock to his wife. The attorney advised that deductions could be taken if the purchase money was in the wife's possession as her property before any suggestion of a sale was made by him. He then selected from his stock list certificates for 552 shares1938 BTA LEXIS 907">*909 of Allied Chemical & Dye Corporation, 2,700 shares of Union Carbide & Carbon Corporation, 1,000 shares of New York Central R.R. Co., 2,000 shares of General Electric Corporation, 1,000 shares of Chesapeake Corporation, and 2,900 shares of Gulf Oil Corporation, and transferred them in street names to Paige, Smith & Remick, a brokerage firm, with which he maintained a trading account. That evening he advised his wife of what he had done and discussed the investment of the money in her bank account. He stated that he 38 B.T.A. 160">*162 had borrowed it to make the gift; that he intended to sell some stocks of his own, and recommended her purchase of them. She agreed to take the Allied Chemical and Union Carbide shares, and he purchased the necessary transfer stamps the following morning. In the evening of the same day, October 22, she agreed to take, after further discussion, the other four blocks of his stock. Petitioner pointed out to her that $350,000 was not enough to pay for them all, and suggested that she open a margin trading account and borrow the remainder of the purchase price from the broker. She agreed, and on October 23 accompanied petitioner to his office, where his secretary1938 BTA LEXIS 907">*910 prepared two bills of sale as of that date, the first stating that petitioner:
| Sold to Victoria B. Allen: - | |
| 1000 Sh. Chesapeake Corp. at 24 | $24,000.00 |
| 552 Sh. Allied Chemical & Dye Corp. at 86 3/4 | 47,886.00 |
| 1000 Sh. New York Central R.R. Co. at 55 3/8 | 55,375.00 |
| 2000 Sh. General Electric Co. at 30 5/8 | 61,250.00 |
| 2700 Sh. Union Carbide & Carbon Corp. at 35 5/8 | 96,187.50 |
| 284,698.50 |
The second stated that petitioner:
| Sold to Victoria B. Allen: - | |
| 2900 Sh. Gulf Oil Corp. of Pa. at 47 7/8 | $133,037.50 |
Petitioner signed both bills and attached the requisite state and Federal transfer stamps thereto. At the same time he received his wife's check for $284,698.50 in payment for the stocks listed in the first bill of sale, and deposited her check for $50,000 with Paige, Smith & Remick to open for her a brokerage account, advising the brokerage firm to transfer the stocks listed in the first bill of sale to it and to lend her $83,037.50, the amount sufficient with the $50,000 to equal the price of the Gulf Oil shares. The firm did so, and then gave to petitioner a check for $133,037.50 as the price of the Gulf Oil shares. Petitioner deposited1938 BTA LEXIS 907">*911 both checks in his special account with the Bankers Trust Co., and the share certificates were kept thereafter in his wife's margin or safe-keeping account with the brokerage firm.
In giving instructions to the brokerage firm on his wife's behalf, petitioner acted upon her oral authorization or her written power of attorney. On October 27, she addressed to the firm a power of attorney authorizing him:
* * * to buy, sell and trade in, for my account and risk and in my name, stocks, bonds and any other securities and/or commodities on margin or otherwise * * *
until written notice of revocation. The wife had had no previous experience in buying and selling securities, and had never owned stocks before. She depended in large measure on her husband's advice, but 38 B.T.A. 160">*163 also consulted her brother-in-law and some friends, who were brokers, about the stocks offered her. Before the gift of $350,000 she had no money of her own.
Petitioner later suggested that she diversify her securities, and offered to sell to her more of his stocks, explaining that she would have to increase her loan from the brokers. She agreed. He arranged a further loan for her of $95,500, and on November 2, 1931, signed1938 BTA LEXIS 907">*912 and affixed the requisite transfer stamps to a bill of stating that he:
| Sold to Victoria B. Allen: - | |
| 10 Sh. The Union Trust Co. of Pittsburgh at 6000 | $60,000,00 |
| 200 Sh. Chase National Bank at 50 | 10,000.00 |
| 6000 Sh. Southland Royalty Co | 25,500.00 |
He instructed the brokers to transfer to his wife's account the 200 Chase Bank shares then in his account, and, having signed in blank certificates for the other two blocks, he placed them in a separate envelope, marked "Victoria B. Allen", and left them in his deposit box. The brokers put $95,500 to the wife's credit in her special bank account, debiting her brokerage account with the amount, and on the same date petitioner, as his wife's attorney in fact, drew a check for a like amount in his favor against her bank account in payment for the shares.
On December 1, 1931, the brokers credited to the wife's account a check for $50,000 drawn in their favor by petitioner, and on December 10 they credited to the account $7,310.40, the proceeds of a sale of 200 shares of Chase National Bank stock on the market.
After persuading his wife to purchase more of his stocks, petitioner signed and affixed the requisite transfer1938 BTA LEXIS 907">*913 stamps to a bill of sale, dated December 30, 1931, stating that he:
| Sold to Victoria B. Allen: - | |
| 200 Sh. Central Railroad of N.J. at 70 | $14,000.00 |
| 200 Sh. Delaware & Hudson Co. at 71 | 14,200.00 |
In payment therefor he received his wife's check for $28,200, dated December 31, 1931, and drawn against her special bank account; he instructed the brokers to transfer the shares from his brokerage account to hers. Prior to the execution of this check the wife's special bank account had been credited with $11,950, representing reimbursement for an insured loss, and with $18,000, the amount of a loan from the brokers for which petitioner had made arrangements.
Petitioner had acquired the 6,000 Southland Royalty Co. shares at a cost of $85,450 more than two years prior to November 2, 1931. He had acquired the other stocks less than two years before his transfers of them to his wife and at the following costs:
| Corporation | Number of shares | Cost |
| Chesapeake Corporation | 1,000 | $43,150.00 |
| Allied Chemical & Dye Corporation | 552 | 72,513.35 |
| New York Central R.R. Co | 1,000 | 99,225.00 |
| General Electric Co | 2,000 | 98,400.00 |
| Union Carbide & Carbon Corporation | 2,700 | 160,592.50 |
| Gulf Oil Corporation of Pennsylvania | 2,900 | 192,732.50 |
| Union Trust Co. of Pittsburgh | 10 | 161,111.11 |
| Chase National Bank | 200 | 17,290.00 |
| Central Railroad of New Jersey | 200 | 38,550.00 |
| Delaware & Hudson Co | 200 | 27,775.00 |
| Total | 911,339.46 |
1938 BTA LEXIS 907">*914 38 B.T.A. 160">*164 On December 31, 1931, the brokers drew a check for $50,000 payable to the Bankers Trust Co. for the special account of the wife. The amount was duly credited and charged against her brokerage account. On the same date she drew a check for $50,000 against her special bank account in favor of petitioner. The check was paid.
The amounts received by petitioner from his wife for the several blocks of stock were based on current prices quoted on stock exchanges or, in the case of unlisted stocks, represented what was thought to be fair market value as determined by investigation. The wife received and reported as income on her tax returns the dividends paid on the shares transferred to her. She still maintains her regular and special bank accounts and her brokerage account, in which she had other transactions in 1931 and later. She still owns 552 shares of Allied Chemical & Dye Corporation, 2,000 shares of the General Electric Co., 2,000 shares of Gulf Oil Corporation, 10 shares of Union Trust Co., and 6,000 shares of Southland Royalty Co. The other shares bought from her husband she has sold on the open market. On January 1, 1938, she owned property of a net value1938 BTA LEXIS 907">*915 of $615,315.53. Separate records of her business transactions, including those with her husband, were kept by a secretary, who opened account books for her on October 16, 1931. The same secretary also kept the accounts of her husband and duly recorded the transactions between them on their respective books.
Petitioner has traded in the market since 1924. At the beginning of 1931 he owned securities of a value of $3,800,000, and was indebted to brokers for loans of $475,000. Market values of securities declined during the year, and at the end of it his securities were worth $2,000,000 and the amount of his loans was $450,000. He repaid the $350,000, borrowed to make the gift to his wife, the latter part of October 1931, using in part the proceeds of his wife's check for $284,698.50. With the exception of 100 shares of Gulf Oil Corporation, which he purchased on the open market December 12, 1931, he has never reacquired any stocks of the kind sold to his wife. He has never borrowed from her brokerage account nor used it for his personal obligations, and has never guaranteed her brokerage loans.
38 B.T.A. 160">*165 Petitioner and his wife filed separate income tax returns for 1931. 1938 BTA LEXIS 907">*916 On his own return he deducted ordinary losses of $395,403.46, representing the difference between $515,936, the amount received from his wife for the ten blocks of shares sold to her within two years of his acquisition of them, and their cost of $911,339.46. He deducted a capital loss of $59,950, representing the difference between $25,000, the amount received from his wife for the 6,000 Southland Royalty Co. shares, acquired more than two years prior to his transfer of them to her, and their cost of $85,450.
OPINION.
STERNHAGEN: In the notice of deficiency, the Commissioner disallowed, in the computation of ordinary income, the "Losses on sales of securities to wife, $395,403.46", and in the computation of capital net loss, the "Loss on sales of securities to wife, $59,950", with the statement, "You are advised that losses claimed on sales of securities to your wife have been disallowed. It is held that the transfers of securities between you and your wife, due to which losses are claimed, do not represent transactions upon which losses may be recognized for income tax purposes"; and, further, as an "explanation", said, "Losses on sales of securities to your wife have been1938 BTA LEXIS 907">*917 disallowed since the transactions cannot be recognized for income tax purposes." The respondent's answer generally denies the allegations of fact, and nothing more explicit appears in the Government counsel's statement at the opening of trial, except to question the bonafides of the sales for the reason that "the funds wherewith these securities were acquired came from the petitioner". In the respondent's brief, the additional ground for the denial is that in fact the petitioner made a gift to his wife not of the money but of the shares themselves, and therefore sustained no deductible loss.
Since the petitioner relies upon an alleged sale of securities to his wife, the evidence has been subjected to the most careful and exact scrutiny, as all such cases should be, (on review C.C.A., 3d Cir.). But no reason is discovered to doubt the bona fides of the transactions. The petitioner, pursuant to his earlier promise, gave his wife $350,000, free from any understanding or commitment on her part as to what she should do with it. It was not until after the gift was complete as to $300,000 and the wife was the unfettered1938 BTA LEXIS 907">*918 owner of this fund that there was any thought on her part about acquiring the shares in question. When the petitioner first talked with her about buying shares from him, she had become possessed of means with which to make such a purchase and she was free to do so or not as she chose. As between them there was no suggestion of a gift of securities and no suggestion that the gift of money or a bank account was an incident of a plan to 38 B.T.A. 160">*166 transfer shares in order to perfect a tax deduction. Cf. (on review C.C.A., 3d Cir.). In order to hold otherwise, it would be necessary to regard the testimony as unworthy of belief; which is the essence of the respondent's position. There is, however, nothing to discredit the testimony of the petitioner, the broker, the bookkeeper, all called by the petitioner, and the petitioner's wife, who was called by the respondent. From this evidence, it must be held that the petitioner made a gift to his wife and thereafter sold to her the securities listed in the findings, and sustained the losses claimed. 1938 BTA LEXIS 907">*919 ; Afterwards the wife dealt with the securities entirely as her own and they were never again acquired or controlled by the petitioner. There is in this record, therefore, no reason for the disallowance of the deduction of the losses sustained, and the respondent's determination is reversed.
Judgment will be entered under Rule 50.