*260 Decisions will be entered under Rule 50.
1. In the taxable year 1947 the Shanis partnership of which the petitioners were equal partners exchanged old bonds of the St. Louis-San Francisco Railway Company for new securities in a tax free reorganization. The respondent included as taxable income an allocated portion of the value of the new securities received as interest accrued on the old bonds subsequent to their acquisition by the partnership. Held, the claim for interest is an integral part of the bonds and together with the principal debt constitutes a security for purposes of section 112 (b) (3), I. R. C., and respondent erred in allocating any part of the new securities to interest accrued subsequent to the acquisition of the old bonds. William W. Carman, 1029">13 T. C. 1029, followed.
2. On or about May 1, 1945, the Shanis partnership entered into 51 "sell" contracts and on September 24, 1946, entered into nine "buy" contracts for the identical kind and quantity of new securities of the St. Louis-San Francisco Railway Company on a "when, as and if issued" basis. The securities involved in such contracts became available for distribution on*261 January 24, 1947, and the respective brokers involved cleared such contracts through the mechanics of the Stock Clearing Corporation. Held, on its sale and purchase contracts of "when issued" securities, the Shanis partnership realized a net short term capital gain in the taxable year 1947.
*642 These consolidated proceedings involve deficiencies in income tax of the respective petitioners for the year 1947 in the amounts as follows:
| Morris Shanis | $ 25,120.41 |
| Beckie Shanis | 25,220.81 |
Each petitioner claims overpayments as follows:
| Morris Shanis | $ 11,500 |
| Beckie Shanis | 12,500 |
The contested issues presented are (1) whether the respondent properly increased the taxable income of the partnership by the amount of*262 $ 18,612.88 by allocating a portion of the new securities received in a nontaxable exchange for old bonds to interest accrued on the old bonds subsequent to their acquisition by the partnership, and (2) whether the respondent erred in determining that the partnership realized only a short-term capital gain in the net amount of $ 100,256.95 in connection with certain sale and purchase contracts "when, as and if issued" of new securities of the St. Louis-San Francisco Railway Company.
Most of the facts have been stipulated and we adopt the stipulation as our findings of fact.
FINDINGS OF FACT.
Petitioners are individuals residing in Atlantic City, New Jersey. Their individual tax returns for the period involved were filed with the collector of internal revenue for the first district of Pennsylvania.
*643 In the taxable year 1947, and during the periods hereinafter mentioned, the petitioners were members of a partnership known as the Morris and Beckie Shanis partnership. The petitioners and the partnership kept their books and filed their returns on the cash receipts and disbursements method of accounting.
During the period April 26 to May 15, 1945, the partnership purchased at*263 the prices set forth the following bonds of the St. Louis-San Francisco Railway Company, hereinafter referred to as old bonds:
| Face amount | Kind | Price |
| 165,000 | Prior lien A 4s of 1950 | $ 96,237.50 |
| 150,000 | Prior lien B 5s of 1950 | 92,845.00 |
| 150,000 | Consolidated A 4 1/2s of 1978 | 66,760.00 |
| 325,000 | Consolidated B 6s of 1936 | 159,489.00 |
| Total | $ 415,331.50 |
At the time of the purchase of such old bonds interest was in default on all bonds since 1933 and the bonds were purchased "flat." During the year 1945 the partnership received on such bonds cash in the total amount of $ 34,847, less commissions and expenses of $ 1,995, representing partial payment of interest which had accrued and remained unpaid prior to the time of their acquisition by the partnership.
On May 16, 1933, the St. Louis-San Francisco Railway Company filed a petition in the United States District Court for the Eastern District of Missouri, Eastern Division, for reorganization under section 77 of the Bankruptcy Act, as amended. Various plans of reorganization were filed with the Interstate Commerce Commission and the court. On July 4, 1944, the Interstate Commerce Commission proposed and approved a revised*264 plan of reorganization which embodied the main provisions of a compromise plan filed by the bondholders' groups with the Commission. The plan was approved by the court by its order entered April 10, 1945, and confirmed by the court on November 15, 1945.
The plan of reorganization was consummated on January 1, 1947, and pursuant to the plan the following new securities and cash were allocated to each $ 1,000 face amount of the old bonds and all rights and claims appertaining thereto:
| Common | |||||
| Income | Preferred | stock | |||
| Old bonds | 1st 4s | 4 1/2s | stock | (no-par | Cash |
| ($ 1,000 face amount) | of 1997 | of 2022 | ($ 100 par) | $ 50 stated | |
| value) | |||||
| 4s of 50 | $ 219.00 | $ 213.19 | $ 332.00 | $ 333.50 | $ 23.04 |
| 5s of 50 | 233.00 | 226.85 | 353.00 | 355.00 | 24.56 |
| 4 1/2s of 78 | 221.00 | 153.01 | 174.00 | 174.00 | 24.80 |
| 6s of 36 | 243.00 | 168.52 | 191.00 | 191.50 | 27.28 |
*644 The fair market value of the new securities as of January 2, 1947, was as follows:
| 1st 4s of 1997 | $ 904.375 |
| Income 4 1/2s of 2022 | 536.25 |
| Preferred stock | 31.625 |
| Common stock | 11.8125 |
The cash distributed was allocable to interest accrued and unpaid for the years 1934 to 1936, as follows:
| 4s of 50 | $ 23.04 | Payment of unpaid balance of $ 17.78 of interest |
| installment which became due on July 1, 1935, and of | ||
| $ 5.26 on account of interest installment which became | ||
| due on January 1, 1936. | ||
| 5s of 50 | $ 24.56 | Payment of unpaid balance of $ 14.62 of |
| interest installment which became due on January 1, | ||
| 1935, and of $ 9.94 on account of interest installment | ||
| which became due on July 1, 1935. | ||
| 4 1/2s of | $ 24.80 | Payment of unpaid balance of $ .76 of interest |
| 78 | installment which became due on March 1, 1935, and payment | |
| of unpaid balance of $ 22.50 of interest installment | ||
| which became due on September 1, 1935, and of $ 1.54 on | ||
| account of interest installment which became due on | ||
| March 1, 1936. | ||
| 6s of 36 | $ 27.28 | Payment of unpaid balance of $ 24.55 of interest |
| installment which became due on December 1, 1934, and of | ||
| $ 2.73 on account of interest installment which became due | ||
| on June 1, 1935. |
*265 On the consummation of the plan the partnership surrendered the old bonds and all rights and claims appertaining thereto and received in exchange therefor the following new securities:
| Face amount of new | Number of shares of | |||
| bonds | new stock | |||
| (Old Bonds) | ||||
| 1st 4s of 1997 | 4 1/2s of 2022 | Preferred | Common | |
| $ 165,000 4s of 50 | $ 36,135.00 | $ 35,176.35 | 547.80 | 1,100.55 |
| $ 150,000 5s of 50 | 34,950.00 | 34,027.50 | 529.50 | 1,065.00 |
| $ 150,000 4 1/2s of 78 | 33,150.00 | 22,951.50 | 261.00 | 522.00 |
| $ 325,000 6s of 36 | 78,975.00 | 54,769.00 | 620.75 | 1,244.75 |
| Total | $ 183,210.00 | $ 146,924.35 | 1,959.05 | 3,932.30 |
The fair market value of the new securities as of January 2, 1947, plus cash received, was as follows:
| Cash for defaulted | |||
| Value of | interest | Total value | |
| bonds | |||
| $ 165,000 4s of 50 | $ 81,868.40 | $ 3,801.60 | $ 85,668.00 |
| $ 150,000 5s of 50 | 79,176.00 | 3,684.00 | 82,860.00 |
| $ 150,000 4 1/2s of 78 | 56,707.50 | 3,720.00 | 60,427.50 |
| $ 325,000 6s of 36 | 135,125.25 | 8,866.00 | 143,991.25 |
| Total | $ 352,875.15 | $ 20,071.60 | $ 372,946.75 |
Other than as above set forth, the partnership neither surrendered nor received any money, securities, or other*266 property and no physical documents, other than the old bonds, were surrendered.
*645 The plan of reorganization contained no specification as to the allocation of the particular new securities to principal and accrued interest on the old bonds. In each of the old bonds the covenant to pay interest was specifically contained in the text of the bonds. Interest had accrued but remained unpaid on the old bonds for the twenty-months' period the partnership held the old bonds from acquisition dates in 1945 to the date of the consummation of the plan in a total amount at least equal to the sum of $ 18,612.88.
On or about May 1, 1945, the partnership, acting through the brokerage firm of Montgomery, Scott & Co., Philadelphia, Pennsylvania, entered into 51 contracts to sell new securities of the St. Louis-San Francisco Railway Company, "when, as and if issued," as follows:
| Face amount or number | Sales price |
| $ 104,050 1st 4 bonds | $ 104,713.70 |
| $ 133,300 4 1/2 bonds | 110,227.35 |
| 1,910 shares preferred stock | 99,788.12 |
| 3,836 shares common stock | 68,200.57 |
| Total | $ 382,929.74 |
The sell contracts were entered into with the following buyers, all of whom were members of the *267 New York Stock Exchange and the Stock Clearing Corporation. The face amount of bonds and the number of shares of stock purchased by each buyer are set forth in the following schedule:
| Shares of stock | ||||
| Buyer | 1st 4 bonds | 4 1/2 bonds | ||
| Preferred | Common | |||
| Mabon & Co | $ 86,550 | $ 120,200 | 1,557 | 2,046 |
| Newburger & Hano | 17,500 | 13,100 | 740 | |
| Laird & Company | 353 | 467 | ||
| Montgomery, Scott & Co | 583 | |||
| Total | $ 104,050 | $ 133,300 | 1,910 | 3,836 |
On or about September 24, 1946, the partnership, through the said Montgomery, Scott & Co., entered into 9 contracts with Mabon & Co., as seller, to buy the same number and kind of securities of the St. Louis-San Francisco Railway Company, "when, as and if issued," in the amount and purchase price as follows:
| Face amount or number | Sales price |
| $ 104,050 1st 4 bonds | $ 101,708.88 |
| $ 133,300 4 1/2 bonds | 70,909.00 |
| 1,910 shares preferred stock | 63,426.33 |
| 3,836 shares common stock | 46,628.58 |
| Total | $ 282,672.79 |
All of the sell and buy contracts were entered into in "over-the-counter" transactions. Within three days after each of the aforementioned *646 sell and buy contracts were entered into written*268 contracts were exchanged between the respective brokers involved in the transactions. Such contracts contained a provision that the specified securities were deliverable when issued, and that either contracting party had the right to call for deposits to assure fulfillment of said contracts. At the time such contracts were entered into and written contracts exchanged the respective brokers involved did not disclose to the partnership whether they were acting as principals on their own account or as agents for customers.
Of the aforesaid sell contracts entered into between Montgomery, Scott & Co., as agent for the partnership, and Mabon & Co., the latter was the "principal" on contracts of the quantity, date, and price specified below:
| Price per | ||
| Date | Security | unit |
| Apr. 25, 1945 | $ 11,600, 4 1/2% bonds | 81 |
| Apr. 27, 1945 | 1,058 shares, common stock | 18 |
| Apr. 27, 1945 | $ 11,050, 1st 4% bonds | 101 |
| Apr. 27, 1945 | $ 12,500, 4 1/2% bonds | 82 1/2 |
| Apr. 27, 1945 | $ 19,000, 4 1/2% bonds | 82 3/8 |
| May 2, 1945 | $ 17,300, 4 1/2% bonds | 85 1/4 |
| May 2, 1945 | 191 shares, preferred stock | 53 |
With respect to other sell contracts, which were entered into between Montgomery, Scott*269 & Co., as agent for the partnership, and Mabon & Co., the latter was acting for three other brokers on contracts of the quantity as follows:
| Price per | ||
| Date | Security | unit |
| Apr. 25, 1945 | 588 shares, common stock | 17 1/2 |
| Apr. 25, 1945 | 115 shares, preferred stock | 51 3/4 |
| Apr. 25, 1945 | 276 shares, preferred stock | 52 |
| Apr. 25, 1945 | $ 25,850, 1st 4% bonds | 100 3/4 |
| Apr. 25, 1945 | 9,500 1st 4% bonds | 81 |
| Apr. 27, 1945 | 419 shares, preferred stock | 52 1/2 |
| Apr. 27, 1945 | 174 shares, preferred stock | 52 5/8 |
| Apr. 27, 1945 | $ 49,650, 1st 4% bonds | 101 |
| Apr. 27, 1945 | $ 15,700, 4 1/2 bonds | 81 3/4 |
| May 1, 1945 | $ 34,600, 4 1/2% bonds | 84 5/8 |
| May 1, 1945 | 400 shares, common stock | 18 1/4 |
| May 1, 1945 | 382 shares, preferred stock | 53 |
With respect to other sell contracts entered into between Montgomery, Scott & Co., as agent for the partnership, on the one hand, and Newburger & Hano, Laird & Company and Montgomery, Scott & Co., respectively, on the other hand, the quantity, date and price are specified below: *647
| Price per | |||
| Date | Broker | Security | unit |
| Apr. 27, 1945 | Newburger & Hano | $ 17,500, 1st 4% bonds | 101 |
| Apr. 27, 1945 | Newburger & Hano | $ 13,100, 4 1/2% bonds | 81 3/4 |
| Apr. 27, 1945 | Newburger & Hano | 374 shares, common stock | 18 |
| May 1, 1945 | Newburger & Hano | 366 shares, common stock | 18 3/4 |
| Apr. 27, 1945 | Laird & Company | 467 shares, common stock | 18 1/4 |
| Apr. 27, 1945 | Laird & Company | 353 shares, preferred stock | 52 3/4 |
| Apr. 27, 1945 | Montgomery, Scott & Co | 200 shares, common stock | 17 1/2 |
| May 2, 1945 | Montgomery, Scott & Co | 383 shares, common stock | 18 1/2 |
*270 The partnership did not through Montgomery, Scott & Co., or any other broker, enter into any buy contract for securities of the type involved from Newburger & Hano, Laird & Company or Montgomery, Scott & Co.
With respect to the buy contracts entered into between Montgomery, Scott & Co., as agent for the partnership, and Mabon & Co., the latter was "principal" on contracts of the quantity, date, and price specified below:
| Price per | ||
| Date | Security | unit |
| Sept. 20, 1946 | $ 29,300, 4 12% bonds | 52 3/4 |
| Sept. 20, 1946 | $ 104,000, 4 1/2% bonds | 53 |
With respect to other buy contracts which were entered into between Montgomery, Scott & Co., as agent for the partnership, and Mabon & Co., the latter was acting for two other brokers on contracts of the quantity, date and price specified below:
| Price per | ||
| Date | Security | unit |
| Sept. 20. 1946 | 750 shares, preferred stock | 33 |
| Sept. 23, 1946 | 1,000 shares, preferred stock | 33 |
| Sept. 23, 1946 | 1,500 shares, common stock | 12 |
| Sept. 24, 1946 | 2,336 shares, common stock | 12 |
| Sept. 24, 1946 | 160 shares, preferred stock | 33 |
| Sept. 25, 1946 | $ 104,050, 1st 4% bonds | 97 1/2 |
After the consummation of the plan of reorganization*271 on January 1, 1947, trading on a "when issued" basis of the new securities of the St. Louis-San Francisco Railway Company continued on the New York Stock Exchange until the close of business, January 20, 1947. On January 21, 1947, the new securities were admitted to list on the New York Stock Exchange and dealing in "when issued" securities was suspended and all transactions thereafter were traded "regular way." The new securities were available for distribution on and after January 24, 1947.
On January 13, 1947, the New York Stock Clearing Corporation issued its announcement number SCC-1414 relative to the clearance *648 of St. Louis-San Francisco Railway Company when issued contracts. When issued contracts entered into prior to January 16, 1947, were settled in accordance with the rules and regulations and through the mechanics of the Stock Clearing Corporation. When issued contracts entered into after January 16, 1947, were settled independently of the Stock Clearing Corporation and directly by the parties to the contracts. The sell and buy contracts involved in this proceeding were settled through the mechanics of the Stock Clearing Corporation. Contracts for securities*272 on a when issued basis, which were settled through the mechanics of the Stock Clearing Corporation, were settled at the price fixed by the Stock Clearing Corporation. The unit settlement price and the total settlement price value of the sell and buy contracts of securities of the St. Louis-San Francisco Railway Company held by the partnership were as follows:
| Price per | Total price | ||
| Face amount or number | Security | unit | value |
| $ 104,050 | 1st 4% bonds | $ 87 | $ 90,523.50 |
| $ 133,300 | 4 1/2% bonds | 48 | 63,984.00 |
| 1,910 shares | Preferred stock | 26 | 49,660.00 |
| 3,836 shares | Common stock | 9 | 34,524.00 |
| Total | $ 238,691.50 |
On January 24, 1947, the Stock Clearing Corporation, in accordance with the usual practice on the settlement of contracts for securities on a when issued basis, credited the account of Montgomery, Scott & Co. with the net amount of $ 144,238.24 on the sell contracts and debited their account in the net amount of $ 43,981.29 on the buy contracts, or a net credit of $ 100,256.95, with respect to the securities involved herein.
In the taxable year 1947 the Shanis partnership realized a short term capital gain of $ 100,256.95 on the purchase and sale of *273 securities of the St. Louis-San Francisco Railway Company.
OPINION.
The first question presented involves the propriety of the respondent's action in increasing the income of the partnership in the amount of $ 18,612.88 by allocating a portion of the new securities received for old bonds of the St. Louis-San Francisco Railway Company in a nontaxable exchange to interest accrued on the old bonds subsequent to their acquisition by the partnership.
The petitioners contend that it has been definitely held in the case of William W. Carman, 1029">13 T. C. 1029, that the principal debt of a bond and accrued interest thereon constitute the security for the purpose of section 112 (b) (3) of the Internal Revenue Code. On this *649 issue the Court was affirmed in Commissioner v. Carman, 189 F. 2d 363. The respondent concedes that the Carman case, supra, holds adversely to his present position, but argues for a reconsideration of his contention. We think the facts in the instant case are indistinguishable from those involved in the Carman case, and for the reasons stated in our opinion therein we adhere to that decision. *274 We hold that the respondent erred in increasing the taxable income of the partnership by the amount of $ 18,612.88, representing interest accrued on the old bonds subsequent to their acquisition.
The second issue presents the question whether the partnership on the settlement of certain sell and buy contracts on a when, as and if issued basis of the new securities of the St. Louis-San Francisco Railway Company realized a net short term capital gain as determined by the respondent, or a long term capital gain and a short term capital loss as contended by the petitioners.
Neither the facts surrounding the transactions nor the amounts involved are in dispute.
On or about May 1, 1945, the Shanis partnership entered into 51 contracts with Montgomery, Scott & Co., its brokers, to sell certain new securities of the St. Louis-San Francisco Railway Company on a when, as and if issued basis. On September 20, 1946, the partnership entered into 9 contracts with the same broker to buy the same number and kind of securities on a when, as and if issued basis. All of such buy and sell when issued contracts were entered into in over-the-counter transactions and are not related to the securities*275 of the St. Louis-San Francisco Railway Company involved in the first issue herein. All the brokers involved in the buy and sell when issued contracts were members of the New York Stock Exchange, the New York Stock Clearing Corporation and the National Association of Securities Dealers.
On January 1, 1947, the National Association of Securities Dealers announced that the securities of the type involved in such when issued contracts would be recognized under the plan of reorganization adopted by the district court and the securities would be issued on January 24, 1947. On that date all of the brokers, who had contracts to buy and to sell the when issued securities in question, had their contracts settled through the medium of the Stock Clearing Corporation.
The petitioners contend that the sell and buy when issued contracts were separate properties and capital assets as defined by section 117 (a) (1) of the Internal Revenue Code; that when such contracts were cleared through the medium of the Stock Clearing Corporation on the settlement date, the net consideration received by the partnership represented the payment for the sale and exchange of the contract *650 rights under the*276 valuable sell contracts and the assumption or release of the partnership liability under its buy contracts; and, since the sell contracts were held for more than 6 months, the gain realized was a long term capital gain, and as the buy contracts were held less than 6 months the loss realized was a short term capital loss.
The respondent's contention is that the partnership sold and exchanged the securities specified in its buy and sell when issued contracts and not its contract rights. It is the respondent's position that when the partnership entered into the sell contracts of when issued securities it was obligated to deliver such securities, and when it entered into the buy contracts it was obligated to receive such securities. It is then argued that as the partnership's sell and buy contracts involved the identical kind and quantity of securities there was an off-setting of the respective contracts on the settlement date, pursuant to the rules and regulations and under the mechanics of the Stock Clearing Corporation, and such offset is in legal effect a delivery. Board of Trade v. Christie Grain & Stock Co., 198 U.S. 236">198 U.S. 236. From such premise the*277 respondent concludes that on the settlement date the partnership impliedly received the securities under its buy contracts and impliedly delivered them on the same date under its sell contracts, resulting in a short term capital transaction.
Conceding that buy and sell contracts of when issued securities are capital assets ( Lewis K. Walker, 35 B. T. A. 640), and that such "contract rights" may be assigned and transferred either separately or together, resulting in a long or short term capital transaction depending upon the holding period of the respective contract, we are convinced that, under the facts here presented, no sale and exchange of contract rights was effected. Where buy and sell contracts of when issued securities are not sold or exchanged prior to their maturity but are retained until the settlement date and cleared through the Stock Clearing Corporation, in our opinion, there is a sale and exchange of the securities involved on the settlement date and a short term capital transaction follows as a consequence.
The respondent's position with respect to the treatment for tax purposes of gains and losses arising out of when issued transactions*278 is set forth in I. T. 3721, 1945 C. B. 164, et seq. Many illustrative questions and answers on when issued transactions are contained therein. Question (g) involves assumed facts comparable to those in the instant case. 1
*279 *651 In Raymond B. Haynes, 17 T. C. 772, which involved capital gains and losses in buy and sell contracts for securities on a when, as and if issued basis, we referred to I. T. 3721, supra, with approval. We there found as ultimate facts:
* * * No actual sale or purchase is effected under a "when issued" contract until the new securities are issued.
* * * No actual sale of securities sold under such contracts takes place until this settlement date.
In the course of our opinion we said in footnote 2:
* * * And since the securities attributable to the partnership's "when issued" purchase contracts cannot be treated as acquired prior to the settlement date (cf. Lewis Walker, 35 B. T. A. 640, 644-645; I. T. 3721, 1945 C. B. 164), their holding period began on the very date of sale.
Since I. T. 3721, supra, here pertinent has been approved by us in Raymond B. Haynes, supra, we sustain the respondent's contention on this issue, and hold that the Shanis partnership on the sale and purchase contracts of when issued securities of the St. Louis-San Francisco*280 Railway Company realized a net short term capital gain in the taxable year 1947.
In view of the dispositions we have made of this issue, we find it unnecessary to discuss the alternative contentions advanced by the respective parties on brief.
Decisions will be entered under Rule 50.
Footnotes
1. I. T. 3721, 1945 C. B. 164, 174:
Question (g): B enters into a contract with A under which B agrees to purchase from A 200 shares of Y Company preferred stock "when issued" at 20. More than six months later, B enters into a contract with C under which B agrees to sell to C 200 shares of Y company preferred stock "when issued" at 25. The plan of reorganization is consummated, and preferred stock of the Y Company is issued. The New York Stock Exchange calls for a clearance and A, B, and C report their contracts to the exchange. B neither receives nor delivers any stock but does receive $ 1,000 from the Stock Clearing Corporation. Is B's gain a long-term or a short-term capital gain?
Answer: B realized a short-term capital gain of $ 1,000. The transactions, in effect, have been completed through the New York Stock Exchange, and no further acquisition or disposition of the new stock will be made under the contracts in so far as B is concerned.↩