*764 Petitioner, while a member of a brokerage firm which was engaged in buying and selling securities, bought for investment after 1921 and sold through the firm as other customers certain stocks which he had held for more than two years. Held, the net profit realized is taxable as "capital net gain" and not as "ordinary" income.
*25 Petitioner seeks a redetermination of a deficiency in income tax for the year 1930 in the sum of $945.81. The only question presented is whether the profit derived by petitioner from the sale of certain corporate stocks is taxable as "ordinary income", as contended by respondent, or as "capital net gain", as contended by petitioner.
FINDING OF FACT.
During the year 1930, petitioner sold 92 shares of Liberty Bank stock at a profit of $7,079.34, and 3,600 shares of Vacuum Oil Co. stock at a profit of $107,078.14. Respondent concedes (as the evidenece discloses) that petitioner had held the stock so sold for more than two years before the sale. But he contends that said stocks were held by petitioner primarily*765 for sale in the course of his trade or business and, therefore, were not capital assets as defined by section 101(c)(8) of the Revenue Act of 1928.
Petitioner filed his 1930 return and therein set up and paid tax on said profits as capital net gain.
Petitioner is a member of the firm of Wallace & Trost (hereinafter called the firm), copartners engaged in the general investment security business at Buffalo, New York. He assisted in organizing the copartnership in 1923, but did not become an active member thereof until about January 1, 1925. The firm does not, as a rule, deal with the general public, but its business consists mainly in buying stocks and bonds and selling them to other brokers. Primarily, they were brokers of brokers. The firm also buys stocks for its own account, that is, as a partnership. During the yeaers here involved it maintained what is called a security company for the purchase and sale of securities in which it was interested. Petitioner's duties with the firm consisted mainly in making contacts outside of the office; meeting officials of the bond departments of banks, telling them of the services the firm had to offer, and showing them what the firm*766 had for sale. Prior to 1925, when he entered the firm as a partner, he was a purchasing agent for a company of manufacturers at a salary of $2,475 per year. He had capital of not more than about $25,000.
Petitioner had a customer's account in his own name with the firm, and he was charged the usual commissions as other customers, and e was charged interest on debit balances and credited with interest on credit balances the same as other customers. The partnership agreement prohibited partners trading for their own account. Liberty Bank stock and Vacuum Oil stock, involved in this proceeding, when sold, were sold through the firm. None of these stocks was issued to the firm. They were purchased in the name of petitioner and delivered to him personally. A very small part of petitioner's time was used in connection with his personal account, not more than ten minutes a day on the average, as he testified.
*26 The petitioner's account, as to the Vacuum Oil stocks, shows the following:
| Purchases: | Shares | Price | Amount |
| July 1, 1924, Vacuum Oil | 100 | 63 7/8 | $6,405.00 |
| July 1, 1924, Vacuum Oil | 200 | 64 | 12,835.00 |
| July 1, 1924, Vacuum Oil | 500 | 64 1/8 | 32,150.00 |
| August 10, 1926, Vacuum Oil | 1,000 | 104.24 | 104,241.67 |
| May 1, 1928, Vacuum Oil | 1,800 | Stock Dividend | |
| 155,631.67 | |||
| Sales: | |||
| December 16, 1930, Vacuum Oil | 200 | 49 | $9,768.00 |
| 300 | 48 7/8 | 14,614.50 | |
| 200 | 48 3/4 | 9,718.00 | |
| 300 | 48 3/8 | 14,464.50 | |
| 200 | 47 1/4 | 9,418.00 | |
| 100 | 48 | 4,786.50 | |
| 200 | 48 1/4 | 9,618.00 | |
| December 17, 1930, Vacuum Oil | 2,100 | 190,322.31 | |
| 262,709.81 |
*767 The Vacuum Oil stock purchased in 1924 was purchased by petitioner for investment through W. A. Gardner's office, and they delivered it to the firm of Wallace & Trost before petitioner became active with the firm. Petitioner then received the stock and placed it in his own safety deposit box at the bank. The stock purchased after 1924 was purchased through the firm by petitioner for investment and it was put into an envelope upon which petitioner's name was written and placed in the firm's safekeeping department, as was the later stock dividend shown.
The petitioner's account, as to Liberty Bank stock, shows as follows:
| Purchases: | Shares | Cost |
| June 21, 1927 | 20 | $9,160.00 |
| August 9, 1928, Dividend | 2 6/7 | |
| August 10, 1928 | 1/7 | 105.00 |
| Total | 9,265.00 | |
| August 28, 1928: | ||
| Split up 4 for 1 | 92 | |
| Subscription on rights | 8 | |
| Total | 100 | |
| Sales: | ||
| June 26, 1930 | 20 | 3,459.00 |
| Do | 20 | 3,479.00 |
| Do | 5 | 874.72 |
| Do | 5 | 889.72 |
| September 20, 1930 | 50 | 7,641.90 |
| Total | 16,344.34 |
*27 This Liberty Bank stock was also purchased by petitioner as an investment, delivered to him personally as was also the stock dividend shown, and placed and kept in envelopes*768 upon which his name was written, in the firm's safety department.
During 1924 to 1930, inclusive, petitioner, through the firm, bought and sold many shares of various corporate stocks other than the Vacuum Oil and Liberty Bank stocks mentioned above, mostly on margin. Before he became active with the firm in 1925, he carried his own accounts, but thereafter his accounts were carried with the firm as accounts of other customers. Petitioner sold 300 shares of Vacuum Oil Co. stock in 1924 and a like quantity in 1925. In 1929 the firm sold Vacuum Oil Co. stock short and petitioner made the firm a loan of 1,000 shares (purchased by him in 1926), in that transaction, which shares were among those sold for petitioner in 1930, and are among those upon which he here claims the right to be taxed at the capital gain rate.
There were debit balances against petitioner in his account with the firm, Wallace & Trost, as follows: December 31, 1925, $294,644.70; December 31, 1926, $131,881.90; December 31, 1927, $180,165.67; December 31, 1928, $251,627.25; December 31, 1929, $139,203.24; and at December 31, 1930, $170,611.72. These debit balances represent amounts owed by petitioner for stocks*769 purchased through the firm. Petitioner's purchases of stock were protected by ample margins held by him with the firm.
Petitioner never included in his investory as a taxpayer at the end of the taxable year any of said shares of stock of the Vacuum Oil Co. or of the Liberty Bank sold for him in 1930, upon which he in this proceeding claims the right to be taxed at capital gain rates.
OPINION.
SEAWELL: Whether petitioner is taxable on the net gain received by him in the sale of the Vacuum Oil Co. stock and/or the Liberty Bank stock, at the "ordinary rate" or at the "capital net gain rate" under the existing facts and admissions, depends upon the proper definition of "capital assets" as contained in section 101 of the Revenue Act of 1928. Subsection (c)(8) of that section defines "capital assets" to mean "property held by the taxpayer for more than two years (whether or not connected with his trade or business)." As respondent admits the stocks mentioned were held by petitioner for more than two years, and the parties are in agreement as to the amount of gain realized by petitioner upon its sale in the taxable year, there would be nothing further to decide if the subsection*770 (c)(8) ended with the above quotation. But, by way of exception, the statute proceeds as follows: "but does not include stock in trade of *28 the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business." If, therefore, the stocks in question fall within the enumerated exceptions contained in the further quoted part of the statute, they would not be "capital assets", and the gain would not be "capital net gain" but "ordinary gain", and the taxpayer would lose.
Under the adjudicated cases in the Board and the courts we are of opinion, and hold, that the transactions in controversy do not fall within said exceptions. The securities purchased by petitioner and sold for his account by the firm in 1930, were not held by petitioner as "stock in trade" or "primarily for sale in the course of his trade or business", ; certiorari denied, *771 . The securities under the circumstances were not such as "would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year." .
In a recent case where the petitioner was a member of a brokerage firm and did a large volume of trading in his personal account, and there were other facts comparable to those here present, we said:
Although it is undoubtedly true that the petitioner was ready to sell any of his investments when the market quotations would show him a satisfactory profit, the evidence does not show that these securities were held "primarily for sale in the course of" petitioner's trade or business, or in fact that the petitioner individually had a trade or business of buying and selling securities. His purchases and sales wee such as might be made by any investor or retired business man. Such a person would not ordinarily be regarded as engaged in a business of buying and selling securities. To regard the petitioner's purchases and sales of securities as a trade or business within the contemplation of the statute does violence to the very*772 language of the statute and to the purpose which Congress had in mind in providing for the taxing of gains from the sale of property held more than two years at the capital gain rate. That object was to facilitate sales of property which had been held for a long period and which had greatly appreciated in value. See Ways and Means Committee Report (p. 10) and Finance Committee Report (p. 12) on Revenue Act of 1921. * * *
* * *
We are of opinion that a professional man, such as a lawyer or a doctor, who invests his surplus income in the purchase of stocks or other property with an idea of sale at a future date at a profit is not ordinarily to be regarded as holding such shares primarily for sale in the course of his trade or business. We think that the same observation applies to the petitioner at bar. He was not engaged as an individual in a trade or business of buying and selling securities; consequently, he could not be regarded as holding them primarily for sale in the course of his trade or business.
The petitioner is entitled to report his gain from the sale of the 4,000 warrants in the amount of $239,864.50 as a capital net gain. [*773
*29 See also ; .
We sustain petitioner and hold that respondent was in error.
Judgment of no deficiency will be entered.