*974 Petitioner was a member of an "employees' trust" of the character described and dealt with in section 165 of the Revenue Act of 1928. In June 1930 he made a cash investment in the trust and in September 1931 the trust was terminated and the trustee distributed to him a small amount in cash and certain shares of stock in the employer corporation. He sold a part of the shares so received at a date more than two years after his investment in the trust, but less than two years after the shares were distributed to him. Held, that the shares of stock sold were not "capital assets" within the meaning of section 101(c)(8) of the Revenue Act of 1928 and that the petitioner did not sustain a capital loss upon the sale thereof.
*881 This proceeding was brought to redetermine a deficiency in income tax in the amount of $666.93 for the year 1933. The only question presented is whether petitioner sustained a capital loss upon the sale of certain shares of stock.
*882 FINDINGS OF FACT.
The case was submitted upon*975 a stipulation of facts, the material parts of which are as follows:
The Petitioner, HARVEY S. STRASSBURGER, is an individual residing at 5600 Bartlett Street, Pittsburgh, Allegheny County, Pennsylvania and is now an employee of Blaw-Knox Company and has been in the employ of Blaw-Knox Company (hereinafter called the Employer) continuously since October 1, 1928.
On September 1, 1928 the Employer organized an Employees' Trust known as the Managers' Association of Blaw-Knox Company and referred to in the deficiency letter of September 30, 1935 as an "Employees' Trust" under Section 165 of the Revenue Act of 1928. The Managers' Association of Blaw-Knox Company is hereinafter referred to as the Trust.
From formation of the Trust on September 1, 1928 to the date of its termination as hereinafter recited various agreements were in force from time to time defining the manner of operation of the Trust, the interest and rights to participating members, the rights and duties of the trustee therein named and the method of distribution of Trust assets in the event of termination of the Trust. On July 1, 1931 an agreement was entered into between the trustee and each employee participant*976 which entirely supplanted and took he place of all prior agreements relating to the Trust and to avoid possibility of confusion arising from the multiplicity of agreements relating to the Trust it is understood for the purpose of this appeal that said agreement of July 1, 1931, a copy of which is attached hereto and made a part hereof and marked "Exhibit B," is the sole agreement setting forth fully in one instrument all things relating to the Trust.
By the Employer's selection the Petitioner was admitted to membership and participation in the Trust on June 15, 1930 and at that time Petitioner made a capital investment of $10,000 in cash in said Trust.
The capital investment of this Petitioner and all other participants in the Trust when made were delivered to the Trustee appointed in the aforesaid agreement (Exhibit B.) For the benefit of this Petitioner and all other participants, the Employer contributed to the Trust in 1928 by selling 15,000 shares of no par capital stock of the Employer to the Trustee for $900,000 when said shares had a market value of $1,545,000 at the time of the sale. Throughout the life of the Trust the joint contributions of Employer and participants*977 were thus invested in shares of the capital stock of the Employer.
Said Trust was terminated September 26, 1931 at which time, for his entire interest in the Trust (that is, for his original capital investment of $10,000.00 in cash plus his proportionate share of contributions made during the life of the Trust by the Employer), the Petitioner received in full and final distribution $191.98 in cash and 307 shares of the capital stock of Blaw-Knox Company having a fair market value at the date of distribution of $3,223.50; that is, the Petitioner received in final liquidation of his interest, cash and securities together having a fair market value on the date of receipt of $3,415.48.
Pursuant to decision of the United States Board of Tax Appeals at Docket No. 76683, promulgated May 24, 1935, in the case of Oscar A. Olstad, Petitioner, v. Commissioner of Internal Revenue, Respondent, concerning this identical Trust, this Petitioner was not taxed for the year 1931 on that portion of the aforesaid final distribution received by him which might have been allocated to the contributions made by the Employer and no loss was claimed by the Petitioner or allowed to him for the year 1931*978 on his investment in the Trust which *883 had depreciated from $10,000.00 at the time of admission to $3,415.48 at the time of final distribution as aforesaid.
In June of 1933, more than two (2) years after the Petitioner invested in the Trust but less than two (2) years after Petitioner's actual receipt of the 307 shares of capital stock of Blaw-Knox Company from the Trust, the Petitioner sold 300 of these shares at a loss of $4,920.90 computed as follows:
| Capital investment in Trust made in cash by Petitioner | $10,000.00 |
| Less cash received on termination of the Trust September 26, 1931 | 191.98 |
| Net investment represented by 307 shares received at termination of Trust | $9,808.02 |
| Cost per share is $9,808.02 divided by 307 shares or $31.948 per share Petitioner sold 300 shares costing as above, $31.948 per share | $9,584.40 |
| Selling price | $4,663.50 |
| Loss claimed | $4,920.90 |
Petitioner claims that the period for which the 300 shares were held prior to sale runs from the date of Petitioner's admission to and investment in the Trust on June 15, 1930 thereby entitling him under Section 101 of the Revenue Act of 1932 to treat the loss sustained on the sale of*979 said 300 shares as a deductible loss.
Respondent contends that said 300 shares were held only from September 26, 1931 when distributed to the Petitioner until June of 1933 or less than the two years necessary for them to become a capital asset of the Petitioner for which a deductible loss could be claimed by him on their sale in June of 1933.
Pertinent provisions of the trust agreement, referred to as Exhibit B, in the stipulation are as follows:
MADE and entered into the 1st day of July, 1931, at Pittsburgh, Pennsylvania, by and between ALBERT C. LEHMAN, later named herein as the TRUSTEE of the MANAGERS ASSOCIATION OF BLAW-KNOX COMPANY and hereinafter referred to as TRUSTEE, and HARVEY S. STRASSBURGER of 5817 Darlington Road, Pittsburgh, Pennsylvania hereinafter referred to as MEMBER, being one of a number of individuals eligible for membership in the MANAGERS ASSOCIATION OF BLAW-KNOX COMPANY executing duplicates of this agreement, WITNESSETH, That,
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3. The association is formed for the purchase, holding, and sale of capital stock and any other securities of BLAW-KNOX COMPANY and such other securities as may be selected by the TRUSTEE for and on behalf of its members.
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5(a) In pursuance of the purposes of the association, the TRUSTEEnow holds, subject to the provisions of this agreement, on behalf of its members and those who may hereafter be admitted to membership, Seventy-two Thousand One Hundred Thirty-three (72,133) shares of the capital stock of BLAW-KNOX COMPANY.
(b) The aforesaid shares now held by the TRUSTEE as well as any securities that may hereafter be purchased for the association shall be issued in his name as TRUSTEE of the MANAGERS ASSOCIATION OF BLAW-KNOX COMPANY: and any stock dividend or stock dividends declared and paid thereon shall be added to the principal assets thereof, all to be retained for the association for a period of time ending August 31, 1935, unless disposed of in whole or in part in the discretion of the TRUSTEE or unless the association be terminated at an earlier date as provided for in Article 4.
*884 6(a) The association's total authorized capital shall be Twenty-four Thousand (24,000) undivided proportionate interests, of which Eighteen Thousand Three Hundred Twenty (18,320) are now issued, outstanding and owned by members.
(b) Each undivided proportionate interest is hereinafter*981 referred to as a SHARE which (subject to the provisions of this agreement) represents one (1) undivided fractional part of the entire interest of all members depending upon the total number of such shares actually issued, outstanding and held by all members at any one time.
(c) Ownership of one or more shares in the association is evidenced by the MEMBER'S holding this agreement executed by the TRUSTEE specifying the MEMBER'S individual investment in Paragraph 6(d). No certificates or other written evidence of membership in the association and ownership of shares therein will be issued by the TRUSTEE.
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11. The TRUSTEE shall manage the association, its funds and securities and in addition to those powers hereinafter expressly conferred upon him, the TRUSTEE may with the advice and consent of the Advisory Board do any and all things deemed expedient and for the best interest of the association in its management.
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(b) The TRUSTEE shall have the right at any time in his sole discretion to exchange or sell and liquidate any investments of the association now or hereafter held by him and to reinvest the proceeds thereof on behalf of the association.
(c) The TRUSTEE*982 shall have the right to buy or sell for the account of the association shares of stock of BLAW-KNOX COMPANY or any other corporate securities and shall not be confined in his investments solely to those securities and shares considered as legal investments for fiduciaries in the State of Pennsylvania.
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(e) The TRUSTEE may at any time sell such of the assets of the association as may be necessary to pay the debts thereof when in his judgment such action would be for the best interest of the association.
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12. During the continuance of this association the TRUSTEE may make such distribution of profits or income either in cash or securities at any time in such manner and amount as the TRUSTEE may deem advisable provided that such distribution shall be in equal amount for each issued and outstanding share or proportionate interest in the association.
13. Upon final termination of the association either on August 31, 1935 or prior thereto, each then MEMBER shall be entitled to that fraction of the net assets of the association represented by the number of shares held by the MEMBER divided by the number of issued and outstanding shares owned by all members at the*983 date of termination of the association and such pro rata share of the MEMBER, as herein defined, shall be distributed to him by the TRUSTEE in the discretion of the TRUSTEE in either securities or cash or both. Receipt of his pro rata share by the Member shall constitute a complete payment in full of account and a surrender by the MEMBER, his heirs and legal representatives, of any further right or interest in the association and such distribution when made shall constitute a full release and discharge of the TRUSTEE and of his CO-TRUSTEE from further responsibility.
*885 14(a) During the continuance of this association, should the MEMBER leave the employ of BLAW-KNOX COMPANY and/or its subsidiaries for any reason whatsoever (including death), such MEMBER or his legal representatives shall be entitled to his equity in the association only in accordance with the provisions of this agreement and such rules, regulations and conditions as may be imposed by the TRUSTEE and his Advisory Board, and in no event may a MEMBER or his estate obtain his pro rata share of the securities held by the TRUSTEE except upon final termination of the association and only then in event that the*984 TRUSTEE shall in his discretion distribute the assets thereof in kind rather than in cash.
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18(a) If at any time prior to final termination of this association, the MEMBER leaves the employ of BLAW-KNOX COMPANY or its subsidiaries for any reason other than death, incapacity or illness (which three contingencies are provided for later herein), such MEMBER shall thereby forfeit his right to any profit accrued on the shares owned by him and shall be entitled to receive only the amount of cash actually paid into the association by him without profit and without interest but with a deduction therefrom of the entire amount of his individual loss, if any, computed in accordance with Paragraph 17. Except as hereinafter noted, this article shall not apply to the TRUSTEE and the six (6) directors of BLAW-KNOX COMPANY serving upon the Advisory Board of this association.
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19. In case of death, incapacity or illness which renders the MEMBER unable to hold a remunerative position with BLAW-KNOX COMPANY, its subsidiaries or elsewhere, such MEMBER'S interest in the association, represented by the shares owned by him, shall cease and determine as of the effective date of death, *985 incapacity or illness and the MEMBER or his estate shall be paid in cash the value of such MEMBER'S shares on said effective date, ascertained by computing the MEMBER'S individual profit or loss in the manner specified in Article 17 and either adding such profit to or deducting such loss from the cash amount actually paid into the association by the MEMBER; provided, however, that the amount of MEMBER'S individual profit payable under this article shall in no event exceed One Hundred (100%) Percent of the total cash payments made by such MEMBER to the association as stated in Paragraph 6(d).
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21. This agreement and the MEMBER'S interest in the association shall be non-assignable; and the sale, assignment and transfer thereof are prohibited except to the TRUSTEE or to BLAW-KNOX COMPANY as security for indebtedness of the MEMBER either to this association or to said company. In event of the MEMBER'S becoming bankrupt or insolvent or his attempt to assign, pledge or in any manner transfer his interest in this association to any one other than the TRUSTEE herein or BLAW-KNOX COMPANY, or in the event that an attachment or execution be issued against the MEMBER'S interest herein, *986 the same shall operate as a forfeiture by the MEMBER OF THE profits, if any, accrued on the shares owned by him in the association and shall constitute a cancellation and surrender by the MEMBER of his shares in the association and the TRUSTEE is hereby authorized to make immediate repayment to such MEMBER or the legal representative of his bankrupt or insolvent estate of the amount of money which the MEMBER has actually paid in to the association, without profit or interest, and with a deduction therefrom of the MEMBER'S individual loss, if any, computed under Paragraph 17, on the shares owned by him.
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*886 25. While the main and fundamental purpose and method of operation of this association have been defined in this agreement, the right is reserved to change or amend all or any part of this agreement upon the joint affirmative vote of the TRUSTEE, a majority of the Advisory Board and a majority of the members. A majority of members is understood to mean the affirmative vote by the holders of Fifty-one (51) or more percent of the issued and outstanding shares held by members in this association.
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OPINION.
TURNER: The parties agree that the trust organized*987 on September 1, 1928, and designated herein as the "Manager's Association of Blaw-Knox Company" was an "Employees' Trust" as contemplated by section 165 of the Revenue Act of 1928. 1 Under that provision of the statute the association was not taxable as a trust, but the amount contributed to the fund by the employer and all earnings of the fund were to be taxable to the distributee in the year in which distributed or made available to him. Petitioner invested $10,000 in the trust on June 15, 1930, and upon the termination thereof on September 26, 1931, received as his proportionate share of the trust assets the sum of $191.98 in cash and 307 shares of the capital stock of the Blaw-Knox Co., which on that date had a fair market value of $3,223.50.
*988 In June 1933, more than two years after petitioner's investment in the trust but less than two years after his actual receipt of the 307 shares of capital stock of Blaw-Knox Co. from the trust, petitioner sold 300 shares of the stock for $4,663.50. Petitioner claims that he sustained a capital loss amounting to $4,920.90 within the meaning of section 101 of the Revenue Act of 1932 2 upon the sale *887 of the said 300 shares. The respondent concedes the amount and year of the loss as contended for by petitioner, but claims that the loss was an ordinary loss, subject, for deduction purposes, to the limitations prescribed by section 23(r)(1) of the act. 3 According to both parties the basis for the 307 shares of the Blaw-Knox Co. stock in the hands of the petitioner was $10,000, the amount of petitioner's investment in the trust, less $191.98, the amount of cash received by him upon the termination of the trust, their only point of difference being as to the date on which the stock was acquired.
*989 We have previously held, in (petition for review dismissed by the Circuit Court of Appeals for the Second Circuit without written opinion), in the case of another employee of the Blaw-Knox Co. and an investor in the above trust, that the employee realized no taxable gain upon the termination of the trust and the distribution of its assets in 1931 where the cash plus the fair market value of the stock received by such employee was less than the amount of his original investment. In the stipulation and on brief, the respondent has accepted the ruling in that case as sound. We have not had before us in any prior case the question as to whether or not an employee, on such facts as those stated, sustained a deductible loss in the year in which the trust was terminated and, so far as we have been able to determine, that question has not been decided by any of the courts. If the petitioner sustained a loss in respect of his investment in the trust in the year of the trust's termination, obviously the correct basis for determining gain or loss upon the subsequent sale of the stock received is not the basis used by the parties herein, but*990 is the basis so used adjusted to take the loss previously sustained into account, and, under such circumstances, *888 it is apparent that the petitioner did not have a loss upon the sale of the stock in the taxable year 1933. Inasmuch, however, as both parties have presented the instant case under the theory that the loss on the sale of the stock was sustained in 1933, and not in the year in which the trust was terminated, and, further, in view of the fact that the respondent must be sustained in his determination of the deficiency herein if petitioner did not sustain a capital loss, a finding that the shares of stock, when sold, were not capital assets will completely dispose of this case and thereby make it unnecessary to consider and determine whether or not the theory of the parties as to the year in which the loss was sustained is erroneous or correct.
Petitioner admits that he did not acquire a legal interest in the trust assets at the time of his investment in the trust, but contends that he acquired an "equitable interest in trust assets to an extent that would entitle him to compute his holdings as from the date investment was made." Respondent argues that petitioner*991 did not "acquire" the shares of stock until they were actually distributed to him by the trust and that they were therefore not "held" by him prior to that date.
We conclude that the date of the distribution by the trust is the date from which the period of holding should be computed. No other conclusion appears reasonable after examining the terms and conditions of the trust agreement. Paragraph 5(a) of the agreement states that "the Trustee now holds" 72,133 shares of the capital stock of Blaw-Knox Co., and subparagraph (b) provides that "shares now held by the trustee, as well as any securities that may hereafter be purchased for the association shall be issued in his name as Trustee" of the association. The trustee had the right at any time, in his sole discretion, to exchange or sell and liquidate any investment of the association, including shares of stock of the Blaw-Knox Co. or any other corporate investment. Upon the final termination of the association each member was to receive his proportionate part of the assets of the association which were to be distributed by the trustee "in the discretion of the trustee in either securities or cash, or both." If any member left*992 the employment of the company prior to the termination of the association, for any reason other than death, incapacity, or illness, he forfeited his right to any profits accrued on the assets of the association and was "entitled to receive only the amount of cash actually paid into the association by him without profit and without interest." In case of death, incapacity, or illness which would render the member unable to hold a remunerative position with the company, his interest in the association ceased and was to be determined as of the effective date of his death, incapacity, or *889 illness and he or his estate was to be paid "in cash" the value of his interest on that date. The right was reserved "to change or amend all or any part of this agreement upon the joint affirmative vote of the Trustee, a majority of the advisory board and a majority of the members."
We think the above provisions of the trust agreement conclusively show that the petitioner did not "acquire" nor become the "owner" of any shares of Blaw-Knox Co. at the time of his investment in the association. Title did not pass until the stock was distributed to petitioner by the trustee and the period of*993 holding begins at the time he acquired title. . Prior to termination of the trust it was not known that he would ever acquire shares of stock in Blaw-Knox Co. Prior to that time he had only the right to certain cash payments in the event of his withdrawal and a right to a proportionate share of the assets of the trust in the event of its termination, in which case the distribution might have been "in either securities or cash, or both." Cf. .
It is of some significance that section 165, supra, provides that the amount contributed to such fund by the employer and all earnings of such fund "shall be taxed to the distributee in the year in which distributed or made available to him." Thus, for the purpose of taxation, the statute does not recognize ownership in the members of such a trust until the shares of stock or other assets are actually delivered to them. See .
With respect to the meaning of the term "held" as used in the statute, the Supreme Court said in *994 , that "In common understanding to hold property is to own it. In order to hold or own one must acquire. The date of acquisition is then, that from which to compute the duration of ownership or length of holding." We are of the opinion that petitioner did not acquire the shares of stock of Blaw-Knox Co. until they were distributed to him by the trustee on September 26, 1931, and since the duration of his ownership must be computed from that date, he had not "held" the shares of stock for more than two years when they were sold in June 1933. We therefore hold that the stock in question was not a capital asset and the petitioner did not sustain a capital loss upon the sale thereof.
Decision will be entered for the respondent.
Footnotes
1. SEC. 165. EMPLOYEES' TRUSTS.
A trust created by an employer as a part of a stock bonus, pension, or profit-sharing plan for the exclusive benefit of some or all of his employees, to which contributions are made by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, shall not be taxable under section 161, but the amount contributed to such fund by the employer and all earnings of such fund shall be taxed to the distributee in the year in which distributed or made available to him. Such distributees shall for the purpose of the normal tax be allowed as credits against net income such part of the amounts so distributed or made available as represents the items of dividends and interest specified in section 25(a) and (b). ↩
2. SEC. 101. CAPITAL NET GAINS AND LOSSES.
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(b) TAX IN CASE OF CAPITAL NET LOSS. - In the case of any taxpayer, other than a corporation, who for any taxable year sustains a capital net loss (as hereinafter defined in this section), there shall be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined as follows: a partial tax shall first be computed upon the basis of the ordinary net income at the rate and in the manner as if this section had not been enacted, and the total tax shall be this amount minus 12 1/2 per centum of the capital net loss; but in no case shall the tax of a taxpayer who has sustained a capital net loss be less than the tax computed without regard to the provisions of this section.
(c) DEFINITIONS. - For the purposes of this title -
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(2) "Capital loss" means deductible loss resulting from the sale or exchange of capital assets.
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(8) "Capital assets" means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of 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. For the purposes of this definition - * * *. ↩
3. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
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(e) LOSSES BY INDIVIDUALS. - Subject to the limitations provided in subsection (r) of this section, in the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -
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(2) If incurred in any transaction entered into for profit, though not connected with the trade or business: * * *
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(r) LIMITATION ON STOCK LOSSES. -
(1) Losses from sales or exchanges of stocks and bonds (as defined in subsection (t) of this section) which are not capital assets (as defined in section 101) shall be allowed only to the extent of the gains from such sales or exchanges (including gains which may be derived by a taxpayer from the retirement of his own obligations). ↩