*2164 Method of computing profit made on sale of margin stock determined.
*149 In this proceeding the petitioner seeks a redetermination of his income tax for the calendar year 1923, for which year the Commissioner has determined a deficiency of $9,557.96. The issue is the *150 basis to be used in determining the profit made on the sale in that year of margin stock.
FINDINGS OF FACT.
The petitioner is an individual with offices at 42 Broadway, New York City, and is engaged in trading in stocks and bonds on his own account.
Petitioner began trading in Studebaker common stock in 1919 on margin, through the houses of J. S. Bache & Company and Josephthal & Company. At the close of 1919, there were 200 shares in the J. S. Bache account. During 1920, 1,000 shares were purchased and 1,200 shares were sold through Bache, leaving no shares in this account at the end of that year. During 1921 there were 400 shares purchased and 400 shares sold. No purchased and sales of Studebaker common were made through Bache during 1922 or 1923.
Petitioner*2165 had 1,000 shares of Studebaker common in his margin account with Josephthal & Company in August, 1919, and thereafter purchased and sold Studebaker common through this firm as follows:
| 1919 | |||||
| Bought | Sold | ||||
| 100 at 122 3/8 | |||||
| Oct. 10 | 500 at 129 | $64,600.00 | Oct. 8 | 100 at 124 3/8 | $24,637.00 |
(Account long 1,300 shares.)
| 1920 | ||
| 200 at 89 1/2 | ||
| Mar. 8 | 100 at 90 5/8 | $27,007.50 |
| 200 at 93 1/2 | ||
| Mar. 9 | 200 at 92 | 46,425.00 |
| 100 at 92 1/2 | ||
| May 8 | 700 stock dividend 33 1/3 per cent. |
(Account long 2,800 shares.)
| 1921 | |||||
| 100 at 56 5/8 | $5,677.50 | Jan. 24 | 100 at 57 1/2 | $5,731.00 | |
| 100 at 57 1/2 | 100 at 57 1/4 | ||||
| Jan. 24 | 100 at 57 3/4 | 17,295.00 | Feb. 14 | 100 at 57 3/4 | 17,255.50 |
| 100 at 57 1/4 | 100 at 58 1/8 |
(Account long 2,800 shares.)
| 1922 | |||||
| 200 at 135 3/8 | $27,115.00 | Apr. 21 | 100 at 122 1/8 | $12,193.50 | |
| Oct. 18 | 200 at 135 | 27,040.00 | June 20 | 100 at 126 1/8 | 12,588.50 |
| 100 at 133 7/8 | 26,702.50 | Oct. 9 | 100 at 136 | ||
| Oct. 19 | 100 at 132 3/4 | 100 at 136 5/8 | 27,214.50 | ||
| Oct. 25 | 100 at 128 3/8 | 12,857.50 | Oct. 13 | 100 at 138 1/4 | 13,801.00 |
| Oct. 14 | 100 at 138 7/8 | 13,863.50 |
*2166 (Account long 2,900 shares.)
| 1923 | ||||
| Jan. 3 | 725 stock dividend | 100 at 118 5/8 | ||
| Feb. 26 | 100 at 119 1/8 | $11,927.50 | 100 at 119 3/8 | |
| 100 at 105 1/2 | Feb. 6 | 100 at 119 1/2 | 11,931.00 | |
| June 18 | 100 at 106 1/8 | 31,682.50 | 100 at 119 3/4 | |
| 100 at 104 3/4 | 100 at 120 3/8 | 12,018.50 | ||
| June 20 | 100 at 103 3/8 | 10,352.50 | 100 at 120 1/8 | |
| 100 at 120 3/4 | ||||
| 100 at 121 1/4 | ||||
| Feb. 7 | 100 at 121 | |||
| 100 at 121 5/8 | ||||
| 100 at 122 1/4 | ||||
| Feb. 10 | 100 at 119 7/8 | |||
| 100 at 120 | ||||
| Feb. 23 | 100 at 120 7/8 | |||
| 100 at 121 1/2 | ||||
| Mar. 5 | 100 at 123 1/2 | |||
| Mar. 14 | 100 at 125 5/8 | |||
| June 21 | 100 at 105 3/8 | |||
| June 25 | 100 at 103 5/8 | 10,377.50 | Aug. 18 | 100 at 106 1/4 |
| 100 at 104 1/4 | Aug. 28 | 100 at 107 5/8 | ||
| Sept. 13 | 100 at 103 1/2 | 31,045.00 | Sept. 1 | 2,025 Studebaker |
| outright as of June 26 | ||||
| 100 at 102 1/2 |
(Account long 500 shares.)
*151 The above figures are taken from petitioner's books. The broker's commission for buying is included in the purchase price and his commission for selling has been deducted from the amount for which the stock was sold.
The petitioner took*2167 up 2,025 of the shares held on margin on June 26, 1923, by paying to Josephthal & Company $71,788.87. This transaction was recorded in the margin account in petitioner's books on September 1, 1923, as a sale as of June 26, 1923, of margin stock at $146,464.51 and in the outright account of Studebaker stock as stock acquired as of June 26, 1923, at $146,464.51. This makes the average cost of the shares taken up approximately $73 per share.
Petitioner had a private telephone from his office to that of Josephthal and orders to sell were given over this telephone, the broker being instructed to sell the particular stock purchased on a certain date at a certain figure.
From the time petitioner began trading in Studebaker common stock, it was his intention never to let his margin account get below 2,000 shares and eventually to take up at least that many shares of his earliest purchases. From the middle of the year 1920, petitioner's margin account with Josephthal & Company was never below 2,000 shares until the date the 2,025 shares were taken up.
OPINION.
MATTHEWS: The respondent contends that the profit made on the 2,000 shares of stock sold in 1923 should be computed by*2168 using the cost of the earliest shares purchased, under the following provision of article 39 of Regulations 62:
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.
*152 In applying this rule, the respondent treated the purchases and sales made through Bache & Company and through Josephthal & Company as not being identifiable and has applied the sales made in 1919, 1920, 1921 and 1922 against the earliest purchases and applied the sales made in 1923 against the next earliest purchases. Necessary adjustments in the cost of stock sold were made to take care of the stock dividends received.
Petitioner contends that he has followed this rule in every case where he was unable to identify the lots sold. He identified lots sold by directing his broker to sell the particular stock purchased on a certain date at a certain figure. He further contends that the stock purchased in 1919 and 1920, amounting to 2,100 shares, upon which a 33 1/3 per cent stock dividend was declared in 1920, bringing*2169 the number held to 2,800 shares on January 1, 1921, is the block of stock from which the petitioner took up 2,025 shares in 1923 by outright purchase, and that the Commissioner is in error in using the cost of this stock as the basis for ascertaining the profits on the sales made in 1923. , is cited by petitioner as authority for his contention.
The petitioner's method of identifying the lots of margin stock sold is the same as that followed by the petitioner in the case of . In that case we held that even assuming that the broker sold as directed, the orders to the broker could be given no force as an identification of the stock sold so as to render article 39 of the regulations inapplicable in the determination of the taxable income, since the shares were not specifically owned or possessed by the taxpayer. We could not find as a fact, therefore, as did the District Court in , that the lots of stock sold were identified as petitioner claimed. It was further held in the Stryker case that article 39, Regulations 65, prescribing*2170 the method of computing gain on sales of stock made from lots purchased on different dates and at different prices where identity of the lots can not be determined, is reasonable and within the full scope of the administrative regulations contemplated by the statute. This article is identical with article 39 of Regulations 62.
Petitioner seeks to identify the stock taken up in 1923 as being a part of the block of 2,800 shares acquired in 1919 and 1920 by purchase and by receipt of stock dividends (1) by the continuity of his holding of this many shares in the margin account on January 1, 1921, January 1, 1922, and January 1, 1923; (2) by book entries - the book value as of June 26, 1923, of $146,464.51 or an average price of about $73 a share, he claims is approximately the cost of stock bought in 1919 and 1920; and (3) by his intention eventually to take up earliest purchases.
*153 We do not think that margin stock taken up can be identified any more than can margin stock sold. In fact, the bookkeeping entry in the margin account, which records the taking up of stock held on margin, is the same as if the stock had been sold. Whatever may have been the intention of*2171 the petitioner, therefore, the orders to the broker to take up the earliest purchases could be given no force as an identification of the stock taken up. Neither can the book entries as to the cost of the stock taken up or the balance paid to Josephthal & Company serve to identify the stock taken up in 1923 as being any particular stock acquired in 1919 or 1920. , affirming District Court decision, .
In so far as the sales of stock made prior to June 26, 1923, are concerned, the method followed by the Commissioner is correct. The shares taken up on June 26 should be applied against the earliest stock then on hand and the sales made after June 26 applied against the earliest purchases still held in the margin account. We think, however, that the margin stock purchased through Bache & Company can be identified from that purchased through Josephthal. As all of the stocks purchased through Bache were sold through that firm and as there was no Studebaker common stock left in this account at the close of 1921, and there were no purchases and sales made in 1922 or 1923, the purchases and sales made through*2172 Bache & Company should not be considered in computing the profit derived on the sales made in 1923 through Josephthal & Company. See ;; ; and .
Judgment will be entered under Rule 50.