*1374 1. In 1930 each of the petitioners sold to the other certain shares of stock of the General Capital Corporation at a price less than cost. Held, that the petitioners are entitled to deduct from gross income losses sustained upon the sales.
2. In 1930 petitioner Marie G. Dennett was the owner of certain bonds which became worthless in that year. Held, that the investment in such bonds is a deductible loss of the year 1930.
*49 These proceedings, consolidated for hearing, are for the redetermination of deficiencies in income tax for 1930 in the respective amounts of $6,134.16 and $6,753.91. The issue in the case of petitioner Carl P. Dennett, Docket No. 71858, is whether the petitioner, who in 1930 sold to his wife certain shares of capital stock which had cost him $75,000 on August 15, 1929, may deduct from his gross income of 1930 a loss of $46,040 claimed to have been sustained on the sale.
The issues in the case of Marie G. Dennett, Docket No. 72023, are:
(1) Whether the petitioner, who had acquired*1375 certain shares of capital stock at a total cost of $150,000 and sold same to her husband *50 in 1930 for $100,000 (less $24 transfer tax), may deduct the resulting loss of $50,024 from her gross income for the year 1930.
(2) Whether the petitioner, who had made an investment of $10,000 in certain debenture bonds prior to 1930, which debentures became worthless during the taxable year due to a reorganization plan and a foreclosure of properties, may deduct the loss sustained therefrom from her gross income of 1930, although she did not discover the worthlessness of such debentures until 1931.
FINDINGS OF FACT.
The petitioners are husband and wife and residents of Boston, Massachusetts. For the calendar year 1930 they filed separate income tax returns. Carl P. Dennett during 1930 was trustee and managing director of certain corporations, and for 30 odd years had been a trader in securities.
In 1930 Carl P. Dennett had extensive holdings in stocks of at least 40 different corporations and extensive holdings in bonds. He made numerous purchases and sales of securities during the year. In that year Marie G. Dennett likewise had extensive holdings of stock in at least*1376 28 different corporations and also investments in bonds. This property of Mrs. Dennett was her sole and separate estate.
At the time of his marriage in 1905, Carl P. Dennett had a large estate; Mrs. Dennett had a small property amounting to $30,000 or $40,000. In 1914 her father died leaving a substantial estate in which she shared and which under the terms of the will came to her 10 years later, in 1924. Since that time her separate estate, derived entirely from such source, has been substantially increased by investment dealings.
At the time of the death of Mrs. Dennett's father, Dennett was made one of the three trustees of his estate and the managing trustee under his will. Since Mrs. Dennett came into possession of her property it has been managed generally by Dennett. Her investments in securities have always been kept in safe-deposit boxes separate from those of her husband. Regular annual audits have been made of her accounts and the contents of her safe-deposit boxes have been checked at such times, which audit reports have been submitted to her annually. She has been thoroughly familiar with her separate estate and all transactions relating thereto. All transactions*1377 made for her account were discussed fully with her. During Dennett's absence for a period of nearly a year during the war she managed both her own affairs and his, making substantial investments for both and acting in his place in connection with the affairs of the Griffin Wheel Co., in which he was largely interested. There has never been any mingling or merging of the separate estates of *51 the petitioners. Dennett has always paid all household and general family expenses. There have never been any gifts of funds between the petitioners, one way or the other.
Dennett maintains an office from which he manages his own investments and activities, the investments of Mrs. Dennett, a number of probate, trustee, and agency accounts, and the investment of other funds from time to time turned over to him by other individuals. The safe-deposit box in which Dennett kept all his own securities was located in the First National Bank of Boston. Mrs. Dennett also had a safe-deposit box in the First National Bank of Boston and another safe-deposit box in the Old Colony Trust Co. All of her securities were kept in her own boxes, to which she had access. For convenience in handling*1378 her investments, many certificates of common stock and registered bonds purchased for Mrs. Dennett were taken in Dennett's name, endorsed in blank, and put in her box to avoid difficulties of transfer when Mrs. Dennett was away. In 1928, for example, there were certificates for 1,600 shares of stock in different corporations which she owned but which stood in Dennett's name, endorsed in blank, and kept in her box. Separate books of account were kept as to the separate properties of the petitioners, which books have always separately reflected the securities belonging to each of them and the income derived from such securities by each.
When Dennett first commenced to manage Mrs. Dennett's affairs, separate bank accounts were kept for each with the First National Bank of Boston. In addition, personal accounts were kept. This resulted in a great deal of confusion through the crossing of checks in the banks into the wrong account. About 10 years prior to the taxable year, Dennett discussed with Mrs. Dennett the advisability of having one bank account and the clearing through it of all moneys handled by Dennett. It was agreed that her affairs would always be kept separate and distinct*1379 and that there would be an annual audit. It was distinctly understood that there would be transferred from that account into Mrs. Dennett's personal checking account, kept at another bank, a fixed sum each month for her personal needs. But it was expressly understood that the funds belonging to Mrs. Dennett in the clearing account were to be investment funds and that the accounts would always be kept in such shape that either she or Dennett could identify the cash that he or she owned in the account. This clearing account has been called the "J" account, and through it have been cleared all moneys for all accounts in the office, including Mrs. Dennett's funds, Dennett's cash, the cash of several voluntary trusts, and all the cash which Dennett held from time to time for other individuals. From this account all investments were made and into the account all income and cash received from maturities *52 or other disposition of securities have been deposited. Separate books of account have always been kept for Dennett and Mrs. Dennett, which have reflected at all times the amount of cash in the "J" account belonging separately to Dennett, Mrs. Dennett, and the other accounts*1380 in the office. The bank was instructed to honor the signature of either Dennett or Mrs. Dennett on this account. It was distinctly understood between the petitioners that the money in the "J" account should belong to the one depositing the same from his or her own separate assets. It was customary for Dennett, in active charge of the office, to sign all checks drawn against this account, except when he was away, at which time Mrs. Dennett would sign them.
On August 15, 1929, there was offered for subscription the common capital stock of the General Capital Corporation, of which Dennett was president. As original subscribers therefor, on that date Dennett subscribed for 4,750 shares and Mrs. Dennett subscribed for 1,334 shares, at $75 per share. In order to raise current funds for the payment of these subscriptions Dennett borrowed $150,000 from the bank and Mrs. Dennett called a loan for $100,000, both of which sums were deposited in the "J" account. Such subscriptions were paid for by check drawn on the "J" account. On the separate books Dennett's balance in the "J" account was thereby reduced $356,250, and Mrs. Dennett's balance was reduced $100,050, such reductions reflecting*1381 the total payment by check for the stock subscribed for. At the end of that month Dennett's secretary, who kept all of the books of account for the petitioners, turned over to him the usual trial balance of the books and a statement as to the condition of the bank balance. From such statement he ascertained that, in paying for the foregoing 4,750 shares, he had overdrawn his portion of the bank balance. Accordingly, on the day such fact was determined he allocated to Mrs. Dennett 1,400 additional shares of stock of the General Capital Corporation at the original subscription price of $75 per share. Her balance of the "J" account was also charged with $105,000 therefor, and his balance was credited with that sum. At this time there had been issued in the name of Dennett temporary certificates for a total of 4,750 shares and in the name of Mrs. Dennett temporary certificates for a total of 1,334 shares of this stock. When the reallocation of the subscription was made on September 3, 1929, Dennett endorsed two temporary certificates for 500 shares and four temporary certificates for 100 shares each, totaling 1,400 shares standing in his name, and transferred these certificates to*1382 Mrs. Dennett's safe-deposit box. In January 1930 all of the temporary certificates were taken to the transfer agent, who subsequently issued permanent certificates in the *53 same names as were borne by the temporary certificates. Upon receiving these permanent certificates Dennett endorsed in blank two certificates for 500 shares each and four certificates for 100 shares each and placed them in Mrs. Dennett's safe-deposit box.
At the end of the year 1929 the regular annual audit was made by public accountants of Mrs. Dennett's books and securities. The auditors prepared a list of all securities belonging to Mrs. Dennett from the books and then visited the vaults at the First National Bank and checked the securities in Mrs. Dennett's safe-deposit box against the books. They found in her box all of the securities shown on the books to belong to her. The auditing staff worked under strict instructions to assure themselves that endorsements were on the back of securities contained in the box of Mrs. Dennett but standing in Dennett's name and at December 31, 1926, found in her box, among other securities, a total of 2,734 shares of General Capital Corporation stock, representing*1383 the 1,334 shares originally subscribed for and the 1,400 shares reallocated to her in September 1929. They also found in her box a statement signed by Dennett that all the securities in that box belonged to Mrs. Dennett, which statement had been placed in the box by Dennett in 1925 so that in the event anything happened to him there would be no doubt that the securities in Mrs. Dennett's possession actually belonged to her, although they might be in his name.
In February 1930 Dennett purchased from Mrs. Dennett, 2,000 shares of the capital stock of the General Capital Corporation for $50 a share, which was the then prevailing market price. To complete the sale Mrs. Dennett transferred to Dennett the certificates for 1,400 shares which she had acquired on September 3, 1929, at the time of the reallocation, and, in addition, certificate No. 1304 for 500 shares, and certificate No. 1619 for 100 shares, a part of the 1,334 shares purchased in August 1929, which certificates were turned in to the transfer agent and canceled, and new certificates for 600 shares were issued in Dennett's name. At the time of this purchase and sale Dennett had a balance of $110,931.28 in the "J" account*1384 and Mrs. Dennett had a balance of $199,546.02. Payment was made to Mrs. Dennett by transferring $100,000 of Dennett's balance to her, which transfer was duly reflected on the books of account and reduced his balance to $10,931.28, while increasing her balance to $299,546.02. All of the balance contained in the "J" account as belonging to Dennett immediately prior to this sale and from which he made such payment had been derived from maturities of bonds, sales of securities, and income from his own securities, and the balance shown as belonging to Mrs. Dennett had been derived entirely from the sale of her bonds and securities and her own income. After the *54 transfer of such purchase price of $100,000 to Mrs. Dennett she used that sum for her own purposes in making reinvestments.
In her income tax return for 1930 Mrs. Dennett claimed a loss from the foregoing sale of 2,000 shares of General Capital Corporation stock in the amount of $50,024, representing the difference between the cost to her and selling price, plus $24 transfer tax. The respondent disallowed the deduction of the loss on the ground that "under the laws of the State of Massachusetts the taxpayer had no*1385 capacity to act in a contractual way with her husband, and as a result the loss claimed is not bona fide and can not be allowed."
On December 19, 1930, Dennett purchased 300 shares of General Capital Corporation stock at $29 per share and on December 20, 100 shares at $29 per share.
In December 1930 Dennett's secretary called his attention to the fact that he was short of cash, and in order to realize funds he sold to Mrs. Dennett on December 22, 1930, 1,000 shares of General Capital Corporation stock at $29 a share, which was the then prevailing market price. Immediately prior to this transaction there was a deficit in the "J" account against Dennett of $57,493.22 and a credit balance belonging to Mrs. Dennett of $334,536.93, all of which balance had been derived from her separate property. Payment to Dennett for the 1,000 shares sold was made by transferring to him on the books $29,000 belonging to Mrs. Dennett, reducing his deficit in the account to $28,493.22. In order to cancel the balance of this deficit Dennett thereupon borrowed $65,000 from the bank, which he deposited in the "J" account. The funds thus transferred to Dennett in payment for such stock were used by*1386 him for his own purposes. Dennett, in completing such sale, transferred to Mrs. Dennett permanent certificates numbered 928 and 129, for 500 shares each, which he had acquired as a part of his original subscription on August 15, 1929, at a total cost of $75,000, which certificates were turned in to the transfer agent and canceled, and new certificates were issued to Mrs. Dennett.
In filing his income tax return for the year 1930 Dennett claimed a loss of $46,000 from the sale of the 1,000 shares of General Capital Corporation stock, plus $40 for transfer taxes, which loss was disallowed by the respondent on the ground that "the Massachusetts law * * * never has given a husband the right to contract with his wife, therefore the loss claimed is not bona fide and can not be allowed."
In June 1925 Mrs. Dennett acquired, at a cost of $10,000, certain debenture bonds of the Detroit Railway & Harbor Terminal Co. having a par value of $10,000. On November 1, 1928, this corporation defaulted in the payment of interest on its securities and thereafter *55 protective committees were appointed to represent holders of the first mortgage bonds and of debenture bonds. In September*1387 1929 a plan of reorganization was presented to holders by the protective committees, which contemplated that holders of first mortgage bonds who deposited these bonds would, upon reorganization of the company, receive 20 shares of preferred stock and 2 shares of common stock in a new company to be formed for each $1,000 par value first mortgage bond deposited. Under the plan of reorganization the holders of debenture bonds who deposited their debentures were to receive 2 shares of common stock in the new company, or, if they subscribed to new first mortgage bonds in an amount equal to one third of the face value of debentures held by them, they would receive 20 shares of the common stock of the new company to be formed for each $1,000 face value of debentures. On February 17, 1930, there having been deposited 97 1/2 percent of first mortgage bonds, the reorganization plan was declared operative by the protective committee and the new corporation, which had been formed on January 17, 1930, under the name of Detroit Harbor Terminals, Inc., prepared to bid in the properties of the old company. On March 4, 1930, the representative of the new company bid in the properties of the old*1388 company at a price equivalent to $170 for each $1,000 of first mortgage bonds of the old company outstanding. The holders of first mortgage bonds who had not deposited their bonds received $170 in cash for each $1,000 of said bonds; the holders of deposited debentures received 5 shares, or 20 shares of common stock of the new company, according to whether or not they subscribed for new bonds; and the holders of debentures who had not deposited their securities received nothing. Mrs. Dennett did not deposit her debentures with the protective committee. She received no notice of the reorganization and it was not until the latter part of 1931 that her husband ascertained what action had been taken. At that time he talked with the representative of the brokers from whom the bonds had been purchased originally and ascertained that it was too late to enter into any reorganization plan. The debentures were thereupon turned over to R. L. Day & Co., public auctioneers for securities in Boston, who, on December 26, 1931, sold the debentures for $10, from which the auctioneer deducted fees amounting to $6, leaving $4 as the net proceeds from the debentures. Mrs. Dennett's investment in*1389 the bonds was thereupon charged off her books as a loss and in her income tax return for 1931 she claimed a loss of $9,996 in respect of this investment. Upon the audit of Mrs. Dennett's income tax return for 1931 the claimed loss was disallowed by the revenue agent upon the ground that it should have been taken in the calendar year 1930. By amended petition the *56 petitioner has now claimed such loss in the amount of $10,000 in 1930.
OPINION.
SMITH: In these proceedings the petitioners claim the deduction from gross income of 1930 of losses alleged to have been sustained by each of them upon the sale of securities to the other. The respondent has disallowed the losses upon the ground that under the laws of Massachusetts there can be no valid sale of property between husband and wife. We think there is no merit in this position. We so held in a memorandum opinion entered April 20, 1932, in the case of Richard W. Hale, which was affirmed by the United States Circuit Court of Appeals for the First Circuit in *1390 . In that case the petitioner claimed the deduction of a loss upon the sale of shares of stock to his wife. The Board and the court allowed the deduction of the loss, the court observing: "He has sustained an actual loss by the transfer as fully as though he had conveyed it for the same sum to a stranger." To the same effect is ; .
A more serious question which is presented by these proceedings is whether the transfers of the wife to the husband and of the husband to the wife, in the circumstances, constituted bona fide sales of securities from which losses were sustained. From the standpoint of the marital community no loss was sustained. The community owned the same property and the same amount of cash after the transfers as before. But husband and wife are not taxed as a community under the income tax laws. Each is liable to income tax upon his or her gains and income. If a bona fide sale is made by husband or wife to the other, the transaction is to be treated in all respects as though it were a transaction with a stranger. *1391 Transactions of the character of those here involved invite scrutiny. If not made at a fair market price a question may arise as to whether the sale was bona fide. But in these proceedings the evidence proves that they were made at the market price. The General Capital Corporation was a large corporation. There was an active market for its shares. The sales were made at the quoted price for the shares. The respondent does not question that the sales were at the market price.
There can be no question but that the transactions between the petitioners effected a transfer of title to and possession of the shares. The separate estates of the two petitioners have always been dealt with as separate estates. It is true that the investment cash of the petitioners was kept in the "J" account, together with other cash, and it is true that either petitioner could draw checks against the *57 account. But the books of account kept for the two petitioners and for others for whom Dennett handled moneys were kept rigidly separate. At any time the cash in the "J" account could be segregated to the several owners. The law of Massachusetts is entirely clear that the money in that*1392 account recorded as belonging to either the husband or wife and derived in each case entirely from their sole and separate estates actually was owned by the party thus shown as entitled thereto.
In ; , a husband had turned over to his mother-in-law a check payable to him which he had received from a third party. The mother-in-law made a gift of the check to her daughter, the wife. Before the check was cashed some creditors of the husband attached his property. The wife gave him the check, told him to pay off the attachment, and for them to assign the attachment to her. Thereafter, other creditors of the husband claimed this property and in doing so presented the proposition (1) that the check became his property because she had turned it over to him and (2) that, the money having become his, he in effect paid off the mortgage himself and the property belonged to him. The court brushed both contentions aside with the statement:
* * * They proceed upon the theory that money of the wife which passes into hands of the husband, even as her agent, become ipso facto the property of the husband, without*1393 regard to justice or the intentions of the parties. The doctrine that a husband may be the agent of his wife is too familiar to need the citation of authorities; and the law does not compel a husband to deprive the wife of her own money, if it comes to his hands as her agent, nor does such possession of her property by him change its ownership.
To like effect is ; . In that case the first suit was to require the John Hancock National Bank to turn over to the wife's estate the money in that bank which the husband had deposited in his name alone and subject only to his signature. The court found that the money was derived from the proceeds of the wife's separate property. The court pointed to old cases where it might be inferred under certain circumstances that a wife had made a gift of money, but pointed out that this was only a rebuttable inference, to be determined by the evidence in a particular case. The court said:
* * * We think, however, that the most reasonable inference from the facts found or agreed in the cases at bar is that the wife intended neither to give nor*1394 to lend to her husband the money which he deposited in his own name in the John Hancock National Bank, but that she permitted it to be deposited in this manner for convenience, until it should be invested, with the intention that it might be used either for her own benefit or that of her husband. It is evident that the whole of the balance of $748.94, standing to the credit of Mr. Goodenough on the books of the John Hancock National Bank, together with what has heretofore been expended for the use of Mrs. Goodenough, *58 including the deposits in the savings banks, will not make up the amount of her money which is shown to have been deposited in that bank; and that, so far as appears, all the money which remains in that bank is her money, unless she has effectually given it to him. * * *
We are of opinion that the transfer made by each petitioner to the other constituted a bona fide sale of stock at the then market price.
In her return Mrs. Dennett claimed the deduction of a loss of $50,024 on the sale of 2,000 shares of stock of General Capital Corporation. For this stock she received $100,000. The cost of the stock to her was $150,000. It is claimed that a stamp*1395 transfer tax of $24 was paid. But whether this payment, if made, was made by the husband or the wife does not appear. For lack of proof upon this point the loss is a legal deduction from gross income in the amount of only $50,000. Similarly, Dennett contends that he sustained a loss of $46,040 upon the sale of 1,000 shares of the stock to his wife in 1930. The cash book introduced in evidence does not show the payment of a stamp transfer tax. Accordingly, the apparent loss may not be increased to the extent of the $40 claimed to have been paid as such tax.
The respondent contends that if the petitioner is entitled to deduct any loss in respect of the sale to his wife he is entitled to deduct only six tenths of the claimed loss, on the ground that within 30 days from the date of the sale he acquired 400 shares of stock at $29 per share and that under section 118 of the Revenue Act of 1928 he is not entitled to deduct any loss in respect of the sale of 400 of the 1,000 shares. Dennett contends that he was a dealer in securities within the meaning of the section, and that section 118 has no application to him. The evidence does not show, however, that Dennett was anything more*1396 than an investor in securities. The contention of the respondent upon this point is sustained. Cf. .
Mrs. Dennett further contends that she is entitled to deduct from her gross income a loss of $10,000 upon the bonds of the Detroit Railway & Harbor Terminal Co. At the time she made out her return for 1930 she was not aware that she had sustained this loss. The bonds were sold at auction in 1931, at a time when they were entirely worthless, at a price of $10, from which she received proceeds of $4. The fact that she succeeded in selling bonds that were entirely worthless in 1931 at an amount to return her $4 does not, we think, bar her from the deduction of the loss in 1930. The evidence proves the utter worthlessness of the bonds in 1930. The contention of Mrs. Dennett upon this point is sustained.
Reviewed by the Board.
Judgment will be entered under Rule 50.
STERNHAGEN, SEAWELL, and ADAMS dissent.