*1366 Where petitioner instructs a broker to sell 1,075 shares of certain stock owned by him and at the same time instructs the broker to purchase the same number of shares in the name of petitioner's wife and pays for the stock by instructing a bank, orally, to charge the purchase price thereof to a bank account opened for that purpose in the name of his wife with a check drawn by him against his own account in the bank, the petitioner all the while retaining control of the situation, held, such transaction does not constitute a sale resulting in a deductible loss to petitioner.
*125 This is a proceeding for the redetermination of an asserted deficiency in income tax for the year 1930 in the amount of $2,905.46.
The petition alleges in substance that the respondent erred (1) in disallowing a deduction from gross income in the amount of $31,174.25, representing a loss from a purported sale on December 26, 1930, of 1,075 shares of stock of the Reynolds Metals Co., and (2) in determining that the return filed by the petitioner was a joint return of the*1367 petitioner and his wife and not the separate return of the petitioner. The respondent in his amended answer alleges that he erred in computing net income, as shown by the notice of deficiency, by allowing excess contributions in the amount of $128 and that such net income and the asserted deficiency should be correspondingly increased; and alleges, in the alternative, that if the Board should reduce the net income determined by him, as shown by the notice of *126 deficiency dated September 15, 1932, then in that event the deduction for contributions should also be reduced to an amount not in excess of 15 percent of the net income determined by the Board before the allowance of any deduction for contributions.
FINDINGS OF FACT.
The petitioner is an individual, residing in Elkins Park, Pennsylvania. He is employed by Blumenthal Bros., Inc., which is owned by himself and brothers.
On and before December 26, 1930, the petitioner was the owner of 1,075 shares of common stock of no par value of Reynolds Metals Co. which had been acquired by him at a cost of $43,206.
While on a train going to New York petitioner and one Lot S. Coons, a salesman in the employ of Montgomery, *1368 Scott & Co., securities brokers with offices in Philadelphia and New York, discussed the subject of taxation and in particular the sale of stock for tax reduction purposes. Coons advised him to sell the Reynolds Metals stock on the New York Stock Exchange and have petitioner's wife purchase a like amount, and suggested that petitioner sell the stock through his office. Petitioner orally instructed Coons to sell the 1,075 Reynolds Metals stock and to buy the same number of shares of the same stock in the name of his wife, Rey S. Blumenthal.
The office records of the Philadelphia office of Montgomery, Scott & Co. contain an order to sell 1,075 shares of Reynolds Metals stock for the account of "Jos. Blumenthal, Blumenthal Bros." dated December 26, 1930; an order to buy 1,075 shares of the same stock for the account of "Mrs. Ray F. Blumenthal, c/o Blumenthal Bros.," dated December 26, 1930, both in the handwriting of Lot S. Coons; confirmation of the New York office of Montgomery, Scott & Co. to its Philadelphia office dated December 26, 1930, of a sale to "Mont Scott" of 1,075 shares of Reynolds Metals at 11 3/8; confirmation of the New York office of Montgomery, Scott & Co. to*1369 its Philadelphia office dated December 26, 1930, of a purchase from "Mont Scott" of 1,075 shares of Reynolds Metals at 11 3/8; ledger card of the Philadelphia office showing that an account was opened for "Mrs. Ray F. Blumenthal c/o Blumenthal Bros. * * *," with a charge on December 29, 1930, of $12,362.51 for 1,075 shares of Reynolds Metals at 11 3/8, a charge for interest at 5 percent to January 5 in the amount of $12.02, and a credit as of January 5, 1931, of $12,374.53, which closed the account; and a ledger card of the Philadelphia office showing that an account was opened for "Jos. Blumenthal c/o Blumenthal Bros. * * *," to which there was credited the amount of $12,050.75 as of December 29, 1930, for 1,075 shares of Reynolds Metals stock.
*127 The sales of Reynolds Metals Co. stock appearing on the tape of the New York Stock Exchange on December 26, 1930, were as follows: 350 shares at 11 3/8; 1,075 at 11 3/8; 200 at 11 1/8; 200 at 11 1/8; 100 at 11 1/4; 100 at 11 3/8; total 2,025 shares.
The following is a rule, in force in 1930, adopted by the "Governing Committee" of the New York Stock Exchange, relating to "Dealings upon the Exchange":
Sec. 13. When a member*1370 has an order to buy and an order to sell the same security, he must offer such security, if bonds at 1/8 of 1%, and if stocks at 1/8 of one dollar, higher than his bid before making a transaction with himself, if not so already bid or offered.
The petitioner received from the Philadelphia office of Montgomery, Scott & Co. a statement under date of December 26, 1930, being in form a confirmation and notice of sale of 1,075 shares of Reynolds Metals at 11 3/8, or $12,228.13, minus $134.38 commission and $43 tax, or a net amount of $12,050.75, addressed to "Jos. Blumenthal Cash A/C"; and bill under date of December 26, 1930, being in form a confirmation and notice of purchase of 1,075 shares of Reynolds Metals at 11 3/8, or $12,228.13, plus commission of $134.38, or a total of $12,362.51, addressed to "Mrs. Ray F. Blumenthal C/O Blumenthal Bros. Cash Acct." Ray F. Blumenthal and Ray S. Blumenthal are one and the same person, the latter being the correct name of petitioner's wife.
The petitioner mailed his check on the Tradesmens National Bank & Trust Co., Philadelphia, dated December 31, 1930, and payable to the order of "Ray S. Blumenthal" in the amount of $12,387.51, to the Tradesmens*1371 National Bank & Trust Co., which amount was debited to his account with that bank on January 2, 1931. The petitioner instructed the bank by telephone to open an account in his wife's name and credit the amount of such check to her account, and, when it received the Reynolds Metals stock from Montgomery, Scott & Co., to charge her account with the purported purchase price thereof. The petitioner's wife did not see the check before it was mailed to the bank and prior to that time had no account with that bank. The bank received no instructions whatever relating to this transaction from petitioner's wife. On the bank of the stock there is stamped the following: "Credited to the Account of Payee Tradesmens National Bank & Trust Co., Phila., Pa. H. E. Deily, Cashier, Absence of Endorsement Guaranteed."
The petitioner and his wife maintained separate bank accounts. About May 7, 1929, petitioner's wife opened and thereafter maintained a checking account with the Elkins Park National Bank. She had no income and no property or money of her own except moneys deposited by her to her account at the Elkins Park National Bank, which were gifts from the petitioner or savings out of a weekly*1372 *128 allowance given to her by the petitioner. She attended to her own banking with the Elkins Park National Bank.
Under date of December 26, 1930, the petitioner wrote a letter addressed to the "Tradesmen's National Bank" of Philadelphia, advising in substance that he was enclosing 1,075 shares of Reynolds Metals Co. stock, represented by 12 certificates listed therein, which he had sold on that date at 11 3/8 through Montgomery, Scott & Co., and instructed the bank to obtain a certified check for the Reynolds Metals stock, credit the amount of such check when received to his account and notify him at once. This letter bears stamped upon its face opposite the listed securities the following: "12/29/30 Received above securities [signed] Montgomery, Scott Co. - W. F. McCoy."
The 12 certificates listed in the above letter, representing 1,075 shares of Reynolds Metals stock, were in the name of petitioner and were endorsed in blank by him when received by the Tradesmens National Bank. The bank clerk inserted the name of "Mrs. Ray S. Blumenthal" as assignee in the endorsement on the back of the 12 certificates. The name of Montgomery, Scott & Co. is stamped in such endorsement*1373 in the space provided therein for the name of the transfer agent. On the back of the certificates is also stamped a form of designation of transfer agent, signed "Montgomery, Scott & Co.," which is undated, and the space provided for the name of the transfer agent is blank.
Under date of December 29, 1930, the Tradesmens National Bank & Trust Co., in a letter addressed to the petitioner, acknowledged receipt of the above mentioned 12 certificates and stated, "As requested, we have delivered these securities to Montgomery, Scott & Co. and have received payment" of $12,228.12, less commission of $134.38 and tax of $43, or a net amount of $12,050.75. Such amount was credited on December 29, 1930, to petitioner's account with the bank.
On January 5, 1931, the same certificates were returned to the bank by Montgomery, Scott & Co.
Under date of January 5, 1931, the Tradesmens National Bank & Trust Co. sent a letter addressed to the petitioner, reading as follows:
In accordance with instructions we have today charged the account of Mrs. Ray S. Blumenthal $1,237.12 [$12,374.53] for the purchase of 1,075 shares of Reynolds Metals stock from Montgomery, Scott & Company. We are*1374 having the certificates transferred and when they are received they will be returned to you.
The amount of $12,374.53 was charged against the account of Ray S. Blumenthal with the Tradesmens National Bank under date of January 5, 1931.
*129 The Tradesmens National Bank, under date of January 8, 1931, wrote a letter addressed to the petitioner as follows:
We are enclosing certificates for 1,075 shares Reynolds Metals Company common stock, which we have transferred to the name of Mrs. Ray S. Blumenthal as requested:
| Nos. 1423/32 incl. | 100 shrs. each |
| 01092 | 75 shrs. each |
* * *
The actions of the petitioner as hereinbefore described were motivated solely by the purpose of showing a loss in his income tax return.
In the income tax return for the calendar year 1930 signed and filed by the petitioner, the answer "Yes" appears to the question, "Is this a joint return of husband and wife?" All the income reported on that return was the separate income of the petitioner for 1930, consisting of salary received from Blumenthal Bros., Inc., in the amount of $46,800, dividends in the total sum of $5,107.52, and interest in the sum of $188.31. In the item*1375 of $594.44 deducted as "Taxes Paid" in such return there is included the item "Personal Taxes - Mrs. Blumenthal 6.80." Such item also included taxes on dues of petitioner's wife paid in 1930 to the Philmont Country Club in the amount of $7.70. The return was made on the cash receipts and disbursements basis. The petitioner's wife did not file a separate return for the year 1930.
In determining the deficiency shown in the notice of deficiency dated September 15, 1932, the respondent allowed as a deduction from gross income contributions in the amount of $4,003.37. It was stipulated that during the year 1930 the petitioner paid contributions in the amount of $3,875.37 only, all of which represents personal contributions of the petitioner, and that the deduction for contributions as allowed by the respondent should be decreased by the amount of $128.
In the return filed by the petitioner he deducted as representing a loss the amount of $31,174.25, the difference between the cost of Reynolds Metals Co. stock and the amount received for such stock in the transaction heretofore described, which deduction the respondent disallowed.
The notice of deficiency dated September 15, 1932, was*1376 addressed to the petitioner.
OPINION.
MCMAHON: The question to be determined is whether the petitioner is entitled to a deduction from gross income for the year 1930 of the amount of $31,174.25, which petitioner claims represents a loss resulting from a sale of 1,075 shares of Reynolds Metals Co. *130 stock in 1930 on the New York Stock Exchange through Montgomery, Scott & Co., brokers, in the regular course of business. The respondent, however, contends that the transaction did not constitute a sale, as the petitioner was the principal in the selling order and also the principal in the buying order, and, further, that if the transaction was a sale in form, it was not an actual sale.
The petitioner testified that he decided to dispose of the Reynolds Metals stock at the very end of 1930, solely because he wanted to show an income tax loss. In , the Board stated:
* * * Since the transaction was made for the avowed purpose of reducing taxation and apparently would not have been consummated otherwise at this time, every requirement of a sale must be met. * * * [Emphasis supplied.]
*1377 In , the Board stated:
* * * The parties must make a bona fide transfer as persons dealing at arm's length would do - the seller for the purpose of absolutely getting rid of the stock and the buyer for the purpose of absolutely acquiring it as his own without any condition covering its later return to the seller. Receiving a credit for the price and the mere indicia of ownership, without the mutual element of intent on both sides to complete an absolute sale, cannot constitute a basis for a deduction for loss under the provisions of the tax law. A loss to be deductible must be a reality. [Emphasis supplied.]
The petitioner contends that he sold the stock in the regular course of business through a member of the New York Stock Exchange on December 26, 1930, and that his wife purchased the stock on the same date with funds presented to her by him as a gift, or, in other words, that there were two transactions.
The petitioner testified that when he gave the order to sell the 1,075 shares of Reynolds Metals stock he also gave an order to buy the same number of shares in the name of his wife; that his wife did not tell*1378 him to purchase the stock, although she knew of it; that his wife had no property or money except such as he had given to her from time to time; that he told his wife that he was going to make her a present of $12,387.51, with which to purchase 1,075 shares of Reynolds Metals stock; and that he wanted his wife to own the stock as he did not want it to pass out of the family. However, the petitioner did not deliver his check in the amount of $12,387.51 to his wife. He delivered it to the bank in which he kept his funds, whereas his wife had a separate account at another bank, and he personally instructed the bank as to its disposition. His wife did not see the check, did not endorse it, and at no time, so far as we know, did she exercise any rights of ownership with respect to the funds deposited in her name by the petitioner with the Tradesmens National Bank.
*131 The petitioner delivered the certificates issued in his name to the Tradesmens National Bank enclosed in his letter of December 26, 1930. The bank on December 29, 1930, delivered these certificates to Montgomery, Scott & Co., and on January 5, 1931, this company returned the same certificates to the bank. On*1379 the same date the bank sent these certificates to the Bankers Trust Co. of New York to be transferred to Mrs. Blumenthal. A clerk of the bank testified that before these certificates were sent to the Bankers Trust Co. he filled in the name of Mrs. Blumenthal in the endorsement on the back of each certificate as assignee, pursuant to instructions; that the bank's records contain a receipt for these certificates signed by the Bankers Trust Co. and dated January 6, 1931, and that these records show that on January 7 the Bankers Trust Co. sent to the Tradesmens National Bank a letter accompanied by the new certificates issued to Mrs. Blumenthal; and that on January 8 the Tradesmens National Bank sent these certificates to the petitioner.
While it is asserted by the petitioner that the sale was made on the New York Stock Exchange on December 26, 1930, through Montgomery, Scott & Co., it appears from the foregoing that the first entry of the transaction in the account of the petitioner, and also in the account of his wife with such broker is dated December 29, 1930, the date the original certificates were delivered to the broker by the Tradesmens National Bank, which certificates were*1380 returned to the bank on January 5, 1931.
From the whole record we are convinced that the foregoing constituted but one transaction and that there was no real or actual sale, the "vital intent to change ownership" being wholly absent. .
In a somewhat analogous situation, the Board, in , stated:
* * * A man can not make a sale to himself. And yet the evidence in this case would indicate that this transaction, which we are asked to accept as a sale, amounted to little, if anything, more than this. We have already eliminated Peters and Brown [the alleged purchasers] from the transaction as independent actors. Whatever, therefore, was done by them or in their names must be taken as if done by or on behalf of Esperson. * * *
In this proceeding it is very apparent that whatever was done was done upon instructions of the petitioner. While the petitioner testified that his wife knew about the transaction because he told her about it, there is no evidence of any independent act on her part in the whole transaction. It is true that the bank clerk testified that the*1381 records of the Tradesmens National Bank contain a letter dated January 9, 1931, from Mrs. Ray S. Blumenthal acknowledging receipt of the certificates issued in her name, but there is no evidence that this letter was signed by her or anyone else. There is no evidence *132 that the certificates were actually delivered to her. These certificates were mailed to the petitioner, were in his possession at the hearing, and, so far as we know, were never out of his possession. In our opinion, at the very outset of this transaction, the petitioner gave the order to sell the stock with the understanding that it or at least an equivalent number of shares would be returned to him issued in the name of his wife.
In ; certiorari denied, , the Circuit Court, in affirming the decision of the Board in , stated:
* * * It may be assumed that an owner of stock would sustain a deductible loss by selling it and later buying back an equal amount, but no real sale is made where by one and the same transaction the same number of shares are both*1382 bought and sold at the same time and at the same price. [Emphasis supplied.]
The petitioner testified that he bought the stock because he thought the Reynolds Metals Co. was a good concern because he had confidence in R. S. Reynolds, the head of the company; that he thought its business was a good business and that the stock would pay; that R. S. Reynolds was president of the Eskimo Pie Corporation, a good customer of Blumenthal Bros.; and that his brothers bought some of the Reynolds Metals stock upon his recommendation and still own it. During the year of 1930 the petitioner received dividends from the Reynolds Metals Co. in the total amount of $2,365. There being nothing to the contrary, this evidence rather supports our view that the petitioner never intended to absolutely get rid of the stock or to lose control thereof.
In support of his contention that his wife purchased the 1,075 shares of Reynolds Metals stock, the petitioner contends that he made her a gift of the money with which to purchase the same. However, the check was never delivered to the wife; and while it was deposited in the bank in her name, as far as we know, the petitioner retained control of the*1383 account. As appears from the testimony of the petitioner, the purported gift was to be used for the purpose of acquiring 1,075 shares of Reynolds Metals stock. The record discloses that the petitioner saw to it that such funds were used for that purpose. Thereafter the certificates transferred to the wife were delivered to the petitioner at his offce. The petitioner testified that his wife at no time agreed or promised to transfer the stock back to him; that he has not received any dividends from the stock; that the certificates have not been endorsed by his wife; and that the stock has never been used as collateral for a loan by either himself or his wife. In our opinion the latter testimony of the petitioner at most indicates an intention on the part of the petitioner to make a gift of the stock *133 to his wife. In that view the entire transaction amounted to a sale and purchase in form by the petitioner to make a gift of the stock to his wife. Such a transaction does not result in a deductible loss under the revenue laws, which answers the only question here presented in this respect.
The action of the respondent in disallowing the deduction of $31,174.25 is approved.
*1384 Since we approve the action of the respondent, it is not necessary to consider the alternative allegations contained in respondent's answer based upon disapproval of his determination.
Pursuant to stipulation, the amount of the contributions allowed by the respondent in computing the tax liability of petitioner for the year 1930 should be decreased in the amount of $128 and the deficiency recomputed accordingly.
The respondent contended further that the return filed by the petitioner was the joint return of petitioner and his wife and that the petitioner and wife, after electing to file a single joint return, became a single interest and represented but one taxpayer within the meaning of section 118 of the Revenue Act of 1928, and that therefore the sale of securities from a husband to a wife must be treated as though made by one individual. Since we have determined that there was no real or actual sale, it is not necessary to consider this contention, or petitioner's second assignment of error based upon such contention.
Reviewed by the Board.
Decision will be entered under Rule 50.