*1322 1. A transaction purporting to be a sale of stock with an option to buy back held, under all the circumstances, not to be a loan but a sale, the gain being taxable.
2. Loss on similar sales held not deductible because of option to repurchase.
3. Basis for percentage limitation of deduction for charitable contributions held to include capital gain.
4. Negligent omission of items from income not relieved from statutory penalty even though return was prepared by taxpayer's secretary and executed by taxpayer without detailed examination.
*433 Respondent determined a deficiency of $43,384.45 and a negligence penalty of $2,169.22 in petitioner's income tax for 1927, and a deficiency of $17,849.78 for 1928. Petitioner assails the determination that amounts received by him were the proceeds from sales of stock, and contends that such amounts were loans to him. In an amended answer respondent prays that (a) deducted charitable contributions in excess of 15 percent of income*1323 exclusive of capital gains and (b) losses allowed on transfers of stock be disallowed.
*434 FINDINGS OF FACT.
1. Petitioner, an individual, residing at New Haven, Connecticut, is an inventor, author, and professor of economics at Yale University. On December 24, 1912, there were issued to him three letters patent on improvements in indexes or files. He used these in a business known as the Index Visible Co., until June 14, 1913, when he transferred them to Index Visible, Inc., a New York corporation, which he had organized with an authorized capital stock of 2,000 preferred and 2,000 common shares, each of a par value of $100. In exchange for the patents and any improvements that he might make on them within five years, the corporation issued 1,995 common shares of stock, of which petitioner received 1,275. At the same time it issued 100 preferred shares to petitioner and 115 to his wife in exchange for the remaining net assets of the Index Visible Co. On October 10, 1913, these 215 preferred shares were surrendered to the corporation, which then issued 65 preferred shares in lieu thereof to Margaret H. Fisher. Index Visible, Inc., operated at a loss from 1913 to*1324 June 30, 1920, with the exception of 1918.
On June 16, 1920, petitioner organized a new corporation, known as index-Visible, Inc., under the laws of New York. The new corporation took over the assets and business of the old one, and on June 30, 1925, merged with Rand-Kardex, Inc., which thereupon took over its business and assets. On December 21, 1925, the business and assets of Rand-Kardex, Inc., were taken over by Rand-Kardex Bureau, Inc., and the latter's business and assets were in turn taken over by Remington Rand, Inc., on March 22, 1927. Each of these transactions was treated as a nontaxable exchange of stock for stock of a newly formed corporation. At the conclusion of the last exchange petitioner held 112,348 common shares of Remington Rand, Inc., of which 26,332 represented 1,171 1/2 shares of the original Index Visible, Inc. The agreed basis of these 26,332 shares is $3.20 each. In computing petitioner's profit on determined sales of these shares in 1927 and 1928, respondent allocated no cost or value to them as of the date of acquisition.
In 1926 petitioner, then a substantial shareholder in Rand-Kardex Bureau, Inc., wished to procure money to purchase more*1325 shares of that company and to diversify his security holdings. He approached one Jennings, a capitalist and personal friend, who was disposed to advance him funds. Jennings, however, wished to be free to speculate in the shares, while petitioner did not wish to lose control over them. Petitioner then advised his attorney that he proposed to borrow $185,000 from Jennings at a rate of interest between 7 and 10 percent, and to offer Jennings 5,000 shares of Rand-Kardex as collateral. The attorney advised that the proposed rate of interest *435 was usurious, and to avoid this difficulty a contract was drawn which provided that petitioner "sell and deliver" to Jennings 5,000 common shares of Rand-Kardex Bureau, Inc., duly endorsed for transfer on the corporate books, and that upon delivery Jennings pay petitioner $185,000 cash "in full satisfaction of the price of said stock"; that in consideration of petitioner's agreement to sell and of $1,000, Jennings further agreed to sell to petitioner at the latter's option and request and at any time between the date of the contract and December 31, 1928, 5,000 common shares of Rand-Kardex, Inc., at $40 a share in 1926, $42.50 in 1927, *1326 and $45 in 1928; that it was specifically understood that petitioner "shall not be required to purchase any portion of said stock * * * unless he shall desire to do so," and that he might elect to purchase any, all, or none, at such times and in such quantities as he might desire during the period of the option; that it was also specifically understood:
* * * that the granting of the foregoing option to the party of the first part (petitioner) was the controlling factor in inducing the party of the first part to sell said five thousand (5,000) shares of stock to the party of the second part at the price of One Hundred Eighty-Five Thousand Dollars ($185,000); and that, if the said option had not been granted upon the terms hereinabove specified, the party of the first part would have demanded a much larger price for the said stock than the aforesaid sum * * *.
This contract was executed June 10, 1926. On April 2, 1927, and after Rand-Kardex Bureau, Inc., was taken over by Remington Rand, Inc., the contract was amended to relate to Remington Rand shares, exchanged at the rate of two for one Rand-Kardex share, and the price arrangement was adjusted to the previous basis.
On April 14, 1927, Jennings*1327 still held 8,000 Remington Rand shares subject to the option of June 10, 1926. Petitioner wished to procure more money for the same purposes as before, and executed with Jennings an agreement in lieu of the former whereby he undertook to pay Jennings $170,000 for the 8,000 shares, and then to "sell and deliver" to Jennings 20,000 common shares of Remington Rand, duly endorsed for transfer, for $600,000, "paid and received in full satisfaction of the price of the said stock." Jennings then agreed to sell petitioner 20,000 such shares for $30 each at any time prior to December 31, 1928, under an option identical in terms with the former. It was further provided, however, that in case petitioner should exercise this option, Jennings was given an option to buy for $25 a share 10 percent of the number of shares repurchased by petitioner. In the substitution of the new contract for the old, petitioner delivered 12,000 Remington Rand shares to Jennings, and received $430,000 from him. The transaction was entered on petitioner's books to reflect a gain on sale of stock.
On December 19, 1928, Jennings agreed to extend the above contract to December 31, 1929, in consideration of petitioner's*1328 quarterly *436 payment to him of 5 percent per annum "on the sum originally received, or such part thereof as may be outstanding," and petitioner's delivery to him of 10,000 additional shares of Remington Rand, returnable to petitioner upon his repurchase of parts or all of the original 20,000 shares in amounts proportionate to his repurchases. As a further consideration for the extension petitioner also agreed that if Jennings desired to purchase 10 percent of the original shares under his option, he might retain, free of charge, 10 percent of the additional shares returnable to petitioner. After December 31, 1929, petitioner repurchased 5,000 shares from Jennings for $42,000; Jennings now holds about 16,100 shares.
Under a contract dated October 11, 1927, similar to that of April 14, 1927, petitioner delivered 4,000 common shares of Remington Rand to Jennings, and received from him $112,000; petitioner's option of repurchase, effective until December 31, 1929, provided for a price of $28 a share, and if exercised, Jennings thereby acquired a right to repurchase 10 percent of such shares at $23 each.
Thereafter petitioner entered into numerous contracts with various*1329 individuals, containing substantially the same terms as the Jennings contract of June 10, 1926. The later contracts, however, provided that the repurchase option run for a period of five years and the repurchase price was fixed according to a graduated scale determined by date and varied in the several instruments. As consideration for the option, petitioner furthermore guaranteed a quarterly dividend of 1 3/4 percent on Remington Rand, and bound himself to pay the amount of any deficiency. The following schedule reflects transactions executed under this type of contract:
| Date | Name | Shares | Amount received by petitioner |
| Sept. 24, 1928 | Susan Bacon Keith | 1,000 | $17,500 |
| Oct. 8, 1928 | Joseph Warren Greene, Jr | 1,000 | 17,500 |
| Nov. 3, 1928 | Edith H. Fobes | 1,000 | 17,500 |
The contract in the following transaction provided, in addition, (A) that in the case of the transferee's death, petitioner should exercise his repurchase option by the following anniversary of the date of the contract or cancel the option, and (B) that the repurchase option should lapse upon petitioner's failure to pay a deficiency in a dividend:
| Date | Name | Shares | Amount received by petitioner |
| July 18, 1928 | Howard Tuttle | 1,000 | $17,500 |
*1330 *437 The contract in the following transactions contained, in addition, provision (A) only:
| Date | Name | Shares | Amount received by petitioner |
| Feb. 16, 1928 | Harold A. Ley | 5,000 | $75,000 |
| Mch. 26, 1928 | Harold A. Ley | 5,000 | 75,000 |
| Apr. 4, 1928 | August S. Holmquist | 1,000 | 15,000 |
| May 15, 1928 | August S. Holmquist | 1,000 | 15,000 |
| May 31, 1928 | August S. Holmquist | 1,000 | 17,500 |
| July 18, 1928 | Harold A. Ley | 5,000 | 87,500 |
| July 25, 1928 | Fred T. Ley | 5,000 | 87,500 |
The contract in the following transactions contained, in addition, provision (B) only:
| Date | Name | Shares | Amount received by petitioner |
| Nov. 7, 1928 | Sarah S. Walden | 1,000 | $17,500 |
| Nov. 12, 1928 | Haven Emerson | 500 | 8,750 |
| Nov. 17, 1928 | Alice M. White | 60 | 1,050 |
| Nov. 19, 1928 | Theodore S. Woolsey | 100 | 1,750 |
| Nov. 21, 1928 | John C. Kebabian | 300 | 5,250 |
| Nov. 22, 1928 | C. M. Walsh | 100 | 1,750 |
| Nov. 26, 1928 | Elizabeth M. Berrien | 1,200 | 21,000 |
| Nov. 26, 1928 | Alice Cook | 572 | 10,010 |
| Dec. 12, 1928 | W. M. Daniels | 200 | 3,500 |
| Dec. 12, 1928 | E. Hershey Sneath | 100 | 1,750 |
| Dec. 12, 1928 | Stanley Rand | 1,000 | 17,500 |
| Dec. 17, 1928 | M. V. O'Shea | 400 | 7,000 |
The contract*1331 in the following transactions contained no provision for the guarantee of dividends, but petitioner therein bound himself to pay an annual amount quarterly as consideration for the repurchase option, and, in the first (Dickinson) transaction, further to pay state and Federal income taxes on the dividends of the stock in the transferee's hands, a failure to do so canceling the option:
| Date | Name | Shares | Amount received by petitioner |
| Apr. 17, 1928 | Hunt T. Dickinson | 2,000 | $30,000 |
| Apr. 26, 1928 | Leo Ley | 5,000 | 75,000 |
By an entirely different contract, dated December 15, 1928, petitioner sold 1,000 shares of Remington Rand for $21,000 to Salmon O. Levinson, who agreed to hold them until January 1, 1930, subject to petitioner's consent to sell. In case of such consent Levinson was to bear any loss that might result, and in case of a profit to divide it equally with petitioner. Petitioner was granted the right of repurchase at any price agreed upon between the parties.
*438 The following is a schedule of the shares of Remington Rand stock delivered to petitioner by the other parties to the above contracts and the amounts paid by him to them:
| Date | Name | Shares received | Amount paid by petitioner |
| December, 1926. | Oliver Gould Jennings | 1 1,000 | $40,000 |
| Apr. 14, 1927 | Oliver Gould Jennings | 8,000 | 170,000 |
| June 19, 1928 | Harold A. Ley | 100 | 1,600 |
| June 22, 1928 | Harold A. Ley | 100 | 1,600 |
| June 29, 1928 | August S. Holmquist | 100 | 1,600 |
| July 13, 1928 | Hunt T. Dickinson | 100 | 1,600 |
| July 23, 1928 | Leo Ley | 100 | 1,600 |
| Aug. 13, 1928 | Harold A. Ley | 100 | 1,600 |
| Aug. 13, 1928 | August S. Holmquist | 100 | 1,600 |
| Aug. 27, 1928 | August S. Holmquist | 100 | 1,850 |
| Sept. 24, 1928 | Harold A. Ley | 100 | 1,600 |
| Oct. 3, 1928 | August S. Holmquist | 100 | 1,600 |
| Oct. 15, 1928 | Harold A. Ley | 100 | 1,850 |
| Oct. 15, 1928 | Hunt T. Dickinson | 100 | 1,600 |
| Oct. 15, 1928 | Howard B. Tuttle | 100 | 1,850 |
| Oct. 24, 1928 | Leo Ley | 100 | 1,600 |
| Oct. 28, 1928 | Fred T. Ley | 100 | 1,850 |
| Nov. 13, 1928 | Harold A. Ley | 100 | 1,700 |
During 1928 petitioner made payments aggregating $17,150.38 to the several transferees, pursuant to the provisions of their several contracts. In his income tax return for 1928 petitioner claimed this amount as a deduction on account of interest paid. Respondent disallowed it on the ground that the payments were made to keep the options alive.
On the dates on which the above contracts were executed, the common stock of Remington Rand, Inc., sold on the New York Stock Exchange at prices ranging between $40 1/4 and $24 3/4 a share. The market price at the date of each contract was substantially in excess of the amount of money received by petitioner from the transferees upon his delivery of shares to them, and the option of repurchase by petitioner was calculated by him with the object that the transferees would realize upon petitioner's repurchase an amount of money representing the principal of their advances and about 14 percent annually in addition. On May 1, 1927, there were 1,265,414 common shares of Remington Rand, Inc., outstanding; on February 29, 1928, 1,333,747. During 1927 petitioner owned between 96,770 and*1333 151,159 such shares; during 1928, between 21,198 and 89,270. There was active trading in the stock.
All of these contracts were made at the suggestion of petitioner and not the other party, and the form and terms thereof were drafted by petitioner or his attorney. Petitioner's net worth was approximately between three and four million dollars at the end of 1927 and more at the end of 1928. This took into consideration large indebtedness to banks, amounting at one time to a million dollars.
*439 Some of these contracts have been canceled; the others are still in effect. Holmquist borrowed on his shares and they were sold during the market crash.
Petitioner kept his books and prepared his returns on a cash receipts and disbursements basis.
In computing petitioner's income tax for 1927 and 1928, respondent treated the transfers of stock under said contracts as sales, and determined an aggregate gain from them of $352,701.34 for 1927, and of $412,288.66 for 1928.
2. In the determination of deficiencies for 1927 and 1928, respondent allowed deductions of $3,565.20 and $1,395.78, respectively, as losses on the sale of 4,000 shares of Remington Rand stock to Jennings*1334 under his contract with option to repurchase, and on the sale of 1,000 shares to Joseph Warren Greene, Jr., under his contract.
3. In the determination of deficiencies for 1927 and 1928, respondent allowed deductions of $68,600 and of $29,345.50, respectively, on account of charitable contributions. He determined that petitioner had no income subject to normal tax for those years, but that he realized $648,486.40 and $544,424.61, respectively, as net income subject to tax as capital net gains.
4. Petitioner did not personally prepare his income tax return for 1927, and does not make or supervise the entries in his books of account, delegating all such matters in so far as possible to his secretary. In preparing the return for 1927, the secretary failed to include several items of gross income, and respondent determined the imposition of a 5 percent negligence penalty, amounting to $2,169.22.
OPINION.
STERNHAGEN: 1. The respondent treated the transactions between the petitioner and Jennings and each of the others as sales of shares, and the prices received as including taxable gain to the extent that they exceeded the proper basis of cost or March 1, 1913, value. The*1335 petitioner's attack centers upon the contention that the transactions were not sales by him, but were loans to him of the amounts received and that the transfers by him of the shares were merely by way of collateral security for such loans. If they were loans to him they were plainly not income. But the burden to establish them as loans is upon the petitioner, not only because the respondent has officially determined that the transactions were sales, but also because they are expressly so designated in the contracts of the parties thereto.
The evidence intended to support the petitioner's view as to the character of the transactions is, aside from the written documents, the oral testimony of petitioner himself and of the lawyer who drew the first contract with Jennings; none of the parties on the other side *440 of these transactions was offered as a witness. The oral testimony is that the petitioner, wanting the use of money with which to acquire more Rand shares, wanted to borrow it. He was an economically independent man of learning and intelligence, a university professor of economics, a writer, and an inventor whose patents had been fruitful. He was not a necessitous*1336 man and under no constraint except that of his own desire. When he learned from his lawyer that the terms upon which he and Jennings had tentatively agreed would amount to a usurious contract, he conscientiously and voluntarily gave up the idea of borrowing and, with the aid of his lawyer, worked out a plan of sale which would distribute the opportunity for profit between himself and the buyer. Although he had a right to reacquire at a fixed price in accordance with a prescribed scale, graduated with time, this was entirely at his election. There was no duty upon him to take back the shares either at a fixed time or upon request and no duty upon him to pay back any of the amount received by him for the shares. His obligation to pay was conditioned upon his exercise of the option.
Clearly upon the face of the transaction this was not a loan, and we are unable to find from anything dehors the contract that the parties intended to and actually did contract only for a loan. As between the petitioner's deliberate writing to express his intention and his oral statement of his intention, the writing must prevail. The evidence all establishes that the contract of sale is exactly what*1337 the parties intended it to be. There is an entire lack of evidence that the petitioner was imposed upon or was in a position where he might be imposed upon, so that he could invoke a court of equity to relieve him from the oppression of an unconscionable promise. He was the originator of the plan (for we must identify him in this respect with his own lawyer) and both its substance and form were at his instigation and to some extent his own drafting.
Were it to be held that after all his care these were but loans, they would be no less usurious than the original plan which he deliberately sought to avoid. While no ruling by this Board that these were usurious contracts would have sanction to stamp them as such in respect of their validity or enforceability, such a determination should not be lightly made in any event, for it would not only affect this petitioner and his taxes, but each other party to the contract, both as to his tax basis and his civic character under the usury statute. While such considerations would give way before unmistakable facts, they require attention when the question is merely one of characterization from circumstance. The charge of usurious lending*1338 should not be applied indirectly to all of these parties by an official decision unless it is amply supported by the *441 evidence; and this we can not find. Certainly a construction of the contract as a valid sale demands recognition over that of a usurious loan.
So far as the evidence shows, the entire conduct of these parties has been consistent with the concept of a sale. They were not extending credit to petitioner, but "regarded this as a very good investment" in the Remington Rand stock. One, for example, as testified by petitioner, "believed that he was making a very great investment and went in too deep. He got the money which he advanced to me, whether you call it a loan or a purchase, by borrowing at the bank on the collateral of the stock which I transferred to him which, of course, is a dangerous thing to do, and when the stock market crash came, he was wiped out, and at that time I agreed to sell him or to modify the contract so as to sell him outright 1,000 shares of Remington Rand at $20 a share so that the whole title and interest would belong to him, and he paid me for that by a note which subsequently I had to take care of myself because he could not*1339 pay it at the bank, in order for him to release the collateral on his loan. He had got in deep water with his loan, and I offered to help him out by endorsing his note, so that eventually I have assumed his obligation." This is wholly inconsistent with the effect of a loan to petitioner on collateral, for the stock market crash would have been disastrous to petitioner as borrower as well as to his creditor who had hypothecated the collateral.
The petitioner argues that the disparity between market quotations at which presumably he could have sold his shares and the prices fixed in the contracts demonstrates that there was no sale. If the disparity between price and actual value were substantial, a court would give it weight in a proceeding by a borrower against an oppressive lender to set aside a deed and have it adjudged a mortgage or to escape the consequences or a usurious loan. But treating the disparity as large enough to be moving, it has its explanation not in oppression but in the reserved option to buy back. This, the contracting parties said in the contract, was of its essence. If petitioner had been willing to sell outright he could have sold at the market. But*1340 instead he wanted an assured right to buy back at a fixed price, and for the reservation of this right he apparently was willing to make a concession in price. At least, he did lower the price and the sale was other than a simple one, and it may be assumed that the price was commensurate with the terms as a whole. But this departure from a simple sale is yet a sale and not a loan, and the low price does not signify that a loan was intended.
That title to the shares passed to the purchasers admits of little doubt. It needs only the assumption of death or bankruptcy to *442 make this clear. What petitioner had was not a right of redemption but a right of purchase at an agreed price. Before this right was perfected, the shares were not his assets and the proceeds of the prior sale were.
The Commissioner, we think, correctly treated the contracts as contracts of sale and the amounts received by petitioner as sale price with the gain included in income. 1 This necessarily dismisses the petitioner's claim for deduction of $17,150.38 as interest upon loans.
*1341 2. In two instances the sales by the petitioner were below cost, involving a loss of $3,565.20 in 1927 upon a sale to Jennings and $1,395.78 in 1928 upon a sale to Greene. The Revenue Act of 1926, section 214(a)(5), provides:
SEC. 214. (a) In computing net income there shall be allowed as deductions:
* * *
(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; but in the case of a nonresident alien individual only if the profit, if such transaction had resulted in a profit, would be taxable under this title. No deduction shall be allowed under this paragraph for any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) or has entered into a contract or option to acquire substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition. If such*1342 acquisition or the contract or option to acquire is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed.
The substance of section 118, Revenue Act of 1928, is similar. Since the petitioner in all of his contracts had an option to acquire substantially the identical shares sold, no deduction for loss may be allowed.
3. The basis for petitioner's 15 percent deduction for charitable contributions is not limited to ordinary income, but includes capital gains, ; (both C.C.A., 2d Cir.); (review pending, C.A.D.C.). Thus limited, the petitioner's deduction should be allowed.
4. The omission by petitioner of substantial items from his 1927 return was clearly negligent and respondent has added the penalty prescribed by Revenue Act of 1926, sec. 275(a). This was correct. *443 Petitioner can not escape his responsibility for a correct return by committing its preparation entirely to his secretary. *1343 ; ; (review pending C.C.A., 5th cir.); (review pending, C.A.D.C.).
Reviewed by the Board.
Judgment will be entered under Rule 50.