*986 CAPITAL ASSETS - PERIOD OF HOLDING. - Notes owned by a debtor in the possession of a taxpayer creditor to become his property in case a note of the debtor was not paid, were not "held" by taxpayer within the meaning of section 117(a) of the Revenue Act of 1934 until the debtor failed to pay the note on the day specified.
*557 The Commissioner determined a deficiency of $1,608.19 in the income tax of the petitioner for 1935. The only issue for decision is whether the petitioner "held" Erie & St. Lawrence notes for more than a year (so that only 80 percent of the gain from their sale is taxable) or for less than a year (so that 100 percent of the gain is taxable). The amount of the gain is not in dispute.
FINDINGS OF FACT.
The petitioner is a lawyer and a member of the partnership of Shattuck, Bangs & Davis. That firm was owed a fee by a former client, the McDougall-Duluth Co. The petitioner was negotiating with representatives of the debtor for payment of the fee. The attorney for the debtor wanted a quick settlement and the petitioner*987 wanted a definite settlement, so that his firm would not have to rely longer upon the mere promise of the debtor but would be assured of a payment of some kind. The attorney for the debtor wrote a letter to the petitioner dated November 3, 1933, outlining a plan of his. Then, on November 15, 1933, the debtor wrote a letter as follows to the petitioner's firm:
We make you the following offer without prejudice, subject to ratification by our Board of Directors.
Your account for professional services to us, including disbursements, up to this date, is to be fixed at the sum of Eighty Thousand ($80,000) Dollars. This account includes services and disbursements of all your predecessor firms.
*558 We agree to discharge said indebtedness in the following manner:
1. By paying you or your order Ten Thousand ($10,000) Dollars cash within fourteen days from date.
2. By delivering to you our promissory note payable to you or your nominee, dated November 1, 1933, for the amount of Seventy Thousand ($70,000) Dollars, payable in six months, and bearing interest at the rate of six percent per annum.
3. By delivering as collateral security for the payment of said note, *988 Eighty-five thousand ($85,000) dollars par value First Preferred Mortgage 5 Year 6% Gold Coupon Notes of Erie & St. Lawrence Corporation, dated August 1, 1930, with all unmatured coupons, secured by mortgage of the same date made by Erie & St. Lawrence Corporation to McDougall-Duluth Company covering American motor vessel I.L.I. 105, official number 221,467.
Upon the payment of the said $10,000 cash as aforesaid, you are to release from said collateral and return to us $10,000 par value of said Notes of Erie & St. Lawrence Corporation. In the event that our note is not paid before the maturity of any coupons on the collateral, you are to have the right to collect such coupons on such collateral as you then hold and as mature during the term of the note and you are to apply such collections first to the payment of interest accrued and to be accrued on our note down to its maturity and thereafter on account of the principal of the note.
In the event that said promissory note for Seventy thousand ($70,000) Dollars, or the interest thereon, shall not be paid when due and payable, you are to become the owner outright of the Erie & St. Lawrence Corporation Notes held by you as*989 collateral, and said Erie & St. Lawrence Corporation Notes shall be accepted by you in full discharge of our note for Seventy thousand ($70,000) Dollars, and you shall have no right to any claim against this company due to any insufficiency in the realization of said collateral.
Together with said Erie & St. Lawrence Corporation Notes we agree to deliver to you a power of attorney authorizing you to proceed in our name, as fully as we ourselves might do, with respect to the enforcement of any rights belonging to us granted by the mortgage securing said Notes made by Erie & St. Lawrence Corporation to this company, this power of attorney being acknowledged to be coupled with an interest and irrevocable.
The above letter was accompanied by another from the president of the McDougall-Duluth Co., explaining that since the debtor would not have funds to pay interest on its note except from the Erie & St. Lawrence note coupons, the provisions requiring quarterly interest payments on the note had been eliminated and the right of the partners to secure the interest on the debtor's note by collecting the coupons on the Erie & St. Lawrence notes was substituted. The petitioner's firm*990 accepted the offer made in the letter of November 15, 1933. The McDougall-Duluth Co. then carried out the agreement by paying the $10,000 cash, delivering its note for $70,000, delivering the $75,000 face value of Erie & St. Lawrence notes, and the power of attorney, all on or about December 4, 1933. The note of the debtor was as follows:
Dated, New York, N.Y.,
November 1, 1933.
Six months after date we promise to pay to the order of SHATTUCK, BANGS & DAVIS Seventy Thousand (70,000) Dollars with interest at the rate of six percent (6%) per annum for value received. This note is delivered subject to the *559 terms and provisions of a settlement agreement dated November 15, 1933, secured and payable accordingly.
MCDOUGALL-DULUTH COMPANY
By: JULIUS H. BARNES
President
The balance sheets of Shattuck, Bangs & Davis for December 31, 1933 and 1934, showed as securities an item as follows:
Note, secured by Bonds [sic] of Erie & St. Lawrence
Motorship $37,500
The balance sheets of the McDougall-Duluth Co. for the same two dates showed, inter alia, the following:
| December 31 | ||
| 1933 | 1934 | |
| ASSETS: | ||
| Motorship Bonds [sic] - Erie & St. Lawrence First Mtg. at net book value | $296,333.33 | $17,564.25 |
| LIABILITIES: | ||
| Notes payable (Shattuck) | 70,000.00 |
*991 The item of $296,333.33 included the $75,000 face value of Erie & St. Lawrence notes delivered to Shattuck, Bangs & Davis in December 1933.
The McDougall-Duluth Co. wrote to Shattuck, Bangs & Davis as follows on May 4, 1934:
Referring to the note of this company for seventy thousand dollars due May 1, 1934, held by you and presented for payment May 1st, we desire to have confirmed that in accordance with the terms of the agreement payment has been effected by the transfer of $75,000. face value Erie & St. Lawrence Corporation notes.
If this is in accordance with your records will you please confirm this letter?
The law firm replied as follows on May 7, 1934:
We acknowledge receipt of your letter of May 4th and confirm your letter to be in accordance with the terms of the agreement dated November 15, 1933.
Shattuck, Bangs & Davis sold the $75,000 face value of Erie & St. Lawrence notes on February 1, 1935, for $62,500.
The partners reported for 1933 a fee of $47,500 from the McDougall-Duluth Co., of which $10,000 was in cash and $37,500 was shown upon the partnership books as "Note, secured by Bonds of Erie & St. Lawrence Motorship." The petitioner reported his*992 share of the $47,500 and the Commissioner made no change.
The partners reported no gain or loss for 1934 from the McDougall-Duluth Co. transaction and the Commissioner made no change.
The partners reported 80 percent of the gain for 1935 on the sale of the $75,000 face value of Erie & St. Lawrence notes as a gain from the sale of a capital asset held for more than one year but not for more than two years. The petitioner reported his share upon that *560 basis. The Commissioner, in determining the deficiency, held that 100 percent of the gain should be recognized because the notes had been held for less than one year.
The partnership and the petitioner used a calendar year, cash receipts and disbursements method of reporting income.
About the only free assets owned by the McDougall-Duluth Co. in the latter part of 1933 were Erie & St. Lawrence Corporation notes of the face value of $135,000, secured by a mortgage on Motorship I.L.I. 105. The $75,000 face value of notes involved herein were among those notes. The McDougall-Duluth Co. was endeavoring to sell the ship and desired to continue to own the notes as long as possible, because the ownership of the notes*993 would facilitate a sale and it expected the notes to be paid at face value in case of a sale. It intended, in the agreement with Shattuck, Bangs & Davis, to retain ownership of the notes until May 1, 1934. The ship was later sold upon a contract entered into in 1935.
The interest upon the $75,000 face value of Erie & St. Lawrence notes due February 1, 1934, in the amount of $2,250 was collected by Shattuck, Bangs & Davis.
The fair market value of the $75,000 face value of notes on December 4, 1933, was $37,500.
The stipulation of facts, including the exhibits attached, is incorporated as a part of these findings by this reference.
The petitioner did not hold his interest in the notes of Erie & St. Lawrence Corporation for more than one year.
OPINION.
MURDOCK: The petitioner contends that he "held" for more than one year within the meaning of section 117(a) of the Revenue Act of 1934, an interest in the $75,000 face value of Erie & St. Lawrence notes, since his firm became the owner of the notes on December 4, 1933, "subject only to an option for their repurchase by the [McDougall-Duluth] Company." He argues that the substance, though not the form, of the transaction*994 of November 1933 was to pay and satisfy the fee by transfer of title to the notes subject only to an option for their repurchase for $70,000 up to May 1, 1934. The substance of the transaction was, as we see it, the same as the form, in so far as ownership of the notes is concerned. They were to remain and they did remain the property of the McDougall-Duluth Co. until May 1, 1934, when it failed to pay its note and the Erie & St. Lawrence notes then became the property of Shattuck, Bangs & Davis to satisfy in full the debt due them. Prior to May 1, 1934, the partnership held the notes as pledgee, not as owner subject to an option. The words of the agreement, the book entries, and the intent of McDougall-Duluth Co. all support that conclusion. The case of Tex-Penn Oil Co. v. Helvering,300 U.S. 481">300 U.S. 481, *561 so strongly relied upon by the petitioner, is distinguishable, since there the writings were contrary to the facts, whereas here there is no such difference. The period of holding for the purpose of section 117(a) did not include the period during which the partnership had possession of the notes as pledgee.
The petitioner argues, as an alternative, *995 that his firm acquired on December 4, 1933, such dominion over and benefits in the Erie & St. Lawrence notes as would start the holding period of section 117(a), even though it did not acquire full title. His point is that his firm gave consideration for the notes at that time, received possession of the negotiable notes, received a power of attorney coupled with an interest, and collected the interest on the notes, all of which shows that the firm had a property right in the notes from December 4, 1933. The possession which the firm received was that of pledgee. The necessity for and the purpose of the power of attorney, as well as the collection of the interest, are all sufficiently explained in the findings of fact. The firm had no dominion over or benefits in the notes inconsistent with ownership of the notes in the McDougall-Duluth Co. up to May 1, 1934.
The period from December 4, 1933, to May 1, 1934, would have a dual or contingent character under the petitioner's alternative theory. It would be a period of holding by the petitioner's firm if the firm finally acquired the notes, but it would be a period of holding by the McDougall-Duluth Co. if the latter paid its note*996 and took possession of the Erie & St. Lawrence notes. The act does not provide for any such method of measuring the period of holding. It does enumerate in section 117(c) certain situations under which the period of ownership by others shall be added to that of the taxpayer, but none of those provisions applies here. The fact that there are such provisions is an indication that Congress did not intend any other exceptions to the general rule. I.T. 1378, I-2 C.B. 26, is not applicable here, nor is W. H. Hay,25 B.T.A. 96">25 B.T.A. 96. The petitioner cites no authority which directly leads to the conclusion he would have us reach. We find no error in the action of the Commissioner.
Decision will be entered for the respondent.