*2039 Where the petitioner, buying and selling stocks on margin with no shares earmarked by having certificates issued in his own name, fails to show which of several lots of stock he sold and which he retained, the respondent's determination that he sold those first acquired is approved.
*779 The respondent determined a deficiency of $1,042.39 in income tax for the year 1925. The only issue involved is whether or not profit on the sale of shares of stock in the year 1925 should be ascertained by applying the cost of the earliest purchases against the selling price of the shares sold.
FINDINGS OF FACT.
The petitioner is an individual, residing and doing business in Philadelphia, Pa. During the years 1924 and 1925 he was trading in the stock of the United Gas Improvement Co. on margin through the brokerage houses of Charles D. Barney & Co. and C. Clothier Jones & Co. and pyramiding his accounts, viz., whenever his account showed a paper profit, more stock was bought and the unrealized profit was accepted by the brokers as security*2040 for the additional purchases. Whenever the market declined and after demands for more margin had not been complied with by the petitioner, the brokers would sell a sufficient amount of the stock to bring the account within their margin requirements.
During the years 1924 and 1925, C. Clothier Jones & Co. purchased for the margin account of the petitioner the following shares of the United Gas Improvement Co. stock:
| Date of purchase | Shares | Cost |
| Jan. 3, 1924 | 100 | $5,903.75 |
| Jan. 7, 1924 | 200 | 12,423.75 |
| Feb. 4, 1924 | 50 | 3,232.50 |
| Mar. 3, 1924 | 50 | 3,307.50 |
| May 23, 1924 | 100 | 7,015.00 |
| June 13, 1924 | 100 | 7,127.50 |
| June 15, 1924 | 100 | 7,277.50 |
| June 23, 1924 | 100 | 7,515.00 |
| June 23, 1924 | 100 | 7,815.00 |
| June 24, 1924 | 100 | 8,015.00 |
| Aug. 13, 1924 | 100 | 8,015.00 |
| Aug. 18, 1924 | 100 | 8,215.00 |
| Aug. 20, 1924 | 100 | 8,415.00 |
| Sept. 17, 1924 | 100 | $8,090.00 |
| Sept. 22, 1924 | 100 | 8,315.00 |
| Oct. 20, 1924 | 100 | 7,965.00 |
| Dec. 23, 1924 | 100 | 8,520.00 |
| Dec. 29, 1924 | 100 | 8,920.00 |
| Dec. 29, 1924 | 100 | 8,720.00 |
| Jan. 5, 1925 | 100 | 9,320.00 |
| Mar. 2, 1925 | 100 | 9,520.00 |
| Mar. 23, 1925 | 100 | 8,954.30 |
| Mar. 23, 1925 | 70 | 6,244.08 |
| Mar. 23, 1925 | 30 | 2,638.50 |
| Apr. 1, 1925 | 100 | 8,320.00 |
*2041 In order the protect the margin account of the petitioner, C. Clothier Jones & Co., during the year 1925, sold the following blocks of United Gas Improvement Co. stock:
| Date of sale | Shares | Sale price |
| Mar. 17, 1925 | 300 | $25,134.00 |
| Mar. 30, 1925 | 100 | 8,478.00 |
| Mar. 31, 1925 | 100 | 8,278.00 |
| Mar. 31, 1925 | 100 | $8,278.00 |
| Do | 200 | 15,956.00 |
| Apr. 1, 1925 | 200 | 15,900.00 |
The petitioner had a similar margin account with Charles D. Barney & Co., who purchased for this account the following shares *780 of United Gas Improvement Co. stock during the years 1924 and 1925:
| Date of purchase | Shares | Cost |
| Jan. 2, 1924 | 100 | $5,865.00 |
| Feb. 4, 1924 | 100 | 6,552.50 |
| May 23, 1924 | 100 | 6,990.00 |
| June 13, 1924 | 100 | 7,140.00 |
| June 23, 1924 | 100 | 7,519.00 |
| Do | 100 | 7,915.00 |
| June 24, 1924 | 100 | 8,050.00 |
| Aug. 13, 1924 | 100 | 8,015.00 |
| Aug. 18, 1924 | 100 | 8,215.00 |
| Aug. 20, 1924 | 100 | 8,415.00 |
| Sept. 17, 1924 | 100 | 8,090.00 |
| Oct. 20, 1924 | 100 | 7,952.50 |
| Dec. 23, 1924 | 100 | 8,520.00 |
| Dec. 29, 1924 | 100 | $8,920.00 |
| Do | 100 | 8,720.00 |
| Jan. 5, 1925 | 100 | 9,320.00 |
| Mar. 2, 1925 | 100 | 9,520.00 |
| Mar. 23, 1925 | 40 | 3,518.00 |
| Do | 30 | 2,631.00 |
| Do | 130 | 11,596.00 |
| Apr. 1, 1925 | 100 | 8,245.00 |
| Apr. 9, 1925 | 100 | 8,420.00 |
| Apr. 15, 1925 | 100 | 8,620.00 |
| May 5, 1925 | 100 | 8,820.00 |
| May 6, 1925 | 100 | 9,020.00 |
*2042 In order to protect the margin account of the petitioner, Charles D. Barney & Co., during 1925, made the following sales of United Gas Improvement Co. stock:
| Date of sale | Shares | Sale price |
| Mar. 17, 1925 | 500 | $41,890.00 |
| Mar. 30, 1925 | 100 | 8,478.00 |
| Mar. 31, 1925 | 100 | 8,278.00 |
| Mar. 31, 1925 | 300 | $23,934.00 |
| June 11, 1925 | 100 | 8,628.00 |
Both of the stock brokerage houses allowed the petitioner to trade up to the limit of the margin requirements, i.e., 33 1/3 per cent, and the petitioner, during the years under consideration, never sold stock unless he was forced to sell it from lack of margin. The stock purchased was taken in the name of the brokerage houses and was hypothecated by them in making bank loans, any excess over the margin limit being kept in the broker's vaults. No stock certificates were issued by the brokers to their clients, whose interest in the stock was represented only by a credit on the books of the broker.
The petitioner duly filed his return for the calendar year 1925 and claimed a loss of $10,284.38 on the shares of stock sold in 1925, by taking the most recently acquired stock as a basis for determining gain or loss. The respondent, *2043 in the audit of the said return, compared the sale prices with the earliest purchases of such stock and determined a profit of $31,162.38, resulting in a deficiency of $1,042.39.
OPINION.
BLACK: The respondent made explanation of the change made in computing petitioner's income, as follows:
In accordance with Article 39, Regulations 69, 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 cannot be determined, the stock sold shall be charged *781 against the earliest purchases of such stock. The increase in the profit on sale of stock is the result of applying the cost of the earliest purchases against the selling price.
In contradiction to the method used by respondent in his determination, the petitioner takes the position that the sales of stock made in 1925 were made in each instance from the stock most recently purchased and that when this basis is used, the sales show a loss instead of a profit.
The testimony that was adduced at the trial convinces us that the position of the respondent is correct. It is obvious that the stock purchased by the brokers for the petitioner's*2044 margin account was held in their names commingled with similar stock purchased for other customers operating in margin accounts, and that at no time during the two years when this stock was being accumulated was any stock transferred to the name of the petitioner. The following testimony clearly indicates that the identification of any particular stock was not made because of the nature of the transactions.
Witness Flitcraft testified as follows:
Q. And if you had purchased the same class of stock for 25 people during the day, outside of having the total number of shares, you could not identify any of that stock as belonging to any particular one of the 25 when it is delivered?
A. No.* * *
Q. When those sales were made and an order given to sell stock, is there any way in which you can identify the particular stock certificates that were Mr. Snyder's?
A. No.Q. You have stated previously that when a sale was made, that covered certain purchases, in naming the dates and the amounts, is that not more of a bookkeeping method rather than an indication of what specific stock was sold?
A. I would say that it was a method which any client would use that was pyramiding*2045 in any stock securities.
Q. Had it any relation whatsoever to the stock certificates which may or may not be sold under the order?
A. No.And then again, witness Robert McDonald, Jr., manager of one of the brokerage houses that handled the account, testified:
Q. But how can you identify the particular share of stock in a case where you made an additional purchase?
A. Except in the capacity of a broker, I knew that he had bought more securities than he should have. If he had not made his recent purchases, his account would not have been embarrassed. Therefore we felt we were selling out immediately what would have been good purchases if the market had gone up but on account of the declining market that he had made a mistake. Therefore we felt that we were disposing of the article that embarrassed the account. It was a mental condition entirely.
* * *
Q. *782 But as to the number of shares of stock that were sold, you could not tell whether it was the first purchase or the last?
A. All the securities in a broker's office are put in the name of the firm until paid for. We probably had ten or fifteen thousand shares of United Gas Improvement in our*2046 office while Mr. Snyder was operating. I couldn't identify any particular stock of Mr. Snyder's or any body else's. It was common property.
The petitioner in support of his contention cites , wherein it is held that evidence of the actual property sold is controlling over the provisions of article 39 of Regulations 69. We think that decision is thoroughly sound. But the essential facts in the instant case differ from those in the Penrose case, where the trial court, on the evidence of Penrose, found that he intended to and did sell certain blocks of stock purchased in 1916 and 1917. Evidence of the petitioner's intention to sell any designated stock is lacking in the proceedings under consideration. Petitioner did not testify at all. As a matter of fact we do not know what particular stock he sold and perhaps no one knows, since the petitioner never had possession of any particular stock, and no shares were ever earmarked in his name. In the case of sales of stock which are not identified, we have approved the Commissioner's determination that it will be deemed that the vendor first sells or disposes of those shares*2047 which he first acquired. See , and the cases cited therein, and .
Judgment will be entered for the respondent.