*282 Decision will be entered under Rule 50.
1. Petitioner, a dealer and broker in securities, carried all securities in inventory prior to March 20, 1943, whether they were owned by it and held for sale to customers, owned by it and held for investment, or simply in its possession as agent for its customers. On March 20, 1943, petitioner established a separate investment account. Certain securities then owned by petitioner were transferred to the investment account on that date. Certain securities also owned by petitioner prior to March 20, 1943, were transferred to the investment account after that date during the taxable years. Certain other securities also owned by petitioner prior to March 20, 1943, remained in inventory throughout the taxable years. Certain securities acquired by petitioner after March 20, 1943, were entered in the investment account at once. Held, that certain of above mentioned securities owned by petitioner were held for sale to customers during the taxable years and thus did not constitute capital assets within section 117 (a) (1) of the Internal Revenue Code. Held, that certain of the above mentioned securities owned by petitioner were held*283 for purposes other than sale to customers during the taxable years and thus constituted capital assets within section 117 (a) (1) of the Code. Held, further, that the remainder of the securities owned by petitioner were first held for sale to customers and then subsequently were held for purposes other than sale to customers during the taxable years and thus constituted capital assets within section 117 (a) (1) only during the latter period.
2. A dividend received in 1945 from a security owned by petitioner was designated by the issuing corporation as a capital gain dividend. Held, that the issuing corporation was a regulated investment company within section 361 of the Code in 1945 and this dividend was a capital gain dividend within section 362 (b) (7) of the Code.
3. Petitioner kept its books and filed its returns upon a hybrid system of accounting which was predominantly accrual in nature. Held, that respondent was authorized under section 41 of the Code to make certain adjustments to petitioner's returns in accordance with the accrual basis.
4. Held, that the excess profits tax deficiency of petitioner for each of the years 1942, 1943, and 1944, to the extent*284 determined under Rule 50, must be accrued as a liability in that year and must be subtracted in computing its accumulated earnings and profits as of the beginning of the succeeding taxable year.
5. Held, that petitioner is entitled, to the extent excess profits tax liability is determined, to accrue as an asset in each of the taxable years 1942, 1943, and 1944 the postwar refund credit provided by section 780 of the Code and to reflect such credit in its accumulated earnings and profits at the beginning of the succeeding taxable year.
*296 Respondent determined a deficiency in petitioner's declared value excess-profits tax for the year 1944 in the amount of $ 1,943.12, and deficiencies in petitioner's excess profits tax for the years 1942, 1943, 1944, and 1945 in the respective amounts of $ 6,657.62, $ 34,251.40, $ 53,820.66, and $ 39,787.94. Petitioner denies that it is liable for any of the above-determined deficiencies. Two of the issues raised by the pleadings were disposed of by oral stipulation of the parties at the hearing. The remaining issues for our determination are as follows:
1. Were certain securities owned by petitioner capital assets within the meaning of section 117 (a) (1) of the Code during the taxable *297 years so it was proper to credit the dividends received thereon in computing petitioner's excess profits net income under section 711 (a) (2) (A) of the Code?
2. Were certain securities owned by petitioner capital assets within the meaning of section 117 (a)*286 (1) of the Code during the taxable years so that gains realized therefrom in the form of sales and liquidating dividends were excludible in computing petitioner's excess profits net income under section 711 (a) (2) (D) of the Code?
3. If it be determined that stock of Lehman Corporation owned by petitioner was not a capital asset, did a dividend thereon in 1945 qualify as a capital gain dividend under section 362 (b) (7) of the Code, so as to be excludible in computing petitioner's excess profits net income in that year under section 711 (a) (2) (D)?
4. Did respondent err in adjusting certain items on petitioner's tax returns in accordance with the accrual basis of keeping books and filing returns?
5. If it be determined that respondent was authorized to adjust items on petitioner's tax returns in accordance with the accrual basis, was it proper for the Commissioner to accrue in each of the taxable years, 1942, 1943, and 1944 the excess profits tax liability for that year here in dispute, and subtract such liability from petitioner's accumulated earnings and profits as of the beginning of the succeeding taxable year?
6. To the extent the above question be answered in the affirmative, *287 was petitioner entitled to accrue as an asset in each of the years 1942, 1943, and 1944 the postwar refund credit provided by section 780 of the Code and to reflect such credit in its accumulated earnings and profits at the beginning of the succeeding taxable year?
FINDINGS OF FACT.
Part of the facts were stipulated and are so found.
Petitioner is a corporation organized under the laws of the State of Delaware with its principal place of business located at 1009 Baltimore Avenue, Kansas City, Missouri. Its returns for taxable years 1942 through 1945 were filed with the collector of internal revenue for the sixth district of Missouri. It was organized over 30 years ago and since that time it has been and now is engaged in the investment banking business. Its business consists generally of underwriting and distributing security issues, managing and assisting in corporate reorganizations, and handling securities both as a dealer and as a broker. In addition to its business activities, petitioner also purchases and holds securities for its own investment. Petitioner has never been a member of a stock exchange. A trading department was maintained during the taxable years for the *288 purchase and sale of securities by petitioner both as principal and as agent. This department *298 kept a position record showing at all times the securities available for sale to customers. Petitioner's salesmen were instructed they were not to sell any securities not listed on the daily position sheet. Securities held by petitioner for sale to customers and those held for investment were never segregated physically during the taxable years.
Prior to March 20, 1943, all securities in petitioner's possession were carried in inventory. Some of these securities were acquired and held for sale to customers, some were acquired and held for other purposes such as investment, and some were not owned by petitioner but were in its possession as purchasing or selling agent for its customers. Before that date petitioner maintained no separate investment account on its books, and consequently those securities held for investment were not segregated on its books in any manner from the securities which constituted the dealer business. It was the accounting practice of petitioner at all times to compute its gross income from security sales by the use of inventories. All securities carried*289 in inventory were valued at cost or market, whichever was lower.
Some time prior to March 20, 1943, petitioner's president, Sigmund Stern, discovered that some securities held for investment purposes had been sold to customers by mistake, and he gave instructions this was not to occur again, and to make certain of this he directed that certain securities be taken out of inventory and transferred to a separate investment account. Following this instruction an investment account was set up on the books of petitioner, and certain securities were transferred out of inventory to this new account by a journal entry on March 20, 1943, reading in part as follows:
| Debit: | Investment Account | $ 231,860.68 |
| Credit: | Corporate Securities Account | 231,860.68 |
| Explanation: To segregate stocks and bonds acquired for investment | ||
| as per following list. |
| Year of | ||
| Stock | Number of Shares | acquisition |
| Central Coal & Coke Corp. | 1,136 Pfd | 1936-1942 |
| Central Surety & Insurance Corp | 1,000 Com | 1932-1942 |
| Central West Utilities | 13,848 Com | 1932-1940 |
| Commonwealth Edison Co | 200 Com | 1941-1942 |
| Deep Rock Oil Co | 300 Com | 1941 |
| Employers Reinsurance Corp | 668 Com | 1936-1941 |
| Inland Mortgage Corp | 12,500 Com | 1932 |
| Lehman Corp | 200 Com | 1942 |
| Long Bell Lumber Corp., Series A | 1,600 Com | 1941 |
| Nash Kelvinator Corp | 200 Com | 1942 |
| Oregon American Lumber Corp | 313 Com | 1942 |
| Orpheum Theatre Corp | 445 Com | |
| Pickering Lumber Corp | 1,184 Com | |
| Pickering Lumber Corp | 160 Pfd | |
| Bonds | ||
| Missouri Pacific R. R. Co., 5% | $ 20,000 par | |
| St. Louis & San Francisco Ry. Co., 4% | 25,000 par |
*290 *299 With regard to the shares of Central Coal & Coke Corporation (hereinafter referred to as Central Coal), petitioner first received voting trust certificates for preferred shares of this stock on August 15, 1936, in exchange for bonds it held when the corporation was reorganized. Between that date and January 21, 1942, petitioner steadily increased its holdings of preferred stock until it reached a total of 1,136 shares. All these shares were entered in general inventory upon acquisition. At first petitioner often acted as a broker in fractional shares of this preferred stock also carried in inventory. Its transactions were with customers who were anxious to dispose of their holdings or to round out their fractional shares into full shares. During the first part of 1942 the directors of Central Coal determined to acquire as many preferred shares as possible for retirement and authorized petitioner as its agent to purchase them on the open market. Shares purchased by petitioner under this authorization were carried in inventory prior to their transfer to Central Coal. Thereafter until March 20, 1943, petitioner dealt in shares of this stock carried in inventory, but *291 it always maintained a balance of 1,136 shares. The balance of 1,136 shares then in its possession was transferred to the investment account on that date. Shares of this stock carried in the investment account were not available for sale to customers. During the years 1942 through 1945 petitioner received cash dividends on these 1,136 shares and in 1942, 1943, and 1944 it received liquidating dividends thereon. The 1,136 shares of Central Coal were held by petitioner primarily for sale to customers until March 20, 1943. After that date petitioner held these shares for investment during the remainder of the taxable years.
Turning to Central Surety & Insurance Corporation, (hereinafter referred to as Central Surety), petitioner first started acquiring shares therein on May 21, 1932, and kept them in both a special and general account in inventory. Petitioner dealt actively with customers in shares of this stock carried in both inventory accounts during the period up to 1941. In that year the shares in the special account were reduced to 1,000 by transfers to the general account. On March 20, 1943, this balance of 1,000 shares in the special account was transferred to the new *292 investment account, and thereafter there was no dealing in those particular shares. Central Surety paid dividends in all taxable years. The 1,000 shares were held for sale primarily to customers prior to March 20, 1943. After that date petitioner held these shares for investment during the remainder of the taxable years.
Petitioner's first acquisition of stock in Central West Utility Co., (hereinafter referred to as Central Utility), arose as compensation for its services in managing a syndicate which organized that company and Erndi Oil & Gas Co. For these services petitioner received one-half of the common stock of both companies on October 4, 1938. *300 These shares were entered in petitioner's general inventory. Additional fractional shares of the stock of both companies were acquired and added to inventory on December 2, 1939. Erndi Oil & Gas Co. was subsequently merged with Central Utility and on March 2, 1940, petitioner received 13,848 shares of the latter in exchange for its shares of the merged corporations. While petitioner entered these shares in general inventory, it never dealt in shares of this company prior to March 20, 1943. Subsequent to the transfer*293 of the 13,848 shares to the investment account on that date, petitioner did deal in Central Utility stock, but not in those shares carried in the investment account. Central Utility has always been and it is now controlled and operated by petitioner. Cash dividends were paid on the stock in all taxable years. The 13,848 shares of Central Utility were acquired and held by petitioner for investment purposes during these years.
Petitioner acquired 200 shares of Commonwealth Edison Co. stock by purchases in December 1941 and April 1942, and they were entered in general inventory. It bought and sold other shares of this listed stock carried in inventory as agent for its customers during the years 1939 through 1941. The balance of 200 shares in inventory on March 20, 1943, was transferred to the investment account on that date. Shares of this stock carried in the investment account were not available for sale to customers. Cash dividends were paid from 1943 through 1945. Petitioner acquired and held the 200 shares for investment purposes at all times.
Petitioner dealt in the bonds of Deep Rock Oil Corporation prior to June 6, 1941. On that date petitioner exchanged the bonds it*294 had on hand for new bonds and 300 shares of stock. These shares were kept in inventory. Other shares of this listed stock carried in inventory were sold by petitioner as agent for a customer in June 1942. The 300 shares were not available for sale to customers following their transfer to the investment account on March 20, 1943. Cash dividends were received in 1943, 1944, and 1945. The 300 shares were acquired and held for investment purposes during these years.
Petitioner helped to float the stock of Employers Reinsurance Corporation and dealt actively in shares of this stock carried in inventory in 1935 and 1936. On August 28, 1936, petitioner set up a special account in general inventory and transferred to it from the regular inventory account 500 of the 1,168 shares balance then on hand. Petitioner sold some of these shares carried in the special account to customers in February 1940 and regained a balance of 500 shares by a transfer from the regular account. Early in 1941 Employers Reinsurance declared a stock dividend of 33 1/3 per cent and to make the balance in the special account divisible by three, petitioner transferred one share to it from the regular account on*295 February 14, 1941. On the following day petitioner received and entered in the special account *301 the stock dividend of 167 shares. Thereafter until 1943 petitioner on several occasions shifted these additional 168 shares to the regular account in inventory, but each time the balance of 668 shares in the special account was restored. On March 20, 1943, the 668 shares were transferred from the special account to petitioner's investment account and thereafter were not available for sale to customers. Cash dividends were paid on the stock in all taxable years. The 668 shares were held for sale to customers prior to March 20, 1943. Thereafter petitioner held these shares for investment.
In the original financing of Inland Mortgage Corporation petitioner acquired 12,500 shares on December 20, 1932. They were entered in general inventory where they remained until their switch to the investment account on March 20, 1943. Morris Stern, brother of petitioner's president, has been and still is president of Inland Mortgage Corporation and petitioner has always had a controlling interest therein. Petitioner never had any transactions in shares of this stock. Cash dividends were*296 received from 1942 through 1945. Petitioner acquired and held the 12,500 shares for investment at all times.
Petitioner acquired a block of 1,500 shares of Lehman Corporation as an underwriter and distributor on September 27, 1929, and thereafter purchased additional shares of this listed stock. They were all carried in general inventory. It proceeded to sell such shares to customers until July 12, 1933, when it had a balance of 35 shares. Thereafter no more of these shares were sold but petitioner continued to purchase other shares as agent for its customers and carried them in general inventory. On June 1, 1937, petitioner received a stock dividend of 70 shares on the balance of 35 shares in inventory. On September 24, 1942, petitioner acquired 200 more shares to give it a total of 305 shares in general inventory. On March 20, 1943, petitioner transferred 200 shares to its investment account and left 105 shares in general inventory. Shares of this stock carried in the investment account were not available for sale to customers. Lehman Corporation paid cash dividends from 1942 through 1945. All 305 shares of this stock were acquired and held by petitioner for sale to customers*297 prior to March 20, 1943. Following that date 105 shares continued to be held for sale to customers, while 200 shares were held for investment for the remainder of the taxable period.
Petitioner's secretary received a notice from Lehman Corporation on July 7, 1945, stating that $ 2.41 of a special dividend of $ 2.60 per share paid during the fiscal year ended June 30, 1945, had been designated by the corporation as a capital gain dividend. Since 1940 petitioner's secretary had dealt with certain dividends of Lehman Corporation on that basis upon its instruction to do so. Lehman Corporation was a regulated investment company in 1945 within section 361, Internal Revenue Code, and $ 735.05 of the special dividend paid *302 in 1945 constituted a capital gain dividend within section 362 (b) (7).
Between May 1, 1941, and December 10, 1941, petitioner purchased a total of 2,100 shares of Series A, common stock of Long Bell Lumber Corporation and carried them in inventory. During January 1942 petitioner sold 500 of these shares to a broker, leaving a balance of 1,600 shares which it maintained until March 20, 1943. Other shares of this listed stock carried in inventory in 1935, 1936*298 and 1942 constituted part of petitioner's brokerage business. On March 20, 1943, the balance of 1,600 shares was transferred from inventory to the investment account and this total was augmented by a 50 share purchase on November 15, 1943. Shares of this stock carried in the investment account were not available for sale to customers. Cash dividends were paid in 1944 and 1945. On September 13, 1945, petitioner sold 200 shares through a broker and on November 21, 1945, it sold two more lots of 100 shares each through brokers. In 1944 and 1945 petitioner held the 1,650 shares as an investment.
On January 23, 1942, petitioner purchased 200 shares of Nash-Kelvinator Corporation stock and entered them in inventory where they stayed until March 20, 1943. Other shares of this listed stock carried in inventory in 1937, 1938, 1939 and 1942 constituted part of petitioner's brokerage business. On March 20, 1943, the 200 shares were transferred to the investment account where they were not available for sale to customers. Cash dividends were received on this stock in 1942 and 1943 and on May 27, 1943, petitioner sold the 200 shares. Petitioner acquired and held these 200 shares for investment*299 in 1942 and 1943.
Petitioner dealt in 6 per cent bonds of Oregon American Lumber Co. (hereinafter called Oregon Lumber) commencing in 1939. Between September 18, 1940, and January 1, 1942, petitioner acquired $ 12,000 par value of such bonds and received with them voting trust certificates for 120 shares of the company's common stock. The certificates were carried in the bond account in general inventory until the bonds were called by the corporation in June 1942. As a consequence on June 3, 1942, petitioner transferred the certificates for 120 shares to a separate account in inventory. By various purchases in 1942 and early 1943 petitioner increased its balance in this account to 313 shares by March 20, 1943. In one instance in June 1942 petitioner dealt in other shares of this stock. On March 20, 1943, petitioner transferred the 313 shares to its investment account. Purchases of 55 and 15 shares, respectively, in July and August 1943 brought the balance in this account to 383 shares at the start of 1944. Purchase of 3 more shares raised the balance to 386 shares on April 4, 1944. The shares in the investment account were not available for sale to customers. *303 Cash*300 dividends were received in 1944 and 1945. The 383 shares which petitioner owned in early 1944 and the 386 shares it owned after April 4, 1944, were held for investment.
When Omaha Orpheum Co. was reorganized in 1934, petitioner turned in some of its bonds and received bonds and voting trust certificates for 11 shares of stock of Orpheum Theatre Corporation, which came into being by virtue of the reorganization. The certificates were placed in a separate account in general inventory. Petitioner gradually increased its holdings until on March 20, 1943, it had a balance of 445 shares. In this period sales of this stock were mainly to petitioner's own employees though some sales to customers were consummated. After the 445 shares were switched to petitioner's investment account on March 20, 1943, their number was augmented on February 10, 1944, by a transfer of 101 shares which petitioner accumulated in inventory subsequent to March 20, 1943. The investment account reached a balance of 586 shares by June 1, 1944, due to purchases totaling 50 shares and one sale of 10 shares to an employee. None of the shares carried in the investment account were available for sale to customers. *301 On June 1, 1944, petitioner was paid a liquidating dividend on these shares. The 586 shares were held for investment in 1944.
Petitioner was one of the underwriters of the original Pickering Lumber Corporation 4 per cent bond issue. When the company got into financial trouble, Sigmund Stern was elected a member of the bondholders' committee and later reorganization manager. When Pickering Lumber Corporation was reorganized, petitioner received new bonds, and voting trust certificates for common and preferred stock in exchange for the old bonds it held. Petitioner continued to purchase those packaged securities which it carried in its inventory so that despite active dealing therein, it had a balance in inventory of certificates for 602 shares of preferred stock and 1,511 shares of common stock on July 29, 1941. On that date it severed the voting trust certificates from the bond account and set up separate accounts for the two kinds of stock in inventory. As to preferred stock carried in inventory, petitioner dealt in it with customers to the extent that its balance was reduced to 460 shares on January 1, 1942. During that year petitioner sold 300 of these shares and also acted*302 as a broker in other shares of this stock carried in inventory. In March 1943 the remaining 160 shares were transferred to the investment account where they were not available for sale to customers. A sale of 100 shares was made on July 31, 1944, and the last 60 shares were sold on October 5 of that year. Petitioner held the 460 preferred shares for sale to customers in 1942, but it held the 160 preferred shares for investment *304 in 1944. As to the 1,511 shares of common stock which were carried in inventory on July 29, 1941, petitioner dealt in them with customers so that the balance dropped to 1,184 shares in March 1943 when the stock was transferred to the investment account. Shares in this account were not available for the dealer business. On October 24, 1944, petitioner sold 85 shares and during 1945 it sold at various times a total of 1,050 shares. During the years 1944 and 1945 petitioner held the common stock of Pickering Lumber Corporation for investment.
Turning to the Missouri Pacific R. R. Co. 5 per cent bonds, Employers Reinsurance Corporation, of which Sigmund Stern was a director, owned $ 20,000 par value of these bonds. When it decided to dispose of*303 them over Stern's objection, he bought them for petitioner at their market price on May 27, 1940, and placed them in general inventory. Similar bonds of this listed security carried in inventory in August 1940 were purchased by petitioner as broker for a customer. On February 2, 1943, petitioner sold $ 10,000 par value of these bonds to a broker. On March 20, 1943, petitioner transferred the remaining $ 10,000 par value of these bonds to the investment account. Bonds carried in this account were not available for sale to customers. On February 24, 1941, petitioner sold the 5 per cent bonds left in its investment account to a broker. Petitioner acquired and held the Missouri Pacific R. R. Co. 5 per cent bonds for investment at all times.
In September 1938 petitioner acquired a total of $ 10,000 par value of the St. Louis & San Francisco Railway Co. (hereinafter referred to as St. Louis Railway) 4 per cent bonds. On April 8, 1939, and September 26, 1939, respectively, it purchased $ 10,000 and $ 5,000 par value more of this listed security. All these bonds were entered in general inventory. Other bonds of this type carried in inventory from 1935 through 1942 constituted part*304 of petitioner's brokerage business. On January 28, 1943, petitioner sold $ 10,000 par value of these bonds to a broker. On March 20, 1943, the remaining $ 15,000 of 4 per cent bonds were transferred to petitioner's investment account. Petitioner acquired and held the St. Louis Railway 4 per cent bonds for investment at all times.
In two instances securities acquired by petitioner prior to March 20, 1943, were transferred from its general inventory to its investment account subsequent to that date during the taxable years. Thus on January 23, 1943, petitioner purchased 200 shares of Federal Water & Gas Co., (hereinafter referred to as Federal Water) stock and entered them in general inventory. Throughout 1942, 1943, and 1944 other shares of this stock carried in inventory were sold to customers. On December 1, 1944, petitioner transferred the balance of 200 shares *305 from general inventory to its investment account where they were not available for sale to customers. Dividends were received on the 200 shares in 1943, 1944, and 1945. The 200 shares were acquired and held for sale to customers until December 1, 1944, but thereafter petitioner held them for investment. *305 Similarly on January 14, 1943, petitioner purchased 10 shares of stock of Union Labor Life Insurance Co., (hereinafter called Union Labor) and entered them in general inventory. They constituted qualifying shares for Sigmund Stern as a director in that company and Union Labor at all times reserved the right to repurchase its own stock. Petitioner had no transactions in shares of this stock at any time but kept them intact. On April 20, 1945, petitioner transferred the 10 shares from inventory to its investment account. On June 8, 1945, petitioner received a stock dividend of 3 1/3 shares. Cash dividends were paid on this stock in 1943, 1944, and 1945. The stock of Union Labor was acquired and held by petitioner at all times to qualify its president as a director and not for the purpose of sale to customers.
The following securities were acquired by petitioner prior to March 20, 1943, but were not transferred from the inventory to the investment account during the taxable years:
| 100 shares (common) | Atlantic Refining Co. |
| 200 shares (common) | Atlas Corp. |
| 500 shares (common) | Colgate-Palmolive-Peet Co. |
| 165 shares (common) | Commercial National Bank & Trust |
| Co. | |
| 3,392 shares (common) | Continental Oil & Asphalt Co. |
| 60 shares (common) | Cook Paint & Varnish Co. |
| 100 shares (common) | Gimbel Bros., Inc. |
| 900 shares (common) | Jonas & Naumburg Co. |
| 50 shares (common) | Missouri Gas & Electric Service Co. |
| 270 shares (common) | Pyramid Life Insurance Co. |
| 1,000 shares (common) | Roosevelt Field, Inc. |
| * 130 shares (preferred) | Kansas City Public Service Corp. |
On May 22, 1940, petitioner purchased 100 shares of Atlantic Refining Co. stock and placed them in general inventory where they remained through the year 1945. From 1930 to 1936 other shares of this listed stock carried in inventory constituted part of petitioner's brokerage business. Cash dividends were received on the 100 shares from 1942 through 1945. Petitioner acquired and held such shares for the purpose of sale to customers during all of these years.
On June 6, 1935, petitioner acquired 200 shares of Atlas Corp. stock and placed them in general inventory where they remained throughout *306 the taxable years. Petitioner never had any transactions in this stock but retained the original shares issued to it. Cash dividends were received in the years 1942-44, inclusive. The 200 shares were acquired and held by petitioner for sale to customers during this period.
Petitioner acquired 500 shares of Colgate-Palmolive-Peet Co. (hereinafter called Colgate) on March 24, 1937, *307 and entered them in general inventory where they stayed during all the taxable years. From 1936 through 1944 other shares of this listed stock carried in inventory constituted part of petitioner's brokerage business. The company paid cash dividends on this stock during the years 1942-45. The 500 shares were acquired and held by petitioner primarily for sale to its customers throughout these years.
On December 5, 1928, petitioner purchased 50 shares of the stock of Commercial National Bank & Trust Co., (hereinafter referred to as Commercial National) and entered them in general inventory. No shares were transferred to the investment account through 1945. Petitioner sold 20 of these shares to a broker in 1929. Other shares of this stock carried in inventory in June 1936 were purchased by petitioner as broker for a customer. There was a stock dividend of 3 shares in 1934 and as the result of a stock split-up on February 7, 1944, petitioner received 165 shares in exchange for its 33 shares. Cash dividends were paid in 1942, 1943, and 1944. Petitioner acquired and held shares of this stock for sale to customers in these years.
On December 31, 1928, as compensation for services*308 rendered in the reorganization of Continental Oil & Asphalt Co., (hereinafter referred to as Continental Oil) petitioner received 2,258 shares of stock which it placed in general inventory where they remained through 1945. On January 1, 1930, and July 22, 1932, petitioner acquired additional stock in the amount of 500 shares and 385 shares, respectively, bringing its holdings to 3,143 shares. On January 7, 1939, and October 28, 1941, petitioner further increased its holdings by acquiring 136 shares and 113 shares, respectively, bringing its balance to 3,392 shares. Other shares of this stock carried in inventory in June 1945 were purchased by petitioner as broker for a customer. Petitioner received cash dividends in the two years 1942 and 1945. The stock of Continental Oil was acquired and held by petitioner for sale to customers during these years.
Petitioner purchased 60 shares of the stock of Cook Paint & Varnish Co., (hereinafter referred to as Cook Paint) on July 31, 1936, and they were placed in a special account in general inventory where they remained during the taxable years. These particular shares were *307 acquired to qualify D. H. O'Leary, an employee of petitioner, *309 on the board of directors of Cook Paint. While petitioner dealt in other shares of this stock carried in the regular account in general inventory, yet the 60 shares carried in the special account were not available for sale to customers. Cash dividends were received in the years 1942-45. Petitioner acquired and held the 60 shares only for the purpose of qualifying an employee on a board of directors and not for sale to customers.
On April 10, 1939, petitioner acquired 100 shares of Gimbel Brothers, Inc., which were entered in general inventory through 1945. From 1929 through 1940 other shares of this listed stock carried in general inventory constituted part of petitioner's brokerage business. Gimbel Brothers, Inc., paid cash dividends in 1943, 1944, and 1945. Petitioner acquired and held the 100 shares for the purpose of sale to customers during this period of years.
Petitioner acquired a total of 900 shares of Jonas & Naumburg Co. stock through purchases of 200 shares on January 18 and August 9, 1937, respectively, and the purchase of 500 shares on December 23, 1937. These shares were all entered in general inventory where they remained through 1945. Petitioner had no transactions*310 in shares of this stock. Cash dividends were received on the 900 shares in the years 1942 through 1945. Petitioner acquired and held the 900 shares for sale to customers during the taxable years.
Stock of Missouri Gas & Electric Service Co. (hereinafter called Missouri Gas), in the amount of 50 shares was acquired by petitioner on September 30, 1941, and entered in general inventory where it stayed in the ensuing taxable years. Petitioner never had any transactions in shares of this stock. Petitioner received cash dividends from 1942 through 1945. The 50 shares of Missouri Gas were acquired and held for sale to customers in these years.
On January 5, 1928, petitioner purchased 200 shares of the stock of Pyramid Life Insurance Co. (hereinafter called Pyramid Life). On March 18, 1940, petitioner turned these shares in to the company in exchange for 250 shares. On February 5, 1945, petitioner purchased 20 additional shares making a total of 270 shares. This stock was kept in general inventory at all times in the taxable years. Petitioner dealt with customers in other shares of this stock carried in inventory. Cash dividends were received in the years 1942 through 1945. Petitioner*311 acquired and held the shares of Pyramid Life for sale to customers through all of these years.
Petitioner purchased 1,000 shares of Roosevelt Field, Inc., on April 1, 1929. They were held in general inventory at all times through 1945. Petitioner had no transactions in shares of this listed stock. *308 Cash dividends were issued in 1942, 1943, and 1945. Petitioner acquired and held the 1,000 shares for sale to customers during these years.
On December 20, 1939, petitioner acquired voting trust certificates for 130 shares of stock of Kansas City Public Service Corporation (hereinafter called Kansas City) and these certificates were kept at all times in general inventory. Petitioner dealt with customers in other certificates for shares of this stock carried in general inventory. On July 16, 1943, petitioner sold the 130 shares. Petitioner acquired and held the 130 shares for sale to customers at all times.
The following securities were not acquired by petitioner until after March 20, 1943, and on acquisition were entered immediately in the investment account and held solely for investment:
| 20 shares (common) | Advertising & Sales Executive Bldg. Corp. |
| 150 shares (common) | Commerce Trust Co. |
| 300 shares (common) | Lockheed Aircraft Co. |
| 190 shares (common) | National Bank of Detroit |
| 200 shares (common) | Union Bag & Paper Co. |
| * 200 shares (common) | Socony-Vacuum Oil Corp. |
On March 23, 1945, petitioner bought 20 shares of Advertising & Sales Executives Building Corporation (hereinafter referred to as Advertising & Sales) and placed them in the investment account. The purchase was made as a civic project to help finance the corporation. Petitioner never had any transactions in shares of this stock. Cash dividends were paid on the 20 shares in 1945. The 20 shares of Advertising & Sales were acquired and held by petitioner for investment purposes in 1945.
On January 16, 1945, petitioner purchased 100 shares of Commerce Trust Co. stock and entered them in the investment account. When a stock dividend was issued on August 7, 1945, 50 more shares were added to investment account. Prior to 1945 petitioner had underwritten a substantial block of this stock and also had dealt therein, but petitioner never dealt in shares of this stock carried in the investment account with one exception. One hundred other shares of this stock erroneously transferred to the investment account on September 21, 1944, were subsequently sold to a customer on October 7, 1944. *313 A cash dividend on the 150 shares was issued in 1945. The 150 shares of Commerce Trust Co. stock in the investment account in 1945 were acquired and held by petitioner for investment.
Petitioner purchased 300 shares of Lockheed Aircraft Corp. stock on November 8, 1945, and entered them in the investment account. *309 Petitioner never had any transactions in shares of this listed stock. Petitioner received a cash dividend on this stock in 1945. The 300 shares were acquired and held by petitioner for investment in 1945.
Petitioner was a member of the underwriting group which distributed the common stock of National Bank of Detroit. It then acquired 190 shares of this stock in May 1945 and entered them in the investment account. Shares of this stock in the investment account were never available for sale to customers. A cash dividend was paid on the stock in 1945. Petitioner acquired and held the 190 shares for investment in 1945.
On May 18, 1944, petitioner acquired 200 shares of Union Bag & Paper Co. (hereinafter referred to as Union Bag), which it erroneously entered in general inventory. On December 27, 1944, the error was discovered and this stock was transferred *314 to the investment account where it was held until sale to a broker on August 31, 1945. While other shares of this listed stock carried in inventory constituted part of petitioner's brokerage business, yet the 200 shares in the investment account were not available for sale to customers. Petitioner received cash dividends in 1944 and 1945 on the 200 shares. Petitioner acquired and held the 200 shares of Union Bag for investment in 1944 and 1945.
On December 31, 1941, petitioner acquired 100 shares of Socony-Vacuum Oil Corp. stock and placed them in general inventory. Their number was increased by 1,250 shares on July 31, 1944, as the result of petitioner's participation in a secondary distribution of this stock. On August 1, 1944, a purchase of 45 more shares produced a balance of 1,395 shares of this stock in general inventory. Petitioner sold such shares to customers during the month of August 1944 until at its close the balance in inventory was only 260. The 260 shares were maintained in inventory through the year 1945. In November 1943 petitioner acquired 200 shares of the same stock which it placed in the investment account at once. Shares of this stock in the investment*315 account were not available for sale to customers during the taxable years. Cash dividends were received on the Socony-Vacuum stock in 1942, 1943, 1944, and 1945. The 200 shares petitioner placed in the investment account in November 1943 were acquired and held for investment in the ensuing taxable years. The other 260 shares of stock were acquired and held for sale to customers at all times.
The cash dividends and the gains from both liquidating dividends and sales arising from petitioner's holdings in the above securities during the years 1942 to 1945, inclusive, were as follows: *310
| Dividends received | |||
| Securities | Shares | ||
| 1942 | 1943 | ||
| Advertising & Sales Exec. Bldg. Corp | 20 com | ||
| Atlantic Refining Co | 100 com | $ 70.00 | $ 100.00 |
| Atlas Corp | 200 com | 100.00 | 100.00 |
| Central Coal & Coke Corp | 1,136 pfd | 2,272.00 | 3,635.20 |
| Central Surety & Ins. Co | 1,000 com | 2,200.00 | 2,200.00 |
| Central West Utility Co | 13,848 com | 4,154.40 | 4,154.40 |
| Colgate Palmolive Peet Co | 500 com | 625.00 | 750.00 |
| Commercial Nat'l Bank & Trust Co | 165 com | 264.00 | 198.00 |
| Commerce Trust Co | 150 com | ||
| Continental Oil & Asphalt Co | 3,392 com | 1,356.80 | |
| Commonwealth Edison Co | 200 com | 540.00 | |
| Cook Paint & Varnish Co | 60 com | 48.00 | 48.00 |
| Deep Rock Oil Co | 300 com | 225.00 | |
| Employers Reinsurance Corp | 668 com | 1,068.80 | 1,336.00 |
| Federal Water & Gas Co | 200 com | 170.00 | |
| Gimbel Bros | 100 com | 45.00 | |
| Inland Mortgage Co | 12,500 com | 3,125.00 | 3,125.00 |
| Jones & Naumburg Co | 900 com | 360.00 | 540.00 |
| Kansas City Public Service Co | 130 pfd | ||
| Lehman Corporation | 305 com | 131.25 | 76.25 |
| Long-Bell Lumber Co., Series A | 1,650 com | ||
| Lockheed Aircraft Co | 300 com | ||
| Missouri Gas & Electric Service Co | 50 com | 100.00 | 100.00 |
| Nash Kelvinator Corp | 200 com | 100.00 | 25.00 |
| National Bank of Detroit | 190 com | ||
| Oregon-American Lumber Co | 383 com | ||
| Orpheum Theatre Corp | 586 com | ||
| Pickering Lumber Co | 1,184 com | ||
| Pickering Lumber Co | 460 pfd | ||
| Pyramid Life Insurance Co | 250 com | 125.00 | 187.50 |
| Roosevelt Field Inc | 1,000 com | 250.00 | 250.00 |
| Socony-Vacuum Oil Corp | 460 com | 50.00 | 50.00 |
| Union Bag & Paper Co | 200 com | ||
| Union Labor Life Insurance Co | 10 com | 22.50 | |
| Missouri Pacific Ry. Co | Bonds $ 20,000 | ||
| St. Louis & San Francisco Ry. Co | Bonds $ 10,000 | ||
| Total | $ 16,400.25 | $ 17,877.85 |
| Dividends received | ||
| Securities | ||
| 1944 | 1945 | |
| Advertising & Sales Exec. Bldg. Corp | $ 12.00 | |
| Atlantic Refining Co | $ 150.00 | 150.00 |
| Atlas Corp | 100.00 | |
| Central Coal & Coke Corp | 3,124.00 | 2,272.00 |
| Central Surety & Ins. Co | 2,500.00 | 2,500.00 |
| Central West Utility Co | 13,848.00 | 13,848.00 |
| Colgate Palmolive Peet Co | 875.00 | 1,000.00 |
| Commercial Nat'l Bank & Trust Co | 330.00 | |
| Commerce Trust Co | 307.50 | |
| Continental Oil & Asphalt Co | 1,696.00 | |
| Commonwealth Edison Co | 280.00 | 280.00 |
| Cook Paint & Varnish Co | 48.00 | 48.00 |
| Deep Rock Oil Co | 300.00 | 420.00 |
| Employers Reinsurance Corp | 1,277.41 | 1,336.00 |
| Federal Water & Gas Co | 180.00 | 200.00 |
| Gimbel Bros | 90.00 | 100.00 |
| Inland Mortgage Co | 3,125.00 | 6,250.00 |
| Jones & Naumburg Co | 450.00 | 450.00 |
| Kansas City Public Service Co | ||
| Lehman Corporation | 427.00 | 423.95 |
| Long-Bell Lumber Co., Series A | 330.00 | 372.00 |
| Lockheed Aircraft Co | 150.00 | |
| Missouri Gas & Electric Service Co | 100.00 | 100.00 |
| Nash Kelvinator Corp | ||
| National Bank of Detroit | 123.50 | |
| Oregon-American Lumber Co | 772.00 | 772.00 |
| Orpheum Theatre Corp | ||
| Pickering Lumber Co | ||
| Pickering Lumber Co | ||
| Pyramid Life Insurance Co | 250.00 | 270.00 |
| Roosevelt Field Inc | 200.00 | |
| Socony-Vacuum Oil Corp | 305.00 | 299.00 |
| Union Bag & Paper Co | 120.00 | 60.00 |
| Union Labor Life Insurance Co | 22.50 | 25.00 |
| Missouri Pacific Ry. Co | ||
| St. Louis & San Francisco Ry. Co | ||
| Total | $ 29,003,91 | $ 33,664.95 |
*317 Note. -- Where the number of shares varied in taxable years, the largest quantity has been stated.
| Gains from liquidating dividends and sales | |||
| Securities | Shares | ||
| 1942 | 1943 | ||
| Central Coal & Coke | |||
| Corp | 1,136 pfd | $ 5,200.00 LD | $ 22,720.00 LD |
| Kansas City Public | |||
| Service Co | 130 pfd | 3,656.25 S | |
| Lehman Corp | 305 com | ||
| Long Bell Lbr. Co., | |||
| Series A | 1,650 com | (**) | |
| Nash Kelvinator Corp | 200 com | 1,346.52 S | |
| Orpheum Theater Corp | 586 com | ||
| Pickering Lumber Co | 1,184 com | ||
| Pickering Lumber Co | 460 pfd | 9,984.00 S | |
| Union Bag & Paper Co | 200 com | ||
| Missouri Pacific Ry. Co | Bonds | 3,047.78 S | |
| St. Louis & San Francisco | |||
| Ry. Co | Bonds | 1,166.20 S |
| Gains from liquidating dividends and sales | ||
| Securities | ||
| 1944 | 1945 | |
| Central Coal & Coke | ||
| Corp | $ 22,715.00 LD | |
| Kansas City Public | ||
| Service Co | ||
| Lehman Corp | $ 735.05 **318 | |
| Long Bell Lbr. Co., | ||
| Series A | 7,854.41 S | |
| Nash Kelvinator Corp | ||
| Orpheum Theater Corp | 14,388.70 LD | |
| Pickering Lumber Co | 700.60 S | 14,542.13 S |
| Pickering Lumber Co | 9,859.00 S | |
| Union Bag & Paper Co | 1,693.00 S | |
| Missouri Pacific Ry. Co | 5,336.36 S | |
| St. Louis & San Francisco | ||
| Ry. Co |
On its income and declared value excess-profits tax returns for each of the taxable years involved petitioner stated it kept its books and reported its income on a cash receipts and disbursements basis. When petitioner purchased a security, the security was not entered on its books until it was paid for. When petitioner sold a security the transaction was entered on its books when the cash was received except where the security was not delivered until after the cash was *311 received, in which event the entry was occasionally made on the date of delivery, but in no event was it entered on petitioner's books prior to the time cash was received. The security remained on petitioner's books as an asset until the cash came in to take its place. Petitioner never made any credit sales. It never entered on its books any receivables from sales or payables from purchases. All operating expenses were paid as far as possible prior to December 31 of each year.
On petitioner's*319 income and declared value excess-profits tax returns for each of the taxable years accounts receivable and accounts payable were listed on the balance sheets. The accounts receivable apparently constituted deposits of cash petitioner placed with underwriting organizations at various times in connection with a future issue of securities. Accounts payable constituted cash deposited by customers of petitioner in advance of receiving securities. In petitioner's tax return for 1945 "Social Security due Industrial Mortgage Investment Co." was listed as an accrued expense. "Unclaimed Checks" were listed as a liability in tax returns for all taxable years. Petitioner kept its books and filed its returns upon a hybrid system of accounting which was predominantly on the accrual basis during the taxable years.
In each of petitioner's excess profits tax returns for all taxable years dividends received on its securities in that year were applied as a credit in computing its excess profits net income by means of the invested capital credit method. On the same returns for the taxable years 1943, 1944, and 1945 gains realized from securities in the form of liquidating dividends and sales as*320 well as the capital gain dividend of Lehman Corporation in 1945 were excluded by petitioner from its excess profits net income. Petitioner reported no excess profits tax due in any of the taxable years involved in this proceeding.
On its 1942 income and declared value excess-profits tax return petitioner deducted $ 1,318.42 representing Federal and state unemployment compensation taxes. Petitioner actually paid such Federal and state taxes to the extent of $ 844.89 in 1942.
In his notice of deficiency respondent determined petitioner held all its securities primarily for sale to customers throughout the taxable years and thus they did not constitute capital assets. As a consequence respondent disallowed all credit of dividends received in each of the taxable years 1942 through 1945. Based on the same determination respondent disallowed all the above mentioned exclusions for the years 1943 through 1945.
Furthermore respondent determined petitioner was predominantly on the accrual basis of keeping its books and reporting income during the taxable years involved. Therefore in computing petitioner's accumulated earnings and profits as of the beginning of each of the taxable years*321 1942-45 for purposes of the excess profits tax, respondent *312 subtracted the amount of the income tax due for the preceding year. In computing petitioner's accumulated earnings and profits as of the beginning of each of the taxable years 1943-45 respondent also subtracted the amount of the excess profits tax he determined was due for the preceding year. As another consequence of his determination that petitioner was on an accrual basis respondent only allowed $ 488.26 of the deduction of $ 1,318.42 petitioner had claimed in its 1942 income tax and declared value excess-profits tax return for Federal and state unemployment compensation taxes. This disallowance eliminated $ 356.63 of the $ 844.89 paid by petitioner in 1942 on the ground that such amount was accruable in 1941.
OPINION.
The first question for our determination arises from two contentions made by petitioner concerning the computation of its excess profits net income for the taxable years 1942 through 1945. Petitioner, which computed its excess profits credit based on invested capital, claims first that dividends received on certain of its securities in each of these years should be allowed as a credit in computing*322 its excess profits net income for that year. Furthermore it claims that gains realized from sales and liquidating dividends of certain of its securities in each of these years should be excluded in computing its excess profits net income for that year.
Section 711 (a) (2) (A) of the Code, as amended by section 211 (a) of the Revenue Act of 1942, states that "The credit for dividends received shall apply, without limitation, to all dividends on stock of all corporations, except that no credit for dividends received shall be allowed with respect to * * * dividends on stock which is not a capital asset" in computing excess profits net income. Section 711 (a) (2) (D) of the Code, as amended by section 207 (e) of the Revenue Act of 1942, states that "There shall be excluded gains and losses from sales or exchanges of capital assets held for more than 6 months" in computing excess profits net income. Thus the question before us is whether certain securities from which petitioner received dividends and on which it realized gains during the taxable years were "capital assets" within the meaning of section 117 (a) (1) of the Code. Section 117 (a) (1) defines "capital assets" in material*323 part as constituting
* * * property held by the taxpayer * * *, but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business * * *.
Petitioner contends that it acquired and held all the securities in controversy on its own account as investments rather than for sale *313 to customers, and consequently that they were capital assets during the taxable years. On the other hand, respondent argues that the securities in question were not held as investments but were a part of petitioner's stock in trade as a dealer in securities, and thus they were not capital assets during the taxable period in question.
At the outset we note that this Court has consistently held that a taxpayer may be a dealer as to some securities and he may also hold similar securities for investment or some other purpose than for sale to customers. As to the latter securities they properly constitute capital assets within the meaning of section 117 (a) (1). E. Everett Van Tuyl, 12 T. C. 900,*324 Carl Marks & Co., 1196">12 T. C. 1196, and Stifel, Nicolaus & Co., 13 T.C. 755">13 T. C. 755. Furthermore, a dealer in securities may acquire securities for the purpose of sale to customers and later change his purpose and hold them for investment. Carl Marks & Co., supra.Finally, it is well established that a dealer may transfer securities actually held for investment out of inventory into a separate account without obtaining permission from the Commissioner to do so. Carl Marks & Co., supra, and Stifel, Nicolaus & Co., supra.
Whether petitioner held the securities at issue primarily for sale to customers in the ordinary course of business or on its own account for some other purpose, such as investment, is essentially a question of fact to be determined in view of all the circumstances surrounding each security. No one element is normally decisive in itself. The purpose for which each security was held during the taxable years involved is the critical factor in determining its character. Carl Marks & Co., supra.*325 A dealer's expressed intent to hold certain securities for purposes other than sale must be supported by conduct on his part in regard to such securities which is clearly consistent with that intent. The dealer's treatment of securities held on his own account for investment must differ materially from his treatment of securities held for sale to customers. In many instances this has been accomplished by some form of segregation, on the books or physically or both. While the lack of any such segregation has great significance, yet it would be exalting one factor for consideration into a sine qua non to say that the absence of such segregation in itself conclusively shows the securities in question were not held for investment.
Turning to the 36 securities at issue, petitioner has sought to distinguish the particular shares of stock and bonds involved from those it held for sale to customers by asserting that they were never carried on its position sheets in the trading department as available for sale. While there is considerable testimony to this effect, we can not rely on this test, first, because the position sheets used during the taxable years are not in evidence to support*326 this testimony and, secondly, because petitioner's president testified that the reason for establishing *314 an investment account was that securities held for investment, which were not listed on position sheets, were mistakenly sold to customers.
The variation in the treatment of these 36 securities by petitioner makes it impossible to categorize them generally as primarily held for sale to customers or otherwise. The manner in which they were handled on petitioner's books does serve to divide them into four main groups for purposes of discussion, namely, securities acquired by petitioner prior to March 20, 1943, which were transferred from inventory to the investment account on that date; securities acquired by petitioner prior to March 20, 1943, which were transferred from inventory to the investment account subsequent to that date during the taxable years; securities acquired by petitioner prior to March 20, 1943, which were never transferred from inventory throughout the taxable years, and securities acquired by petitioner after March 20, 1943, which were placed in the investment account at once.
We turn first to the group of securities acquired by petitioner prior to *327 March 20, 1943, which were transferred from inventory to the investment account on that date. Petitioner received its dividends or gains from several of these securities only in 1944 and/or 1945. The 1,650 shares of Series A, common stock of Long Bell Lumber, the 386 shares of Oregon Lumber, the 586 shares of Orpheum Theatre Corporation, and the 1,184 shares of Pickering Lumber common stock meet this test. Due to this fact we are not concerned with whether they were acquired and held for sale to customers or for some other purpose prior to March 20, 1943, but need only determine their character during the taxable years 1944 and 1945. By their transfer from the inventory account to the investment account petitioner clearly segregated these shares of stock from its dealer business and they were not available for sale to customers thereafter. We thus found as a fact that the above securities were held for investment during the taxable years 1944 and 1945. We now hold that they were capital assets during these 2 years.
In the case of one security, bonds of St. Louis Railway, petitioner received its only income, therefrom during the taxable period on January 28, 1943, when it sold*328 $ 10,000 par value of such bonds to a broker. This transaction occurred prior to the establishment of the investment account on March 20, 1943, while such bonds were still carried in inventory along with all other securities possessed by petitioner. Thus the status of this security must be determined before petitioner made any segregation of its stocks and bonds. There were three types of securities in inventory prior to March 20, 1943. Some securities were owned by petitioner and held primarily for sale to its customers. Some were owned by petitioner and held for investment or some purpose other than sale. Other securities carried in inventory *315 were not owned by petitioner, but were in its possession as purchasing or selling agent for its customers. As to this last group of securities petitioner was merely a broker. When it bought these securities, it did not buy them for itself but for its customers. When it sold those securities, it did not sell them to customers, but for customers. It never acquired and held such stocks and bonds for sale to customers or for any other purpose.
The fact that a particular security is carried in general inventory alongside securities*329 which are a part of the dealer business does not exclude the possibility that it was acquired and is held for investment and constitutes a capital asset. Thus in E. Everett Van Tuyl, supra,Carl Marks & Co., supra, and Stifel, Nicolaus & Co., supra, we held that certain securities originally carried in a dealer's inventory or trading account were nevertheless acquired and held for investment at all times. The test to determine the character of a particular security where there has been no segregation of securities held for sale and those held for investment, is whether the taxpayer has dealt in this type of security with his customers as a part of his dealer business, or whether the taxpayer has only traded in this type of security on his own account outside the circle of his customers. The fact that the taxpayer has purchased or sold this type of security as a broker for its customers is not determinative of the character of the shares which it owned. It does not signify that he has been a dealer in this type of security. Seeley v. Helvering, 77 Fed. (2d) 323.*330
Here, petitioner never dealt in the bonds of St. Louis Railway while they were carried in inventory. The purchase and sale of these bonds as a broker for its customers is the only activity reflected on petitioner's books. We therefore found as a fact that petitioner held the St. Louis Railway bonds for investment prior to March 20, 1943. We now hold that they were a capital asset in 1943.
Petitioner received dividends and/or gains from the rest of the securities in this first group both prior and subsequent to the critical date of March 20, 1943. Thus we must determine their character both before and after they were segregated in the investment account. It is clear they all were held for investment purposes after March 20, 1943, since they were not available for sale to customers thereafter, and we found this as a fact. Therefore, we hold that the 1,136 shares of Central Coal, the 1,000 shares of Central Surety, the 668 shares of Employers Reinsurance, 200 shares of Lehman, the 160 shares of Pickering Lumber preferred, the 13,848 shares of Central Utility, the 12,500 shares of Inland Mortgage, the 200 shares of Commonwealth Edison, the 300 shares of Deep Rock Oil, the 200 shares*331 of Nash Kelvinator, and the bonds of Missouri Pacific R. R., were capital assets after March 20, 1943. One exception to this holding is 105 of the 305 shares of Lehman Corp. stock in issue. They were not transferred *316 to the investment account during the taxable years but remained in general inventory along with securities held for sale to customers. Therefore we found as a fact these particular shares were held primarily for sale to customers after March 20, 1943, and we now hold they were not capital assets after that date.
We have a further determination to make as to the above stocks and bonds, whether they were acquired and held primarily for sale to customers or for some other purpose previous to March 20, 1943. Again the test to determine the character of each security, where there has been no segregation, is whether shares of stock or bonds of this type carried in inventory were dealt in by petitioner with its customers and thus formed a part of its dealer business. As to the 1,136 shares of Central Coal, the 1,000 shares of Central Surety, the 668 shares of Employers Reinsurance, the 305 shares of Lehman and the 460 shares of Pickering Lumber preferred stock, *332 the evidence shows in each instance that petitioner dealt in shares of this type of security carried in inventory. We found as a fact they were all acquired and held primarily for sale to customers until March 20, 1943. We now hold that the above securities were not capital assets before that date.
We found as a fact that the 13,848 shares of Central Utility, the 12,500 shares of Inland Mortgage, the 200 shares of Commonwealth Edison, the 300 shares of Deep Rock Oil, the 200 shares of Nash Kelvinator, and the bonds of Missouri Pacific R. R. were acquired and held by petitioner for investment purposes prior to March 20, 1943. The evidence reveals that petitioner did not handle the first two types of securities either as a dealer or as a broker prior to March 20, 1943, and as to the other types of securities it purchased and sold them only as a broker for its customers. Thus none of the above types of securities were included in petitioner's dealer business before their segregation. They underwent no change in their character by transfer to the investment account. We now hold that the above securities were capital assets prior to March 20, 1943.
We now take up the second group*333 of securities, those which were acquired before March 20, 1943, but were not transferred from inventory to the investment account until subsequent to that date during the taxable years. The two securities involved, Federal Water and Union Labor were not transferred until December 1, 1944, and April 20, 1945, respectively. Dividends were received on the stock of both Federal Water and Union Labor in 1943, 1944, and 1945 so that we must examine their status both before and after their transfer. The particular shares at issue of both corporations were not available for sale to customers after their segregation so it is clear that they were not a part of the dealer business after the critical dates when they were transferred and we so found. We now hold that the shares of both securities were capital assets after their respective dates of transfer. *317 But we must examine their status prior to these two dates. In determining whether securities carried in inventory are held primarily for sale or not, it is of real significance that a means of segregation has been furnished for securities not involved in the dealer business. Here, such a means had been created on March 20, *334 1943, by petitioner's president for the sole purpose of preventing its investment securities from being mistakenly sold by its salesmen. Under such circumstances if no explanation is given for the failure to segregate securities from those held for sale to customers until long after it is possible to do so, the normal implication is that such stocks were held for sale until the actual date of segregation from the dealer business. Strong affirmative evidence must appear to overrule such a conclusion. In this situation the mere fact that there has been no actual dealer transactions in a security is not enough in itself to indicate that it was not held for sale to customers, for presumably this lack of dealer activity reflects only the unsalability of the stock to customers rather than the dealer's intent to hold it apart from his dealer operations.
As to the stockholdings in both Federal Water and Union Labor, no explanation is offered for petitioner's failure to transfer them to the investment account on March 20, 1943. Nor are there any strong circumstances appearing to upset the normal inference therefrom in the case of Federal Water. Actually there is the additional factor that*335 petitioner actively dealt in this security prior to December 1, 1944. Therefore, we found as a fact that petitioner held the 200 shares of this stock primarily for sale to customers until December 1, 1944. We now hold such shares did not constitute capital assets before December 1, 1944, but were capital assets after such date. The situation is quite different in regard to the Union Labor stock. There is additional evidence strongly persuasive of the fact that the 13 1/3 shares were acquired and held for other purposes than the dealer business. The 10 shares originally purchased were bought as qualifying shares for petitioner's president as a director of Union Labor and the remaining 3 1/3 shares were received as a stock dividend. Furthermore, Union Labor reserved the right at all times to repurchase its own stock, so that shares thereof were not freely salable. Finally, the number of shares acquired by petitioner is far below the normal quantity of a security carried by a leader for its customers. In view of all these circumstances, we found as a fact that petitioner acquired and at all times held the Union Labor stock to qualify its president for a directorship rather than*336 for the purpose of sale to customers. We now hold that the shares in question were capital assets both prior and subsequent to April 20, 1945.
We next take up the third group of securities, those acquired by petitioner prior to March 20, 1943, but which remained in inventory *318 throughout the taxable years. Nothing appears in the evidence to explain why this large group of stocks allegedly held for investment was not segregated in the investment account on March 20, 1943, or even in the remaining taxable period under consideration. As to many of these stocks, it is true that the books of petitioner reveal no dealer transactions in such securities, but due to the reasons already set forth, this factor is not in itself enough to obviate the conclusion they were held for sale to customers throughout the taxable years. With the exception of the Cook Paint stock there is no significant evidence supporting the view that they were held for investment on petitioner's own account. Therefore, we found as a fact that the 100 shares of Atlantic Refining, the 200 shares of Atlas Corp., the 500 shares of Colgate, the 165 shares of Commercial National Bank, the 3,392 shares of Continental*337 Oil & Asphalt, the 100 shares of Gimbel Brothers, the 900 shares of Jonas & Naumburg, the 50 shares of Missouri Gas, the 270 shares of Pyramid Life, the 1,000 shares of Roosevelt Field, Inc., and the 130 shares of Kansas City were acquired and held for sale to customers during the taxable years. We now hold that such securities were not capital assets during the taxable years. As to the 60 shares of Cook Paint, special circumstances reveal a different intent on petitioner's part in acquiring them. They were purchased to qualify D. H. O'Leary, an employee of petitioner, on the board of directors of Cook Paint. Furthermore, petitioner at once entered these shares in a special account in general inventory apart from the shares of this security in which petitioner dealt. Under these circumstances we found as a fact that petitioner acquired and always held the 60 shares for the purpose of qualifying an employee on a board of directors. We now hold that the 60 shares were a capital asset throughout the taxable years.
The final group of securities is made up of those stocks which petitioner acquired subsequent to March 20, 1943, and entered at once in the investment account. Those*338 securities falling in this category are 20 shares of Advertising & Sales, the 150 shares of Commerce Trust, the 300 shares of Lockheed Aircraft, the 190 shares of National Bank of Detroit, the 200 shares of Union Bag, and 200 of the 460 shares of Socony-Vacuum in controversy. It is true that as to the 200 shares of Union Bag, they were first entered in general inventory, but the books of petitioner reveal this entry was a mistake, and when the error was discovered, the shares were transferred to the investment account. By segregating the above stocks from its dealer business at the time of their purchase and not making them available for sale to customers thereafter, petitioner clearly manifested its intent to acquire and hold them for investment purposes and we so found. We now hold that *319 the above-listed shares of stock were capital assets during the taxable years. As to the 260 other shares of Socony-Vacuum at issue, they were entered in general inventory upon acquisition and remained there through 1945. Such different treatment of these shares offers the strongest sort of evidence that petitioner intended to hold them for sale to customers during the taxable years, *339 and, in the absence of any evidence to support a contrary intent, we found this to be a fact. We now hold that these 260 shares of Socony-Vacuum were not capital assets during the taxable period.
We held above that 200 shares of Lehman Corporation stock were capital assets after March 20, 1943, while 105 shares of this stock did not constitute a capital asset at any time during the taxable years. A subsidiary issue concerning this stock arises from an alternative contention of petitioner that in the event Lehman Corporation stock was not a capital asset, nevertheless a dividend of $ 735.05 received in 1945 was a capital gain dividend of a regulated investment company within the meaning of section 362 (b) (7)1*340 of the Code and therefore excludible from petitioner's excess profits net income for 1945 by virtue of section 362 (b) (6). 2 Respondent challenges this contention on the ground that petitioner failed to meet its burden of proving that Lehman Corporation was a regulated investment company, as defined by section 361, by the evidence introduced at the hearing.
Petitioner has established to our satisfaction a prima facie case that Lehman Corporation was a regulated investment company within the meaning of the statute in 1945. Respondent offered no evidence whatsoever to prove that Lehman Corporation was not a regulated investment company within the statute, nor was it able to discredit the testimony of petitioner's secretary in any manner. Under these circumstances we hold that Lehman Corporation was a regulated investment company in 1945 within section 361 and that $ 735.05 of the special dividend paid by it in that year was a capital gain dividend within section 362 (b) (7).
*320 Effect to all the above holdings will be given in the recomputation of petitioner's excess profits tax liability for each of the taxable years under Rule 50.
The next question for our decision is whether respondent was authorized to adjust certain items on petitioner's tax returns in accordance with the accrual*341 basis of keeping books and filing returns. Petitioner claims that it kept its books on a strict cash basis which clearly reflected its income during the taxable years. Thus petitioner contests the adjustment made to its accumulated earnings and profits at the beginning of each of the taxable years by subtracting therefrom the income and excess profits taxes due the preceding year. On the same ground petitioner also challenges $ 356.63 of the $ 830.16 disallowance made by respondent of the deduction for Federal and state unemployment compensation taxes claimed for 1942. The $ 356.63 constituted that portion of these taxes which was accruable in 1941, though petitioner did not pay this amount until 1942. It is respondent's position that petitioner used a hybrid system of accounting which was predominantly on an accrual basis, and under such circumstances the Commissioner is empowered by section 41 of the code to adjust items on petitioner's returns in accordance with the accrual basis. Section 41 requires that net income be computed in accordance with the method of accounting regularly employed in keeping the books of a taxpayer, but if no such method of accounting has been employed, *342 or if the method employed does not clearly reflect the income, then it authorizes computation in accordance with such method as in the opinion of the Commissioner does clearly reflect the income.
While we are handicapped by the lack of relevant data from petitioner's books in the evidence, yet we conclude from an examination of petitioner's returns and from testimony of its employees that petitioner kept its books and filed its returns on a hybrid system of accounting during the taxable period involved. Certain factors point to the use of the cash basis by petitioner. When it purchased a security, the security was not entered on its books until it was paid for. When a security was sold, the security remained on petitioner's books as an asset until cash came in to take its place. It was not petitioner's practice to make credit sales of securities. It never entered on its books any receivables from sales or payables from purchases. All operating expenses were paid as far as possible prior to December 31 of each year. We note also that on its income and declared value excess-profits tax returns petitioner stated that it was on a cash receipts and disbursements basis. This fact*343 in itself is not determinative of whether petitioner was on the cash basis. Aluminum Castings Co. v. Routzahn, 282 U.S. 92">282 U.S. 92, and Denman v. Squire, 111 Fed. (2d) 921.
*321 On the other hand, compelling facts indicate that petitioner was keeping its books and reporting income in the taxable years on the accrual basis. At all times petitioner used inventories to determine its gross income, and securities carried in inventory were valued at cost or market whichever was lower. Furthermore certain items listed on balance sheets in petitioner's income and declared value excess-profits tax returns are peculiar only to an accrual system of accounting. Accounts receivable and accounts payable were so listed in each of the taxable years. Apparently the accounts receivable were deposits of cash petitioner placed with underwriting firms at various times in connection with a future issue of securities and the accounts payable constituted cash deposited by customers in advance of receiving securities from petitioner. In petitioner's return for 1945 "Social Security due Industrial Mortgage Investment Co." was listed as*344 an accrued expense. "Unclaimed checks" were set out as a liability in returns for all taxable years. Therefore we found as a fact that petitioner was on a predominantly accrual basis of reporting income in the years 1942-45.
It is well settled that a taxpayer generally may not make returns upon a basis of receipts and disbursements as to some items of his business and on an accrual basis as to other items of the same business, for such a return does not reflect true net income. Massachusetts Mutual Life Insurance Co. v. United States, 288 U.S. 269">288 U.S. 269; United States v. Anderson, et al., 269 U.S. 422">269 U.S. 422. Where, as here, a taxpayer employs a hybrid system of accounting which does not reflect true net income, the Commissioner may correct the returns so as to reflect true income. Hygienic Products Co., 37 B. T. A. 202, affd., 111 Fed. (2d) 330, certiorari denied, 311 U.S. 665">311 U.S. 665; Schuman Carriage Co., Ltd., 43 B. T. A. 880. In such a situation the Commissioner has a wide discretion as to whether the method of*345 accounting employed by a taxpayer correctly reflects his income. Where his discretion is not abused, the court will sustain his determination. See Hardy, Inc. v. Commissioner, 82 Fed. (2d) 249; Niles Bement Pond Co. v. United States, 67 Ct. Cls. 693, affd., 281 U.S. 357">281 U.S. 357; and Schuman Carriage Co. Ltd., supra.
Both long established regulations and court decisions provide a foundation for the action of the Commissioner here in adjusting items on petitioner's returns during the taxable years in accordance with the accrual basis of accounting. Regulations 111, section 29.22 (c)-1 states in part:
Need of inventories. -- In order to reflect the net income correctly, inventories at the beginning and end of each taxable year are necessary in every case in which the production, purchase, or sale of merchandise is an income-producing factor. * * *
*322 Petitioner was certainly selling "merchandise" when it acted as a dealer in securities and thus properly used inventories. Regulations 111, section 29.41-2 provides in pertinent part that "in any case in *346 which it is necessary to use an inventory, no method of accounting in regard to purchases and sales will correctly reflect income except an accrual method." In Aluminum Castings Co. v. Routzahn, supra, page 99, the Court held:
* * * The use of inventories, and the inclusion in the returns of accrual items of receipts and disbursements appearing on petitioner's books, indicate the general and controlling character of the account, * * * and support the finding of the trial court that books and returns were on the accrual basis. * * *
In A & A Tool & Supply Co., et al. v. Commissioner, 182 Fed. (2d) 300, the Court of Appeals for the Tenth Circuit declared:
* * * Ordinarily when there are inventories to consider, the accrual basis is the only method which will properly reflect the taxpayer's income. * * *
Specific authority for the adjustments made by the Commissioner to the accumulated earnings and profits stated by petitioner on its excess profits tax returns is set forth in Regulations 112, section 35.718-2 (a). It provides in part:
* * * In computing accumulated earnings and profits as of the beginning of the*347 taxable year, a taxpayer keeping its books and making its income tax returns on the accrual basis shall subtract the income and excess profits taxes for the preceding taxable year. * * *
This provision was quoted with approval in Atlumor Manufacturing Co., 12 T. C. 949, 954.
We therefore hold that respondent did not abuse his discretion under section 41 in making adjustments on petitioner's returns in accordance with the accrual basis.
Petitioner contends, in the event of such a holding, the respondent still erred in accruing in each of the taxable years 1942-44 and then subtracting from accumulated earnings and profits in the succeeding year the excess profits taxes here in dispute. This assertion is based on the well-settled rule that a tax which is being contested does not accrue until liability therefor is finally determined. Dixie Pine Products Co. v. Commissioner, 320 U.S. 516">320 U.S. 516, and Security Flour Mills Co. v. Commissioner, 321 U.S. 281">321 U.S. 281.
Petitioner's argument is based upon a failure to distinguish the accrual of Federal income and excess profits taxes called for by Regulations*348 112, section 35.718-2 (a) from the more usual accrual for purposes of deduction from, or inclusion in, income. The accrual of these taxes results in no deductible expense in computing taxable *323 income. The sole reason for the accrual of such taxes is to properly reflect the amount of a corporation's accumulated earnings and profits at the beginning of a taxable year for invested capital credit purposes. If accumulated earnings and profits at the start of any taxable year are to show the true financial status of an accrual basis taxpayer, an adjustment must be made for income and excess profits taxes arising in the preceding year. Thus the accrual called for by this subsection of the Regulations is simply an adjustment to accumulated earnings and profits.
To effectuate the required adjustment, income and excess profits taxes must be accrued by an accrual basis taxpayer in the year they arose regardless of whether its liability therefor became definite and ascertainable in amount in that year or a subsequent year. The fact that liability for either or both taxes is contested does not postpone accrual of liability to a later year. To hold otherwise and invoke the rule that*349 a contested tax is accruable only in the taxable year when liability is finally determined would completely defeat the purpose of the Regulation. Thus by simply contesting liability for income and excess profits taxes a taxpayer could postpone their accrual until after the year in which they arose, and its accumulated earnings and profits for the succeeding year would never be diminished by the amount of these taxes. In fact if petitioner's argument were upheld in the present case, it would not accrue its excess profits tax liability for each of the years 1942-45 prior to 1951, the year of our determination of liability, and its accumulated earnings and profits at the beginning of each of the years 1943-45 would never be adjusted by the amount of the taxes arising in the preceding year. We can not think that such a result was intended by Congress. We therefore reject the contention of petitioner and hold that petitioner's excess profits tax liability for each of the years 1942-44, to the extent determined under Rule 50, must be accrued in that year and must be subtracted from its accumulated earnings and profits at the beginning of the succeeding year.
As a corollary to the above*350 holding we also hold that to the extent excess profits tax liability is determined petitioner is entitled to accrue as an asset in each of the years 1942 through 1944 the postwar refund credit provided by section 780 of the Code and add this amount to its accumulated earnings and profits at the beginning of the succeeding year. See Altschul's, Inc., 9 T. C. 697, and Gorman Lumber Sales Co., 12 T.C. 1184">12 T. C. 1184.
Since the amount of petitioner's tax liability for each of the taxable years must be recomputed,
Decision will be entered under Rule 50.
Footnotes
*. Note. -- While the journal entry of March 20, 1943, includes 130 shares of Kansas City Public Service Corp., yet this stock was not actually transferred out of general inventory prior to its sale.↩
*. Note. -- 260 other shares of Socony-Vacuum remained in general inventory in the taxable year.↩
**. A gain of $ 155.13 was listed by both parties, but it is explained by neither petitioner nor respondent, and the Long Bell Lumber Co. sheet from petitioner's security ledger fails to show any sales in 1943.↩
*. This portion of the 1945 cash dividend was designated as a capital gain dividend.↩
1. SEC. 362. TAX ON REGULATED INVESTMENT COMPANIES.
* * * *
(b) Method of Taxation of Companies and Shareholders. * * *
* * * *
(7) A capital gain dividend means any dividend or part thereof which is designated by the company as a capital gain dividend in a written notice mailed to its shareholders at any time prior to the expiration of thirty days after close of its taxable year. If the aggregate amount so designated with respect to a taxable year of the company is greater than the excess of the net long-term capital gain over the net short-term capital loss of the taxable year, the portion of each distribution which shall be a capital ain dividend shall be only that proportion of the amount so designated which such excess of the net long-term capital gain over the net short-term capital loss bears to the aggregate amount so designated.↩
2. SEC. 362 (b) (6)↩. A capital gain dividend shall be treated by the shareholder as gains from the sale or exchange of capital assets held for more than 6 months.