*972 A partnership, in addition to its business as a dealer in securities, and with no relation to its customers in that branch of its business, made substantial purchases of securities for the purpose of resale, to any buyer, at a profit, upon an expected rise in the market. Neither the relative amount nor the necessity of that additional business to its business as such a dealer, was established. Held, respondent's determination that such partnership is not a dealer in securities within article 105, Regulations 74, as to such additional branch of its business, and is, therefore, not entitled to inventory, at market value, the securities purchased in connection with that additional business and carried in a special account, will not be disturbed.
*289 These consolidated proceedings seek redetermination of income tax deficiencies, for the calendar year 1929 in the amount of $33,329.20 against Algernon S. Schafer, $33,423.09 against Edward Schafer, and $32,681.97 against Leonard Schafer.
During 1929 petitioners were members of the partnership of Schafter*973 Bros. The disputed taxes are based upon their respective incomes as such partners. They assign as error: (1) The respondent's determination that the partnership of Schafer Bros. was not entitled to inventory at market value, securities on hand at the beginning and end of the year 1929, and (2) that the partnership was not entitled to deduct, in same year, alleged bad debts aggregating $2,500, resulting in a substantial increase in the net income each petitioner *290 derived from the partnership. At the hearing, the parties limited the first issue to the sole question of whether the partnership was entitled to inventory securities in a so-called "Error Account" on the partnership books at the beginning and end of the year 1929. A portion of the facts has been stipulated.
FINDINGS OF FACT.
From 1918 to February 1932, the petitioners, residents of New York, were general partners with a one-third interest each, in the partnership of Schafer Bros., which had its principal office at 120 Broadway, New York City. The original firm of Schafer Bros. was founded in 1860 by petitioners' father and, as constituted from time to time, it has conducted a general brokerage business*974 in New York City. Since about 1865 the firm has been a member of the New York Stock Exchange.
Leonard Schafer has owned a New York Stock Exchange seat since 1899. During the existence of the partnership involved in these proceedings, including 1929, Leonard Schafer was the floor member while the other two petitioners were the office members. Leonard Schafer was also a specialist in one or two stock issues. All three petitioners were actively engaged in the partnership business, which, throughout the period from 1918 to 1932, included several activities in relation to securities. The partnership was a dealer and merchant in securities on commission and on margin. Such business activity comprised the execution of orders for purchase or sale of securities by its customers either on the Exchange, the Curb, or wherever the particular securities were listed. From 1925 through 1929 the partnership participated in a great number of syndicate and underwriting operations. Also, as a part of its business activities, but with no relation to its customers' accounts nor to the execution of orders for its customers, the partnership has always, to some extent, bought and sold securities*975 for its own account.
Beginning in 1925 or 1926 and continuing through 1929, the partnership traded in securities for its own account, much more extensively than had been its practice prior to 1925. Such trading was conducted through orders executed by Leonard Schafer or other brokers and had no relation to or connection with the accounts of the partnership's customers, but were purchased in expectation of a rise in the market price and for the purpose of resale, to any buyer, at a profit for the partnership's own account. Such securities were not purchased for investment. Sales of those securities were made through orders given Leonard Schafer or other brokers and the identity of the purchasers was not known. Such purchases and sales were entered in the so-called "Error Account" (the name having *291 no significance), which was just an old account carried on the books and used for the partnership's own transactions in securities. During 1929, the partnership purchased 107,500 shares and sold 92,500 shares of 72 different issues of securities, entered in the "Error Account." The number of such recurities carried at the close of 1929 was unusually large, due to the drop*976 in the market and the inability to sell at a profit. However, all but a comparatively few shares were sold during 1930.
Prior to 1925 the partnership carried its own securities in the "Error Account" at cost, but beginning with that year, and including 1929, it has inventoried at fair market value, the securities held for its own account at the beginning and end of the year. The change was made as a matter of business policy, but with knowledge of the effect of the taxing statutes. The New York Stock Exchange, since about 1923, has required its members to inventory securities for the purpose of certain Exchange questionnaires.
At the close of business on December 31, 1928 and 1929, the partnership owned, and carried in the "Error Account", the securities specified and described in Exhibits "B" and "C", respectively (attached to the stipulation and included herein by reference), which exhibits also set forth the actual cost and the fair market value of such securities, totaling as follows:
| Actual cost | Fair market | Cost over | |
| value | market | ||
| December 31, 1928 | $ 332,982 | $ 298,732 | $ 34,250 |
| December 31, 1929 | 1,527,882 | 981,965 | 545,917 |
The Commissioner*977 determined that the partnership was not a dealer with respect to such securities and that they must be carried at cost. He disallowed the use of inventories and increased the partnership income by the amount of $511,667, the difference between cost over market value at the beginning and the end of the year 1929.
Harold Seaman, a boat builder, asked Edward Schafer for a loan of $1,000 by the firm. Schafer, having granted Seaman many favors, advanced the $1,000 although Seaman was not worth anything. Edward Schafer, acting for the firm, loaned Emil Kolb, a mechanic and inventor, $1,000 upon the latter's request, and Schafer has been giving Kolb money ever since. Edward Schafer loaned $500 to one Reissler, a poor man in the radio business. Subsequently Reissler went through bankruptcy proceedings. At various times, including the year 1929, Schafer made several requests for repayment of the three loans, but all three debtors were insolvent and no part of the loans has ever been collected.
*292 OPINION.
LEECH: The respondent has determined that, as to the securities carried in the so-called "Error Account", the Schafer Bros. partnership was not, during 1929, a*978 "dealer in securities" within the meaning of article 105, Regulations 74, 1 promulgated by the explicit authority of section 22(c) of the Revenue Act of 1928, 2 and was not entitled, under that statute and regulation, to inventory, at market, its securities carried in that account in computing its income tax for that year. The first issue here involves only the question of whether, upon this record, that determination shall be reversed.
*979 That regulation has been approved as a reasonable application of the statute. ; . Since respondent's disputed determination was the result of the exercise of an administrative discretion definitely committed to him by statute, difficult as it may be to evaluate presumptions for practical comparison, petitioners' burden in overcoming that determination is undoubtedly heavier than that of overthrowing the general presumption of correctness arising upon all determinations of tax liability by respondent. ; ; .
There can be no doubt that an individual, partnership, or corporation may engage, at the same time, in more than one distinct branch of business activities, and that one of those may be that of "dealer in securities." Cf. . These separate activities may even all have to do with the purchase and sale of securities, but not all be those of a "dealer *293 *980 in securities." ; ; However, the purpose of the statute and the quoted regulation was to provide a means for the correct reflection of income resulting from a definitely limited character of business. Obviously, this purpose would not be furthered by permitting the use of this privileged method of tax computation to income from business activities which are not within the controlling regulation in question. The fact that a taxpayer may be a statutory dealer in securities as to some of its activities, does not, alone, entitle him to return income from its other and different activities, computed by that privileged method.
This record does not disclose that the activities of the Schafer Bros. firm, reflected in the "Error Account", were essential to its business as a "dealer in securities." The ratio of those activities to the entire partnership business is not shown. However, it does appear that those activities were quite substantial. Certainly, at least, in such circumstances, the partnership is entitled to inventory only those securities*981 purchased in its business or branch of business of dealing in securities as defined by the regulation. That regulation, itself, provides for such a segregation and different treatment for tax purposes of the income from separate branches of a business. Cf.
The testimony in these proceedings is very clear and positive as to the purpose and character of the transactions covering the securities carried in the "Error Account." During the year 1929, the partnership purchased those securities through orders executed by Leonard Schafer, or other brokers on any exchange on which the desired securities were listed. If the market price went up, those securities were sold through the execution of orders given to Leonard Schafer or other brokers. The identity of the purchasers of such securities was not known to the members of the partnership. The purchase and sale of securities in the "Error Account" had no relation to the partnership's customers' accounts or connection with the execution of orders given by its regular customers. They were purchased solely in expectation of a rise in the market, for the partnership's*982 own account for resale, to any buyer, at a profit.
The meaning of "dealer in securities", as defined in the controlling regulation, has been considered many times by the courts, and this Board. It is limited to one who, as a merchant, buys and sells securities for customers for the profit thereon.
It is unnecessary here to attempt an abstract description of what this definition includes, since it is clear that the transactions of the partnership, recorded in the "Error Account", were not within its boundaries.
*294 Thus, except for customers in the sense that any speculator must have someone to whom he sells, which is not sufficient to bring the partnership within the regulation, it is not shown that as to the securities carried in the "Error Account", the partnership had customers - an essential requisite of the controlling definition. The stocks in dispute were purchased for the firm's own account solely in expectation of a rise in the market, for sale to anyone at a profit, "as distinguished from a purchase to create a stock of securities to take care of future buying orders in excess of selling orders." *983 So far as this record discloses, as to this branch of the partnership business, it was apparently a speculator and not a "dealer" within the regulation. ;
It is contended for petitioners further that, inasmuch as the partnership has followed the practice of inventorying its securities at market in determining its income, since 1925, it should be permitted, as a matter of course, to follow the same practice for the year 1929, here involved. Important as is the evidence of such prior practice of the partnership (), it cannot be and is not controlling here, since we are concerned directly with only the year 1929. Even if the relevant facts pertaining to the securities carried in the "Error Account" in those prior years were similar to the facts appearing here as to 1929, and the respondent approved the partnership's return of income therefrom as a "dealer in securities", that approval certainly does not constitute more than a determination for those earlier years. *984 It does not foreclose a change in such determination as to 1929. To do so would permit the perpetuation of an error, a result not only repugnant to common sense, but certainly not within the clear intent of the statute. Cf. ; .
Petitioners argue also that the partnership used the inventory method in reporting income for 1929. There was oral testimony to that effect. But the partnership return for that year, admitted in evidence as such, without objection, does not corroborate that contention. Nothing appears in that return after the titles "Inventory at beginning of year" and "Less inventory at end of year." Nor does the record disclose that either in that return or attached thereto was there a description of the method or basis upon which the questioned accounts of the partnership were kept. This is also fatal to the inventory privilege for the partnership. .
In any event, petitioners have not sustained their burden of establishing error in respondent's determination that the partnership of *295 Schafer Bros. was not a*985 "dealer in securities" in reference to the "Error Account" within the meaning of the regulation. Nor have they shown its compliance with the conditions, provided in that regulation, precedent to the right to inventory securities carried in that account in determining income for the year 1929.
As to the second issue, involving the deductibility of certain alleged bad debts, the facts are insufficient to support a reasonable determination that the debts actually became worthless during 1929. The record indicates that the debts became worthless at the time the loans were made. Their deduction in computing taxable income for 1929 was properly denied. ; ; ; .
The respondent's determination is approved.
Reviewed by the Board.
Decision will be entered for respondent.
Footnotes
1. ART. 105. Inventories by dealers in securities. - A dealer in securities, who in his books of account regularly inventories unsold securities on hand either -
(a) At cost;
(b) At cost or market, whichever is lower; or
(c) At market value,
may make his return upon the basis upon which his accounts are kept; provided that a description of the method employed shall be included in or attached to the return, that all the securities must be inventoried by the same method, and that such method must be adhered to in subsequent years, unless another be authorized by the Commissioner. For the purpose of this rule a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. If such business is simply a branch of the activities carried on by such person, the securities inventoried as here provided may include only those held for purposes of resale and not for investment. Taxpayers who buy and sell or hold securities for investment or speculation and not in the course of an established business, and officers of corporations and members of partnerships who in their individual capacities buy and sell securities, are not dealers in securities within the meaning of this rule. ↩
2. (c) Inventories.↩ - Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.