*1353 A trust, engaged in business as a trader in securities, sold certain stocks to the wife of a trustee and mother of the beneficiaries at a price closely approximating the market as reflected by exchange quotations. The trustees wished to sell the stocks in order to raise money with which to buy another security in which market activity was anticipated. The other security was purchased and sold three days later at a substantial profit. The trust then repurchased at the same price, the stock it had sold to the private purchaser. Both the sale and repurchase were carried out in ordinary business channels through brokers and banks, and there was no understanding or agreement between the parties concerning repurchase. Held, the sale by the trust was valid and bona fide, and the loss sustained thereon is deductible from income.
*509 In this proceeding petitioners assail respondent's determination of a deficiency in income tax for the year 1929 in the amount of $137,383.50. Upon trial, certain allegations of error set forth in the petition*1354 were waived, leaving for our determination a single issue, namely, whether petitioners sustained, upon the sale of certain stocks in 1929, a loss deductible from income of that year. Respondent denied the deduction on the ground that the transactions giving rise to the claimed loss were not bona fide. The parties presented a stipulation of facts which, of course, we adopt. However, as much of the stipulation relates to issues raised by the pleadings but waived upon trial, we set out here the facts, not exactly as stipulated, but *510 as necessary to a report of the case, together with our findings upon the evidence relating to the issue remaining.
FINDINGS OF FACT.
On December 1, 1921, Oscar F. C. Kunau, then a resident of Buffalo, New York, established an irrevocable trust for the benefit of his children, naming the Marine Trust Company, a corporation, of Buffalo as "corporate trustee" and himself as "individual trustee." Certain properties were turned over to the trust, and the trustees were given jointly full power to make and change investments and buy and sell securities and other property, for the benefit of the trust. About September 29, 1925, the Marine Trust*1355 Company resigned as corporate trustee and on October 5, 1925, the Liberty Bank, a corporation of Buffalo, by order of court, was appointed successor corporate trustee.
During the period from January 1, 1927, to December 31, 1929, the trust made numerous purchases and sales of stocks, bonds and other securities, the majority of which were listed upon the exchange, and was engaged in the business of trading in securities. Its trading profits up to April, 1929, amounted to nearly two millions of dollars. The transactions were instigated by the individual trustee and acquiesced in and carried out by the corporate trustee through brokers and banks, using funds belonging to or borrowed by the trust. On March 6, 1929, the trust owned and held 5,000 shares of the common stock of the Niles-Bement-Pond Company, and at about that time received as a dividend thereon 10,625 shares of the common stock of United Aircraft and Transport Corporation having a fair market value of $87.8125 a share. Thereafter the trust acquired 5,000 additional shares of Niles-Bement-Pond Company common stock, the total cost of its 10,000 shares being $946,195.
Early in December 1929, Kunau, anticipating market*1356 activity in stock of the Simmons Bed Company, desired to have the trust purchase a large block of that stock, but as the greater part of its funds was invested in the Niles-Bement-Pond and United Aircraft stocks, it could not do so without first disposing of the latter investments. As the trading in these stocks was somewhat limited, it was feared that such large blocks could not be disposed of rapidly without adversely affecting the market price. At this time, Gladys E. Kunau, the wife of petitioner Kunau and mother of the beneficiaries of the trust, who for some time past had been trading in securities on her own account, had a credit balance with her brokers in excess of $450,000. After some discussion of the matter she expressed herself as willing to buy from the trust its Niles-Bement-Pond and United Aircraft stocks and, on December 6, 1929, did so, for a consideration *511 of $800,000 cash, which represented, within a fraction of a point, the price then prevailing as reflected by sales upon the exchange on that day. The purchase was made by Mrs. Kunau through her brokers, payment being made by their check, and delivery was made to them by the corporate trustee of the*1357 trust, all through the Equitable Trust Company of New York. There was no understanding, agreement or intimation that the trust would subsequently repurchase these stocks. It was Mrs. Kunau's plan to dispose of them on the market in small blocks as a profit.
The trust, through its brokers, immediately purchased 10,000 shares of Simmons stock, the price of which advanced almost at once, and on December 9, 1929, the trust sold its holdings of Simmons at a substantial profit. It was then desired to repurchase for the trust its former holdings of Niles-Bement-Pond and United Aircraft. While the quotations of these securities were somewhat advanced over the prices prevailing on December 6, it was improbable that the market could have absorbed at the prevailing prices such amounts of these stocks and as Mrs. Kunau was willing to sell provided she did not sustain a loss, she agreed to sell back to the trust these stocks at the same price she had paid for them, $800,000. Accordingly the trust purchased them from her on December 9, 1929, the transaction being consummated through brokers and banks.
Respondent has refused to allow as a deduction from income of the year 1929 the loss*1358 claimed upon the sale by the trust of its stocks of the Niles-Bement-Pond Company and United Aircraft and Transport Corporation to Mrs. Kunau.
OPINION.
GOODRICH: The question for our determination is largely one of fact - whether the trust actually sold its stocks to Mrs. Kunau, and, if so, whether the sale was made without any understanding or agreement concerning repurchase or other incident such as would prevent it from being a fully consummated and bona fide transaction between the parties. Respondent points out that we must also determine another question of fact, namely, whether the trust was engaged in buying and selling securities as a trade or business, for, unless it was, the loss claimed is not deductible under section 23(e)(2) of the Revenue Act of 1928, because of the provisions of section 118 of the same act, prohibiting the deduction of losses sustained upon sales of securities in cases where the same or similar property is acquired by the seller within thirty days of such sale. If the trust was so engaged the loss is deductible as one incurred in its trade or business, notwithstanding the fact that the same amount of identical securities was repurchased a few*1359 days after the sale. *512 (I.T. 2523, IX-1 C.B. 145.) From the evidence we have determined and found as a fact that the trust at the time here material was engaged in business as a trader in securities. (See Harriet Pullman Schermerhorn,26 B.T.A. 1031">26 B.T.A. 1031, and cases there cited.) Consequently, we revert to our inquiry concerning the bona fides of the sale.
We fully recognize the necessity for close scrutiny of transactions between persons related by blood, marriage, or community of interest in order to be sure that their dealings are in fact what they, on face, purport to be as to their validity, effect and finality. Such scrutiny here shows us nothing to indicate that the sale by the trust to Mrs. Kunau was other than an arm's-length, valid, transaction, bona fide in all respects. The trustees were trading for profit; their purchases were selected with a view to immediate market activity; their sales were made to realize a profit; they were trading as rapidly as possible for those ends. The fact that they believed the Simmons stock offered a better possibility for a quick, profitable turnover was a sufficient and compelling reason for their disposal of*1360 the Niles and United stocks, and the probabilities of adversely affecting the market by offering such large blocks of these latter stocks was sufficient reason for seeking a private purchaser. We are convinced that Mrs. Kunau's trading activities were carried on upon her own initiative, free from the domination of her husband, and that her purchase of these securities was upon her own volition and unaccompanied by any agreement or understanding concerning the reacquisition of the stocks by the trust. Her decision to sell back the stocks to the trust we think was likewise the result of her independent judgment. The transactions were carried out not privately, but through ordinary business channels, and, in view of the testimony before us concerning the prevalence of the practice, particularly during the year 1929, of private trading in listed securities at prices varying widely from market quotations, we can not but be convinced that the consideration for which these securities were sold was fair and adequate.
Respondent, relying mainly upon *1361 Harold B. Clark,2 B.T.A. 555">2 B.T.A. 555, urges that Mrs. Kunau should be regarded as an accommodation purchaser, rather than a bona fide purchaser. In the cited case it was admitted that securities were sold solely to establish a loss thereon to be taken as a deduction from income and, in the circumstances of that case, there were ample grounds for the inference that the purchaser bought with the expectation of later being called upon to resell the stock and that there was lacking the mutual intention of completing a bona fide sale. Here, we have no such circumstances; indeed, the evidence is to the contrary and convinces us that Mrs. Kunau bought not as an accommodation purchaser with the expectation *513 of later reselling the stocks to the trust, but for her own account and purposes, and that both she and the trustees intended that the transaction should be a valid and bona fide sale. Cf. Harold F. Seymour,27 B.T.A. 403">27 B.T.A. 403.
We hold, therefore, that respondent erred in refusing to deduct from petitioner's income for the year 1929 the loss sustained upon the sale of 10,000 shares of stock of the Niles-Bement-Pond Company and a like amount of stock*1362 of United Aircraft and Transport Corporation.
Judgment will be entered under Rule 50.