*1174 Where the decedent in 1926 and 1928 purchased on margin through a broker at various times sundry lots of stock of United Gas Improvement Company, and in 1928 sold through the broker a portion of the stock thus held on margin, the respondent's determination that he sold those first acquired is approved.
*1204 This is a proceeding for the redetermination of a deficiency in income tax of decedent for 1928 of $11,173.05. The question presented by this proceeding is whether a sale of a portion of the number of shares of stock, owned by the petitioner through a broker on margin, shall be applied against the latest shares purchased or against the first shares purchased.
FINDINGS OF FACT.
1. The decedent, who died subsequent to the filing of the petition in this case, was during the taxable year here involved and for many years prior thereto president and principal owner of the Turner Supply Company, Chester, Pennsylvania. From 1924 until his death in 1932 he was sick, and from 1928 on was blind, and his two closest business associates (one was his*1175 personal attorney and also the secretary of the company, and the other was manager of the company) had to and did handle a great many of his personal affairs, including the transactions hereinafter referred to.
2. Early in 1926 a distribution in kind was made of the estate of the decedent's father, at which time he received as a part of his share of the estate about $20,000 in bonds. He did not believe in *1205 bonds as an investment and desired to change his inheritance from his father from bonds into stock. He had several friends who were interested in United Gas Improvement Company of Philadelphia, and, after conversations with them, decided to purchase as many shares of Unit d Gas Improvement Company stock as the funds to be obtained from the sale of his bonds would warrant. At his direction his attorney opened for him a marginal account with West & Company, a brokerage firm, and with the proceeds of the bonds he purchased on margin during the early part of 1926, 1,200 shares of United Gas Improvement Company stock at a total cost of $117,202.50.
3. On November 22, 1926, decedent was credited by his broker with 300 shares of United Gas Improvement Company stock*1176 as a stock dividend on the 1,200 shares which he had purchased, making a total of 1,500 shares of that stock held on margin on December 31, 1926.
4. During 1927 the decedevt had no marginal transactions in this
4. During 1927 the decedent had no marginal transactions in this the end of that year his margin account showed 1,500 shares of United Gas Improvement Company stock long. On June 8, 1928, the decedent bought through the same broker on margin 1,000 shares of United Gas Improvement Company stock costing $143,225.
On May 8, 1928, the decedent gave orders to his broker to sell 300 shares of United Gas Improvement Company stock, which was sold for $44,619 net. On October 22, 1928, he sold an additional 500 shares of the same stock for $73,865, and on November 7, 1928, an additional 500 shares for $74,115, making a total selling price for all of this stock sold in 1928 of $192,599.
The respondent included in decedent's income for 1928 the sum of $92,864, representing profit on the sale of 1,300 shares of United Gas Improvement Company stock in 1928. The profit was computed as follows:
The cost of the 1300 shares was computed at $99,735 by taking the earliest purchases*1177 in 1926 together with the 25% stock dividend on each such purchase as follows:
| 125 shares(100+25) cost | $9,020 |
| 625 shares(500+125) cost | 44,475 |
| 125 shares(100+25) cost | 9,095 |
| 425 shares cost | 37,145 |
| 1,300 | 99,735 |
This last item was computed by taking the cost of the 400 shares bought June 14, 1926 ($43,700); adding 100 shares received as a stock dividend which would give a total of 500 shares; dividing 500 into the cost of $43,700 which *1206 would give a cost per share of $87.40; and multiplying this $87.40 by 425 (the number of shares necessary to make up the total of 1,300 shares) would give a cost of $37,145 as above. The total cost of $99,735 computed as above when deducted from the total selling price of $192,599, leaves a profit of $92,864.
The decedent always intended to retain the ownership on margin of 1,200 shares of the United Gas Improvement Company stock, since he had faith in the company and desired to hold that in lieu of the bonds which he had received from the estate of his father. In giving orders to his broker to sell 1,300 shares of the stock in 1928, the decedent did not specify any particular shares to be sold. An employee*1178 of the broker understood, however, that the decedent desired to retain 1,200 shares to take the place of the bonds which he had received from his father. The decedent had made it plain to his associates that the 1,200 shares were in the nature of a permanent commitment on his part.
OPINION.
SMITH: It is the contention of the petitioner in this proceeding that, since it was the intention of the decedent to retain 1,200 shares of the United Gas Improvement Company stock as an investment, and that intention was understood by his associates who gave the orders to purchase and sell the stock and by an employee of the brokerage concern, it must be assumed that the 1,300 shares that were sold by the broker in 1928 represented the 300 shares received as a stock dividend and in addition the 1,000 shares purchased by the decedent on June 8, 1928. The respondent rejected such contention, in accordance with article 58 of Regulations 74, which provides, so far as material, as follows:
Sale of stock and rights. - When shares of stock in a corporation are sold from lots purchased at different dates and at different prices and the identity of the lots can not be determined, the stock*1179 sold shall be charged against the earliest purchases of such stock. The excess of the amount realized on the sale from the cost or other basis of the stock will constitute gain. In the case of stock in respect of which any stock dividend was paid, the basis for determining gain or loss from a sale of a share of such stock shall be ascertained in accordance with the principles laid down in article 600. * * *
The evidence indicates that the decedent in the case at bar assumed that when he purchased shares of stock on margin a certificate for a given number of shares was acquired by him and retained by the broker. When the respondent first claimed that the decedent owed an additional tax for 1928, he, through his attorney, went to the broker's office to ascertain what certificates of stock were carried to the credit of the decedent and what certificates were actually sold *1207 for him in 1928. He learned that no certificates were earmarked for the decedent on the broker's books of account and that the broker could not advise him as to any specific certificate for the shares of stock that were purchased for him in the years 1926 and 1928. The character of the transaction*1180 is stated by the Circuit Court of Appeals for the Third Circuit in , in the following language:
* * * The evidence of the transaction and of the customer's ownership is merely a book entry of a debit of the shares purchased against a credit of the margin paid. The shares are commingled with perhaps many thousand held by the broker for other customers, subject always to be hypothecated by him in raising the difference in money between the customer's margin and the purchase price of the shares, which of course the broker must pay in order to get a certificate. The shares are not delivered or earmarked or allocated to the customer even on the books.
The facts in the case referred to above are substantially the same as those which obtain in the proceeding at bar. In that opinion the court affirmed the decision of the Board in . See also ; affd. ; certiorari denied, .
The contention of the petitioner, that article 58 of Regulations 74 does not apply to the facts in this*1181 case and that if it does to that extent it is unreasonable and invalid, is sufficiently answered by the decisions above referred to.
The petitioner makes the further contention that if the shares sold can not be identified, then under the general principles of law there was no profit on sales of these shares until the entire capital investment therein had been recovered. Petitioner relies upon . In our opinion there is no merit for such a contention. Manifestly, shares of stock represent divisible interests in a corporation, and where a person sells one or more of a lot of shares owned he may sustain a gain or loss in respect of that transaction.
Judgment will be entered for the respondent.