*774 Where the petitioners held certain shares of stock in a safe deposit box, intended to sell these specific shares, and instructed their broker that they wished to sell them but could not conveniently make delivery for several days, held, that, regardless of what certificates were sold and delivered by the broker to the market purchaser, the petitioners did not make a short sale on the market but a sale of their specific shares.
*1171 These two cases, which were consolidated for hearing, involve deficiencies in income tax for the year 1933 of $246 in No. 86618 and $325.51 (erroneously stated as $346 in respondent's brief) in No. 86619. The principal issue is whether petitioners are entitled to take as a deduction, under the limitation imposed by section 23(r)(1) of the Revenue Act of 1932, set out in the margin, 1 certain losses sustained *1172 in the year upon stock claimed by petitioners to be capital assets but denied this status by respondent under section 23(s), also set out below, 2 on the ground that*775 they were not actually sold by petitioners' broker to the purchaser on the market but were merely delivered to the broker in fulfillment of petitioners' obligation under a previous short sale. This issue is common to both appeals. In No. 86619 a second issue is raised on the rate of depreciation allowed on a dwelling.
*776 FINDINGS OF FACT.
Petitioners, who are husband and wife, were in 1933 residents of Santa Cruz, California, Joseph Wilson having an office both at Santa Cruz and at San Francisco, a distance of 78 miles from Santa Cruz. At that time they held an equal interest, under the community property laws of California, in certain stocks, the company, date of purchase, and cost being as follows:
| Name of security | Date of purchase | Shares purchased | Cost |
| Anaconda Copper stock | May 2, 1930 | 50 | $3,031.25 |
| Do | Sept. 30, 1930 | 50 | 1,831.25 |
| Do | Oct. 2, 1930 | 50 | 1,862.50 |
| Do | Dec. 19, 1930 | 50 | 1,343.75 |
| 200 | 8,068.75 | ||
| Southern Pac. Ry. stock | Nov. 4, 1929 | 30 | 4,189.50 |
| Cities Service stock | Nov. 7, 1929 | 41 | 2,080.50 |
| Do | Aug. 5, 1930 | 32 | |
| Total cost | 14,338.75 |
Petitioner Joseph Wilson had a neighbor, one Doyle, senior partner in the brokerage firm of Doyle-Finne of San Francisco, and, while talking with him at his home during the latter part of May 1933, told him to sell the shares above described, with i7 other shares of Cities Service stock - all that he owned of the several issues in question. Accordingly, the broker complied with the instructions to sell*777 as follows:
| On June 1, 1933, 30 shares of So. Pac. Ry. Co. for | $737.25 |
| On June 1, 1933, 73 shares of Cities Service for | 402.23 |
| On June 2, 1933, 200 shares of Anaconda Copper for | 3,255.00 |
or a total sale price of $4,394.48, together with the remaining Cities Service stock not here in question. The loss claimed on these sales is $9,944.27.
Petitioner Joseph Wilson did not specify the date upon which the securities should be sold by the broker at the time he authorized their *1173 sale, nor did he specify the date upon which he would deliver the securities to the broker.
As to the circumstances of delivery, petitioner Joseph Wilson informed his broker at the time he ordered the sale that he was going to Los Angeles for a few days but would send the stock certificates to him as soon as possible. Accordingly, when he returned from Los Angeles petitioner sent to his broker by registered mail the certificates of 30 shares of Southern Pacific stock, 100 shares of Anaconda Copper, and 100 shares of Cities Service stock, which were in his Santa Cruz safe deposit box, in time for them to be received by his broker on June 6. On June 13, upon visiting San*778 Francisco for the first time since their conversation regarding the stock, petitioner sent to the broker, by messenger, certificates for the remaining 100 shares of Anaconda Copper stock, which had been deposited in his safe deposit box at San Francisco. All the stock sold was owned outright by petitioners and was not pledged for any loan. Petitioner Joseph Wilson had unrestricted access to both his safe deposit boxes.
The broker understood that petitioner Joseph Wilson intended to sell the shares which he owned, but he understood also that no delivery of the shares would be made to him within twenty-four hours, or, in fact, for several days. Petitioners did not intend to make a short sale, and did not authorize a short sale. The sales of Cities Service and Southern Pacific stocks were made on the San Francisco Stock Exchange and of the Anaconda on the New York Stock Exchange. Petitioner Joseph Wilson was charged by his broker with the Federal stamp tax on each of the three lots sold.
Petitioner Alice Fynes Wilson in 1933 owned a dwelling in Aurora, Illinois, which was a frame building with a stucco exterior, built some four or five years before 1925.
OPINION.
KERN: *779 The first issue is a very narrow one - whether petitioners are to be denied a deduction as a capital loss on the ground that they made a short sale, although they did not intend to make a short sale and were then long on the stock sold and could have made delivery immediately, but, in fact, did not make delivery until several days later.
The record is silent on what stock certificates were actually delivered by the broker on the sales, but the Federal stamp tax which was imposed under section 723 of the Revenue Act of 1932 and was charged by the broker to petitioners on the transactions, and the well known rule of the New York Stock Exchange requiring delivery within twenty-four hours, raises a strong presumption that deliveries of the stock sold were made immediately and that the certificates *1174 actually delivered to the purchaser, therefore, were not those held by petitioners and received by the broker from them some four to eleven days afterwards, but were certificates either held by the broker himself in "street names" or borrowed by him for just such an emergency. Upon this presumption respondent strongly relies to support his contention that the "sale" by the broker*780 was necessarily a short sale, made on petitioners' behalf. He disregards, however, the question of whether the intent of the petitioners was to make a short sale.
We shall assume in respondent's favor that the broker did not deliver petitioners' certificates to the market purchaser.
A "short sale", as defined by the Supreme Court in , "is a contract for the sale of shares which the seller does not own or the certificates for which are not within his control so as to be available for delivery at the time when, under the rules of the Exchange, delivery must be made." In that case the Supreme Court held that both the "loan" of stock certificates by one broker to another and their "return" after the seller has fulfilled his obligation to the borrowing broker constituted transfers of title to the certificates physically passing, and as such were taxable transfers under the Federal stamp tax then applicable. The above definition of a short sale would not apply to the circumstances here presented, but, as we intimated in *781 , the Supreme Court may not have intended the definition as an "all-inclusive one." We thereafter held, in , that where the taxpayer clearly intended to sell certain shares short and made deliveries from certificates later obtained, the sale was a short sale notwithstanding the fact that the taxpayer was during the transaction "long" on the same stock in another account. We considered the taxpayer's intent as important in determining whether the sale was "short" or "long."
In Provost's case, supra, the Supreme Court set out with great particularity the various sales which successively took place in completion of the transaction of a so-called short sale, "in each of which", the Court pointed out, "there is either a sale or a complete transfer of all the legal elements of ownership." They are:
(1) the sale of the stock by the person effecting the short sale, followed by the transfer and delivery of the certificates for the borrowed stock to the purchaser's broker; (2) the transfer of the shares from the lender to the borrower, who uses them for delivery on the*782 customer's short sale; (3) the purchase by the borrowing broker of the stock required to repay the loan; and (4) the transfer and delivery by the borrower to the lender of the certificates for the purchased shares to replace the shares borrowed. * * *
Physical transfer of the certificates may accompany all four transfers, but usually accompanies only (1) and (4). We touch upon *1175 these particulars merely to emphasize the fact that, as the Supreme Court's definition of a short sale quoted above may not have been intended to be definitive, so, likewise, its analysis of the several steps of legal import involved in a short sale may not have been intended to comprehend the situation of a sale by a person then "long" on the stock, much less that of a person, as here, both long on the stock and not intending to make a short sale but to make later delivery of certificates held at the time of the sale. Situation (1) above in such circumstances would require further analysis. The Court speaks of the sale "by the person effecting the short sale", assuming, apparently, that the broker acts for his principal, the short-seller, and effects the sale for him by delivery of the borrowed*783 certificates. In doing so, obviously, the broker, as agent, merely carries out the will of his principal and acts within the scope of his authority in procuring by "loan", or, more accurately, as the Court has held, by purchase, the necessary certificates for prompt delivery. But what if the seller does not intend to sell short? The broker then would have no implied authority to obtain other certificates and deliver them for the seller. On the contrary, the broker then becomes a principal, acting for himself, if he chooses to sell immediately and to deliver other certificates. Two sales are effected - the sale by the broker to the purchaser on the market and the sale by the "seller" to the broker.
While our prior decisions have not carried the analysis so far in words, it is obvious that this principle has been controlling. In , appeal dismissed April 8, 1935, petitioner owned shares of certain stocks and held them in his safe deposit box. He ordered his broker to sell them on December 30, 1930, which was done, but no delivery was made until January 5, 1931. We held that it was not a short sale, that "failure to make delivery*784 was a mere inadvertence, for he was at all times in position to make a complete transfer", and that the loss was sustained in the earlier year. In ; affd., , the situation was similar but, if anything, went further. There the petitioner had the certificates in his safe deposit box. On December 19, 1929, he sold part of the certificates through his broker and made delivery on the next day. The remainder he instructed the broker to sell on December 27, identifying them as those in the box. The broker sold on December 31, but no delivery was made. Finally, a month later, on January 31, 1930, and February 3, 1930, petitioner bought certain certificates of the same stock through the broker, the broker delivering only the balance after deducting a number equal to those sold on December 31. We held the sale not a short sale and that the loss was sustained in 1929, when the sale became effective, saying (p. 726):
* * * Indeed, if we are to treat the broker as a mere agent, it must be assumed that in behalf of his principal, the petitioner, he made a delivery as *1176 required by the rules of the Stock Exchange, *785 and thus completed the sale. It was to his own broker that the petitioner was then obligated to deliver the certificates, and we can not regard his delay as postponing the realization of loss. * * *
In , the same question of the year of loss was involved. The taxpayer directed sale on December 30, 1930, of certain stock which she held in a safe deposit box, and sale was then made by her broker, but there was no delivery by the taxpayer until January 2, 1931. The Commissioner contended that it was a short sale, and that in any event no title passed until delivery of the certificates. We answered these two objections, respectively, as follows:
* * * Here the petitioner owned the shares and they were within her control and available for delivery. She intended to sell the shares that she owned, and it is stipulated that they were sold. Mere failure to deliver certificates is not alone enough to establish a short sale. * * * [P. 197.]
* * * The petitioner intended to sell in 1930 specific shares then available for delivery and the broker intended to sell those shares. And, as said in the Ferree case, the Sales Act allows*786 delay in delivery. [P. 201.]
The respondent relies upon our decision in However, in that case it was stipulated that the sale of stock was a "short" sale. It is, therefore, apparent that the question presented by this case was not considered or decided by Farr's case.
Since our decision in that case, the Third Circuit Court has affirmed our earlier decision in Ferree's case, supra, and the Second Circuit Court, in , has reversed our decision in that case, . In Ruml's case the taxpayer in December 1928 owned certain stock which was deposited with a bank as collateral for a loan. As the Circuit Court said:
* * * He desired to sell that stock at the then market, and instructed his broker to do so, advising him how the shares were held as collateral, and telling him that there might be some delay in making delivery. His broker informed him that the stock would be sold, and that petitioner might make delivery to the broker at his convenience when he paid off the loan or substituted other collateral to release the shares.
The broker*787 sold the same number of shares of the same stock as petitioner held in December, and the taxpayer delivered part of his certificates in the same month, but the majority not until February 1929.
On January 1, 1929, the petitioner received a statement from the broker indicating that he was being carried short 2,500 shares of the stock, and upon inquiring what that meant, was told, "That is simply the way we carry it until you deliver it." The petitioner neither intended to make what is known as a short sale nor instructed his broker to do so, though he did direct his broker to sell the shares, leaving the broker free to make the sale as he might.
*1177 The question was whether a short sale had been made, and, if so, whethr the loss was realized in 1928 or 1929. The court continued:
It is clear that the petitioner intended to sell the specific shares he owned and only those. If the broker made a short sale to his customer, it was for his own account, not for the petitioner who had authorized no short sale for his account. It seems to us clear that the transaction between the petitioner and the broker was a sale by the petitioner to the broker of the specific shares pledged*788 to the bank, under an understanding with the broker that certificates therefor were to be later delivered. The result was that the petitioner became bound in December, 1928, to deliver to the broker the shares sold to him. Actual delivery was not made that month, and so the transaction in that respect was not completed, but we are primarily concerned with whether or not the loss evidenced by the sale was realized within the meaning of that term as applied to income taxation * * *. But when the evidence of realization is a sale of personal property, it is not always necessary to deliver the property before there may be a deduction of a loss. It is enough that the obligation to deliver is so fixed that the loss is reasonably certain in fact and ascertainable in amount. * * *
Here we are not concerned with the precise time when title passed from petitioner, as was so in Ruml's case, supra, and others discussed, but only with the point whether title to the shares held by petitioner passed so as to create a loss on capital assets. Under both the common law and the Uniform Sales Act the seller's intent will govern in cases of such sales of stock as in the instant case, cf. *789 ; so that delivery was not necessary to effect the sale, but delivery was, in fact, made by the petitioner here as soon as he could conveniently do so. Petitioner here had at all times complete dominion over the certificates in question, and his arrangement with his broker was very similar to that involved in Ruml's case.
We think that there was here a sale by petitioner of certificates which he had held for more than two years; that this sale was not a short sale, and was not, therefore, within the terms of section 23(s); and that a capital loss thereby resulted which should have been allowed.
We pass now to the question of depreciation. Petitioner Alice Wilson claims that 4 percent and not 2 1/2 percent should have been allowed in respect of a stuccoed frame dwelling. Since the evidence is insufficient to establish the probable life of the house, we must hold on this point for the respondent.
This opinion is in substitution for the division opinion in the same cases, *790 , promulgated September 6, 1938, and ordered reviewed by the Board on September 26, 1938.
Reviewed by the Board.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * *
(r) LIMITATION ON STOCK LOSSES.
(1) Losses from sales or exchanges of stocks and bonds (as defined in subsection (t) of this section) which are not capital assets (as defined in section 101) shall be allowed only to the extent of the gains from such sales or exchanges (including gains which may be derived by a taxpayer from the retirement of his own obligations). ↩
2. (s) SAME - SHORT SALES. - For the purpose of this title, gains or losses (A) from short sales of stocks and bonds, or (B) attributable to privileges or options to buy or sell such stocks and bonds, or (C) from sales or exchanges of such privileges or options, shall be considered as gains or losses from sales or exchanges of stocks of stocks or bonds which are not capital assets. ↩