*683 As applied to sales through a brokerage account of shares of stock purchased at different times and at different prices the first in, first out rule is not applicable:
(a) Where the seller ordered the broker to sell certain specified shares which had been issued to him and put up as collateral for a loan and in completion of the sale the seller delivered to the broker certificates for the identical shares. The certificates delivered to the broker identified the shares sold.
(b) Where the seller ordered the broker to sell certain specified shares which had not been issued to the seller but were held by the broker in a "street" name. The order to the broker to sell certain specified shares identified the shares sold. Helvering v. Rankin,295 U.S. 123">295 U.S. 123.
(c) Where the seller ordered the broker to sell certain specified shares which had been issued to him and deposited with a bank as collateral on a loan, but in completion of the sale the bank by mistake delivered to the broker certificates for other shares. The certificates delivered to the broker identified the shares sold.
(d) Where the seller ordered the broker to sell certain specified shares which*684 had been issued to him and deposited with a bank as collateral on a loan, but in completion of the sale the seller, being unable to get possession of the shares specified, delivered certificates for other shares. The certificates delivered to the broker identified the shares sold.
*556 These proceedings are for the redetermination of deficiencies in petitioners' income taxes as follows:
| Petitioner | Docket No. | Year | Deficiency |
| James E. Davidson | 61741 | 1928 | $2,609.47 |
| Do | 72904 | 1929 | 9,352.50 |
| Edith L. Davidson | 72905 | 1929 | 10,156.14 |
It is alleged that in his computation of each of the deficiencies the respondent erred in applying the rule of first in, first out in computing the profit on the sale of certain shares of stock. The proceedings were consolidated for hearing.
FINDINGS OF FACT.
The petitioners, James E. Davidson and Edith L. Davidson, are husband and wife. James E. Davidson is president of the Nebraska Power Co. He began active trading in stocks in about 1925. He then owned*685 a number of shares of National Power & Light Co. stock which he put up with the brokerage firm of Logan & Bryan, hereinafter sometimes referred to as the broker, with instructions that the shares were to be preserved "intact" and kept as his "estate" unless he specifically ordered them to be sold. He further instructed his broker that his active trading was to be done in other shares which he would purchase on margin or with funds borrowed from the banks.
The transactions in question in these proceedings were all conducted through the brokerage firm of Logan & Bryan in the name of petitioner James E. Davidson. Both of the petitioners had other stock transactions during the years involved which are not in controversy.
*557 National Power & Light Co. transactions of James E. Davidson in 1928.
On January 1, 1928, the petitioner, James E. Davidson, had in his brokerage account 900 shares of National Power & Light Co. stock designated as "collateral" stock which he had put up with the broker in 1925, and 900 other shares of the same stock designated as "trading" stock which he had purchased in 1926. The cost of the collateral stock was $4.42 per share and of the trading*686 stock $23 3/8 per share. In addition to those shares the petitioner had 2,200 shares of the same stock on deposit as collateral with the Omaha National Bank and 1,400 shares in a safety-deposit vault.
In January 1928 the petitioner arranged with the Omaha National Bank for a loan of approximately $25,000 with which to purchase 1,000 additional shares of National Power & Light Co. stock, with the understanding that the shares purchased would be deposited with the bank as collateral for the loan. On the petitioner's instructions the broker purchased for his account 1,000 shares on January 27, 1928, at a cost of $25,337.50. The certificates for 900 of those shares, numbered 27,417 to 27,425, inclusive, were delivered to the petitioner on February 8, 1928, and a certificate for the remaining 100 shares, numbered 27,556, was delivered to him on February 16, 1928. On those dates the petitioner deposited the certificates with the bank in accordance with his agreement.
On March 9, 1928, the petitioner ordered the broker to sell the 1,000 shares purchased on January 27, 1928, stating that he would get the certificates from the bank and deliver them as soon as the sale was made. On*687 that date, March 9, 1928, the broker sold 1,000 shares for petitioner's account and in completion of the sale the petitioner, on March 9, 1928, got the identical certificates, numbered 27,417 to 27,425, inclusive, and 27,556, from the bank and delivered them to the broker. The petitioner then received a check from the broker in the amount of $26,310, representing the proceeds of the sale, which he deposited with the bank and paid off the loan.
In substantially the same manner the petitioner, on March 14, 1928, purchased 1,000 shares of the same stock with a loan from the First National Bank of Omaha and on March 20, 1928, he purchased 1,000 additional shares with a loan from the Omaha National Bank, the cost of each lot being $25,650. On April 13, 1928, the broker, on the petitioner's order, sold 2,000 shares for his account and on April 16, 1928, the petitioner got the identical certificates which he had put up as collateral at the banks when the shares were purchased and delivered them to the broker, receiving a check for the proceeds of the sale. One of the lots was sold for $29,310 and the other for $29,060.
On September 24, 1928, the petitioner instructed the broker to*688 sell the remaining 1,000 shares of National Power & Light Co. stock, which he mistakenly thought was the balance in his trading account. *558 In fact, there were only 900 shares in the trading account, being the same 900 shares that the petitioner had purchased in 1926. The broker, however, sold 1,000 shares for the petitioner's account, as he had been instructed to do, and notified the petitioner that his trading account was 100 shares short. The petitioner then instructed the broker to take 100 of the shares held in his collateral account and apply to the sale. The proceeds from the sale of the 1,000 shares were $39,835. The cost of the 900 shares of trading stock was $21,150 and the cost of the 100 shares of collateral stock was $441.89.
On September 25, 1928, the petitioner purchased 2,000 shares of National Power & Light Co. stock for $84,375, and on October 2, 1928, 200 additional shares for $8,280, all of which he left in his trading account.
On December 31, 1928, the petitioner had on hand 800 shares in his collateral account and 2,200 shares in his trading account. He also had the 2,200 shares still on deposit as collateral at the Omaha National Bank and*689 the 1,400 shares in his safety-deposit vault.
National Power & Light Co. transactions of James E. Davidson in 1929.
On January 3, 1929, the petitioner instructed the broker to sell 500 of the National Power & Light Co. shares in his trading account purchased September 25, 1928. On the same day the broker sold 500 shares for the petitioner's account for $23,405 and, on petitioner's further instructions, purchased for his account 500 shares at a cost of $22,825.
On January 22, 1929, the petitioner instructed the broker to sell the 200 shares purchased on October 2, 1928. The broker sold 200 shares for petitioner's account on that day, the proceeds being $9,162. The profits on 100 of these shares belonged to another individual and were sent to him.
On January 28, 1929, the petitioner instructed the broker to sell 500 of the shares in his trading account purchased September 25, 1928, and also the 500 shares purchased January 3, 1929. On the same day the broker sold 1,000 shares for the petitioner's account for $53,785. Also, at about that time the petitioner took the remaining 1,000 shares in the trading account, purchased September 25, 1928, and deposited them as*690 collateral on a loan at the Omaha National Bank. After these transactions there were no National Power & Light Co. shares left in the trading account. On February 11, 1929, the petitioner purchased through his trading account 600 shares for $31,905 and on February 15, 1929, he sold 600 shares for $32,871, leaving the trading account again exhausted.
On February 15, 1929, the petitioner withdrew the remaining 800 shares from the collateral account and put them in his safety-deposit *559 vault with other securities. There were then no shares left in either the trading or the collateral accounts.
All of the sales in 1929 up to this point were made through the trading account and the shares sold had never been issued to the petitioner but were held by the broker for his account in "street" names.
The next transaction in National Power & Light Co. stock occurred on March 27, 1929, when the petitioner purchased through the broker 1,000 shares with a part of the proceeds of a loan from the Omaha National Bank. Certificates for these shares numbered 80,250 to 80,258, inclusive, and 80,264 were delivered to the petitioner and put up as collateral with the bank as had been*691 done in the previous transactions.
On June 19, 1929, the petitioner instructed the broker to sell 500 of the 1,000 shares purchased on March 27, 1929, certificates for which were on deposit at the Omaha National Bank. When the sale was made the petitioner called at the bank to get the certificates for delivery to the broker, but the bank refused to release them to the petitioner, stating that they would make delivery themselves. The petitioner then instructed the bank to deliver 500 shares from the certificates numbered 80,250 to 80,258, inclusive, and 80,264. In making delivery of the certificates, however, a bank clerk, by mistake, delivered certificates from another lot which had been held as collateral by the bank since 1925. The mistake was not known by the petitioner at that time.
On July 1, 1929, the petitioner instructed the broker to sell the remaining 500 shares purchased on March 27, 1929. When this sale was made he instructed the bank to deliver to the broker certificates for 500 shares from the remainder of the certificates numbered 80,250 to 80,258, inclusive, and 80,264. Again, however, the bank made the same mistake and delivered to the broker certificates*692 for 500 shares from the same lot which it had held as collateral since 1925. The selling price of the first 500-share lot sold by the broker on June 19, 1929, was $28,142.50 and of the second 500-share lot sold July 1, 1929, was $31,392.50. The cost of the 1,000 shares purchased by the petitioner on March 27, 1929, represented by certificates 80,250 to 80,258, inclusive, and 80,264, was $49,900. The cost of the 1,000 shares delivered to the broker by mistake was $4.42 per share or $4,420 for the 1,000 shares.
General Electric Co. stock transactions of James E. Davidson in 1929.
On February 19, 1929, the petitioner, through his broker, purchased 100 shares of General Electric common for $22,750. A certificate for these shares, numbered 86,242, was received by the petitioner on March 4, 1929, and deposited as collateral with the Omaha *560 National Bank, along with other collateral shares, to secure a loan of $147,000 which had been used to purchase these and other stocks. On March 26, 1929, the petitioner instructed his broker to sell the 100 shares purchased February 19, 1929. The broker sold the shares on that date and in completion of the sale the petitioner*693 called at the bank and got the identical certificate numbered 86,242 which he had put up as collateral when the shares were purchased and delivered to the broker. The selling price of the 100 shares was $22,791. This was the petitioner's only transaction in General Electric Co. stock in 1929.
American Gas & Electric Co. stock transaction of Edith L. Davidson in 1929.
On January 1, 1929, the petitioner, Edith L. Davidson, was the owner of 1,100 shares of American Gas & Electric Co. stock which she had purchased May 11, 1928, for $185,900. In purchasing these shares she had obtained a loan at the Omaha National Bank of $100,000, for which 700 of the shares were put up as collateral, and another loan from the First National Bank of $90,000, for which 400 shares were deposited as collateral. For each of these loans she executed a demand note in her own name. Certificates for the 1,100 shares purchased were delivered to her and deposited with the banks on July 6, 1928.
On January 2, 1929, a 52 percent stock dividend was issued on the American Gas & Electric Co. stock and the petitioner received on the 1,100 shares bought May 11, 1928, 572 shares, which she placed in her*694 safety-deposit vault. On January 10, 1929, the petitioner instructed the broker to begin selling the 1,672 shares which she then owned in 100 or 200-share lots so as not to break the market. Thereafter, the broker made sales as follows:
| January 10, 1929 | 1,000 shares |
| January 16, 1929 | 500 shares |
| January 21, 1929 | 170 shares |
The two remaining shares were not sold. The total proceeds of the sales were $246,340.70.
As the sales were made the certificates were taken from the banks and delivered to the broker. From the Omaha National Bank the petitioner got the identical certificates for the 700 shares that were on deposit there, but at the First National Bank she was unable to get release of the certificates for the 400 shares there on deposit. The bank stated that it wanted to make its own delivery. In order to complete the transaction, however, the petitioner took from her safety-deposit vault certificates for 400 other shares received January 2, 1929, as stock dividend on stock of American Gas & Electric Co. of a previous purchase, together with 570 shares received on the same date as stock dividend on the 1,100 shares of said stock bought May 11, 1928, and*695 delivered these certificates to the *561 broker. When she received a check from the proceeds of these sales she paid off the loan at the First National Bank and got the certificates held by it, which she put in the safety-deposit vault in the place of the ones delivered to the broker.
The 400 shares which were taken from the safety-deposit vault for delivery to the broker were issued as a stock dividend on shares acquired by the petitioner previous to the purchase of the 1,100 shares on May 11, 1928, and had a cost to the petitioner of $27.50 a share. The cost of the 1,672 shares acquired by the purchase of the 1,100 shares on May 11, 1928, and the stock dividend thereon of 572 shares on January 2, 1929, was about $109 each.
OPINION.
SMITH: The petitioners contend that the respondent has erroneously applied the first in, first out rule in computing their gains upon the above described sales of stock and that in each of the transactions involved the shares of stock sold were identified by their instructions to the broker to sell certain specified shares.
By amendments to his answers duly filed in each of the proceedings the respondent admits error in applying the*696 first in, first out rule to the 400 shares of the American Gas & Electric Co. stock sold by Edith L. Davidson in 1929 and avers that such shares were identified by the certificates which the petitioner delivered to the broker in completion of the sale as those acquired by stock dividend, with a stipulated cost of $27.50 per share.
The respondent further avers that if the rule of first in, first out is held not applicable to the gains on the sale of certain of the shares of stock sold in 1928 and 1929 such gains are not taxable as capital net gains, as they were treated in the computation of the deficiencies herein, but are taxable as ordinary gains at the normal rate.
The respondent further avers in the amendment to his answer filed in Docket No. 72905 that, due to error in the computation of the deficiency therein asserted against Edith L. Davidson, capital net gains were understated in the amount of $22,660.79.
For reasons hereinafter discussed we have found that the first in, first out rule is not applicable to any of the transactions involved in these proceedings, since in each transaction the shares sold were sufficiently identified. This ruling, however, does not dispose*697 of the proceedings. We must still determine what shares were sold in each transaction and the amount of the profit or loss thereon.
The several transactions will be discussed in the order indicated in the above findings of fact.
National Power & Light Co. transactions of James E. Davidson in 1928.
As to the sale of the several lots of National Power & Light Co. shares in 1928, we think that there was an identification by the petitioner *562 of all the shares sold and that the first in, first out rule is therefore inapplicable. The Commissioner's regulations, article 58 of Regulations 74, provide that this rule is to be applied only when the identity of the lots sold can not be determined. See . In each of these sales the shares which the petitioner instructed the broker to sell had been bought and paid for by the petitioner and, with the exception of the 100 shares sold on September 24, 1928, the certificates for the shares had been issued to him. In each instance the petitioner instructed his broker to sell certain shares which he clearly identified by certificate numbers, and afterwards he delivered the*698 shares so identified to the broker where they were not already in the broker's possession.
The respondent makes the argument that the evidence does not show that the broker actually sold the shares which the petitioner instructed him to sell or delivered to him for sale and that in fact the shares sold by the broker were all kept in "street" names and were not susceptible of identification. That is immaterial, we think. It is not identification by the broker, but the owner and seller of the shares, that is required. In , the Court said:
* * * It is true that certificates provide the ordinary means of identification. But it is not true that they are the only possible means. Compare ; ; ; ; . Particularly is this so when, as here, the thing to be established is the allocation of lots sold to lots purchased at different dates and different prices. The*699 required identification is satisfied, if the margin trader has, through his broker, designated the securities to be sold as those purchased on a particular date and at a particular price. It is only when such a designation was not made at the time of the sale, or is not shown, that the "First-in, first-out" rule is to be applied.
The petitioner's instructions to the broker to sell certain specified shares and the subsequent delivery to the broker of certificates for the shares specified sufficiently identifies the shares sold.
National Power & Light Co. transactions of James E. Davidson in 1929.
As to the petitioner's 1929 transactions in the National Power & Light Co. stock a different situation is found. The first four sales in that year, 500 shares sold January 3,200 shares sold January 22, 1,000 shares sold January 28, and 600 shares sold February 16, were all made through the petitioner's trading account with the broker, which was "long" at the time of the sales for the number of shares sold. No certificates for the shares sold had ever been issued to the petitioner. The shares were carried by the broker in "street" names and were not earmarked. In each instance*700 the petitioner instructed *563 the broker to sell certain shares purchased on a specified date. Under the decision of the Supreme Court in , that was a sufficient identification of the shares sold. Apparently, the transactions in , were conducted in substantially the same manner as the transactions here, since in both instances the shares sold had not been issued in the name of the customer or earmarked by the broker, but were held in "street" names.
In each of the two remaining sales in 1929, 500 shares sold June 19 and 500 sold July 1, the petitioner instructed the broker to sell certain shares represented by certificates which had been issued to him and were then being held by the bank as collateral on a loan. The petitioner expected to get these identical certificates from the bank and deliver them to the broker in completion of the sales, just as he had done in the 1928 sales, but through a mistake on the part of the bank other certificates, representing shares acquired at an earlier date, were delivered to the broker. In those circumstances, we think that the shares delivered*701 to the broker were the shares actually sold by the petitioner.
In , the rule pronounced in , was held to apply to transactions other than those conducted by a "margin trader." The facts there were that the broker, who had in his possession a number of shares of stock which the taxpayer had purchased at different times and for different prices, was instructed to sell a certain number of shares from a specified lot, but instead sold and delivered to the purchaser shares from a different lot. The court held that the taxpayer's instructions to the broker to sell certain of the shares identified those shares as the ones sold, notwithstanding that the broker delivered other shares to the customer. In concluding its opinion, the court stated the three following rules:
* * * (1) that where there is no designation by the taxpayer at the time of making the sale, the certificate should be treated as the proper means for identification; (2) that a designation by instructions to the broker of the shares to be sold is controlling though the certificate delivered does not correspond with*702 the instructions; (3) that the "First-in, first-out" rule applies only where there is neither identification by a certificate, nor by designation of the taxpayer.
In , the Board followed , with the qualification, however, that clause (2) of the above quotation from the court's opinion in that case should be construed to mean that a designation by instructions to the broker is controlling though the certificate delivered by the broker does not correspond with the instructions. Where the shares are already in the broker's possession there is nothing more for the seller to do after he instructs the broker to sell certain of those shares. *564 Ordinarily, too, it is of no consequence to the broker or to the customer which shares are delivered by the broker. But as long as the petitioner has possession of the shares he is free to exercise his own choice and deliver whatever shares he may choose to in conclusion of the sale. In the instant case, for instance, the petitioner after instructing the broker to sell certain shares was free to change his mind about what*703 shares he would dispose of and to deliver certificates for other shares. See also , affirming ; ; ; affd., . There is no suggestion in the Court's opinion in , that the seller's instructions to the broker to sell certain shares would have prevailed as a means of identification over the fact of the delivery to the broker of certificates for other shares, nor was this question presented by the facts in In this case the delivery of the certificates by the petitioner or by the bank as his agent, we think, definitely identified the shares sold. The brokers sold the shares of stock represented by the certificates of indebtedness delivered - not those represented by some other certificates.
General Electric Co. stock transactions of James E. Davidson in 1929.
The petitioner had only one completed transaction in General Electric Co. stock in 1929, involving the purchase of 100*704 shares on February 19 and the sale of those shares on March 26. The material facts with respect to the transaction are identical with those relating to the purchase and sale of the several lots of National Power & Light Co. stock in 1928. The petitioner received delivery of certificates for the shares purchased, deposited them with the bank as collateral on a loan, instructed the broker to sell those specific shares, and when the sale was made delivered the identical certificates to the broker in completion of the sale. The purchase price of the 100 shares was $22,705, the sale price $22,791, and the profit $86.
American Gas & Electric Co. stock transactions of Edith L. Davidson in 1929.
The questions raised with respect to the transactions of Edith L. Davidson in American Gas & Electric Co. stock in 1929 have also been answered in our foregoing discussion of the sales of National Power & Light Co. shares by the petitioner, James E. Davidson, in 1929. There, other shares than those which the broker had been instructed to sell were delivered to him through a mistake on the part of the bank acting as agent for the petitioner. Here, other shares than those which the broker*705 had been instructed to sell were delivered to him by the seller intentionally because she was unable to get possession of the shares which she had instructed the broker to *565 sell. As to the identification of the shares sold there is no basis for a distinction in these transactions and, for the reasons already stated, we hold that the shares sold were the shares actually delivered to the broker and not in part other shares which the seller instructed the broker to sell but did not deliver. We can not sustain the petitioner's contention "that the delivery of a certificate other than the share representing that particular lot [which the broker was instructed to sell] because of inability to obtain the identical certificate from the bank did not alter the transaction and that it still remained the sale of that specific lot."
With respect to the net capital gain question raised by the respondent in the amendments to his answers, it can be readily ascertained from the above stated facts whether the different lots of shares of stock sold by the petitioners in 1928 and 1929 had been held by them for a period of two years or more and therefore constituted capital assets within*706 the meaning of section 101 of the Revenue Act of 1928. Where the shares sold had been held for less than two years the gains derived from such sales were not capital net gains, but were ordinary income taxable as such. Pursuant to the amended answers filed by the respondent the necessary adjustments in petitioners' tax liabilities will be reflected in the Rule 50 computations.
The further averment contained in respondent's amendment to his answer filed in Docket No. 72905 that Edith L. Davidson's net capital gains have been understated by the amount of $22,660.79 due to an error in the computation of the deficiency is supported by the evidence. The error appears on the face of respondent's Exhibit C. Adjustment in respect of this error likewise will be made in the Rule 50 computation.
Reviewed by the Board.
Judgment will be entered under Rule 50.
MURDOCK, concurring: The author of the prevailing opinion attempts to distinguish the present case from the Miller and McCarter cases on the ground that in the latter cases the delivery of the wrong certificate was made by the taxpayer's broker, while in the present case the wrong delivery was*707 made either by the taxpayer himself to the broker or by a bank to the broker. I do not agree that the difference in the facts is a sound basis for distinguishing the cases. A broker, just like a bank, is merely the agent of the seller, and where it appears, as it did in the Miller and McCarter cases, that the certificate actually delivered was identifiable as that pertaining to a different lot of stock from the one which the taxpayer designated for sale, there is just as good reason for holding the seller to the basis applicable to the shares represented by the certificate actually *566 delivered as there is in the present case. I agree with the result reached in the present case because I think that identification by certificates is a better method of identification than identification by designation to the broker. See William W. Miller,31 B.T.A. 192">31 B.T.A. 192, and my dissent in Estate of Uzal H. McCarter,34 B.T.A. 535">34 B.T.A. 535.
MCMAHON and TURNER agree with the above.
ARUNDELL, dissenting: In the case of Estate of Uzal H. McCarter,34 B.T.A. 535">34 B.T.A. 535, we definitely held that we would follow the rule laid down*708 by the Second Circuit in Miller v. Commissioner, 80 Fed.(2d) 219, to the effect that a designation to the broker of the shares to be sold is controlling although the certificate delivered does not correspond with the instructions given. I think we depart from that ruling in the instant case when we hold that the mistaken delivery by the banker of certain certificates shall prevail as an identification of what was intended to be sold over the very definite instructions of the owner to the contrary. The two rulings can not be reconciled. We should adhere to the rule announced in Miller, supra.
VAN FOSSAN, MELLOTT, and ARNOLD agree with this dissent.