Before BIGGS, CLARK, and JONES, Circuit Judges.
The petitioner was indebted to Bankers Trust Company of New York which called upon him either to deposit additional collateral or reduce the amount of his loan.The petitioner had 90,000 shares of duPont Company stock with Bankers Trust Company as security for this loan. He thereupon made an agreement with Christiana Securities Company to sell to it, and Christiana agreed to buy from the petitioner 62,500 shares of duPont Company stock for $2,000,000. This agreement was made on April 20, 1932. The petitioner thereupon employed Raymond Ellis to carry out the transaction.Ellis was "a customer's man" employed in the Wilmington office of Laird, Bissell & Meeds, brokers, but he also maintained an office of his own and had a separate clientele. He was accustomed to act as an agent for the petitioner in brokerage transactions and was regularly employed by the petitioner to make up his income tax returns.
Upon April 20, 1932, Ellis wrote to Ross, an employee in the New York office of Laird, Bissell & Meeds, and instructed him to pay Bankers Trust Company for the brokers the sum of $2,000,000 and to receive from Bankers Trust Company 62,500 shares of duPont Company stock belonging to the petitioner and standing in his name. Ellis wrote Ross to put this stock in the name of the brokers and to deliver it to their Wilmington office, stating that " * * * to eliminate any possible chance of being taxed on the sale, we must see to it that none of the Bankers Trust certificates are used in making this delivery."
On April 21, Ellis executed a buy order showing that Laird, Bissell & Meeds purchased 62,500 shares of duPont Company stock from the petitioner for their own account. A short account of the petitioner, known as the "Short No. 2 Account", was thereupon shown as having sold 62,500 shares of duPont Company stock and credited with the sum of $1,999,250, the sum of $750 having been deducted from the amount of the sale price in payment of transfer taxes. At the same time Ellis executed a sell order showing that Laird, Bissell & Meeds had sold 62,500 shares of duPont Company stock to Christiana Securities Company for $2,000,000.
Upon April 21, the New York office of Laird, Bissell & Meeds procured from Bankers Trust Company 62,500 shares of duPont Company stock owned by the petitioner and standing in his name. Bankers Trust Company then billed the brokers for $2,000,000 and payment of this sum was made by the brokers to Bankers Trust Company through the Stock Clearing Corporation as part of the brokers' daily settlement check. The brokers proceeded to take the shares to the duPont Company transfer agent and had new certificates issued in their names. They thereupon delivered 62,500 shares of duPont Company's stock to J. P. Morgan & Company in New York and received from Morgan & Company the sum of $2,000,000. Of the stock so delivered 40,500 shares were out of the certificates of stock of the petitioner received that day by the brokers in lieu of the certificates of the petitioner delivered by the brokers to the duPont Company transfer agent. Ellis made records showing the receipt of 62,500 shares of duPont Company stock in the "H. F. duPont Special Account",*fn1 a long account of the petitioner and showing the delivery of 62,500 shares of duPont Company stock by the brokers to Christiana Securities Company.
It will be observed that at this time, viz., April 21, 1932, the records of the brokers showed the petitioner to be short 62,500 shares of duPont Company stock in the duPont "Short No. 2 Account", while at the same time the "H. F. duPont Special Account" showed him to be long 62,500 shares of duPont Company stock.
Upon august 19, 1932, the short position of the petitioner of 62,500 shares of duPont Company stock in his "Short No. 2 Account" and his long position of 62,500 shares in the "H. F. duPont Special Account" were set-off against each other through a third account of the petitioner's known as the "H. F. duPont Account."
The question presented for our determination is whether under the circumstances the petitioner made a short sale of the 62,500 shares of his duPont Company stock held by Bankers Trust Company, within the purview of Section 23(s) of the Revenue Act of 1932.*fn2 If the petitioner did so, the decision of the Board of Tax Appeals must be affirmed. Otherwise the Board must be reversed, and the petitioner must be held to be entitled to report the gain upon the sale of the stock as a capital gain subject to taxation under Section 101(a) of the Revenue Act of 1932, 26 U.S.C.A. Int. Rev. Acts, since the shares were held by him for a period of more than two years.
The Board held that Ellis acting on behalf of the petitioner made a short sale of 62,500 shares against the "box", the box in this instance being 62,500 shares of his 90,000 shares held by Bankers Trust Company when he sold 62,500 shares of duPont Company stock for the brokers' own account; that the sum of these transactions resulted in a short sale within the purview of Section 23(s) of the kind adjudicated by this court in Henry B. DuPont v. Commissioner, 98 F.2d 459.
The petitioner contends that the records and bookkeeping entries executed or caused to be executed by Ellis were fictitious and must be disregarded since they do not reflect actual facts.The petitioner contends that his stock was sold to Laird, Bissell & Meeds by the Bankers Trust Company and was delivered, precluding the possibility of a short sale of those shares of stock.
Was there a short sale in the case at bar? If so, it took place when Ellis sold 62,500 shares of duPont Company stock from the petitioner to the brokers for their own account. At this point the brokers' records showed the petitioner to be short 62,500 shares in the "Short No. 2 Account", he being credited simultaneously with the sum of $1,999,250 in that account. But to bring the case at bar within our ruling in Henry B. DuPont v. Commissioner, supra, 98 F.2d at page 461, stock from the petitioner's "box", viz., 62,500 shares of the 90,000 shares held by Bankers Trust Company, must have been used to close the short transaction. Assuming that there was a short sale, did the petitioner mould the disposition of his long interest into the form and substance of that sale?
It must be borne in mind that the capital gain sought to be taxed as ordinary income amounts to the difference between the price ($1,547,487.12) paid by the petitioner for the 62,500 shares of box stock and the price ($1,999,250) at which 62,500 shares of the duPont Company stock were sold by Ellis to the brokers for their own account. This subtraction will determine the amount subject to tax only if the 62,500 shares of box stock were delivered to the brokers for the benefit of the petitioner, that is to say were put to the credit of "H. F. duPont Special Account", so that such credit could be used to close the short position in the "Short No. 2 Account." The brokers gained possession of the 62,500 shares of the box stock in one of two ways; either they bought the stock for themselves or, acting as agents for the petitioner, they procured it from Bankers Trust Company for his benefit, advancing the necessary funds to effect such a transaction. If the brokers pursued the second course, the entries in the "H. F. duPont Special Account" of a long position of 62,500 shares with a countervailing debit to the ...