This case presents further questions regarding the application to marginal transactions on the stock exchange of Article 58 of regulations No. 74, as well as some of those already considered in Helvering v. Rankin, 295 U.S. 123, 55 S.Ct. 732, 79 L.Ed. --, decided this day.
Snyder was the salaried secretary of an insurance company. During 1928, as in previous years, he made on his individual account, at different dates and different prices many purchases and sales on margin of United Gas Improvement Company stock. In his federal income tax return for the calendar year 1928 he reported, apparently, no profits from trading on the stock exchange. The Commissioner of Internal Revenue concluded that he had made large gains; determined that his net income was $197.495.85; and, after making the appropriate deductions, assessed a deficiency tax of $38,961.22. The large income computed by the Commissioner was the result of applying the sales made in 1928 against purchases in earlier years, in accordance with the 'First-in, first-out' regulation and sections 111-113 of the act (26 USCA §§ 2111-2113). The Board of Tax Appeals (29 B.T.A. 39) and the United States Circuit Court of Appeals (73 F.(2d) 5) affirmed the Commissioner's determination. The facts found by the Board of Tax Appeals, upon which the case was submitted, are these:
Snyder traded in United Gas Improvement Company stock for profit through brokers on margin; and increased his holdings by the method known as 'pyramiding.' On January 1, 1928, there stood to his credit 5,300 shares; and his debit balances aggregated $501,865.59. He purchased during the tax year 10,600 shares and sold 7,900. At the close of the year, 8,000 shares stood to his credit, and his debit balances aggregated $932,822.67. Upon rises in the market, paper profits had been used to increase his holdings. Upon declines in the market, when his margin fell below the required percentage, the brokers reduced his debit balances by sufficient sales to make up the deficiency in the margin. The purchases and sales were effected by the brokers transferring so-called 'street certificates,' each for 100 shares, in the name of some stock exchange concern, endorsed by it in blank. At no time was any stock certificate delivered by the brokers to Snyder, or by him to them; nor was any certificate earmarked for him or his account. The certificates were inextricably mingled with other securities pledged with banks. They were at all times incapable of identification as having been bought or sold for the account of Snyder. The transactions between him and the brokers were reflected solely in entries in Snyder's account on the brokers' books; and no entry indicated that any particular lot theretofore purchased had been sold or retained. The only attempt at identification found by the Board, was the uncontradicted testimony of Snyder to the effect that 'in each case where a sale was made it was his intention to sell the last acquired stock first and shortly thereafter to buy back an equivalent amount in order to increase his margin and acquire additional shares of the stock.'
First. Snyder contends, in the alternative, that his intention to sell the last acquired stock first, constituted sufficient identification to make the 'First-in, first-out' rule inapplicable; or else that the regulation as applied to marginal transactions on the stock exchange is invalid, because there is no possible means, other than the trader's intentions, of identifying the shares sold. What has already been said in Helvering v. Rankin is enough to dispose of both of these contentions. It is there determined that shares traded on margin are capable of identification for the purposes of the regulation; but that the mere intention of the trader to sell particular shares, without further designation, does not constitute sufficient identification.