The sole question presented by this case is whether certain sales of shares of stock made by the taxpayer, petitioner's decedent, were 'short' sales or sales of 'long' stock. If they were not 'short' sales, then the taxpayer was justified in deducting from dividends credited to the 'long' shares the amount of dividends charged to the shares sold.
The taxpayer maintained several accounts with a brokerage house-'regular', 'special', and 'short'. The 'regular' and 'special' accounts were 'long' accounts. During the years 1934 and 1935 the taxpayer's 'long' accounts were credited with dividends on certain shares. During the same years her 'short' account was charged with dividends on shares of the same stock issues. The taxpayer did not include in her income tax returns for 1934 and 1935 the dividends credited to her 'long' accounts on the theory that the amount of stock which she owned was not the number of shares credited to her in the 'long' accounts but only the number of shares by which her 'long' position exceeded her 'short' position in each of the stock issues held in the several accounts. The Commissioner assessed deficiencies on the theory that the sales made through the 'short' account were in fact 'short' sales and that the dividends charged to the 'short' account represented additional cost of the shares and could not be offset against the dividends credited to the 'long' accounts. Accordingly he ruled that the taxpayer was taxable on all of the dividends credited to her 'long' accounts. On a petition for review the Board of Tax Appeals found that the sales made through the 'short' account were sales of shares held in the taxpayer's 'long' accounts. It therefore held that the dividends charged to the 'short' account should be offset against the dividend credits. Ortiz v. Commissioner, 42 B.T.A. 173. The Circuit Court of Appeals reversed. 3 Cir., 124 F.2d 156. We granted the petition for certiorari, 315 U.S. 789, 62 S.Ct. 488, 86 L.Ed. --, limited to the question whether the sales in the 'short' account were in fact 'short' sales, because the action of the Circuit Court of Appeals in setting aside the findings of the Board on that issue was seemingly erroneous under the rule of such cases as Helvering v. F. & R. Lazarus & Co., 308 U.S. 252, 60 S.Ct. 209, 84 L.Ed. 226.
The findings of the Board were substantially as follows: The sales in question were sales of shares of which the taxpayer held an equal or greater number of the same kind in her 'long' accounts. In every such instance the broker, acting under authority from the taxpayer to consider all her accounts as a unit, treated the sales through the 'short' account as sales of the taxpayer's 'long' shares. None of these sales was labeled as a 'short' sale. The broker required no margin and charged no 'short' sale tax. He credited the 'short' account with the proceeds and made an entry therein showing delivery of the shares at the time of the execution of the sales to the purchaser. In no such case did the broker borrow any stock from other brokers or customers. Orders were executed on the stock exchange in the regular way and delivery was made on the next full business day from certificates in street names held by the broker's New York correspondents. Those street certificates included shares held by the broker for the taxpayer, though none of them was specifically designated as belonging to the taxpayer. The taxpayer was allowed interest on the proceeds of sale. Dividends were collected for the taxpayer only on the number of shares by which her 'long' position exceeded her 'short' position. On the other hand, whenever the taxpayer's 'long' accounts contained no shares of the kind sold, the broker executed the sale as a 'short' sale, required the customary margin, charged the 'short' sale tax, and made delivery from borrowed stock. On the basis of such facts the Board found that 'the sales in question were intended to be and were actually executed as ordinary sales, or sales of shares held' in the taxpayer's 'long accounts'.