Opinion
Docket No. 60333.
1957-09-25
JOHN B. AND GWENDOLEN N. SHETHAR, Petitioners,v.COMMISSIONER OF INTERNAL REVENUE, Respondent.
Paul C. Guth, Esq. , and Henry Brach, C. P. A. , for the petitioners. Clarence P. Brazill, Esq. , for the respondent.
Husband and wife each owned securities which had declined in value. They wished to establish tax losses without at the same time relinquishing family control over the securities. In accordance with a prearranged plan, each purchased on the market an identical number of shares of the same stock owned by the other, and, subsequently, each sold on the market the shares originally owned. The transactions were consummated in the case of one security on the New York Stock Exchange, and in the case of the other security on the ‘over-the-counter’ market. Held, deduction for losses disallowed under section 24(b)(1)(A), I. R. C. 1939. McWilliams v. Commissioner, 331 U. S. 694, followed. Paul C. Guth, Esq., and Henry Brach, C. P. A., for the petitioners. Clarence P. Brazill, Esq., for the respondent.
Respondent determined a deficiency in petitioners' income tax for the year 1953 in the amount of $6,935.73. At issue is whether certain losses resulted from sales ‘indirectly’ between members of a family. Sec. 24(b)(1)(A), I. R. C. 1939.
FINDINGS OF FACT.
Some of the facts have been stipulated and the entire stipulation is incorporated herein by this reference as part of our findings.
Petitioners John B. Shethar (hereinafter referred to as John) and Gwendolen N. Shethar (hereinafter referred to as Gwendolen) are, and were during 1953, husband and wife. They filed a joint income tax return for that year.
Gwendolen has independent means, and the securities which she owned on October 14, 1953, were not acquired by her directly or indirectly from her husband. She manages her property, and is thoroughly familiar with financial and investment matters.
Gwendolen has, and had during the year in question, a ‘cash’ account with Wellington and Co. (hereinafter referred to as Wellington), a member firm of the New York Stock Exchange. She makes the final decisions as to all purchases and sales for her account, and keeps her securities separate from her husband's in a safe-deposit box held in her name.
Among the securities owned by Gwendolen on October 14, 1953, were 500 shares of the common stock of Amerada Petroleum Corp. (hereinafter referred to as Amerada) which she had purchased in 1952 at a cost of $99.454.23. Amerada stock is traded on the New York Stock Exchange.
John has been a member of the New York Stock Exchange for more than 40 years. During 1953 he maintained a margin account with Wellington. This account was a trading account, and at the close of business on October 14, 1953, showed a debit balance due to Wellington in the amount of $273,587.41.
On October 14, 1953, John owned 1,500 shares of the common stock of Canadian Superior Oil Corp. (hereinafter referred to as Canadian) which he had purchased on June 30, 1953, at a cost of $14,720.05. Canadian stock is traded ‘over-the-counter.’
John annually reviews the securities owned by his wife and himself in the early part of October to determine which securities should be sold in order to create losses deductible for tax purposes. John made such a review in the year in question.
On October 14, 1953, John directed Gwendolen's attention to the fact that his Canadian stock, which had cost him approximately $9.81 a share, had a then market value of approximately $7 per share. He also pointed out that her Amerada stock, which had cost her approximately $198.91 per share, had a then market value of approximately $150 a share. John suggested that they sell these securities in order to create losses which would be deductible in computing their income tax for 1953. Gwendolen agreed with his suggestion. Petitioners were not willing to sell these shares in order to create losses if it meant that they would no longer be able to continue their ownership of 500 shares of Amerada and 1,500 shares of Canadian. Petitioners were aware of the fact that section 118 of the Internal Revenue Code of 1939 (pertaining to ‘wash sales') might be relevant in determining the tax consequences of any plan involving the above-outlined purposes.
Petitioners decided that John should purchase 500 shares of Amerada at market for his account, and he was authorized to purchase 1,500 shares of Canadian at market for Gwendolen's account. In addition John was to request an opinion from Wellington as to when petitioners could sell their original Amerada and Canadian shares without jeopardizing the deductibility of their expected losses.
In accordance with these decisions John gave Wellington the necessary purchase orders in the morning of October 15, 1953, and requested Wellington to furnish him with an opinion as outlined above.
On the morning of October 15, 1953, Wellington purchased for John's account 500 shares of Amerada on the floor of the New York Stock Exchange at a total price of $74,832.50. This purchase was made from brokers acting for unknown principals other than Gwendolen. During that morning Wellington also purchased for Gwendolen 1,500 shares of Canadian ‘over-the-counter’ from various brokers at a total price of $11,222.94. In addition Wellington forwarded John's request for an opinion to its tax accountants.
The credit balance in Gwendolen's account was sufficient to cover the cost of her purchase. The debit balance in John's account was increased by his purchase to $293,866.60.
On the morning of October 16, 1953, a Mr. Doyle, an employee of Wellington, showed John the contents of a letter from Wellington's tax accountants containing the requested opinion. The writer of the letter indicated that section 118 did not disallow a loss deduction where the immediate sale was by one spouse and the immediate purchase by the other. However, the accountant pointed out the possibility of the loss being disallowed because of the provisions of section 24(b), Internal Revenue Code of 1939.
John informed Gwendolen of the contents of the above-mentioned letter and of his conclusion that they could sell their original Amerada and Canadian shares immediately without endangering the deductibility of the ensuing loss. Gwendolen agreed to the immediate sale of her Amerada stock and gave John the necessary authority to act on her behalf.
Subsequent to that conversation, but prior to 9:40 a. m., October 16, 1953, after deciding that the condition of the stock market warranted no change in his plans, John gave Wellington the order to sell at market his Canadian stock and Gwendolen's Amerada stock. The Canadian stock was sold over the counter to various brokers on October 16, 1953, at a total price of $10,598.60. The Amerada stock was sold during the morning of October 16, 1953, on the floor of the New York Stock Exchange to brokers acting for unknown principals other than John at a total price of $75,118.06.
At no time did either spouse agree to sell any of the above-mentioned Amerada and Canadian shares directly to the other spouse. Nor did they have an understanding that one would account to the other for the proceeds from the sale of any of the above-mentioned shares in those companies.
On their joint return for 1953 Gwendolen claimed a long-term capital loss of $24,336.17 on account of the above-described sale of her Amerada stock, and John claimed a short-term capital loss of $4,121.45 on account of his sale of Canadian stock.
Respondent disallowed both deductions.
OPINION.
RAUM, Judge:
We are asked to decide whether the losses in question resulted from sales of securities ‘indirectly’ between members of a family. Sec. 24(b)(1)(A), I. R. C.1939.
Contrary to petitioners' contention, we think that this case is similar to McWilliams v. Commissioner, 331 U. S. 694, and that a like result is called for here.
SEC. 24. ITEMS NOT DEDUCTIBLE.(b) LOSSES FROM SALES OR EXCHANGES OF PROPERTY.—(1) LOSSES DISALLOWED.—In computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly—(A) Between members of a family, as defined in paragraph (2)(D);(2) STOCK OWNERSHIP, FAMILY, AND PARTNERSHIP RULE.—For the purpose of determining, in applying paragraph (1), the ownership of stock—(D) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants;
In the McWilliams case the husband managed both his and his wife's property. On several occasions he gave to his broker orders ‘to sell certain stock for the account of one of the two, and to buy the same number of shares of the same stock for the other, at as nearly the same price as possible. He told the broker that his purpose was to establish tax losses. On each occasion the sale and purchase were promptly negotiated through the stock exchange, and the identity of the persons buying from the selling spouse and of the persons selling to the buying spouse was never known. Invariably, however, the buying spouse received stock certificates different from those which the other had sold.’ McWilliams v. Commissioner, supra, at 695. The Supreme Court held that section 24(b)(1)(A) was applicable.
Although there are some differences in the facts, we think that the instant case presents essentially the same situation. In each case, a spouse owned securities that had declined in value and wished to establish a tax loss without letting them leave the family. Had he sold them directly to his wife, the loss would have been disallowed by section 24(b)(1)(A). Instead, in the McWilliams case, he sought to achieve the same result indirectly by selling the securities on the market and having his spouse buy an identical number of shares on the market. This, the Supreme Court held, was also governed by section 24(b)(1)(A), which disallowed losses on sales between members of a family whether they are made ‘directly or indirectly.’ The present case differs primarily in that the order of the transaction was reversed: the purchasing spouse acquired the same number of identical shares before the other spouse sold his shares. We think that this is not a crucial difference. The important thing is that the sale and purchase were parts of a single prearranged plan, upon the consummation of which one spouse emerged owning an identical number of shares of the same stock which the other spouse had owned in the first place. The McWilliams case makes clear that it is immaterial that the parties utilized the facilities of the market place to achieve that result—a result that is denied tax consequences by section 24(b)(1)(A) since the transaction is an ‘indirect’ sale between members of a family.
Petitioners point to the fact that in the present case it was stipulated that Gwendolen managed her own property, and argue that this distinction requires a holding opposite to that reached in McWilliams v. Commissioner, supra. The difference is more verbal than real. The evidence indicates that John conceived of the plan, placed the orders, and made the necessary inquiries. Furthermore, petitioners incorrectly assume that the active cooperation of both spouses in the formulation and execution of a plan to sell securities in order to create losses for tax purposes negates the possibility that such sales are indirect sales. That circumstance is in no way inconsistent with the conclusion that sales have been made ‘indirectly’ between the spouses.
Petitioners also argue that the length of time separating the purchases from the sales precludes our holding that the sales were indirectly between one spouse and the other. There is little merit to this argument. The operation of section 24(b) does not depend upon the simultaneous execution of the transaction of purchase and sale. Cf. Commissioner v. Kohn, 158 F. 2d 32 (C. A. 4). Moreover, it was pointed out in McWilliams v. Commissioner, supra, at 702, that if section 24(b) were construed so as to exclude sales made on a stock exchange because it did not set forth any prescribed interval of time within which the sale and purchase must take place, the section would be converted ‘into a mere trap for the unwary.’
Petitioners argue finally that in any event the ‘over-the-counter’ sale must be treated differently from the sale through the stock exchange. However, there is nothing in section 24(b)(1)(A) or in the McWilliams opinion which indicates that indirect sales of securities can only be accomplished through a stock exchange. Petitioners formulated their plan attaching little if any significance to the fact that the Canadian shares were traded ‘over-the-counter,’ and they have not convinced us that we must now attach greater significance to that fact. Where the question is whether there has been an indirect intrafamily sale of securities were do not think the answer can be found in the label given to the particular market used to effectuate the sale.
If section 24(b)(1)(A) is to accomplish its purpose, indirect sales cannot be limited to a fixed number of known methods of creating losses. The problem in this case is whether the purchase by one spouse was so related to the sale by the other spouse that the loss from the latter must be disallowed because it resulted from an indirect sale by one spouse to the other. In this case husband and wife cooperated in the development and execution of a plan designed to create losses deductible for tax purposes and at the same time preserve the family position in the very securities that were to be sold to create the losses. Under this plan they determined the securities to be sold, and when and how they should be sold. The same number of certain shares purchased by one spouse was sold by the other. The purchases and sales were so closely connected in time that no significant fluctuation in the price of the securities occurred between the time of the purchases and the sales. Petitioners viewed their purchases and sales as all part of one transaction, and we have been shown no reason why we must blind ourselves to reality and treat the various purchases and sales as totally unconnected events.
It is of little importance that petitioners may not have known at the outset the exact moment at which they would make their sales. The fact is that they intended to make the sales as promptly as they could upon receiving reassuring tax advice and upon being satisfied that market conditions warranted the sales. The significant thing is that the subsequent sales were planned in such manner that, as a result of the anticipatory purchases, each spouse, in the end, would own the identical number of shares of the same stock which the other spouse owned in the first instance. The opinion in the McWilliams case cannot fairly be read without concluding that the transactions before us are covered by the statute.
Accordingly we hold that section 24(b)(1)(A) forbids giving effect to the losses sustained upon the sales of the Amerada and Canadian shares.
Decision will be entered for the respondent.