Holmes v. Commissioner

*584 This is a proceeding for the redetermination of a deficiency in income tax for the year 1924 in the amount of $5,945.70. The issue is whether the income derived in the taxable year from a certain account with a brokerage firm, designated as "Milton A. Holmes No. 3" is taxable to the petitioner.

FINDINGS OF FACT.

The petitioner is an individual, residing at 50 Linwood Avenue, New York, N.Y. For 24 years, his entire business career, he has *585 been an employee of the partnership firm of Jesup & Lamont, stock brokers. The petitioner was married in 1921, and is still living with his wife.

Prior to and during the year 1924, the petitioner maintained two trading accounts with his employers, Jesup & Lamont, to wit, his personal account carried under his*1834 own name, and an account designated "Milton A. Holmes No. 2." This latter account was opened and operated by the petitioner for and at the request of his tailor. On August 22, 1924, the petitioner opened a new trading account recorded on the books of Jesup & Lamont as "Milton A. Holmes No. 3."

Said account No. 3 was opened by the petitioner at the direction of his wife, and was thereafter operated by the petitioner solely for and as the account of his wife. About a year prior to August, 1924, the petitioner's wife requested him to open a trading account for her. He agreed to do so in time, whenever conditions in his judgment should be favorable. The account was finally opened by the petitioner for his wife on the date above stated. Prior to opening the account, petitioner warned his wife that the account might result in losses instead of profits, and it was agreed that if losses were sustained they should be borne entirely by the wife and that if profits were derived they should be the property of the wife.

The first transaction in the account was the purchase of 400 shares of Cast Iron Pipe, at a total purchase price of $41,810. Entries in the account indicated credits*1835 for the shares purchased and debits for the amounts paid therefor by Jesup & Lamont, plus commissions. No margin was deposited, nor did the petitioner inform any member of the firm of the opening of the account at said time. However, at the time of the first transaction when the account was opened, petitioner advised the employees of the firm concerned that the "Milton A. Holmes No. 3" account was his wife's account. At about the same time and later, both the petitioner and his wife, in conversation with friends, referred to the account as being the wife's account. Also, some time after the account had been opened but prior to the close of the year 1924, petitioner informed a member of the firm that the No. 3 account was his wife's account.

The first transaction occurred on August 22, 1924, when the account was opened, and resulted in a loss of about $686. The account was active during the remainder of 1924, and on December 31 of that year showed a debit balance of $134,999.05. At the close of the year the account showed a substantial profit. At that time there was an equity in the account of about $30,000. Trading in *586 the account during the year 1924 was solely*1836 in the hands of the petitioner.

On August 22, 1924, when the account in question was opened, the petitioner's wife had a savings account of $1,500, Liberty bonds in the amount of $600, and other securities having a market value of approximately $17,000. The securities were kept in the petitioner's safe-deposit box, to which his wife did not have access. The securities had been in the petitioner's possession for some time prior to August, 1924, and at the time the account was opened the petitioner was authorized by his wife to use the securities in connection with the proposed account. However, none of the securities were in fact deposited in the account until subsequent to 1924.

Prior to the year 1924 the petitioner and his wife filed joint income-tax returns. For the year 1924 separate returns were filed. The petitioner prepared his wife's return for 1924 and included therein the profits arising from the "Milton A. Holmes No. 3" account. The respondent determined that said account during 1924 was the property of the petitioner and that the income therefrom for said year was taxable to him.

No funds or property were ever at any time withdrawn by the petitioner from said*1837 account for his own use or for the joint use of himself and wife. No part of the credit balance of the account was withdrawn by or for anyone during 1924, but in subsequent years all income from said account was paid over to the petitioner's wife.

The respondent accepted the income-tax returns of the petitioner's wife for the years 1925 and 1926, in which was included the income from said No. 3 account, thus treating said account as the property of petitioner's wife for said years. Respondent also accepted the petitioner's returns for said years as filed, in which no part of the income from the account in question was included.

Said account, designated "Milton A. Holmes No. 3," was, during the year 1924, the separate property of the petitioner's wife.

OPINION.

TRAMMELL: Only one issue is raised by the pleadings in this case, which issue presents a pure question of fact, namely, whether the trading account designated "Milton A. Holmes No. 3" was, during the taxable year 1924, the property of the petitioner. The deficiency here involved results in large part from the determination by the respondent that said account was the property of the petitioner and that the income*1838 therefrom was taxable to him.

*587 The undisputed evidence establishes that this account was opened by the petitioner on August 22, 1924, with the brokerage firm of Jesup & Lamont, by whom he had been employed during his entire business career of 24 years, and that the account was so opened and thereafter operated by him for and at the request of his wife. At the time of the first transaction in the account, which occurred on the day it was opened, the petitioner informed other employees of the firm, who handled matters in connection therewith, that the No. 3 account was his wife's account. Shortly thereafter he also gave the same information to the executive partner of the firm.

It appears from the record that about a year prior to August, 1924, the petitioner's wife requested him to open a trading account for her, but he was reluctant to do so, explaining that such an account might result in losses instead of profits. However, at her insistence, he agreed to open the account whenever in his judgment market conditions became favorable, and the account was finally opened in August, 1924. No margin was deposited, but on a rising market and in the circumstances disclosed*1839 in this case, such fact does not appear significant. In order to protect the account against possible losses, the petitioner's wife authorized him to use certain securities in his possession belonging to her, which then had a market value of approximately $17,000. She also had a savings account of $1,500 and Liberty bonds in the amount of $600 available for the same purpose. Prior to the opening of the account, it was specifically agreed and understood that any losses sustained in the operation of the account should be borne solely by the wife, and that any profits derived should be her property.

The first transaction resulted in a loss of $686, but at the close of the year, about four months later, the account showed an equity of $30,000, which was more than sufficient to provide the usual 20 per cent margin for an account of its size.

The petitioner never at any time withdrew any funds from the account for his own use or for the joint use of himself and his wife. The account was at all times treated as the separate property of the wife and the income was in fact paid over to her in the subsequent years.

From a consideration of all the evidence before us, we are satisfied, *1840 and have so found the fact to be, that the account in question during the year 1924 was not the property of the petitioner, but was the separate property of his wife. The income, therefore, is not taxable to the petitioner. The deficiency will be redetermined accordingly.

Judgment will be entered under Rule 50.