Reckford v. Commissioner

*900 This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1932 in the amount of $5,470.89. The sole issue raised by the pleadings is whether or not respondent erred in disallowing as a capital loss the sum of $16,194 representing a loss *901 from a sale of securities held more than two years. Respondent made other adjustments to income which are not contested by petitioner, so that only a*785 portion of the alleged deficiency is in controversy.

FINDINGS OF FACT.

During the calendar year 1932 petitioner sustained a loss of $16,194 on a sale of securities which had been held by him for more than two years.

Petitioner filed income tax returns for the years 1929 and 1930 in which he gave his occupation as "stock trader," and filed returns for the years 1932 to 1934, both inclusive, in which he stated his occupation was that of a "trader." Petitioner was under the impression that once having been classified as a trader such classification necessarily continued, regardless of his trading activities or lack of them, until the Government changed his status. In his returns for the years mentioned petitioner did not enter the net results of his security transactions under the caption "Income from Business or Profession."

During the year 1932, petitioner was president of the American Lead Pencil Co., which office he held from the time of his brother's death in 1928 until January 1936. At the time of the hearing, in January 1939, he was chairman of the board. This company is one of the largest pencil companies in the United States.

Petitioner did not maintain any separate*786 office for the purpose of trading in securities. His security transactions were handled principally over the telephone from the office he occupied with the American Lead Pencil Co., and all orders to buy or sell were given after due reflection. There was no more necessity for his having a separate office for his trading activities in 1929 than there was in 1932.

Petitioner devoted only that amount of time to his market transactions during the period of his trading activities which the volume of the transactions required. When business in general was good not so much time was required for the business of the American Lead Pencil Co. When business generally was not so good he would worry more about the affairs of the company. Because of the fact that petitioner had not been in good health for many years, and because of the conditions existing particularly in 1931 and 1932, he had to devote most of his available time to the affairs of the pencil company. He gave what time he could to the business of the company at all times and never permitted his trading activities to interfere with his duties as president of the company. Petitioner's security transactions in 1932 occupied*787 a negligible portion of his time. Petitioner thought principally about his losses in 1932, and to some extent his stock transactions in that year were in the form of liquidation from his activities of prior years.

*902 The following table shows the volume of petitioner's stock transactions in the years 1929 to 1934, inclusive:

During 1932 petitioner's average investment in securities carried in brokerage accounts was $25,000, while his investment in real estate and in the American Lead Pencil Co. was in excess of $500,000.

Petitioner reported income from salaries, real estate, and dividends for the years 1929 to 1934, inclusive, as follows:

*788 Of the loss of $50,504.22 claimed by petitioner on sales of stocks in 1932, $16,194 was from the sale of stock in the Texas Gulf & Sulphur Co., held more than two years.

In 1929 petitioner purchased 2,900 shares of stock of the Texas Gulf & Sulphur Co. in 12 different lots of from 100 to 500 shares and during the same year sold 1,700 shares of the same stock in 6 different lots of from 100 to 500 shares; in 1930 he purchased 1,300 shares of stock of that company on 9 different occasions in lots of 100 to 200 shares, and during the same year sold 1,700 shares of such stock in 7 different lots of from 100 to 500 shares.

During 1931, 1932, 1933, and 1934, petitioner purchased stock of the Texas Gulf & Sulphur Co. in lots aggregating 800 shares, and sold during those years a total of 1,600 shares in 14 lots of 100 and 200 shares. The only lot of such stock sold in 1934 was 100 shares sold on March 20, which had been purchased on February 5 of the same year.

OPINION.

HILL: During the taxable year 1932 petitioner admittedly sustained a loss of $16,194 from the sale of shares of stock of the Texas *903 Gulf & Sulphur Co. which had been held by him for more than two years. *789 The question presented is whether or not such loss was a capital loss; that is, a loss resulting from the sale of a capital asset. If the stock was not a capital asset, as defined in section 101 of the Revenue Act of 1932, the loss is subject to the limitations of section 23(r)(1), and is allowable only to the extent of the gains from similar sales or exchanges. ¹ If the stock was a capital asset, the amount of the loss is allowable in full as a deduction from gross income.

*790 Since it is conceded that petitioner had held the shares of stock in controversy for more than two years, the question of whether or not such shares constituted a capital asset within the meaning of the statute depends upon whether or not they were held by him primarily for sale in the course of his trade or business; and this raises for decision the question of whether or not petitioner's stock market activities in 1932 constituted a trade or business.

Under the facts set out above, respondent contends that petitioner was engaged in carrying on such a trade or business during the taxable year, while petitioner, although admitting that he was a market trader in prior years, contends that in the taxable year his trading activities had been reduced to such an extent as to take him out of that classification.

No hard and fast rule of general application can be laid down as to just what constitutes a trade or business. Each case must stand on its own facts. But we can not agree, as petitioner argues, that the extent of the market activities of a taxpayer in a particular year are necessarily determinative of his classification as a trader or otherwise. The extent of the market*791 operations may be an important factor in determining whether or not the taxpayer is merely a passive investor, but beyond that point the extent of such activities tends only to define the difference between a large and a small trade or business. In determining whether a trade or business was being carried on, a factor of more decisive importance than the volume of transactions lies in whether or not the taxpayer's market activities *904 consisted of dealing in securities for speculative purposes, or for investment purposes.

Thus the court in , reversing , held that where the taxpayer made all decisions affecting the sale or purchase of securities and employed a bookkeeper with whom she held conferences three or four times a week, such activities were sufficient to take her out of the class of a passive investor; that she was carrying on a trade or business.

Likewise, in , it was held that a taxpayer who does no more than is usually done by a passive investor who gives reasonable attention to preserving his investments and changing*792 them from time to time, so as to obtain a fair income therefrom, is not engaged in carrying on a trade or business.

But it has also been held that the management of investments may constitute a trade or business, so that expense incurred in that connection is deductible as business expense. .

Petitioner concedes that he was a trader in securities in years prior to the taxable year 1932. In our opinion the evidence is not sufficient to take him out of such category during the taxable year. The difference between petitioner's market activities in the taxable year and the prior years is one of degree only. During the year 1932 he had 130 market transactions, consisting of 55 purchases and 75 sales; they involved 18,250 shares of stock, having a total value of slightly less than $400,000. Petitioner was not a mere passive investor in respect of such transactions. He was not investing his surplus funds; he was engaged in speculative operations on the market, buying and selling securities in the hope of realizing gain. Questioned on this point, and particularly in reference to the shares of stock of the Texas Gulf*793 & Sulphur Co., the sale of which gave rise to the loss in controversy, petitioner testified:

Q. Mr. Reckford, what was your main idea in trading in securities; was it for investment or was it for profit on selling, buying?

A. Well, * * * I thought I was going to be able to make a profit; over eighty-one times the past years I was able to do so. * * *

Q. There was no other stock in '32 than Texas stock which you had held for as long a period as two years?

A. The stocks which belonged to me outright, and in my box, but not speculative.

In support of his contention, petitioner cites our decisions in ; ; ; and . These cases are distinguishable on the facts, and are *905 not controlling here, for the reason that in each it was found that the securities involved had been purchased and held for investment and not primarily for sale in the course*794 of the taxpayer's trade or business. In the Weld case, we said:

We are of the opinion that a professional man, such as a lawyer or doctor, who invests his surplus income in the purchase of stocks or other property with an idea of sale at a future date at a profit is not ordinarily to be regarded as holding such shares primarily for sale in the course of his trade or business.

In the Page case, we stated:

Although the petitioner had large holdings of shares of stock in many corporations, the evidence all indicates that he was not, so far as the year 1932 is concerned, an active trader in the market. He did no trading on margin in 1932. * * * He had a large estate which it was necessary for him to keep invested for income purposes. The investment of his money was not the carrying on of a trade or business within the contemplation of the statute. Cf. ; .

In the instant proceeding, respondent has determined in effect that petitioner during the taxable year was engaged in carrying on the trade or business of buying and selling securities on the market*795 for profit, and that the shares of stock in controversy were held primarily for sale in the course of such trade or business. The evidence presented is not sufficient, in our opinion, to justify us in disturbing respondent's determination.

Decision will be entered for the respondent.