The opinion
ROYCE W. GILBERT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
LINWOOD C. CHASE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Gilbert v. Commissioner
Docket Nos. 45837, 45838.
United States Board of Tax Appeals
21 B.T.A. 1245 ; 1931 BTA LEXIS 2227 ;
January 19, 1931 , Promulgated
*2227 A loss sustained upon the sale of certain shares of stock which were acquired as payment for services in erecting an apartment house building, held a capital loss within the meaning of section 208 of the Revenue Act of 1926, since the shares of stock were not held primarily for sale in the course of trade or business.
Howard W. Brown, Esq., for the petitioners.
Bruce A. Low, Esq., for the respondent.
TRAMMELL
*1245 These proceedings are for the redetermination of deficiencies in income tax for the calendar year 1926 of $1,054.47 on behalf of the petitioner, Royce W. Gilbert, and $1,040.60 on behalf of the petitioner, Linwood C. Chase, the issues being identical in each of the petitions. The proceedings were consolidated for hearing.
FINDINGS OF FACT.
During the year 1923 the petitioners, Royce W. Gilbert and Linwood C. Chase, were equal partners in the partnership of Chase & Gilbert, which was engaged in the engineering and contracting *1246 business. The partnership has continued in such business up to the present time. During 1923 it entered into a contract with the Bay State Road Co. for the construction of an apartment *2228 house building in the city of Boston. It was agreed that the partnership would receive for its services $50,000 in the form of 500 shares of the 7 per cent cumulative preferred stock of the Bay State Road Co. of a par value of $100 each.
The apartment house building was erected pursuant to the contract during 1923 and 1924 and from time to time during those years the 500 shares of stock were issued to the partnership in payment for its services. The shares of stock were duly entered in the partnership's books when received as business income at the par value thereof, and the amount of $50,000 was reported as income in the partnership's income tax returns for 1923 and 1924. Each of the partners reported his share of this amount in his individual returns for those years.
The partnership did not receive the saie shares of stock with any intention of holding them. It accepted them in lieu of cash as a means of securing the contract, with the intention of converting the shares of stock into cash as soon as possible.
In addition to the 500 shares of stock received under the contract, the partnership purchased, in 1924, 79 additional shares of the same stock for $100 per share. *2229 These additional shares were purchased by the partnership at the solicitation of the Bay State Road Co., and as a means of aiding it to secure sufficient funds through sales of stock to begin business operations. The purchase of the additional shares was made by the partnership to protect its interest in the shares of stock already held.
At July 1, 1925, the partnership had sold 164 shares of stock of the Bay State Road Co., leaving 415 shares which it still owned. Of the 164 shares sold the partnership received $100 per share for all except 50 shares for which it received $90 per share. During 1926, the partnership sold the remaining 415 shares of stock for $12,381.52.
In its return for 1926, the partnership claimed a loss of $25,259.87 on the sales of its shares of stock of the Bay State Road Co. In his audit the respondent has computed the loss at $29,118.48, but has ruled that the loss is a capital net loss within the meaning of section 208 of the Revenue Act of 1926.
OPINION.
TRAMMELL: The respondent has denied the petitioners the deduction under section 214 of the amount of the loss sustained by the partnership upon the sale of the shares of stock of the Bay *2230 State *1247 Road Co., but has allowed it as a capital loss within the meaning of section 208 of the Revenue Act of 1926. This section of the statute provides, in part, as follows:
(a) For the purposes of this title -
* * *
(2) The term "capital loss" means deductible loss resulting from the sale or exchange of capital assets;
* * *
(8) The term "capital assets" means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. * * *
It is admitted that the shares of stock in question were held by the partnership for more than two years, but the petitioners contend that the stock was held primarily for sale in the course of business and is therefore excluded from "capital assets" under the definition given in the statute.
We do not think however that this stock was held for sale by the petitioners in the course of their trade or business. *2231 In order to be excluded from "capital assets" the stock must not only be held for sale, but held for sale in the course of petitioners' trade or business. The petitioners' trade or business was that of engineering and contracting, not the purchase and sale of stock. In the course of that business they did not hold the stock for sale. Property held by a taxpayer for more than two years whether or not connected with his trade or business is under the statute "capital assets," but only if it is held "primarily for sale in the course of his trade or business" is it excluded. We think that the above quoted language from the statute refers to property which might be called stock in trade or what is being sold in the course of the business being carried on and not to other kinds of property.
Since the stock comes within the general provision as to "capital assets" and is not excluded by either of the subsequent provisions as to what shall not be included therein it is our opinion that the stock in question constituted "capital assets" and that the capital gain or loss provisions are applicable.
Reviewed by the Board.
Judgment will be entered for the respondent.
*2232 SMITH
SMITH, dissenting: The only question presented by these proceedings is whether the shares of stock sold in 1926 by the partnership of Chase & Gilbert, of which the petitioners were members, which *1248 had been held by the partnership for a period of more than two years, were held by the partnership "primarily for sale in the course of" its "trade or business." The evidence shows that the stock was acquired by the partnership as an incident to its trade or business; that it was received in payment for regular fees at par; that the purchase of 79 shares in 1924 was for the purpose of tiding over the corporation for a short period and was made only to protect the partnership's investment that the shares of stock were for sale from the time that they were acquired; that there was no public market for the shares; that the partners made every effort to sell them at private sale and up to July 1, 1925, had succeeded in selling 114 shares at par, and 50 shares at $90 per share; that in 1926 the partnership sold its remaining shares at a sacrifice because, as testified by Gilbert, "we were forced to realize what cash we could."
Since the shares of stock in question were *2233 acquired by the partnership as an incident to its business and since it made every reasonable effort to sell them at the earliest date possible I think that they were not "capital assets" within the meaning of the statute.
LANSDON and SEAWELL agree with this dissent.