Kraus v. Commissioner of Internal Revenue

• Decision Date: 08 March 1937
• Docket Number: No. 232.,232.
• Citation: 88 F.2d 616
• Parties: KRAUS v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

88 F.2d 616 (1937)

KRAUS v. COMMISSIONER OF INTERNAL REVENUE.

No. 232.

Circuit Court of Appeals, Second Circuit.

March 8, 1937.

Henry P. Molloy, of New York City (Melvin J. France, of New York City, of counsel), for petitioner.

James W. Morris, Asst. Atty. Gen., and Sewall Key and Harry Marselli, Sp. Assts. to the Atty. Gen., for respondent.

Before L. HAND, SWAN, and CHASE, Circuit Judges.

CHASE, Circuit Judge (after stating the facts as above).

The dispute between the petitioner and respondent concerns only the proper cost basis of the stock sold. The petitioner insists that it should be at the average cost per share of his holdings acquired throughout the years up to the time of sale while the respondent applied the first in, first out rule in determining the deficiency. Article 58 of Reg. 74.

It may be taken as established that if the petitioner were able to identify the stock he sold with any particular stock he acquired that he would be entitled to take the basis of that stock so identified as the basis of the shares sold. Section 113 (a) (6) Revenue Act of 1928, 26 U.S.C.A. § 113 note. We agree that he acquired the shares he sold in a nontaxable exchange of stock for stock in a reorganization. Section 112 (b) (3) Revenue Act of 1928, 26 U.S.C.A. § 112 (b) (3) and note. He had the right to sell whatever stock he desired and the right of course to have the taxable gain, if any, computed on the basis of the cost of the particular shares which he elected to sell. The weakness of his objection to the action of the respondent lies in the fact that he did not take steps which would enable him to identify the shares sold with any particular shares he acquired at any definite cost. Consequently it is of no avail to him to show merely acquisition under such circumstances that the stock sold should be given the basis of some of the stock for which he acquired it on the exchange he made for he exchanged then many shares of old stock for the new. He must prove such identification of new shares sold with specific old shares that the basis of those old shares can be known. The old shares had been acquired by him at different times and at different prices, and, when all were turned in indiscriminately for an aggregate amount of new shares with no allocation of new shares to old, it became impossible to tell whether any particular new shares were exchanged for any particular old shares rather than for some other old shares. Moreover, it has been justifiably found by the Board that the petitioner made no allocation of new shares to old. It is quite true that the first in, first out rule is applicable only when there is no identification of shares sold with shares purchased. Helvering v. Rankin, 295 U.S. 123, 55 S.Ct. 732, 79 L.Ed. 1343; Skinner v. Eaton, 45 F.(2d) 568 (C.C.A.2). And equally true that stock certificates are not the only means of identification. A direction to a broker to sell shares designated by date of purchase and price paid will be sufficient to establish identity of the stock sold for determining the cost basis of it even though the broker actually delivers other certificates than those he was directed to sell, but intention without more is not designation. Miller v. Commissioner, 80 F.(2d) 219, (C.C.A.2). See, also, Fuller v. Commissioner (C.C.A.) 81 F.(2d) 176.

But, notwithstanding this, the petitioner insists that as he has shown that all the shares he sold were acquired at one time in a nontaxable exchange of stock for stock he is entitled to the average cost of the old shares as a basis for the new. See Commissioner v. Von Gunten (C.C.A.) 76 F.(2d) 670, ...