Commissioner of Internal Revenue v. Ickelheimer, 69.

• Decision Date: 05 January 1943
• Docket Number: No. 69.,69.
• Citation: 132 F.2d 660
• Parties: COMMISSIONER OF INTERNAL REVENUE v. ICKELHEIMER.
• Court: U.S. Court of Appeals — Second Circuit

132 F.2d 660 (1943)

COMMISSIONER OF INTERNAL REVENUE v. ICKELHEIMER.

No. 69.

Circuit Court of Appeals, Second Circuit.

January 5, 1943.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Helen R. Carloss, and Robert R. Barrett, Sp. Assts. to the Atty. Gen., for petitioner.

Leon Lauterstein, Montgomery B. Angell, and Jesse B. Spiller, all of New York City, for respondent.

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

SWAN, Circuit Judge.

In 1935 and 1936 the taxpayer purchased on the New York Stock Exchange, through a brokerage firm of which her husband was a member, certain bonds of the face value of $100,000. The bonds were paid for by her and were thereafter carried in the safe-custody account which she maintained with the brokerage firm. On various days during the latter part of September 1937 her husband, acting on her behalf under a general power of attorney, caused her bonds to be sold for less than their cost in order that she might take the loss in computing her 1937 income tax. The orders for these sales were given to the husband's brokerage firm and by that firm were executed on the New York Stock Exchange in the regular manner; and the proceeds from the sales, $14,910.86, were credited to the taxpayer's personal account on the broker's books. The taxpayer's husband was one of three trustees of a trust set up by her father in 1920, under which she was life beneficiary and donee of a special power of appointment. On the day following a sale of bonds of the taxpayer (or, in one instance, two days later) the husband, acting on behalf of the trust, purchased a like number of bonds of the same issue. The bonds were purchased for the trust at a cost of $15,303.75 through the husband's brokerage firm, the orders for purchase being executed by that firm on the New York Stock Exchange in the regular manner. The trust maintained a current account with the broker and the cost of the bonds was charged to the account of the trust which had ample funds to pay for them. The bonds were then placed in the safe-custody account of the trust. Of the 100 bonds purchased four bore the same serial numbers as bonds sold by the taxpayer. Before the sales and purchases were made, the husband had been advised by counsel that a loss deduction might be taken by the taxpayer despite the purchase a day later of similar securities by the trust. The Tax Court held that the loss realized by the taxpayer on the sale of her bonds was an allowable deduction against her gross income in 1937. The correctness of this ruling is the sole issue presented.

Section 301 of the Revenue Act of 1937, 50 Stat. 827, 26 U.S.C.A. Int.Rev. Code, § 24(b), amending section 24(a) of the Act of 1936, provides that "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 — * * * (F) Between a fiduciary of a trust and a beneficiary of such trust." The Commissioner concedes that there was no direct sale between the taxpayer and the trust of which she was a beneficiary, but argues that since the husband acted for his wife in making the sales and for the trust in making the purchases, the sales must be considered as "indirectly" made "between" her and the trust. We think not. The sales completely divested the taxpayer of any interest in the bonds and passed title thereto to unknown purchasers. There was no agreement between her and her husband or between the husband and the undisclosed purchasers from her that the trust would buy what she sold or that she should sell to enable the trust to buy. Indeed, it is apparent that the trust could have purchased 96 of the 100 bonds bought for it even if she had not sold, and as to the 4 bonds which she had formerly owned it was mere accident that the trust later acquired them rather than others. The most that can be said is that when the sales were made the husband entertained an intention to purchase similar securities for the trust; but there was nothing to prevent him from changing his mind. Had there been a sudden fall in the value of the bonds his fiduciary duties as a trustee would have required him to change his intention to buy them. Both sales and purchases were completely at the risk of the market, and, though the variation happened to be slight, the cost price to the trust was not the same as the sales price of the taxpayer. It is clear that the transactions do not fall within the letter of the statute.

Nor do we think they were such as the purpose of the statute sought to embrace. The purpose was to disallow losses incurred in transactions which were not "definitely at arms length." See 81 Cong. Rec. 9019. Sales between members of a family were often not real transactions but it was not easy for the Commissioner to prove them sham. Indirect sales through a friend or dummy were also not uncommon. The restriction on losses first introduced in section 24 of the 1934 Act was intended to meet these evidentiary difficulties. See 78 Cong.Rec. 2662. Congress did not express, and we see no reason to suppose that it entertained, any intention to disallow losses realized by bona fide sales on a...