Fuld v. Commissioner of Internal Revenue

• Decision Date: 30 December 1943
• Docket Number: No. 69,70.,69
• Citation: 139 F.2d 465
• Parties: FULD v. COMMISSIONER OF INTERNAL REVENUE, and three other cases.
• Court: U.S. Court of Appeals — Second Circuit

139 F.2d 465 (1943)

FULD v. COMMISSIONER OF INTERNAL REVENUE, and three other cases.

Nos. 69, 70.

Circuit Court of Appeals, Second Circuit.

December 30, 1943.

O. R. Folsom-Jones, of Washington, D. C., for Leonard Felix Fuld and Florentine M. Fuld.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Morton K. Rothschild, Sp. Assts. to the Atty. Gen., for Commissioner of Internal Revenue.

Before SWAN, AUGUSTUS N. HAND, and FRANK, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

Leonhard Felix Fuld petitions for review of a decision of the Tax Court involving income taxes of about $19,000 for the year 1933, and the Commissioner of Internal Revenue files his cross-petition involving income taxes for that year of about $8,000. Florentine M. Fuld also petitions for review of the decision of the Tax Court involving her income taxes for the same year of about $19,000, and the Commissioner files his cross-petition involving her income taxes for that year of about $9,000. The proceedings in the two appeals, and cross-appeals, have been consolidated for hearing on a single record pursuant to our order of March 30, 1942.

The taxpayers were brother and sister, each of whom was interested in investing in securities. Prior to October 9, 1930, they had purchased only for investment, and had no purpose of disposing of the securities in the course of trade or business but intended to hold them for an indefinite period. It was their belief that if investors acquired stocks in diversified companies which were leaders in a particular field and held those stocks over a sufficiently long period of time through successive business cycles, they would be able by the receipt of dividends from those stocks and from a long-term profit from them, to obtain a much larger return than would be possible by purchasing and holding investment bonds. Accordingly the taxpayers, prior to October 9, 1930, acquired primarily common stock, but also some preferred stock and bonds. Their only sales prior to October 9, 1930, were a few bonds, one 20 share lot of American Foreign Power Preferred stock and some scrip of fractional shares. Their principal source of income for livelihood prior to October 9, 1930, was interest and dividends on their securities. But in 1930 they changed their policy as to securities, because of their experience during and after the year 1929, and decided that they would pay as much attention to the sale of securities as they had in the past to purchasing them; in other words, they sought to obtain profits quickly rather than gradually over a long period of years, and, beginning October 9, 1930, they changed from a policy of investment to one of speculation by purchasing large lots ranging from 1,000 to 3,000 shares. In order to obtain funds to carry out this new policy of speculation they submitted to their brokers almost every week a list of their securities (acquired under their earlier investment policy) for the purpose of determining what was to be sold. To facilitate their new policy they began after October 9, 1930, and continued through 1933 to sell their old investments as fast as they could be disposed of with the exercise of reasonable discretion.

In their income tax returns for the year 1933 the taxpayers offset losses incurred that year through the sale of some of the securities which they had bought for investment prior to October 9, 1930 (and consequently had held for more than two years prior to sale), against profits realized in 1933 from sales of securities held for less than two years. They did this because they regarded all their securities after they had changed their policy on October 9, 1930, as primarily held for sale in the course of a trade or business and not as mere investments. The Commissioner, however, refused to allow the offsets on the ground that the losses resulted from the sale of capital assets and were, therefore, capital and not ordinary losses and, under Section 101 of the Revenue Act of 1932, 26 U.S. C.A. Int.Rev.Acts, page 504, were only deductible to the extent of 12½ per cent. The Tax Court decided that each taxpayer was engaged in business on and after October 9, 1930, but prior to that time was not engaged in business because the previous purchases of securities had been only for investment purposes. It accordingly held that the assets purchased prior to October 9, 1930, and sold in the year 1933, were capital assets held only for liquidation and not for sale in the course of trade or business, and that the losses in respect of such capital assets could not be off-set against the profits on sales of securities held for less than two years but could only be deducted to the extent of 12½ per cent. It, however, allowed losses on sales of securities purchased after October 9, 1930, to be off-set against profits on sales of such securities because they were not capital assets as defined by Section 101(c) (8) of the Revenue Act of 1932. The Commissioner appeals on the ground that neither taxpayer was at any time engaged in business, and consequently all profits and losses were subject to limitation. The taxpayers appeal on the ground that all sales made in 1933 were in the course of trade or business and hence an off-set of the losses from sales of securities purchased prior to October 9, 1930, and held for more than two years should have been allowed. We think the Tax Court was right and should be affirmed upon both appeals.

The Tax Court made the following findings, based upon substantial evidence, as to the business activities of the taxpayers after their change of policy on October 9, 1930:

"From 1930 and during 1933 Leonhard Fuld devoted an average of eight hours per day to the study of new texts, reading services, charting prices of securities, conferring with his broker, attending meetings of corporations in which he owned securities, and consulting with corporate executives. Some of this work also assisted him in connection with the college course which he taught. He spent about one or two hours per day at the broker's office.

"Florentine Fuld had no trade or business other than buying and selling securities. In this connection she studied the services, read corporation annual reports, charted her own security prices, attended meetings of corporations in which she held securities, and consulted with corporate executives. It was her policy to buy and sell the same securities as Leonhard Fuld and in the same amounts, but in some instances she disagreed with him as to such purchases and sales. Her decisions in this connection were made independently of Leonhard's. She never visited the broker's office and had no direct conversations with the broker. Her orders were placed with the broker through Leonhard Fuld, who acted as agent only in the physical transmission of such orders and the acceptance of deliveries.

"The main source of livelihood of both petitioners was from their securities transactions. They maintained no business office, had no customers to whom they might sell securities, practically never sold securities short, and never advertised or held themselves out to the public as dealers. However, Leonhard Fuld was registered with the Securities Exchange Commission as a dealer and as an investment counselor and was listed in the stock directories throughout the United States. Also, he acted for some of his college students in the consummation of security transactions but received no compensation therefor. Neither of the petitioners was a director, officer, or employee of any of the companies in which they purchased securities in 1930 and thereafter.

* * * * *

"Some of the securities held by petitioners for more than 2 years and sold in 1933 were acquired prior to the beginning of their new policy, October 9, 1930, and some of such securities were acquired subsequent to that date. In 1933, Leonhard Fuld made approximately 249 sales of securities held for more than 2 years and approximately 98 held for 2 years or less. Also, in the same year Florentine Fuld made approximately 229 sales of securities held for more than 2 years and approximately 89 held for 2 years or less. The sales of both petitioners ranged as high as 1,000 shares per transaction.

"Beginning October 9, 1930, through 1933, petitioners were engaged in...