Hendricks v. CIR, 13270.

• Decision Date: 04 March 1970
• Docket Number: No. 13270.,13270.
• Citation: 423 F.2d 485
• Parties: Walter E. HENDRICKS and Dema P. Hendricks, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

423 F.2d 485 (1970)

Walter E. HENDRICKS and Dema P. Hendricks, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 13270.

United States Court of Appeals, Fourth Circuit.

Argued June 9, 1969.

Decided March 4, 1970.

Charles D. Gray, III, Gastonia, N.C., for appellants.

William L. Goldman, Atty., Dept. of Justice (Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson, Meyer Rothwacks and Lester B. Snyder, Attys., Dept. of Justice, on brief), for appellee.

Before SOBELOFF, BOREMAN and CRAVEN, Circuit Judges.

PER CURIAM:

Appellants seek reversal of a Tax Court decision holding that short-term capital losses of $967,650.60, resulting from short sales of securities in the stock market, were not properly deductible for the taxable year 1963.

During 1963, the taxpayers sold short 3900 shares of Syntex Corporation through their broker, Bache & Co., depositing sufficient cash and securities with Bache to meet established margin requirements for short sales. The price of the stock continued to rise, however, and on December 26, 1963, Bache issued a call for additional margin. The taxpayers, unable or unwilling to post the additional margin of $380,000, directed Bache to purchase sufficient shares to close out their entire short position.

The cost of purchasing the Syntex shares was irrevocably fixed by December 31, 1963, but the settlement dates for the transactions were January 3 and 6, 1964, four business days after the respective purchases. It was not until those dates that the purchased Syntex shares were delivered to Bache and in turn delivered by Bache to the party from whom the necessary stock had been borrowed at the time of the original short sales.

In their joint return for the taxable year 1963, the taxpayers reported the loss of the $967,650.60 resulting from the short sales of Syntex stock. The Commissioner issued a notice of deficiency, determining that the short sale losses should not be taken into account until the taxable year 1964, when the actual delivery of the shares to cover the short sale took place.

The consistent position of the Commissioner has been that a short sale is not consummated or closed, for income tax purposes, until delivery of the shares to cover the short sale. For that proposition he relies on a long-standing administrative practice and line of judicial decisions as well as Treas.Reg. § 1.1233-1(a). That Regulation provides that:

(1) For income tax purposes, a short sale is not deemed to be consummated until delivery of property to close the short sale.

* * * * * *

(4) * * * If the short sale is made through a broker and the broker borrows property to make a delivery, the short sale is not deemed to be consummated until the obligation of the seller created by the short sale is finally discharged by delivery of property to the broker to replace the property borrowed by the broker.

Taxpayers on the other hand contend that the loss became ascertainable and irrevocably fixed by the end of December, 1963 and for that reason should be taken into account in that year. The Regulation, we are told, is not apposite, since it speaks only to the problem addressed by section 1233 of the 1954 Code, that is, whether a gain or loss from a short sale is capital or ordinary, and if capital, whether it is short-term or long-term.

The Tax Court upheld the Commissioner and adopted a reading of the Regulation which would make it apply according to its literal terms, "for income tax purposes" generally rather than for purposes of section 1233 only. In reaching that result the Tax Court explained the Commissioner's position and the rationale behind the rule. The short sale transaction is fundamentally different from the long sale, because "in the case of the short sale the seller has some flexibility until the short position is closed by delivery of the covering stock. * * * Prior to that time stock ordered to be bought for the purpose of covering the short sale could be retained as long stock if, for example, the short seller...