Provost v. United States, 258

• Decision Date: 04 January 1926
• Docket Number: No. 258,258
• Citation: 46 S.Ct. 152,269 U.S. 443,70 L.Ed. 352
• Parties: PROVOST et al. v. UNITED STATES
• Court: U.S. Supreme Court

269 U.S. 443

46 S.Ct. 152

70 L.Ed. 352

PROVOST et al.

v UNITED STATES.

No. 258.

Argued Nov. 18, 1925.

Decided Jan. 4, 1926.

[Syllabus from pages 443-445 intentionally omitted] Messrs. Charles E. Hughes, Samuel P. Goldman, and William F. Unger, all of New York City, for appellants.

[Argument of Counsel from pages 445-449 intentionally omitted] Mr. Alfred A. Wheat, of New York City, for the United States.

Mr. Justice STONE delivered the opinion of the Court.

The appellants are copartners engaged in business as stockbrokers with membership in the New York Stock Exchange. They brought suit in the Court of Claims to recover, as an illegally exacted tax, the cost of internal revenue stamps affixed by them in the period from 1917 to 1920 to 'tickets' which were documentary evidence of transactions commonly known in the stockbrokerage business as the 'loan' of shares of stock and the return by the borrower to the lender of shares of stock 'borrowed.' The case was tried upon agreed facts embodied in the findings of the court below, and from the judgment for the defendant in that court the case was brought here on appeal. Judicial Code, § 242 (Comp. St. 1219), before amendment of 1925 (43 Stat. 941). The applicable provisions of the statutes are to be found in War Revenue Act of 1917, title 8, schedule A, par. 4, 40 Stat. 300, 322 (Comp. St. 1918, § 6318h), which is printed in the margin,¹ and in the similar provision of the Revenue Act of 1918, title 11, schedule A, par. 4, 40 Stat. 1057, 1135 (Comp. St. Ann. Supp. 1919, § 6318p), which may, for the purposes of this case, be taken to be a re-enactment of the 1917 provision. Both acts imposed a stamp tax of 2 cents per share upon 'all sales or agreements to sell, or memoranda of sales or deliveries of, or transfers of legal title to shares or certificates of stock.' The question presented is whether the transfers of shares of corporate stock involved in the 'loan' and 'return' transactions in accordance with the rules and practice of the Stock Exchange, are taxable transfers within the meaning of the statute.

The loan of stock is usually, though not necessarily, incidental to a 'short sale.' As the phrase indicates, a short sale is a contract for the sale of shares which the seller does not own or the certificates for which are not within his control so as to be available for delivery at the time when, under the rules of the Exchange, delivery must be made. Under the rules of the New York Stock Exchange, applicable so far as the facts of this case are concerned, a broker who sells stock is required to make delivery of the certificates on the next business day. If he does not have them available, he must procure them for the purpose of making delivery. This he may do by purchasing or borrowing the required shares, delivery of the certificates to be made to the broker to whom he has already contracted to sell.

If he borrows them, he deposits with the lending broker their full market price; and until the loan is returned, this deposit is maintained, by means of daily payments back and forth between the borrower and the lender, at the varying level of the market value of the shares loaned. The lender, who thus receives in money the full market value of the shares-much more than he would ordinarily realize by pledging them-usually pays interest on the money so received, at the current rate for demand loans. But the rate of interest is a matter of negotiation and agreement, and the deposit may, on occasion, carry no interest, or the borrower of the stock may pay a premium when the stock is greatly in demand.

During the continuance of the loan the borrowing broker is found by the loan contract to give the lender all the benefits and the lender is bound to assume all the burdens incident to ownership of the stock which is the subject of the transaction, as though the lender had retained the stock. The borrower must accordingly credit the lender with the amount of any dividends paid upon the stock while the loan continues and the lender must assume or pay to the borrower the amount of any assessments upon the stock. The lender of the stock, concurrently with the receipt of the deposit, delivers to the borrower the certificates of the stock lent, and the transaction is evidenced by a 'loan ticket,' to which the broker lending the stock affixes the revenue stamps here in question. The stock thus borrowed then becomes available for delivery on the short sale.

The original short sale is thus completed and there remains only the obligation of the borrowing broker, terminable on demand, either by the borrower of the lender, to return the stock borrowed on repayment to him of his cash deposit, and the obligation of the lender to repay the deposit, with interest as agreed. The stock for this purpose, if not provided by the customer, must be obtained by borrowing stock of like kind and amount from other brokers, or by purchasing the stock in the open market and charging the customer, for whose account the sale was originally made, with the purchase price. In that case the short sale transaction and the borrowing transaction as well are brought to their conclusion by the actual purchase of stock of which the customer was short at the time when the sale was made and the delivery of the stock, thus purchased, to the lender.² The return transaction in every case is evidenced by a 'borrowed stock return ticket' to which the borrowing broker affixes the revenue stamps. The claim of the appellants comprises the cost of stamps purchased by them and affixed to loan tickets or to borrowed stock return tickets pursuant to Treasury regulations.

It will be observed that the completed short sale transaction usually involves four separate steps in each of which there is either a sale or a complete transfer of all the legal elements of ownership. These are (1) the sale of the stock by the person effecting the short sale, followed by the transfer and delivery of the certificates for the borrowed stock to the purchaser's broker; (2) the transfer of the shares from the lender to the borrower, who uses them for delivery on the customer's short sale; (3) the purchase by the borrowing broker of the stock required to repay the loan; and (4) the transfer and delivery by the borrower to the lender of the certificates for the purchased shares to replace the shares borrowed. Each transfer may be accompanied by a physical delivery of certificates of the stock transferred; but the intermediate deliveries in (2) and (3) are usually eliminated by use of the Stock Exchange Clearing House.

It is conceded that the first and third transactions are taxable as 'sales' or 'agreements to sell' within the meaning of the statute; but it is contended that the second and fourth are not subject to the tax, because they involve neither a transfer of the legal title to the stock loaned and returned, nor 'deliveries' of the shares or certificates representing them within the meaning of the acts of 1917 and 1918, and that taking into account the history and purposes of the two statutes, it was not intended to include these transactions among the taxable transfers described.

On the argument it was also earnestly urged that the lender of stock is in a position analogous to that of a pledgor of the stock which he lends; that in consequence there is no transfer of title to the stock within the meaning of the taxing provisions of the two acts, and that in any event the lender is in the position of a borrower of money and the transaction falls within the proviso of the acts exempting from the tax deposits of stock certificates as collateral security for money loaned.

These arguments ignore the essential legal characteristics of the loan transaction. It may be agreed for the purpose of this discussion, as was argued at the bar, that it is the law of many jurisdictions, including New York, where these transactions occurred, that the relation of the customer and the broker with whom the customer deposits stock as security for advances, or who purchases securities for account of the customer, is technically that of pledgor and pledgee, with authority and power on the part of the broker to repledge to the extent of his advances. See Richardson v. Shaw, 209 U. S. 365, 374, 28 S. Ct. 512, 52 L. Ed. 835, 14 Ann. Cas. 981; Gorman v. Littlefield, 229 U. S. 19, 33 S. Ct. 690, 57 L. Ed. 1047; Duel v. Hollins, 241 U. S. 523, 36 S. Ct. 615, 60 L. Ed. 1143; Skiff v. Stoddard, 63 Conn. 198, 26 A. 874, 28 A. 104, 21 L. R. A. 102; Markham v. Jaudon, 41 N. Y. 235; Lawrence v. Maxwell, 53 N. Y. 19; Taussing v. Hart, 58 N. Y. 425; Caswell v. Putnam, 120 N. Y. 153, 24 N. E. 287. But that view of their legal relationship finds support in the agreement between the customer and the broker which contemplates, as the law requires, that the broker should at all times have on hand specific securities for delivery to the customer on payment of the amount of the broker's advances for the customer's account. Although the broker has an implied authority to substitute other securities of the same kind and amount for the securities which he holds for his customer, and to repledge them to the extent of his advances, courts have not dispensed with the requirement that he should at least have, either in his own prossession or lodged with his bank on the repledge, specific securities of the kind and amount purchased for his customer, available for delivery to the customer on payment of the balance due. Richardson v. Shaw, supra; Skiff v. Stoddard, supra; Taussig v. Hart, supra; Lawrence v. Maxwell, supra; Caswell v. Putnam, supra. See ...