Stavisky v. Comm'r of Internal Revenue, Docket No. 65637.

• Decision Date: 29 April 1960
• Docket Number: Docket No. 65637.
• Citation: 34 T.C. 140
• Parties: MEYER J. STAVISKY AND THERESA Z. STAVISKY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

34 T.C. 140

MEYER J. STAVISKY AND THERESA Z. STAVISKY, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 65637.

Tax Court of the United States.

Filed April 29, 1960.

Asher Lans, Esq., for the petitioners.

Clarence P. Brazill, Jr., Esq., for the respondent.

On September 19, 1950, petitioner contracted to sell 10,000 shares of a proposed issue of stock on a ‘when issued’ basis at 58 1/4 per share. The following day, he contracted to purchase the same number of such shares at 58 3/8 per share. By late December of 1951 the market price of the anticipated stock had risen substantially, and petitioner then transferred to another 40 per cent of his contract to sell, paying the transferee $31,150 as consideration for its assumption of his ‘short’ position thereunder. On January 2, 1952, he transferred 40 per cent of his contract to purchase to the seller under that contract, receiving $29,975 as consideration. Held, the 1951 transfer by petitioner of 40 per cent of his contract to sell constituted a sale or exchange within the meaning of section 117, I.R.C. 1939. Held, further, section 117(1), I.R.C. 1939, is inapplicable to the transaction; petitioner realized a long-term capital loss.

FORRESTER, Judge:

Respondent has determined a deficiency in petitioners' 1951 income tax in the amount of $12,861.64. The sole issue remaining is whether he erred in characterizing a payment by petitioners in the amount of $31,150 as a long-term capital loss.

FINDINGS OF FACT.

The stipulated facts are so found.

Petitioners are husband and wife residing in Brooklyn, New York. Their joint income tax return for 1951 was filed March 7, 1952, on the cash and calendar year basis with the then collector of internal revenue for the first district of New York. Meyer J. Stavisky will hereinafter be called the petitioner.

Sometime to September 10, 1950, a plan of reorganization had been proposed for the Missouri Pacific Railroad (hereinafter called Mo-Pac), under which new preferred stock was to be issued and listed on the New York Stock Exchange.

On September 19, 1950, petitioner contracted to deliver to Ira Haupt & Co. (hereinafter called Haupt) 10,000 shares of such proposed stock on a ‘when issued’ basis, at a price of 58 1/4 per share. The following day he contracted to buy 10,000 such shares from Haupt at 58 3/8 per share. Both agreements contained the following:

It is understood and agreed that all transactions made for you are subject to the rules and customs of the Exchange or Market (and its clearing house, if any), where executed by us or our agents; that we have the right to close transactions without further notice at public or private sale, without liability for subsequent differences in value, when such a sale or purchase is deemed necessary by us for our protection; * * *

Such contracts for the purchase of when, as, and if issued securities are referred to generally as ‘when issued’ contracts. At all times pertinent to this case there was trading on the New York Stock Exchange in such contracts having this new Mo-Pac preferred stock as their subject matter and official price quotations of the N.A.S.D.¹ on them were published daily in newspapers.

When stock traded on a ‘when issued’ basis rises in price, a customer-seller may have to ‘mark to market,‘ that is, deposit cash or securities to cover his potential loss liability. Conversely, a fall in price may require a customer-buyer to ‘mark to market.’ However, so long as the transaction remains open, the customer will not realize or receive any amount as a result of changes in market value in favor of his position.

By December 1951 the price of Mo-Pac ‘when issued’ stock had risen considerably. Petitioner was concerned over the ‘mark to market’ requirements of his contract to sell, which would have entailed the deposit of substantial cash.

Late in December of 1951 petitioner transferred 40 per cent of his selling contract to Sutro Bros. & Co. (hereinafter called Sutro), paying the latter $31,150 as consideration for its assumption thereof.

On January 2, 1952, petitioner and Haupt entered into a contract under which petitioner transferred to Haupt 40 per cent of his contract to purchase Mo-Pac ‘when issued’ shares. Haupt paid petitioner $29,975 as consideration therefor.

In his income tax return for 1951 petitioner claimed the payment to Sutro as a deduction from ordinary income. In his 1952 return he reported the amount received from Haupt as a long-term capital gain.

On or about December 22, 1954, the proposed plan of reorganization of Mo-Pac failed. Contracts to purchase and to sell the proposed preferred shares on a ‘when issued’ basis were then canceled.

OPINION.

Petitioner first argues that his 1951 transaction with Sutro constituted merely a payment by him for his release from an obligation, rather than a sale or exchange. We do not agree.

Petitioner was a party to a bilateral contract with mutual rights and obligations, not a mere obligor. Had the market price of Mo-Pac shares ‘when issued’ declined instead of risen, his rights under his contract to sell would have outweighed his liabilities (as happened here with respect to his contract to buy), and he would have been the payee rather than the payor as the result of the transaction of December 1951 (as was the case when he sold part of his purchase contract in 1952). We think it clear that in such case he would have been in the position of having sold a portion of his rights under the contract (consistent with his treatment of his 1952 transaction) and are not prepared to hold that a given transaction is or is not a sale or exchange from day to day depending on the vagaries of the securities market.

Respondent has ruled in I.T. 3721, 1945 C.B. 164, that transfers of rights under ‘when issued’ contracts constitute sales or exchanges of capital assets, and create capital gain or loss, in the following language (pp. 170, 171):

First, is the amount which A pays to B in consideration of B's assuming A's liabilities under the ‘when issued’ sell contract deductible by A as an ordinary loss or as a business expense?

It is held that the transaction is an exchange by A of his contract, a capital asset, and that the resulting loss is a capital loss within the meaning of section 117 of the Code.

Section 111(a) of the Code provides that the loss upon the sale or other disposition of property shall be the excess of the adjusted basis over the amount realized. Section 111(b) of the Code provides that the amount realized shall be the sum of any money received plus the fair market value of the property (other than money) received.

Presumably, A's contract to sell ‘when issued’ stock of the Y...