Weir v. Commissioner of Internal Revenue

• Decision Date: 19 January 1940
• Docket Number: No. 7219.,7219.
• Citation: 109 F.2d 996
• Parties: WEIR v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Third Circuit

109 F.2d 996 (1940)

WEIR v. COMMISSIONER OF INTERNAL REVENUE.

No. 7219.

Circuit Court of Appeals, Third Circuit.

January 19, 1940.

Earl F. Reed, John E. Laughlin, Jr., and Thorp, Bostwick, Reed & Armstrong, all of Pittsburgh, Pa., for petitioner.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Norman D. Keller, and S. Dee Hanson, Sp. Assts. to Atty. Gen. for respondent.

Before MARIS, CLARK, and BIDDLE, Circuit Judges.

CLARK, Circuit Judge.

The first issue at bar concerns the disallowance of a loss deduction from petitioner's net income for the year 1932. The loss asserted is on a transaction involving the purchase and sale of preferred stock in the Bellefield Company, a corporation which owned hotels and apartment houses in Pittsburgh. Petitioner bought the stock in lots at various times in 1925 and 1926, and sold it on December 16, 1932. He repurchased it three and one-half months later, on March 1, 1933. We say "it" because, as it happened, the identical shares were reacquired on repurchase. One Falk, an acquaintance, had held them in the three and one-half months' interval. The Commissioner, not unnaturally, denied the deduction and attacked the good faith of the sale before the Board. But that attack failed utterly. The purchase, sale, and repurchase were made in due course through petitioner's brokers, and in such wise as to establish petitioner's complete ignorance of Falk's connection with the stock. This assurance was made doubly sure by other undisputed facts. Petitioner was, as he explained, a tenant in an apartment owned by the Bellefield Company. His motive in acquiring the stock was to have a voice in the management in order to "maintain certain standards". He sold the stock because he had decided to move out, the rent, in his opinion, being too high; he repurchased it because he changed his mind and decided to remain inasmuch as the rent had been reduced. The Board, however, stressed the motive for the purchase and held, sua sponte that the transaction was not "entered into for profit" within the meaning of the statute, Revenue Act of 1932, § 23 (e) (2), 47 Stat. 169, 180, 26 U.S.C.A. § 23 (e) (2).

The limitation of deductible losses, outside the sphere of the taxpayer's trade or business, to those incurred in "transactions entered into for profit", first appeared on the statute books as § 5(a) (5th) of the Revenue Act of 1916, 39 Stat. 759. It has been construed ever since in terms of the taxpayer's state of mind, see, Paul, Motive and Intent in Federal Tax Law, Selected Studies in Federal Taxation, Second Series, p. 280. The myriad cases and rulings are collected and discussed in the article above cited, in 3 Paul & Mertens, The Law of Federal Income Taxation § 26.49, and in 401 C.C.H. para. 195. There are no apt precedents among them. Some are complicated by the rather technical circumstance of a shift in ownership through gift, bequest or devise. Some are concerned with the narrow and often elusive connection between profit and real estate holdings. Others reflect the dreary financial lot of guarantors, or entrepreneurs acting under the suasion of moral obligation. Still others (with, we think, greater pertinence) involve a more sportive segment of the citizenry and their characteristic exploits, such, for example, as the breeding of polo ponies, Farish v. Comm., 36 B.T.A. 1114; Id., 5 Cir., 103 F.2d 63; the maintenance of racing stables, Whitney v. Comm., 3 Cir., 73 F.2d 589; Comm. v. Widener, 3 Cir., 33 F.2d 833; the equipment of expeditions to find the quasi-mythical Central American "white Indian", Du Pont v. Comm., 36 B.T.A. 223; the purchase of cabin cruisers, Lihme v. Anderson, D.C., 18 Supp. 566; the culture of trees, Montgomery v. Comm., 37 B.T.A. 232; or the pursuit of gentleman farming, Thacher v. Lowe, D.C., 288 F. 994. Generally speaking, the Board and the courts have been liberal in finding the requisite greed. As the author cited above puts it: "The American business man has never appeared so indefatigably optimistic as in some of the cases on this point."¹

When stock is the subject matter of the transaction, the taxpayer's optimism stands on a much firmer footing. More than twenty years ago a terse Office Decision ruled that the "profit" which must be intended on the purchase of property might relate to income flowing from the tenure of that property, as well as gains realized from its resale, O.D. 138, 1 C.B. 124, and see L.O. 1061, 4 C.B. 160, A.R.R. 604, 5 C.B. 136. This construction is of course an eminently reasonable, indeed necessary, one — otherwise it would be virtually impossible to buy bonds at a premium "for profit" — and it has been consistently followed, see Lewis v. Comm., 34 B.T.A. 996; Tanzer v. Comm., 37 B.T.A. 244; Heiner v. Tindle, 276 U.S. 382, 48 S.Ct. 326, 72 L.Ed. 714. By hypothesis, the purchase of stock carries with it in the form of dividends a share in the earnings and profits of the corporation. Again, by hypothesis, although profits are not always forthcoming, the corporation, at least, is trying to earn them, and generally does. Of course if the corporation cannot earn them, and the taxpayer knows that its stock is worthless, his acquisition of that stock is surely not for profit, Dresser v. United States, Ct.Cl. 55 F.2d 499, certiorari denied 287 U.S. 635, 53 S.Ct. 85, 77 L.Ed. 550. The simpler case is where the corporation is not even trying to earn profits, and the taxpayer has been instrumental in its organization, see Paine v. Comm., 37 B.T.A. 427, affirmed 1 Cir., 102 F.2d 110. So, the intention to purchase stock must from the very nature of the thing purchased include the intention to receive profits (dividends or accretion in value) unless the purchaser knows at the time of purchase that such profits are an impossibility.

Before proceeding further, it is appropriate to notice a timeworn but salient distinction and corresponding difference in terminology. We quote: "* * * `Intent' may be used in at least three distinct legal meanings. It may designate simply the exercise of will power necessary to cause muscular or physical movement. This concept is, of course, irrelevant in the field of tax law. Secondly, it may denote the immediate result desired by the actor. Thirdly, it may signify the ultimate reason for aiming at that immediate objective. At this point, however, intent shades into motive, which is really the ulterior intent or the cause of the intent. Intent, in other words, is the object of the act; motive, in turn, is the object or spring of the intent. Using the terms in these senses, intent is frequently material to tax questions; whereas motive — properly enough — is of importance only in comparatively rare instances." Paul, Motive and Intent in Federal Tax Law, Selected Studies in Federal Taxation, Second Series, pp. 257, 258.

Petitioner's profit intention must, we think, be taken for granted. His purchase of preferred stock is of course conceded, and that is sufficient to establish prima facie his intent to profit. The deduction has been allowed on similar showings, Tanzer v. Comm., above cited, Lewis v. Comm., above cited, Terry v. United States, D.C., 10 F.Supp. 183, and see T.B.R. 35, 1 C.B. 122, 123. Nothing in the record tends to disprove the intention so established. It is not suggested that petitioner knew, or had any cause to know, that his purchase would be profitless. Furthermore, petitioner's intention and motive of influencing the "standards" of the corporation through his stock ownership presents no repugnancy. One does not exhibit an intention to bid farewell to profits by signing a proxy. This last, it will be noted, serves to distinguish the decisions dealing with non-income producing property. If, for instance, the taxpayer has purchased a yacht, his cruising about in it presupposes a state of mind inconsistent with making a profit out of it by chartering. Hence that inconsistency must be resolved by ascertaining whether the intention or motive of pleasure or that of profit is the "prime thing", Lihme v. Anderson, above cited, and see Helvering v. National Grocery Co., 304 U.S. 282, 58 S.Ct. 932, 82 L.Ed. 1346, footnote 5. In the instant case, on the other hand no such resolution is necessary. We have a profit intention, side by side with a non-profit motive.

We are brought, then, to the final question: Is the requirement "for profit" satisfied by the petitioner's intention or by his motive? The answer, of course, does not lie in the language used. Nor is the legislative history of the statute of any assistance. The similarly worded provision governing...