On Petition for Review from the United States Board of Tax Appeals.
Before WOOLLEY, DAVIS, and THOMPSON, Circuit Judges.
The Commissioner of Internal Revenue found a deficiency tax against Snyder arising out of marginal transactions in the year 1928 which were similar in characater to marginal transactions of the same taxpayer in 1925 on which this court passed in Snyder v. Commissioner, 54 F.2d 57. The Commissioner claims the decision in that case is res judicata of the matter raised on the present petition. Although the law may be the same, the facts, though similar, are different and, being different, they were not passed upon in that case. We hold against the Commissioner's contention of res judicata.
From the deficiency tax assessed by the Commissioner in the instant case, reckoned by setting off the last sales of shares of stock against shares earliest purchased, Snyder appealed to the United States Board of Tax Appeals. That tribunal discussed in its opinion two questions: one, the validity of Article 58 of Regulations 74 promulgated under the Revenue Act of 1928; the other, the applicability of the regulation to the facts of this case. Snyder is here on petition to review the Board's order sustaining the tax assessed by the Commissioner.
The regulation whose validity is challenged is in these words:
"When shares of stock in a corporation are sold from lots purchased at different dates and at different prices and the identity of the lots can not be determined, the stocks sold shall be charged against the earliest purchases of such stock. * * *"
The validity of this regulation, and of like ones under previous statutes, now, for brevity, called the "First in, first out" rule, has repeatedly been sustained by this court and other courts. Snyder v. Commissioner (C.C.A.) 54 F.2d 57; Commissioner v. Merchants' & Manufacturers' Fire Insurance Company (C.C.A.) 72 F.2d 408; Skinner v. Eaton, Collector (C.C.A.) 45 F.2d 568; Howbert v. Penrose (C.C.A.) 38 F.2d 577, 579, 68 A.L.R. 820.
The usual ground of attack has been that the rule is arbitrary and capricious and therefore in contravention of the due process clause of the Fifth Amendment to the Constitution. This court has held that while the rule is, from the very nature of the situations to which it applies, fixed and peremptory and in that sense arbitrary, it is, from the latitude of its words, not inflexible or capricious and therefore is not unreasonable. Since this pronouncement, Heiner v. Donnan, 285 U.S. 312, 52 S. Ct. 358, 76 L. Ed. 772, has been decided. On that case the petitioner here takes a new stand. By that decision the Supreme Court held that section 302 (c) of the Revenue Act of 1926 (26 USCA § 1094 (c) creating a presumption that gifts made within two years of the donor's death were made in contemplation of death, was unconstitutional. The petitioner says that the rule which, on failure to identify shares sold, affords a presumption that the shares sold were those first bought is likewise unconstitutional. There is really no analogy between the provision of the statute under consideration by the Supreme Court in the Heiner Case and the terms of the rule here under discussion. There the presumption was "conclusive" and made so by the statute. Here the presumption is rebuttable, hence constitutional. Cockrill v. California, 268 U.S. 258, 261, 45 S. Ct. 490, 69 L. Ed. 944; Yee Hem v. United States, 268 U.S. 178, 183, 184, 45 S. Ct. 470, 69 L. Ed. 904; Mobile, J. & K. C.R. Co. v. Turnipseed, 219 U.S. 35, 42, 43, 31 S. Ct. 136, 55 L. Ed. 78, 32 L.R.A. (N.S.) 226, Ann. Cas. 1912A, 463. The taxpayer is given every opportunity to identify the shares he has sold and to prove his loss or gain accordingly. Indeed, the rule comes into operation only "when" the identity of the shares sold cannot be determined, which usually happens when the owner in ordering their sale has failed to identify the lots in which they were purchased. In such case there must be some way of determining for the benefit of the taxpayer his losses or gains in his taxable transactions and, similarly, of determining what taxes the government is entitled to exact. Except for this rule or some similar rule, efficiently to administer the revenue act, a vast multitude of potential taxpayers dealing in the purchase and sale of shares on margin and actually making profits would escape taxation because of their inability or disinclination to identify the shares sold and the government would lose the taxes which the statute imposes.
We re-state our judgment that the rule is valid.
The petitioner next contends that the rule, if valid, is not applicable to the instant case because it is inconsistent with the Revenue Act of 1928 which provides (sections 11, 12, 21-23 [26 USCA § 2011, 2012, 2021-2023]) that there shall be levied, collected and paid "for each taxable year" normal and surtaxes at certain rates. The substance of this contention is that the annual tax is to be levied and paid only on transactions begun and completed within the "taxable year" and to that end the entire series of the petitioner's marginal transactions in 1928 (the tax year) should be segregated from all transactions in prior years and that transactions of sale in the tax year should be charged only against transactions of purchase in that year, leaving open and unanswered the question how profits from later sales of shares purchased earlier can be taxed. The informity in this contention lies in the fact that a transaction of sale of shares previously purchased, yielding a gain, is taxable in the year in which the transaction of sale takes place and the gain is made. 7 R.C.L. § 245. Until the shares, whenever purchased, are sold there is neither gain nor loss. A gain springs from a sale and the tax is imposed on the gain in the year of the transaction of sale. That is the "taxable year." Whether or not there is gain or loss in a sale of shares made in the tax year depends on what shares were sold, the last purchased or the first purchased, or shares intermediate the two, which always is a question answered by the taxpayer's evidence, or by the rule, as to the identity of the shares involved.
We find nothing substantial in this defense.
The petitioner's next position is that the "First in, first out" rule, if valid, is inapplicable to the facts of this case. The facts as stated by the petitioner himself are these:
In 1928 and several prior years the petitioning taxpayer dealt, through two brokerage houses in Philadelphia, in stock of the United Gas Improvement Company known to speculators as U.G.I. through ...