APPEAL FROM THE COURT OF CLAIMS.
Taft, Holmes, Van Devanter, McReynolds, Brandeis, Sutherland, Butler, Sanford, Stone.
MR. JUSTICE STONE delivered the opinion of the Court.
The appellants are co-partners engaged in business as stock brokers 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 stock-brokerage 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. Jud. Code, § 242, before amendment of 1925.
The applicable provisions of the statutes are to be found in War Revenue Act of 1917, Title VIII, Schedule A, par. 4, 40 Stat. 300, 322, which is printed in the margin*fn* and in the similar provision of the Revenue Act of 1918, Title XI, Schedule A, par. 4, 40 Stat. 1057, 1135, 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 two 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 bound 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 ...