Appeal from the United States Board of Tax Appeals.
Before MANTON, L. HAND, and SWAN, Circuit Judges.
The opinion below, reported in 14 B.T.A. 743, states that the sole question presented to the Board was whether the bank was a dealer in securities during the taxable years under review, and as such entitled to return its income on the basis of inventories of its securities. The Commissioner had denied it the use of inventories, resulting in the imposition of deficiencies in taxes aggregating some $220,000. The Board of Tax Appeals confirmed these deficiencies on the ground that the evidence was insufficient and left the Board in doubt whether or not the bank was a dealer in securities.
Section 203 of the Revenue Act of 1918 (40 Stat. 1060) and section 203 of the Revenue Act of 1921 (42 Stat. 231) provide in identical language:
"That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income."
By article 1585 of Treasury Regulations 45, promulgated under the Revenue Act of 1918, it was provided that a dealer in securities might under specified circumstances use inventories in making his income tax return, and the article defined the term "dealer" in securities as follows:
"* * * For the purpose of this rule a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers, that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. If such business is simply a branch of the activities carried on by such person, the securities inventoried as here provided may include only those held for purposes of resale and not for investment. Taxpayers who buy and sell or hold securities for investment or speculation, and not in the course of an established business, and officers of corporations and members of partnerships, who in their individual capacities buy and sell securities, are not dealers in securities within the meaning of this rule."
The applicable regulation under the Revenue Act of 1921 is substantially the same Article 1585 of Treasury Regulations 62.
It is not denied that it is within the legal powers and within the common practice of national banks to deal in negotiable securities. See Mercantile Nat. Bank v. New York, 121 U.S. 138, 156, 7 S. Ct. 826, 30 L. Ed. 895; Yerkes v. National Bank, 69 N.Y. 382, 387, 25 Am. Rep. 208; People ex rel. Pratt v. Goldfogle, 242 N.Y. 277, 295, 151 N.E. 452. Nor is it denied that a national bank, if it conforms to the requirements of the above-quoted regulation, may, for purposes of taxation, inventory the securities held by it for resale. The dispute is solely one of fact, namely, whether the evidence shows the petitioner to be a dealer.
Its witnesses were Mr. Colombo, an accountant who had been in its employ for approximately ten years, Mr. Burke, its vice president and comptroller, and Mr. Turner, its chief clerk. The accountant identified Exhibits 1, 2, 3, and 4 as prepared by him from the books of the bank, with the exception of the figures showing market quotations. By stipulation the exhibits were conceded to be correct transcripts from the books and to contain correct market quotations. They tabulate (a) the cost of the bank's securities at the beginning of each of the years in question; (b) the market value on January 1 of each year except 1918; (c) purchases during each year; (d) sales during each year; and (e) market value at the end of each year. The accountant stated that the books were kept, as required by the National Banking Law, upon the basis of cost, but that supplementary sheets showing the market value of securities were also kept and were available for making up the income tax returns for the years in question. The supplementary book had been lost in the course of changing from one banking house to another. The original tax returns did not use inventcries, but by amended returns the use of this method was claimed.
Mr. Burke and Mr. Turner testified as to the character of the bank's dealings in securities. The former said that during each of the years in question the bank bought and sold securities as part of its business. He had charge of such buying and selling, and in making purchases he considered safety of the security the dominant factor, by which "he meant safety from the viewpoint of the customer -- the people to whom the Bank might sell securities." Mr. Turner testified that he had been in the employ of the bank for fifteen years and was familiar with the buying and selling of securities by the bank during all of the taxable years. The bank maintained a separate department for the buying and selling of securities. All the securities listed upon the four exhibits mentioned above were held by the bank for resale. He had charge of the books, and no separate account was kept for profits and losses resulting from the sale of securities; "nor did they segregate individual profits in any department," but the same were recorded in the general profit and loss account. The bank purchased securities to fill specific orders only when they did not have the securities in hand. He said the idea of the bank in carrying securities was to fill orders; if it thought prices were reasonable it would sell the securities it had. Asked if it was the bank's policy to buy with the idea of immediate prospect of market changes, or with the idea of the soundness of a long-term investment, he replied: "I think you are confusing the two again. It is not a question of investment, but of resale value. If they thought they could sell the securities quickly; it was not a question of investment; it was a question of carrying securities we held ready for anybody that may want them."
And again: "They were bought to be held in case people would consider buying. There are several features which are taken into consideration. For instance, the bond buyers, if they thought it advisable, would take some of these bonds and hold them for customers; something they know is impending. That is the basis on which these things were purchased."
Mr. Turner also testified that during the years in question bonds had been purchased for the purpose of using them as a pledge to secure circulation and postal savings, but the amount of the bonds so used does not appear. During the taxable years sales amounted to more than ...