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Tellier v. Commissioner of Internal Revenue

decided: February 16, 1965.

WALTER F. TELLIER AND EVELYN H. TELLIER, PETITIONERS,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.



First issue before LUMBARD, Chief Judge, and HAYS and ANDERSON, Circuit Judges.

Second issue before LUMBARD, Chief Judge, and WATERMAN, FRIENDLY, SMITH, KAUFMAN, HAYS, MARSHALL and ANDERSON, Circuit Judges.

HAYS, Circuit Judge.

I.

The first issue in this case is whether the profits realized from the sale by the taxpayer (Evelyn H. Tellier is a party only because she and her husband filed a joint return) of certain securities during the years 1952-1956 were taxable as ordinary income rather than as capital gain. The resolution of this issue turns upon whether the securities were held by the taxpayer for sale to customers in the ordinary course of his business of underwriting and selling securities. If they were so held, then under Section 117(a)(1)(A) of the Internal Revenue Code of 1939 (Section 1221(1) of the 1954 Code)*fn1 the profits were taxable as ordinary income.

There is ample evidence to support the Tax Court's finding that the taxpayer held the securities for sale in the ordinary course of business. The taxpayer was engaged through Tellier and Company, in form a partnership but in fact wholly controlled by the taxpayer, in the business of underwriting the public sale of stock offerings and in purchasing securities for resale to customers. In connection with the underwriting agreements the taxpayer himself received stock or stock warrants which he sold, frequently through Tellier and Company.

There were seventy separate transactions of this kind during the years in question and the net gains from these sales were:

1952 ... $74,755.33

1953 ... 74,089.23

1954 ... 49,184.05

1955 ... 97,864.12

1956 ... 13,277.42

On some occasions as an inducement to make more sales of the publicly issued shares, taxpayer would give Tellier and Company's salesmen a part of his stock warrants. Tellier and Company had at all times free call upon the securities which taxpayer kept in an "investment account." The cashier of Tellier and Company had authority to borrow any security it might need either because of a short sale or because a security was not received.

In the words of the Tax Court:

"The volume of sales, petitioner's activities with respect to the securities, and the close relationship between petitioner's investment accounts and the dealing activities of Tellier and Company support the conclusion that the securities here involved were being held by petitioners for ...


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