Currie v. Commissioner , 53 T.C. 185 ( 1969 )

Francis C. Currie and Eleanor B. Currie, et al., ^{Currie v. Commissioner}

Docket Nos. 3190-67, 3226-67, 3227-67

United States Tax Court

53 T.C. 185; 1969 U.S. Tax Ct. LEXIS 28;

November 10, 1969, Filed

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Decisions will be entered for the petitioners.

The petitioners were members of a syndicate formed in mid-1962 for the purpose of acquiring, holding, and eventually selling at a profit 51 percent of the common stock of a stock and mutual life insurance company. At that time, the syndicate acquired from another syndicate (of which petitioners were also members) an option to buy the stock. Both syndicates were organized and controlled by an individual active in the securities business who was a specialist in the field of insurance securities. The second syndicate immediately exercised the option and purchased the stock. In mid-1963, over 6 months after its acquisition, the syndicate sold some of the stock to a group of securities underwriters who, in turn, disposed of the stock in a public offering. Thereafter the syndicate was liquidated. Held: The stock was not property held for the sale to customers of either the syndicate or its members in the ordinary course of the trade or business of either; it was held as an investment. Therefore, the sale of the stock by the syndicate on behalf of its members was the sale of a capital asset.

William Waller, for the petitioners.

Jack D. Yarbrough, for the respondent.

Kern, Judge.

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KERN

Respondent determined the following income tax deficiencies for the calendar year 1963 in these consolidated cases:

Petitioners	Docket	Deficiency
Francis C. Currie and Eleanor B. Currie	3190-67	$ 32,148.92
James C. Bradford, Jr	3226-67	112,164.23
James C. Bradford and Eleanor A. Bradford	3227-67	748,816.32

The only issue for decision in each of the instant consolidated cases is whether the gain realized by petitioners on the sale on July 9, 1963, of shares of Northwestern National Life Insurance Co. common stock is taxable as ordinary income from the sale of "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,"

These three cases, consolidated for trial and opinion, were tried on the same calendar with Joseph J. Turner, docket No. 1203-67, and Harry Lahman and Rose A. Lahman, docket No. 1971-67. These two cases involve the same basic issue and, in the main, the same facts. The trial of the instant consolidated cases was confined by the parties to an opening statement by counsel for petitioners and brief testimony by petitioner James C. Bradford, who testified extensively in the Turner case. It was stipulated by the parties that the testimony and exhibits which were received in the trial of the Turner case would be received in the Lahman case and the instant consolidated cases subject to objections on grounds of relevancy and materiality.

FINDINGS OF FACT

Some of the facts are stipulated. They are found to be as stipulated and the stipulation, together with the exhibits identified therein, are incorporated herein by this reference.

Petitioners filed their respective income tax returns for the year 1963 with the district director of internal revenue, Nashville, Tenn. Petitioners James C. and Eleanor A. Bradford are husband and wife. Eleanor A. Bradford is a party to this proceeding only because she filed a joint return with her husband.

Petitioner James C. Bradford, Jr., is the son of James C. and Eleanor A. Bradford and is not married. At the time of filing his petition herein, James C. Bradford, Jr., resided with his parents in Nashville, Tenn.

Petitioners Francis C. and Eleanor B. Currie are husband and wife, residing at the time they filed their petition herein in Memphis, Tenn. Francis C. Currie is a party to this proceeding only because he filed a joint return with his wife. Eleanor B. Currie is the daughter of James C. and Eleanor A. Bradford. Eleanor B. Currie is also the beneficiary of a trust created by James C. Bradford on December 10, 1957. The trustee of this trust (hereinafter sometimes referred to as the Currie Trust) is Eleanor A. Bradford. James C. Bradford handled his wife's business affairs, including the Currie Trust's participation in the transactions to be described below. A fiduciary return for the Currie Trust for the year 1963 was filed with the district director of internal revenue, Nashville, Tenn.

The Currie Trust is a limited partner, and James C. Bradford and James C. Bradford, Jr., are general partners of J. C. Bradford & Co. and were such at all times here relevant.

J. C. Bradford & Co. (sometimes hereinafter called Bradford & Co.) is a partnership engaged in the securities business, and is a member of the New York Stock Exchange. Bradford & Co. was a member of the National Association of Securities Dealers (hereinafter sometimes called the NASD) and has been registered with the Securities and Exchange Commission (hereinafter sometimes called the SEC) as a broker-dealer at least since February 4, 1945. James C. Bradford (hereinafter sometimes called J. C.) is a senior and principal partner of Bradford & Co. J. C. has been in the securities business for 41 years. Bradford & Co. was formed in 1927 and first acquired its seat on the New York Stock Exchange in 1930. J. C. and Bradford & Co. have been very active in life insurance company stocks during the years J. C. and Bradford & Co. have been in business. J. C. has advertised Bradford & Co. as "Specialists in Life Insurance Stocks" in a book entitled 'Security Dealers of North America," published semiannually by Standard & Poor's Corporation, which is circulated among securities dealers and in which securities dealers, underwriters, and investment bankers place advertisements.

The names of the partners in Bradford & Co. during the years 1961, 1962, and 1963 are listed below.

J. C.	Gordon Brooks
Einer Nielsen	Gordon Duval
Kenneth H. Wood	David Steine
James C. Bradford, Jr.	A. S. Hill
Mrs. Eleanor A. Bradford, trustee	W. M. Robinson

J. C. Bradford & Co., Inc. (hereinafter sometimes referred to as Bradford, Inc.), was incorporated under the laws of the State of Tennessee; and its principal office and place of business is located in Nashville, Tenn. All of the outstanding stock of Bradford, Inc., was owned by Bradford & Co. Bradford, Inc., was a member of the NASD and was registered with the SEC as broker-dealer in 1961. The corporation Bradford, Inc., was occasionally used as an underwriter of corporate securities. Bradford, Inc., was registered with the State of Tennessee regulatory agency as a broker-dealer. It was not a member of the New York Stock Exchange. During the years 1961, 1962, and 1963 the officers of Bradford, Inc., were as follows:

Office	Name
President	J. C.
	Einer Nielsen
	Walter M. Robinson
	Kenneth H. Wood
Vice presidents	Gordon Brooks
		1 David Steine
	1 Albert S. Hill
Secretary	J. C. Bradford, Jr.
Treasurer	Mary Smart

Aragon Corp. (hereinafter sometimes referred to as Aragon) is a Tennessee corporation; and its principal office and place of business is in Nashville, Tenn. All of the stock of Aragon is owned by the 418 Union Street Corp., the stock of which, in turn, was owned by Eleanor A. Bradford, the wife of J. C., and by three partners of Bradford & Co.

Nationwide Corp. (hereinafter sometimes referred to as Nationwide) was incorporated under the laws of the State of Ohio. Nationwide conducts a life insurance business. Its principal office was located in Columbus, Ohio. Nationwide owned or controlled several other life insurance companies during the years 1961 to 1963, inclusive.

Northwestern National Life Insurance Co. of Minneapolis, Minn. (hereinafter sometimes referred to as Northwestern), was organized in 1885 under the laws of the State of Minnesota. Northwestern is a stock and mutual life insurance company and is controlled jointly by its stockholders and its mutual policyholders. Each participating policyholder has one vote for each $ 1,000 of life insurance carried. As of March 31, 1963, its life insurance in force exceeded $ 2.7 billion and its total assets exceeded $ 420 million.

During a period of approximately 2 months, i.e., in December 1956 and January 1957, Nationwide acquired approximately 51 percent of the outstanding common stock of Northwestern by purchase on the open market. It was acquired from small investors and from owners of large blocks of Northwestern stock. Murray D. Lincoln, the president of Nationwide, requested that J. C., as an official of Bradford & Co., assist Nationwide in its acquisitions of the stock of Northwestern.

J. C. was aware that there had been litigation between Nationwide and Northwestern after Nationwide's acquisition of Northwestern's stock, arising from Nationwide's efforts to gain the proxies of Northwestern's participating policyholders. At that time J. C. believed that the dispute between Northwestern and Nationwide depressed the market price of Nationwide's stock. He believed that if Bradford & Co. acquired an option to purchase the Northwestern stock owned by Nationwide and it became known that Nationwide would no longer own stock in Northwestern, the price of Northwestern stock would rise. J. C. was also aware that the 51-percent stock interest, represented by 113,728 shares of Northwestern common stock, did not provide control of Northwestern because of the votes of the participating policyholders.

With these considerations in mind J. C. made an offer in mid-1961 to Mr. Lincoln, the president of Nationwide, to purchase an option to acquire Nationwide's stock interest in Northwestern. After some discussion and negotiation, the board of directors of Nationwide authorized the acceptance of J. C.'s offer. The negotiations culminated in an option agreement in the form of a letter dated September 18, 1961, from Nationwide addressed to Bradford & Co. which stated that upon payment of $ 3 per share for the 113,728 shares owned by Nationwide on or before October 12, 1961, Bradford & Co. would have the option to purchase the Northwestern stock for $ 153 per share on or before October 31, 1962. The payment of $ 3 per share, totaling $ 341,184, was to be applied to the purchase price on exercise of the option. The market price of Northwestern at the time the option was granted was approximately $ 123 per share.

After J. C. received the option letter from Nationwide, but before it was effective, J. C. requested a meeting with John S. Pillsbury, the president of Northwestern, with whom he was not yet acquainted. Among the reasons which J. C. had for requesting that meeting was to establish a relationship between the management of Northwestern and the first syndicate which would be more friendly than the relationship between Northwestern and Nationwide, which had been distinctly unfriendly. After this meeting and until the 1963 sale of the Northwestern stock here at issue, J. C. and Pillsbury met and corresponded frequently.

On or about October 9, 1961, J. C. organized a syndicate (hereinafter sometimes referred to as first syndicate) which made the payment needed to purchase the option and to keep the option in force until October 31, 1962. Listed below are the members of the first syndicate and the share participation of each member.

	Share
Syndicate member	participation
J. C. Bradford	36,228
Eleanor A. Bradford, trustee
for Eleanor B. Currie	3,000
J. C. Bradford & Co., Inc	2,500
James C. Bradford, Jr	6,000
Gordon Brooks	2,000
Gordon Duval	2,000
Albert S. Hill	1,000
Mrs. Helen G. Kyes	500
Roger M. Kyes	500
Einer Nielsen	7,000
R. T. Smith	5,000
David Steine	3,000
William Waller	2,000
Kenneth H. Wood	6,000
Bradford Associates	37,000
Total	113,728

The "Syndicate Agreement" dated October 9, 1961, and signed by each member of the first syndicate stated that while the option was taken in the name of Bradford & Co., Bradford & Co. was only the managing agent for each of the members of the first syndicate. Under the agreement Bradford & Co. was authorized to sell or assign each member's share of the option to an underwriting group or to any other purchaser at such price and upon such terms as it might determine, subject to the prior written consent of that member.

As shown above, J. C. and most of his partners in Bradford & Co. were members of the first syndicate. The syndicate members known as Bradford Associates were employees of Bradford & Co. who were advised by the managers of Bradford & Co.'s various offices that Bradford & Co. was organizing the syndicate. J. C. agreed to let each of these employees who were made members of Bradford Associates participate in the syndicate to the extent of 1,000 shares of the stock covered by the option. Each Bradford & Co. employee participating in the syndicate through Bradford Associates signed a document dated October 6, 1961, entitled "Joint Venture Agreement" and paid certain amounts to an appointed agent.

From the time of his first meeting with Pillsbury, J. C. was making plans for the eventual sale of the option by the first syndicate. At their first meeting J. C. discussed with Pillsbury the possibility of having Northwestern split its stock. Pillsbury advised him that it was not permitted under Minnesota law. Pillsbury also advised J. C. that a bill had been submitted to the Minnesota legislature in 1959 which would allow such a stock split, but because of Nationwide's opposition the bill had been withdrawn. Pillsbury further advised J. C. that the bill could not be brought up again for another year because the legislature was not in session. Because of the impossibility at that time of having a stock split, J. C. then suggested the possibility of creating a voting trust in which the Northwestern stockholders might place their stock and might receive in return certificates evidencing participation in fractional shares of Northwestern. No action was taken on this proposal.

After 6 months had elapsed from the time the option was purchased by the first syndicate, J. C. began discussions with Lehman Bros., a securities dealer specializing in underwriting activities, with a view to the sale of the first syndicate's option. It was contemplated that Lehman Bros., acting as "managing underwriter," would organize a group of securities dealers, or "underwriters," who would purchase and exercise the first syndicate's option and thereafter make a public offering of the Northwestern shares. A document entitled "Preliminary Prospectus,"    , 1962, was prepared which recited the transaction described above and which stated that Lehman Bros. was the managing underwriter.

In the latter part of May 1962, the stock market fell rapidly. The market price of Northwestern shares also fell during the general market decline. At that time Lehman Bros. advised J. C. that because of the market decline the first syndicate would not be able to make a profit on the transaction. Lehman Bros. thereupon withdrew from the plan that was described in the "Preliminary Prospectus" dated June    , 1962. J. C. thereupon contacted Lehman Bros. again to see if that firm would be interested in organizing a syndicate to buy and hold the stock rather than distribute it. Lehman Bros. advised J. C. that they were not interested in such an arrangement. J. C. then went to Loeb, Rhoades & Co., another securities dealer specializing in underwriting activities, to see if they would be interested in organizing a syndicate to exercise the option and hold the stock. Loeb, Rhoades was no more interested in this plan than Lehman Bros. J. C. also offered the option to another insurance company, American General Insurance Co., but American General declined the offer because they did not wish to buy themselves into a fight for control of Northwestern.

Finally by late August in 1962, following a rise in the stock market, *43 were denominated "Class A" members, and new members, who were denominated "Class B" and "Class C" members. The class B members included several individuals and five brokerage firms who were members of the NASD, three of which were also member firms of the New York Stock Exchange. Two life insurance companies, Reserve Life Insurance Co. and Old Line Life Insurance Co., were the class C members. As a matter of convenience to separate the affairs of the two syndicates Bradford, Inc., rather than Bradford & Co., was made the manager of the second syndicate. In forming this syndicate, J. C. contacted some individuals personally; the others were contacted by partners of Bradford & Co. and by other members of the first syndicate. However, J. C. was the primary negotiator in forming the second syndicate and was the individual who made the major decisions in connection with the second syndicate.

The syndicate agreement, pursuant to which the members of the second syndicate had agreed to acquire the Northwestern stock optioned to the first syndicate, was in the form of a letter dated August 30, 1962, addressed by each member to Bradford, Inc.

Copies of the syndicate agreement were executed respectively, by Eleanor A. Bradford, trustee for 1,500 shares; by J. C., for 18,114 shares; and by Bradford, Jr., for 3,000 shares of the Northwestern stock, each of which was accepted by Bradford & Co., Inc. There was also an acknowledgment of the receipt of interest payments and notes in the amounts shown below.

	Interest	Note
Eleanor A. Bradford, trustee	$ 2,578.13	$ 187,500
J. C. Bradford	31,133.44	2,264,250
J. C. Bradford, Jr	5,156.25	375,000

Upon execution of the letter agreements by all members of the second syndicate, Bradford & Co. assigned the option to purchase the Northwestern stock to Aragon. In practically simultaneous transactions Aragon exercised the option and purchased the Northwestern stock from Nationwide, and immediately sold the stock to the second syndicate. In consideration for the stock, the amount of $ 2,193,200 was paid in cash to Aragon (at the rate of $ 50 per share on their participations) by the class B members. The $ 341,184 previously paid by the class A members for the option was credited on the purchase price. The remainder of the purchase price ($ 14,866,000) was evidenced by promissory notes executed by the class A and class B members, dated September 1, 1962, and payable on or before 3 years from date to the order of Aragon, and by certain guaranty agreements executed by the class C members. Aragon delivered the cash to Nationwide and executed a promissory note dated September 1 and payable on or before 3 years from date to the order of Nationwide in the total amount of the notes to the order of Aragon received from the syndicate members. An agreement between Aragon and Bradford, Inc., acknowledged receipt of the Northwestern stock on behalf of the second syndicate. Thereafter the Northwestern stock, the guaranty agreements, and the notes executed by each syndicate member to the order of Aragon were deposited with Nationwide as collateral securing the payment of Aragon's note payable to the order of Nationwide. Aragon was used in this transaction at the request of Nationwide, since under Ohio insurance law it was to Nationwide's advantage to own a note signed by a 5-year-old corporation rather than notes signed by individuals or other entities.

The transaction is outlined in an agreement between Aragon and Bradford, Inc., dated September 5, 1962, as follows:

1. Aragon has this day purchased from Nationwide Corporation, an Ohio corporation with principal office and place of business in Columbus, Ohio, hereinafter referred to as Nationwide, 113,728 shares of the capital stock of Northwestern National Life Insurance Company hereinafter referred to as Northwestern, at $ 153 per share, all of which has been paid in cash with the exception of $ 14,866,000, and for said amount Aragon has executed its promissory note dated September 1, 1962, payable on or before three (3) years from date, with interest at 5 1/2% per annum, payable quarterly in advance. Aragon hereby sells and delivers to Bradford said 113,728 shares of Northwestern stock, and Bradford acknowledges receipt of same, for and on behalf of participants of a syndicate of which Bradford is manager. Bradford will have said shares transferred into the name of J. C. Bradford & Co. (a partnership), and said shares, endorsed by (or accompanied by stock powers executed by) J. C. Bradford & Co., shall be held by Nationwide as security for the payment by Aragon of its aforesaid promissory note in the principal amount of $ 14,866,000. On behalf of the participants in the syndicate, of which Bradford is manager, it is agreed by Bradford that said shares shall be held by Nationwide under the terms and conditions set forth in the aforesaid note, a copy of which is annexed hereto marked Exhibit 1.

* * * *

3. Bradford may at any time notify Aragon of its desire to sell all or part of said shares of Northwestern stock, in which event Aragon agrees to cooperate fully with Bradford, to the end that said shares may be sold free and clear of all liens, with good title delivered to the purchasers, and the proceeds of sale applied to the payment of the special obligation notes of participants, to effect the release of the guaranty agreements of participants, and to the payment of any and all obligations on which said shares, or any interest therein, may be pledged or assigned as security (including Aragon's aforesaid note given to Nationwide in part payment for the stock), in accordance with the respective interests and liabilities of the participants.

In 1963 J. C., acting this time on behalf of the manager of the second syndicate, Bradford, Inc., negotiated again with Lehman Bros. with a view to the organization by the latter of a group of securities underwriters who might buy the Northwestern stock, or a part of it, in order to make a public offering. Such an underwriting group was in fact formed by Lehman Bros. Lehman Bros. thereafter undertook registration of the stock with the SEC. The second syndicate had nothing to do with the selection of the members of the underwriting group, other than Lehman Bros., and had nothing to do with the preparation and filing of the registration statement other than to provide the information under the caption "Selling Stockholders" in the prospectus and to pay certain expenses.

On May 1, 1963, the Northwestern stock was split 8 for 1. Thereafter the second syndicate owned 909,824 shares of Northwestern.

The following undated letter was mailed to each member of the second syndicate by Bradford, Inc., concerning a proposal to sell approximately two-thirds of the Northwestern stock:

414 Union Street,

Nashville, Tenn.

J. C. Bradford & Co., Incorporated

Investment Bankers.

To the Members of the Northwestern National Life Insurance Company Syndicate:

Effective May 1, the stock of Northwestern National was split 8 for 1, and we have been studying the market action of the stock to determine whether this is a proper time to market syndicate shares.

We believe that a complete sellout by the syndicate of the 909,824 shares now owned, which would involve an offering of more than $ 30 million, would adversely affect the offering price.

We therefore, propose that the syndicate sell approximately two-thirds of these shares at a price not below $ 35 and retain the remaining one-third of the shares for later sale or for eventual distribution to the owners.

A sale of two-thirds of the shares at 35 would realize enough profit to pay in full the notes to Aragon Corporation, recover for each participant the amount of his original deposit and provide sufficient additional cash to pay the capital gains tax incurred.

That we may be prepared to take advantage of favorable market conditions and to move promptly for registration, we request that you execute and return to us the enclosed letter of authorization in duplicate and the questionnaire in triplicate, retaining one copy of each for your files.

We will keep you fully informed.

Yours very truly,

J. C. Bradford & Co., Incorporated.

Subsequently a majority in interest of the participants in the second syndicate signed letters to the syndicate manager approving "a gross offering or sale price to the public of not less than $ 33.50 per share of the new stock," and approved the execution by the syndicate manager "of an Underwriting Agreement which contemplates an offering to the public at not less than this price." On June 29, 1963, the syndicate manager wrote a letter to the SEC, saying in part:

With respect to the inquiry in your letter of June 28th we are pleased to inform you, as agent for each of the selling stockholders, that the proposed sale is being made because it presents an opportunity to pay, in full, the note for the balance due on the purchase of the aggregate of 909,824 shares owned by the selling stockholders so that the balance of the shares will be owned free and clear for investment purposes.

A prospectus dated July 2, 1963, was published and filed with the SEC concerning a public offering of 518,600 shares (after the 8 for 1 split) of the stock. Lehman Bros. was named therein as the managing underwriter.

On July 2, 1963, an underwriting agreement was executed in the form of a letter addressed to Lehman Bros. by Northwestern

3. Upon the basis of the representations and warranties herein contained, and subject to the terms and conditions herein set forth, the Selling Stockholders agree, severally and not jointly, to sell to the Underwriters, and the Underwriters agree, severally and not jointly, to purchase from the Selling Stockholders, at the price of $ 33.35 per share, the respective number of shares of the Stock set forth opposite the names of the Selling Stockholders in Schedule No. 2. The obligations of each Underwriter to each Selling Stockholder shall be to purchase from such selling Stockholder that number of shares which represents the same proportion of the number of shares set forth opposite the name of such Selling Stockholder in Schedule No. 2 as the number of shares set forth opposite the name of such Underwriter in Schedule No. 1 hereto represents of the total number of shares to be purchased by all Underwriters pursuant to this Agreement. The respective purchase obligations of each Underwriter, among the Underwriters, shall be rounded to avoid fractional shares, as the Representative may determine.

* * * *

Nothing herein contained shall relieve any defaulting Underwriter of its liability, if any, to the Company and the Selling Stockholders for damages occasioned by its default hereunder.

* * * *

5. Certificates for the shares of Stock to be sold to the Underwriters by the Selling Stockholders hereunder shall be delivered by the Selling Stockholders to the Representative, for the account of the Underwriters, at the office of Lehman Brothers, 39 South La Salle Street, Chicago, Illinois, against payment therefor by certified or official bank checks payable in Chicago funds in amounts determined in accordance with Paragraph 3 hereof, drawn to the order of J. C. Bradford & Co., Incorporated (herein called the "Syndicate Manager"), on such date and at such time (such date and time being herein sometimes called the "date of delivery") as shall be fixed by notice in writing to be given by the Representative to the Company and the Syndicate Manager, such date to be not less than five nor more than nine full business days after the date on which such notice shall have been given and not more than eleven full business days after the initial public offering of the Stock. The date of delivery may be postponed from time to time by mutual agreement of the Representative and the Syndicate Manager. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition of the obligations of each Underwriter.

* * * *

7. The Selling Stockholders, in proportion to the number of shares of the Stock which they are each selling to the Underwriters, hereby agree to pay all costs and expenses incident to the performance of their and the Company's obligations under this Agreement, including all expenses incident to the sale and delivery of the Stock to the several Underwriters, all transfer taxes in connection therewith, the fees and expenses of the Company's counsel and accountants, the costs and expenses incident to the printing of this Agreement, the preparing, printing and filing under the Act of the Registration Statement (including all exhibits thereto), any Preliminary Prospectus, the Prospectus and, subject to the provisions of Paragraph 13 hereof, any amended or supplemented Prospectus, all expenses (including fees of counsel for the Underwriters and their disbursements) incurred in connection with any Blue Sky law qualifications and the preparation of a memorandum with respect thereto, and the cost of furnishing to the several Underwriters copies of the Registration Statement and Prospectus as herein provided, it being understood that, except as provided in this Paragraph 7 or in Paragraph 9 hereof, the Underwriters will pay all their own costs and expenses, including fees and expenses of their counsel, transfer stamp taxes on any Stock which they may sell, and any advertising expenses connected with any offering they may make.

* * * *

9. Anything herein to the contrary notwithstanding, if the Underwriters shall for any reason permitted under this Agreement decline to purchase the Stock, the Selling Stockholders will reimburse the several Underwriters for all out of pocket expenses (including the fees and disbursements of counsel) incurred by them in connection with this Agreement and the proposed purchase of the Stock, and upon demand will pay the full amount thereof to you as Representative of the several Underwriters. Neither the Company nor the Selling Stockholders shall be required to pay any amount for any expenses of the Underwriters except as aforesaid or shall be liable, under any circumstances, to the Underwriters for damages on account of the loss of anticipated profits.

Pursuant to the underwriting agreement, the sale of 518,600 shares to the underwriters was closed at Chicago, Ill., on July 9, 1963. Simultaneously with the payment by the underwriters of the purchase price, the notes which had been executed by the members of the syndicate were paid and the Aragon note to Nationwide was paid. The excess cash after payment of expenses, and certificates for the shares of stock not sold were distributed to the members of the second syndicate in proportion to their respective interests. Thereafter the second syndicate engaged in no other transaction and was never reactivated for any purpose.

The second syndicate was never registered with the SEC as a dealer or broker; it was never a member of the NASD; it was never registered as a dealer in securities with any regulatory body of any State; it never paid any privilege tax or license fee of any kind to any State or political subdivision; it never engaged in any transaction of any kind other than the purchase of 113,728 shares of Northwestern National Life Insurance Co. stock on or about September 5, 1962, and the agreement for the sale of 518,600 shares on July 2, 1963, after the 8 for 1 split; it never owned or held any securities of any kind other than this Northwestern stock; it never owned or used any other property of any kind; it had no telephone or any mailing address or place of business in its name; and it was not to be used for any transaction other than the one previously described involving the purchase and sale of the Northwestern stock.

The Currie Trust has never been registered with the SEC, or with the regulatory body of any State, as a securities dealer, has never paid a privilege tax to engage in the business of dealing in securities, and has never held itself out to the public in any manner whatsoever as a dealer in securities. The same is true as to James C. Bradford, Jr., and as to James C. Bradford.

On their 1963 income tax returns petitioners reported as long-term capital gains profits on the sale on July 9, 1963, of common stock of Northwestern as follows: Francis C. Currie and Eleanor B. Currie, $ 94,899.97; James C. Bradford, Jr., $ 189,799.74; James C. Bradford and Eleanor A. Bradford, $ 1,146,013.05.

On April 6, 1967, respondent mailed notices of deficiency to the petitioners for the calendar year 1963 as a result of treating the gain on the sale of the Northwestern stock as ordinary income rather than capital gain. The respondent, in amending paragraph 5(d) of his answer to the petition in docket No. 3190-67, Francis C. Currie and Eleanor B. Currie, gave the following reason for his determination: *59 course of a trade or business; hence, the stock was not a capital asset in the hands of the trust.

The syndicate did not hold the Northwestern stock for sale to customers in the ordinary course of a trade or business. Petitioners did not hold Northwestern stock for sale to customers in the ordinary course of their trade or business. The stock sold by petitioners through the syndicate was a capital asset.

OPINION

The respondent has determined that the stock of Northwestern National Life Insurance Co. sold by the syndicate described as the "second syndicate" in our Findings of Fact was not a capital asset under section 1221 and that the gain realized by petitioners as members of the second syndicate upon the syndicate's sale of this stock was taxable as ordinary income pursuant to section 61. The relevant portion of section 1221 of the Internal Revenue Code of 1954 defines the term "capital asset" as "property held by the taxpayer (whether or not connected with his trade or business), but does not include * * * property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business."

In support of his determination respondent contends that the second syndicate was a partnership, or a joint venture taxable as a partnership, which held the Northwestern stock primarily for sale to its customers in the ordinary course of its trade or business, or, in the alternative that the Northwestern stock held by the syndicate which was allocable to each member of the syndicate was held by each member primarily for sale to customers in the ordinary course of his own trade or business. *61 firm which advertised itself as "Specialists in Life Insurance Stock," and at all times intended for the syndicate to acquire and hold for at least 6 months the stock of Northwestern for the purpose of thereafter selling the stock at a profit to an organization of underwriters later to be formed who would in turn make an offering of the stock for sale to the general public.

We find some difficulty in following certain phases of respondent's argument. *62 of the syndicate communicated to the other members of the syndicate and acquiesced in by them must be considered to be the intent of petitioners. However with regard to the question of whether this Northwestern stock was property held by petitioners for sale to customers in the ordinary course of their trade or business, respondent's argument is far from clear.

By his citation of Estate of Freeland v. Commissioner, 393 F. 2d 573 (C.A. 9, 1968), affirming a Memorandum Opinion of this Court, ^{*64 and his underlined quotations from the opinion in that case, it might be surmised that respondent considered the taxpayers as indirectly participating in the sale made by the securities dealers who were members of the purchasing underwriters to their own customers after they had purchased the stock from petitioners' syndicate. However, later in his brief, respondent categorically states that "The word 'customers,' as found in the context of this litigation, were [sic] the 104 underwriters who purchased the stock from the syndicate" and "The business purpose of the syndicate herein [of which petitioners were members] was to sell the shares of Northwestern to its customers, the underwriters." This latter statement immediately follows a statement that "the Court has held that a joint venture for a single transaction may be engaged in a trade or business," citing Morris W. Zack, 25 T.C. 676 (1955), affirmed per curiam 245 F. 2d 235, certiorari denied 355 U.S. 823">355 U.S. 823. arguendo that respondent is correct in his argument that the intent of J. C. Bradford, the manager of the syndicate, should be attributed to the syndicate, and to petitioners as members thereof, we are in disagreement with the second and crucial phase of respondent's argument. In our opinion the sale of the Northwestern stock by the syndicate, of which petitioners were members, to the underwriters, of which Lehman Bros. acted as representative, did not constitute a sale or sales of property held by the taxpayers or any of them for sale to customers in the ordinary course of their trade or business. To the contrary it seems obvious to us that the sale to the group of underwriters represented by Lehman Bros. constituted the liquidation of investments made by the members of the selling syndicate who, in this respect, were traders in securities rather than dealers in or merchants of securities. Petitioners were clearly engaged in a speculation in stock for their own accounts and not in the retail sale of securities to customers as securities dealers. See Harry M. Adnee, 41 T.C. 40">41 T.C. 40, 43 (1963). For discussions of the distinction between dealers and traders in securities with particular reference to "customers," see Francis Shelton Farr, 44 B.T.A. 683">44 B.T.A. 683, 690-691 (1941); and George R. Kemon, 16 T.C. 1026">16 T.C. 1026, 1032-1033 (1951). In the latter case we made the following statement:}

In determining whether a seller of securities sells to "customers," the merchant analogy has been employed. Schafer v. Helvering, 299 U.S. 171">299 U.S. 171; Van Suetendael v. Commissioner, 152 F. 2d 654, affirming a Memorandum Opinion of this Court (Sept. 25, 1944); Leach Corp. v. Blacklidge, 23 F. Supp. 622">23 F. Supp. 622; Warren Co. v. United States, 53 F. Supp. 578">53 F. Supp. 578; Regulations 111, sec. 29.22(c)-5. Those who sell "to customers" are comparable to a merchant in that they purchase their stock in trade, in this case securities, with the expectation of reselling at a profit, not because of a rise in value during the interval of time between purchase and resale, but merely because they have or hope to find a market of buyers who will purchase from them at a price in excess of their cost. This excess or mark-up represents remuneration for their labors as a middle man bringing together buyer and seller, and performing the usual services of retailer or wholesaler of goods. Cf. Schafer v. Helvering, supra;Securities v. Commissioner, 95 F. 2d 384, certiorari denied, 305 U.S. 617">305 U.S. 617, affirming 36 B.T.A. 168">36 B.T.A. 168; Commissioner v. Charavay, 79 F. 2d 406, affirming 29 B.T.A. 1255">29 B.T.A. 1255. Such sellers are known as "dealers."

Contrasted to "dealers" are those sellers of securities who perform no such merchandising functions and whose status as to the source of supply is not significantly different from that of those to whom they sell. That is, the securities are as easily accessible to one as the other and the seller performs no services that need be compensated for by a mark-up of the price of the securities he sells. The sellers depend upon such circumstances as a rise in value or an advantageous purchase to enable them to sell at a price in excess of cost. Such sellers are known as "traders."

We have previously stated in our Findings of Fact that none of the petitioners in these consolidated cases is a securities dealer and that the second syndicate is not a securities dealer. We think the record clearly shows that the second syndicate's major purpose was to hold the Northwestern stock for a period of time in order to realize capital gain from the excess of its market price over the option price, either anticipated or already existing. *68 were expressly designed to reach the very type of transaction involved in these cases. Despite respondent's assertion to the contrary, there are no "unique or unusual facts" which would render these statutory provisions inapplicable to the petitioners in the stock transaction here at issue.

The cases cited by respondent which do not involve sales of securities are clearly distinguishable from the instant proceedings. The only case cited to us by respondent in which long-term capital gains treatment was denied on an alleged sale of a security held for investment for more than 6 months is Nielsen v. United States, 333 F. 2d 615 (C.A. 6, 1964), modifying 212 F. Supp. 801">212 F. Supp. 801 (M.D. Tenn. 1962). In the Nielsen case the taxpayer, a general partner in the partnership of James C. Bradford & Co. which was a dealer and trader in securities and which is also involved in the instant proceedings, brought a suit for refund of taxes paid with respect to his distributive share of partnership income. The Court of Appeals held, with respect to two different transactions involving stock of two different corporations, that certain of the stocks held by the partnership James C. Bradford & Co. in its own name for more than 6 months in compliance with the formal identification requirements of section 1236 were nevertheless held for sale to customers in the ordinary course of its business as a dealer in securities. From the facts as recited by the Court of Appeals and the District Court, it appears that in each of the transactions the partnership purchased the stock in question pursuant to an order of the customer and held the stock for the benefit of the customer for whom it had been purchased and not for the partnership's own benefit, even though the stock was held in the partnership's name.

It is obvious that the instant cases are factually distinguishable from the Nielsen case. In the instant cases the record clearly shows that the second syndicate had no commitment from any prospective purchaser to buy the shares when it purchased them through Aragon from Nationwide and did not purchase them on behalf of or at the order of any customer. The record shows with utmost clarity that the second syndicate held the Northwestern stock solely for the benefit of its participants, who expected to realize a profit from the ultimate sale of the stock at a price in excess of the price paid for it by the syndicate and far in excess of the normal "mark-up" contemplated by securities dealers who "make a market" in over-the-counter stock. It is true that J. C., the manager of the syndicate, contemplated that the stock, or at least a large part of it, would be sold at a large profit, if possible, to a group of underwriters to be formed for the purpose of selling, in turn, the stock to the customers of the members of such group, and probably contemplated that Lehman Bros. would organize and represent the underwriters. However, under no reasonable theory can it be said that petitioners or any syndicate of which they were members acquired the stock here in question (or the option to purchase such stock) at the order or on behalf of Lehman Bros. or any underwriting group formed by it or of any other "customer." Thus the Nielsen case has no relevance to the question before us.

We hold that the Northwestern stock held and sold by or on behalf of petitioners through the second syndicate was a capital asset, and that the sale of some of this stock by the second syndicate at a price in excess of its cost basis after being held for more than 6 months produced a long-term capital gain for the second syndicate's participants, including petitioners. Mirro-Dynamics Corp. v. United States, 374 F. 2d 14 (C.A. 9, 1967). None of the petitioners involved in the cases before us were members of the underwriting group which purchased the Northwestern stock. The fact that members of the underwriting group were dealers in securities and the fact that the ultimate sales of the Northwestern stock were made by them to their own customers are in no way relevant to the question of whether the Northwestern stock, or any option in connection therewith, constituted property held by the petitioners for sale to their customers in the ordinary course of their trade or business.

Decisions will be entered for the petitioners.

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Footnotes

• 1. Cases of the following petitioners are consolidated herewith: James C. Bradford, Jr., docket No. 3226-67; and James C. Bradford and Eleanor A. Bradford, docket No. 3227-67.↩

• 2. Sec. 1221(1), I.R.C. 1954↩. Hereafter all statutory references are to the Internal Revenue Code of 1954, unless otherwise indicated.

• 1. Elected on May 18, 1961.↩

• 3. The printer's proof of the "Preliminary Prospectus" was dated June 7, 1962.↩

• 4. On Aug. 24, 1962, the market price per share of Northwestern stock "was in the area of $ 180."↩

• 5. Northwestern was a party to the underwriting agreement only because its stock was to be offered for sale in the public offering. Its undertakings therein were with regard to matters which might affect the validity of the stock and of its sale to or by the underwriters and which might affect its value.↩

• 6. The corresponding paragraphs in the other two dockets in these consolidated proceedings are the same except for the first sentence, which was a denial, and the names of the petitioners.↩

• 7. No issue has been raised by either party in these proceedings as to whether the first syndicate was a parnership for tax purposes or as to the tax treatment of the sale by the first syndicate of its option to purchase stock of Northwestern.↩

• 8. "Respondent's Request for Findings of Fact" as set out in his "brief" filed in these cases covers 147 pages. To a large extent it consists of unedited quotations from the over-voluminous documentary evidence. Respondent's argument tends to become obscured by the undiscriminating recitation of oral and written testimony.↩

• 9. In that case the basic finding was that taxpayer partners in a real estate venture "would seek constantly to construct vehicles for development, in which they would probably participate in one form or another, in order to be in a position to sell the acreage involved in slices of varying sizes as promptly as possible" -- and hence that there was an indirect participation by taxpayers in sales and development activities.↩

• 10. In this case, the purchase by the joint venture of the property later sold (hundreds of gun hoists) was a single transaction. However, the property was sold in three transactions after being offered for sale to the general public and after strenuous sales activities by certain members of the venture.↩

• 11. When the second syndicate purchased the Northwestern stock, it did so at a price below the stock's then-current market price.↩