4 T.C. 252">*253 Respondent has determined deficiencies in income taxes for the calendar years 1940 and 1941 in the amounts of $ 1,584.70 and $ 1,205.34, respectively. The issue is the correctness of respondent's action in treating as ordinary income, includible in its full amount in gross income, the gain derived by petitioner in sales of certain real estate and securities, petitioner having reported the profit from these transactions as short term capital gains includible in gross income only to the extent of their excess over short term capital losses. Certain of the facts were stipulated and others were established by testimony on the hearing.

FINDINGS OF FACT.

Petitioner is a corporation engaged in the banking business and organized under the laws of West Virginia, with its principal office1944 U.S. Tax Ct. LEXIS 29">*31 and place of business at Charleston, West Virginia. Its returns for the periods here involved were filed with the collector of internal revenue for the district of West Virginia. Petitioner is a member of the Federal Reserve System.

During the calendar year 1940 petitioner sold three parcels of real estate, two of which it acquired within that year and the third in the year previous, all acquisitions being by foreclosure of liens obtained in connection with regular loan transactions in the carrying on of its usual banking business. On two of the sales petitioner realized a profit and on the third, a loss. On its returns petitioner treated these transactions as sales of capital assets giving rise to short term loss or gain.

Petitioner is not permitted under the laws of West Virginia to carry on a real estate business and is required, in such cases as those mentioned above, to dispose of such real estate within a period of five years. As a result of this requirement it has been petitioner's established practice to immediately list for sale with a subsidiary corporation engaged in the real estate business any real estate to which it takes title as a result of efforts to collect 1944 U.S. Tax Ct. LEXIS 29">*32 upon its loans.

In determining the deficiency for 1940, respondent has treated the gains and loss from the disposition of these three parcels of real estate as ordinary gain or loss.

During 1940 and 1941 the Treasury announced offerings of Treasury notes or bonds, for a portion of which petitioner in each instance subscribed. Since it was not known before allotment what percentage 4 T.C. 252">*254 of the subscription would, in fact, be allotted by the Treasury, it was petitioner's custom to subscribe for a much larger amount in the bonds or notes to be issued than the amount it actually desired to purchase as an investment. Subsequently, in each instance, upon receiving notice from the Treasury of the amount of its allotment, petitioner sold on an "if and when issued basis" the excess amount of the securities over and above those it desired to keep. In some cases it sold upon this basis its entire allotment by the Treasury. These sales were not to depositors of the bank, but to one or the other of three financial houses engaged in the business of dealing in government securities and with which petitioner had carried out transactions of this character over a term of years. In each instance, 1944 U.S. Tax Ct. LEXIS 29">*33 the bonds in question were transferred direct to petitioner's purchaser on the date of their issuance by the Federal Reserve Bank at Richmond.

The date of each transaction of this character in the two taxable years and the amount of profit realized by petitioner thereon are stipulated. Petitioner treated these transactions as sales and exchanges of capital assets giving rise to capital gain, and in determining the deficiencies respondent has treated the profits in each instance as ordinary gain.

During the year 1940 petitioner participated in a syndicate which, on August 1 of that year, purchased and sold $ 18,000 par value United States Treasury notes, petitioner's share of the profit from this transaction being $ 21.19, which it treated as capital gain and which respondent in determining the deficiency treated as ordinary income.

During the calendar year 1940 petitioner entered into an arrangement with Young, Moore & Co. for the purchase of paving certificates issued by municipalities in the State of West Virginia, representing obligations of individuals. Under this agreement petitioner was to advance the necessary funds for the purchase of the certificates, was to receive interest1944 U.S. Tax Ct. LEXIS 29">*34 at 4 percent on the daily balance of such advances, and was to participate to the extent of 50 percent in any other profit resulting from the payment of the certificates at maturity.

During the years 1940 and 1941 certain of the certificates acquired under this arrangement were paid by the individuals indebted thereunder. Petitioner's share of the profits upon such payments amounted to $ 2,959.88 for 1940 and $ 1,595.97 for 1941, which it treated on its returns for those years as capital gains, but which respondent, in determining the deficiencies, treated as ordinary income.

On October 21, 1940, petitioner took over five shares of stock of Cities Service Co. which had been put up as collateral on a loan made by petitioner. On December 23, 1941, this stock was sold at a profit of $ 10.06, which petitioner reported on its return as a short term 4 T.C. 252">*255 capital gain, and respondent, in his determination of the deficiency, has treated as ordinary gain.

OPINION.

The issue is whether or not the parcels of real estate and the securities acquired by petitioner, under the circumstances set out in our findings of fact, constituted capital assets within the purview of section 117 (a) (1) 1944 U.S. Tax Ct. LEXIS 29">*35 of the Internal Revenue Code, 1939 edition. ¹

There is no doubt that in each instance these assets constituted "property held by the taxpayer." Respondent does not contend that they constituted "stock in trade" or "property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year." His contention1944 U.S. Tax Ct. LEXIS 29">*36 is that they constituted "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business."

With respect to the three parcels of real estate involved, respondent relies on G. C. M. 21497, C. B. 1939-2, p. 187, which holds that in all cases parcels of real estate acquired by a bank by foreclosure must be considered as held by it primarily for sale to customers in the ordinary course of trade or business and that the gains and losses resulting from its disposition are ordinary in character. We think, however, that the reasoning upon which the announced rule is predicated can not be reconciled with our view expressed in Thompson Lumber Co., 43 B. T. A. 726. We held there that a taxpayer corporation whose principal business was furnishing lumber and building material and which took over, either by foreclosure or voluntary conveyance, various properties representing the security pledged for unpaid accounts, even though its charter permitted it to legally carry on a real estate business, was not by reason of such acquisitions to be considered as carrying on such a business and that the1944 U.S. Tax Ct. LEXIS 29">*37 gains and losses realized upon the disposition of these properties were capital in character.

In the present case the facts support more forceably than the facts in Thompson Lumber Co., supra, the conclusion that the parcels of real estate were capital assets. In the latter case there were a number of properties involved, while here we have only three instances of acquisition and sale in the two years presented. Cf. Ehrman v. Commissioner, 4 T.C. 252">*256 120 Fed. (2d) 607; Snell v. Commissioner, 97 Fed. (2d) 891. In Thompson Lumber Co., supra, the taxpayer was legally empowered under its charter to carry on a real estate business, while in this case the petitioner is precluded by section 3128 of the West Virginia Code of 1937, ² from engaging in such business. That statute permits the acquisition of real estate by a banking institution only for use as its offices or such as is acquired as an incident, of the satisfaction of debts, and properties acquired in the latter case are required by the statute to be disposed of at the earliest practicable date.

1944 U.S. Tax Ct. LEXIS 29">*38 We think it unreasonable to conclude that petitioner, forbidden by state law to carry on a real estate business, was actually engaged in that business and selling real estate to customers in the regular course thereof, merely because it had acquired and sold three parcels of real estate over a period of two years, the transaction in each instance being an incident to the collection or recovery of money loaned by it in the transaction of its regular banking business. We think that the three parcels of real estate here involved were capital assets in petitioner's hands within the purview of section 117 (a) (1), supra. Thompson Lumber Co., supra.

With respect to petitioner's transactions in disposing of government securities allotted to it by the United States Treasury, we think the facts clearly demonstrate that these securities were never held by petitioner as investments, but were acquired for sale in the regular course of its business. It appears that these transactions have long been carried on by petitioner and that it has several firms as its usual 4 T.C. 252">*257 customers for such securities. The plan to sell was arranged prior to the acquisition1944 U.S. Tax Ct. LEXIS 29">*39 of the securities, which were transferred on issuance direct to petitioner's customers. The sale being coincident with the acquisition, the bonds in question were not an investment in petitioner's hands. Respondent is sustained in his treatment of the gain on their sale as ordinary income.

This same reasoning applies with equal force to the syndicate transaction of petitioner in the purchase and sale, on the same date, of certain Treasury bonds and respondent's action on this item is likewise accordingly sustained.

As to the acquisition of certain paving certificates as detailed in the findings of fact, it is noted that these were not sold or exchanged, but were paid on or before maturity by the obligors. In such case the payment does not constitute a sale or exchange for tax purposes under section 117 (f) of the Internal Revenue Code, 1939 edition, unless they be those of a "corporation (including those issued by a government or political subdivision thereof), with interest coupons or in registered form." There is no indication that the paving certificates here were of that character. The evidence indicates that they constituted personal obligations of the abutting property owners1944 U.S. Tax Ct. LEXIS 29">*40 secured by a lien upon such property. And it is not established that the certificates either carried "interest coupons" or were "in registered form."

Respondent contends that the item of gain in the sum of $ 10.06, realized on the sale of five shares of stock of Cities Service Co., was ordinary gain, since the stock was taken over as collateral upon a loan and, under G. C. M. 21497, supra, it must therefore be treated as held for sale in the regular course of business and the gain upon sale is ordinary in character. However, for the reasons above set out with respect to the issue upon the acquisition and sale of the real estate here involved, we hold that these shares of stock were capital assets in petitioner's hands. They can not be denied that character merely because acquired through the enforcement of a lien as an incident of the collection of an indebtedness.

Decision will be entered under Rule 50.