the rules of the exchange, delivery must be made, appears in the decision of the United States Supreme Court in George D. Provost v. U. S., 269 U. S. 443, 5 AFTR: 5681, which contains the following statement:

"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 certificate for which are not within his control so as to be available for delivery at a time when, under the rules of the Exchange, delivery must be made." [Italics ours.]

In determining the weight that should be given to this definition, it should be borne in mind that the question at issue in the Provost case was one of stamp-tax liability and not one of income-tax liability. The question before the Court was whether certain transfers of stock in connection with borrowings by vendors who were unable to make delivery on settlement date were subject to the stamp tax imposed on transfers of stock. For this purpose it gave a definition of "short sale" which included every situation in which there would be a borrowing of stock.

While the decision in the Provost case has sometimes been cited in incometax cases, an examination of such cases will show that the citation was for the first part of the definition re "the sale of shares which the seller does not own.' The income-tax cases cited in this memorandum that failure to make timely delivery does not of itself make a sale a "short sale" and that as we have pointed out, intent is the controlling factor.

EXHIBIT A

STATE OF NEW YORK, County of New York, 88:

Frederick S. Todman, being duly sworn, deposes and says:

I am a certified public asscountant and I am the senior member of the public accounting firm of Frederick S. Todman & Co. with offices at 60 Beaver Street, New York, N. Y.

I have been a certified public accountant for more than 30 years. A substantial part of my practice has consisted of the auditing of accounts of members of the New York Stock Exchange and New York Curb Exchange. At the present time my firm acts as accountants for more than 50 members, or member firms, of these exchanges. For a number of years I was a partner in a member firm of the New York Stock Exchange.

I am the author of a textbook titled "Brokerage Accounts," published in 1916 and issued in 1921 in a revised and enlarged form under the title "Wall Street Accounting" and have written numerous articles on various accounting problems of members of security exchanges.

I am thoroughly familiar with the practice of members of the New York Stock Exchange and of other persons in the financial community who trade in securities with respect to the treatment of sales of securities as long sales or as short sales, as such practice existed prior to the promulgation of Securities and Exchange Commission rule X10A-1 in February 1938. I have been asked the following question:

Under the practice prevailing prior to February 1938, would a sale of stock made under the following circumstances be a long sale or a short sale? A member of the New York Stock Exchange purchases bonds which are currently convertible into stock of the issuing corporation. Shortly after such purchase the member makes a sale of stock of the issuing corporation in a quantity equal to the number of shares he will receive upon the conversion of the bonds he has purchased.

The purpose of the member in making such sale of stock is to realize a profit based upon the current difference between the cost of the bonds, adjusted for all payments to be made on conversion and the selling price of the stock. It is his intention that the shares of stock received upon the conversion of the bonds shall be applied to complete the sale. To carry out this intent, he gives oral instructions to those of his employees who are charged with the receipt and delivery of securities that upon the receipt of the bonds from the vendors thereof, they are to be sent to the transfer agent of the issuing corporation for conversion and that upon receipt of the stock from the transfer agent. the stock is to be used forthwith to complete the sales of stock theretofore made. At the time the sale of stock is made, the member is aware of the fact that the vender of the bonds will be obligated to deliver the bonds to him on the same day that he is obligated to deliver stock to the vendee of the stock and that it will take a day

or more after the receipt of the bonds to convert the bonds into stock. He therefore instructs his employees that if, at the time that he is obligated to deliver stock to the vendee, they have no stock received on conversion of the bonds available for delivery, they should fail to deliver the shares to the vendee-broker until the stock is received from the transfer agents in exchange for the convertible bonds heretofore deposited, or they should borrow stock temporarily to make delivery and later apply the stock received on conversion to liquidate the previous borrowing of the shares. The instructions so given are executed by the employees of the broker who made the sale of the stock against the convertible bonds.

It is my opinion that sales made in the manner described above would be long sales and not short sales. My reasons for this opinion are as follows:

Historically, a short sale of a security is a sale of a security that the seller does not own at the time of sale. Thus, on page 41 of Brokerage Acounts, I said "By the expression 'short' is meant the selling of shares not previously purchased or held, but sold with the expectation of realizing a profit through the decline in value of such shares." I repeated this definition on page 28 of Wall Street Accounting. Since I wrote these texts, it has been recognized that a person may make a “short sale" of a security in which he has a "long" position. However, where a person has a long position in a security and makes a sale of the same security, the sale will not be regarded as a "short" sale unless he indicates clearly at the time of the sale that he has no intention of currently using his long position to complete the sale. The mere fact that at the time of the sale, the long security is held in such a manner that it will not be available for delivery at the time delivery against the sale must be made, does not make the sale a "short" sale. A very common instance is where the vendor owns the security which he has sold but such security is in a safe deposit box to which he does not have access until after settlement date fixed by the rules of the exchange on which the sale is made. The broker making the sale must "fail to deliver" or "borrow" the shares. But such "failing" or "borrowing" does not convert the sale into a short sale.

The fact that at the time of the sale, the vendor does not own the security which he has sold, but does own a security which is convertible into the security sold, does not change the situation. For all purposes, I would regard the ownership of security A which is convertible into security B, as being the ownership of security B.

Where a person is long a security and makes a sale of the same security, the major factor in determining whether the sale is a "short" sale or a "long" sale is intent. Such intent is evidenced by the vendor's actions both before and after the sale. On the basis of the facts stated in the question, it is clear that the vendor's intention was to make a sale of securities which he had purchased and not to make a short sale.

FREDERICK S. TODMAN.

Subscribed and sworn to before me this 28th day of May 1952.

Term expires March 30, 1953.

AUGUST WILLS, Notary Public, State of New York.

STATE OF NEW YORK,

County of New York, s8:

EXHIBIT B

Max Jacquin, Jr., being duly sworn, deposes and says:

From June 1929 until April 1946, I was associated with the New York Stock Exchange in various capacities. I served as secretary of a number of its committes, including the committee on arbitration, the committee on foreign business, and various special committees which included supervision of the conduct of domestic and foreign arbitrage transactions of members. I was successively assistant secretary and assistant vice president of the exchange. My duties included working with members of the exchange, public officials and legislators in the solution of problems of stamp tax and income tax liabilities which were common to a substantial portion of the membership of the exchange.

In the course of my work, I became thoroughly familiar with the practice of members of the exchange and of other members of the financial community with respect to the designation of sales of securities as long sales or short sales, par

ticularly insofar as arbitarge transactions are concerned. I have been asked the following question:

Under the practice prevailing prior to February 1938, would a sale of stock made under the following cirmustances be a long sale or a short sale?

A member of the New York Stock Exchange purchases bonds which are currently convertible into stock of the issuing corporation. Shortly after the purchase of the bonds, the member makes a sale of stock of the issuing corporation in a quantity equal to the number of shares he will receive upon the conversion of the bonds he has purchased. The purpose of the member in making such sale of stock is to realize a profit based upon the current difference between the cost of the bonds, adjusted for all payments to be made on conversion, and the selling price of the stock. It is his intention that the shares of stock received upon the conversion of the bonds shall be applied to complete the sale. To carry out this intent he gives oral instructions to those of his employees who are charged with the receipt and delivery of securities that upon the receipt of the bonds from the vendors thereof they are to be sent to the transfer agent of the issuing corporation for conversion and upon the receipt of the stock from the transfer agent the stock is to be used forthwith to complete the sales of stock theretofore made. At the time the sale of stock is made, the member is aware of the fact that the vendor of the bonds will be obligated to deliver the bonds to him on the same date that he, the member, is obligated to deliver stock to the vendee of the stock and it will take a day or more after the receipt of the bonds to convert the bonds into stock. He therefore instructs his employees that if, at the time that he is obligated to deliver stock to the vendee they have no stock received on conversion of the bonds available for delivery, they should endeavor to obtain the consent of the vendee's broker to a failure to make delivery and, if they cannot obtain such consent, they shoud borrow stock temporarily to make delivery and apply the stock received on conversion to satisfy the borrowings. The instructions given are carried out.

It is my opinion that the sales made under such circumstances would be long sales and not short sales.

Where an individual owns a security and makes a sale of the same security he may be making a long sale or a short sale. Which it is will depend on his intent. If at the time he makes the sale he intends to use his long stock to complete the sale, the sale will be a long sale and not a short sale. For example, if the stock which he is long is in a safe deposit box and he cannot get to such box in time to make delivery of the stock at the time delivery must be made under the rules of the stock exchange, he has nevertheless made a long sale. The fact that he fails to make delivery on delivery date or borrows stock to make such delivery does not make the sale a short sale. Likewise, if an individual owns a convertible bond and he makes a sale of stock into which the bond is convertible, he may be making either a long sale or a short sale. If at the time he makes the sale it is his intention that the bonds which he owns are to be converted into the stock and the stock received upon the conversion is to be used to complete the sale, he is making a long sale and not a short sale. Obviously, the individual's future conduct is a fact to be taken into consideration in determining his intent. If, upon making the sale of the stock, he forthwith takes the steps necessary to convert the bonds into the stock and actually uses the stock received upon the conversion to complete the sale, such facts will be evidence of his intent to make a long sale.

I am familiar with the fact that in 1938 the Securities and Exchange Commission promulgated a ruling known as rule X-10A-1, the purpose of which was to regulate short sales. This ruling required all orders for sales of securities executed by members of the national securities exchange to be designated as either long or short. The provisions in this rule as to the conditions which must be met before a sale could be marked long were such that the sale of stock against a long position in bonds convertible into the stock could not be designated as long sales. Members of the exchange who in the course of their business made such sales formed a committee which appeared before the Securities and Exchange Commission and urged a change in the requirement for designation of sales as long sales so as to permit the sales of the kind herein referred to, to be designated as long sales. I knew the members of this committee and discussed their problem with them, their associates, and their counsel. Their position was that such sales were not short sales within the generally accepted meaning of the term "short sales" and in this position I concurred with them.

I understand that, for the purpose of facilitating the administration of its rule relating to short sales, the Securities and Exchange Commission decided not

to change its requirements for the designation of sales as long sales. Instead, it provided that certain sales which were required to be marked short sales would be free from the restriction applicable to other short sales as to the price at which the sale could be made. Since, at the time this question arose, the only consequence of the designation of a sell order as a short sale was to restrict the price at which the sale could be made, it was felt that there was nothing to be gained by pressing the Securities and Exchange Commission to have its requirements for designation of the sales herein discussed as long sales, as long as the Commission itself exempted such "short" sales from the restriction.

EXHIBIT C

STATE OF NEW YORK,

County of New York, ss:

Richman Proskauer, being duly sworn, deposes and says:

I have been a member of the New York Stock Exchange since 1924. I am now a partner in the firm of Rosenbaum, Proskauer and Russhon, a member firm of the New York Stock Exchange, with its office at 160 Broadway, New York, N. Y.

In 1938 I was a member of a committee of members of the New York Stock Exchange which conferred with the Securities and Exchange Commission for the purpose of obtaining a revision of rule X-10A-1 of the Securities and Exchange Commisison. The facts concerning the work of this committee were as follows:

In the early part of 1938, the Securities and Exchange Commission had promulgated a ruling, designated as rule X-10A-1, which was to become effective on February 8, 1938. Such rule provided that "(a) no person shall, for his own account or for the account of any other person, effect on a national securities exchange a short sale of any security (1) below the price at which the last sale thereof, regular way, was effected on such exchange, or (2) at such price unless such price is above the next preceding different price at which a sale of such security, regular way, was effected on such exchange ***; (b) no member of a national securities exchange shall, by the use of any facility of such exchange, execute any sell order unless such order is marked either 'long' or 'short'; (c) no member of a national securities exchange shall mark a sell order 'long' unless (1) the security to be delivered after sale is carried in the account for which the sale is to be effected, or (2) such member is informed that the seller owns the security ordered to be sold and, as soon as is possible without undue inconvenience or expense, will deliver the security owned to the account for which the sale is to be effected."

A number of firms who were member firms of the New York Stock Exchange carried on operations which involved the purchase of convertible securities and the sale almost immediately thereafter of the security into which the security purchased was convertible. The sales made in such transactions could not qualify as long sales under the restrictions in subdivision (c) of the rule for the reason that the security sold was not "carried in the account for which the sale is to be effected" nor could it be said the seller "owns the security ordered to be sold." The result was that the orders for such sales would have to be marked "short" and would be subject to restriction as to the price at which the sale could be made.

Such member firms appointed a committee, of which comittee I was a member, to confer with the Securities and Exchange Commission for the purpose of obtaining such change in the wording of subdivision (c) as would permit selling orders of the kind herein described to be marked "long." The committee spent 2 days in Washington conferring with members of the Commission and members of its staff. The gist of the argument made by the committee was that the financial community had not previously regarded sales of the kind herein described as short sales in that, if the seller was long security A, and security A was convertible into security B, he was, in effect, the owner of security B.

The Commission declined to amend subdivision (c). It did, however, agree to add to subdivision (d) of rule X-10A-1, which subdivision contained a list of sales to which the price restriction of subdivision (a) would not apply, a new item which would also exempt sales of the type in question from the price restriction. Such exemption was later embodied in subdivision (7) of subdivision (d) which became effective on April 3, 1938. While the members of the committee would have preferred a change in subdivision (c) so as to permit the sales to be made as long sales, the Commission's solution had the same effect,

i. e., the sales could be made without restriction as to price. Consequently, the committee accepted the Commission's solution.

At that time (i. e., in 1938), once the restriction on selling price was removed, it was immaterial to the members of the committee and to the member firms they represented whether the sales were marked as "long" or as "short" exempt. I am certain that, had there been any unfavorable tax consequence from the designation of the sales as "short" exempt, the members of the committee would have adhered to their position that the sales were not short sales and would have insisted on such change in subdivision (c) as would have permitted the sales in question to be marked "long." I know that I, for one, would have done so.

RICHMAN PROSKAUER.

Subscribed and sworn to before me this 3d day of June, 1952.

Term expires March 30, 1954.

LOUIS A. KATZ, Notary Public, State of New York.

PEERLESS CEMENT CORP., Detroit 26, Mich., April 20, 1954.

Hon. CHARLES E. POTTER,

Senate Office Building,

Washington, D. C.

DEAR SENATOR POTTER: I have recently been advised that during the current session there is a House bill, H. R. 8361, having to do with rapid amortization of machinery and equipment for elimination of air and water pollution by industry. I understand this bill was introduced by Representative Kersten of Wisconsin as an amendment to the 1954 revenue bill now in the Senate.

Anything you may be able to do toward legislation furthering the program of rapid amortization of capital investment of this kind, I believe, would be for the best interests of the public because it would encourage industry to provide capital for this.

I hope the amendment will be passed by the House.
Sincerely,

W. C. RUSSELL.

CHICAGO, ROCK ISLAND AND PACIFIC RAILROAD CO.,
Chicago, April 14, 1954.

Hon. EUGENE D. MILLIKIN,

United States Senate, Washington, D. C.

DEAR SENATOR MILLIKIN: I know that the Finance Committee has a tremendous task before it in studying and reporting upon H. R. 8300: and consequently it is with some hesitation that I make the request that consideration be given to a change in one of its provisions.

Section 309 imposes a corporate tax which has no counterpart in the presentTM law. Obviously, it is intended to serve the entirely laudable purpose of preventing stockholders in closely held corporations from converting income into capital gain by the device of issuing preferred stock to themselves instead of declaring a dividend. Such tax avoidance is not, and ordinarily cannot be, practiced by stockholders of corporations whose stock is publicly held; and therefore, I believe that the House bill goes too far in making section 309 applicable to such corporations.

The redemption of preferred stock is frequently desirable from the standpoint of good corporate management. It would be very unfortunate if such redemptions were to be placed under the cloud of possible exposure to this confiscatory tax merely in order to eliminate the possibility of tax avoidance by the stockholders of closely held corporations. Surely it is not necessary to close the door so hard that the whole house falls down.

Section 309 (a) provides five exemptions from the tax. These are not sufficient to eliminate from the possibility of its application many preferred stock redemptions by publicly held corporations, which are entirely proper and completely free from any taint of tax avoidance abuses. I believe that the purposes of the section could be fully effectuated if its application were confined to closely held corporations, and consequently I suggest that there be added a sixth exemption reading as follows: