Wilson

The Commissioner of Internal Revenue petitions for review of the decision of the Tax Court in the above case. Petitioner contends that the Court erred in allowing as expenses dividends paid on stocks in which the respondent had a short position. The facts were presented by stipulation which were adopted as findings and are as follows:

Respondent throughout the taxable years 1938, 1939 and 1940 was engaged as a trader in the business of dealing in securities on his own account. He made many short sales of securities, and was continuously in a short position as a trader. He paid as dividends on stock which he had sold short $19,242.62 in 1938, $23,557.34 in 1939 and $28,044.69 in 1940.

The mechanics of short sales, such as those involved here, were described by the Supreme Court in Provost v. United States, 269 U. S. 443, 450-452 , 46 S.Ct. 152 , 70 L.Ed. 352 . The short seller sells securities which he does not then own and which, therefore, are not available for immediate delivery. But the rules of the stock exchange require delivery of stock to the purchaser on the next business day following the sale. To comply with this requirement, the short seller must arrange to borrow an…