Provost v. United States

Background

A pair of partners who worked as stock brokers on the New York Stock Exchange paid revenue stamps on tickets used when shares were loaned and later returned during 1917–1920. They sued to recover those stamp costs, arguing that the loan and return of shares were not taxable transfers under the War Revenue Act of 1917 and the Revenue Act of 1918. The trial was on agreed facts, and the lower court ruled for the Government; the brokers appealed to the Supreme Court.

Reasoning

The core question was whether the loan of stock and the later return of borrowed stock count as transfers of legal title subject to the two-cent-per-share tax. The Court explained how stock loans commonly support short sales: borrowed certificates are delivered so a short sale can be completed, and the borrower and lender exchange cash deposits and contractual obligations. The Court found that, as a legal matter, these steps transfer the incidents of ownership and thus amount to transfers of legal title. The Court also reviewed administrative decisions and the statutory language, noting Congress reenacted the taxing language in 1918 without change. Because the statute plainly reached “transfers of legal title,” the Court held the loan and return tickets fell within the tax.

Real world impact

The decision means brokers who loan or borrow shares in the course of short sales must treat those loan and return steps as taxable and bear the stamp cost. The ruling affirms the lower court judgment, leaving the tax in force for the period and transactions described.