Schafer v. Helvering

Background

The case involves three partners in Schafer Brothers, a brokerage firm at 120 Broadway and members of the New York Stock Exchange. The firm traded securities for customers and also bought and sold securities for its own account in an "Error Account." The tax commissioner treated the Error Account holdings as non-dealer property and valued them at cost, finding deficiencies against the partners. The Board of Tax Appeals and the lower court upheld the commissioner’s method, and the partners asked the Court to decide whether they were a "dealer in securities" entitled to inventory those holdings under the tax rules.

Reasoning

The Court focused on the narrow question whether the partnership fit the Treasury Regulation’s definition of a dealer in securities. The opinion explained that a dealer is a merchant who regularly buys securities to sell to customers with a view to profit. The Court noted Schafer Brothers was not a "Specialist," and accepted the Board’s finding that the Error Account purchases were speculative buys held for resale to any buyer rather than inventory held to serve customer orders. Considering prior cases the Court found no conflict with its decision. Because the evidence supported the Board’s view that the firm was not a dealer under the controlling regulation, the Court affirmed the judgment against the partners.

Real world impact

The ruling lets the tax commissioner value similar brokerage holdings at cost when the firm does not qualify as a dealer, which can raise taxable income and produce tax deficiencies. The decision upholds lower-court and agency interpretations of the dealer-inventory rule for these facts.