Case E24

Judges:
FE Dubout Ch
G Thompson M
N Dempsey M

Court:
No. 3 Board of Review

Judgment date: 5 July 1973.

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F.E. Dubout (Chairman): The reference of this taxpayer relates to the year of income ended 30 June 1970, and the subject matter of the reference is a surplus of $17,567 made by the taxpayer on the sale of certain shares. The Commissioner has included the amount of $17,567 in the taxpayer's assessable income, as a profit caught by the first limb of sec. 26(a).

2. Having studied again the considerable volume of evidence in this case, I consider that the facts really relevant to the determination of the matter in issue can be set out in a fairly brief form. The taxpayer has been carrying on a business on his own account for about twelve years. It would appear that initially the taxpayer's interest in company shares was stimulated by advice and encouragement from his father, who had set out in 1949 or 1950 to build up a portfolio of shares from which there would be, upon his retirement, some supplement to his superannuation. In about 1954, the taxpayer's father first consulted a certain sharebroker and thenceforth relied implicity on the advice of that broker. It is sufficient to say that in the ensuing years, guided by this broker, the taxpayer's father, and his mother also, acquired most impressive portfolios of shares in solid commercial or industrial companies, or established mining companies. If there is one thing that is clear from the

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evidence of the taxpayer's father, and from an examination of the investment portfolios of both the father and the mother, it is that the taxpayer's parents eschewed any involvement with shares of a speculative nature.

3. The taxpayer's first purchase of shares was made following upon a gift to him from his father of rights to take up shares. The taxpayer exercised the rights and utilised his own moneys to pay for the shares. This was at a time when the taxpayer was a student at a University, from which he obtained his degree in 1959. After a period during which he made some study of the shares market through a specialised financial newspaper, and had discussions with his father, the taxpayer purchased shares in two companies in June 1963, acting on advice given by his father's broker, not directly to the taxpayer himself, but to his father. In his first personal dealings with the sharebroking firm, the taxpayer dealt with a partner other than the partner who habitually advised his father, and the taxpayer was not, in general, favourably impressed with advice received from this other partner. Towards the end of 1964, the taxpayer met the partner who advised his father (I shall refer to that partner henceforth simply as ``the broker'') and I think it is true to say that thereafter the taxpayer purchased only shares that were recommended by the broker.

4. By 24 March 1970, the taxpayer had amassed a portfolio of shares which had a market value in excess of $160,000. The companies selected were similar in character to those chosen by the taxpayer's father, i.e. profitable commercial or industrial enterprises, and if the taxpayer ventured into mining then it would be with established mining companies. Since he first began to acquire shares, the taxpayer had made some sales of shares, but such sales were explicable as necessary for the proper reorganisation of the portfolio. Some companies failed to produce adequate dividends, others lacked indications of potential growth, and the shares were sold to enable funds to be invested more advantageously.

5. What I have said in the preceding paragraph would suggest that, absolutely without exception, every share that the taxpayer ever purchased was of the good, solid, long term investment type. In fact, there was one exception to the general rule, and that was the purchase by the taxpayer, on 30 October 1969, of one hundred shares in a no liability company prospecting for minerals. These shares, for which the taxpayer paid $37 per share, were sold on 15 January 1970 at a price in excess of $200 per share. The excess of the sale price, $21,267, over the purchase price, $3,700 is the amount of the profit that the Commissioner has included in the taxpayer's assessable income. The Commissioner contends that the shares can only have been purchased for the purpose of profit-making by sale, and certainly, if all that one knew about the case were the bare facts of purchase and sale, there would seem to be much to be said for the view held by the Commissioner. The taxpayer, however, has an explanation for the purchase of the subject shares and that is what has now to be considered.

6. For some time leading up to the taxpayer's purchase of the subject shares, the shares had been receiving increasing publicity. A metalliferous ore body had been found by the company, and although it was still apparently of uncertain extent, and results of assays were incomplete, the shares had made spectacular advances in price. The taxpayer admitted to a general awareness of the publicity surrounding the shares, but disclaimed any real knowledge or understanding of what the company was doing. On 27 October 1969, the taxpayer telephoned the broker, with a view to making an appointment for 30 October. In the course of conversation, the taxpayer inquired about the subject shares, and was informed by the broker that they were probably just a well-promoted stock, and that they were not the taxpayer's type of share, being more of a gambler's share. The taxpayer's evidence regarding the information obtained from the broker by telephone on 27 October 1969, was confirmed by the evidence of the broker.

7. Then came the events of 30 October 1969, when the taxpayer kept his appointment with the broker. On that day, the broker and one of his partners had a discussion with a director of the prospecting company concerned in this reference. The

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director was most enthusiastic and optimistic about the prospects of the company, and the broker and his partner were, for the time being anyway, convinced that the director's opinions were sound. Later on that day, the taxpayer interviewed the broker, who advised him to buy some of the subject shares. It was the taxpayer's recollection that the broker had said that the company could ``well be a second Western Mining Corporation''. In evidence, the broker said ``We believed, and we convinced the taxpayer to believe, that these shares could be another Western Mining Company''. Thus advised by the broker, the taxpayer then purchased 100 of the shares at $37 per share.

8. Of the circumstances attendant upon the sale of the shares by the taxpayer, I do not think a great deal need be said. By about the middle of January 1970, the shares had risen to a price in excess of $200. The taxpayer telephoned his broker, and asked what he should then do. After some discussion, the broker said ``I find it very hard to believe that a mining company can earn sufficient money to pay dividends which would justify 200 odd dollars per share.'' In brief, the broker then realised that this was not the kind of share which the taxpayer required, and advised him to sell, which the taxpayer did.

9. It must be recalled that for several years the taxpayer had relied implicitly on his broker's advice. He did not have either the time or the expertise to look into the affairs of companies. He knew, from long acquaintance with his father's ideas on investment, what kind of shares he wanted and he relied upon the broker to put the right shares in his way. If something was likely to be a second Western Mining Corporation, that was good enough for the taxpayer, and when he purchased the subject shares, he believed that they were of the sound investment type for which he invariably looked. That is the taxpayer's story. Should it be believed? I think ``Yes''. If there was any lingering doubt as to the truth of the taxpayer's evidence per se that doubt must be dispelled by the substantial support which that evidence receives in all material respects from the evidence of the broker.

10. I am satisfied, therefore, that the taxpayer did not purchase the subject shares for profit-making by sale, but as an investment. Accordingly my decision is that the taxpayer's objection should be allowed and the assessment amended accordingly.