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Show SHORT SALES COMPLICATED BY TRANSFER TAX RULING New Problem Confronting Brokerage Houses Relegates Excess Profits Nightmares Into the Background. stamp to get the use of A's money, for A, in borrowing the 100 Steel, advances to B the full market price of $9000, on which B pays interest at rate of 6 per cent. If B wanted to borrow from his bank on the 100 shares he could get ordv $7000. For $9000 received from A he would pay $1.50 a day, and for $7000 received from the bank he would pay (at the same rate) $1.17. Thus he would get an extra $2000 (by lending lend-ing the stock to Al for 33 cents" If B were required to pay for the $2 stamp on the 100 shares, he lends to A, the extra $2000 would cost him $2.33. Naturally Nat-urally he would not do this unless he knew A would not tender delivery of the stock for at least seven days. Therefore There-fore B will not lend his stock to A unless un-less A agrees to pay the tax. For all practical purposes, therefore, A, the short seller, must undertake the extra tax every time he borrows stock. If A has to make three borrowings before be-fore he covers his short sale, he has been taxed $12 extra -under Attorney General Gregory's ruling, so bis 100 shares of Steel sold short stand him at 897s instead of 90. With six borrowings borrow-ings the sale price would be reduced to S9i. This is entirely regardless of New York state transfer tax also of $2 per 100 shares. More Complications. Now conies the complications. Ordinarily Ordi-narily when a customer in a brokerage house sells "short," other customers are "long," and the broker uses the long stock to make delivery without going into the "loan crowd" to borrow. bor-row. Under the new ruling, the borrowing bor-rowing of this stock inside the office must be accompanied by a memorandum memoran-dum to which the transfer 'tax stamp is affixed. Blanlc & Co. have four customers who are long 100 shares each of Steel, and three customers who are short. Blank & Co. use the long stock to make delivery de-livery on the short sales. The next day or two of the long customers sell, so "stock must be supplied to make good 100 shares of stock borrowed. Which one of the three short customers must pay the tax on the extra 100 shares WAUL street is gradually waking1 up to the fact that the new ruling which compels payment pay-ment of at least four federal transfer taxes to complete a short sale, presents the most complicated tax problem prob-lem which has ever confronted brokerage broker-age houses. It makes the excess tax puzzle look simple. If it involved only a possible imposition impo-sition of transfer tax four times, all would be well, but there seems to be no limit to number of times the extra tax may be paid under the attorney general's gen-eral's ruling. Nothing was probably further from the thoughts of those who drew the stamp tax feature of the revenue reve-nue act than the effect the ruling may have. In an ordinary "long" transaction A buys 100 United States Steel at 90. This price includes $2 transfer tax which is paid by the seller, who attaches at-taches a $2 stamp to the memorandum of sale that accompanies the stock. When A sells the 100 shares, he pays a $2 tax, and attaches the stamp to his memorandum of sale. Heretofore, "short"' selling was .just as simple, so far as transfer tax was concerned, as the stamps accompanied only actual change of ownership of the shares. In case of a short sale, under the new ruling, A cannot obtain possession of 100 shares of Steel, by borrowing, until a $2 stamp is affixed to memorandum or the loan. Then he must attach at-tach a $2 stamp to his memorandum mem-orandum of sales. When he buys 100 shares to make good his borrowing, borrow-ing, the seller supplies the stamp, but A has to use another stamp when he returns the borrowed stock. Thus an extra tax of $4 has been involved in the transaction, as compared with a straight buying and selling transaction. Who pays that $4 tax? But a loan of stock is a demand loan. Before A gets ready to cover his short sale by purchase, the lender, B, may call for his stock. Then A must borrow 100 shares from someone else to repay B, and two more $2 stamps become involved. in-volved. In a day or two C, the second sec-ond lender, calls for his stock, and A borrows another 100 shares from D, with two more charges of $2 'each. Under ordinary, pro-Gregory circumstances, circum-stances, this process went on indefinitely indefi-nitely without extra expense until A decided to cover. Now A will hesitate to sell short because he does not know how many times he may have to pay the tax before he completes his transaction trans-action and apparently he will be the one to pay it. At first blush it would appear that B would be willing to buy the first $2 taken to the "loan crowd? There might be ten customers long and eight short, and six of the longs might sell. If he goes to the "loan crown ' for all the borrowing all the loans may be called five times a week, with $20 extra ex-tra on every 100 shares. Then there is the case of a man who has 100 Steel in a strong-box in San Francisco. He sells the stock in the New York market by wire. Heretofore Hereto-fore his broker has been able to borrow stock for delivery in New York and' await arrival of the actual shares. Now, at least six days must elapse before be-fore the stock can reach here, the broker may have to renew the loan six times with a charge of $4 each time before delivery can be made Boston News Bureau. |