DocketNumber： Docket No. 84509.
Judges： Haüron
Filed Date： 1/28/1938
Status： Precedential
Modified Date： 11/2/2024
*1071 Husband and wife filed a joint income tax return. The husband realized profits in the taxable year from sales of securities held less than two years but sustained no losses from such sales. The wife sustained losses in the taxable year from such sales but realized no profits from like sales.
*226 The Commissioner determined a deficiency of $1,163.67 in income tax of these petitioners for 1933. The sole issue is whether petitioners in a joint return can deduct a noncapital loss of $3,646.78 sustained by Alma Pierce from the joint taxable income reported in the joint return in view of limitations on deductions of noncapital losses contained in section 23(r).
FINDINGS OF FACT.
H. Denny Pierce and Alma C. Pierce are and were in the taxable year husband and wife living together in New York City. In making their income tax return*1072 for 1933, the income of each was included in a single joint return of husband and wife. The return was filed with the collector for the second district of New York.
The total income reported is $70,517.99; total deductions $19,506.26; net income $51,011.73. The items making up income and deductions are the following:
| Salary, H. Denny Pierce | $13,016.32 |
| Interest on bank deposits, notes, etc | 620.60 |
| Profit from sale of stocks and bonds held two years or less | 51,340.54 |
| Dividends (a) domestic corporations | 5,540.53 |
| 70,517.99 | |
| Interest paid | $6,639.81 |
| Taxes paid | 4,371.80 |
| Contributions | 65.00 |
| Other deductions | 5,429.65 |
| 19,506.26 |
During the year 1933, H. Denny Pierce realized net profits from sales of stocks and bonds held less than two years and sold in 1933 in the amount of $54,987.32. Alma C. Pierce sustained losses from sales of stocks and bonds held less than two years and sold in 1933 in the amount of $3,646.78. Petitioners, in their joint return under item 8(a), "profit from the sale of stocks and bonds held two years or less", reported as taxable profit $51,340.54, the difference between the gains of H. D. *1073 Pierce and the losses of Alma Pierce.
In determining the deficiency, respondent increased item 8(a) to $54,987.32, disallowing the loss of $3,646.78 which had been deducted from the gains realized. Explanation given for this action is the following:
Section 23(r) of the Revenue Act of 1932 specifically provides that losses from the sales or exchanges of stocks and bonds, which are not capital assets, shall be allowed only to the extent of the gains from such sales and exchanges. In as much as the husband and wife are held to be separate taxpayers, even *227 though they filed a single joint return, the wife is entitled to a deduction for losses only to the extent of her gains. Your wife not being entitled to a deduction for the loss in question, it follows that the amount thereof cannot be allowed as a deduction in the joint return filed by you and wife.
OPINION.
HARRON: The question involved in this proceeding is whether, in the case of a joint return of husband and wife, the limitations imposed by section 23(r) of the Revenue Act of 1932, as amended, on deductions of noncapital losses require that the noncapital gains and losses of each spouse be treated separately, *1074 i.e., whether noncapital losses shall be allowed only to the extent that
Section 51(b), Revenue Act of 1932, provides that:
(b) HUSBAND AND WIFE. - If a husband and wife living together have an aggregate net income for the taxable year of $2,500 or over, or an aggregate gross income for such year of $5,000 or over -
(1) Each shall make such a return, or
(2) The income of each shall be included in a single joint return, in which case the tax shall be computed on the aggregate income.
Where husband and wife exercise the statutory right to file a single joint return the gross income and deductions represent the combined receipts and deductions of each. To reach the aggregate taxable net income all deductions to which either is entitled are taken from the aggregate income of both. The Commissioner has recognized this in his regulations relating to the applicable statutory provision. Regulations 77, promulgated under the 1932 Act, article 381, provides in part:
Where the income of each is included in a single joint return, the tax is computed on the aggregate income and all deductions and credits*1075 to which either is entitled shall be taken from such aggregate income.
This Board has held that where a joint return is filed by husband and wife, each should be treated as an individual in applying provisions of the applicable revenue act where the question involved is whether the individual is entitled to some specific deduction. See ; . It is noted here that the question involved in those cases is not involved in this proceeding.
In the above cases, a joint return was filed for husband and wife. Each had sold securities at a loss and each was entitled to deduct the losses sustained individually under section 23(e) of the Revenue Act of 1928. The issues in the two cases referred to differ from the issue in this proceeding, but they are referred to because in those cases it resulted that, after holding that each was entitled to a deductible loss under section 23(e), each having sold securities at a *228 loss in transactions entered into for profit, it was held that the combined losses were deductible from the combined income reported in the single joint return. The Commissioner*1076 in those cases argued that where a husband and wife elect to file a joint return, they must be treated as one person for all purposes of the revenue act. The Board overruled this contention and said:
No authority has been pointed out to us that a husband and wife are to be denied deductions for losses sustained by them because they see fit to jointly return their taxable income. * * * Nor are we impressed with the argument of respondent that, if the view here announced is to prevail, then the deduction of each spouse is to be limited to the gross income of each. To accept this view we must deny 20 years of history in the administration of the income tax laws. * * * The acceptance of the privilege of filing a joint return by a married couple carries with it no denial of their individual rights under the statute. [.]
It appears to be the principle of the above cases that once it is clear that a husband or a wife, as an individual taxpayer, is entitled to a deduction, then effect shall be given to the deduction allowable to each by including the deductions of each in the aggregate deductions in the single joint return filed. *1077 Since Congress has said that where a single joint return is elected by husband and wife as a method of reporting the income of each, then "the tax shall be computed on the aggregate income", aggregate income is offset by aggregate deductions.
The issue in this proceeding would not arise under section 23(e)(2), Revenue Act of 1928. Specifically, the gain of the husband, $54,987.32, would be part of the aggregate income in the joint return and the loss of the wife, $3,646.78, would be part of the aggregate deductions. This would be the case because the loss in question did result from a transaction entered into for profit and Alma C. Pierce, as an individual taxpayer, would be entitled to a deduction for the loss.
However, in the Revenue Act of 1932, Congress enacted section 23(r), 48 Stat. 209. Section 23(r)(1) is applicable to the taxable year. Reading section 23(r)(1) with section 23(e)(2),
In this proceeding, the issue involves first the question whether Alma C. Pierce, as an individual taxpayer, was entitled to a deduction for the losses she sustained in 1933 from the sale of stock she had held less than two years. She had not realized any gains in 1933 from sales of similar stocks. It is our understanding of the limitation set forth by section 23(r), upon section 23(e)(2) that although the losses resulted*1079 from a transaction entered into for profit, nevertheless, under 23(r), Alma Pierce could not take the losses in 1933 because they were realized on securities held less than two years and
Petitioner's counsel has made a carefully prepared argument which contends that the aggregate noncapital gain and loss of both spouses should be considered as a unit, so that section 23(r) be construed, as we see it under the argument, to allow in a joint return the noncapital loss of one spouse if the other spouse realized a noncapital gain. In another manner of statement, the argument is that even though Alma C. Pierce, as an individual taxpayer, is not entitled to deduction for her noncapital loss, since she had no noncapital gains to the extent of which the loss could be allowed, nevertheless, the husband and wife constitute a tax computing unit under a joint return and there is present in that return an amount of noncapital gains larger than her losses, albeit her husband's gains, to provide the ground for allowing the claimed loss under section 23(r). Thus the petitioner argues that where a joint*1082 return is filed, the husband and wife are treated as a single
Congress' intent, in enacting section 23(r) was to protect the revenues from the growing practice of reducing tax liabilities by the sale of securities on which losses had accrued and to prevent speculative losses from wiping*1083 out ordinary income which represents real taxpaying ability. Section 23(r) must therefore have geen intended to impose a limit on
The peculiarity of section 23(r) is that the allowability of certain losses is dependent upon the existence of certain gains. To take the loss one must have a gain. Further, one may have the loss only to the extent of the gain and we believe one may have the loss only to the extent of
It has been held that the net loss provisions of the statute relate only to the taxpayer sustaining the net loss. ; affd., ; certiorari denied, ; ; affd., ; . We think that section 23(r), which, of course, is a different provision of the revenue act, likewise relates only to the taxpayer, so that net losses Sustained by a
It is, therefore, held that respondent correctly disallowed the deduction claimed.
Reviewed by the Board.
1. SEC. 23. (e) LOSSES BY INDIVIDUALS. - Subject to the limitations provided in subsection (r) of this section, in the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -
* * *
(2) If incurred in any transaction entered into for profit, though not connected with the trade or business; or
* * *
(r) LIMITATION ON STOCK LOSSES. -
(1) Losses from sales or exchanges of stocks and bonds (as defined in subsection (t) of this section) which are not capital assets (as defined in section 101) shall be allowed only to the extent of the gains from such sales or exchanges (including gains which may be derived by a taxpayer from the retirement of his own obligations). ↩
2. Finance Committee Report No. 665, Revenue Act of 1932, p. 10 -
* * * The provision was based upon a twofold policy: (1) Protecting the revenues from the growing practice of reducing tax liabilities by the sale of securities on which losses had accrued, and (2) preventing speculative losses from wiping out ordinary income, which represents real taxpaying ability.
* * *
A somewhat different situation exists with respect to losses realized from the sale of securities held by the taxpayer for less than two years. These losses should property be permitted only as an offset against gains from securities held for less than two years. But undue hardship under existing conditions should be avoided. Your committee believes that security gains and losses should be segregated, that security losses should be deducted solely from security gains; but that security gains should not be taxed until they actually exceed security losses. Accordingly, it is provided that an excess of the security losses in any year should be allowed, subject to certain necessary limitations, as a deduction against security gains in the subsequent year. ↩