Commissioner of Internal Revenue v. Lamont

• Decision Date: 08 July 1946
• Docket Number: No. 37,Docket 19857.,37
• Citation: 156 F.2d 800
• Parties: COMMISSIONER OF INTERNAL REVENUE v. LAMONT.
• Court: U.S. Court of Appeals — Second Circuit

156 F.2d 800 (1946)

COMMISSIONER OF INTERNAL REVENUE v. LAMONT.

No. 37, Docket 19857.

Circuit Court of Appeals, Second Circuit

July 8, 1946.

I. Henry Kutz, Sp. Asst. to Atty. Gen. (Sewall Key, Acting Asst. Atty. Gen., and J. Louis Monarch, Sp. Asst. to Atty. Gen., on the brief), for petitioner.

Josiah Willard, of New York City (White & Case and Walter S. Orr, all of New York City, on the brief), for respondent.

Before AUGUSTUS N. HAND, CHASE, and CLARK, Circuit Judges.

CLARK, Circuit Judge.

The question here is whether partnership capital losses may be offset against individual capital gains in computing a partner's income tax for 1937 under the Revenue Act of 1936. The respondent taxpayer had reported both personal income and his distributable share of the income of J. P. Morgan & Co., a New York partnership which also did business in Philadelphia under the name of Drexel & Co. In addition, however, he showed individual capital gains and losses leaving a net taxable capital gain of $55,249.96, against which he would set off his share of partnership capital losses. The partnership had sustained losses in the sale of capital assets of $1,825,885.40, as computed under the differing percentages, according to duration of ownership, of § 117(a), Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Acts, page 873. After giving effect to the deduction of $2,000 allowed the partnership under § 117(d), the taxpayer's share of the loss, based on his distributive share in partnership income of 9.980335 per cent, would be more than three times his individual capital gain. Taxpayer was also a member of certain syndicates which have been held to be partnerships and as to which like questions arise, involving comparatively small amounts, though increasing the overplus of the offset, if allowable. The Commissioner, disallowing the claimed deduction, determined a deficiency in the tax paid; but on petition to the Tax Court, Judge Kern ruled in favor of taxpayer, in a considered opinion, 3 T. C. 1217, and ordered a refund for overpayment. The Commissioner petitions for review.

There being no dispute as to the underlying facts, the issue must turn upon the correct interpretation of the statute. As the Commissioner says: "It is not disputed that this cross deduction was permitted in the Revenue Act of 1932 and permission to take it restored by the Revenue Act of 1938." The Commissioner, however, relies not only upon the language of the Revenue Acts of 1934 and 1936 — identical so far as this issue is concerned — but, perhaps even more, on the legislative history of the statutory provisions, which we must examine in some detail. And since this is a matter of statutory interpretation, it is a case, on the Commissioner's contention, of "a clear-cut mistake of law," Commissioner of Internal Revenue v. Wilcox, 66 S.Ct. 546, 550, and hence within our power of review, notwithstanding the limitations stated in Dobson v. Commissioner of Internal Revenue, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248.

In 1932, capital gains, taxed at 12½ per cent, were limited by definition of "capital assets" to property held by the taxpayer for more than two years, Revenue Act of 1932, c. 209, § 101(a) and (c) (8), 47 Stat. 169, 26 U.S.C.A. Int.Rev.Acts, pages 504, 505; but a special provision — intended to prevent the growing custom of deducting losses on sales of securities following the fall in prices after 1929 — restricted losses from sales or exchanges of stocks and bonds not capital assets to only the amount realized from gains from such sales. Id., § 23(r) (1), 26 U.S.C.A. Int.Rev.Acts, page 493. See H.R.Rep.No.708, 72d Cong., 1st Sess., 12, 13, and Sen.Rep.No.665, 72d Cong., 1st Sess., 10, both reprinted in 1939-1 Cum. Bull. (Part 2) 457, 465, 496, 503; Neuberger v. Commissioner of Internal Revenue, 311 U.S. 83, 85, 61 S.Ct. 97, 85 L.Ed. 58. There was also a provision, § 186, 26 U.S.C.A. Int.Rev.Acts, page 545, most significant for our later history, providing for the taxation to each individual partner of his share not only of the ordinary net income, but also of capital net gain and capital net loss "at the rates and in the manner provided in section 101(a) and (b), relating to capital net gains and losses."

It will be well first to state succinctly the statutory changes before we pass to a consideration of the legislative background. In the National Industrial Recovery Act of June 16, 1933, c. 90, 48 Stat. 195, there was included an amendment, effective January 1, 1933, to the provisions for "Tax of Partners," Revenue Act of 1932, § 182(a), 26 U.S.C.A. Int.Rev.Acts, page 544, stating that "No part of any loss disallowed to a partnership as a deduction by section 23(r) shall be allowed as a deduction to a member of such partnership in computing net income." This had the effect of disallowing such deductions as are here claimed.¹ But the 1934 Act made a substantial change in the taxation of capital gains and losses, as a consequence of which this amendment and the entire provision of § 23(r) (1), as well as the general partnership provision of § 186, all dropped out of the statute. By the new plan the gain or loss upon the sale or exchange of a capital asset (no longer restricted to property held by the taxpayer for more than two years) was computed upon a sliding scale depending upon the time held, beginning at 100 per cent where the property had been held for a year or less and declining to 30 per cent where it had been held for more than ten years. And capital losses were allowed only to the extent of $2,000 over the amount used to offset capital gains. Revenue Act of 1934, c. 277, § 117, 48 Stat. 680, 26 U.S.C.A. Int.Rev.Acts, page 707. The provisions as to partnership returns, including that for the computation of the net income of the partnership — of which each partner must return his distributive share as a part of his net income — "in the same manner and on the same basis as in the case of an individual" were continued, except for the omission of § 186, as noted above. Id. Supp. F, particularly §§ 182, 183, 26 U.S.C.A. Int.Rev.Acts, page 728. These sections were re-enacted in the Revenue Act of 1936, c. 690, 49 Stat. 1648, 26 U.S.C.A. Int.Rev.Acts, page 897. But in the 1938 Act, provision was made for segregation in the partnership return of the items of capital gains and losses, and, in quite specific terms, for the inclusion of the individual partner's "distributive share" of the partnership capital gains and losses in computing his net income. Revenue Act of 1938, c. 289, §§ 182, 183, 52 Stat. 447, 26 U.S.C.A. Int.Rev.Acts, pages 1085, 1086.

Both taxpayer and the court below stress the omission of the 1933 amendment from later acts; but their chief reliance is upon the Neuberger case, supra. In fact taxpayer originally did not claim the deduction, but filed a claim for refund based upon that decision after its announcement in November, 1940. In relying on this case they are forced to the interesting analysis of having to repudiate as ill-considered dictum what the opinion says about the course of legislative history, here important, in order to stress what they consider the implications of the actual holding. That case and the companion case of Mosbacher v. United States, 311 U.S. 619, 61 S.Ct. 167, 85 L.Ed. 393, concerned income taxes for the year 1932, turning upon the converse of the case here, i. e., the offsetting of individual stock losses against partnership profits.² As we have seen, these were not "capital assets" as the law then stood. The Court, three justices dissenting, allowed the deduction. This was a reversal of the decision below, Neuberger v. Commissioner of Internal Revenue, 2 Cir., 104 F.2d 649, which followed Johnston v. Commissioner of Internal Revenue, 2 Cir., 86 F.2d 732, 734, certiorari denied 301 U.S. 683, 57 S.Ct. 784, 81 L.Ed. 1341, where this court had held that under the 1932 Act the partnership was a "tax computing unit," and that the 1933 amendment was only "inserted out of abundant caution when that law was passed and as but a clarification of existing law." The Supreme Court said, however, 311 U.S. 83, 88, 61 S.Ct. 97, 101, 85 L.Ed. 58, that in this Act "Congress recognized the partnership both as a business unit and as an association of individuals" and, finding no specific prohibition of the deduction of individual losses from the partner's distributive share of partnership income, held it allowable. And this, so the argument goes, leads to a like holding in the converse situation here in view of the omission of the 1933 amendment from later acts.

But the Supreme Court itself had a different interpretation. It held its conclusion to be "confirmed by the action of Congress since 1932." Citing first the 1933 amendment as reaching "the converse of the instant case" (i. e., the case here), it continued: "More significantly, in 1938, after the Treasury Department had ruled to the contrary citing the Treasury Regulations, infra, Congress expressly provided for the deduction of individual security losses from similar partnership gains citing the 1938 Act, supra, and the House Committee Report, infra. That the amendment of 1933 changed and the Revenue Act of 1938 restored the law of 1932 as we have explained it is plain from the legislative history of the two Acts and of § 23(r) (1)." Neuberger v. Commissioner of Internal Revenue, supra, 311 U.S. 83, 89, 90, 61 S.Ct. 97, 102, 85 L.Ed. 58.

We, too, think this conclusion is plain from the legislative history, and we think it is made incontrovertible by the repeated statements made as to the purpose and intent of the 1934 Act during its passage. Harrison v. Northern Trust Co., 317 U.S. 476, 63 S.Ct. 361, 87 L.Ed. 407. The court below considered this inconclusive. But we do not see how it can be so regarded; on the contrary, it seems unusually convincing. Moreover, it is supported by both contemporaneous and subsequent interpretation without a dissent, so...