Jennings v. Commissioner of Internal Revenue, 9383.

Decision Date11 April 1940
Docket NumberNo. 9383.,9383.
PartiesJENNINGS et al. v. COMMISSIONER OF INTERNAL REVENUE.
CourtU.S. Court of Appeals — Fifth Circuit

Muckleroy McDonnold, of San Antonio, Tex., for petitioners.

Helen R. Carloss, Sewall Key, and Joseph M. Jones, Sp. Assts. to Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and Irving M. Tullar, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for respondents.

Before SIBLEY, HUTCHESON, and HOLMES, Circuit Judges.

SIBLEY, Circuit Judge.

We think the Board of Tax Appeals wrongly refused to allow the petitioners to deduct individual losses in gambling from gambling gains made in partnership, on redetermining their several income taxes for the year 1936. The facts were stipulated. The Board found: "The distributive share of each petitioner of partnership gains from gambling operations exceeded the amount of losses by petitioners in their individual gambling operations." The Revenue Act of 1936, Sect. 23(g), 26 U.S.C.A.Int.Rev.Acts, referring to deductions, provides: "Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions." The Board thought the partnership in making up its return could offset its wagering losses against its wagering gains, and each partner might similarly offset his wagering losses against his wagering gains, but that each partner's share of wagering gains made in the partnership could not be reduced by wagering losses made individually.

We find nothing in the statute to support the last proposition. A partnership is recognized as an entity separate from the partners in bankruptcy proceedings, but not in income taxation. United States v. Coulby, 6 Cir., 258 F. 27. For many years the Revenue Acts have provided that "individuals carrying on business in partnership shall be liable for income tax only in their individual capacity." Revenue Act of 1918, § 218(a), 40 Stat. 1057, 1070, Revenue Act of 1936, § 181, 49 Stats. 1648, 1709, 26 U.S.C.A.Int.Rev.Code, § 181. Thereunder a tax on income earned in partnership was held not a claim against the partnership in bankruptcy, and it went unpaid for lack of individual assets. United States v. Kaufman, 267 U.S. 408, 45 S. Ct. 322, 69 L.Ed. 685. The partnership return is for information, and to secure uniformity and save repetition in the individual returns. It ascertains each partner's gain and apportions it to him to be taxed, whether distributed or not. It does not transform his share in the gain. If "individuals carrying on business in partnership", to use the phrase of the statute, make gains in wagering transactions, the share of each is a wagering gain; and when it is entered on his individual return to be taxed, a deduction of his losses in other wagering transactions is allowed by the statute, but only to the extent of such gains.

The Board followed especially the decision in Johnston v. Commissioner, 2 Cir., 86 F.2d 732, which held a partner's losses by sale of noncapital assets could not be offset against a similar gain coming from his partnership, one judge dissenting. We are impressed that the dissenting judge was probably right, but that case dealt with a different statutory provision, and it had been amended by Congress, the purpose of the amendment being one of the disputed points. No amendment of the provision before us has been made, and its words seem plain enough.

The cause is remanded with direction to allow the deductions claimed and redetermine the taxes accordingly.

HOLMES, Circuit Judge (dissenting).

The majority opinion holds that petitioners are entitled to offset personal losses from gambling operations against their distributive shares of partnership gains from similar operations. To concur in this ruling, it is necessary to conclude that, while Congress provided for the separate computation of partnership income, it intended that the total so reached would be discarded and the individual items of gain or loss would then be separated and each brought forward into the returns of the respective partners, and there combined with individual income and deductions to arrive at the partners' net taxable income. The legislative intent, it seems to me, was just the opposite.

A defendant, in a suit against him for a debt due by him alone, may not offset a debt due to him and another, because the parties are different and there is a want of mutuality.1 With this bed-rock principle in mind, the Congress undertook to regulate the method of accounting with a taxpayer as to income derived from the operations of a partnership. The firm, as an entity, is required to make a return but is not required to pay the tax. In this respect it has an advantage over a corporation.

Individuals carrying on business in partnership are liable for income tax only in their individual capacity. Each partner, in computing his net income, shall include in his individual return his...

To continue reading

Request your trial
17 cases
  • Presley v. Commissioner
    • United States
    • U.S. Tax Court
    • August 27, 1979
    ...on this issue a Memorandum Opinion of this Court, cert. denied 332 U.S. 817 (1948); Jennings v. Commissioner 40-1 USTC ¶ 9385, 110 F. 2d 945 (5th Cir. 1940), cert. denied 311 U.S. 704 (1940); Offutt v. Commissioner Dec. 18,325, 16 T.C. 1214 (1951); Joseph v. Commissioner Dec. 11,614, 43 B.T......
  • Wegener v. COMMISSIONER OF INTERNAL REVENUE
    • United States
    • U.S. Court of Appeals — Fifth Circuit
    • April 7, 1941
    ...their joint capital, their joint credit, and their joint efforts in developing and operating the oil properties. Citing Jennings v. Commissioner, 5 Cir., 110 F.2d 945, and Neuberger v. Commissioner, 311 U.S. 83, 61 S.Ct. 97, 85 L.Ed. ___, the petitioner contends that as a partner he should ......
  • Gordon v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • October 31, 1974
    ...to the partner as wagering gains or losses, and does not lose its identity as such in the partner's hands. Sec. 702; Jennings v. Commissioner, 110 F.2d 945 (C.A. 5, 1940), certiorari denied 311 U.S. 704 (1940). Since petitioner's gains were literally ‘wagering income,‘ and since the policy ......
  • Neuberger v. Commissioner of Internal Revenue
    • United States
    • U.S. Supreme Court
    • November 12, 1940
    ...37 B.T.A. 223. On appeal the Second Circuit Court of Appeals affirmed. 104 F.2d 649. Because of substantial conflict with Jennings v. Commissioner, 5 Cir., 110 F.2d 945, and Craik v. United States, Ct.Cl., 31 F.Supp. 132, we granted certiorari limited to the questions whether Section 23(r)(......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT