Johnston v. Commissioner of Internal Revenue

• Decision Date: 07 December 1936
• Docket Number: No. 88.,88.
• Citation: 86 F.2d 732
• Parties: JOHNSTON v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

86 F.2d 732 (1936)

JOHNSTON v. COMMISSIONER OF INTERNAL REVENUE.

No. 88.

Circuit Court of Appeals, Second Circuit.

December 7, 1936.

William W. Spalding, of Washington, D. C. (Mason, Spalding & McAtee, of Washington, D. C., of counsel), for petitioner.

Robert H. Jackson, Asst. Atty. Gen., and Sewall Key and Berryman Green, Sp. Assts. to the Atty. Gen., for respondent.

Cohen, Cole, Weiss & Wharton, of New York City (John F. Wharton and Harry J. Leffert, both of New York City, of counsel), for petitioner.

Proskauer, Rose & Paskus, of New York City (Walter Mendelsohn, Wilbur H. Friedman, and Harry Silverman, all of New York City, of counsel), amicus curiÊ.

Before L. HAND, SWAN, and CHASE, Circuit Judges.

CHASE, Circuit Judge.

During the taxable year 1932 the petitioner sold at a loss noncapital assets which he owned personally. During the same year he was one of the partners in a partnership which sold noncapital assets of the partnership at a profit. The partnership filed its information return showing this profit, and the petitioner included his share of it in his own return. The amount of gain so included was less than the loss he had sustained. He deducted the above-mentioned loss to the extent of his share of the partnership gain, thus diminishing what would otherwise have been his net taxable income as shown by his return. The Commissioner, deciding that the deduction was not allowable in view of section 23 (r) of the Revenue Act 1932 (26 U.S.C.A. ß 23 note), added it to the petitioner's net income as shown in his return and determined the deficiency accordingly. A majority of the Board upheld that action.

Section 23 (r) of the 1932 Revenue Act limited deductions which might be taken from income on account of losses sustained on the sale or exchange of noncapital assets "to the extent of the gains from such sales or exchanges." Since it is undisputed that the profits of the partnership with which we are now concerned were derived from the sale of assets held less than two years and so from the sale of noncapital assets as defined in section 101 of the Revenue Act 1932 (26 U.S.C.A. ß 101 note) and that the personal losses of the petitioner were sustained in the sale of such assets, the sole issue is whether the petitioner's share of such partnership gains is to be treated as though derived from the sale of noncapital assets which the petitioner owned personally.

It is argued with much force that as a partnership is not a taxpayer its income distributable to a partner and taxed to him should be held to retain in the partner's return all the characteristics by way of derivation which it had in the information return filed by the partnership as there is nothing in section 23 (r) which is expressly to the contrary. And this idea is thought to be somewhat fortified by the fact that when Congress passed the National Industrial Recovery Act in 1933 section 218 (d), 48 Stat. 209, provided that: "Effective as of January 1, 1933, section 182 (a) of the Revenue Act of 1932 is amended by inserting at the end thereof a new sentence as follows: `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.'" Reliance is placed upon the usual inference that when a statute is amended the purpose is that of change rather than a declaration of its former meaning unless the latter intention clearly appears.

Yet we think these considerations must yield to others that seem to be more potent in their bearing upon the issue. Though a partnership is not a taxpayer (section 181 of the 1932 Revenue Act 26 U.S.C.A. ß 181 and note) and each partner is taxed on his distributive share of partnership income (section 182, 47 Stat. 222 see 26 U.S.C.A. ß 182 and note), the partnership is a tax computing unit whose income is to be calculated in the same manner and on the same basis as that of an individual, with the exception that no deductions for charitable contributions are allowable (section 183 of the act 26 U.S.C.A. ß 183 and note). See Earle v. Commissioner (C.C.A.) 38 F.(2d) 965. In such computation noncapital losses are of course deductible to the extent of noncapital gains under section 23 (r), but, when the partnership return shows net income, a partner's distributive share is to be entered in his own return as his own income derived from the partnership without retaining the peculiar character it had in the partnership return unless Congress has expressly so provided and then only for the purpose stated. The general rule of section 182 indicates that this is so, and, unless it is, there would be no reason for section 184 of the act of 1932 (26 U.S.C.A. ß 184 note), which provides that for the purpose of the normal tax a partner shall be allowed as an additional credit "his proportionate share of such amounts of dividends and interest specified in section 25 (a) and (b) as are received by the partnership"; nor for section 186 of the act of 1932 (47 Stat. 223), providing for showing in the partnership return "the proper part of each share of the net income which consists, respectively, of ordinary net income, capital net gain, or capital net loss," and for taxing the partners "at the rates and in the manner provided in section 101 (a) and (b), relating to capital net gains and losses." So, too, section 188 of the act of 1932 (26 U.S.C.A. ß 186 and note) permits a...