Lamont v. Comm'r of Internal Revenue, Docket No. 1419.

• Decision Date: 11 August 1944
• Docket Number: Docket No. 1419.
• Citation: 3 T.C. 1217
• Parties: THOMAS W. LAMONT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

3 T.C. 1217

THOMAS W. LAMONT, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 1419.

Tax Court of the United States.

Promulgated August 11, 1944.

Held, partnership capital losses may be offset against individual capital gains under 1936 Revenue Act. E. G. Wadel, 44 B.T.A. 1042, distinguished. Josiah Willard, Esq., and Walter S. Orr, Esq., for the petitioner.

Scott A. Dahlquist, Esq., for the respondent.

Respondent determined a deficiency in petitioner's income tax for the year 1937 in the amount of $29,693.03; and petitioner seeks a redetermination thereof and also a determination that petitioner has overpaid his income tax for that year in the amount of $35,721.41. Only one question is raised on brief, whether a member of a partnership is entitled to apply as an offset to his personal capital gains his distributive share of the capital losses of the partnership which are not allowable to it by reason of the limitation of section 117(d), Revenue Act of 1936. The facts were stipulated and are as follows:

FINDINGS OF FACT.

During the year 1937 petitioner was a member of the partnership doing business in New York under the name of J. P. Morgan & Co., and doing business in Philadelphia under the name of Drexel & Co., and filing its return under the name of J. P. Morgan & Co.-Drexel & Co. Petitioner's share of the ordinary net taxable income of the J. P. Morgan & Co.-Drexel & Co. partnership for the year 1937 was $65,076.18. During the year 1937 J. P. Morgan & Co.-Drexel & Co. sustained a loss of $1,825,885.40 on the sale of capital assets, after giving effect to the provisions of section 117(a) of the Revenue Act of 1936. To the extent of $2,000 this capital loss was reflected in computing the net income of the partnership and petitioner's distributive share therein, which in 1937 was 9,980335 percent.

During 1930 petitioner, together with certain other individuals and trustees, five in number, entered into four syndicates known as syndicates A, B, C, and D, respectively, for the purpose of dealing in certain stocks and securities. These syndicates were in existence during the year 1937 until about October 15, when they were liquidated. A copy of syndicate A's agreement was put in evidence and is incorporated here by reference. During 1937 syndicate A sustained a loss of $12,783.31 on the sale of capital assets after giving effect to the provisions of section 117(a) of the Revenue Act of 1936. To the extent of $2,000 this capital loss is reflected in the respondent's computation of the net income of syndicate A and the petitioner's distributive share therein, which, in 1937, was 40 percent.

During 1937 petitioner himself realized capital gains of $131,441.72 on the sale of capital assets and sustained individual capital losses of $76,191.76, after effect is given to the provisions of section 117(a) of the Revenue Act of 1936.

During 1937 syndicate B held 5,000 shares of American Certificates of Kreuger & Toll at a cost of $108,250. On October 15, 1937, syndicate B charged off this cost as a bad debt ascertained to be worthless and this amount has been allowed as a deduction in computing the net income of the syndicate and petitioner's distributive interest therein, which, in 1937, was 40 percent.

On or about March 13, 1941, petitioner filed with the collector of internal revenue for the second district of New York a claim for refund, a copy of which is incorporated by reference. On or about October 24, 1941 the United States Board of Tax Appeals entered decisions in the proceedings Syndicate ‘A,‘ an alleged association v. Commissioner, Docket No. 103277; Syndicate ‘B,‘ an alleged association v. Commissioner, Docket No. 103278; Syndicate ‘C,‘ an alleged association v. Commissioner, Docket No. 103280; and Syndicate ‘D,‘ an alleged association v. Commissioner, Docket No. 103279, in all of which it held that the syndicates were not associations, but were in the nature of joint ventures or partnerships. These decisions became final on January 24, 1942. On or about March 12, 1942, petitioner filed with the collector of internal revenue for the second district of New York a claim for refund, copy of which is incorporated herein by reference. On or about January 8, 1943, petitioner filed with the collector of internal revenue for the second district of New York another claim for refund, also incorporated herein by reference.

Petitioner filed his income tax return for 1937 on or about March 15, 1938, with the collector of internal revenue for the second district of New York and paid the tax shown thereon of $576,558.06 in four installments, as follows: March 15, 1938, $144,139.51; June 15, 1938, $144,139.51; September 15, 1938, $144,139.52; December 15, 1938, $144,139.52. On or about February 5, 1941, petitioner executed a waiver (Form 872) pursuant to section 276(b) of the Revenue Act of 1936, extending until June 30, 1942, the period in which respondent could assess income tax liability for 1937 or mail a notice of deficiency pursuant to section 272(a) of the Internal Revenue Code with respect thereto. This waiver was executed by respondent on or about February 8, 1941. On or about June 1, 1942, petitioner executed another waiver (Form 872) pursuant to section 276(b) of the Revenue Act of 1936, extending until June 30, 1943, the period in which respondent could assess income tax liability for 1937 or mail a notice of deficiency pursuant to section 272(a) with respect thereto. Respondent executed this waiver on or about June 2, 1942.

OPINION.

KERN, Judge:

The only question presented is whether petitioner may offset against his personal capital gains his distributive share of capital losses of a partnership which are not themselves allowable to the partnership because of the limitation of section 117(d), Revenue Act of 1936.¹ The allowable capital losses of the partnership were duly taken by it as deductions and also by petitioner to the extent of his share. All other issues are disposed of by concession or abandonment.

To state the question in issue with more particularity, it is whether, under the Revenue Act of 1936, the income of the partners and of the partnership is to be considered as so separate and distinct that the partner's distributive share of losses of the partnership may not, beyond the limitation allowed by section 117(d), be applied against the partner's individual gains to reduce the latter for tax purposes. The respondent's argument proceeds from the separation made by the revenue acts between ordinary income and capital gains, which has put them in separate categories for tax purposes; and the argument assumes, apparently, that a logical corollary of this separation is a like separation of the income of the partnership and that of the partner. This contention does not find any support either in particular provisions of the revenue acts or in the general concept of partnership income adopted by Congress in their enactment. The legislation's history need not be detailed here at length, but its broad outlines should be stated so as to make clear the opposing contentions.

In the Revenue Act of 1932 Congress, realizing in a period of general economic depression the growing tendency of taxpayers to offset against ordinary income their capital losses, sought to stop this drain on the revenue by enacting section 23(r)(1), which restricted the deduction of losses from sales or exchanges of stocks or bonds which were not capital assets to gains from the same category. In the 1934 Revenue Act section 117(d) imposed a similar limitation on losses from capital assets, except to the extent of $2,000. Neither of these acts laid any limitation on the offsetting of individual gains by partnership losses or otherwise indicated that these two classes of income, capital and ordinary, as received by the partnership should lose their identity when absorbed into that of the individual partners. Nor were there any clear indications in the statutes that the entity theory of partnerships had been adopted, although the partnership was required to make a return, for informational purposes only. On the contrary, section 181, in both acts, expressly provided that ‘individuals carrying on business in partnership shall be liable for income tax only in their individual capacity‘; and section 182 required that there be included in the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership. So far, then, as the general theory of the revenue acts or express provisions were concerned, no authority existed for increasing the stringency of separation of the two classes of income, capital and ordinary, by application of a further restrictive separation between partnership income and the individual partner's income. In 1933, however, Congress in its unconstitutional National Industrial Recovery Act, by section 218(d), amended section 182(a) of the Revenue Act of 1932 by providing that ‘no part be allowed as a deduction to a member of such partnership in computing net income.‘ This would cover the situation here, except that the disallowance applies to ordinary losses and not capital losses. The 1934 and 1936 Revenue Acts, however, returned in their section 182 to the simpler form of the 1932 Act, without any such express limitation; and, since the National Industrial Recovery Act provision was an amendment only of the 1932 Act, it has no relevance here, except for conclusions on the general intent of Congress which may be drawn from it. For that purpose we shall return to it in a moment.

In 1940 the Supreme Court, in Neuberger v. Commissioner, 311 U.S. 83, clarified the law of the 1934 and 1936 Revenue Acts in so far as analogies may be drawn from its construction of section 23(r) of the 1932 Act. There the taxpayer sought to deduct a net loss sustained in his individual noncapital transactions from partnership gains of the same...