Neuberger v. Commissioner of Internal Revenue, No. 5

• Court: United States Supreme Court
• Writing for the Court: MURPHY
• Citation: 61 S.Ct. 97,85 L.Ed. 58,311 U.S. 83
• Docket Number: No. 5
• Decision Date: 12 November 1940
• Parties: NEUBERGER v. COMMISSIONER OF INTERNAL REVENUE

311 U.S. 83 61 S.Ct. 97 85 L.Ed. 58 NEUBERGER

v.

COMMISSIONER OF INTERNAL REVENUE.

No. 5. Argued Oct. 16, 17, 1940. Decided Nov. 12, 1940.

Page 84

Messrs. Wilbur H. Friedman and Joseph M. Proskauer, both of New York City, for petitioner.

Messrs. Robert H. Jackson, Atty. Gen., and J. Louis Monarch, Sp. Asst. to Atty. Gen., for respondent.

Mr. Justice MURPHY delivered the opinion of the Court.

Petitioner, a resident of New York, was a member of the New York Stock Exchange. He was engaged in the business of trading in securities on the floor of the Exchange for the partnership of Hilson & Neuberger, of which he was a member, executing orders on behalf of customers of the partnership. In addition he made numerous purchases and sales of securities for his own account.

During the year 1932, the one here in question, Hilson & Neuberger derived a profit of $142,802.29 from the sale of securities which were not capital assets as defined in Section 101 of the Revenue Act of 1932, 47 Stat. 169, 191, 26 U.S.C.A. Int.Rev.Acts, page 504. The firm had other income of $170,830.65 and deductions of $203,981.78, or net income of $109,651.16. Petitioner's distributive share was $44,158.55. During the same year petitioner sustained a net loss of $25,588.93 on his private transactions in stocks and bonds which were not capital assets as defined in Section 101.

In his income tax return for the year 1932 petitioner deducted from gross income the loss of $25,588.93. The Commissioner disallowed the deduction and assessed a deficiency. The Board of Tax Appeals upheld the action of the Commissioner. 37 B.T.A. 223. On appeal the

Page 85

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)(1) of the Revenue Act of 1932, 47 Stat. 169, 183, 26 U.S.C.A. Int.Rev.Acts, page 493, authorized the claimed deduction and whether, in the event that it did not, the statute as so construed was constitutional. 310 U.S. 655, 60 S.Ct. 1085, 84 L.Ed. 1419.

Section 23 of the Revenue Act of 1932 sets out the allowable deductions from gross income. Section 23(r)(1) provides: '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 (as deductions from gross income) only to the extent of the gains from such sales or exchanges * * *.'

The basic and narrow queston is whether, in computing the income of an individual partner, the word 'gains' in Section 23(r)(1) includes gains from sales or exchanges of partnership stocks and bonds which are not capital assets as defined in Section 101. We are of opinion that it does.

In computing gross income prior to the Revenue Act of 1932, subject to certain limitations a taxpayer was entitled to deduct the full amount of his losses from transactions in securities. Revenue Act of 1928, §§ 23(e), 23(g), 101(b), 113, 26 U.S.C.A. Int.Rev.Acts, pages 357, 371, 380. But the growing custom of diminishing ordinary income by deducting losses realized on the sale of securities which had shrunk in value, due no doubt to the fall in prices after 1929, led Congress to provide in Section 23(r)(1) that deductions for such losses should be limited to gains from similar transactions.

That this was the purpose and the only purpose of Section 23(r)(1) abundantly appears from the Report of the Senate Finance Committee accompanying the bill. ¹ Nowhere

Page 86

does there appear any intention to deny to a taxpayer who chooses to execute part of his security transactions in partnership with another the right to deductions which plainly would be available to him if he had executed all of them singly. Nowhere is there any suggestion that Congress intended to tax noncapital security gains until they exceeded similar losses. The language of Section 23(r)(1) does not require such a construction. Nor do the available evidences of Congressional intent indicate such a purpose.

Respondent points out, however, that under Sections 181—189 of the Revenue Act of 1932, 47 Stat. 169, 222, 223, 26 U.S.C.A. Int.Rev.Acts, pages 544—546, ² part-

Page 87

nership income is computed on an entity basis, that items of partnership gross income do not appear on a partner's return, that only partnership net income is reflected in the individual partner's income and is reported only in the form of a distributable or distributed share. He contends that since partnership income is computed in the same way as an individual's the deduction afforded by Section 23(r)(1) to the partnership is a distinct privilege not to be confused or combined with that afforded to the individual. Thus, he argues, the deduction claimed here is inconsistent with the general scheme created for reporting partnership income as well as, in effect, a second or double use of Section 23(r)(1).

Page 88

It is not to be doubted that in the enactment of Section 23(r)(1) Congress intended not only to deal with individual security gains and losses, but also to permit losses suffered in partnership security transactions to be applied against partnership gains in like transactions. It does not follow, however, and the language of the statute does not provide, either expressly or by necessary implication, that losses sustained in an individual capacity may not be set off against gains from identical though distinct partnership dealings. If the individual losses are actually incurred in similar transactions it cannot justly be...