Winmill v. Commissioner of Internal Revenue

• Decision Date: 06 December 1937
• Docket Number: No. 72.,72.
• Citation: 93 F.2d 494
• Parties: WINMILL v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

93 F.2d 494 (1937)

WINMILL v. COMMISSIONER OF INTERNAL REVENUE.

No. 72.

Circuit Court of Appeals, Second Circuit.

December 6, 1937.

Thomas M. Wilkins, of Washington, D. C., for petitioner.

James W. Morris, Asst. Atty. Gen., and Sewall Key and Helen R. Carloss, Sp. Assts. to Atty. Gen., for respondent.

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

MANTON, Circuit Judge.

Petitioner seeks a review of an income tax deficiency, charged against him for 1932. For several years prior to and during 1932, he was a member of a partnership engaged in the stock brokerage business. During 1932 petitioner ran three separate securities trading accounts which were his own. These operations involved 419 separate sales of 61,992 shares which had been acquired in 353 separate purchases. The cost of these shares was $2,884,531.14, exclusive of purchase commissions amounting to $8,911. Of this $8,911, $7,493.50 was paid in 1932 and $1,417.50 in 1931. On the sale of these shares, the return to him was $2,722,904.37, representing a loss. In 1932 he paid brokerage commissions of $9,574 on said sales. During 1932 petitioner also operated four other security trading accounts in each of which he had an interest. These were joint ventures with another person who shared in the profits or losses as they might occur. Petitioner, however, furnished all the capital needed in the operation of these four accounts. During the year there were sold, through these four accounts, 2,525 shares of stock in 22 separate sales transactions. These 2,525 shares had been acquired in 22 separate purchases. Petitioner's share in the cost of this stock was $68,300. The buying commissions paid by him in 1932 amounted to $270. Petitioner's share of the proceeds of stock sold through the four accounts was $71,687.88, and petitioner's share of the selling commissions paid during 1932 was $273.75. His share of the profits made in these four joint accounts during 1932 was $2,267.80 after payment of all costs and expenses. All shares sold through each of these seven accounts had been held less than two years, and hence were "non-capital" assets under the 1932 Revenue Act (47 Stat. 192, § 101(c) (8), 26 U.S.C.A. § 101 note). In his 1932 return, petitioner claimed the right to offset his share of the profits arising from the operation of the four accounts against the losses resulting from the three accounts and show a loss deductible from ordinary income. The Commissioner disallowed the deductions claimed on the petitioner's return and increased his income for the year 1932 by $2,267.80, the sum of the stock profit on the joint accounts, plus $172,771.02, which represented the stock losses in the three accounts. This resulted in the additional tax. No part of the broker's commissions referred to have been allowed by the Commissioner as deductions. The petitioner kept his books and made his return for the year 1932 on a cash receipt and disbursement basis.

It is contended on this petition to review that section 23(r) (1) of the Revenue Act of 1932, 26 U.S.C.A. § 23 note,¹ dealing with deductible losses from the sale of "non-capital" assets, permits him to include among his own "non-capital" gains his share of the joint venture's "non-capital" gains, where, as here, another party agreed with him, without furnishing any capital, to share equally with petitioner in the profits and losses resulting from such transactions as the joint venture might conduct. He also contends that, if section 23 (r) (1) of the Revenue Act of 1932 limits the deductibility of losses resulting from sales of stocks or bonds (which are "non-capital" assets) to gains from such sales during the taxable year, it is unconstitutional and void. Petitioner contends further that the buying and selling commissions paid were a necessary incident to the conduct of his business — trading in the market — and that, pursuant to section 23 (a) of the Revenue Act of 1932, 26 U.S.C. A. § 23(a) and note,² he should be allowed these as deductions, even though such operations resulted in a loss and even though the losses from sales of "non-capital" assets are limited by section 23(r) of the act, 26 U.S.C.A. § 23 note, to the gains from similar transactions.

The facts were stipulated, but the petitioner also testified that he devoted a portion of his time to the operation of these seven trading accounts.

Section 23(r) places a limitation upon the deduction of losses. Congress has the power to condition, limit, or deny deductions from gross income in order to arrive at the net to be taxed. Burnet v. Thompson Oil & Gas Co., 283 U.S. 301, 51 S.Ct. 418, 75 L.Ed. 1049; Stanton v. Baltic Mining Co., 240 U.S. 103, 36 S.Ct. 278, 60 L. Ed. 546; Helvering v. Independent Life Ins. Co., 292 U.S. 371, 54 S.Ct. 758, 78 L. Ed. 1311. We held this provision of the statute constitutional in Davis v. United States (C.C.A.) 87 F.2d 323. The petitioner may not offset his gains from the four joint accounts by his losses on the three accounts which he operated individually.

Section 1111(a) (3) of the Revenue Act of 1932, 26 U.S.C.A. § 1696(2), defines "partnership" as including a "syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this Act title a trust or estate or a corporation; and the term `partner' includes a member in such a syndicate, group," etc. Assuming that the petitioner and his associates in the joint ventures were not partners as generally accepted, they were nevertheless engaged in a "joint venture" in conducting these accounts and in dividing the profits and losses. For taxing purposes they must be considered as a "partnership." Johnston v. Com'r, 86 F.2d 732 (C.C.A.2). Accordingly, the Commissioner correctly ruled that the set-off could not be made.

Section 23(a) of the 1932 Act (26 U.S. C.A. § 23(a) and note) provides that there shall be deducted in computing net income, the ordinary necessary expenses of carrying on a trade or business "including * * * compensation for personal services actually rendered." The volume of sales and the amounts thereof and the time consumed in carrying on these operations would justify the Board of Tax Appeals in finding (they made no such finding) that the petitioner carried on these operations as a trade or business. During the year he expended "for personal...