Petitioners Brief — Pierce v. United States (No. 36)

Supreme Court brief1940

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cn cnn cs socal alcaieipaiin ied esenediae id desde hanna eee ease eminie 1

SD NN in kines wr esac armani kipeaictibig china ~< 2

Statute and Regulations involved. .__-.............---.--.- 2

Rc niineann wilhudaus Wwkeddil tucks badauiababe i weintateth 2

Specification of errors to be urgedé___-.-...-_-.-----...---- 4

EE Le Pe EEE Oe ere 3

Argument: ; : :

The filing of a joint return does not, under the Revenue

ct of 1934, permit the husband’s capital losses to be

ucted from his wife’s capital gains............___- 8

ES eR I Pe Re le a ere OEE 10

eh OY OP Nok a a ods wdmainboerenidaments 12

3. The administrative construction._.........-..-.....-. 21

INR os. c :nin Bugthinqes Abbadon nek Aaawaticeaasneeiael 33

AREAS Sing - REE LOSS awe Bask nwedeuae 34

CITATIONS

Cases:

Cole v. Commissioner, 81 F. (2d) 485........--.---..---- 20, 31

Commisstener v. Brumder, 82 F. (2d) 944_.....-.-.-.--_-- 7

Commissioner v. Rabenald, 108 F. (2d) 639. .___-_- anceie 31, 32

Commissioner v. Thomas, 84 F. (3d) Sa ea 6, 19

Crowe v. Commissioner, 86 F. (2d) 796_.__..-...-_--- se

Demuth v. Commissioner, decided February 7, 1938, memo-

randum opinion, unreported_--_--..........---------- 11

Demuth v. Commissioner, 100 F. (2d) 1012, certiorari de-

ee ia tas ngcansdccetedumaiewae 5, 10

Gaines v. Helvering, 111 F. (2d) 144, pending on petition

for certiorari, No. 113, this Term--.-.----....-..------. 5, 10

Gummey, Frank B., 26 B. T. A. 8942. ._......---------- 19, 23

oT Re ee eee 31, 33

Helvering v. N. Y. Trust Co., 292 U. 8. 455_......_.----- 29

Helvering v. Wilshire Oil Co., 308 U. 8. 90___-__-. ..---.-- 29, 33

cuemeetng ©. Wingtes S00 U. Bo Tiivcnem cic cscn banddsan 32

Hill v. United States, 12 F. Supp. 798__..-..-----.------ 19

McCaughn v. Hershey Chocolate Co., 283 U. 8. 488_...--_--. 33

Monigomery v. Commissioner, 37 B. T. A. 232....__-.-_-- 11

Nelson v. Commissioner, 104 F. (2d) 521_.....-_..------ 5, 10

Pierce v. Commissioner, 37 B. T. A. 225.......-.-.------ 1

Pierce v. Commissioner, 100 F. (2d) 397_ 5, 10, 11, 12, 26, 27, 28, 29

Rogers v. Commisaioner, 111 F. (2d) 987_....--..-.------ 31

Estate of Sanford v. Commissioner, 308 U. 8S. 39......-.-- 29

261513—40——-1 (I)

Cases—Continued. ; Page

Sweet v. Commissioner, decided June 30, 1938, memorandum

| AEE SOP "hea ee ll

Sweet v. Commissioner, 102 F. (2d) 103, certiorari denied,

I Oe a ns a il an ects ati 5, 10

Taft v. Helvering, 111 F. (2d) 145, pending on petition for

certiorari, No. 183, this Term...................... 5, 12, 16

Uihlein, Joseph E., 30 B. T. A. 399, affirmed sub nom. Com-

missioner v. Brumder, 82 F. (2d) 944_....._..__.___-_. 19

Van Vleck v. Commissioner, 80 F. (2d) 217, certiorari de-

a ns idinrcahoeiel acaba oninatdanedie de ieetus 6, 19

Woolford Realty Co. v. Rose, 286 U. 8. 319__..__._______- 19

Statutes:

Revenue Act of 1918, c. 18, 40 Stat. 1057, Sec. 223______-_ 14

Revenue Act of 1921, c. 136, 42 Stat. 227, Sec. 223_______ 14

-Revenue Act of 1932, c. 209, 47 Stat. 169:

6 <p EE Ena aokis wag enacnaniees 7, 11, 12, 17, 22, 28, 29

pe MRT i Mane Nee 11

Revenue Act of 1934, c. 277, 48 Stat. 680:

Sec. 23 (j) (U. 8. C., Title 26, Sec. 23)......--.-.-- 4, 8, 34

See. 23 (0) (U. 8. C., Title 26, See. 23)..............-..- 11, 16

Sec. 51 (b) (U. S. C., Title 26, Sec. 51)_...-.---.-__.-_-

6, 8, 9, 12, 13, 14, 15, 30,

Sec. 51 (b) (1) (U. 8. C., Title 26, Sec. 51).-._.-___- 34

Sec. 51 (b) (2) (U. 8. C., Title 26, Sec. 51).-.__.___- 4, 34

Sec. 117 (a) (U. 8. C., Title 26, Sec. 101)_....__..... 8,34

> Sec. 117 (b) (U. 8. C., Title 26, Sec. 101)_..___.___- 35

Sec. 117 (d) (U. 8. C., Title 26, Sec. 101)__.__.____- 4,

7, 8, 12, 13, 16, 17, 22, 23, 24, 26, 30, 32, 35

Revenue Act of 1936, c. 690, 49 Stat. 1648, Sec. 117 (d)___- 24, 31

Revenue Act of 1938, c. 289, 52 Stat. 447:

eR, RR AEG oS Pee oa cI eC 19

(RRS Mi BY Raa ERS. E UR aa oda ee 20, 31, 32

Ot 21

EI ero aoe eS FERRE es ROME 21, 24, 32

Revenue Act of 1939, c. 247, 53 Stat. 862, Sec. 212______- 24

Internal Revenue Code, Sections 24 (b) (1), 117... -..--- 19, 25

Miscellaneous:

I I reat scald Ra wecician yg atone diaicnbuy masse 19

I nt alin macdanuon 23

XIII-2 Cum. Bull. 293, I. T. 2824, overruling I. T. 1997,

NSS GS SRS REZ ESI pene Ses CRETE Rare 19

XIV-—2 Cum. Bull. 156 (1935), G. C. M. 15438______ 7, 23, 29, 30

Den Se, SE es nau netcctinenandamons« 19

1933 C. C. H., Federal Tax Rewrite Service, par. 6037__-_- 22

Hearings before Senate Committee on Finance on: H. R.

8245, 67th Cong., Ist Sess., p. 74............--.-..-.. 14

H. Rept. No. 704, 73d Cong., Ist Sess____.__.....__-_-- ._ 17,19

H. Rept. No. 350, 67th Cong., 2d Sess., p. 13......-...- * 4

H. Rept. No. 1860, 75th Cong., 3d Sess., pp. 29-30_....-- 20, 32

PREP RI OEE FRI SURE Bh TIERONE OTD SETAE ONT ee eC kn ee |

Ill

Miscellaneous—Continued. Page

(1940) 53 Harv. L. Rev.:

Gh cat OE: a LR oC RE PS TE 10, 19, 21, 33

; St Ons cenenhduneeeendhekaunaeuduuwent 19, 21, 33

Paul and Havens, Husband and Wife under the Income Taz

(1936) 5 Brooklyn L. Rev. 241, 257.........--...---- 18

Sol: Op. 90, Cum. Bull. No. 4, p. 236 (1921)........----. 14

8. Rep. No. 275, 67th Cong., Ist Sess., p. 17.....-.------ 14

8. Rep. No. 665, 72d Cong., Ist Sess., p. 17-......-.---- 17

Treasury Regulations 62, promulgated under the Revenue

Act of 1921:

PE EP atisscutasnehurcikn webtaneaaioaséende 7, 21

Treasury Regulations 65, promulgated under the Revenue

Act of 1924:

Bi clk wekowaseecyadhescesadaddsweodevcuen 22

Treasury Regulations 69, promulgated under the Revenue

Act of 1926:

CN EET A CRE. SMO A A aR 22

Treasury Regulations 74, promulgated under the Revenue

Act of 1928:

PONS SEG ee SSO ee AMOR SF AOR tae 22, 27

Treasury Regulations 77, promulgated under the Revenue

Act of 1932:

Treasury Regulations 86, promulgated under the Revenue

Act of 1934:

Etre: the vain atk cexatarnigasaaie iis 21, 22, 25, 26, 27, 28, 29, 36

Fk Eee 4, 7, 10, 23, 24, 25, 28, 29, 30, 31, 32, 37

9 Tréasury Regulations 94, promulgated under the Revenue

Act of 1936: ;

Dp CM cikeua nace aewiagumuniaant nkdeaae be 22

Be SIE ca cacccaddbeveccdwiwes vores nnuckne 24

Treasury Regulations 101, promulgated under the Revenue

Act of 1938:

En, cncabliddidiuasobéuhdennatccaondaes 22

CN A REESE, CRE Ge oO NLC ee Mo! 25

Treasury Regulations 103, promulgated under the Internal

Revenue Code:

CIN nb a eee eunweeneawencuwae cue mie 22

ans ce deata st dna cin blalaibusas a andes ciao 25

(1940) 49 Yale L. J

aid inal niabartnds hieti-binidedyitctueaees oaremibcaicaas eae --< 10, 17, 20, 32

dimdbbimdaducdsdduiwpinkuduetdaied dane tuuanenes 17

Di dctidintnigesy tthbavtibobninddabaueweinwwon 20

Piped ierinncoaborsesbarinesverasanenes 17, 20, 32

@LANK PAGE

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Guthe Supreme Court of the United States

OctToBER TERM, 1940

No. 36

Guy T. Hetvertnc, CoMMISSIONER OF INTERNAL

REVENUE, PETITIONER

WaLteR C, JANNEY AND PAULINE F. M. JANNEY

ON WRIT OF CERTIORARI TO THE UNITED STATES CIRCUIT

COURT OF APPEALS FOR THE THIRD CIRCUIT

BRIEF FOR THE PETITIONER

OPINIONS BELOW

The opinion of the Board of Tax Appeals (R.

23-27) is reported in 39 B. T. A. 240. The opinion

of the Cireuit Court of Appeals (R. 32-36) is re-

ported in 108 F, (2d) 564.

JURISDICTION

The judgment of the Circuit Court of Appeals

was entered December 26, 1939 (R. 36-37). The

petition for a writ of certiorari was filed March 26,

*The date of the judgment is erroneously given in one

place (R. 37) as December 26, 1940.

(ay,

1940, and was granted April 29, 1940 (R. 37). The

jurisdiction of this Court rests upon Section

240 (a) of the Judicial Code as amended by the Act

of February 13, 1925.

Gouaietone PRESENTED

Whether, under the Revenue Act of 1934, the fil-

ing of a joint return permits the husband’s capital

losses to be deducted from his wife’s capital gains.

STATUTE AND REGULATIONS INVOLVED

The pertinent provisions 6f the Revenue Act of

1934 and of the regulations promulgated there-

under will be found in the Appendix, infra, pp.

34-37.

STATEMENT

The stipulation of facts (R. 8-22), adgpted by

the Board of Tax Appeals as its findings (R. 24)

may be summarized as follows: :

_- The respondents are husband and wife and re-

side at Bryn Mawr, Pennsylvania (R. 8). Dur-

ing 1934 the wife, Pauline F. M. J anney, realized

net gains from the sale of capital assets in the sum

of $126,303.52. The amount of such gains to be

taken into account under Section 117 (a) of the

Revenue Act of 1934 (set out in the Appendix)

was $94,491. During 1934 the husband, Walter

C. Janney, realized net losses from the sale of capi-

tal asests in the sum of $220,687.06, of which the

amount to be taken into account under Section

117 (a) of the Revenue Act of 1934 was arora

(R. 8-9).*

The respondents filed a single joint income tax

return for the year 1934 (R. 8). In this return

they reported a capital gain of $2,527.65, which

represented the difference between the wife’s ad-

justed capital gains ($94,491) and the husband’s

adjusted capital losses ($91,963.35) (R. 9-10, 13).

In auditing the return the Commissioner held,

in accordance with Article 117-5 of Regulations 86,

that the losses sustained by the husband could not

be applied to reduce the gains realized by the wife

and that the husband’s losses accordingly could be

deducted only to the extent of his own gains plus

$2,000 (R. 10). By reason of this holding the

Commissioner increased the capital gain reported

by respondents by $89,963.35 (R. 10). On the basis

of this adjustment, and of another adjustment not

here inwolved, the Commissioner determined a defi-

ciency of $37,109.29 (R. 5-6).

The Board of Tax Appeals. sustained the Com-

missioner’s decision on the capital loss issue and

2 The’sum of $126,303.52 represents Mrs. Janney’s capital

gains less her own capital losses (R. 9). The sum of $220,-

687.06 represents Mr. Janney’s capital losses less his own

capital gains (R. 9). The*item of $04,401 stated to repre-

sent the percentage of Mrs. Janney’s capital gains which

may be taken into account and the item of $91, 963.35 stated

to represent the percentage of Mr. Janney’s losses to be

taken into account are based on these net gains and net

dosses.

determined a deficiency of $36,700.60 (R. 27). The

Circuit Court of Appeals: reversed the Board

(R. 37). This Court granted certiorari (R. 37).

SPECIFICATION OF ERRORS TO BE URGED

The Circuit Court. of Appeals erred:

1. In holding that Section 117 (d) of the Reve-

nue Act of 1934, either alone or in conjunction with

Section 51 (b) (2); permits losses sustained by one

spouse on the sale of capital assets to be applied

against the gains of the other spouse from similar

sales, if a joint return is filed.

2. In not holding that under Section 117 (d) and

Section 51 (b) (2) a loss sustained on the sale of

capital assets by one spouse is deductible only to

the extent of his or her gains from similar’ sales

(plus $2,000), even though a joint return is filed.

3. In not holding that the deductions which may

be entered in a joint return are those to which

each spouse, separately considered, is entitled.

4. In not holding that regulations promulgated

under Section 51 (b) (2) and Section 117 (d) of the

Revenue Act of 1934 were valid regulations which —

controlled the disposition of this case.

5. In holding that Article 117-5 of Regulations

86 is inconsistent with Section 51 (b) (2) of =

Revenue Act of 1934 and is invalid.

SUMMARY OF ARGUMENT

Sections 23 (j) and 117 (d) of the Revenue Act |

of 1934 together provide that losses from the sale

5 at tars.

of capital assets shall be allowed as deductions —

only to the extent of $2,000 plus gains from such

sales. Section 51 (b) permits a husband and

wife to make a single joint return, in which case

the tax shall be computed on the aggregate income.

It is the Government’s position that even if a

joint return is made the husband’s capital losses

ean be deducted only to the extent of his own capi-

tal gains, and that gains of the wife cannot aug-

ment the deduction for the husband’s losses. De-

ductions in a joint return may not be computed as

if the husband and wife were one person. What-

ever doubt might attend this question if the stat-

ute stood alone-is eliminated, we submit, by the

administrative construction, which has been im-

pliedly approved by Congress. 4.

1. With-the exception of the decision wale the

Government’s position has been uniformly sus-

tained by the courts. Pierce v. Commissioner, /

100 F. (2d) 397 (C. C. A. 2d); Demuth v.

Commissioner, 100 F. (2d) 1012 (C. C. A. 2d),

certiorari denied, 307 U. S. 627; Sweet v. Commis-

sioner, 102 F. (2d) 103 (C. C. A. Ist), certiorari

denied, 307 U. S. 627; Nelson v. Commissioner,

104 F. (2d) 521 (C. C. A. 4th) ; Gaines v. Helver-

ing, 111 F. (2d) 144 (€. C. A. 2d), pending on peti-

tion for certiorari, No. 113, this Term. And com-

pare Taft v. Helvering, 111 F. (2d) 145 (C. C. A.

281518—40——2

2d), pending on petition for certiorari, No. 183,

this Term.

2. The provision in Section 51 (b) that if a

_joint return is made the tax shall be computed on

the aggregate income contemplates that a hus-

band and wife may, in such a return, utilize all

deductions which would be allowable to either sep-

arately, including deductions of one spouse in ex-

cess of that spouse’s gross income,. But it carries

no inference that if a joint ret is made these

deductions are to be determined as if the husband

and wife were one person. Deductions are to be

computed as in any other case, and the aggregate.

net income is then to be ascertained by combining

the separate items of income and the separate de-

ductions of each spouse.

Statutory limitations upon the allowance of a

deduction which are contingent upon the amount

or kinds of inccine of the taxpayer should not be

abridged by treating husband and wife as a sin-

gle taxpayer if they elect to file a joint return.

There is no general principle that husband and

wife are to be treated as a single taxpayer for

purposes of deductions if they file a joint return.

Instead the cases have regarded them as separate

taxpayers in computing deductions, except as Con-

gress has specifically provided otherwise. Van

Vleck v. Commissioner, 80 F. (2d) 217 (C. C. A.

2d), certiorari denied, 298 U. S. 656; Commis-

sioner V. Thomas, 84 F. (2d) 562 (C. C. A. 5th);

Commissioner v. Brumder, 82 F. (2d) 944 (C. C.

A. 7th).

3. Whatever doubt might attend the meaning of

the Act if it stood alone it resolved by the admin-

istrative construction which has been tacitly ap-

proved by.Congress. Ever since 1921 the Treas-

ury has taken the general position that even-in a

joint return only those deductions can be taken ‘‘to

which either spouse is entitled.’’ Article 401 of

Regulations 62. Under Section 23 (r) (1) of the

1932 Act, the predecessor of Section 117 (d) of the

1934 Act, the Bureau of Internal Revenue ruled

that securities losses sustained by the wife might

not be offset against securities gains of the hus-

band, even though a joint return was filed. G. C. M.

15438, Cum. Bull, XIV-2, p. 156. And Article

117-5 of Regulations 86, promulgated under the

Revenue Act of 195% and explicatory of Section

117 (d) of that Act, explicitly provides that the

limitation ‘‘on the allowance of losses of one spouse

from sales or exchanges of capital assets is in ail

cases to be computed without regard to gains and

losses of the other spouse upon sales or.exchanges

of capital assets.”’ This regulation unequavocally

covers the question here at issue. The interpreta-

tion given Section 117 (d) of the 1934 Act by this

regulation received tacit Congressional approval

through the enactment of identical statutory provi-

sions in the Revenue Act of 1936 and of analogous

provisions in the Revenue Acts of 1938 and 1939.

ARGUMENT

THE Fitine oF a Joint Retuxn Does Not, UNDER

THE Revenve Act or 1934, Permit THE Hvs-

BAND’s CAPITAL LOSSES TO BE DEDUCTED From His

Wire’s Capital GAINS

Section 23 (j) of the Revenue Act of 1934 pro-

vides that losses from sales or exchanges of capita

assets shall be allowed as deductions only to the

extent provided in Section 117 (d). Section

117 (d) provides: ‘‘ Losses from sales or exchanges

of capital assets shall be allowed only to the ex-

tent of $2,000 plus the gains from such sales cr

exchanges.’’ Section 51 (b) of the Act permits a

husband and wife to make a single joint return

‘“in which case the tax shall be computed on the

aggregate income.”’

The two respondents in the present case are hus-

band and wife and they filed a joint return for

1934. During that year the husband realized net

losses of $220,687.06 from the sale of capital assets,

of which $91,963.35 was to be taken into account

in computing net income under Section 117 (a)

of the Revenue Act of 1934.’ During the same

* Section 117 (a) of the Revenue Act of 1934 (set out in

the Appendix) provides that in the case of a taxpayer

other than a corporation only certain enumerated per-

centages of the gain or loss. recognized upon the sale or

exchange of capital assets shall be taken into account in

computing net income, the percentages being graduated

downward according to the length of time for which the

capital assets have been held.

period the wife realized net gains of $126,303.52

from the sale of capital assets, of which $94,491

was to be taken into account under Section 117 (a). ©

The court below held that the husband’s net

losses from the sale of capital assets might be de-

ducted in the joint return to the extent of the wife’s

net gains from similar sales. It said that the pro-

vision of Section 51 (b) that if a joint return is

used the ‘‘tax shall be computed on the aggregate

income’’ necessarily means ‘‘that in arriving at

joint net income both gross income and deductions

of the spouses must be aggregated and treated as

the income and deductions of a single taxpayer.”’

(R. 34).

It is the Government’s position that the hus-

band’s capital losses could be deducted only to the

extent of his own capital gains plus $2,000, and

that the gains of the wife could not be used to

augment the permissible deduction for the hus-

band’s losses. It is, of course, admitted that if

the spouses had made separate returns each could

deduct his or her capital losses only to the extent

of his or her capital gains. And we think that

nothing in the statutery provision permitting a

joint return implies that deductions are to be com-

puted in such a return as if the husband and wife

were one person. On the contrary, we think that

deductions are to be determined separately for each

spouse, and that their aggregate net income is then

to be ascertained by combining their separate items

of income and their separate deductions.

— -

If, however, the statute is ambiguous, that am-

higuity is resolved by the administrative construc-

tion, tacitly approved by Congress, in favor of

the interpretation which we here urge. Article

117-5 of Regulations 86, promulgated under the

Revenue Act of 1934, explicitly and admittedly

covers the present case. This regulation was pre-

sumptively valid when issued. It has since been

approved by Congress, by its reenactment in the

Revenue Act of 1936 of statutory provisions identi-

eal with those of the 1934 Act on which the regula-

tion was based, and by its enactment of analagous

provisions in the Revenue Acts of 1938 and 1939.

1. The Decisions.—With the single exception of

the decision helow in the present case, the posi-

tion here taken by the Government has been uni-

formly upheld by the lower courts.‘ Substantially

the same question which is here presented was

resolved in favor of the Government in Pierce v.

Commissioner, 100 F'. (2d) 397 (C. C. A. 2d) That

case has since been followed in Demuth v. Commis-

sioner, 100 F. (2d) 1012 (C. C. A. 2d), certiorari

denied, 307 U. S. 627; Sweet v. Commissioner, 102

F. (2d) 103 (C. C. A. 1st), certiorari denied, 307

U. S. 627; Nelson v. Commissioner, 104 F. (2d)

521 (C. C. A. 4th) ; and Gaines v. Helvering, 111 F.

*The decision below is commented upon and criticized

adversely in (1940) 49 Yale L. J. 1279, and in (1940) 53

Harv. L. Rev. 681.

(2d) 144 (C. ©. A. 2d), pending on petition for cer-

tiorari, No. 113, this Term. The Gaines case, like

the case at bar, was decided under the Revenue Act

of 1934. The other cases involved the cognate pro-

visions of the Revenue Act of 1932. Section 23 (r)

(1) of that Act provided that losses from sales or

exchanges of stocks and bonds which were not cap-

ital assets should be allowed only to the extent of

gains from such sales or exchanges, and Section

101 (ce) (8) defined ‘‘capital assets’? as property

held by the taxpayer for more than two years. In

each of those cases the courts held that the losses of

one spouse from the sale of non-capital assets could

not be deducted from the gains of the other spouse

from similar sales, even though a joint return was

used. The court below recognized that these cases

support the Government’s position, but declined to

follow them (R. 33).°

Since the decision below, the Circuit Court of

Appeals for the Second Circuit has held per

curiam, upon the authority of its decision in the

Pierce ease, that the limitation on the deduction

for charities to 15 percent of the taxpayer’s net

income (Section 23 (0) of the Revenue Act of 1934)

5 The Board of Tax Appeals also has consistently upheld

the Government’s position. Pierce v. Commissioner, 37

B. T. A. 225; Montgomery v. Commissioner, 37 B. T. A.

932; Sweet v. Commissioner, decided June 30, 1938, memo-

randum opinion, unreported; Demuth v. Commissioner,

decided February 7, 1938, memorandum opinion, unreported.

must be computed with reference to the husband’s

and wife’s separate net incomes, and may not, even

though a joint return is filed, be computed on their

combined net income. Taft v. Helvering, 111 F.

(2d) 145, pending on petition for certagrari, No.

183, this Term.

2. Meaning of the Act.—The decision below in

the present case relies largely upon the reasoning

of Judge Learned Hand’s dissent in the Pierce

ease. Both the opinion below and that of Judge

Hand rest their rejection of the Government’s

position, not on any construction of Section 117

(d) in the present case or of Section 23 (r) (1)

of the 1932 Act in the Pierce case, but on their

interpretation of Section 51 (b). In ‘his dissent

in the Pierce case Judge Hand asserted that the

privilege given by Section 51 (b) of filing a joint

return was based upon disregarding the source of

the deductions and of the items of income. 100 F.

(2d) at 398, 399. The court below approved this

reasoning, and similarly concluded that tue provi-

sion that if a joint return is made the tax shall be

computed on the aggregate income necessarily

means that both gross income and deductions of

the spouses be ‘‘treated as the income and deduc-

tions of a single taxpayer.”’ (R. 341.)

This argument fails, we think, to distinguish

between the undisputed proposition that the al-

lowable deductions of both spouses are to be con-

solidated in a joint return, and the further propo-

sition, here at issue, that the two spouses are to

be regarded as a single taxpayer or as one person

in determining what deductions are allowable in

such a return. It overlooks, in other words, the

fyndamental distinction between ‘‘nooliag’’ the de-

ductions and items of income of the two spouses

in a joint return and treating the two spouses as

one person for the purpose of ascertaining what

items of income and what deductions are to be

entered in that return. If the capital losses of

Mr. Janney in 1934 had been deductible in full,

without limitation, those losses could have been

pooled in the joint return with any other deduc-

tions allowable to Mr. Janney or to his wife, and

their aggregate sum could have been deducted from

the aggregate income of the two in determining

their taxable net income. But Mr. Janney’s capi-

tal losses were not deductible in full, without limi-

tation. By Section 117 (d) the deduction was

specifically limited to $2,000 plus capital gains.

Sectior#51 (b) provides that if a joint return is

filed the tax shall be computed on the aggregate

income. But nothing in this provision suggests

that the making of a joint return expands the

measure of the deduction under Section 117 (d)

to embrace the capital gains of both spouses.

The provision of Section 51 (b) in question has.

to do with the computation of the tax on the joint.

261513—40——-3 ‘

return and not with determining what items of in-

come should be reported, or what deductions are

allowable, or the amount of permissible deductions.

eet

It unquestionably ¢ontemplates that a husband

and wife may, in a joint return, use all deductions

which would be allowable to either separately, in-

cluding deductions of one spouse in excess of that

spouse’s gross income.’ But it carries no infer-

ence that because a joint return is employed these

deductioys are to be determined as if the husband

and wife were one person. On the contrary, it

is most unlikely that Congress intended by Sec-

tion 51 (b) to provide for different limitations

° The provisions of Section 51 (b) of the Revenue Act of

1934 were first enacted in that form in Section 223 of the

Revenue Act of 1921, and were contained also in the various

intervening revenue acts. The Revenue Act of 1918, Sec-

tion 223, provided for che filing of joint returns but di’ not

‘specify how the tax was to be computed if a joint return was

filed. In Sol. Op. 90, Cum. Bull. No. 4, p. 236 (1921), the

Solicitor of Internal Revenue ruled that under the’1918 Act

the tax of a husband and wife filing a joint return was to be

computed on their net aggregate income, and that the deduc-

tions of one spouse, if they exceeded his or her income, could

be deducted from the gross income of the other. Appar-

ently,*however, some doubt existed as to right of taxpayers

having income subject co surtaxes to file joint. returns and

have their tax computed in this fashion, and it was to resolve

this doubt thet there was inserted in the 1921 Act the pro-

vision that in joint returns the tax should be computed on

the aggregate income. See S. Rep. No. 275, 67th Cong., 1st

Sess., p. 17; H. Rep. No. 350, 67th Cong., ist Sess., p. 13;

, Hearings before the Senate Committee on Finance on H. R.

8245, 67th Cong., 1st Sess., p. 74.

¢ <7 %

on the allowance of deductions depending upon

whether joint or several returns were made.

Rather the implication is that deductions are to be

determined as in any other case and that the ag- -

gregate net income is then to be ascertained by

combining the separate items of income and the

separate deductions of each spouse. In other

words, two calculations are required for determin-

ing the tax. The first is the calculation, which

would be necessary in any return, of the separate

items of income and the separate deductions.

Section 51 (b) has no reference to this first cal-

culation. It merely provides that after this cal-

culation has been made, the items of income and

the deductions of the husband and those of the

wife are to be combined and the tax calculated on

the aggregate net income thus determined. There

is nothing in the phrase ‘“‘aggeregate income’’ to

suggest that a husband and wife are to be con-

sidered as one person in determining what deduc-

tions are allowable, and it has never before

been construed as prescribing such a rule, either

by the courts, by the Board of Tax Appeals, or by

ile Treasury Department regulations.

Statutory limitations upon deductions which

are contingent upon the amount or kinds of

income of the taxpayer should not be curtailed

by permitting husband and wife to elect to be

treated as a single taxpayer by filing a joint re-

turn. There can be no question that such a con-

oad.

struction of the revenue act would in considerable

part defeat such limitations upon deductions. For

example, the statutory limitation here involved,

Section 117 (d), provides that capital losses shalt

be offset only against capital gains, except that cap-

ital losses are deductible unconditionally up to

$2,000. The operation of this limitation would

be substantially curtailed if capital losses. could

be offset against capital gains of either spouse,

-sinee the two would be likelier to have cap-

ital gains than the spouse who suffered the losses

would be alone. Again, the statutory provision

involved in the Taft case, Section 23 (0), hmits

deductions for charitable contributions to 15 per-

cent of the taxpayer’s net income. This limitation,

too, would be relaxed if a husband and wife making

a joint return were treated as a single taxpayer,

since the combined net income of husband and wife

would normally exceed the individual income of the

spouse making the contributions. Situations can

be conceived with respect to both of these statutory

limitations on deductions in which the single tax-

payer theory urged by the Government would be

advantageous to the taxpayer, and the contentions

urged by reSpondents disadvantageous.’ But, on

* Seetion 117 (d) allows a deduction of $2,000 of capital

loss from ordinary income, which would in some situations

render advantageous to taxpayers the interpretation here

urged by the Government. Thus, if both husband and wife

had large capital losses and no capital gains, they could,

under the separate taxpayer theory which we urge, each

i rn teen nines

17 4

the whole, the construction here urged by the Gov-

ernment is that calculated to giye full effect to such

statutory limitations on deductions and thus to

produce maximum revenue. See (1940) 49 Yale

L. J. 1279, 1284.

In the court below respondents argued, in effect,

that to allow capital losses of one spouse to be offset

against capital gains of the other spouse would not

be inconsistent with the purpose of Section 117 (d).

Specifically they pointed out that the legislative

history both of Section 117 (d) of the 1934 Act and

of its predecessor, Section 23 (r) (1) of the 1932

Act, shows that the purpose of Congress was to pre-

vent taxpayers from escaping taxation on their or-

dinary incomes, that is on income from salaries,

rents, dividends, ete., by utilization of deductions

for security losses. See S. Rep. No. 665, 72d Cong.,

1st Sess., p. 17; H. Rep. No. 704, p. 10, 73d Cong.,

2d Sess., p.10. And respondents argued that since

to permit security losses of one spouse to be offset

against security gains of the other spouse would

take a $2,000 deduction, while under the theory of respond-

ents. but one $2,000 deduction would be allowable for both

if a joint return were filed. See (1940) 49 Yale L. J. 1279,

1282. The spouses would still, however, have the option

of filing separate recurns.

Similarly, in the case of the limitation of charitable de-

ductions to 15 percent of net income, the construction urged

by respondents would be advantageous to the Government

if one of the two spouses had no net income, ¢. ¢., had deduc-

tions in excess of gross income. But there, too, the taxpay-

ers would still have the option of filing separaig returns.

not enable them to escape taxation on their ordi-

nary incomes, Congress cannot have intended to

prehibit such offsets.

‘This argument, carried to its logical conclusion,

would permit capital losses sustained by one spouse

to be offset against capital gains of the other spouse

regardless of whether separate or joint returns

were made.. Moreover, while the basic purpose of

Congress was doubtless to prevent security losses

from being applied against ordinary income (ex-

cept up to $2,000), Congress did not relieve capital

gains from taxation, except as capital losses were

available under the statute to offset them. And

the normal reach of the tax on capital gains would

be curtailed if husband and wife, by filing a joint

return, could offset the capital losses of both

against the capital gains of éither.

There is no general principle that husband and

wife are to be treated as a single taxpayer for

purposes of deductions if they elect to file a joint

return. ‘‘Even if they file joint returns, husband

and wife apparently do not blend into a single tax-

payer, at least for the purpose of the deduction

provisions.”” Paul and Havens, Husband and

Wife under the Income Tax (1936), 5 Brooklyn

L. Rev. 241, 257.

Thus net losses sustained by the husband in a

year in which he filed a separate return may not be

carried over and deducted from the income of the

wife in a joint return for the following year. Van

Vleck v. Commissioner, 80 F. (2d) 217 (C. C. A.

2d), certiorari denied, 298 U. S. 656. The court

said (80 F. (2d) at 218), ‘“‘Although the peti-

tioners filed a joint return in 1930, each of them

remained a separate and distinct taxpayer.’’ Com-

pare Woolford Realty Co. v. Rose, 286 U. 8. 319.

Similarly, it was formerly held that losses sus-

tained by one spouse in a bona fide sale of securi-

ties to the other spouse could be deducted in a

joint return. Commissioner v. Thomas, 84 F.

(2d) 562 (C. C. A. 5th); Joseph E. Uihlein, 30

B. T. A. 399, affirmed sub nom. Commissioner v.

Brumder, 82 F. (2d) 944 (€. C. A. 7th); Hill v.

United States, 12 F. Supp. 798 (C. Cls.); Frank

B. Gummer, 26 B. T. A. 894; I. T. 2824 XITI-2

Cum. Bull. 293, overruling I. T. 1997, I{I-1 Cum.

Bull. 149. Section 24 (b) (1) of the Internal

Revenue Code, derived from Section 24 (b) (1) of

the Revenue Act of 1938, now prohibits deductions

for losses resulting from sales between members

of a family, but this provision was adopted

merely to prevent tax evasion. See H. Rep. No.

704, 73d Cong., 2d Sess., p. 23; 1939-1 Cum. Bull.

554, 571; 78 Cong. Rec. 2662. See also (1940) 53

Harv. L. Rev. 681, 682.. It prohibits the deductions

in question without reference to whether separate

or joint returns are filed ; clear proof that it carries

no general inference that husband and wife are to

be treated es a single taxpayer if they make a joint

return. See (1940) 49 Yale L. J. 1279, 1283.

Formerly, also, some courts refused to hold

spouses jointly and severally liable for the tax

even though they filed a joint return. Cole v.

Commissioner, 81 F. (2d) 485, 487 (C. C. A. 9th) ;

Crowe v. Commissioner 86 F. (2d) 796 (C. ©. A.

7th). The doubt engendered by these decisions

was eliminated by the insertion in Section 51 (b)

of the 1938 Act of a provision explicitly making

liability with respect to the tax joint and several.

Here too, however, the reason for the change was

merely administrative expediency and not any

theory that husband and wife are one taxpayer.

See H. Rep. No. 1860, 75th Cong., 3d Sess., pp.

29-30; (1940) 49 Yale L. J. 1279, 1284. And see

infra, pp. 31-82.

Section 51 (b), we have sought to show, carries

no inference that spouses filing a joint return are

to be treated as a single taxpayer for the purpose

of computing limitations on deductions. And since

husband and wife are not required to make a joint

return the privileges stemming from the option

to do so should not be increased beyond the appar-

ent intention of Congress. If, however, it‘ is

thought that the general congressional policy to

favor the family unit, embodied in Section 51 (c)

and in the larger personal exemption accorded

married taxpayers, encompasses the issue at bar,

that policy conflicts with the specific congressional

intention, expressed in Section 117 (d), stringently

to limit deductions for capital losses. ‘** * * the

policy of mitigating the tax burden of the family

as an economic unit might be balanced against that

of limiting deductions to these specifically al-

iowed.’’ (1940) 53 Harv. L. Rev. 681, 682. This

statutory ambiguity, or conflict of policies, if there

be such, ig appropriate for solution by adminis-

trative construction. Below respondents asserted

no more than that the relevant provisions of the

Act are ambiguous, and, standing alone, are com-

patible with either the construction urged by re-

spondents or that urged by the Government.

3. The administrative construction.—Article 51-1

of Regulations 86, promulgated under the Revenue

Act of 1934, and explicatory of Section 51 of that

Act®reads: 7

If the income of each is included in a single

joint return, the tax is computed on the ag-

gregate income and all deductions and

credits to which either is entitled shall be

taken from such aggregate income.

This provision is ultimately derived from Article

401 of Regulations 62, promulgated under the

Revenue Act of 1921 (Section 223), which has been

preserved in substance in succeeding regulations.’

® See Article 401 of Regulations 65 and 69, promulgated,

respectively, under the Revenue Acts of 1924 and 1926 (Sec-

tion 223 of those Acts); Article 381 of Regulations 74 and

77, promulgated, respectively, under the Revenue Acts of

1928 and 1932 (Section 51 of those Acts); Artiele 51-1 of

As has been stated, Section 117 (d) of the Reve-

nue Act of 1934 was derived, with modifications

nét here material, from Section 23 (r) (1) of the

Revenue Act of 1932: the revenue acts prior to

1932 had not contained any comparable provision

limiting deductions for stock losses. No regula-

tions explicatory of Section 23 (7) (1) were pro-

mulgated under the Revenue Act of 1932.

However, in a letter of December 29, 1932, to the

Commerce Clearing House, Ine. (1933 C. C. H..

Federal Tax Rewrite Service, par. 6037) the Com-

missioner stated that in a joint return the wife’s

gains from sales of securities might be offset by

the husband’s losses from such sales, since a ‘‘joint

return is treated as if it was the return of a single

individual.’’ The view thus expressed by the Com-

missioner was never embodied in any sort of Treas-

Regulations 86 and 94, promulgated, respectively, under the

Revenue Acts of 1934 and 1936 (Section 51 of those Acts).

The provision in question was somewhat amplified in Ar-

ticle 51-1-(b) of Regulations 101, promulgated under the

Revenue Act of 1938 (Section 51). It there reads: “A

husband and wife, if living together at the close of ghe

taxable year, may eject to make a joint return (see Section

51 (b)), that is, to include in a single return made by them

jointly the income and deductions of each, even though one

has no gross income. In such a case, the tax shall be com-

puted on the aggregate income and all deductions and credits

to which either is entitled shall be taken from such aggregate

income.” This expanded version is retained as quoted in

Sec. 19.51-1 of Regulations 103, promulgated under the

Internal Revenue Code (Section 51).

ury ruling and was not published by tHe

Government.

In G. C. M. 15438, Cum. Bull. XTV-2, p. 156

(1935), on the other hand, the Bureau of Internal

Revenue ruled that under the 1932 Act losses sus-

tained by the wife through sales of securities

might not be allowed as an offset against gains

derived by the husband from like transactions,

even though a joint return were filed. This

ruling did not refer to the December 29, 1932,

letter. Following Frank B. Gummey, 26 B. T. A.

894; acquiesence, XIII-2 Cum. Bull. 8, it took the

view generally that a husband and wife filing a

joint return remain separate taxpayers for the

purpose of determining their right to deductions.

Article 117-5 of Treasury Regulations 86, pro-

mulgated under the Revenue Act of 1934 and ex-

plicatory of Section 117 (d) thereof, squarely

and admittedly covers the question here at issue.

It reads:

In the application of section 117, a hus-

band and wife, regardless of whether a joint

return or separate returns are made, are

considered to be separate taxpayers. Ac-

cordingly, the limitation under section 117

(d) on the allowance of losses of one spouse

from sales or exchanges of capital assets is

in all cases to be computed without regard

to gains and losses of the other spouse upon

sales or exchanges of capital assets.

The provisions of Section 117 (d) of the Revenue

Act of 1934 were retained in the same form in

Section 117 (d) of the Revenue Act of 1936, and

the provisions of Article 117-5 of Regulations 8&6

were retained in substantially the same form in

Article 117-5 of Regulations 94. In both the

Revenue Act of 1938 (Section 117) and that of

1939 (Section 212) considerable changes were

_ made in the treatment of capital gains and losses,

but in both provisions comparable to those of

Section 117 (d) of the Act of 1934 were retained.’

And Article 117-5 of Regulations 101, promul-

*Section 117 (d) (i) of the 1938 Act provided that in

the case of a corporation losses from sales or exchanges of

capital assets should be allowed only to the extent of $2,000

plus the gains from such sales or exchanges. Section 117

(a) (2) of that Act provided that “In the case of a tax-

payer-other than a corporation, short-term capital losses

shall be allowed only to the extent of short-term capital

gains.” ’ Section 117 (a) defined short-term capital gains

and losses as those resulting from the sale or exchange of a

capital asset held for less than 18 months, and defined long- —

term capital gains and losses as those resulting from the

sale or exchange of a capital asset held for more than 18

months,

Section 117 of the 1938 Act was carried over into the

Internal Revenue Code, but was thereafter amended by

Section 212 of the Revenue Act of 1939 to eliminate the

distinction between corporate and other taxpayers. As thus

amended the Code provides (Sec. 117 (d)) that “Long-term

capital losses shall be allowed, but short-term capital losses

shall be allowed only to the extent of short-term capital

gains.”

gated under the Revenue Act of 1938, and Section

19.117-5 of Regulations 103, promulgated under

the Internal Revenue Code, are each to the same

effect as Article 117-5 of Regulations 8€.”

The interpretation of the Act here urged by the

Government is thus supported, in the first place,

by the provision of Article 51-1 of Regulations

86, and its predecessors, that if a joint return

is filed the tax is computed on the aggregate in-

come and all deductions ‘‘to which either is entitled

shall be taken from such agg: egate income.’”’ This

regulation clearly means that before any deduction

may be entered in the joint return it must be a de-

duction to which either the husband or the wife,

separately considered, is entitled under the law.

As applied to the czse at bar, it means that the hus-

band’s own right to deduct a loss on the sale of

10 Article 117-5 of Regulations 101 reads:

“Arr, 117-5. Application of section 117 in the case of

husband and wife—(a) Short-term capital gains and

losses —Under the general rule with respect to taking de-

ductions in a joint return of husband and wife (see article

51-1), a deduction which is not allowable in computing the

net income of one spouse making a separate return is not

allowable in a joint return made by both spouses. Hence,

the limitation under section 117 (d) (2), relating tc the:

allowance of short-term capital losses, is, in the case of one

spouse, to be computed without regard to the short-term

capital gains and losses of the other spouse, regardlecs of

whether a joint return or separate returns age filed.”

Section 19.117-5 of Regulations 103 follows Article 117-5

of Regulations 101 without substantial change.

capital assets must be established before the deduc-

tion may be entered in the joint return. Under

Section 117 (d) of the 1934 Act the husband may

deduct his losses from such sales only to the extent

of gains from similar sales, plus $2,000. And

under Article 51-1 no further deduction can be cal-

culated and allowed in the joint return on the basis

of the wife’s gains. —

That is the view which was taken of the regula-

tion by the Circuit Court of Appeals for the Second

Circuit in the Pierce case, decided under the 1932

Act. It said (100 F. (2d) at 398):

* * * petitioners contend that when hus-

band and wife file a joint return they be-

come a taxable unit with the result that a

loss.of this character sustained by one

~spouse is an allowable deduction against

gains of the same character received by the

other. This contention cannot be sustained

in view of the Treasury Regulations and

judicial decisions in analogous cases. As

already noted, the Regulations provide that

the deductions to be taken from the aggre-

gate income of husband and wife shall be

those ‘‘to which either is entitled.’”’ Here

neither was entitled to the deduction i in ques-

tion. - * *

As has been stated, Judge Send ‘Hand dis-

sented in the Pierce case, and the reasoning of his

t was approved in the case at bar (R. 34).

fore reaching the conclusion, already discussed,

is ®

that the privilege of filing a joint return neces-

sarily involves disregarding the source of deduc-

tions, Judge Hand -put aside Article 381 of

Regulations 77 (the predecessor of Article 51-1 of

Regulations 86), as ambiguous. This conclusion he

reached by finding uncertainty in the word “en-

titl

” He said (100 F. (2d) at 398):

The regulations—which I accept as law—

add to these words [of Section 51 (b)] that

‘deductions * * * to. which either

spouse is entitled shall be taken from the

aggregate income’’. To find the deductions

to which ‘‘either spouse”’ is ‘‘entitled’’, one

must look to those allowed individuals; in

the case at bar to section 23, 26 U. 8. C. A.

.§ 23. Subdivision (e) of that section allows

losses like those before us to be deducted,

“subject torthe limitations of subdivision

(r).”? The Commissioner argues that that

clause imposes a condition, upon the privi-

lege, as opposed to a limitation upon its

amount, so that in order to learn whether a

spouse is ‘‘entitled’’ to any deduction what-

ever, it is first necessary to find out whether

the limitation would extinguish it if he or

she filed a separate return. The taxpayer

answers that §23 (e) grants the privilege,

and therefore ‘‘entitles’”’ the spouse to a de-

duction, ahd that subdivision (r) merely

limits its amount when the joint net income

is being computed. As a mere matter of

words I can see nothing to prefer. in either

: sy,

construction; it begs the question to say that

the extent of the deduction under a separate

return must be taken as a condition upon its

existence, € ° *

. This reading of ambiguity into the regulation is,

we submit; unwarranted: the alternative construc-

tion accepted by Judge Hand as plausible is hyper-

technical and departs from the ordinary meaning

of the word “‘entitled.’’ Mrs. Pierce could not in-

dividually deduct her securities losses because

under Section 23 (r) they could be offset only

against securities gains, and she had none. Thus

she was not, under any usual meaning of the term,

‘entitled’? to a deduction for securities losses.

It is artificial to suggest, as does Judge Hand,

that perhaps she was-“‘entitled’’ to the deduction

and that the deduction was merely limited as to

“amount—limited, in the Pierce case, to zero—by

her lack of securities gains. A deduction which

cannot be taken is not, in any usual sense, a deduc-

tion to which a taxpayer is ‘‘entitled.’’

The court below apparently accepted :Judge

Hand’s treatment of Article 51-1 (or, rather, of its

predecessor) ; in addition it relied upon the Com-

missioner’s letter of December 29, 1932, as showing

an administrative construction,.up to the promul-

gation of Article 117-5 of Regulations 86, contrary

to the position now taken by the Government. See

R. 33-35. This letter was an informal cvinion,

never published by. the Bureau of Internal Revenue

as a ruling, and is not entitled to the weight given

to Treasury Regulations (Helvering v. N. Y. Trust

Co., 292 U. S. 455, 468) or to publisied rulings of

the Internal Revenue Bureau (see Estate of San-

ford v. Commissioner, 308 U. 8. 39, 52-53) ) More-

over, the only published ruling of the Bureau con-

Qstruing Section 23-(r) (1) of the 1932 Act is G.

C. M. 15438, XIV-2 Cum.*Bull. 156 (1935), and it

is directly contrary to the letter. G. C. M. 15438

was not issued until after the Revenue Act of 1934

was enacted, and it is in line with Article 117-5 of

Regulations 86, promulgated under the 1934 Act.

The Bureau, of course, had power to change its

ruling, even if the letter be considered as such.

Helvering v. Wilshire Oil Co., 308 U. 8. 90, 100-

101. G. C. M. 15438, is not referred to in the

opinion below or in Judge Hand’s dissenting opin-

ion in the Pierce case, though it would have re-

solved the ambiguity which Judge Hand found in

the regulations.

The Treasury Department has, we think, taken

the general position ever since 1921, through the

predecessors of Article 51-1 of Regulations 86, that

even though a joint return is filed only those dedue-

tions can be taken which would be allowable to one

or the other of the spouses singly. And after the

enactment of Section 23 (r) (1) of the 1932 Act

gave rise to the specific question here in issue, the

only official ruling under that Act unequivocally

interpreted the Act as here urged by the Govern-

ment.

But whatever the administrative construction of

the 1932 Act, the regulations under the 1934 Act ad-

mittedly cover the present case, and, we submit, —

should be controlling. Article 117-5 of Regula-

tions 86, set out supra, p. 37, explicitly provides

that the limitation ‘‘on the allowance of losses of

one spouse from sales or exchanges of capital assets

is in all cases to be computed without regard to

gains and los#es of the other spouse upon sales or

exchanges of capital assets.”’

This regulation directly covers the question at

bar. The court below gave two reasons for its

refusal to give effect to it, namely: (1) that

it was invalid because inconsistent, not with the

provisions of Section 117 (d), but with the provi-

sions of Section 51 (b); and (2) that the adminis-

trative construction had not been consistent and

had not in reality received legislative approval.

The former contention has been dealt with; the lat-

ter, is, we think, untenable. _

The asserted lack of consistency in the adminis-

trative construction refers to the Commissioner’s

letter of December 29, 1932. As stated, we do not

think that that letter is entitled to any weight, and

it was, moreover, tactily repudiated by G. C. M.

15438.. In any event some ambiguity in the admin-

istrative construction prior to the promulgation of

Article 117-5 of Regulations 86 would not vitiate

31 ;

the effect of subsequent congressional approval of

that Article.

The conclusion of the court below that Article

117-5 Sid not receive legislative sanction is based

on the fact that in Section 51 (b) of the Revenue

Act of 1938 Congress made certain changes from

the 1936 Act in the provisions regarding the fil-

ing of joint returns. But Articie 117-5 had al-

ready received tacit legislative approval when

Congress enacted both Section 51 (b) and See-

tion 117 of the Revenue Act of 1936, without

change from the 1934 Act. See Hassett v. Welch,

303 U. S. 303, 312. Moreover, the 1938 modifica-

tion of Section 51 (b) was directed to a wholly dif-

ferent problem. No change was made in the provi-

sion that if a joint return was filed the tax should

be computed on the aggregate income, but for the

first time the statute provided that liability for the

tax should be joint and several. Previous statutes

had not contained any provision as to liability for

the tax, and two courts had held that in the absence

of a provision making the liability both joint and

several, one spouse could not be held liable for a

deficiency attributable to the other spouse ’g in-

come. See Cole v. Commissioner, 81 F. (2d) 485

(C. C. A. 9th), and Crowe v. Commissioner, 86 F’.

(2d) 796 (C..C. A. Tth). Accord: Commissioner

vy. Rabenold,108 F. (2d) 639 (C..C. A. 2d), and

compare Rogers y. Commissioner, 111 F. (2d) 987

.. SSSA

loophole with respect to the collection of the tax —

that Section 51 (b) was modified. See H. Rep.

No. 1860, 75th Cong., 3d Sess., pp. 29-30; Commis-

sioner v. Rabenold, 108 F. (2d) 639, 640-641 (C. C.

A. 2d) ; (1940) 49 Yale L. J. 1279, 1284. The enact-

g ment of this provision dealing with collection did

not in any way indicate Congressional disapproval

of Article 117-5 of Regulations 86, which had al-

ready received tacit Congressional approval. If

Congress had disapproved the interpretation given

Section 117 (d) of the 1934 Act by Article 117-5,

it would undoubtedly have incorporated in some

subsequent act a provision expressly dealing with

the treatment of capital losses in joint returns.

But it did not do so. While Section 117 of the

Revenue Act of 1938 made substantive changes in

the treatment of different classes of capital losses,

it nevertheless provided that short term capital

losses should be deducted only to the extent of short

term capital gains, without indicating how the

limitation was to be applied in the case of joint

returns.

Consequently, the interpretation given the stat-

utory provision by Article 117-5 of Regulations

86, which received legislative approval through the

enactment of identical statutory provisions in

the Revenue Act of 1936 and of analogous provi-

sions in the Revenue Acts of 1938 and 1939, now

has the force and effect of law. Helvering v. Win-

mill, 305 U. 8. 79; McCaughn v. Hershey Choco-

late Co., 283 U. 8S. 488; Hassett v. Welch, 303 U.

S. 303; Helvering v. Wilshire Oil Co., 308 U. 8.

90. tl

CONCLUSION

- For the reasons stated it is respectfully sub-

mitted that the decision of the court below should

be reversed.

Rosert H. JACKSON,

Attorney General.

SamMvEL QO. CLARK, Jr.,

Assistant Attorney General.

SEWALL KEy,

HELEN R. CARLOSS,

Special Asskatants to the Attorney General.

THomas KE. HARRIS,

| Special Attorney.

: Sem, 1940. ”

4 3 (1940) 53 Harv. L. Rev. 681, 682, discussing the decision

below in the present ¢ states:

“Thus whatever the merits of the unit theory as a matter

of de novo interpretation of the policy of a vague statute, it .

would seem that this was not the construction generally

given to it by the courts, or by the Treasury Regulation

promulgated under puted provisions which were —

quently reenacted by y| Congress 4

6 |

a APPENDIX

Revenue Act of 1934, ¢. 277, 48 Stat. 680:

SEc. 23. DEDUCTIONS FROM GROSS INCOME.

In computing net income there shall be

allowed as deductions:

* * * x *

(j) Capital Losses——Losses from sales or

exchanges of capital assets shall be allowed

only to the extent provided in section 117

Soe * * * *

[U. 8S. C., Title 26, Sec. 23.]

Sec. 51. INDIVIDUAL RETURNS.

* * * * *

(b) Husband and Wife.—If a husband

and wife living together have an aggregate

net income for the taxable year of $2,500 or

over, or an aggregate gross income for such

\ year of $5,000 or over—

(1) Each shall make sifch a return, or

‘ (2) The income of each shall be included

in a single joint return, in which case the

tax shall be computed on the ecg aid in-

come.

, * * +. * *

[U. 8. C., Title 26, Sec. 51.] 3

SEc. 117. CAPITAL GAINS AND LOSSES.

(a) General Rule—In the case of a tax-

payer, other than a corporation, only the.

llowing percentages of the gain or loss

recognized upon the sale or exchange of a

capital asset shall be taken into account in -

computing net income:

100 per centum if the sala asset has

been held for not more than 1 year;

o (84)

80 per centum if the capital asset has

been held for more than 1 year but not for

more than 2 years;

60 per centum if the capital asset nas

been held for more than 2 years but uot for

more than 5 years;

40 per centum if the capital asset has

been held for more than 5 years buc not for

more than 10 years;

30 per centum if the capital asset has

been held for more than 10 years.

(b) Definition of Capital Assets.—¥or

the purposes of this title, ‘‘capital assets’’

means property held by the taxpayer

(whether or not connected with his trade or

business), but does not include stock in trade

of the taxpayer or other property of a kind

which would properly be included in the in-

_ventery of the taxpayer if on hand at the

close of the taxable year, or property held

| by the taxpayer primarily for sale to cus-

-*tomers in the ordinary course of his trade

or business. is

* & * % *

(d) Limitation on Capital Losses.—Losses

from sales or exchanges of capital assets

shall be allowed only to the extent of $2,000

lus the gains from such sales or exchanges.

f a bank or trust company incorporated

under the laws of the United States or of

any State or Territory, a substantial part of

whose business is the receipt of deposits,

sells any bond, debenture, note, or certificate

or other evidence of indebtedness issued by

any corporation (including one issued by a

government or political subdivision thereof),

with interest coupons or in registered form,

any loss resulting from such sale (except

such portion of the loss as does not exceed

the amount, if any, by which the adjusted

basis of such instrument exceeds the par or

en cenee ee ce CO Ee ATEN I OREN OR NU TE I EEN ORRIN pen yt ys NC ON ae -

. 36

face value thereof) shall not be subject to the

foregoing limitation and shall not be in-

cluded in determining the applicability of

such limitation to other losses.

* * *

me ad

av [U. 8. C., Title 26, Sec. 101.]

Treasury Regulations 86, Bronmlgyted: under the

“Revenue Act of 1934:

Art, 51-1. Individual returns.—F or each

taxable year every single person and every

married person not living with husband or

wife for any part of the taxable year, whose

gross income as defined in sections 22 and 116

is $5,000 or over, or whose net income as de-

fined in section 21 is $1,000 or over, must

make a return of income. Every married

person living with husband or wife for any

part of the taxable year, but not-at the close

of the taxable year, must make a return if

his gross income for the taxable year is

$5,000 or more, or his net income is equal to,

or in excess of, the credit allowed him by

section 25 (b) ( ‘1) and (3) (computed with-

out regard to his status as the head of a fam-

ily). (See article 25-7.) A husband and

wife living together for the entire year need

‘make no returns unless their aggregate gross

income for the taxable yéar is at least $5,000

or their aggregate net income is at least

$2,500. If their aggregate net income for

aggregate gross income is $5,000 ,or more,

either each must make a return, or the in-

come of each must be included in a single

, joint return. A husband and wife living to-

gether <t the close of the taxable year but

not during the entire taxable year must make

a return or returns if their aggregate gross

income for the taxable year is $5,000 or _

more, or their aggregate net income is equal

to, or in excess of, the credit allowed them

by section 25 (b) (1) and (3) (computed

without re to the status of either of them

as the head of a family). (See article 25-7.)

If the income of each is included in a single

joint return, the tax is computed on the aggre-

gate income and all deductions and credits

to which either is entitled shall be taken

from such aggregate income. A joint re-

turn of husband and wife may be filed only

if they were living together at the close of

their taxable year. If one spouse dies prior |

to the last day of the taxable year, the sur-

viving spouse may not include the income of

the deceased spouse in a joint return for such

taxable year.

Art. 117-5. Application of sectione117 in

the case of husband and wife.—In the appli-

cation of section 117, a husband and wife, re-

gardless of whether a joint return or sepa-

rate returns are made, are considered to be

separate taxpayers. Accordingly, the limi-

tation under section 117 (d) on the allow-

ance of losses of one spouse from sales or ex-

changes of capital assets is in all cases to be

computed without regard to gains and losses

of the other spouse upon sales or exchanges

of capital assests.

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