# Petitioners Brief — Pierce v. United States (No. 36) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386402_0014%3A04 ## Record - **Collection:** Supreme Court brief - **Document type:** Petitioners Brief - **Published:** January 1, 1940 ## Text BLANK PAGE BLANK PAGE Page NNT ON ss atest nia iineend mo dienmaliecl gpedécccucetvebunsuaninn 1 cn cnn cs socal alcaieipaiin ied esenediae id desde hanna eee ease eminie 1 SD NN in kines wr esac armani kipeaictibig china ~ 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 -- 13 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 ‘ 14 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. Pe ¢ <7 % 15 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. 16 4 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. 18 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 19 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. 20 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 21 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 22 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). 23 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. 24 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.” 25 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. 26 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 ® 27 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, 28 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, 29 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 30 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 (C. ©. A. 6th). It was solely to remedy this .. SSSA 32 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- 33 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 the taxable year. is ©, 500 or more, or their 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