Brief for Respondent — McWilliams v. Comm.; Estate of McWilliams; & McWilliams v. Comm. of Int. Rev.

Supreme Court brief1946

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Text

ou Nos. 945, 946° and 947

- Bathe Supreme done fe Wied Sines

“ Octoses TERM, 1946 hie

Be Fouts Rs MeWMauasts PETITIONER®

COMMISSIONER OF eI NTERYAL "Bayes UB ,

° . o

‘ESTATE ‘or Susan. ‘P. McWitc.tams, Deckasin,

JOHN P. Mc Wi HLLLAMS, Exec ULOR, PETITIONER »

ve: : a ya

GeMMISSIONER OF INTERNAL REVENUE

’ ; ‘\ \" Pe

Brooks B. MCWUuLLIAMS PETITIONER. /

Se v. e

COMMISSIONER OF INTERN AL. REVENUE

ON WRITS OF CER TIORARI Te THE UNITED STATES

CIRCUIT CoOL RT OF APPLAELS FOR RHE SIRTH CIROULYE

SR a een cee oe

. BRIEF FOR-THE RESPONDENT

‘*

¢ S |

meer - INDEX a

— 3 Page

Opinions below __ _-- - Mminmhshinnkaekainn a 1

* Jurisdietion< +. _. A ee a pr ae Sn aie heen ae ee. are a 2

_ Question presented... ..--..--- ey = ee ee AE RSE -2

Statute involved. __. ee aa ies ahe pre Ada w Mihin aaeme 2

" Statement. _- athe BR Ghabiiea hed cekacds omnes ease 3

Summary of argument____- we nwenenseeese--- appar 7

Argument:; - : a

The court below eorrectiy held that transactions in ques-

tion were sales or exchanges, “intitectly,” between the

members of a fatnily withinghe mearing of Sectioj: 24 (b).

(1) of the Internal Revenue Code__. — = ‘ ae 9

1. Background of the statutory provisions. . - : ro

* 2. The sales her¢ involved fall within Section 24 (b) (1).. i4

3. The Tax Court's interpretation of Section 24 (b) (1) wag

reviewable by the Court below. _-- i. 3 21

Conclusion... _- 3 ‘A el ep oncdaana? aa

ee : CITATIONS. :

Casesg Ch

Allen v. Commissioner, 38 B. 'T. A. 160_. = iS

Angelus Milling Co.'v. Commissioner, 325 U. 82293 __. ‘ 22

Arguimbau v. Comn&ssioner, 31 B. T..A. 604____ 6

Bingham, Trust of, v.. Commissioner, 325 U.S. 365 fa

‘ Brochon v. Commissioner, 30 B. T. A. 404. 15

* Choate v. Commissiéner, 324 U.S. ; 22

%. Claridge Apartments #4, v. Commissioner, 323 V. S.°141- 22

Cole x. Hetburn, 4 F. Supp. 230 , ; &

Commissioner'v. Behan, 90 F..2d 609_ _- : 16

Commissioner ¥. Court Holding Co., 324. U_ 3. ee : 18

- Commissioner V. Disston, 325 U.S. 442 . : 22

Commissioner v. Estate of Bedford. 325 U.S. 283 22

Commissioner v. Estate of Field, 324 U.S. 113 ‘ - 32

Commissioner Vv. Hale, 67 F. 2d 561 12

i Commissrones y. Harmon, 323 U.S. 44 : 22

Commissioner v. IckhAdeimer, 132 F. 2d 660 Gewta 17

Cemegenonye v. Kofin, 158-F. 2d 32 ss

Commssioner v. Smith, 324U 8.177. ©. ‘ 22

Commissioner vo Wemisss, 324 U.S. 308 —_

Commissioner v. Wheeler, 324 U.S. 542 es

Crane v2 Commissioner, No. 68S, this Term. deetded April 4. .

1947... - : ; ' 22

T4GAS) 47 Be

ig -

bs °

we?

Duel: v. Holfins, 241 U! S. ee : cai

° e

0 :

2 6 «:

Cases—( ‘ontinued ue . Page

Deputu v. duPont, 308 U. 8.488-..- : Nes Sees 20

Dobson v #Commissioner, 320 U.S. 489_-..---- ee 28 a

Douglas v. Commissioner, 322 U. Kee ae

DuPont v. Commissioner, 118 F. 2d 544, sestioonsd denied, -

314 U.S. 6238_._. : Pariah

* Statutes:

Equitable Society v. Commissioner, 321 US. 560. cn eee

Zsperson v. Commissioner, 49 F, 20 259, certiorari denied,

on 77, 6 O68... 2 ee are at | ER». eee

Fondren vy. Commissioner 824 is te 50.5.5 < 8

Gorman v. Littlefield, 229 U. “1 19... A AE AY - eld

Gregoty v. Helvering, 293 U.S. et cae Toon ae

* Griffiths v. Commissioner, 308 U.S. 355. ; Ds aes

_— Helvering v. Miter- Mountain Life —— Co., 294 U.S.

5k SN Ae Tee Fee eee Sieaee

Helvering v. Mitchell, 303 UL 8. 391- ‘ Geticits

Helvering v. Northwest Steel | Mills, 311 eo aes

Peres Fe, Wee Us Oe ACP. oe 8 ch este

Hill vy. United States, 12 F. Supp. 798~ — —.----

— Interstate Transit Lines v. Commissioner, 319 U. Ss. 590 os

MeDonaid v. Commi ssioner, 323 U.S. 57- adn teion

Minnesota Ted Co. v. Helvering, 202 U: 8. 609. : 18 oe

Mitchell v. Commissioner, 3%! B. T. A. 1093, reversed, 89 f ;

2d 873 ...%...-.-- SSR r, a aan see a ©

‘New. Colonial ‘Co. v. Helievine, 292 U. S. 435. a &; Ne 20 «

- Peters v. Commissioner, 38 B. T. A. 978, *ppeal dismissed,” cae

69 F. 2d°999_ Sauce aaee a are Caren

Porter v. Commissioner, 36 B. T. ry 4t5. Sonam a jai to

Powell v: Commissioner, 94 F. 2d 483_.. -_.- Sched coe

Putnam, Estate of, v. Commissioner, 324 U.S. 393. ages 22

Security Mills Co. v. Commissioner, 321 U.S. 281_..- e 22

oo. v. Commissioner, 77 F. 2 446, i denied,

296 U.S. 586__- : » 16

Uihlein v. Ouasalealadi 36 B. T. A. 399, sigan, 82 F. -

DOE Ket eetiicsh amd ccchnipebebaesnhasw aes wwas a 12

United States v dimer. euckiie Aasn’s, 310 U. 8. 534. 20

’ Webre Steib'Co. v. Commissioner, 324 U.S. a apn peng 22

» White vi United States, 395 U 281. ee 20

Zimmerman Vv. Comminsisgeh, , 3G B. T. A 27g, reversed,

100 F. 2d 1623. Dee epics. ee

Interna! Revenue Code: 2 ee

Sie. 23 (26 U.S. C. 1940 ed., See. $3) _. # re

See. 24 (.26ULS. C. 1949 ed, See, 24). 257, 9,10, 4,°18, 19, 20

Reveétuie Act of 1934, ¢. 277, 48 Stat. 680: \s

Ree, $4.2... .\. bed Sette COME pn ea a0

v° } ‘ Oss

ef . ; P . <" . .

\ ~ ss j

t «“

* mM,

Miscellanfoiis: “Page ~

78 Cong. 2662 |. : « 1.

. H. Doe. NAX26 Mong., Ist Sess... Aix at ale 14

H. Doe. No. 337,-7: Sth Cong,, Ist Sess., pp. It a 14

H. Rep. No. 764, 73d Cong., 2d Sess.. pp2 1, 3 | 1939- A om

Cum. Bull. (Part 2)0554, 571). ‘ a 13.

H. Rep. Nov 1546, 75th Cong!, Ist Sess., p. 26 (1939-1

Cum: Bull. (Part 2) 704, 722-723) .__- rh Aape ld

Preliminary Report of a Subcommittee, of the Conimitiee

on Ways and, mag on Prevention of Tax Avoidance, .

73d Cong... 2d Seas., p. 15 , a ae 13

s. Rép. No. 558, "73d rt ong. 42d Hees, ‘p. 27° (1939-1 Cum. i

Bull. (Part 2) 586, 607)_ ee : oe Pee 14

- Wiillisto4 or Bales (24 ed.), Sees. 146-159 ee ee 19

/ a.

See ay 26

Se a * of 4

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e e ce Ps

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E P os eg 6;

° r E | Na! - : :

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‘

gn he Spree Girt of the Winited Sat

Oc poRE rR Term, 1946

= ; c ‘i ;

Pk ae No. 945. = Peer aren ts

JOuN P. McWILLIAMS, PETITIONER

r Vi. \

COMMISSIONER OF INTERNAL REVENUE — ;;

a : ‘ er act ‘ .

5 ect };

No. 946

MS, DECEASED,

R, PETITIONER

Estate oF Susan P. ° McWuuu

JoHn P. McoWinuiamMs, Exreur

ev.

COMMISSIONER OF INTERNAL REVENUE

No. 947: ° Je

Brooks B. ne PETITIONER

ae COMMISSIONER OF ENTERS AL REVENUE

<a PE ga ee, ee me o

ON WRITS* OF CERTIORARI “Pu THE UNITED” STATES

CIRCUIT COURT OF APPEALS FOR THE SIXTH CIRCUIT

BRIEF FOR THE RESPONDENT

cht eee

. OPINIONS BELOW 7

The dpinion of the Tax Court of the United

States (R. 11-16) is reported in 5 T. C. 623. - The.

(1)

’ fee 2 =

opinion ‘of the Circuit Court of Appeals (R. 101,

106) is reported i ‘in 158 F. 2d 637.

JURISDICTION - ~

The Sadinensaili of the Cireuit Court of Appeals

were ente? edd on December 2, 1946. (R. 97-99.)

The petition Tor writs of cértiorari was . filed’ on,

Jarfuary #4, 1947 and was granted on March 3,

1947 (R. 108). “The jurisdiction of this Court is ii-

voked under Section240 (a) of the J udicial Code, as

amended by the Act of February 13, 1925.)

QUESTION PRESENTED _ 4 Se)

| oC

Section 24 (b) (1) of the Internal Revenvie Code ~~

disaHows deductions on account of losses fron

sales “directly or indirectly -*: * * Between

members of a family’. In this’ case, in accord- -

-ance with.a pre-arranged plan’ to establish tax -

losses, a spouse sold’shares of stock on‘the New

York Stoek Exchange, and ‘on the same day, an

identical, number of shares of the same stock (hear-

ing dfterént certificate numbers) was purchased

on | the’ eXe hange for the aceount of ‘the other

spouse. The ‘question presented is whether, as a

matter of law, the provisions of ‘Seetion 24 (by

(1) aré re ndered Anapphe: ible: by such a device.

STATUTE INVOLVED :

Inte ral Reve nue: Code :-

Src. 24. Trens‘Nor 1 DEDUCTIBLE.

e* fg soe * oc)

(b) Losses from Sales or r Kaxchanges of

P yaa py Yo

Oe 3 pee: 3

“1) Losses Disallowed.—In computing net

~S income fo deduction shail in any. case be al-

lowed in respect of losses from sales or ex- —

~ changes of property, directly or indirectly—

<i ~ (A) Between members of a faniily, as de-

ane fined in paragraph (2) (D) 3 -

* e¢ ae” x e ake.

So ee Stock ownership, fam ily, and partner-

. ship rule—For the purposes-of determin--

: ing, in applying paragi aph (1), the owner-

°: ; ship of stock—— -

ae * ve ere : + *,

ia a (D). The family of-an individual: shall

Y) {° “ ~ inchide — only Hs brothers ande, sisters

Ko (whether by the whole or. half blood),

SX... Spouse, ancestors, and lineal descendants ;

a * * ‘cee

/ £9 ; i : .

oye GS, * ‘* . Tene a

ae |

(26 BSS. C. 1940 ed., See. 24.) |

ie rie STATEMENT

The | facts as stipulated (R. 20-77) oe ats found

t the Tax Court (R. 11-14) are substantially

as follows: ee ae =

John P. MeWilliams and Brooks B. McWilliams -

are husband and wife, and are residents of Cleve-

land, Ohio. Susan P. MeWilliams, deceased, was

the mother.of John P. MeWilliams. She died in -

Nove mber, 1941, and Jobn BP. MeWillianis was ap

pointed executor. of her estate. CR. 12. )

Mr. Me Williams is president of the Y ogtrestown

Steel’ Door “Company. In 1940 “anid 1944 he

hought and sold’ a ‘consider: able ammount of securi-

ties for his OW and his, wife’s account@aml also

for his mether’s account until her death, His

wife and mother both had large estates of their

ewn whieh he: ‘mautaged for a ntimber oft years.

'.(#.. 12.)

The* sales of securities which gnve rise te the

losses here in econtrove ray admittedly were for the

purpose of establishing tax losses. In each jini-

stance Mr. MceW illiams would give his broker an .

_ order by phone to sell for his or his wife’s, or

Ris mother’s aceount a-certain number of ee

“of a particnlar stoek at market and, at the same

time, would instruct the broker theyeafter to pur-

chase at-as nearly the same price as possible a

‘like. numberof shares of the same stock for the

accoult of one @f the others. In each instance:

the broker was told that thé sale was for the pur-

pose of establishing a tax-loss. (R. 12.)

During the taxable years the following shares of

stock were sold by Mr. McWilliams for bas indi-

vidual account and for his wife’s account &.

» . . ‘2 €

12-13) Ps . . ° * - oe

John P. McWttliams—Year 1941:

700 shares @ International Nickel of .

Canada, Ltd. — :

200 shares of Eastman Kodak C ‘ompany,

TOO shares of General Eleetrie C ompany. *

100 sharts of Monsanto Chemical Ggmpany.

100 shares of Westinghouse Electric Com-

pany, | |

Brooks’ Be Me W illiams~ Your 1940:

300 shares of General Electric.

100 shares of Standard Oil Company a

New Jersey.

af 200 shares of International Nie ke 1C ompany

* of Canada, Ltd.

Brooks B. MeW illiams—Y ear’ 1941s

1,000 shares of Basie Refractories, Inc.

300 shares of Libby-Owens-Ford Glass

—~ Company. oa yas,

-- 100 shares. of hs. 1.. DuPont deNempurs

Company. :

200 shar€s of General - Motors ¢ orporation.

100 shares of American Tel. & Tet Com-

pany.

i, 200, shares of Liggett gi Myers 'T ohaego Com- °

pany. |

All of the above s®curities were sie pursuant

ty. orders: given to Curtiss-House & Company,

" Btod ‘kbrokers in Cleveland, Ohio, and were exe-

cuted on ‘the New York Stock Exchange in the

regulay marther bag lark; Dodge & Company,

members of the New York Stock Ex¢

correspondents of eCurtiss-House 42

‘ompany.

The securities: had agl-been acquired :

the taxpayers ‘more than 18 months pric » their

sale. ‘The purchasers of the, securities were un- ’

. a ¢ ‘Ze r

. «+ known te the taxpavers: CR.)

FAVGNS. AT p.

- *-

ange and

Td hy :

“x

eet Ne

At the time that Mr. McWilliams placed the

‘orders for sale of the above. securities for his

individual account he instructed. his. brokers to

pyrchase a like nunsticr of the same shares at as

ndirly the same price as possible for the account

ofthis wife. “Likewise, when giving the orders to |

sell the shares for his wife’s account he instrueted

his brokers to purchase a like. nuniber of the

‘same shares for his ‘individual .account. These

bustructions were carried out and new certificates

bearing different numbers .from those st¥y were

issued to the taxpayers. ~The purchase orders

were executed in the same manner as the sales

orders,, (R. 13.). It appears. that’ iv cach in-

stance the purchase orders were it. fact execyted

‘ * '¢ e-

_on the same days and at precisely the sdmie, prices

us the matching sales orders, (IR. 23. 24, 7-99.)

His wife in 1940 and 1941 owned property .

ereatiy in excess -of ‘the {mounts invelved in the

transactions under consideration. . During all of

her married life Her securities have stood in her

own name and have been kept separate from those

of her husband... She has maintained a separate

bank aceount and she and taxpayer have filed

separate incame tax returns. (RiIN4.)

On the above-mentioned sales Mr. MeWilliams

claimed long-term capital losses of $21,276.53. iar

1941, and his Wife claimed simiter losses of

$5,592. 44 in 1940, and $13,946.95 in 1941. The de-

ductions were disallowed by the Comifnissioner as

Coming within the provisions of Section >4 (by

~ , 2 . Y

‘

Ny . “e & . .

of the Internal Revenue Code, which denies losses -

from sales “directly or indireetly -*- * * Be-

tween members of afandily * * *.” “Re 14.)

Under substantially the same circumstances. as:

those described abeive, relating to the sales and .

purchase of securities by Mr. McWilliams and his. .

wife, he on November 28, 140. sold 100 shares of .

Eastman Kodak Company stock for the account of:

his mother, Susan “P. MeWifliams, and on the

same day purchased a tike ‘number of the same

shares at the same price’ for his individual, ae-

count: A long-term capital loss: on the sales of

those shares in the amount of $1,755.79 was

claimed in the return filed by Susan P. McWil-

ams, and-was disallowed by the Commiisstoner,

(R. 14, 45. )

The Tax Court decided that the taxpaye rs were

entitled *to’ deduct Ahe losses in question on the

ground that the tfinsactions between the various

taxpayers did not constitute sales, directly or. in-

direetly, _ betwrert the members of a family’ within

the meaning of Section 24 (b). (1) of the Internal

Reverse Colle. The Commissioner appealed to’

the Circuit Court of Appeals for the Sixth Cir-

cuit*which re ve sed the décision of the Tax Court,

With Judge Miter dissenting.

suMMARY OF ARGUMENT | ea)

. 4 * }

The- statutory _ provisions here involved. were.

first enacted in the Revenne Act of 1934. Con-

“gress had heen deeply conce ened with devices. for

* . °

g - .

° . : ‘ 7 s® : r Ae , . ‘

_/tax- avoidance and the 1934 Act was\ primarily a

loophole-c ‘losmg statute. One of the tax-avoid-

ande tee bhiques -commonly employ . ” the sale

of _seenrities between members of

ing the tax : that. ‘would otherwi ise sc imposed 1

income actuaily recelve d. This basie ‘device had

wppeared ina variety of forms, and received wide- &.

- spread” attention, particularly in such’ notorious :

eases as that of. Charles E. Mitchell:

» Prior to the 1954 Aet, the Government chal-

lenged sueh sales, but. was sue cessful only wher eit

could , be shown that they were not bona: fide,

Pivwever ’ the intimacy of the family relationship -

enabled persens to enter “into transactions having

the outward appeart ue of sales which were in

fact mere shams, and it was exceedingly difficult

for the Government te -estabm h, the absence of

bona. fides since the facts were

generally. within»

the control of the parties themselves. “Accord-

ingly, in order to eliminate this de vice effectively,

~Congréss provided , that no deductions should ‘be - ; F.

ae allowed in amy case on account of loss from sales | =

"ov exchanges* between members of a family. And —

knowing that sueh transactions could be accom. |

plishe «din an almost infinite variety of ways, Con-

gress furthe o provided that there was to be no

-deduction whether the sales or exchanges he ex-

at ecuted ‘directly o r Indirectly. oo) This sweeping

language aptly describes the broad legislative aim

that anticipatory: arrarigements however circui-’

; . 9 e “ ;

tous or skillfully devised may not be availed of to

circumvent ‘the _ purpose of Congress; at conveys

the meaning that the plan must be looked at asa.

whole, and that the true nature of the transaction |

_is not‘to be disguised by inter posing intermediate’

steps between the initial step and the end Tesult.

The court below was not precluded under the

rule of the Dobson ease trom reversing the judg-

“ment of the Tax Court.. The decisions of the Tax

Court did not rest upon the mere application of the

statute to a particular set of facts. The Tax Court

“had laid down a general rule, namely, that the stat,

ute is inapplitable in every case where the Stock

Exchange and unknown purchasers and sellers are -

interposed between the original sale by the taxpayer

and’ the figal purchase by. a member of his ° ‘amily.

Its devision the sreforelpresented a clear cut question,

of law,.as to the seopie of an act of C ongress, and

was therefore subject to appellate review.

; ; ‘ ®

Ene res. Sa ARGUMENT | c

THE COURT BELOW CORRECTLY HELD THAT TRANSAC

TIONS IN QUESTION WERE, SALES OR “EXCHANGES.

“INDIRECTLY,” BETWEEN THE MEMI: nit OF A PAMILY.

WITHIN THE MEANING OF SECTION’ 24 (b) (1). a) THE

iN'RERNAL REVENUE, CODE ae

Seeti~n 24 (b). ey (A). of the Internal Sve

C de, se

puting net income no deduction shall in any case.

he allowéd in respect of losses ‘from sales or ex-,

wa. pp. 2-3, provides j in part that in com-

Changes of property, directly or indipectly, be-

tween members of a family, and Stetion 24 (D)7

sar

—

7%,

(2) (D), supra, provides in part tht the family

of an individual shal] inclade his spouse and his

ancestors. |

There is no dispute i as to the Facts in this ¢ se;

most. of them were stipulated (R. 20-77)

The only substantial question in this case, under

the fridings as made by the Tax Court, is one of

statutory construction. The court below has held

that the interposition of the Stock Exchange does

“not, aS a matter of law, remove the transaction

from the provisions of Section 24 (b) (1); where

— the sae and purchase of idy: itical stock intkvests

by members of a family are executed pursuant to.

a pre-arranged plan. The Tax Court, onthe

other hand, relying on a prior decision, has held ¢

asa matf@r of law, that (R. 16); + : |

, ‘where listed sécurities are sold

thrdtgh the Stock Exchange to an unknown

purchaser, and like securities are purchased

through the Exe hange-frem an. unknown

‘seller by: some person having a-relationship

to the seller sue h as’that deseribed in see-

“ tiow, 24 (b) (1), Internal Reve nue Code, the

“ transaction does not constitute a sale “of —

property upon whieh a loss deduction -is

deniéd under the statutes ~~" i“

We submit that.the- court helow correctly reve ‘rsed

the judgment of the Tax Court, since this mite I"

pretation of the statute nuduly restriets its scope,

i oes siolencée to the legislative purpose,

: Background of the statutory provision:

‘t 2 provisions of Section 24 (by (1) of the ay

ternal Revenue Codé, here involved, first appeared

in the law as Section 24 (a) (6) of the Revenue

Act of 1934 (@g277, 48 Stat. 680). The purpore

of these provisions and the. general aim, of the

1934" Act itself are important factors to be kept

in mind in construing the statute,

~The L934 Act was. designed primarily as a low.

hole-c dosing Statute. "Widespread abuses- under

_pre- existing law had been brought to the atte nition

ot C ONLEESS (ef. 78 Cong. Ree. 2661). Re ‘prese nta-

‘tive Donghtun, in expounding upon the bill whieh”

later became the ’1934-Aet, stated that it was, in- :

tended to raise ‘additional devenne “not through

- any Material: ine Tease in tax rates but chiefly

-by the prevention of tax itvoidancg und he noted

that “a great many of our wealthy taxpaye rs have

‘found means, through expert legal advice, ta aveid

the surtaxes *° * *°°.478 Gong. Ree. 2510.

A familiar device to avoid nga the.

‘taxpayer. had investments that shewed Saper

losses, Was the sale of such investmeftts to 4 mem-

ber of the taxpayer's family, In this manner, the

taxpayer would’ be able to claim the loss jis a

deduction for tax purpoges, ‘And yet keep the in-

Vestinents within the family, presumably subject

to ready reacquisition by him whenever he should,

desire, ‘The Commissioner chatlettsed this device

ina matuber of cases, and was successful wher® it

was shown that the transaction was net “‘beoria

fide’. The cases of Charles E. Mitchell was per

haps one of. the most neterious, atid received: ’

~ 3

e °

Gori SUE eat

widespread attention. See* Mitchell vy. Commis.

sioney, 32 B. T. A, 1098." Cf. DuPontey. Commis.

stoner, 118 F. 2d 544 (C. CoA. a); cerpiorar de-

giied, 314 ms S. 623; Espe ‘SON V. Commissioner,

. F. (2d) 2 89 (CC. A. 5), certiorari denied, 284

U.S, 658, However, since the control of the facts “+ -

was generally in the: hands of the t taxpayer him- ,

self, the Government eneountered considerable

difficulty in establishing that a parti ticular, sale was =

lacking in bona fides” It. beeame iner@isingly |

“lear that effective enforcement of the statute

MT his case also uivatved c vil fraud pen mailties, and to that

extent’ the decision was revet ‘sec by the Circuit Court of Atp-

peals far the Second Circuit by reason of a prior acquittal

of the taxpayer ner iniinal cage. 89 F.2d 873.> However,

this Court, in turn, reversed the judgment . -~ Circuit

Court® Appeals, Helvering Vv. Mighell, 303 391.

Thé Mitchell case was specificaply called’ to fe attention

of Congress in connection with the very provisions here in- >

Volved. Tn explaining these provisions to the House, Repre-

sentative Hill stated (78 Cong. Rec, 2662) : "A

“We have also provided in this bil@that transfers between

nembers of the family for the purpose of creating.a loss to

be offset against ordinary income shall hot be recognized *

for such dédiiction Jpurposes. This ahah meet the Mitchell

tax. avoidance case,” :

As illustrations of: the approach of ‘the Board of Tay

Appeals and of the courts to the problem of sales bet ween

husband and. wife under th® law phage 1934. see Zimmer:

mann NV, Commissioner 36 BT. a hig eke pers curva re

on another rssue, 100 F.2d 1025 = A. 3) Peters vo C om- m1 z

MEESST ON ri 28 1: ; A. A745, ap pes abeli + eI GUE vd nn’,

a Ly: Vihlein wee OME wiOne r, 30 B. T. A. 399. tioned: gy oe

EK. 2d 944 (C. CL A..7): Will ¥. United Sat x, 12 F. Supp. oe

ro (C. -©ils.}: Cpirmestoner Vv. Hale, 67 F. 2d 56] (Cc.

©: A. 1). ae 3 a a.

: aa

: : \3

. et $ * .

P 7

°. , -¢ ‘

would be possible oath: if deduyt tions: for losses

_were disallowed in: ‘all’ Gases of isales within the

; family group. ‘The report of Ja ‘ subeormittee of

the House Ways and. Medns Committee in 1938

which made a general study of tax avoidance, pro-

posed that the statute be.amended to deny deduc-

tions in such *aAS€S, and it concluded that (Pre- .

‘liminary. Report.of a- ‘Subcommittee of the Cons-

“mittee on Ways and’ Meaus on Prevention of Tax

_. Avoidance e, 73d Cong., 2d Sess. pi 15): 2°

.* * ~* It is believed that the reeom-

mendation of the subconunittee, rf followed,

will effectually close this opportumity for

; tax, avoidance. 3 yl oes

~The rey ommendation was adopte “lL by the full

Ways and Means Committee. The Committée Re-

‘ an = ° or ;

port stated-that the.primary purpose of the Rev-

enue Act of 1934 was “‘taginerease the revenue hy

preventing tax avoidance.”” H. Rep. No, | 704,

73d Cong., 2d Sess., p. 1 ( 1939-1 Cum. Bull. (Part

2) 54, 571). . As to the purpose of Section. 24

(a), (6) of the Act the Committee Report stated

(p. 23 |

> + v

spree shows that the practice of

- ereating losses. through transaetions: be--

tiyeen me mbers of a family and e¢ lose GOrpo-

rations - has “been: frequently utilized for

avoiding the income tax. It is béheved

‘that the. proposed change will operate te

Close vagoabs Nphol of tax avoidance.

”

, Ome

‘family- portfolio, Obviously,

een . . 14° Bs | P Q

res.

v .

See also S. Rep. No. 558, 73d Cong., 2d’ Sess s8., p.

7 bag ie Cum. Bull.t (Part 2), 586, 607).!

. The Sales *here Un olved fall within en

94 % (1).—It seems clear hoth from the broad

language of.the statute and from the legislative

ackground that Cé ongress has plainly expressed

its will that no deductions shall be allowed on ac-

count of tr ansactions, however execiited, which

amount to nothing nrore than a reshuffling gf the:

sale between hus-

‘bard atrd wife, could be execute in innumerable

Va ingeAuity ef

_ tax expertseand was undoubtedly alse avy rave of the

ways. Congress. Was aware of

futility of attempting to catalogue every conceiv-

able ‘device ‘e by gwhich stich: ‘a sale. could i in effect be .

4) 4 é

>The Revgnue Act) of 1936 simply reenacted Section 24 |

(a) (6) in. its previous forme In ‘June 1937, however, the

President in a special message to Congress urged a further

, effort to prevent tax avoidance. H. Doc. No. 260, 75th

Cong., Ist Sess. A special Joint. Committee of Congress

on.Tax Evasion and Avyidinee was formed and included’

in its ‘recomfrendations was the provision for the prohibi-

tion of losses between a fiduciary, of @ trust and any bene-

ficiary thereof. H. Doé. No, 337, 75th Cortg., Ist Sess.. pp.

14-15. The recommendation was adopted with the fol-

lowing explanation incorporated in the House Committee ’

Report (H. Rep. No. 146, :75th Cong. Ist Sess. p.226

(1939-1 Cum. Bull. (Part 2) TO4, 722-823) ) :

“Under exisung lage s section 24 (a) (6y of the Re venue

- Act of 1936, Josses ate “spec Mieally demed in the case of

sales or exchange ‘ofy property hetwee, members of. a

family or between a shareholder’ and a corporation tn.

hick such shareholder and his immediate ‘family owns

mere than SQ percent in value of the outstanding stock.

This a AIA fe eae lnwois net exclusive and the

’

of claiming deductions for

enses fot covered thie reby,

-adhie ved.’ “Instead of: attempting such’ particu-

ldvity, Congress wisely used general language and

plainly expressed. its will by disallowing dedue-

tions on all sales between members of a. family,

whether. the sales-be.madde *directly or indirectly”

In this coéntext,. the word “indireetly’ > speaks

volumes. a

Tt seems inconeti ‘able that in using such com-

re herlaive language Congress: nevertheless in--

; , So) 7 :

Government. may still deny losses in the case of sales or’

exchanges not specifically ‘covered thereby (for instance,

between uncle and. nephew) if such sales or exchanges

are not bona tide. “ However, because. the evidence necés.

sary to establish tlie fact iat’ a sale or exchange was not

made in ‘good faith is almost wholly within the knowledge

of the person claimibg’ the dedutet inti the Government has

encountered considerable difficulty in sustaining the disal-

Jowance of the deduction in a’ great many cases. More-.

over, the specific provisions of ‘sectittn Yt--(a) (6) of

existing law have proved inadequate to meet many situa-

tions of this tvpe. Accordingly, your commitiee proposes

the amendment of this section to provide certain additional

restrictions oc: deductions of this character. However, as

in the case of the provisions of existing law. it is not in-

tended by this amendguent to imply any legislative sanction

Jlosses on sales or exchanges in

Where the transaction lacks’ the

elements of good faith or ality, . gener rally characterizing

sales “and exchanges of pFoperty.” a

- * Por xanpl of sich dévices? see All n V..Q@lomanis-

aroner OS BT. A. 1600 (purported gift of money by hius- ..

harid th wife folkowed by sale of stock to her through n

broker) 2 Brochonr v. Commissioner, a0 LB. Z, “A. 404 ts tock

hehl by taxpayer on margin Was sold by broker and at the

same time a like amount of same stock: was purchused on

“margin by. saine breker ino the name of “pa Pit ver’s wife,

the taxpayer being required to “guarantee his wife's ae-

. “

| ae = é

; \ CG . a .

= fe - a F

nded to Ryave a loophole for such transactions as

are involved’ heréim. ‘We submit that fhe court be-’

low correctly interpreted the statute as embracing

the present situation. The same result was also—

reached by the Circuit Court of Appeals fdr the *

Pourth Cireuit in. Commissioner v. Kohn, 158 ¥F.

2432. The court said (158 F.! 2d at 3t):

- + If:the adverb “indirectly”? in the statute

count): Porter v. Commissioner; 36 B. T.A. 475 (sale by

husband and purchase by wife‘of same securities on same

day through sume braker, the husband making a ®eift” of .

the prec eeds of his sale to his wife with which she paid

for: her purchases) : trguimban v. @ OMMASSIY ar, Ol

B. T. A. 604. (sale by Wife-and purchase by husband on

same day through same broker of same securities. followed:

by wifesdepositing the amount of the purehase price’to hus-

band’s account): Cole v. Helburn, 4 F. Supp. 2: 0 (W. Dd.

Ky.) (sale by-taxpayer and purchase by son on following - “

day through same brokers of same‘ sectirities, taxpayer

. ending” his son the amount of the. purchase price; loan

never paid and six months later stock reacquired by tax- >

epayer from son); Shoenberg x. Commissioner, 77 F. 2d

446 (C, CLA. 8), certiorari denied, 296.0. S. 586 (sale by

taxpiysr of securities through, a broker and: purehiase on

sand dat the. saime* securities by his controtted corpora-

tion, the taxpayer reacquiring’ the securities*from the cor-

poration nore than =o reg later); Commissioner’ v.

Behan, WF, 2a GOH (C. . 2) (sales and purcliases op

Same day by husband ts wit through same’ broker, the

: “eller: anaione@ a coift” of proc eek: of Sale to ne purch: aser Pe.

Pinel V. Commissioner, Of F, Sad 453 iC, A. ‘1 (sale -

ootritiodt ificeks more “thes thisty Tokay later "s hy sule

by trust of same stock through. brokers and purehase on

same-day -of idetitical securities by taxpayer).

. ae a& a

mm : 3 . ape

has any meaning (as Congress unques---

“os ME ‘et 4

to prevent. just such transactions as are

here involved. Otherwise evasioy throvgh

the family device’ is almost invited.- —

A contrary holding appears In. Cominissioner v.

. Ickelheimer, 132. F. 2d 660 (C.-C. A. 2), but we

submit: that Judge Learned Hand’s dissenting

opinion ‘states the correct view. He said (132 B.,

2d at 662

* .* *) HYtrve we ean have no doubt of the

purpose, of what Congress was aiming ab;

and that, T submit, we truncate, if we do

not include, tr arisactions by which, in ac-

cordance with a pre existing’ design, prop-

erty passes by whatever Combination of

moves at a substantially unelfanged price’

from: one- me mrber to the other of any of

the specified pairs. Finally there is no

difference between on the’ one hand, se Hing

units of fungibles and buying. 6ther units,

and on the ofer the sale of single units.

That seems sO obvious that T shall not: labor

Cees 8 Fe Fn

Indeed, even if Congress had not used the. wena

“directly. sv indirectly’, it could have been are

- gued Se rauuatiel that such transactions. as are

here involved constitute sales between the parties.

For, as this Court has often held, the st#bstance

of a transaction rather than its form is the de- :

terminative criterion. €f., 6 .¢.. Griffiths 6. Com-.

mssioner, 308 U.S. 355. ‘A given result at. the

end of a straight path is not made a different’

o 2

”

. * * “9 : . : 2,

~ tionably intended), it must have been .used

‘ ‘18 %

ray |

-result) because re sched by filowing a devious

path.”’ Minnesota Tea Co. v. Helvering, 302

U.S. 609, 613. Cf. Gregory Vv. Hel vering, Ms

U.S. 465; Higgins \ Smith, 308 "8. 473; Com-

“missioner Vv, Ce rt Holding Co., 304 U_S. 331.

‘By the use ale words “directly or indirectly”

ir Section 24 (b) (1). Congress’ has, we submit,

enacted. ™m apt language the prineiples embodie

in the foregoing. cases. ‘The use of the Stor

~ Exchange as-a circuitous means for shifting the

investment from one. member of the family to

another is precis¢ly the type of situation to which

the adverb “indirectly” Was meant to Sy ah

The holding of the Tax Hae gives improper

emphasis to the word “betaveen”” used in Section

oy” (b) cand sunwaeranted « ‘mportanee to he fact

that when a sale. og purchase is made upon the .»

‘Stock Exchange the seller deals with an mmknown

purchaser and the sbuyer deals with an unknown

seller: This. view disguises the transaction ‘by’

meres formalise add in effect deprives the word:

“indirectly uscd in the statute: of substantial

meaning. The tracing, of Ye old certiticates or

the issuance of new certific ates. be aring different”

niunbers: from those sold is; we submit, of no real’

=o) signifiearice, T his: C eurt has recognized that eer-

tificates of stock | are not the property itself but.

merely the evidence of.it and that a certifieate for

the. same, TMOCY of shaves’ represents: precisely

, €°

_ thessame Kind and value of property as “another -

19 °°

certificate for w@ like number ef shares in the same

corporation; that the return by. a broker of

different ce “tificate or the substitution of one cer-

tifieate for another makes no material change in

the property right of the customer; that such

shares are unlike distinct articles of personal

“property, differing ‘in kind or value, as a horse,

| wagon, or harness, and that stock has: no earmark

SF imap distinguishes one share from’ another but

is like grain of a uniform, quality in an elevator,

one bushel being of the same kind and value =

another. Gorman v. Littlefield, 229 U.S. 19,

See also Duel. Hollies, 241 Ur S. 9235, | wil

liston on Si: les (2d ed.), Sections 146-1! 59.

In the present case, what one member of the

family glisposed of by sale, namely, certain shares

ot corporate-stoc k, another ame mber of the family

a I sequired by purchase. The. preconceived plan

that the sale by one me amber sheuld be followed by

the purchase, by atiother member of identical

property indisputably establishes * a connection’

. between the .sale and the purchase and between

— the seller and the purchaser, It. is this connec-

tion that establishes the’ transaction as. being

"be twee ve * them, and to the extent that there is a

formal hiatttis in the execution of the plan on the.

“Stock - Exchange, that hiatus is rendered sim-

tuaterial by” the-use of the word “indirectly? in

+. Section 24 (bd) 1).

We yespectfully submit that the statute should

he construed=so as to give effect to the legislative

-purpose. See United States v. Amer. Trucking

Ass’ns, 310.U. 8.534, F44.. Particularly is this

true where a téxpayer, as here,is claiming a -de-

duction. from gross income, for he must show that

-he comes squarely within the terms oT the statu-

tory provision allowing the pga fion. > New. C olo-

nial Co. v. Helvering, 292 U.S. 435, 440: Helvering

v. North west Steel Mills, 311 U.S. Sie 49; De puty

. Vv. duPont, 308 e S. 488, 493; White v. United

States, BAD U, S. 281, 292 ; Helveriny v. Dnter-

Motuntain Life eRe Co, 294 U.S. 686, H89-

690; Me ‘Donald vo omimissioner, 323 U.S. at

Equitable Society ve omimisstoner, o21U. O60),

D64; Tnterstate Transit Lines’ V. bahar tre ae

319 U.-S. 590, 593. +

The section, of the Act. under ‘which the tax-

pavers claim thd losses is’ Section 23 Ye) of the

‘Internal Revenue Cade (26 U. S.C. 1940 ed, |

‘See. 233), allowing loss4s on transactions entered

into for profit. Segtjori 24 (b) is an express:timi-. bap

. tation upon the loss provision, and provides’ that

no deduction, shall in any case be allowed in re~

spect. pf losses fram sales or exchanges “ of prop--

erty, directly or Indirectly, between members of

a family, and détines family sas ing shading one’s

spouse and gure’s ancestors, Since the court below

was coustruing a limitation on i deduction, it

Would see mn proper for it to have resolved any

ag ge

doubt about thé mei aning of the word “‘indirectly”’

in favor of the ‘Commissioner = the

taxpayer. ; |

3. The Tar Court’s interpretation - Séction

bi (b) (1) was reviewable by the court. below

The taxpayers contend that the court below -

erred in reversing a faetual tinding of the Tax”

Court supported by substantial evidence; aeneety :

to the. rule, first laid down by this Court in”

Dobson Nv. Commissiower, 320_U. 5. 489 (Br. 4).

But there-is no dispute between the parties as to

the facts, and the Government does not challenge

a single fiuding of “fact made by tlie Tax Goprt. :

The Govérnnent challenges olily the rule of law

announced, by the Tax Court that (It. 16);

* * * where listed securities are sold

. through the Stock, Exchange to an unknown

purchaser, and like securities are purchased

through the Exchange from an unknown. °

seller by some person having a relationship.

‘to the seller such as that deseribed im sec-

tion 24 ¢(b) (1), Internal Revenue Code, the °

transaction does not constitute a. sale of |

property. upon which “a less deduction’ As :

denied’ under the statute. . 7

The degision of the Tax. Court did not involve.

the mere application of the statute to a particular

set of facts. It undertook to establisli-a rile of

genera) appl ability; it constituted an interpret ta-

tion of Section 24 (b), and particularly of the — fs

‘word “indirectly. The. isstte is the refore on of

‘ ae ; , . o)

law. | Trust’ ‘of Bingham -V. . United ‘States, $25. .

UL S: 365. ‘ | ee

“The aici does not argaie that every ..

-applieatioy of this statute to a particular set of

: facts by the Tax Court is reviewable. Thus, we -

would agree that the Dobson rule applies if the

Tax *Court,-in ruling’ against the Conimissioner,

had found, on substantial evidence, . that a tax-~

*paye r had sold’ the same humber of shares of

the same stock axhith, by pure coincidence, had

been purchased on the same. day by a member of

his family in another city. But where the pur-

chase and sale are parts ofa single plan, as shown

by undisputed findings: of the Tax Court, fhen-the

Tax Court | errs as a matter of law when it holds

that the statute Is inapplicable bic reason of the

interposition of the Stk Exe harniy between. the

’

“members of the fainily involved. Such a general, °

ruling, which. is not Jmited to the fae ts the-

” See also Cc vane V. Commishione 7, a 68 this Term, de-

sided Apr ib 14, 947: > Secur ity Mills Cove € anmis Ones w21-

ci. 281, Pb: Douglas vy C sang rsde r, 322 U.S. 275: Com-

missioner V. sponge BO f Ut. $; McDonald vy. Commis-

sioner, 323 U. S..57; Oleridn inthe nts Co. v. Commis-

sioner, 3230. % 141,145; Fondren vy, e ommissioner, 324 US,

IS: Choate v0 gg enh WAT. S130 OMMISSIONELN, 1 s-

tate of Ficld B24. CU. Ss113: Webr Nteib CO. V. Commissioner,

324U.S. 164: Commissioner vy. Smith, “324.ULS. 177: Commis.

<oner V Ww CMY RS, 32 U.S 403: Commissioner v. Whee

B24. D442: fe state of Putnam Vv. Gominissoner, | ~ ty.

+. 393 pr las Milling Co. vy. Commissioner, 825 U, S oar.

Commissioner Vv. e stake of Be d ford, 325 U.S, 283. Comma

STOME? v. Disston,: 5 U.S. 442. .

i 4

. @

93°

particular case, and Which misconceives the scope.

of the statute, is plainly subject to appellate review.

ms ‘conc LUSION

“i he Waetalais of the court he low 1s gorrect and

shoyld therefore’ be affirmed.

mony ct fully submitted.

! GEORGE - T’. WASHINGTON, yy

Acting Sokeitor er

SEwau. Key,

Acting Assistant Attorney General.

Arnoup Rava, °

LEE A. JACKSON,

Morron K. Roruscuiny,

Special Assistants to the Altorney General.

~Angip, 1947... es

‘ . . bal

ts,

‘ . i ys

. . Re

° ‘

‘ : _ 7 ~

. : e “

‘ * ‘ UB BUVERNMENT PRINTING OFFICE AIBA? og

: ?

-* .

_ SWPREME COURT OF THE UNITED STATES

Nos. 945, 946 anv 947.—Ocroser Term, 1946.

John P. MeWilliams, Petitioner,

945 . ? v. , . ; si .

Commissioner of Internal Revenue.

On Writs of Cer-

~Estate of Susan P. McWilliams, De-| j:orari to the

ceased,’ John. P. McWilHiams, Exee- - United States _

_utor, Petitioners, " | Cireuit Court

046 ~- J ok ema. of* Appeals tor

~ Commissioner: of Infernal Revenue.| , the Sixth Cir-

* cuit.

Brooks B. McWilliams, Petitioner,

947 v.

My . * . ; ee : ¥ .

’ Conimissioner of Intefmal™ Revenue.

(June, 16, (19474

Mr. Cuter Justice VINSON souvernd- the opinion of

the Court.

The facts of these cases are not in dispute. John P.

MeWilliams, pehtioner in No. 945, had for a number of

years managed the large independent estate of his wife,

petitioner in No. 947, as well as his own. On several

occasions in 1940 and 1941 he ordered his broker, to gell

certain stock for ghe account of one of the two, and to

- buy the same number of sharés of the same stock for

the other, at as nearly the same price as ‘possible. He

told the broker that his purpése was to ‘establish tax

losses. On each occasion the sale and purchase were

promptly negotiated through the Steck Exchange. and

the identity of the persons buying-from the selling spouse

of the persons selling to the buying spouse was never

cnown. Invariably. however, the buying spouse received -

stock certificates iffement from those which the other had

, ee ae | ; : :

2. -MeWILLIAMS v. INTERNAL REVENUE,

sold. Petitioners filed separate income tax returns for

these years. and claimed the losses which he or she sus-»"

tained on the sales as deductions from BNPSs income.

? The Commissioner disallowed these deductions on the

authority of § 24 (b) of the Internal Revenu@ Code,

which’ 'prohibits deductions for losses from “sales or eXx-

changes of property, directly or indirectly . . . between .

members of a family,” and between certain other closely

‘related individuals and corporations, 2 : a

On the taxpayers’ applications to the Tax Court: it held

§ 24 (bh) inapplicable, following its own decision in Ickel- ..

heimer vy. Commissioner,’ and expunged the Commission- |

* The materia} parts of § 24 (b) areas follows: *

“¢b). Losses from sales or exchanges of property. N f 2

“(1) Losses disallowed. Ip computing net income no deduetion

° shall in any case be allowed in respect of losses from sales or exchanges

-of property, digectly or indirertly— ;

“(Ad Between membeps df a family, as defined in p cagraph (2).

orld Stee ee ee

“(B) Except in the ease, of distributions in liquyja

individual and a Corporation more than. 50 per-centy

outstanding stock of which is-owned, directly: or j

such individual; ‘ae

“(C) Except in the case of distribytions in hguidation, between two

corporations more than 50 per centum in valle. of the outstanding

Stotk of each of which is owned, directly or indirertty,, by or for the ‘

. sam indi vidusl, if either one of such corporations, with respect: to the

taxable year of the corporation preceding the date of the sale or eX-

change was, urder the law a pplicable to sueh tdxabie year, a Personal

holding company or a foreign persorial holding company; . +.

“(D) Between 4 grantor and a fiduciary of any trust ; .

« “(E) Between the fiduciary of 4 ‘rust and the fiduciary of another

trust, if the same Person is werantor with respect to each trust: or

“(F) :Between a fiduciary of 4 trust and 4 beneficiary of such

trust,” Fan 8

eee Section 24 (h) (2) (D) defines the family of an individual to include

- “only his braghers and sisters (Whether by the whole or half blood),

fpouse, ancestors, and lineal descendants: « pe

ae BT. ATs. atkrmied, 132 F. 2d 660 (CCA 2).

in, between an

in value of the

urectly, by of for

hed

Tome oO

MeWILLIAMS v. INTERNAL REVENUE. 3

er’s deficiency assessments.’ The Circuit Court of Appeals

reversed the Tax Court * and.we granted¥certiorari® be- “|

of the question involved.

Petitioners contend that Congress | ‘could not have in--

tended to disallow losses on transactions like those de-

scribed above, w®ich, having been made through a public

market, were undoubtedly bona fide sales, both in the

sense that title to property was actually transferred, and

also in the sense that a fair consideration was paid in.

exchange. Theycontend that the disallowance of such.

losses would amount, pro tanto, to treating husband and

_ wife as a single individual for tax purposes. ~

In support of this contention, they call ovr attention

to the pre-1934 rule; which applied to all sales regardless

of the relationship of seller and, bayer, and-made the

-deductibility of the resultant loss turn.on the “good faith”

of the sale, i. e:, whether the seller actually parted. with

title and control.’ They point out that m the case of

the usual intra-family sale, the evidence material tc this

dela ac. a 2

5 T.C. 623:

° scale? 2d 637 (CCA 6).

— U.S.—. In No. 946, the petition for certiorari of the Estate :

Bs Susan P. MeW ‘illiams, the deceased mother of John bp. MeWilliams;,

_ was granted at the same tire as the petitions in Nos. 945 and 947,

-and the three cases were consolidated in this Court. As all three

present the same material facts and raise precisely the same issues,

no further reference wil!’be made to the several cases separately.

* The decision of the Circuit Court of Appeals for the Second Cir-

° ° ’ . . * g - ° a. +¢

cuit in Commissioner Vv. Ickelheimer, supra, note 2, is in conflict -on

this point with the decision of the Circuit Court of Appeals for the

Sixth Circuit in the present cuse, and also with that of the Circuit

Court of Appeals for the Fourth Circiut in Commissinner v. Kohn, 158

F.2d 32. yy ;

7 Comm’? -sioner V. Hale, 67 F. 2d 561 (CCA 1); Zimmerman vy.

Commissioner, 36 B. T. A. 279, reversed on other grounds, 100 F. 2d_

1023 (CCA 3); Uihlein v. Commissioner, 30 B. T. A. 399, affirmed, 82

F. 2d 944 (GEAT by P 4

in : BT

4° MeWILLIAMS v. INTERNAL REVENUE. —

issue was peculiarly within the ‘knowledge and eyen the

control of the <a and those amenable to his wishes,

“and inacetssible’ to “the Government.* They maintain

that the only purpose of the provisions of the 1934 and

1937 Revenue Aets\the forerunners of § 24 (b)’—was to *

overcome these evidentiary difficulties by disallowing

losses on such sales irrespeetive of Good faith. It seems

to he petitioners’ belief that the evidentiary difficulties

so contemplated were only those relating to proof of the

parties’ observance of the formalities of a sale and of the

fairness of the price, and-conseqrently that the legislative

remedy applied only to sales made immediately from one

member of a family to another, or mediately through a_

_- controlled intermediary. aa ie

We are not persuaded that yore had ‘so limited ,an

appreciation of this type of tax avoidance problem. Even

assuming that the problem was thought to arise solely

out-of the taxpayer’s inherent ‘advantage in .a contest

concerning the good or bad faith of an intra-family. sale,

deception could obviously be practfeed by a buying .°’

spouse's agreement or tacit readiness to hold the propexty

sold at the disposal of a selling spouse, rather more easily

’ than by a pretense of a sale where none actually oecurréd,:

or by an un price. The difficulty of determining the ;

finality of an intra-family transfer was one with which

the courts wrestled under the pre-1934 law,” and which ,

Breathe

*See-H. Rep. No. 1546, 75th Cong., Ist Sess., p. 26 (1939-1 Cum.

Bull. A Part 2) 704, (22-723). See also bases cited In note 7, supra.

‘he provisions of § 24 (b) (1) (A) and (Bi of the Internal Rev-

~ enue Code origjnated ‘in § 24 (a) (6) of the Revenue Act of 1934, 43

Stat. 680, 691. These, provisioris -were reenacted without change as

§ 24 (a} (6) of theRevenue Acf of 1936, 49 Stat: 1648, 1662, and the

_ provisions of § 24 (b) (1) (C), (D), (E), and (F) af the Code were —

. added by § 201 of the 1937 Act, 50 Stat, 813, 827°, <n hal :

” Cf. Shoenberg Vv. Commiesiéner. 77 F. 24,446 (CCA 8); Cole y'

Helburn, 4 F. Supp. 230 ; Zimmerman v. Commissioner, supra, note 7, »

p ; i)

{7 ©

Congress undoubtedly meant to overcome by enacting

the provisions of $24 (b).” 4 . : :

Tt is clear, however, that this difficulty is ‘one which

arises out of the close relationship of -the parties, and

- would be met whenever, by. prearrangement, one spouse -

sells and another buys the same property at a-common —

price, regardless of the mechanics of the transaction. In-

deed..if the property is fungible, the possibility that a

sale and purchase may be rendered nugatory by the buying

spouse's agreement to hold forthe benefit of the selling

spouse, and the difficulty of proving that fact against _

the taxpayer, are equally, great wheri the units of the’

property which the one buys are not the, identical zanits

‘which ‘the other sells. ;

a a transactions have been the most common ve-:

hicle for the creation of intra-family losses. E.ven if we

should accept petitioners’ premise that the only purpose

_ of § 24 (b) was to meet an evidentiary problem, we could

_ agree that Congress di i nat mean to reach the transactions -

in this case only if we thought it completely indifferent to

\ © 3

| the effectuality of its solution. .

Moreover, we think the evidentiary problem: was not °

the only one which Congress intended to thee Section

24 (b) states-an. absolute prohibition-—not aay Pe

tion—against the allowance of losses on any sales between

the members of certain designated groups. ~ The one com-

. “mon characteristic of these groups is that their members,

although distinct legal entities, generally have a hear-

identity of economic interests.” It is‘a fair inference that —

even legally genuine intra-group ‘transfers were not

theught to result, usually, in economically genuine realiza--

tions of loss, and actordingly that Congress did not deem

— ; i .

! See H. Rep. No. 1546, 75th Cong., Ist Sess., p 2% supra, note 8.

12 See the text of §X (b) (1), quoted uw hote l.

“

‘

e i ‘ * ’

6 McWILLIAMS vy. INTERNAL REVENUE.

__ them to be appropriate occasions for the allowance of

- deductions. 4 aes ies

_ The pertinent legislative. history. lends support to this

inference. The Congressional Committees, in reporting

the provisions enacted in 1934,-merely stated that “the

practice of creating losses through transactions between

members of a family and close corporations has been fre-

quently utilized for avoiding the income tax,” and that

these provisions were proposed to-“deny losses to be taken

in the case of [such] sales” and “to close this loophole of

tax avoidance: *’ Similar latiguage was used in reporting

the 1937 provisions.’* Chairman Doughton of the Ways

and Means Committee, in explaining the 1937 provisigns

to the House, spoke of “the artificial taking and establish-

. ment of losses where property was shuffled back and forth

. between various legal entities owned by the sanyé:persons

or person,” and stated that “these transactions’ seem to

occur at moments remarkably opportune to the real party

in interest in reducing his tax liability but, at the same

time allowing him'to keep substantial control of the assets

being tradec r exchanged.” *. i ;

We conelyde that the purpose of § 24 (b) was to. put an —

end to the right of taxpayers to choose, by intra-family

_————_--

“1H. Rep. No. 704, 73d Cong,, 2d Sess., p. 23 (1939-1 Cum. Bull.

(Part 2) 554, 571) ; S. Rep. No. 558, 73d Cong., 2d Sess,, p. 27 (193941

+ Cum. Bull. (Part 2) 586,607). ° is

. -*The type of situations to which ‘these provisions applied “was

described as being that “in which due to family relationships or friendly

control, artificial losses might be. created for tax purposes.” H. Rep.

No.°1546, 75th Cong., ist Sess.* p. 28 (19301 Cum. Bull. (Part 2)

' 704,724)... :

» 81, Cong. Ree. 9019. Representative Hill, chairman of a House-

subcommittee on the income-tax laws, explained to the House with

reference.to the 1934 provisions that the Committee had “provided

in this bill that transfers between: members of the family for the pur- .

_ poses of creating a loss to be off syt against ordinary income shall not

be recognized fer such d purposes.” 78 Cong. Rec. 2662.

Piet a McWILLIAMS v. INTERNAL REVENUE. 7

transfers and other designated deviceg, their own time for .

realizing tax fosses of investments W hich, for most prac-

tical purposes, are continued uninterrupted. . |

“We are clear as to this purpose. too. that its effectuation

obviously had to be made independent of the.manner in

: which an intra-group transfer was accomplished. Con-

gress, with stich purpose in mind, could not have intended

»* to include within the scope of § 24 (b) only simple trans-

fers made directly or through a dummy, or to exclude

transfers of securities effected through the medium of the

Stock Exchange, unless it wanted to leave a loop-hole .

aimost as large as the one it had set out’ to close. sighs

Petitioners suggest that C “ongres@ if it truly’ intended to

disallow losses on intra-family transactions through the -

market, would probably have done so by an amendment.

to the wash sales provisiens,” making them apphcable

where the seller and buyer were members of the same.

family,-as well’as where they were one and the same in- .

dividual. This extension: of the, wash sales provisions,

- however, would bar only ene particular means of aecom-

"_ plishing the evil at which § 24 itt was armed, and the

16 See. 118 of the Internal Rev enue Code, which first appeared in te}

present form as § 118 of the Revenue Act of 1932, 47 Stat. 169, 2

proyides in part as follows: - ; a

Kg 118. Loss from wash sales of stock br securities.

“(ay In-the case of any loss claimed to have been sustained from

any sale or other disposition of shares’ of stock or securities where it

‘appears that, withirf a period beginning 30 days before the date of

_-_such-sale or disposition and ending 30 days after such date, the tax-

pay er has acquired (by purchase or by an’exchange upon which the

entire amount’ of gain or loss was recognized by law), or has entered,

into a contract or option so te acquire, substantially identical stock

or securities, then no deduction for the loss shall be allowed under

section 23 (e) (2); nor shall such deduetion be allowed under section

- . £23 (f) unless the claim is made by a corporation, a dealer in stocks

or securities, and with respect to a transaction made in the ordinary

course of its business.”

. in itself to break the contir

; “ite,

x .

McWILLIAMS v. INTERNAL REVENUE, : .

necessity. for a cotaprehensive remedy would ver

remained. — . F

Nor can we agree that Congress Cel ilethiien S 24 (b)

of any prescribed tinie interval, comparable in function to

that in the wash salés provisions, intlicates that °$ 24 (b)

was not intended to apply to intya- -family: transfers

through: the E xchange. ‘*Petitjoners’ argument i predi-

cated’ on the difficulty which courts may. have in deter- ’

mining whether the elapse of certain periods of time be-.

tweeh one spouse’s sale and the other’s purchase of tike

securities on the Exchange i is of great. enough importance

luity of the inv estment and

24 (h) inapplicable... . \ f

. Precisely the same difficulty may arise, how ever, in the

: case of an intraefamily transfer through ‘ah individual i in-

termediary, who, by pre-arrangement, buys from one

spouse at the market price and a short time later sells the

identical certificates to the other at the price prevailing »

at the time of sale.- The omission of a prescribed time

interval negates the applicability of § 24 (b) to the former

type of transfer no more than it does to the latter, But

we should hold that it negated’ both, we would have

converted the section into a. mere trap for the unwary.” |

Petitioners also urge that, whatever may have been

Congress’ intent, its designation in §°24 (b) of sales “be-

tween” members.of.a family is not adequate to compre-

We have noted petitioners’ suggestion that 4 taxpayer is assured, |

under the wash sales provisions, of the right to deduct the loss incurred

on 4 sale of securities, even though he himself buys similar securities

thirty-one days later; and that he should aceriainiy not be precluded 3

by. § 24 (by). from elaiming a similar loss if the taxpayer's spouse, in.

stead of the taxpayer, makes’ the purchase under the same cireum-

stances. We do. not feet impelled to commerit on these propositions, a"

however, in a case in which the sale and purchase were practwally

simultgneous and the net considerafion- received by one spouse and

that paid by the, other differed only in the. amount of brokers’

commissions aad’ excise taxes.

”

-MeWILLIAMS v. INTERNAL’ R EVENUE. 9

hetid the transactions in- this casey which consisted only

Af a.sale of stock by one of the petitioners to an unknown

stranger, and the purchase of different certificates of stock

by the. other petitioner, presumably from another

- stranger. apse _

~~ ‘We ean understand how this phraseology, if construed

Piiterally and out of context, might be thought to mean

only direct intra-farnily transfers. But petitioners con-

“ “vede that the express statutory reference to sales made

“directly or ‘inidireetly” preMudes® that construction.

Moreover, we can discover in this language no dwplication

whatsoever that an indirect intra-family sale of funBibles

is outside the statute unless the units sold by one spouse

and those bought by the other are identical. Indeed, if

we accepted petitioners’ construction of thé statute, we

think we would be reading into it a crippling exception f

which is not there: - .

‘Finally, we must’ reject petitioners’ assertionéha the

Dobson rule controls this case. The Tax Court found .

the facts‘as we stated them, and then ‘overruled. the @om-.

missioner’s determination because it thought that § 24 (b)

had no application to a taxpayer's sale of securities on the

_Exchange to an unknown purchaser, regardless of what

other circumstances accompanied the sale. We have de-

cided otherwise, and on our construction of the statute,

ar 1 the conceded facts, the Tax Court could fot. have

reached a result contrary to our own.” ‘ae *

Mr. Justice Burton took no part in the consideration

_or decision of these cases. a

* ,

' .

“

’

8 Dobson ve Commissioner, 320-°U S489 -

Cf. Trust’of Byngham vy, Commusoner, 825 U.S. 365.

Affirmed.’

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