1. The Revenue Act of 1918 provided that net income should
include "gains" derived from sales or dealings in property, §§
212(a), and 213(a); that there should be allowed as deductions
"losses" sustained during the taxable year "incurred in any
transaction entered into for profit," § 214(a), and that
"for the purpose of ascertaining the gain derived or loss
sustained from the sale or other disposition of property . . . the
basis shall be -- (1) In the case of property acquired before March
1, 1913, the fair market price or value of such property as of that
date, and (2) In the case of property acquired on or after that
date, the cost thereof."
§ 202(a).
Held:
(a) That the provisions of the act in reference to the gains
derived and the losses sustained from the sale of property acquired
before March 1, 1913, were correlative, and that whatever effect
was intended to be given to the market value of property on that
date in determining taxable gains, a corresponding effect was
intended to be given to such market value in determining deductible
losses;
(b) That the Act of 1918 imposed a tax and allowed a deduction
to the extent only that an actual gain was derived or an actual
loss sustained from the investment, and the provision in reference
to the market value on March 1, 1913, was applicable only where
there was such an actual gain or loss -- that is, that this
provision was merely a limitation upon the amount of the actual
gain or loss that would otherwise have been taxable or deductible.
Goodrich v. Edwards, 255 U. S. 527;
Walsh v. Brewster, id., 255 U. S. 536. P.
268 U. S.
100.
2. Decisions of this Court affecting the business interests of
the country should not be disturbed except upon the most cogent
reasons. P.
268 U. S.
105.
59 Ct.Cls. 719 reversed.
Appeal from a judgment of the Court of Claims allowing recovery
of an income tax paid under protest.
Page 268 U. S. 99
MR. JUSTICE SANFORD delivered the opinion of the Court.
James J. Flannery bought, prior to March 1, 1913, certain
corporate stock for less than $95,175. Its market value on March 1,
1913 was $116,325. He sold it in 1919 for $95,175 that is, for more
than cost. He died in March, 1920. The executors of his estate, in
returning his income for the year 1919, deducted, as a loss, the
difference between the market value of the stock on March 1, 1913,
and the price received. The Commissioner of Internal Revenue
disallowed the loss claimed, and an additional tax was assessed.
The executors paid this under protest, and thereafter, a claim for
refund having been denied, brought this action in the Court of
Claims to recover the amount paid. Judgment was rendered in their
favor. 59 Ct.Cls. 719.
The question presented is whether, under the income tax
provisions of the Revenue Act of 1918, [
Footnote 1] a deductible loss was sustained by the sale of
the stock in 1919 for more than it had cost by reason of the fact
that, on March 1,
Page 268 U. S. 100
1913, between the dates of purchase and sale, it had a market
value greater than the sale price.
This Act provided that net income should include "gains" derived
from sales or dealings in property, §§ 212(a), 213(a); that there
should be allowed as deductions "losses" sustained during the
taxable year "incurred in any transaction entered into for profit,"
§ 214(a), and that,
"for the purpose of ascertaining the gain derived or loss
sustained from the sale or other disposition of property . . . ,
the basis shall be -- (1) In the case of property acquired before
March 1, 1913, the fair market price or value of such property as
of that date, and (2) In the case of property acquired on or after
that date, the cost thereof. . . ."
Section 202(a).
The United States contends that, under § 214(a), there was no
deductible loss whatever unless the taxpayer had sustained an
actual "loss" in the entire transaction by selling the property for
less than it had cost, and that the effect of § 202(a) was merely
that, if such an actual loss had been sustained in selling property
acquired before March 1, 1913, only so much thereof could be
deducted as was sustained after the latter date -- that is, the
difference between the market value on that date and the sale
price.
The executors contend, on the other hand, that § 202(a)
established the market value of such property on March 1, 1913, as
the sole basis for ascertaining the loss sustained, without regard
to its actual cost, and that, if such market value was higher than
the sale price, this conclusively determined that there had been a
deductible "loss" in the transaction, and fixed the amount thereof
at the difference between the market value on that date and the
sale price.
It is clear, in the first place, that the provisions of the Act
in reference to the gains derived and the losses sustained from the
sale of property acquired before March 1, 1913, were correlative,
and that whatever effect was intended to be given to the market
value of property on
Page 268 U. S. 101
that date in determining taxable gains, a corresponding effect
was intended to be given to such market value in determining
deductible losses. This conclusion is unavoidable under the
specific language of § 202(a) establishing one and the same basis
for ascertaining both gains and losses.
Taking this as a premise, we think that the question of
determining taxable gains is concluded, in accordance with the
contention of the government, by the decisions of this Court in
Goodrich v. Edwards, 255 U. S. 527, and
Walsh v. Brewster, 255 U. S. 536.
These cases, which were decided in 1921, arose under the income tax
provisions of the Revenue Act of 1916. [
Footnote 2] That Act provided, as did the Act of 1918,
that the "gains" derived from sales or dealings in property should
be included in net income, [
Footnote 3] and also that the losses actually sustained in
transactions entered into for profit should be allowed as
deductions. [
Footnote 4] In the
Act of 1916, however, the provisions for the ascertainment of the
gains derived and losses sustained from the sale of property were
not contained, as in the Act of 1918, in one provision, but in
separate clauses of the same tenor and effect as the combined
provision in the Act of 1918. Section 2(c) provided that: "For the
purpose of ascertaining the gain derived from the sale or other
disposition of property . . . acquired before" March 1, 1913, "the
fair market price or value of such property as of" March 1, 1913,
"shall be the basis for determining the amount of such gain
derived." The correlative clause relating to the ascertainment of
loss was in precisely the same language except that the words "the
loss" and "loss sustained" were used instead of the words "the
gain" and "gain derived." [
Footnote
5]
Page 268 U. S. 102
In
Goodrich v. Edwards, supra, in the second
transaction involved, the taxpayer had acquired in 1912 certain
corporate stock of the then value of $291,600. Its market value on
March 1, 1913, was only $148,635.50. He sold it in 1916 for
$269,346.25, being $22,253.75 less than its value when acquired,
but $120,710.75 more than its value on March 1, 1913. A tax was
assessed on the latter amount, which was sustained by the trial
court. The government confessed error in this judgment. After
reciting this fact and setting forth the pertinent provisions of
the Act, this Court, in reversing the judgment, said:
"It is . . . very plain that the state imposes the income tax on
the proceeds of the sale of personal property to the extent only
that gains are derived therefrom by the vendor, and we therefore
agree with the Solicitor General that, since no gain was realized
on this investment by the plaintiff in error no tax should have
been assessed against him. Section 2(c) is applicable only where a
gain over the original capital investment has been realized after
March 1, 1913, from a sale or other disposition of property."
This case was followed by
Walsh v. Brewster, supra. In
the first transaction there involved, the taxpayer had purchased
bonds in 1899 for $191,000, which he sold in 1916 for the same
amount. Their market value on March 1, 1913, was $151,845. A tax
was assessed on the difference between the latter amount and the
selling price, namely $39,155. This tax was held invalid, under the
authority of
Goodrich v. Edwards, on the specific ground
that "the owner of the stock did not realize any gain on his
original investment by the sale in 1916." In the second transaction
involved, the taxpayer had purchased certain bonds in 1902 and 1903
for $231,300, which he sold in 1916 for $276,150. Their market
value on March 1, 1913, was $164,480. A tax was assessed upon the
difference between the selling price and the market value of
Page 268 U. S. 103
the bonds on March 1, 1913. It was held however, that "since the
gain of the taxpayer was only the difference between his investment
of $231,300 and the amount realized by the sale, $276, 150," under
the authority of
Goodrich v. Edwards, "he was taxable only
on $44,850," the difference between the purchase and sale
prices.
These decisions are equally applicable to the Act of 1918. There
is no difference in substance between the language of the two Acts
in respect to the ascertainment of the gain derived or loss
sustained from the sale of property acquired before March 1, 1913,
and the correlative nature of these two provisions is emphasized in
the Act of 1918 by their combination in one and the same sentence.
As it was held in these decisions that the Act of 1916 imposed a
tax to the extent only that gains were derived from the sale, and
that the provision as to the market value of the property on March
1, 1913, was applicable only where a gain had been realized over
the original capital investment, so we think it should be held that
the Act of 1918 imposed a tax and allowed a deduction to the extent
only that an actual gain was derived or an actual loss sustained
from the investment, and that the provision in reference to the
market value on March 1, 1913, was applicable only where there was
such an actual gain or loss -- that is, that this provision was
merely a limitation upon the amount of the actual gain or loss that
would otherwise have been taxable or deductible.
We cannot sustain the contention that the decision in
Goodrich v. Edwards is not entitled to controlling weight
in the matter of deductible losses because of the government's
confession of error, or because it involved the question of taxable
gains, as to which it is said that, under a different construction
of the Act, a grave constitutional question would have arisen which
could have no application to the question of deductible losses. The
decision shows that it was not based on the confession of error
or
Page 268 U. S. 104
on any constitutional question, but upon the conclusion that, as
a matter of construction, it was "very plain" that the statute
imposed a tax upon the proceeds of sales "to the extent only that
gains are derived therefrom by the vendor." [
Footnote 6] The language of the opinion is
specific and unambiguous; it embodied the reasoned judgment of the
court as to the proper construction of the Act, and it applies
equally to the construction of the similar provisions of the Act of
1918, relating to gains and losses alike.
This was recognized by the Treasury Department, which promptly
amended its former Regulations by incorporating therein
"the rule announced by the Supreme Court in the cases of
Goodrich v. Edwards and
Walsh v. Brewster
respecting the basis for the determination of taxable gains or
deductible losses in the case of property acquired prior to March
1, 1913, and sold or disposed of subsequent thereto."
23 T.D. 763, 764. To the same effect is the opinion thereafter
given to the Secretary of the Treasury by the Attorney General in
reference to taxable gains and deductible losses under both of the
Acts. 33 Op.Atty.Gen. 291. And, it may be noted, a like
construction has been independently given by the courts of New
York, without reference to any constitutional
Page 268 U. S. 105
question, to the Income Tax Law of that state, in which the
provisions relating to gains derived and losses sustained from the
sale of property, are a substantial transcript of those of the Act
of 1918, except that January 1, 1919, is substituted for March 1,
1913; this construction being embodied in a series of decisions,
the first of which, relating to taxable gains, was written before
those in
Goodrich v. Edwards and
Walsh v.
Brewster were announced.
People ex rel. Klauber v.
Wendell, 196 App.Div. 827,
aff'd without opinion, 232
N.Y. 549;
People ex rel. Keim v. Wendell, 200 App.Div.
388;
Re Application of Bush, 206 App.Div. 800.
It is unnecessary to consider in detail, as in a matter of first
impression, various contentions urged in behalf of the executors in
respect to the construction that should be given to the provisions
of the Act of 1918 in reference to deductible losses. For the
reasons stated we think that the question should be resolved
according to the earlier decisions, and nothing has been suggested
which disposes us to depart from them now. Decisions affecting the
business interests of the country should not be disturbed except
for the most cogent reasons.
National Bank v. Whitney,
103 U. S. 99,
103 U. S.
102.
Since Flannery sustained no actual loss in the transaction in
question, having sold the stock for more than it had cost, his
executors were not entitled to the deduction which they claimed
because it was sold at less than its market value on March 1,
1913.
The judgment of the Court of Claims is accordingly.
Reversed.
MR. JUSTICE McREYNOLDS and MR. JUSTICE SUTHERLAND dissent.
[
Footnote 1]
Act Feb. 24, 1919, c. 18, Tit. 2, 40 Stat. 1058.
[
Footnote 2]
Act Sept. 8, 1916, c. 463, 39 Stat. 756.
[
Footnote 3]
Section 2(a).
[
Footnote 4]
Section 5(a), Fifth.
[
Footnote 5]
Section 5(a), Fourth.
[
Footnote 6]
It distinctly appeared from the Solicitor General's brief that
the confession of error was not made because of any constitutional
question, to which he made only an incidental reference, but
because he was "forced to the conclusion" that, as a matter of
construction of the Act, it was clear that it imposed a tax only on
the "gains" derived from the sale of property, and that § 2(c)
could have "no application until it is first ascertained, by
comparing the purchase and selling prices, that there had been an
actual gain." And this was followed by the statement that, in the
government's view, the similar provision relating to losses must be
construed in the like manner -- "that is, it must first be
ascertained by comparing the purchase and selling price that a loss
on the entire transaction has been sustained."