1. A loss sustained by an individual taxpayer upon the
foreclosure sale of an interest in real estate which he had
acquired for profit
held, in computing taxable income
under the Revenue Act of 1934, deductible only to the limited
extent allowed by §§ 23(j) and 117(d) for losses from "sales" or
exchanges of capital assets, and not in full under § 23(e)(2). Pp.
311 U. S. 505,
311 U. S.
510.
2. The language, the purpose, and the legislative history of the
provisions of the Revenue Act of 1934 relating to capital gains and
losses support the view that no distinction was intended between
losses from forced sales and losses from voluntary sales of capital
assets. P.
311 U. S.
510.
3. Courts are not free to reject the literal or usual meaning of
the words of a statute when adoption of that meaning will not lead
to absurd results nor thwart the obvious purpose of the statute. P.
311 U. S.
510.
4. In this case, the foreclosure sale, and not the decree of
foreclosure, was the definitive event which established the loss
within the meaning and for the purpose of the Revenue Act. P.
311 U. S.
512.
5. The view that the loss in this case may not be treated as a
loss from a sale because, by the state law, the vendor in a land
contract may declare a forfeiture upon default cannot be sustained,
since it does not appear from the record that the contract in this
case contained a forfeiture clause, nor that there was in fact a
forfeiture apart from the foreclosure sale. P.
311 U. S.
512.
108 F.2d 753 reversed.
Certiorari, 310 U.S. 619, to review the affirmance of a decision
of the Board of Tax Appeals redetermining a deficiency in income
tax.
Page 311 U. S. 505
MR. JUSTICE STONE delivered the opinion of the Court.
We are asked to say whether a loss sustained by an individual
taxpayer upon the foreclosure sale of his interest in real estate,
acquired for profit, is a loss which, under § 23(e)(2) of the 1934
Revenue Act, 48 Stat. 680, may be deducted in full from gross
income for the purpose of arriving at taxable income, or is a
capital loss deductible only to the limited extent provided in §§
23(e)(2), (j), and 117.
In the computation of taxable income, § 23(e)(2) of the 1934
Revenue Act permits the individual taxpayer to deduct losses
sustained during the year incurred in any transaction for profit.
Subsection (j) provides that "losses from sales or exchanges of
capital assets" shall be allowed only to the extent of $2,000 plus
gains from such sales or exchanges as provided by § 117(d). By §
117(b), it is declared that "capital assets"
"means property held by the taxpayer . . . , but does not
include stock in trade of the taxpayer . . . or property held by
the taxpayer primarily for sale to customers in the ordinary course
of his trade or business."
Respondent taxpayers, with other members of a syndicate,
purchased "on land contract" a plot of land in Oakland County,
Michigan, for the sum of $96,0000, upon a downpayment of $20,000.
The precise nature of the contract does not appear beyond the fact
that payments for the land were to be made in installments, and the
vendor retained an interest in the land as security for payment of
the balance of the purchase price. Before the purchase price was
paid in full, the syndicate defaulted on its payments. The vendor
instituted foreclosure proceedings by suit in equity in a state
court which resulted in a judicial sale of the property, the vendor
becoming the purchaser, and in a deficiency judgment against the
members of the syndicate. Respondents'
Page 311 U. S. 506
contribution to the purchase money, some $4,000, was lost.
The commissioner, in computing respondents' taxable income for
1934, treated the taxpayers' interest in the land as a capital
asset and allowed deduction of the loss from gross income only to
the extent of $2,000 as provided by §§ 23(j) and 117(d), in the
case of losses from sales of capital assets. The Board of Tax
Appeals ruled that the loss was deductible in full. The circuit
court of appeals affirmed, 108 F.2d 753, holding that the loss
established by the foreclosure sale was not a loss from a "sale"
within the meaning of § 23(j). We granted certiorari, 310 U.S. 619,
to resolve a conflict of the decision below with that of the Court
of Appeals for the Second Circuit in
Commissioner v.
Electro-Chemical Engraving Co., 110 F.2d 614.
It is not denied that it was the foreclosure sale of
respondents' interest in the land purchased by the syndicate for
profit, which finally liquidated the capital investment made by its
members and fixed the precise amount of the loss which respondents
seek to deduct as such from gross income. But they argue that the
"losses from sales" which, by § 23(j), are made deductible only to
the limited extent provided by § 117(d), are those losses resulting
from sales voluntarily made by the taxpayer, and that losses
resulting from forced sales like the present, not being subject to
the limitations of § 117(d), are deductible in full like other
losses under § 23(e)(2).
To read this qualification into the statute, respondents rely on
judicial decisions applying the familiar rule that a restrictive
covenant against sale or assignment refers to the voluntary action
of the covenantor, and not to transfers by operation of law or
judicial sales
in invitum. See Guaranty Trust Co. v.
Green Cove Springs & M. R. Co., 139 U.
S. 137;
Gazlay v. Williams, 210 U. S.
41;
Riggs
Page 311 U. S. 507
v. Pursell, 66 N.Y. 193. But here, we are not concerned
with a restrictive covenant of the taxpayer, but with a sale as an
effective means of establishing a deductible loss for the purpose
of computing his income tax. The term "sale" may have many
meanings, depending on the context,
see Webster's New
International Dictionary. The meaning here depends on the purpose
with which it is used in the statute, and the legislative history
of that use. Hence, the respondents argue that the purpose of
providing in the 1934 Act for a special treatment of gains or
losses from capital assets was to prevent tax avoidance by
depriving the taxpayer of the option, allowed to him by the earlier
acts, to effect losses deductible in full by sales of property at
any time within two years after it was acquired, which, until held
for that period, was not defined as a capital asset, § 208, Revenue
Act of 1924, 43 Stat. 253, 262; § 208, Revenue Act of 1926, 44
Stat. 9, 19, and § 101 of the Revenue Act of 1928, 45 Stat. 791,
811.
It is said that, since losses from foreclosure sales not within
the control of the taxpayer are not within the evil aimed at by the
1934 Act, they must be deemed to be excluded from the reach of its
language. To support this contention, respondents rely on the
report of the Ways and Means Committee submitting to the House the
bill which, with amendments not now material, became the Revenue
Act of 1934. The Committee, in pointing out a "defect" of the
existing law, said:
"Taxpayers take their losses within the two-year period and get
full benefit therefrom, and delay taking gains until the two-year
period has expired, thereby reducing their taxes."
H.Rept. 704, 73d Cong., 2d Sess., pp. 9 and 10.
But the treatment of gains and losses from sales of capital
assets on a different basis from ordinary gains and losses was not
introduced into the revenue laws by the 1934 Act. That had been a
feature of every revenue
Page 311 U. S. 508
law beginning with the Act of 1921, 42 Stat. 227, and each had
defined as capital losses "losses from sales or exchanges of
capital assets." The 1934 Act made no change in this respect, but,
for the first time, it provided that "capital assets" should
include all property acquired by the taxpayer for profit,
regardless of the length of time held by him, and that capital
gains and losses from sales of capital assets should be recognized
in the computation of taxable income according to the length of
time the capital assets are held by the taxpayer, varying from 100%
if the capital asset is held for not more than a year, to 30% if it
is held more than ten years. § 117(a). Finally, for the first time,
the statute provided that capital losses in excess of capital gains
should be deducted from ordinary income only to the extent of
$2,000. Thus, by treating all property acquired by the taxpayer for
profit as capital assets, and limiting the deduction of capital
losses in the manner indicated, the Act materially curtailed the
advantages which the taxpayer had previously been able to gain by
choosing the time of selling his property.
The definition of capital losses as losses from "sales" of
capital assets, as we have pointed out, was not new. As will
presently appear, the legislative history of this definition shows
that it was not chosen to exclude from the capital assets
provisions losses resulting from forced sales of taxpayers'
property. And, if so construed, substantial loss of revenue would
result under the 1934 Act, whose purpose was to avoid loss of
revenue by the application of the capital assets provisions. In
drafting the 1934 Act, the Committee had before it proposals for
stabilizing the revenue by the adoption of the British system,
under which neither capital gains nor losses enter into the
computation of the tax. In declining to follow this system in its
entirety, the Committee said: "It is deemed wiser to attempt a step
in this direction without
Page 311 U. S. 509
letting capital gains go entirely untaxed." It accordingly
reduced the tax burden on capital gains progressively with the
increase of the period up to ten years, during which the taxpayer
holds the capital asset, and permitted the deduction, on the same
scale, of capital losses, but only to the extent that there are
taxable capital gains, plus $2,000. In thus relieving capital gains
from the tax imposed on other types of income, it cannot be
assumed, in the absence of some clear indication to the contrary,
that Congress intended to permit deductions in full of losses
resulting from forced sales of the taxpayers' property, from either
capital gains or ordinary gross income, while taxing only a
fraction of the gains resulting from the sales of such property.
See White v. United States, 305 U.
S. 281,
305 U. S. 292;
Helvering v. Inter-Mountain Life Ins. Co., 294 U.
S. 686,
294 U. S.
689-690.
The taxation of capital gains after deduction of capital losses
on a more favorable basis than other income was provided for by §
206 of the 1921 Revenue Act as the means of encouraging
profit-taking sales of capital investments, H.Rept. No. 350, 67th
Cong., 2d Sess., p. 8.
Burnet v. Harmel, 287 U.
S. 103,
287 U. S. 106.
In this section, as in later Acts, capital net gain was defined as
"the excess of the total . . . capital gain over the sum of the
capital deductions and capital losses;" capital losses being
defined as the loss resulting from the sale or exchange of capital
assets. In submitting the proposed Revenue Act of 1924, the House
committee pointed out that the 1921 Act contained no provision for
limiting deduction of capital losses where they exceeded the amount
of capital gains. H.Rept. No. 179, 68th Cong., 1st Sess., p. 14.
This was remedied by providing in § 208(c) that the amount by which
the tax is reduced on account of a capital loss shall not exceed 12
1/2% of the capital loss. In commenting on this provision, the
Committee said, p. 10:
"If the amount by which the tax is to be increased on account of
capital gains is limited to 12 1/2% of the capital gain,
Page 311 U. S. 510
it follows logically that the amount by which the tax is reduced
on account of capital losses shall be limited to the 12 1/2% of the
loss."
This provision was continued without changes now material until
the 1934 Act. § 208(c) in the 1924 and 1926 Acts; § 101(b) in the
1928 and 1932 Act, 47 Stat. 191.
Congress thus has given clear indication of a purpose to offset
capital gains by losses from the sale of like property and upon the
same percentage basis as that on which the gains are taxed.
See
United States v. Pleasants, 305 U. S. 357,
305 U. S. 360.
This purpose to treat gains and deductible losses on a parity but
with a further specific provision provided by § 117(d) of the 1934
Act, permitting specified percentages of capital losses to be
deducted from ordinary income to the extent of $2,000, would be
defeated in a most substantial way if only a percentage of the
gains were taxed, but losses on sales of like property could be
deducted in full from gross income. This treatment of losses from
sales of capital assets in the 1924 and later Acts, and the reason
given for adopting it, afford convincing evidence that the "sales"
referred to in the statute include forced sales such as have
sufficed, under long-accepted income tax practice, to establish a
deductible loss in the case of noncapital assets. Such sales can
equally be taken to establish the loss in the case of capital
assets without infringing the declared policy of the statute to
treat capital gains and losses on a parity.
We can find no basis in the language of the Act, its purpose, or
its legislative history for saying that losses from sales of
capital assets under the 1934 Act, more than its predecessors, were
to be treated any differently whether they resulted from forced
sales of voluntary sales. True, courts, in the interpretation of a
statute, have some scope for adopting a restricted, rather than a
literal or usual, meaning of its words where acceptance of that
meaning would lead to absurd results,
United
Page 311 U. S. 511
States v. Katz, 271 U. S. 354,
271 U. S. 362,
or would thwart the obvious purpose of the statute,
Haggar Co.
v. Helvering, 308 U. S. 389. But
courts are not free to reject that meaning where no such
consequences follow and where, as here, it appears to be consonant
with the purposes of the Act as declared by Congress and plainly
disclosed by its structure.
It is not without significance that Congress, in the 1934 Act,
enlarged the scope of its provisions relating to losses from sales
of capital assets by including within them losses upon the
disposition of the taxpayer's property by methods other than sale
and without reference to the voluntary action of the taxpayer. It
thus treats as losses from sales or exchanges the loss sustained
from redemption of stock, § 115(c), retirement of bonds, § 117(f),
losses from short sales, § 117(e)(1), and loss sustained by failure
of the holder of an option to exercise it, § 117(e)(2), although
none of these transactions involves a loss from a sale.
See
McClain v. Commissioner, post, p.
311 U. S. 527.
The scope of the capital loss provisions was still further
enlarged by § 23(k)(2) of the Revenue Act of 1938, 52 Stat. 447,
which provides that, if securities, which are capital assets, are
ascertained to be worthless and are charged off within the taxable
year, the loss, with an exception not now material, shall be
considered as a loss arising from a sale or exchange. These
provisions disclose a consistent legislative policy to enlarge the
class of deductible losses made subject to the capital assets
provisions without regard to the voluntary action of the taxpayer
in producing them. We could hardly suppose that Congress would not
have made provision for the like treatment of losses resulting from
a forced sale of the taxpayer's property acquired for profit either
in the 1934 or 1938 Act, if it had thought that the term "sales or
exchanges" as used in both acts did not include such sales of the
taxpayer's property.
Page 311 U. S. 512
Respondents also advance the argument, sustained in
Commissioner v. Freihofer, 102 F.2d 787, that the
definitive event fixing respondents' loss was not the foreclosure
sale but the decree of foreclosure which ordered the sale and
preceded it. But, since the foreclosure contemplated by the decree
was foreclosure by sale and the foreclosed property had value which
was conclusively established by the sale for the purposes of the
foreclosure proceeding, the sale was the definitive event
establishing the loss within the meaning and for the purpose of the
revenue laws. They are designed for application to the practical
affairs of men. The sale, which finally cuts off the interest of
the mortgagor and is the means for determining the amount of the
deficiency judgment against him, is a means adopted by the statute
for determining the amount of his capital gain or loss from the
sale of the mortgaged property.
The court below also thought that the loss suffered by
respondents could not be treated as a loss from a sale, since, by
the law of Michigan, the vendor upon a land contract containing the
usual forfeiture clause had the right to deprive respondents and
their joint adventurers of all interest in the property by a
declaration of forfeiture, and that the only additional advantage
of foreclosure was to obtain a deficiency judgment. But there is
nothing in this record to show that the land contract in this case
contained a forfeiture clause. Even if it did, it does not appear
that there was, in fact, a forfeiture apart from the sale on
foreclosure.
Cf. Davidson v. Commissioner, 305 U. S.
44,
305 U. S. 46;
Helvering v. Midland Insurance Co., 300 U.
S. 216,
300 U. S. 224;
United States v. Phellis, 257 U.
S. 156,
257 U. S.
172.
Reversed.
MR. JUSTICE ROBERTS is of opinion that the judgment should be
affirmed for the reasons stated in the opinion of the Circuit Court
of Appeals, 108 F.2d 753.