Sales commission paid by a taxpayer engaged in the business of
buying and selling securities on his own account are not deductible
as ordinary and necessary expenses, under § 23(a) of the Revenue
Act of 1934, but are to be treated a offsets against selling price
relevant only to the determination of capital loses or gains. P.
315 U. S.
627.
In Art. 282 of T.R. 77, under the Revenue Act of 1932, and Art.
22 of T.R. 86, under the Revenue Act of 1934, providing that
commissions paid in selling securities are an offset against the
selling price "when such commissions are not an ordinary and
necessary business expense," the qualifying clause is controlling
only in the case of dealers in securities.
119 F.2d 667 affirmed.
Certiorari, 314 U.S. 600, to review the reversal of a ruling of
the Board of Tax Appeals, 41 B.T.A. 1204.
MR. JUSTICE BLACK delivered the opinion of the Court.
During 1934 and 1935, the petitioner, bought and sold stocks,
bonds, and commodities. In connection with the sales, he paid
selling commissions to brokers, and in his books these commissions
were deducted from selling price before net profit or loss was
determined. In his income tax returns for 1934 and 1935, he treated
the commissions
Page 315 U. S. 627
similarly, not making deductions for them as ordinary and
necessary business expenses. In 1939, however, in the course of
proceedings before the Board of Tax Appeals, [
Footnote 1] the petitioner asserted that he was
entitled to tax refunds for the reason that his failure to make
deductions for the commissions had resulted in overpayment in both
years. The Board sustained his contention in part, holding that the
selling commissions could properly have been deducted as ordinary
and necessary business expenses, that the refund claimed for 1935
should be allowed, but that the refund claimed for 1934 was barred
by the applicable statute of limitations. 41 B.T.A. 1204. The
Circuit Court of Appeals reversed, holding that the claimed
deductions for selling commissions were not permissible, and
finding it unnecessary therefore to determine whether the refund
claim for 1934 was timely. 119 F.2d 667. Because of a conflict in
decisions of Circuit Courts of Appeal, [
Footnote 2] we granted certiorari, 314 U.S. 600, to
consider the question: are sales commissions paid by a taxpayer
engaged in the business of buying and selling securities [
Footnote 3] deductible as ordinary and
necessary expenses under Section 23(a) of the Revenue Act of 1934,
[
Footnote 4] or are they to be
treated as offsets against selling
Page 315 U. S. 628
price relevant only to the determination of capital losses or
gains?
In
Helvering v. Winmill, 305 U. S.
79, we held that a taxpayer who bought and sold
securities could not deduct the commissions paid on his purchases
as a business expense. Although the
Winmill case arose
under the Revenue Act of 1932, the statutory provisions and
regulations there relevant are identical with those again in
controversy here. And the conclusion we reached there -- that a
general regulation [
Footnote 5]
designating "commissions" as one of a long list of deductible
business expenses is not controlling in the face of a specific
regulation pertaining to commissions on securities transactions --
is equally applicable here.
The specific regulation pertaining to securities transactions
provides:
"Commissions paid in purchasing securities are a part of the
cost price of such securities. Commissions paid in selling
securities, when such commissions are not an ordinary and necessary
business expense are an offset against the selling price. . . .
[
Footnote 6]"
If there is any justification for treating sales commissions
differently from purchase commissions, it must depend upon the
significance of the clause "when such commissions are not an
ordinary and necessary business expense." This clause first
appeared in Treasury Regulations 77, accompanying the Revenue Act
of 1932. In the income tax regulations prior to that time, it was
consistently prescribed that commissions paid on purchases and
sales of
Page 315 U. S. 629
securities were to be treated as part of the cost or selling
price and were not otherwise to be deductible. [
Footnote 7] And in
Helvering v. Union Pacific
Co., 293 U. S. 282,
293 U. S. 286,
this Court expressly recognized that such commissions have been
"consistently treated . . . not as items of current expense, but as
additions to the cost of the property or deductions from the
proceeds of sale."
What, then, is the significance of the qualifying clause first
appearing in the Regulations of 1932, and what effect is to be
given to it? Prior to the formal adoption of the Regulations of
1932, the Commissioner of Internal Revenue permitted one exception
to what appears to have been an otherwise uniform practise of
treating commissions on the sales of securities as mere offsets
against selling price. This exception was made in the case of the
dealer in securities, one who "as a merchant buys securities and
sells them to customers with a view to the gains and profits that
may be derived therefrom." [
Footnote 8] It reflects the view that there are practical
considerations of accounting convenience which make it as difficult
for such dealers in many instances to set commissions off against
the proceeds of individual sales as it would be for the merchant of
other wares to treat his selling expenses only as a series of
subtractions from the selling price realized on particular items of
his stock. [
Footnote 9]
Incorporation of the clause "when such commissions are not an
ordinary and necessary business expense" was intended to provide
formal recognition for an established business usage, based on the
peculiar
Page 315 U. S. 630
necessities of securities dealers, a usage to which the
Commissioner had already given informal acquiescence. [
Footnote 10] For the casual buyer
and seller of securities, or even for the large scale trader on his
own account, as here, the practical obstacles to treating sales
commissions as offsets against selling price do not exist. In this
very case, for example, the taxpayer apparently found it more
convenient to follow this method in keeping his own business
records.
We therefore conclude that the clause "when such commissions are
not an ordinary and necessary business expense" was intended to be
and is controlling only in the case of securities dealers.
[
Footnote 11] In the case of
a trader on his own account, where there are no compelling
practical grounds for treating sales commissions as such an
expense, we find no persuasive reason for distinguishing, under the
statute and regulations, between sales commissions like those
before us and purchase commissions like those of the
Winmill case. The judgment of the court below is
accordingly
Affirmed.
MR. JUSTICE JACKSON took no part in the consideration or
decision of this case.
[
Footnote 1]
These proceedings had been initiated in connection with other
issues not relevant here.
[
Footnote 2]
With the decision below and
Commissioner v. Covington,
120 F.2d 768,
compare Winmill v. Commissioner, 93 F.2d
494, and
Neuberger v. Commissioner, 104 F.2d 649.
[
Footnote 3]
Although the petitioner alleges that some of the commissions
were paid on sales of commodities, it does not appear from the
record that the petitioner asked for separate treatment of these
commissions before either the Board of Tax Appeals or the Circuit
Court of Appeals. Nor was such separate treatment requested before
this Court.
[
Footnote 4]
48 Stat. 680, 688. The statute provides:
"In computing net income there shall be allowed as
deductions:"
"(a)
Expenses. All the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any trade
or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered. . . ."
[
Footnote 5]
"Among the items included in business expenses are . . .
commissions . . . advertising and other selling expenses. . . ."
Article 121 of Treasury Regulations 77, under the Revenue Act of
1932; Article 23(a)-1 of Treasury Regulation 86, under the Revenue
Act of 1934.
[
Footnote 6]
Article 282 of Treasury Regulations 77, under the Revenue Act of
1932; Article 24-2 of Regulations 85, under the Revenue Act of
1934.
[
Footnote 7]
See, e.g., Article 8, par. 10 of Treasury Regulations
33, Revised, under the Revenue Act of 1916; Article 293 of Treasury
Regulations 45, under the Revenue Act of 1918.
[
Footnote 8]
See Article 22(c)-5 of Treasury Regulations 86, under
the Revenue Act of 1934.
[
Footnote 9]
See Bureau of Internal Revenue, G.C.M. 15430, XIV-2
Cum.Bull. 59 (1935).
[
Footnote 10]
Ibid.
[
Footnote 11]
As the government points out in its brief, a dealer's tax
liability under the Revenue Acts of 1932 and 1934 would ordinarily
have been the same whether the commissions he paid on sales were
treated as deductible business expenses or offsets against selling
price. For, in general, his gains or losses would not have been
capital gains or losses as defined in those acts.
See
Section 101(c)(8) of the Revenue Act of 1932, 47 Stat. 169, 192;
Section 117(b) of the Revenue Act of 1934, 48 Stat. 680, 714.