1. In order to establish tax losses, a husband who managed the
separate estate of his wife, as well as his own, ordered his broker
to sell certain stock for the account of one of the two and to buy
the same number of shares of the same stock for the other at as
nearly the same price as possible. The sales were made to, and the
purchases from, unknown strangers through a stock exchange, and the
buying spouse received stock certificates different from those
which the other had sold.
Held: deductions in their separate income tax returns
for losses on such sales are forbidden by § 24(b) of the Internal
Revenue Code, as losses from "sales or exchanges of property,
directly or indirectly . . . [b]etween members of a family." Pp.
331 U. S.
695-703.
2. The purpose of § 24(b) was to put an end to the right of
taxpayers to choose, by intra-family transfers and other designated
devices, their own time for realizing tax losses on investments
which, for most practical purposes, are continued uninterrupted --
regardless of the manner in which the transfers are accomplished.
Pp.
331 U. S.
700-701.
3. The words "directly or indirectly" in § 24(b) preclude a
construction which would limit the prohibition to direct
intra-family transfers or to those in which the units of fungible
property sold by one spouse and those bought by the other are
identical. Pp.
331 U. S.
702-703.
158 F.2d 637, affirmed.
The Tax Court expunged deficiency assessments for losses
realized from indirect intra-family transfers of stocks. 5 T.C.
623. The Circuit Court of Appeals reversed. 158 F.2d 637. This
Court granted certiorari. 330 U.S. 814.
Affirmed, p.
331 U. S.
703.
Page 331 U. S. 695
MR. CHIEF JUSTICE VINSON delivered the opinion of the Court.
The facts of these cases are not in dispute. John P. McWilliams,
petitioner 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 sell certain stock for the account of one of the two, and
to buy the same number of shares of the same stock for the other at
as nearly the same price as possible. He told the broker that his
purpose was to establish tax losses. On each occasion, the sale and
purchase were promptly negotiated through the Stock Exchange, and
the identity of the persons buying from the selling spouse and of
the persons selling to the buying spouse was never known.
Invariably, however, the buying spouse received stock certificates
different from those which the other had sold. Petitioners filed
separate income tax returns for these years, and claimed the losses
which he or she sustained on the sales as deductions from gross
income.
The Commissioner disallowed these deductions on the authority of
§ 24(b) of the Internal Revenue Code, [
Footnote 1]
Page 331 U. S. 696
which prohibits deductions for losses from "sales or exchanges
of property, directly or indirectly . . . between members of a
family," and between certain other closely related individuals and
corporations.
On the taxpayers' applications to the Tax Court, it held § 24(b)
inapplicable, following its own decision in
Ickelheimer v.
Commissioner, [
Footnote 2]
and expunged the Commissioner's deficiency assessments. [
Footnote 3] The Circuit Court of
Appeals reversed the Tax Court, [
Footnote 4] and we granted certiorari [
Footnote 5] because of a conflict between circuits
[
Footnote 6] and the importance
of the question involved.
Page 331 U. S. 697
Petitioners contend that Congress could not have intended to
disallow losses on transactions like those described above, which,
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. They contend 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 our attention to the
pre-1934 rule, which applied to all sales regardless of the
relationship of seller and buyer, 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. [
Footnote 7] They
point out that, in the case of the usual intra-family sale, the
evidence material to this issue was peculiarly within the knowledge
and even the control of the taxpayer and those amenable to his
wishes, and inaccessible to the Government. [
Footnote 8] They maintain that the only purpose of
the provisions of the 1934 and 1937 Revenue Acts -- the forerunners
of § 24(b) [
Footnote 9] -- was
to
Page 331 U. S. 698
overcome these evidentiary difficulties by disallowing losses on
such sales irrespective of good faith. It seems to be 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
consequently that the legislative remedy applied only to sales made
immediately from one member of a family to another, or mediately
through a controlled intermediary.
We are not persuaded that Congress 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 practiced by a
buying spouse's agreement or tacit readiness to hold the property
sold at the disposal of a selling spouse, rather more easily than
by a pretense of a sale where none actually occurred, or by an
unfair price. The difficulty of determining the finality of an
intra-family transfer was one with which the courts wrestled under
the pre-1934 law, [
Footnote
10] and which Congress undoubtedly meant to overcome by
enacting the provisions of § 24(b). [
Footnote 11]
It 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. Indeed, if the property is fungible, the possibility
that a sale and purchase may be rendered nugatory by the buying
Page 331 U. S. 699
spouse's agreement to hold for the benefit of the selling
spouse, and the difficulty of proving that fact against the
taxpayer, are equally great when the units of the property which
the one buys are not the identical units which the other sells.
Securities transactions have been the most common vehicle for
the creation of intra-family losses. Even if we should accept
petitioners' premise that the only purpose of § 24(b) was to meet
an evidentiary problem, we could agree that Congress did not mean
to reach the transactions in this case only if we thought it
completely indifferent to the effectuality of its solution.
Moreover, we think the evidentiary problem was not the only one
which Congress intended to meet. Section 24(b) states an absolute
prohibition -- not a presumption -- against the allowance of losses
on any sales between the members of certain designated groups. The
one common characteristic of these groups is that their members,
although distinct legal entities, generally have a near identity of
economic interest. [
Footnote
12] It is a fair inference that even legally genuine
intra-group transfers were not thought to result, usually, in
economically genuine realizations of loss, and, accordingly, that
Congress did not deem them to be appropriate occasions for the
allowance of deductions.
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 frequently
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
Page 331 U. S. 700
tax avoidance." [
Footnote
13] Similar language was used in reporting the 1937 provisions.
[
Footnote 14] Chairman
Doughton of the Ways and Means Committee, in explaining the 1937
provisions to the House, spoke of
"the artificial taking and establishment of losses where
property was shuffled black and forth between various legal
entities owned by the same 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 traded or exchanged. [
Footnote 15]"
We conclude that the purpose of § 24(b) was to put an end to the
right of taxpayers to choose, by intra-family transfers and other
designated devices, their own time for realizing tax losses on
investments which, for most practical 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. Congress, with such purpose
in mind, could not have intended to include within the scope of §
24(b) only simple transfers made directly or through a dummy, or to
exclude
Page 331 U. S. 701
transfers of securities effected through the medium of the Stock
Exchange, unless it wanted to leave a loophole almost as large as
the one it had set out to close.
Petitioners suggest that Congress, 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
provisions, [
Footnote 16]
making them applicable where the seller and buyer were members of
the same family, as well as where they were one and the same
individual. This extension of the wash sales provisions, however,
would bar only one particular means of accomplishing the evil at
which § 24(b) was aimed, and the necessity for a comprehensive
remedy would have remained.
Nor can we agree that Congress' omission from § 24(b) of any
prescribed time interval, comparable in function to that in the
wash sales provisions, indicates that § 24(b) was not intended to
apply to intra-family transfers through the Exchange. Petitioners'
argument is predicated on the difficulty which courts may have in
determining
Page 331 U. S. 702
whether the elapse of certain periods of time between one
spouse's sale and the other's purchase of like securities on the
Exchange is of great enough importance, in itself, to break the
continuity of the investment and make § 24(b) inapplicable.
Precisely the same difficulty may arise, however, in the case of
an intra-family transfer through an individual intermediary who, by
prearrangement, 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, if we should hold that it negated both, we would have
converted the section into a mere trap for the unwary. [
Footnote 17]
Petitioners also urge that, whatever may have been Congress'
intent, its designation in § 24(b) of sales "between" members of a
family is not adequate to comprehend the transactions in this case,
which consisted only of 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.
We can understand how this phraseology, if construed literally
and out of context, might be thought to mean
Page 331 U. S. 703
only direct intra-family transfers. But petitioners concede that
the express statutory reference to sales made "directly or
indirectly" precludes that construction. Moreover, we can discover
in this language no implication whatsoever that an indirect
intra-family sale of fungibles 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 the
statute, we think we would be reading into it a crippling exception
which is not there.
Finally, we must reject petitioners' assertion that the Dobson
rule [
Footnote 18] controls
this case. The Tax Court found the facts as we stated them, and
then overruled the Commissioner'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 decide otherwise, and,
on our construction of the statute and the conceded facts, the Tax
Court could not have reached a result contrary to our own.
[
Footnote 19]
Affirmed.
MR. JUSTICE BURTON took no part in the consideration or decision
of these cases.
[
Footnote 1]
The material parts of § 24(b) are as follows:
"(b) LOSSES FROM SALES OR EXCHANGES OF PROPERTY. --"
"(1) LOSSES DISALLOWED. In computing net income, no deduction
shall in any case be allowed in respect of losses from sales or
exchanges of property, directly or indirectly --"
"(A) Between members of a family, as defined in paragraph
(2)(D);"
"(B) Except in the case of distributions in liquidation, between
an individual and a corporation more than 50 percentum in value of
the outstanding stock of which is owned, directly or indirectly, by
or for such individual;"
"(C) Except in the case of distributions in liquidation, between
two corporations more than 50 percentum in value of the outstanding
stock of each of which is owned, directly or indirectly, by or for
the same individual, if either one of such corporations, with
respect to the taxable year of the corporation preceding the date
of the sale or exchange was, under the law applicable to such
taxable year, a personal holding company or a foreign personal
holding company;"
"(D) Between a grantor and a fiduciary of any trust;"
"(E) Between the fiduciary of a trust and the fiduciary of
another trust, if the same person is a grantor with respect to each
trust; or"
"(F) Between a fiduciary of a trust and a beneficiary of such
trust."
Section 24(b)(2)(D) defines the family of an individual to
include "only his brothers and sisters (whether by the whole or
half blood), spouse, ancestors, and lineal descendants. . . ."
[
Footnote 2]
45 B.T.A. 478,
aff'd, 132 F.2d 660.
[
Footnote 3]
5 T.C. 623.
[
Footnote 4]
158 F.2d 637.
[
Footnote 5]
330 U.S. 814. In No. 946, the petition for certiorari of the
Estate of Susan P. McWilliams, the deceased mother of John P.
McWilliams, was granted at the same time 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 will be made to the several
cases separately.
[
Footnote 6]
The decision of the Circuit Court of Appeals for the Second
Circuit in
Commissioner v. 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 case, and also with that of the Circuit
Court of Appeals for the Fourth Circuit in
Commissioner v.
Kohn, 158 F.2d 32.
[
Footnote 7]
Commissioner v. Hale, 67 F.2d 561;
Zimmerman v.
Commissioner, 36 B.T.A. 279,
reversed on other
grounds, 100 F.2d 1023;
Uihlein v. Commissioner, 30
B.T.A. 399,
aff'd, 82 F.2d 944.
[
Footnote 8]
See H.Rep. No.1546, 75th Cong., 1st Sess., p. 26
(1939-1 Cum.Bull. (Part 2) 704, 722-723).
See also cases
cited in
note 7
supra.
[
Footnote 9]
The provisions of § 24(b)(1)(A) and (B) of the Internal Revenue
Code originated in § 24(a)(6) of the Revenue Act of 1934, 48 Stat.
680, 691. These provisions were reenacted without change as §
24(a)(6) of the Revenue Act of 1936, 49 Stat. 1648, 1662, and the
provisions of § 24(b)(1)(C), (D), (E), and (F) of the Code were
added by § 301 of the 1937 Act, 50 Stat. 813, 827.
[
Footnote 10]
Cf. Shoenberg v. Commissioner, 77 F.2d 446;
Cole v.
Helburn, 4 F. Supp.
230;
Zimmerman v. Commissioner, supra, note 7
[
Footnote 11]
See H.Rep. No.1546, 75th Cong., 1st Sess., p. 26,
supra, note 8
[
Footnote 12]
See the text of § 24(b)(1), quoted in
note 1
[
Footnote 13]
H.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
(1939-1 Cum.Bull. (Part 2) 586, 607).
[
Footnote 14]
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., 1st Sess., p. 28 (1939-1
Cum.Bull. (Part 2) 704, 724).
[
Footnote 15]
81 Cong.Rec. 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 purposes of creating a loss to be offset against
ordinary income shall not be recognized for such deduction
purposes."
78 Cong.Rec. 2662.
[
Footnote 16]
Sec. 118 of the Internal Revenue Code, which first appeared in
its present form as § 118 of the Revenue Act of 1932, 47 Stat. 169,
208, provides in part as follows:
"SEC. 118. LOSS FROM WASH SALES OF STOCK OR SECURITIES."
"(a) 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, with in a period beginning 30 days before
the date of such sale or disposition and ending 30 days after such
date, the taxpayer 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 to acquire, substantially
identical stock or securities, then no deduction for the loss shall
be allowed under section 23(e)(2); nor shall such deduction 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."
[
Footnote 17]
We have noted petitioners' suggestion that a taxpayer is
assured, under the wash sales provisions, of the right to deduct
the loss incurred on a sale of securities, even though he himself
buys similar securities thirty-one days later, and that he should
certainly not be precluded by § 24(b) from claiming a similar loss
if the taxpayer's spouse, instead of the taxpayer, makes the
purchase under the same circumstances. We do not feel impelled to
comment on these propositions, however, in a case in which the sale
and purchase were practically simultaneous, and the net
consideration received by one spouse and that paid by the other
differed only in the amount of brokers' commissions and excise
taxes.
[
Footnote 18]
Dobson v. Commissioner, 320 U.
S. 489.
[
Footnote 19]
Cf. Trust of Bingham v. Commissioner, 325 U.
S. 365.