Summary
In Klingenstein v. United States, 85 Ct.Cl. 164, 18 F.Supp. 1015, this court followed the decision of the Circuit Court of Appeals of the Second Circuit, in Johnston v. Commissioner, 86 F.2d 732, where it was held by a divided court that a partner could not offset his noncapital net loss against his share of partnership net gain.
Summary of this case from Central Hanover Bank & Trust Co. v. United StatesOpinion
No. 43165.
April 26, 1937.
Thomas G. Haight, of Jersey City, N.J. (Robert H. Montgomery and J. Marvin Haynes, both of Washington, D.C., and James O. Wynn, Roswell Magill, and Thomas Tarleau, all of New York City, on the brief), for plaintiff.
J.W. Blalock, of Washington, D.C., and Robert H. Jackson, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Suit by Joseph Klingenstein against United States.
Judgment for defendant.
Plaintiff sues to recover $20,455.75, alleged overpayment of income tax for 1932, with interest from July 10, 1935.
The question is whether the plaintiff, as a member of a partnership, was entitled in the taxable year to offset certain individual losses against his share of the net income of the partnership. The circumstances which give rise to this question are disclosed in the special findings of fact:
1. The plaintiff, a resident and citizen of New York, filed a joint income tax return with his wife, Esther Klingenstein, for the calendar year 1932 showing a tax of $23,285.22 which was paid in the amounts of $5,821.48 (with interest of $14.39) on March 30, 1933, and $5,821.25 each on June 15 and September 15, 1933, and $5,821.24 on December 15, 1933.
2. During 1932, the taxable year here involved, certain transactions resulting in losses and profits occurred as set forth in this finding and in findings 3 to 8, inclusive. Plaintiff, who was a member of the partnership hereinafter mentioned, sustained an individual loss of $65,970.44 on the sale by him of stocks and bonds (as defined in section 23(t) of the Revenue Act of 1932 [ 26 U.S.C.A. § 23 note]) which were not capital assets as defined in section 101 of the Revenue Act of 1932 ( 26 U.S.C.A. § 101 note).
3. In addition to the sale of the stocks and bonds mentioned in the preceding finding, plaintiff as an individual sold other stocks and bonds (as defined in section 23(t) of the Revenue Act of 1932) which were not capital assets as defined in section 101 of the Revenue Act of 1932. On these sales plaintiff realized a profit of $64,690.76.
4. Plaintiff as an individual sustained a loss of $10,419.62 from trading in commodities not constituting capital assets as defined in section 101 of the Revenue Act of 1932.
5. Plaintiff realized an individual profit of $1,031.99 on the sale of securities not constituting stocks and bonds (as defined in section 23(t) of the Revenue Act of 1932) which were not capital assets as defined in section 101 of the act of 1932.
6. Plaintiff's wife, Esther Klingenstein, sustained an individual loss of $30,865.27 on the sale of stocks and bonds (as defined in section 23(t) of the Revenue Act of 1932) which were not capital assets as defined in section 101 of the act of 1932.
7. The partnership of Wertheim Co., of which plaintiff was a member, realized a profit on the sale of stocks and bonds (as defined in section 23(t) of the Revenue Act of 1932) which did not constitute capital assets as defined in section 101 of the 1932 act. Plaintiff's share of this profit was $71,385.68.
During the same year the partnership realized a profit on the sale of securities other than stocks and bonds (as defined in section 23(t) of the Revenue Act of 1932) which were not capital assets as defined in section 101 of that act. Plaintiff's share of this profit was $24,913.31.
8. The partnership of Wertheim Co. (in liquidation), of which plaintiff was a member, sustained a loss on the sale of stocks and bonds (as defined in section 23(t) of the Revenue Act of 1932), which stocks and bonds did not constitute capital assets as defined in section 101 of that act. Plaintiff's share of this loss was $3,876.09.
9. In the joint tax return filed by plaintiff and his wife for 1932 there was reported as a profit from the sale of property not constituting capital assets as defined in section 101 of the Revenue Act of 1932 the sum of $50,890.32 representing the difference between $162,021.74, the total of the profits mentioned in findings 3, 5, and 7, and $111,131.42, the total of the losses mentioned in findings 2, 4, 6, and 8. All of the above-mentioned profits were realized from and the losses sustained in transactions entered into for profit.
10. In the audit of the joint return for 1932 the Commissioner of Internal Revenue determined a profit of $83,035.27 from the sale of property not constituting capital assets, as defined in section 101 of the Revenue Act of 1932, instead of a profit of $50,890.32 referred to in finding 9. This increase was arrived at by disallowing as a deduction from the total of the profits of $1,031.99, $71,385.68, and $24,913.31, referred to in findings 5 and 7, the excess of the losses of $65,970.44 and $30,865.27, referred to in findings 2 and 6, over the gain of $64,690.76 referred to in finding 3, that is, $32,144.95. As a result of this and other adjustments not here in controversy, the Commissioner determined and assessed a deficiency of $21,438.98. This deficiency, with interest, was paid July 10, 1935. Plaintiff filed a timely claim for refund which was rejected November 8, 1935.
The question presented is whether plaintiff was entitled to offset his individual losses amounting to $32,144.95, which arose from the sale of securities held by him for less than two years, against his share of the net income of the partnership of Wertheim Co., of which he was a member, when the net profits of the partnership resulted from the sale of securities which the partnership had held for less than two years. We are of opinion that the plaintiff was not entitled to the deductions claimed.
In Archbald v. Commissioner, 27 B.T.A. 837, the government advanced the same contentions made by the plaintiff in the case at bar and, in deciding against the government, the Board said:
"It is clear, therefore, that a doctrinaire assertion that a partnership is not an entity affords no key to the determination. Congress has not taxed partnerships directly; but, apart from that, there is no reason to think that their existence was ignored or that for other purposes under the statute their legal character was not to be fully accepted. * * *
"Since, then, a partnership is treated sometimes as an entity and sometimes not, its nontaxation carries no implication of the measure of its income or that of the individual partners. It is clear from section 183 of the 1928 Act [ 26 U.S.C.A. § 183 and note] [which is the same as section 183 of the 1932 Act, 26 U.S.C.A. § 183 and note] and all its predecessors that partnership income was fully recognized as a unit figure, and that its computation proceeded from the same basis as if it were that of an individual. The basis of the partnership's gain is the capital investment or cost of the partnership, as it would be of an individual."
Later, in Johnston v. Commissioner, 34 B.T.A. 276, the Board considered and decided the exact question presented in the case at bar, and held that the taxpayer, who was a member of the partnership, was not entitled to offset his individual losses against the profits of the partnership. In reaching that conclusion, the Board at page 279 of 34 B.T.A., said:
"To accept that theory we must conclude that Congress provided for the separate computation of partnership net income, but intended that the total so reached would be discarded and the individual items of gain or loss, income or deduction, would then be separated and each brought forward into the returns of the several partners, in the proportionate amounts of these partners' individual interests in profits, and there combined, in each case, with nonpartnership income and deductions, to arrive at the partners' net taxable income."
Later, the same question was again decided in favor of the government in Klauber v. Commissioner, 34 B.T.A. 998, and Winmill v. Commissioner, 35 B.T.A. ___ (Mar. 31, 1937). The judgment of the Board in Johnston v. Commissioner, supra, was affirmed by the Circuit Court of Appeals on December 7, 1936, 86 F.2d 732, 734. The decisions of the United States Board of Tax Appeals and of the Circuit Court of Appeals for the Second Circuit, and the cases cited above, with which we agree, fully answer every contention advanced by plaintiff in the case at bar.
Upon the authority of those cases, plaintiff's petition is dismissed. It is so ordered.