Appeal from the Board of Tax Appeals.
Before L. HAND, SWAN, and CHASE, Circuit Judges.
The petitioners, husband and wife, elected to file a single joint return for the year 1933, as they were privileged to do by virtue of section 51(b) of the Revenue Act of 1932, 47 Stat. 188, 26 U.S.C.A. § 51(b). Mr. Pierce realized a profit of nearly $55,000 from the sale during 1933 of securities which were not "capital assets" as defined in section 101, 47 Stat. 191, 192, 26 U.S.C.A. § 101 note; that is to say, the securities so sold had not been held by him for more than two years. During the same year Mrs. Pierce sustained a loss of $3,646.78 in selling securities which she had not held for more than two years. In their joint return Mrs. Pierce's loss was deducted from her husband's profit. The commissioner's disallowance of the deduction resulted in a deficiency tax which the Board has confirmed. The question presented is whether, in a joint return of husband and wife, losses sustained by one spouse from the sale of securities which are not capital assets may be offset against gains realized by the other spouse from similar sales.
At least since the enactment of section 223 of the Act of 1918, 40 Stat. 1074, the revenue laws have always granted to a husband and wife who are living together the privilege of filing either separate returns or a single joint return. Regarding the latter alternative section 51(b)(2) of the Revenue Act of 1932, 47 Stat. 188, 26 U.S.C.A. § 51(b)(2), provides: "(2) The income of each shall be included in a single joint return, in which case the tax shall be computed on the aggregate income."
Although nothing is there said about deductions the Treasury Regulations have for many years contained a provision to the following effect: " * * * Where the income of each is included in a single joint return, the tax is computed on the aggregate income and all deductions or credits to which either is entitled shall be taken from such aggregate income." Reg. 77, Art. 381; Reg. 74, Art. 381; Reg. 65, Art. 401.
As long ago as 1921 it was ruled by the Solicitor of the Bureau of Internal Revenue that in cases in which the husband or wife has allowable deductions in excess of his or her gross income, such excess may, if a joint return is filed, be deducted from the net income of the other for the purpose of computing both the normal tax and the surtax. Solicitor's Opinion 90, 4 Cum.Bul. 236 (1921). Indeed, it is only when the allowable deductions of one spouse exceed his or her income, that any advantage can be derived from filing a joint return.
Most of the allowable deductions, for example, taxes, interest and ordinary losses, are not dependent upon the receipt by the taxpayer of a particular kind of income. But the 1932 Act introduced such a limitation with respect to losses sustained from the sale of securities which are not capital assets. Section 23, 47 Stat. 179, 26 U.S.C.A. § 23 provides:
"In computing net income there shall be allowed as deductions: * * *
"(e) Losses by Individuals. - Subject to the limitations provided in subsection (r) of this section, in the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise * * *
"(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *
"(r) Limitation on Stock Losses. - (1) Losses from sales or exchanges of stocks and bonds (as defined in subsection (t) of this section) which are not capital assets (as defined in section 101) shall be allowed only to the extent of the gains from such sales or exchanges (including gains which may be derived by a taxpayer from the retirement of his own obligations)."
Under the limitation imposed by section 23(r)(1) it is obvious that, if separate returns had been filed, neither husband nor wife could take deduction of the loss in question. Mrs. Pierce could not deduct it from her gross income because such a loss is allowable only to the extent of her gains from sales of non-capital securities, and she had no such gains. Mr. Pierce could not deduct it from his gains from sales of non-capital securities because it was not has loss but was sustained by a different taxpayer. But the petitioners contend that when husband and wife file a joint return they become a taxable unit with the result that a loss of this character sustained by one spouse is an allowable deduction against gains of the same character received by the other. This contention cannot be sustained in view of the Treasury Regulations and judicial decisions in analogous cases. As already noted, the Regulations provide that the deductions to be taken from the aggregate income of husband and wife shall be those "to which either is entitled." Here neither was entitled to the deduction in question. Nor have the cases relating to joint returns treated the two spouses as one. Thus, it has been held that where a husband has sold property to his wife at a loss, the loss he sustained may be deducted in the joint return. Commissioner v. Thomas,, 5 Cir., 84 F.2d 562; Commissioner v. Brumder, 7 Cir., 82 F.2d 944; Hill v. United States, 12 F.Supp. 798, Ct. Cl. See, also, Gummey v. Commissioner, 26 B.T.A. 894. Another analogous ruling is our own decision in Van Vleck v. Commissioner, 2 ...