Petition to review an order of the United States Board of Tax Appeals.
Before L. HAND, CHASE and FRANK, Circuit Judges.
During the taxable year, Martin F. Reddington was president of taxpayer, a New York corporation, and owned 9,500 of the 18,000 shares of taxpayer's common stock. The remainder of the outstanding common stock of taxpayer was owned by Reddington's daughter. Reddington owned the entire outstanding preferred stock of taxpayer, consisting of 2,500 shares. Taxpayer was originally a going concern engaged in the advertising business, but ceased active business upon retirement of Reddington in 1931. Taxpayer concedes that, during the taxable year, it was a personal holding company within the meaning of § 402(a) of the Internal Revenue Act of 1938, 26 U.S.C.A. Int. Rev. Acts, page 1130.
On June 27, 1938, Reddington caused taxpayer to sell him, for $315,181.25, securities consisting of shares in twenty-one different corporations at their fair values on that date. Taking the aggregate cost of these securities as a unit, the sale resulted in a loss of $79,481.20. But if the transaction be regarded as twenty-one sales, then it appears that sixteen resulted in losses and five resulted in gains aggregating $27,500.03. The sale of the securities by taxpayer to Reddington was effected because he considered those securities speculative and did not wish to jeoprardize his daughter's interest in taxpayer by reason of retention of speculative securities in taxpayer's protfolio. The following statement appears in the mintutes of a regular meeting of the Boad of Directors of taxpayer held July 5, 1938, at which the sale of the twenty-one securities on June 27, 1938 was approved: "The Chairman pointed out that the sale was to constitute a single transaction whereby the securities were sold as a block for the lump sum equal to their value thereof, to wit, $315,181.25."
In its 1938 income tax and excessprofits tax return and in its 1938 personal holding company surtax return, traxpayer did not attempt to deduct any portion of the $79,481.20 aggregate loss, but did not include in its income any part of the gains on the five items above noted. The commissioner determined deficiencies, based on the nonexclusion of such gains. On petition to the Board, the Commissioner was sustained, and the taxpayer asks us to review and revise the Board's order.
Section 24(b) of the Revenue Act of 1938, 26 U.S.C.A. Int. Rev. Acts, page 1016, in part provides:
"(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. * * *
"(B) Except in the case of distributions in liquidation, between an individual and a corporation more than 50 per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; * * *
"(2) Stock ownership, family, and partnership rule. - For the purposes of determining, in applying paragraph (1), the ownership of stock * * *
"(B) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family * * *
"(D) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; * * * ."
The intention of Congress obviously was to prevent the fixing of losses by the transactions of personal holding companies. The taxpayer contends that the statute forbids merely the deduction of net losses. Taxpayer grants that the Commission would be correct, if the sales of the twenty-one items had consisted of twentyone separate sales, each made on a sepatate day. But it argues that here the situation is different in two significant respects: (1) The sales were made simultaneously, with payment of the purchase price, by agreement, in a lump sum; (2) Reedington's purpose was to protect his daughter's interest in the taxpayer.
We think this reasoning unsound. The gains were part of taxpayer's gross income as defined in § 22(a), 26 U.S.C.A. Int Rev. Acts, page 1008. Congress was not required to permit any deductions from gross income. New Colonial Co. v. Helvering, 292 U.S. 435, 440, 54 S. Ct. 788, 78 L. Ed. 1348. It did permit some deductions of losses, but forbace deduction of losses resulting from sales by a person holding as larlge a percentage of the company's stock as that owned by Reddington. If, in forbidding deduction of such losses, Congress had intended to refer to "net losses," it was easy to say so.*fn1 The application of the "so easy to say so rule" is pertinent here, since Congress elsewhere in the same Act used the "net loss" locution: In Section 117 of the same Act, it provided in subdivision (d)(2), 26 U.S.C.A. Int. Rev. Acts, page ...