Marvin L. Levy and Wilhelmina F. Levy, Petitioners, v. Commissioner of Internal Revenue, Respondent, 46 B.T.A. 1145

OPINION. Disney: Upon the authority of Spreckels v. Helvering, 315 U. S. 626, we decide in favor of respondent on the first issue herein, involving the treatment of commissions on the sale of securities, and hold that such commissions are not deductible as business expense. The second issue is raised by respondent’s amended answer, in which he alleges that he erred in allowing capital loss deductions aggregating $3,477.87, consisting of $2,000 deduction by the wife, who had capital losses in excess of $2,000, and a $1,477.87 deduction by the husband, whose capital losses were in that amount.

Respondent now contends that only one deduction of $2,000 is permissible. The petitioners contend that if each spouse has capital losses of $2,000 or more, each should be allowed a deduction of $2,000. They do not argue for an aggregate deduction of $4,000 in the sense that a spouse with losses exceeding $2,000 should be allowed full deduction, if addition of those of the other spouse did not make an aggregate of more than $4,000. Petitioners and respondent both rely on language used by the Supreme Court in its opinions in the recent cases of Helvering v. Janney, 311 U. S. 189, and Taft v. Helvering, 311 U.

S. 195. In our opinion, those cases bear out the view of the respondent. The Jarmey case lays down the rule that in the computation of income in case of a joint return by husband and wife the expression “aggregate income”, used by the statute, Revenue Act of 1934,

section 51 (b), means the aggregate net income of the two spouses, arrived at by offsetting the capital losses under

section 117 (

d) of each spouse against the capital gain of the other. In so holding, the Court said that the statute could not be changed by Treasury Regulations 86,

article 117-5. That regulation reads: Aut. 117-5. Application of

section 117 in the case of hushanú, am.& wife. — In the application of

section 117, a husband and wife, regardless of whether a joint return or separate returns are made, are considered to be separate taxpayers. Accordingly, the limitation under

section 117 (

d) on the allowance of losses of one spouse from sales or exchanges of capital assets is in all cases to be computed without regard to gains and losses of the other spouse upon sales or exchanges of capital assets. Yet the petitioners’ contention herein necessarily requires adoption of the view advocated by the regulation, and refused recognition by the Court — for essentially the petitioners urge us to consider each spouse separately, without regard to the gains or losses of the other, and to allow each a deduction of $2,000 for capital loss, if in fact that much loss, above capital gains, has been suffered. Furthermore, the Court points out that “Section 117 (

d) merely limited the amount of losses which could be deducted.” The Court plainly, approved the idea expressed in a “Solicitor’s Opinion” that the return “is treated as the return of a taxable unit * * * as though the return were that of a single individual.” Petitioners’ desire is directly to the contrary — they wish, with reference to capital losses, to treat the return as that of two individuals.

If we treat the return, as commanded by the Supreme Court, as that of a “taxable unit” and as if filed by a “single individual” obviously the limitation of $2,000 above capital gains, upon capital losses, can be applied only once— to the aggregate net capital loss ascertained. In the Taft case a limit was set upon deduction of charitable donations, analogous to the limit which

section 117 (

d) sets upon capital losses. The Court held that “The principle of a joint return permitted aggregation of income and deductions and thus overrode the limitations incident to separate returns.” [Italics supplied.] The opinion commented upon Eegulations 62,

article 401, which provides that “in a single joint return, the tax is computed on the aggregate income and all deductions and credits to which either is entitled shall be taken from such aggregate income.” That

article is particularly relied upon by the petitioners here. The Court pointed out that “The argument stresses the words ‘to which either is entitled’ ” (as do the petitioners herein), called it “an inadmissible construction of the statute”, and refused to apply it as against the view that the joint return was that of a taxable unit and treated as that of a single individual. The reason for filing a joint return is to amalgamate the items of income, losses, etc., of the two spouses, so that there may be offsets unavailable in individual returns.

Thus it appears that there are no longer two individuals, with their own rights to deductions, but an impersonalized return of items of income, losses, deductions, etc., which, though originating in the affairs of two people, are no longer so viewed, because all are merged and integrated into a whole. By exercising the option to obtain the benefit of such merger, the spouses are seen logically to lose their identity, and the right to claim individual deductions, which have become those of the integrated returner of income.

It would be peculiar illogic to permit the “joint” return to give the benefit of offset of gains and losses not available to the individual by merging all items, including capital gains and losses of the spouses, yet to say that in one very particular respect, the limitation on capital losses, there is no such merger, and that the identity of the taxpayer is preserved, so that each can individually take a deduction of $2,000 capital losses.

More accurate consideration- indicates that capital losses and gains, like all other items returned, are by virtue of such return no longer those of either party, but of one entity, the returner of income, that all items are, as indicated in the Janney case, added together, or put into hotchpotch, and that the aggregate result, and not the result in the case of each individual, is the subject of tax computation. It follows that if capital losses add up to more than capital gains plus $2,000, there can be, under

section 117 (d), no allowance above that limit. The limitation, like the offsetting of gains and losses, is not separate, but a part of the method of computation of the income under the integrated return. That there is such impersonality is well indicated by the fact that the resultant tax is less than that of both individuals considered separately — such result being the practical reason for filing a joint return. In George W. Schoenhut, 45 B. T. A. 812, we construed the Janney case to require us to follow our prior view in Frida Heilman Cole, Executrix, 29 B. T.

A. 602, that in case of a joint return there is joint and several liability and not “according to the net income attributable to each.” Recently in Halbert P. Gillette, 46 B. T. A. 573, we followed the Schoenhut case. Moore v. United States, 37 Fed. Supp. 136, by the Court of Claims, held that a spouse was liable for the full amount of tax shown upon a joint return. The “taxable unit” theory was followed. Frank B. Gummey, 26 B. T.

A. 894, we do not consider to be to the contrary, for there the question was merely whether where within thirty days after sale of stock by a spouse the other spouse purchased substantially identical stock the two transactions comprised a purchase and sale by the same taxpayer within the language of

section 118, Kevenue Act of 1928. We had already in William M. Fleitmann, Jr., et ad., Executors, 22 B. T. A. 1291, allowed as a deduction a loss sustained by a husband in a transaction with his wife, and, following the theory of that case, we held that for purposes of

section 118 the two transactions were between different taxpayers. It does not follow that the separate identity remains in filing a return as a “taxable unit” under the Taft and Jarmey cases. The respondent erred in allowing the deduction of more than $2,000 capital losses above capital gains. Reviewed by the Board. Decision will be entered wnder Rule 50.