Source: https://supreme.justia.com/cases/federal/us/311/504/
Timestamp: 2019-04-24 12:15:05+00:00

Document:
1. A loss sustained by an individual taxpayer upon the foreclosure sale of an interest in real estate which he had acquired for profit held, in computing taxable income under the Revenue Act of 1934, deductible only to the limited extent allowed by §§ 23(j) and 117(d) for losses from "sales" or exchanges of capital assets, and not in full under § 23(e)(2). Pp. 311 U. S. 505, 311 U. S. 510.
2. The language, the purpose, and the legislative history of the provisions of the Revenue Act of 1934 relating to capital gains and losses support the view that no distinction was intended between losses from forced sales and losses from voluntary sales of capital assets. P. 311 U. S. 510.
3. Courts are not free to reject the literal or usual meaning of the words of a statute when adoption of that meaning will not lead to absurd results nor thwart the obvious purpose of the statute. P. 311 U. S. 510.
4. In this case, the foreclosure sale, and not the decree of foreclosure, was the definitive event which established the loss within the meaning and for the purpose of the Revenue Act. P. 311 U. S. 512.
5. The view that the loss in this case may not be treated as a loss from a sale because, by the state law, the vendor in a land contract may declare a forfeiture upon default cannot be sustained, since it does not appear from the record that the contract in this case contained a forfeiture clause, nor that there was in fact a forfeiture apart from the foreclosure sale. P. 311 U. S. 512.
Certiorari, 310 U.S. 619, to review the affirmance of a decision of the Board of Tax Appeals redetermining a deficiency in income tax.
We are asked to say whether a loss sustained by an individual taxpayer upon the foreclosure sale of his interest in real estate, acquired for profit, is a loss which, under § 23(e)(2) of the 1934 Revenue Act, 48 Stat. 680, may be deducted in full from gross income for the purpose of arriving at taxable income, or is a capital loss deductible only to the limited extent provided in §§ 23(e)(2), (j), and 117.
In the computation of taxable income, § 23(e)(2) of the 1934 Revenue Act permits the individual taxpayer to deduct losses sustained during the year incurred in any transaction for profit. Subsection (j) provides that "losses from sales or exchanges of capital assets" shall be allowed only to the extent of $2,000 plus gains from such sales or exchanges as provided by § 117(d). By § 117(b), it is declared that "capital assets"
"means property held by the taxpayer . . . , but does not include stock in trade of the taxpayer . . . or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business."
contribution to the purchase money, some $4,000, was lost.
The commissioner, in computing respondents' taxable income for 1934, treated the taxpayers' interest in the land as a capital asset and allowed deduction of the loss from gross income only to the extent of $2,000 as provided by §§ 23(j) and 117(d), in the case of losses from sales of capital assets. The Board of Tax Appeals ruled that the loss was deductible in full. The circuit court of appeals affirmed, 108 F.2d 753, holding that the loss established by the foreclosure sale was not a loss from a "sale" within the meaning of § 23(j). We granted certiorari, 310 U.S. 619, to resolve a conflict of the decision below with that of the Court of Appeals for the Second Circuit in Commissioner v. Electro-Chemical Engraving Co., 110 F.2d 614.
It is not denied that it was the foreclosure sale of respondents' interest in the land purchased by the syndicate for profit, which finally liquidated the capital investment made by its members and fixed the precise amount of the loss which respondents seek to deduct as such from gross income. But they argue that the "losses from sales" which, by § 23(j), are made deductible only to the limited extent provided by § 117(d), are those losses resulting from sales voluntarily made by the taxpayer, and that losses resulting from forced sales like the present, not being subject to the limitations of § 117(d), are deductible in full like other losses under § 23(e)(2).
v. Pursell, 66 N.Y.193. But here, we are not concerned with a restrictive covenant of the taxpayer, but with a sale as an effective means of establishing a deductible loss for the purpose of computing his income tax. The term "sale" may have many meanings, depending on the context, see Webster's New International Dictionary. The meaning here depends on the purpose with which it is used in the statute, and the legislative history of that use. Hence, the respondents argue that the purpose of providing in the 1934 Act for a special treatment of gains or losses from capital assets was to prevent tax avoidance by depriving the taxpayer of the option, allowed to him by the earlier acts, to effect losses deductible in full by sales of property at any time within two years after it was acquired, which, until held for that period, was not defined as a capital asset, § 208, Revenue Act of 1924, 43 Stat. 253, 262; § 208, Revenue Act of 1926, 44 Stat. 9, 19, and § 101 of the Revenue Act of 1928, 45 Stat. 791, 811.
"Taxpayers take their losses within the two-year period and get full benefit therefrom, and delay taking gains until the two-year period has expired, thereby reducing their taxes."
H.Rept. 704, 73d Cong., 2d Sess., pp. 9 and 10.
law beginning with the Act of 1921, 42 Stat. 227, and each had defined as capital losses "losses from sales or exchanges of capital assets." The 1934 Act made no change in this respect, but, for the first time, it provided that "capital assets" should include all property acquired by the taxpayer for profit, regardless of the length of time held by him, and that capital gains and losses from sales of capital assets should be recognized in the computation of taxable income according to the length of time the capital assets are held by the taxpayer, varying from 100% if the capital asset is held for not more than a year, to 30% if it is held more than ten years. § 117(a). Finally, for the first time, the statute provided that capital losses in excess of capital gains should be deducted from ordinary income only to the extent of $2,000. Thus, by treating all property acquired by the taxpayer for profit as capital assets, and limiting the deduction of capital losses in the manner indicated, the Act materially curtailed the advantages which the taxpayer had previously been able to gain by choosing the time of selling his property.
letting capital gains go entirely untaxed." It accordingly reduced the tax burden on capital gains progressively with the increase of the period up to ten years, during which the taxpayer holds the capital asset, and permitted the deduction, on the same scale, of capital losses, but only to the extent that there are taxable capital gains, plus $2,000. In thus relieving capital gains from the tax imposed on other types of income, it cannot be assumed, in the absence of some clear indication to the contrary, that Congress intended to permit deductions in full of losses resulting from forced sales of the taxpayers' property, from either capital gains or ordinary gross income, while taxing only a fraction of the gains resulting from the sales of such property. See White v. United States, 305 U. S. 281, 305 U. S. 292; Helvering v. Inter-Mountain Life Ins. Co., 294 U. S. 686, 294 U. S. 689-690.
it follows logically that the amount by which the tax is reduced on account of capital losses shall be limited to the 12 1/2% of the loss."
This provision was continued without changes now material until the 1934 Act. § 208(c) in the 1924 and 1926 Acts; § 101(b) in the 1928 and 1932 Act, 47 Stat. 191.
Congress thus has given clear indication of a purpose to offset capital gains by losses from the sale of like property and upon the same percentage basis as that on which the gains are taxed. See United States v. Pleasants, 305 U. S. 357, 305 U. S. 360. This purpose to treat gains and deductible losses on a parity but with a further specific provision provided by § 117(d) of the 1934 Act, permitting specified percentages of capital losses to be deducted from ordinary income to the extent of $2,000, would be defeated in a most substantial way if only a percentage of the gains were taxed, but losses on sales of like property could be deducted in full from gross income. This treatment of losses from sales of capital assets in the 1924 and later Acts, and the reason given for adopting it, afford convincing evidence that the "sales" referred to in the statute include forced sales such as have sufficed, under long-accepted income tax practice, to establish a deductible loss in the case of noncapital assets. Such sales can equally be taken to establish the loss in the case of capital assets without infringing the declared policy of the statute to treat capital gains and losses on a parity.
States v. Katz, 271 U. S. 354, 271 U. S. 362, or would thwart the obvious purpose of the statute, Haggar Co. v. Helvering, 308 U. S. 389. But courts are not free to reject that meaning where no such consequences follow and where, as here, it appears to be consonant with the purposes of the Act as declared by Congress and plainly disclosed by its structure.
It is not without significance that Congress, in the 1934 Act, enlarged the scope of its provisions relating to losses from sales of capital assets by including within them losses upon the disposition of the taxpayer's property by methods other than sale and without reference to the voluntary action of the taxpayer. It thus treats as losses from sales or exchanges the loss sustained from redemption of stock, § 115(c), retirement of bonds, § 117(f), losses from short sales, § 117(e)(1), and loss sustained by failure of the holder of an option to exercise it, § 117(e)(2), although none of these transactions involves a loss from a sale. See McClain v. Commissioner, post, p. 311 U. S. 527.
The scope of the capital loss provisions was still further enlarged by § 23(k)(2) of the Revenue Act of 1938, 52 Stat. 447, which provides that, if securities, which are capital assets, are ascertained to be worthless and are charged off within the taxable year, the loss, with an exception not now material, shall be considered as a loss arising from a sale or exchange. These provisions disclose a consistent legislative policy to enlarge the class of deductible losses made subject to the capital assets provisions without regard to the voluntary action of the taxpayer in producing them. We could hardly suppose that Congress would not have made provision for the like treatment of losses resulting from a forced sale of the taxpayer's property acquired for profit either in the 1934 or 1938 Act, if it had thought that the term "sales or exchanges" as used in both acts did not include such sales of the taxpayer's property.
Respondents also advance the argument, sustained in Commissioner v. Freihofer, 102 F.2d 787, that the definitive event fixing respondents' loss was not the foreclosure sale but the decree of foreclosure which ordered the sale and preceded it. But, since the foreclosure contemplated by the decree was foreclosure by sale and the foreclosed property had value which was conclusively established by the sale for the purposes of the foreclosure proceeding, the sale was the definitive event establishing the loss within the meaning and for the purpose of the revenue laws. They are designed for application to the practical affairs of men. The sale, which finally cuts off the interest of the mortgagor and is the means for determining the amount of the deficiency judgment against him, is a means adopted by the statute for determining the amount of his capital gain or loss from the sale of the mortgaged property.
The court below also thought that the loss suffered by respondents could not be treated as a loss from a sale, since, by the law of Michigan, the vendor upon a land contract containing the usual forfeiture clause had the right to deprive respondents and their joint adventurers of all interest in the property by a declaration of forfeiture, and that the only additional advantage of foreclosure was to obtain a deficiency judgment. But there is nothing in this record to show that the land contract in this case contained a forfeiture clause. Even if it did, it does not appear that there was, in fact, a forfeiture apart from the sale on foreclosure. Cf. Davidson v. Commissioner, 305 U. S. 44, 305 U. S. 46; Helvering v. Midland Insurance Co., 300 U. S. 216, 300 U. S. 224; United States v. Phellis, 257 U. S. 156, 257 U. S. 172.
MR. JUSTICE ROBERTS is of opinion that the judgment should be affirmed for the reasons stated in the opinion of the Circuit Court of Appeals, 108 F.2d 753.

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