Court Opinion

ID: 8816690
Source: CourtListenerOpinion
Date Created: 2022-11-26 15:20:51.804872+00
Date Added: 2024-06-11T17:04:29.816578
License: Public Domain

MANTON, Circuit Judge.
I dissent from the prevailing opinion and will state my reasons. ■
The controversy that gives rise to this action brings to this court for construction a provision of the Income Tax Daw of October 3, 1913. Section 2, subd. B, thereof sets forth deductions allowed in computing net incomes. They are, first, the expenses of carrying on any business; second, interest on indebtedness; third, taxes; and, fourth, “losses actually sustained during the year, incurred in trade, or arising from fires, storms, or shipwreck and not compensated for by insurance or otherwise.” The plaintiff in error made his return for the last ten months of 1913 and the year 1914, and paid his taxes due as shown, by these returns. For the period from March to December 31, 1913, he deducted from his gross income the sum of $31,555, claiming a right so to do because of loss sustained during this period of the year, and claims it occurred as a loss in trade. In his return for 1914, *163lie deducted $65,245.33 pursuant to the same contention, contending it was a loss sustained in trade. These losses resulted from the purchase of cotton, through brokers, upon the New York Cotton Exchange, and the subsequent sale of such cotton in the same manner at a lower price. The method of doing this business was as follows: The plaintiff in error instructed some person to buy for him a certain number of bales of cotton, and that person sought a seller, or the agent of a seller, and secured from the seller or agent an agreement to deliver cotton to the plaintiff in error at a future date at a certain price. He delivered to the seller or his agent the plaintiff in error’s agreement to buy upon the same terms. It was in such transactions that the plaintiff in error met with his losses. This method of trading is a permitted business of the Cotton Exchange.
The question presented is: Does this constitute a transaction “in trade,” within the meaning of section 2, subd. B, of the Income Tax Law? This kind of trade is referred to as dealing in cotton futures. The goods were not yet in existence; but does that alter the nature of the transaction ? Does the fact that the goods are to be delivered in the future so distinguish the purchase as to make it something else than a deal “in trade”? In the commercial life of the day perhaps more than one-half of the products ultimately sold may be said to be contracted for long before they have come into existence. The test of obligation, either for profit or loss, must necessarily be measured by the contractual relations as expressed by the written agreement. The fact that there may be a transfer of the contract at a lower price or a higher price does not change the nature of the transaction. The contract delivered fixes the obligation of the parties and denotes a sale and a purchase. A certificate of stock, for example, in itself merely evidences a fractional undivided interest in real, personal, or corporate property. It passes from one to the other, and is regarded in itself as property. Business transactions in which the title of the property is transferred without delivery are frequent in this day. The word “trade,” in its normal and natural meaning, cannot be so restricted as to apply only to transactions where actual merchandise is handled by the taxpayer, or where the specific merchandise is designated by the contract. The Treasury Department has made a ruling under section 5, known as Decision No. 2005, dated July 8, 1914, which provides as follows:
“Losses may be sustained by individuals or corporations on personal or real property. Only thoso losses are deductible which are sustained during' the tax year ‘in trade’ — that is, the, business which engages the time, attention, and labor of any one for the purpose of livelihood, profit, or Improvement. Loss, to be deductible, must be an absolute loss, not a speculative or fluctuating valuation of continuing investment, but must be an actual loss, actually sustained and ascertained during the tax year for which the deduction is sought to be made; it must be incurred in trade, and be determined and ascertained upon an actual, a completed, a closed transaction.
“Losses sustained by individuals or corporations from the sale of or dealings iu personal or real property growing out of ownership or use of or interest in such property will not be deductible at all, unless they are an incident of, connected with, and grow out of the business of the individual or corporation sustaining the loss, and are ascertained, determined, and fixed as abso*164lute in the above sense within the taxable year in which the deduction is sought to be made. * * * ”
And Decision No. 2090, dated December 14, 1914, is as follows:
“Loss, to be deductible, must be an absolute loss, not a speculative or fluctuating valuation of continuing investment, but must be an actual loss, actually sustained and ascertained, during the tax year for which the deduction is sought to be made; it must be incurred in trade, and be determined and ascertained upon an actual, a completed, a closed transaction. The term ‘in trade,’ as used in the law, is held to mean the trade or trades in which the person making the return is engaged; that is, in which he has invested money otherwise than for the purpose of being employed in isolated transactions, and to which he devotes at least a part of his time and attention. A person may engage in more than one trade, and may deduct losses incurred in all of them, ■provided that in each trade the above requirements are met. As to losses on stocks, grain, cotton, etc., if these are incurred by a person engaged in trade to which the buying and selling of stocks, etc.; are incident as a part of the business, as by a member of a stock, grain, or cotton exchange, such losses may be deducted. A person can be engaged in more than one business, but it must be clearly shown in such cases that he is actually a dealer, or trader, or manufacturer, or whatever tne occupation may be, and is actually engaged in one or more lines of recognized business, before losses can be claimed with respect to either or more than one line of business, and his status as such dealer must be clearly established.”
I do not think that Congress had in mind any such limitations of the words “losses in trade” when it enacted the income tax. Bouvier’s Daw Dictionary refers to “trade”' as business, or any transaction or dealing by way of sale or exchange. The courts have adopted this view. May v. Sloan, 101 U. S. 231, 25 L. Ed. 797; In re H. R. Leighton (D. C.) 147 Fed. 311; United States v. Douglas, 190 Fed. 482, 111 C. C. A. 314, 36 L. R. A. (N. S.) 1075. Nowhere has it been so restricted that it has been said that the man engaged in trade must give his habitual or principal attention to the occupation or employment. “Tradesman” or “trader,” whether used separately or spoken of in connection with business, indicates one engaged in the barter, sale, or exchange of merchandise or commodities. In re Surety, etc., Co., 121 Fed. 73, 56 C. C. A. 654; In re Woodward, 30 Fed. Cas. 543.
Webster’s Dictionary describes “trade” as follows:
“To barter, or to buy and sell; to be engaged in the exchange, purchase, or sale of goods, wares, merchandise, or anything else; to trafile; to bargain; to carry on commerce as a business.”
“Trade,” as used in the act, should be considered synonymous with business. But the defendant in error interprets the words “in trade” as “in his business.” A broker, who acts only as a broker, receives his income solely from his commissions. But the decision of the Treasury Department would permit him to .deduct losses sustained, if he bought and sold on his own account — <kaS and* if they are incident as a part of the business, as by a member of a stock, grain, or cotton exchange, such losses may be deducted.” The Treasury decision insists that, while admitting that a person may be engaged in more than one business, in. order that he may deduct his losses, it must clearly be shown that he is actually engaged as a dealer, or trader, or manufacturer, or whatever the occupation may be. His status as such dealer must be clearly established.
*165Bul nothing can be found in the act itself to place any such restriction upon the phrase “in trade.” The test is not to find out what his habitual business is, or to which he may expend the greater part of his time and effort, or what may be his principal business. The determining factor, as Congress expressed it, is: Was there a loss, and was it sustained in trade? This must be our guide in determining the right to deduct. Undoubtedly the purpose of the Treasury Decision seems to be to forbid deductions of losses which result from a speculative or fluctuating valuation of a continuing investment. But the tax is imposed on the profits so obtained. If Congress intended to make this restriction, it should have guarded against reduction of such loss in taxation by a phrase which would be clear. There is an element of speculation in every transaction. Such may be the result of the purchase of a house or piece of real estate. So it may be in the purchase of shares of stock. He may buy it in the best of faith for continued investment and find it necessary to sell in a low market because of his then needs. The tax laws cannot be based upon the intent of the person taxed; they must be based upon the facts as they exist and the results which follow. This court, in New York Life Ins. Co. v. Anderson, 263 Fed. 527, -— C. C. A. —, decided January 14, 1920, considered the Act of August 5, 1909, which provided, as to net income:
“It shall bo ascertained by deducting from the gross amount of the income 0 * * all losses * * * sustained within the" year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation of property.”
It was held that loss of market value of stocks and bonds is depreciation.
The Act of 1918 (section 214, subd. 5 [40 Stat. 1067]), now permits the deduction of all losses occurring in transactions “entered into for profit.” These losses may be deducted from profits arising from other transactions. It is inconsistent, in my opinion, to say that a broker, who deals in stocks and bonds, is engaged in trade, and may-deduct his losses, and say that the plaintiff in error, who was engaged in the cotton bagging business, may not deduct the loss that he sustained trading in the market as described. His principal business was not dealing in cotton, but in bagging; but his transaction was in trade, and the losses flowing from this effort to make profit from his trade should be allowed him as a deduction. The fact that the law was amended as above indicated, effective in 1918, evinces a dissatisfaction with the interpretation which has been placed upon the previous law.
lu my opinion, the plaintiff in error was entitled to deductions which he made, and should have a judgment to recover back payments which he made to the collector under protest.