Court Opinion

ID: 4483216
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:57.967319+00
Date Added: 2024-06-11T08:49:13.927580
License: Public Domain

Goffe, J., dissenting: I respectfully dissent. The majority opinion is cast in terms of exclusions from gross income but the end result is to deny the full losses petitioner sustained in the operation of her farm. This result is produced by holding that Jack E. Golsen, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971), precludes examination of our prior decision and requires a decision in favor of respondent. Our holding in Jack E. Golsen, supra, recognized that if a party losing a case in the Tax Court appealed to a Court of Appeals which previously held a position contrary to ours, that he would win on appeal. Therefore, in the interest of efficient and harmonious judicial administration we held that in such instances we would apply the holding of that Court of Appeals. We stated that "We shall remain able to foster uniformity by giving effect to our own views in cases appealable to courts whose views have not yet been expressed, and, even where the relevant Court of Appeals has already made its views known, by explaining why we agree or disagree with the precedent that we feel constrained to follow.” 54 T.C. at 757. Golsen involved a position of the Court of Appeals that arose from an appeal from the District Court not the Tax Court. Golsen requires us to follow the position of the Court of Appeals for the circuit in which the taxpayer resided at the time he filed his petition in the Tax Court. All appeals from cases initiated in the Tax Court by United States citizens residing abroad lie in the United States Court of Appeals for the District of Columbia. If the Golsen rule is applied to the instant case, therefore, a whole class of taxpayers (U.S. citizens residing abroad), are precluded from having us reexamine our holding in the first Brewster case unless such taxpayers pay the tax and sue in the Court of Claims or unless they change their residence to the United States, except to the District of Columbia. The Golsen rule is solely a rule of law of the Tax Court. It is not etched in stone. It has been neither commended nor criticized by a Court of Appeals or the Supreme Court. It has never been extended to apply to the same taxpayer. Application of the Golsen rule in this case makes our prior opinion virtually "review-proof.” I conclude, therefore, that Golsen should not compel a decision for respondent but we should, instead, freely examine our holding in the first Brewster case. Moreover, the recent holding of the Court of Claims in Vogt v. United States, 537 F.2d 405 (Ct. Cl. 1976), severely undermines the rationale of our prior Brewster decision and that of the Court of Appeals in the first Brewster case. The majority in the instant case disallows 30 percent of petitioner’s deductions from the operations of her farm in Ireland under section 911(a) of the Code. This section is not a general section of the Code. It provides only for disallowance of deductions properly allocable to or chargeable against amounts excluded from gross income. The sole purpose of disallowing deductions so "allocable or chargeable” is to prevent a double benefit; i.e., excluding the income and deducting the expenses relating to such income. There is no statutory prohibition against offsetting foreign deductions against income from U.S. sources. Even the majority permits petitioner to offset the remaining 70 percent of her Ireland farm deductions against income from U.S. sources. The disallowance of petitioner’s deductions comes about by requiring petitioner to exclude 30 percent of the gross income from operations of her farm in Ireland. On her returns petitioner excluded no income from the operation of the farm because it operated at a loss. In the first Brewster case we held that she must exclude 30 percent of the gross profits from the farm although section 911(b) allows an exclusion not to exceed 30 percent of net profits. The exclusion is designed to permit a U.S. citizen residing abroad to exclude from income a portion of the net income from a trade or business attributable to the personal services rendered by such a taxpayer as distinguished from the portion of net income produced by invested capital. We held in the first Brewster case that the 30-percent limitation on the amount of income excludable was applicable only if there were net profits from the business; because there were only losses, not profits, the limitation did not come into play; and, therefore, petitioner must exclude 30 percent of gross profit. Accordingly, under section 911(a), we required that a portion of petitioner’s deductions be disallowed (the amount to be disallowed was stipulated in the first Brewster case but not in the instant case). The exclusion provided in section 911(a) is for "earned income” as that term is defined in section 911(b). The definition of earned income which is embodied in section 911(b) originated in the Revenue Act of 1924. It had nothing to do with income earned from foreign sources but, instead, was defined in order to impose a lower rate of tax on all earned income. Sec. 209(a)(1), Revenue Act of 1924, ch. 234, 43 Stat. 263, 264. The limitation was enacted to facilitate administration of the Act. H. Rept. No. 179, 68th Cong., 1st Sess. (1924), 1939-1 C.B. (Part 2) 241, 245. S. Rept. No. 398, 68th Cong., 1st Sess. (1924), 1939-1 C.B. (Part 2) 266, 281; 65 Cong. Rec. 2850. The concept of earned income as distinguished from income derived from invested capital in the case of unincorporated businesses resulted from a floor amendment to the bill designed to aid farmers (as is petitioner here) and small businessmen. 65 Cong. Rec. 2849. The application of the "earned income” concept to exclude income earned outside the U.S. was first enacted in the Revenue Act of 1926. Sec. 213(b)(14), Revenue Act of 1926, ch. 27, 44 Stat. 26. At that time Congress also provided that deductions properly allocable to or chargeable against such excluded income were not allowable (now sec. 911(a)). Although Congress has changed the percentage and has otherwise modified the percentage limitation on exclusion of earned income it has never expressed the limitation in terms other than as a percentage of net profits. The effect of our prior decision, the decision of the Court of Appeals, and now, the majority, is to nullify the language of the percentage limitation when the business suffers a net loss. Such an interpretation is erroneous. There is no legislative history to support our prior conclusion. Moreover, it is fundamental in statutory construction to give effect to all of the language of the statute. Hellmich v. Hellman, 276 U.S. 233 (1928); Larkin v. United States, 78 F.2d 951 (8th Cir. 1935); Stanford v. Commissioner, 297 F.2d 298, 308 (9th Cir. 1961); William C. Stolk, 40 T.C. 345 (1963), affd. per curiam 326 F.2d 760 (2d Cir. 1964). The limitation of 30 percent of net profits should be applied in all cases, regardless of the existence of net profits. Therefore, applying the limitation literally, to a net loss as we have here, 30 percent of zero is zero and the limitation of section 911(b) precludes exclusion of any portion of petitioner’s income as "earned income.” Because no income is excluded, no deductions are disallowed under section 911(a). Moreover, our interpretation in the first Brewster case is not consonant with the taxation of proprietorships generally; i.e., no income is realized by virtue of the efforts of the proprietor unless a net profit results. In the first Brewster case the Court of Appeals held that the statutory concept of "earned income” was structured in terms of gross income not net profits. Brewster v. Commissioner, 473 F.2d 160, 162 (D.C. Cir. 1972). That conclusion has since been rejected by the Court of Claims. Vogt v. United States, 537 F.2d 405 (Ct. Cl. 1976). That case involved the method of computing the amount excludable from income under section 911(a) received from a partnership which operated outside the U.S. It did not involve an allocation between the income attributable to the taxpayer’s personal services and the income attributable to the invested capital but, instead, whether the dollar limitation on the amount excludable applied to the partner’s distributive share of the gross profit of the partnership or its net profit. Relying in part on our decision in Warren R. Miller, Sr., 51 T.C. 755 (1969), the Court exhaustively examined all of the interpretations of section 911 and concluded that the taxpayer demonstrated that there was a long-standing administrative interpretation that a partner’s "earned income” from a partnership is his share of net profits. The net profits concept, so aptly explored by the Court of Claims, in the partnership context should apply here to a sole proprietorship. In both cases a taxpayer includes in his gross income his net profit from a proprietorship or his distributive share of the profits of a partnership (except for items upon which the Code imposes limitations). By the same token, he deducts the net loss of his sole proprietorship or his distributive share of the net loss of the partnership. The net profits concept is the only rationale that is consistent with taxation generally. Requiring petitioner to exclude 30 percent of the gross profits of the proprietorship is not consistent with the general scheme of taxation of sole proprietorships or partnerships. Expression of the exclusion in terms of an exclusion from gross income in section 911(a) does not make the exclusion a gross income concept. It merely identifies the point in the computation of the taxpayer’s overall tax liability at which the exclusion applies. All exclusion provisions are expressed in terms of exclusion from gross income. The reliance by the Court of Claims on Warren R. Miller, Sr., supra, requires an examination of our holding in that case. We had before us the meaning of the term "earned income” for purposes of reduction of retirement income in connection with the retirement income credit. We were called upon to interpret that term as it. is used in section 911(b), the identical section involved herein. We thoroughly analyzed the term and concluded that earned income was keyed to net profits, not gross profits. 51 T.C. at 762. In the first Brewster case we admitted that Miller "gave us pause”; however, we dismissed petitioner’s contention that Miller applied by pointing out that in Miller we were coordinating two sections of the Code which we were not doing in Brewster. That is a distinction without a difference. Section 37, which allowed the retirement income credit, incorporated by reference section 911(b). We may have so lightly dismissed our prior interpretation of section 911(b) in Miller when we decided the first Brewster case but the Court of Claims considered it viable enough to quote from our Miller opinion in its opinion. I conclude that our interpretation of "earned income” in section 911(b) as being a net profits concept as fully developed in Miller, was correct as is the opinion of the Court of Claims in Vogt, relying on Miller, and we erred in holding to the contrary in the first Brewster case which, in turn, led the Court of Appeals in Brewster to an erroneous conclusion. I would, therefore, hold that the 30-percent limitation of section 911(b) means exactly what it clearly says without any "court made” limitation; "30 percent of his share of the net profits of such trade or business.” Applying the unmistakable language of section 911(b) to the "net profits” of petitioner’s trade or business; i.e., a net loss, 30 percent of zero is zero and petitioner had no earned income and no deductions should be disallowed under section 911(a). Featherston, Irwin, and Wiles, JJ., agree with this dissent.