Court Opinion

ID: 9642891
Source: CourtListenerOpinion
Date Created: 2023-08-22 18:11:45.39679+00
Date Added: 2024-06-11T18:10:53.915541
License: Public Domain

HOLMES, Circuit Judge
(dissenting).
The majority opinion holds that petitioners are entitled to offset personal losses from gambling operations against their distributive shares of partnership gains from similar operations. To concur in this ruling, it is necessary to conclude that, while Congress provided for the separate computation of partnership income, it intended that the total so reached' would be discarded and the individual items of gain or loss would then be separated and each brought forward into the returns of the respective partners, and there combined with individual income and deductions to arrive at the partners’ net taxable income. The legislative intent, it seems to me, was just the opposite.
A defendant, in a suit against him for a debt due by him alone; may not offset a debt due to him and another, because the parties are different and there is a want of mutuality.1 With this bed-rock principle in mind, the Congress undertook to regulate the method of accounting with a taxpayer as to income derived from the operations of a partnership. The firm, as an entity, is required to make a return but is not required to pay the tax. In this respect it has an advantage over a corporation.
Individuals carrying on business in partnership are liable for income tax only in their individual capacity. Each partner, in computing his net income, shall .include in *947his individual return his distributive share, whether distributed or not, of the net income o-f the partnership for the taxable year* The net income of the partnership shall be computed in the same manner and on the same basis as in the case of.an individual. A partnership is not a taxable entity for income tax payment, but it is an entity for the purpose of computing the income upon which the partners individually are taxable.2
The inference is clear that Congress did not intend that income from a partnership should retain in the individual partner’s return the same characteristics which it had in the partnership, except as specially provided in Sections 184, 185, and 186 of said Revenue Act of 1936, 26 U.S.C.A.Int.Rev. Code, §§ 184-186, which special provisions negative any other exceptions.3 The distributive share which the individual partner is required to include in his return may result from the computation of separate items of gain or loss, but is distinct from those items and has a separate identity. It is reported as a separate item in the partner’s return just as the shareholder reports a corporate dividend. The complications of any other method of accounting are apparent.
An identical question of statutory construction was presented to the court in Johnston v. Commissioner, supra, the only difference being that this case involves Section 23(g), which relates to wagering losses, while the Johnston case involved Section 23(r), which limited the deduction of losses sustained on the sale of non-capital assets in relation to the gains from such sales. It is true, there was a dissent in that case, and the majority opinion here follows in principle the reasoning of that dissent, though this is a weaker case for the application of the principle, as a gambling partnership is not entitled to legislative encouragement as is a legitimate business. See also, to the same effect as the majority ruled in the Johnston case, Klingenstein v. United States, Ct.Cl., 18 F.Supp. 1015, certiorari denied, 302 U.S. 716, 58 S.Ct. 37, 82 L.Ed. 553.
In the Revenue Act of 1938, Section 182, 26 U.S.C.A.Int.Rev.Code, § 182, was amended for the specific purpose of allowing the segregation of short-time gams or losses in the partnership return, and the retention of such status for use by the partner in his individual return. In its report, the committee noted that the proposed change involved a departure from the general rule.4 Since no such change or departure from the general rule was made by the Congress with reference to the statute limiting the deduction of wagering losses, the reasonable conclusion is that there was no intention to depart from the general rule where gambling gains, or losses resulted from partnership operations. While, as we have seen, some exceptions were expressly made with reference to partnership items retaining their original characteristics' in the partners’ individual returns, it is undisputed that no such exception was expressly made which involved gains or losses from gambling operations; and I think none should be implied.

 57 C. J., p. 454, Sec. 105, et seq., Mintz v. Tri-County Natural Gas Co., 259 Pa. 477, 103. A. 285; Boehm v. United States, 20 Ct.Cl. 142.

 Sections 23, 181, 182, and 183 of the Revenue Act of 1936, ch. 690, 49 Stat. 1648; Johnston v. Commissioner, 2 Cir., 86 F.2d 732, certiorari denied, 301 U.S. 683, 57 S.Ct. 784, 81 L.Ed. 1341.

 Botany Mills v. United States, 278 U.S. 282, 289, 49 S.Ct. 129, 73 L.Ed. 379.

 H.Rep.No.1860, 75th Cong., 3rd Sess., pp. 42-43.