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Statement of the Case.

268 U.S.

THE UNITED STATES v. FLANNERY ET AL., EXECUTORS OF THE ESTATE OF JAMES J. FLANNERY, DECEASED.

APPEAL FROM THE COURT OF CLAIMS.

No. 527. Argued January 12, 1925.—Decided April 13, 1925.

1. The Revenue Act of 1918 provided that net income should in

clude "gains" derived from sales or dealings in property, $8 212 (a), and 213 (a); that there should be allowed as deductions “ losses " sustained during the taxable year “incurred in any transaction entered into for profit,” § 214 (a); and that “for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property ... the basis shall be (1) In the case of property acquired before March 1, 1913, the fair market price or value of such property as of that date; and (2) In the case of property acquired on or after that date, the cost

thereof." § 202 (a). Held: (a) That the provisions of the act in reference to the gains derived

and the losses sustained from the sale of property acquired before March 1, 1913, were correlative, and that whatever effect was intended to be given to the market value of property on that date in determining taxable gains, a corresponding effect was intended

to be given to such market value in determining deductible losses; (6) That the Act of 1918 imposed a tax and allowed a deduction

to the extent only that an actual gain was derived or an actual loss sustained from the investment, and the provision in reference to the market value on March 1, 1913, was applicable only where there was such an actual gain or loss, that is, that this provision was merely a limitation upon the simount of the actual gain or loss that would otherwise have been taxable or deductible. Goodrich

v. Eduards, 255 U. S. 527; Walsh v. Brewster, Id. 536. P. 100. 2. Decisions of this Court affecting the business interests of the

country should not be disturbed except upon the most cogent

reasons. P. 105. 59 Ct. Cls. 719, reversed.

APPEAL from a judgment of the Court of Claims allowing recovery of an income tax paid under protest.

98

Opinion of the Court.

The Solicitor General, with whom Messrs. Nelson T. Hartson, Solicitor of Internal Revenue, and Frederick W. Dewart, Special Attorney, were on the brief, for the United States.

Mr. Edward S. Burling, with whom Mr. Spencer Gordon was on the brief, for appellees.

Messrs. Richard W. Hale and Reginald H. Smith filed a brief as amici curiae, by special leave of Court.

Messrs. Sanford Robinson, Arthur Ballantine and Bernhard Knollenberg, also filed a brief as amici curiae, by special leave of Court.

MR. JUSTICE SANFORD delivered the opinion of the Court.

James J. Flannery bought, prior to March 1, 1913, certain corporate stock for less than $95,175. Its market value on March 1, 1913 was $116,325. He sold it in 1919 for $95,175, that is, for more than cost. He died in March, 1920. The executors of his estate in returning his income for the year 1919 deducted, as a loss, the difference between the market value of the stock on March 1, 1913, and the price received. The Commissioner of Internal Revenue disallowed the loss claimed, and an additional tax was assessed. The executors paid this under protest, and thereafter, a claim for refund having been denied, brought this action in the Court of Claims to recover the amount paid. Judgment was rendered in their favor. 59 Ct. Cls. 719.

The question presented is whether, under the income tax provisions of the Revenue Act of 1918,” a deductible loss was sustained by the sale of the stock in 1919 for more than it had cost, by reason of the fact that on March 1,

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1 Act of Feb. 24, 1919, c. 18, Title II, 40 Stat. 1057.

Opinion of the Court.

268 U.S.

1913, between the dates of purchase and sale, it had a market value greater than the sale price.

This Act provided that net income should include gains

derived from sales or dealings in property, SS 212 (a), 213 (a); that there should be allowed as deductions " losses” sustained during the taxable year “incurred in any transaction entered into for profit”, § 214 (a); and that “for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property

the basis shall be-(1) In the case of property acquired before March 1, 1913, the fair market price or value of such property as of that date; and (2) In the case of property acquired on or after that date, the cost thereof ." $ 202 (a).

The United States contends that under $ 214 (a) there was no deductible loss whatever unless the taxpayer had sustained an actual “loss” in the entire transaction by selling the property for less than it had cost; and that the effect of $ 202 (a) was merely that if such an actual loss had been sustained in selling property acquired before March 1, 1913, only so much thereof could be deducted as was sustained after the latter date, that is, the difference between the market value on that date and the sale price.

The executors contend, on the other hand, that $ 202 (a) established the market value of such property on March 1, 1913, as the sole basis for ascertaining the loss sustained, without regard to its actual cost; and that if such market value was higher than the sale price, this conclusively determined that there had been a deductible “loss” in the transaction, and fixed the amount thereof at the difference between the market value on that date and the sale price.

It is clear, in the first place, that the provisions of the Act in reference to the gains derived and the losses sustained from the sale of property acquired before March 1, 1913, were correlative, and that whatever effect was intended to be given to the market value of property on

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98

Opinion of the Court.

that date in determining taxable gains, a corresponding effect was intended to be given to such market value in determining deductible losses. This conclusion is unavoidable under the specific language of $ 202 (a) establishing one and the same basis for ascertaining both gains and losses.

Taking this as a premise, we think that the question of determining taxable gains is concluded, in accordance with the contention of the Government, by the decisions of this Court in Goodrich v. Edwards, 255 U. S. 527, and Walsh v. Brewster, 255 U. S. 536. These cases, which were decided in 1921, arose under the income tax provisions of the Revenue Act of 1916. That Act provided, as did the Act of 1918, that the “gains” derived from sales or dealings in property should be included in net income, and also that the losses actually sustained in transactions entered into for profit should be allowed as deductions. In the Act of 1916, however, the provisions for the ascertainment of the gains derived and losses sustained from the sale of property were not contained, as in the Act of 1918, in one provision, but in separate clauses of the same tenor and effect as the combined provision in the Act of 1918. Section 2 (c) provided that: “For the purpose of ascertaining the gain derived from the sale or other disposition of property

acquired before ” March 1, 1913," the fair market price or value of such property as of” March 1, 1913, “shall be the basis for determining the amount of such gain derived." The correlative clause relating to the ascertainment of loss was in precisely the same language except that the words “ the loss” and “ loss sustained were used instead of the words “the gain” and “gain derived.” 5

2 Act of Sept. 8, 1916, c. 463, 39 Stat. 756. 38 2 (a). 4 & 5 (a) Fifth 5 § 5 (a) 4th.

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Opinion of the Court.

268 U.S.

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In Goodrich v. Edwards, supra, in the second transaction involved, the taxpayer had acquired in 1912 certain corporate stock of the then value of $291,600. Its market value on March 1, 1913, was only $148,635.50. He sold it in 1916 for $269,346.25, being $22,253.75 less than its value when acquired, but $120,710.75 more than its value on March 1, 1913. A tax was assessed on the latter amount, which was sustained by the trial court. The Government confessed error in this judgment. After reciting this fact and setting forth the pertinent provisions of the Act, this court, in reversing the judgment, said:

very plain that the statute imposes the income tax on the proceeds of the sale of personal property to the extent only that gains are derived therefrom by the vendor, and we therefore agree with the Solicitor General that since no gain was realized on this investment by the plaintiff in error no tax should have been assessed against him. Section 2(c) is applicable only where a gain over the original capital investment has been realized after March 1, 1913, from a sale or other disposition of property.”

This case was followed by Walsh v. Brewster, supra. In the first transaction there involved the taxpayer had purchased bonds in 1899 for $191,000, which he sold in 1916 for the same amount. Their market value on March 1, 1913, was $151,845. A tax was assessed on the difference between the latter amount and the selling price, namely, $39,155. This tax was held invalid, under the authority of Goodrich v. Edwards, on the specific ground that “the owner of the stock did not realize any gain on his original investment by the sale in 1916.” In the second transaction involved the taxpayer had purchased certain bonds in 1902 and 1903 for $231,300, which he sold in 1916 for $276,150. Their market value on March 1, 1913, was $164,480. A tax was assessed upon the difference between the selling price and the market value of

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