Jennings v. Commissioner of Internal Revenue

110 F.2d 945, 24 A.F.T.R. (P-H) 824, 1940 U.S. App. LEXIS 4703

• Court: Court of Appeals for the Fifth Circuit
• Decided: April 11, 1940
• Docket: 9383
• Status: Published

Opinions

SIBLEY, Circuit Judge.

We think the Board of Tax Appeals wrongly refused to allow the petitioners to deduct individual losses in gambling from gambling gains made in partnership, on redetermining their several • income taxes for the year 1936. The facts were stipulated. The Board found: . “The distributive share of each petitioner of partnership gains from gambling operations exceeded the amount of losses by petitioners in their individual gambling operations.” The Revenue Act of 1936, Sect. 23(g), 26 U.S.C.A.Int.Rev.Acts, referring to deductions, provides: “Losses from wagering transactions shall be allowed only to the extent of- the gains from such transactions.” The Board thought the partnership in making up. its return could offset its wagering losses against -its wagering gains, and each partner might, similarly offset his wagering losses against his wagering gains, but that each partner’s share of wagering gains made in the partnership could hot be reduced by wagering losses made individually.

We find nothing in the statute to support the last proposition. A partnership is recognized as an entity separate from the partners in bankruptcy proceedings, but not in income taxation. United States v. Coulby, 6 Cir., 258 F. 27. For many years the Revenue- Acts have provided that “individuals carrying on business in partnership shall be liable for income tax only in their individual capacity.” Revenue Act of 1918, § 218(a), 40 Stat. 1057, 1070, Revenue Act of 1936, § 181, 49 Stats. 1648, 1709, 26 U.S.C.A.Int.Rev.Code, § 181. Thereunder a tax on income earned in partnership was held not a claim against the partnership in bankruptcy, and it went unpaid for lack of individual assets. United States v. Kaufman, 267 U.S. 408, 45 S.Ct. 322, 69 L.Ed. 685, The partnership return is for information, and to secure uniformity and save repetition in the individual returns. It ascertains each partner’s gain and apportions it to him to be taxed, whether distributed or not. It-does not transform his share in the gain. If “individuals carrying on business in partnership”, to use the phrase of the statute, make gains in wagering transactions, the share of. each is a wagering gain; and when it is entered on his individual return to be taxed, a deduction of his losses in other wagering transactions is allowed by the statute, but only to the extent of such gains.

The" Board followed especially the decision in Johnston v. Commissioner, 2 Cir., 86 F.2d 732, which held a partner’s losses by sale of noncapital assets could not be offset against a similar gain coming from his partnership, one judge dissenting. We are impressed that the dissenting judge was probably right, but that case dealt with a different statutory provision, and it had been amended by Congress, the purpose of the amendment being one of the disputed points. No amendment of the provision before us has been made, and its words seem plain enough.

The cause is remanded with direction to allow the deductions claimed and- redetermine the taxes accordingly. •