MANTON, Circuit Judge.
Petitioner seeks a review of an income tax deficiency, charged against him for 1932. For several years prior to and during 1932, he was a member of a partnership engaged in the stock brokerage business. During 1932 petitioner ran three separate securities trading accounts which were his own. These operations involved 419 separate sales of 61,992 shares which had been acquired in 353 separate purchases. The cost of these shares was $2,884,531.14, exclusive of purchase commissions
It is contended on this petition to review that section 23(r) (1) of the Revenue Act of 1932, 26 U.S.C.A. § 23 note,
The facts were stipulated, but the petitioner also testified that he devoted a portion of his time to the operation of these seven trading accounts.
Section 23(r) places a limitation upon the deduction of losses. Congress has the power to condition, limit, or deny deductions from gross income in order to arrive at the net to be taxed. Burnet v. Thompson Oil & Gas Co., 283 U.S. 301, 51 S.Ct. 418, 75 L.Ed. 1049; Stanton v. Baltic Mining Co., 240 U.S. 103, 36 S.Ct. 278, 60 L. Ed. 546; Helvering v. Independent Life Ins. Co., 292 U.S. 371, 54 S.Ct. 758, 78 L. Ed. 1311. We held this provision of the statute constitutional in Davis v. United States (C.C.A.) 87 F.2d 323. The petitioner may not offset his gains from the four joint accounts by his losses on the three accounts which he operated individually.
Section 1111(a) (3) of the Revenue Act of 1932, 26 U.S.C.A. § 1696(2), defines "partnership" as including a "syndicate,
Section 23(a) of the 1932 Act (26 U.S. C.A. § 23(a) and note) provides that there shall be deducted in computing net income, the ordinary necessary expenses of carrying on a trade or business "including * * * compensation for personal services actually rendered." The volume of sales and the amounts thereof and the time consumed in carrying on these operations would justify the Board of Tax Appeals in finding (they made no such finding) that the petitioner carried on these operations as a trade or business. During the year he expended "for personal services actually rendered to him" compensation in the form of commissions in the amount of $17,067.50 which the Board has disallowed. In such disallowance, the Board based its holding upon regulations having to do with "non-capital" assets not purchased in connection with a trade or business. Article 121 of the Treasury Regulations 77 provides in part that "among the items included in business expenses are * * * commissions. * * *" The allowance of commissions on real estate sales as business expenses has been approved by the Board. The Highlands, Trust No. 1546 v. Com'r, 32 B.T.A. 760. See, also, Alexander Sprunt & Sons v. Com'r (C.C.A.) 64 F.2d 424; Kornhauser v. U. S., 276 U.S. 145, 48 S.Ct. 219, 72 L.Ed. 505; Whitman v. Com'r, 16 B.T.A. 197, affirmed (C.C.A.) 49 F.2d 1087. The same principle should be equally applicable to one whose trade and business involves the purchase and sale of stocks for profit.
Article 282 of Treasury Regulations 77 provides that commissions paid in purchasing securities are a part of the cost price of such securities while commissions paid in selling securities when such commissions are not an ordinary and necessary expense of carrying on a business are an offset against the selling price. If the petitioner's activities in buying and selling amounted to a trade or business, his expenses would be deductible under section 23(a), 26 U.S.C.A. § 23(a) and note, which allows "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." This would apply to commissions paid in buying and selling securities. No good reason is advanced for a discrimination against dealers in securities. The statute makes no such discrimination. The regulations and decisions which controlled the Board in support of the majority opinion contemplate the eventual allowance against income of the commissions paid on purchases and sales not connected with a business.
The questions presented in Helvering v. Union Pacific Ry. Co., 293 U.S. 282, 55 S.Ct. 165, 79 L.Ed. 363, dealt with deductions of commissions on bonds issued by the taxpayer itself. The court there approved the regulation providing for the capitalization of the commissions involved. The taxpayer suffered no hardship by such a rule, as was pointed out in Hutton v. Com'r, 39 F.2d 459 (C.C.A.5), since, under the Revenue Acts then in force, the commissions would be reflected against income when the securities were eventually sold. But under the 1932 Revenue Act, due to section 23(r), 26 U.S.C.A. § 23 note, the commissions paid would not be reflected against gross income unless the sale of the securities resulted in a profit.
Section 23(r), 26 U.S.C.A. § 23 note, does not deal with expenses at all, and there is no conflict between it and section 23(a), 26 U.S.C.A. § 23(a) and note. Nor may it be said that there is a possibility that the petitioner would have the benefit of his expenses in a future year on other sales or exchanges. Taxing statutes consistently assess income taxes on the basis of annual accounting periods. If the commissions be regarded as an expense of a trade or business, the petitioner's operations within the year will be accounted for within that same year, and this meets the intent of Congress to levy taxes on an annual basis. If a merchant employed a buyer, his salary would be deductible as a current expense and would not be allocated as part of the cost of the goods. If the
The decision is reversed and the cause remanded for the Board to make a finding as to whether or not the petitioner, in 1932, was a trader in the business of buying and selling securities. If so, the commissions for purchases and sales are deductible.
(1) Losses from sales or exchanges of stocks and bonds which are not capital assets shall be allowed only to the extent of the gains from such sales or exchanges.