Winkler v. Commissioner

Eli and Selma Winkler, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent Winkler v. Commissioner Docket No. 111007 United States Tax Court 2 T.C. 735; 1943 U.S. Tax Ct. LEXIS 60; September 24, 1943, Promulgated *60 Decision will be entered for respondent. Petitioners acquired jewelry in 1929 and sold it in 1940 at below cost. They claimed a long term capital loss deduction, though the loss was not incurred in trade or business or in a transaction entered into for profit. Held, a capital loss deduction is allowable to an individual only if the loss meets the requirements relative to the deductibility of losses by individuals, generally, as provided in section 23 (e) of the Internal Revenue Code. Held, further, that the purchase of jewelry as an "investment," there being no expectation of profit, is not such a transaction as to bring a loss arising therefrom within the provisions of section 23 (e) (2) of the Internal Revenue Code. Howe P. Cochran, Esq., and Margaret F. Luers, Esq., for the petitioners. William G. Ruymann, Esq., for the respondent. Hill, Judge. HILL *736 This proceeding involves a deficiency in income tax for the calendar year 1940 in the sum of $ 3,052.50. The sole question herein presented is whether or not petitioners are entitled to a capital loss deduction arising from the sale of jewelry. The tax return for the period in question was filed*61 with the collector of internal revenue for the third district of New York. FINDINGS OF FACT. Petitioners are and at all times material herein have been husband and wife, residing in the United States. For the calendar year 1940 petitioners filed a joint return on the cash basis, wherein they claimed a long term capital loss of $ 9,250 which, when offset by long term capital gains for the same period, resulted in an asserted net long term capital loss of $ 8,064.50. In a memorandum incorporated in the return Eli Winkler stated that the loss was claimed under sections 23 (g) and 117 of the Internal Revenue Code. The property involved in the transaction from which the alleged capital loss was sustained comprised a necklace and a bracelet set with rubies and diamonds. Eli Winkler purchased this jewelry in 1929 in Paris, France, for $ 23,000. Coincident with the purchase an agreement was made between Winkler and the seller under the terms of which the latter agreed to repurchase the jewelry at any time for $ 12,000 or to allow Winkler the cost less 10 percent upon its exchange for different merchandise. Shortly before this purchase Mrs. Winkler had been robbed of all jewelry then owned*62 by her. The necklace and bracelet were selected to replace the loss, the consideration for their purchase being derived in part from proceeds of robbery insurance. Mr. Winkler gave the new jewelry to his wife immediately after its delivery to him in 1929. At that time Mrs. Winkler planned to keep and wear it indefinitely and she did in fact so use it for her personal adornment. The purchase was made with no expectation of profit and neither petitioner was engaged in the jewelry business. In 1930 petitioners made an offer to sell the jewelry locally and during the succeeding year Winkler determined to resell it under the terms of the agreement with the Paris merchant. However, it developed that the merchant had gone out of business and his whereabouts could not be ascertained. Consequently, the resale was not effected. Thereafter, further efforts were made to sell the jewelry, a sale being consummated in 1940 in behalf of Mrs. Winkler by Oppenheimer Bros. of New York. The sale price was $ 4,500. OPINION. The primary issue is whether a capital loss, to be deductible by an individual, must be incurred in trade or business or in a transaction entered into for profit though not*63 connected with *737 trade or business. For the purpose of discussion we assume, without deciding, that the jewelry in question constituted a capital asset within the meaning of section 117 (a) (1) of the Internal Revenue Code. The jewelry was sold for $ 18,500 less than its cost, whereupon a long term capital loss of $ 9,250 was claimed jointly by petitioners, though they concede that the purchase was not made in connection with trade or business or with an expectation of making a profit therefrom. While Eli Winkler formerly relied upon sections 23 (g) and 117 of the Internal Revenue Code as authorizing such deduction, petitioners now depend upon section 22 (f) thereof. 1 Respondent contends that all loss deductions permitted individuals and arising from the sale of property, be the loss capital or ordinary, find their inception in section 23 (e) (1) and (2) of the Internal Revenue Code. 2 Since the loss in question arose from a transaction without petitioners' trade or business and one not for profit, he determined it to be nondeductible. We think it clear that respondent's position as to the applicable subsection of the Code is sound and that his determination is correct. *64 Pursuant to chapter I of the Internal Revenue Code, a tax is levied upon the net income of individuals. Section 21 defines "net income" as gross income computed under section 22, less the deductions allowed by section 23. Deductions depend upon legislative grace for their allowance and are permitted only when specifically granted by statute. New Colonial Ice Co. v. Helvering, 292 U.S. 435.*65 Thus, section 23 is named as that part of the statute wherein authorized deductions are spelled out, and petitioners' asserted capital loss can reduce their gross income only if brought within the purview of language in that section. Of the several subsections within section 23, it is (e) alone which allows as deductions to individuals losses sustained during the taxable year. Hence, petitioners' loss is deductible, if at all, solely by virtue of the express terms therein. But this subsection grants loss deductions to individuals provided the losses, not compensated for by insurance or otherwise, were (1) incurred in trade or business, (2) incurred in any transaction entered into for profit though not connected with trade or business, or (3) the result of casualty. Since the loss in this case does not fall within any of such classes, a deduction therefor is not allowable. *738 It is true that capital losses are deductible, in computing net income, only to the extent provided in section 117. This limitation is explicity stated in section 23 (g) (1) of the Internal Revenue Code. However, there is no provision in the Code which can be construed to permit the deduction of a *66 capital loss which would not be deductible as an ordinary loss if the property involved were not a capital asset. On the contrary, the very definition of capital loss contained in section 117, which includes the phrase "if and to the extent such loss is taken into account in computing net income," requires the conclusions that a capital loss must, in all instances, be the type of loss deductible under section 23, and we so hold. See also Juliet P. Hamilton, 25 B. T. A. 1317, and section 19.33 (g)-1 of Regulations 103. Petitioners' reliance upon section 22 (f) is misplaced. Section 22 concerns the computation of gross income and subsection (f) thereunder simply says that the computation of any gain or loss is fixed by section 111. Clearly, no loss deduction is authorized by this subsection. There was some testimony in this case to the effect that petitioners in 1929 believed jewelry to be a safer "investment" than stocks, bonds, or real estate. Accordingly, it is suggested that the loss upon the sale of the jewelry in question should be treated similarly to a loss from the sale of securities or analogous property. Cf. Weir v. Commissioner, 109 Fed. (2d) 996;*67 certiorari denied, 310 U.S. 637. There is no merit in this argument. Jewelry is not ordinary investment property. See Juliet P. Hamilton, supra.Cf. Laurence Arnold Tanzer, 37 B. T. A. 244. It is not susceptible of providing an income. Moreover, petitioners had no expectation or intention of deriving a profit from the transaction and this is the real test of deductibility for loss on sales of property, capital or otherwise, not purchased in trade or business. Dupont v. United States, 28 Fed. Supp. 122; Lihme v. Anderson, 18 Fed. Supp. 566. Petitioners are not entitled to a capital loss deduction arising from the sale of the jewelry. We perceive no error in respondent's determination. Decision will be entered for respondent. Footnotes 1. SEC. 22. GROSS INCOME. * * * * (f) Determination of Gain or Loss. -- In the case of a sale or other disposition of property, the gain or loss shall be computed as provided in section 111.↩ 2. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * * (e) Losses by Individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -- (1) if incurred in trade or business; or (2) if incurred in any transaction entered into for profit, through not connected with the trade or business; * * *↩