dissenting: The real significance of the issue to be decided by the Court today can be illustrated by figures contained in the congressional debate: reportedly, notices of deficiency have been issued in 15,000 cases involving tax straddles and deficiencies of $1.5 billion. 11 Cong. Rec. S8390 (daily ed. June 27,1984), and 12 Cong. Rec. E3251-E3252 (daily ed. July 24, 1984). By the enactment of section 108 of the Tax Reform Act of 1984, Congress has clearly indicated that tax relief is to be extended to dealers in tax straddles at a cost of over $300 million in revenue. Based, not on the words of the statute but on a vague sentence in the Conference Committee report, the majority of this Court has decided to interpret section 108 so as to extend the tax relief to all traders in tax straddles with a cost of $1.5 billion in revenue. These figures illustrate why, as a court, we should not depart from the well-established meaning of the phrase "transaction entered into for profit” without a clear direction by the Congress to do so, and why I must dissent.
Section 108 provides that any loss from the disposition of a position forming part of a straddle entered into before 1982, and to which the amendments made by title V of the Economic Recovery Tax Act of 1981 (erta) do not apply, "shall be allowed for the taxable year of the disposition if such position is part of a transaction entered into for profit.” (Emphasis added.) The requirement that the loss position be part of a transaction entered into for profit is identical in phraseology to the requirement of section 165(c)(2), which permits an individual to deduct losses "incurred in any transaction entered into for profit.” Contrary to the implication contained in the majority opinion at page 838, we were not "forced to interpret this assertedly unambiguous section 165(c)(2) language” for the first time in Smith v. Commissioner, 78 T.C. 350 (1982), and Fox v. Commissioner, 82 T.C. 1001 (1984); rather, in those cases, we relied on long-established precedent in holding that a "transaction entered into for profit” is, for purposes of section 165(c)(2), a transaction entered into with the predominant or primary hope of deriving an economic profit aside from tax benefits. As we observed in Fox v. Commissioner, supra at 1019-1020, the "primary purpose” test first appeared as a judicial gloss on the statutory language of section 165(c)(2) in Helvering v. National Grocery Co., 304 U.S. 282 (1938), where the Supreme Court stated in a footnote that "the deductibility of losses under section 23(e) [the predecessor of section 165(c)(2)] * * * may depend upon whether the taxpayer’s motive in entering into the transaction was primarily profit.” 304 U.S. at 289 n. 5. The subjective, primary purpose test has since been adopted as the standard to be applied in determining whether a transaction is "entered into for profit” in cases arising under section 165(c)(2) and its predecessor, section 23(e). King v. United States, 545 F.2d 700, 708 (10th Cir. 1976); Austin v. Commissioner, 298 F.2d 583, 584 (2d Cir. 1962), affg. 35 T.C. 221 (1960); Knetsch v. United States, 172 Ct. Cl. 378, 348 F.2d 932, 936 (1965); Ewing v. Commissioner, 20 T.C. 216, 233 (1953), affd. 213 F.2d 438 (2d Cir. 1954). Moreover, essentially the same standard has been adopted in determining when an activity is "not engaged in for profit” for purposes of section 183 (sec. 1.183-2(a), Income Tax Regs.; Fox v. Commissioner, 80 T.C. 972 (1983), affd. by order 742 F.2d 1441 (2d Cir. 1984), affd. sub nom. Barnard v. Commissioner, 731 F.2d 230 (4th Cir. 1984), affd. without published opinions sub nom. Hook v. Commissioner, Kratsa v. Commissioner, Leffel v. Commissioner, Rosenblatt v. Commissioner, Zemel v. Commissioner, 734 F.2d 5-7, 9 (3d Cir. 1984)), and whether a taxpayer is "carrying on any trade or business” under section 162 or is holding property "for the production of income” under section 212 (Hager v. Commissioner, 76 T.C. 759 (1981); Lemmen v. Commissioner, 77 T.C. 1326 (1981)).
In light of these cases, when Congress used the phrase "transaction entered into for profit” in section 108, its well-established meaning must have been evident to those working with the statute. We must presume that Congress intended such phrase to have the same meaning when used in section 108. Helvering v. Stockholms Enskilda Bank, 293 U.S. 84, 87 (1934). Even so, it is still appropriate to examine the legislative history for further evidence of the legislative purposes. United States v. American Trucking Associations, 310 U.S. 534, 543-544 (1940). "Nevertheless, where a statute is clear on its face, we would require unequivocal evidence of legislative purpose before construing the statute so as to override the plain meaning of the words used therein.” Huntsberry v. Commissioner, 83 T.C. 742, 747-748 (1984) (emphasis added).
In explanation of the purposes of section 108, the Statement of the Managers provides in relevant part:
The conferees believe it is inappropriate to prolong the uncertainty with respect to the treatment of losses claimed with respect to straddle positions for periods prior to 1981. Accordingly, in lieu of the Senate amendment’s requirement of a report with respect to pre-1981 cases, the conference agreement provides that a loss on the disposition of a position entered into before 1982 will be allowed, except to the extent nonrecognition is required under any applicable provision, if the position is part of a transaction entered into for profit. This treatment applies where the position is part of a straddle as defined in section 1092 as in effect on the day after the date of enactment of ERTA (as well as a straddle consisting entirely of RFCs), and is one to which the provisions of Title V of ERTA did not apply. The loss generally will be allowed for the taxable years in which the position is disposed of. Rules affecting the period within which the loss is recognized, and its treatment as long-term or short-term, such as sec. 1233 or sec. 1234, are to be applied without regard to the fact that the position is part of a straddle.
* * * In determining whether the position is part of a transaction entered into for profit, it is intended that the provision be applied by treating the condition as satisfied if there is a reasonable prospect of any profit from the transaction.
In the case of commodity dealers and persons actively engaged in investing in RFCs, the provision is to be applied by presuming that the position is held as part of a transaction entered into for profit unless the Internal Revenue Service establishes to the contrary. In determining whether a taxpayer is actively engaged in trading in RFCs with an intent to make a profit, a significant factor will be the extent of transaction costs. If they are sufficiently high relatively to the scope of the taxpayer’s activities that there is no reasonable possibility of a profit, the presumption will be unavailable.
[H. Rept. 98-861 (1984), 1984-3 C.B. (Vol. 2) 1, 171.]
The statement reveals that Congress wishes to put an end to the litigation over tax straddles, and to accomplish that end, it adopted two new statutory rules: (1) It rejected the Commissioner’s position and provided that the disposition of a loss leg of a straddle constitutes a closed and completed transaction for purposes of section 165(c)(2); and (2) it establishes a rebuttable presumption that any position held by a commodities dealer or any person regularly engaged in investing in regulated futures contracts is part of a transaction entered into for profit. However, there is no clear indication that Congress intended any other changes in pre-ERTA law with respect to straddles. The Conference Committee report does not express dissatisfaction with our decision in Smith v. Commissioner, supra; in fact, the committee adopted our conclusion in that case that the disposition of a loss leg is a taxable event. While the committee also adopted a presumption in favor of commodity dealers, it did not expressly overrule our application in Smith of the traditional subjective test of primary purpose, insofar as it was applied to "investors with isolated [commodity futures] transactions.”
The majority focuses on the phrase "reasonable prospect of any profit” and concludes that such language establishes a new "for profit” test. The majority first examines the words "any profit” and says "The phrase 'any profit,’ therefore, requires some prospect for dollar gain over cash investment plus transaction costs.” In connection with "reasonable prospect,” the majority states at page 844:
Finally, whether or not the prospect of any profit is reasonable is tested on a facts and circumstances basis in the context of the futures market for the particular commodity at the time the trades are made.
* * * On this record we simply cannot determine whether the prospect for a profit from these straddles in a rising market was a reasonable one. If, however, the market had reversed its course, one of respondent’s experts is in agreement with petitioner’s expert that profits were foreseeable from these straddles. There is every reason to believe, as we do, that each of the straddles to be tested here had when acquired a reasonable prospect for profit and there is no evidence to the contrary. * * * [Fn. ref. omitted.]
The majority had already concluded that the petitioner’s trading strategy was predicated on an assumption that the gold market would rise; yet, the majority declined to inquire as to whether, in such a market, the prospect of profit would be reasonable. Since some experts expected the market to fall, there was the possibility of a profit, and apparently, that possibility was sufficient to convince the majority that there was a "reasonable prospect” of a profit.
Such interpretation is not compelling. The dictionary defines "prospect” as an "act of looking forward; anticipation, foresight.” Webster’s Third New International Dictionary (1981). Yet, in the statute, "prospect” is modified by "reasonable.” It is not enough to anticipate or foresee some profit; that anticipation must be reasonable. We cannot determine the reasonableness of a prospect without some inquiry into the likelihood that it will occur. Can we say that a prospect is reasonable when the petitioner, an experienced trader in commodity futures, his Merrill Lynch advisers, and many market experts expected that it would not occur? The use of "reasonable” reveals that Congress had in mind more than the mere possibility; an unlikely possibility cannot be said to be reasonable. It appears that the majority has totally ignored the requirement of "reasonable” in its interpretation.
Furthermore, if the majority’s interpretation is adopted, the presumption contained in section 108(b), which was enacted to provide special relief to dealers in tax straddles, is unnecessary. In virtually every tax straddle, there will exist the possibility of a profit, and therefore, under the majority’s interpretation, all traders in tax straddles will receive tax relief, thereby eliminating the need for a presumption in favor of dealers. In addition, if we conclude that Congress meant to reject the definition of the "for profit” test in Smith and Fox, other broad and significant questions arise: Is this new "for profit” test to be applied henceforth under section 165(c)(2), and is the new test to be applied for purposes of sections 162, 183, and 212? Surely, if Congress intended to adopt a new provision of law with such broad and pervasive effect, it would have done so in a more conspicuous manner.
Aside from the Statement of the Managers in the Conference Committee report, the managers of the legislation, Chairman Rostenkowski of the Ways and Means Committee and Senator Dole, Chairman of the Finance Committee, offered no further explanation of the scope or effect of section 108. However, Senator Howard Metzenbaum, of Ohio, spoke out about section 108:
the effect of that provision is virtually to preclude the IRS from pursuing tax cases against about 200 traders of commodity futures for an estimated $300 million in taxes that the IRS is trying to collect from traders who used the now outlawed tax avoidance scheme known as a commodity straddle.
As a matter of fact, the IRS preliminary data indicates that there are 4,400 cases presently pending in [the] Tax Court representing $500 million in taxes before interest is assessed. The IRS has assessed deficiencies for 15,000 taxpayers for $1.5 billion. There is no data on how many professional traders are involved, but we do know that whether it is $300 million or $500 million or a substantial amount more, the commodity traders and dealers were well taken care of in the conference committee * * *
[11 Cong. Rec. S8390 (daily ed. June 27, 1984).]
Similarly, Richard L. Ottinger, a Representative from New York, stated on July 24, 1984, that "This tax break [provided by section 108] has been afforded to 200 or so commodity traders in Chicago at a cost of $300 million to the Government.” 12 Cong. Rec. E3251 (daily ed. July 24, 1984). Mr. Ottinger also inserted into the Congressional Record an article from the Washington Post of July 2,1984, in which the author stated that:
Rostenkowski’s bailout means that two taxpayers who arranged virtually identical commodity deals to avoid paying taxes will be treated differently.
Ordinary investors will have to show they were trying to make money, not simply create losses to claim as tax deductions. But thanks to Rostenkowski, "professional commodity traders and persons who regularly trade commodity futures contracts” will be presumed to have a profit motive.
In many cases that distinction will mean the brokers who invented this tax dodge will get away with using it, but their clients will have to pay taxes.
[12 Cong. Rec. E3251 (daily ed. July 24, 1984).]
These statements by Senator Metzenbaum and Representative Ottinger do reflect the contemporaneous understanding of what Congress was doing by the enactment of section 108. Congress realized that it was extending substantial tax relief to dealers in tax straddles, but these statements make it indisputably clear that Congress had no understanding that it was granting tax relief to all traders in tax straddles with a consequent loss in revenue exceeding $1.5 billion. The outcry by the critics of the legislation would, no doubt, have been substantially greater had they understood that the legislation was extending tax relief to all traders of tax straddles.
Nearly 100 years ago, the Supreme Court observed:
These cases show the principle upon which is founded the rule that a claim for exemption from taxation must be clearly made out. Taxes being the sole means by which sovereignties can maintain their existence, any claim on the part of any one to be exempt from the full payment of his share of taxes on any portion of his property must on that account be clearly defined and founded upon plain language. There must be no doubt or ambiguity in the language used upon which the claim to the exemption is founded. It has been said that a well founded doubt is fatal to the claim; no implication will be indulged in for the purpose of construing the language used as giving the claim for exemption, where such claim is not founded upon the plain and clearly expressed intention of the taxing power. [Bank of Commerce v. Tennessee, 161 U.S. 134, 146 (1896).]
Over the intervening years, this proposition has been repeatedly embraced and applied by the Supreme Court. Bingler v. Johnson, 394 U.S. 741, 751-752 (1969); Commissioner v. Jacobson, 336 U.S. 28, 48-49 (1949); United States v. Stewart, 311 U.S. 60, 71 (1940); Helvering v. Northwest Steel Mills, 311 U.S. 46, 49 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Here, a trader in tax straddles urges us to construe section 108 so as to allow a deduction for his losses; to allow such losses, we must find that Congress intended by the "reasonable prospect of any profit” sentence to change the well-established meaning of the "for profit” test. In my judgment, that sentence, at most, casts some doubt on the intention of Congress; it certainly does not unequivocally manifest an intention to change the law. Under such circumstances, long-established principles of statutory construction should require us to conclude that the traditional "for profit” test is to be applied in this case and that the petitioner is not entitled to deduct his losses.
Dawson, Chabot, Parker, Shields, Swift, Jacobs, and Wright, JJ, agree with this dissent.