*34 Decisions will be entered under Rule 155.
P and M were brothers who inherited from their father stock in a family corporation and an interest in real estate. They also jointly purchased other real property. Later, hostility developed between them. They retained arbitrators who directed that P sell M his stock in the corporation and his interests in three parcels of the real estate. P claimed long-term capital loss and ordinary loss deductions on the sales to his brother. Held: The deductions for losses sustained from the sales of property between brothers are not allowed by
*182 In these consolidated cases the respondent determined the following deficiencies in petitioners' Federal income taxes:
Docket No. | Year | Deficiency |
1538-79 | 1976 | $ 4,541.00 |
10923-79 | 1977 | 757.00 |
The deficiency determined for the year 1976 is based on an adjustment disallowing the deductions of losses sustained from the sales of the*36 interests of petitioner David L. Miller in eight parcels of real estate, and a sale of his stock in Charles Miller, Inc., to his brother, I. Marvin Miller. Respondent has conceded that claimed losses related to sales of property to unrelated third parties are deductible. In dispute, however, are three parcels of real estate and the stock of Charles Miller, Inc., sold by the petitioner to his brother. The deficiency determined for the year 1977 is based on an adjustment disallowing the deduction of the long-term capital loss carryover which resulted from the 1976 sales.
The principal issue for decision is whether the deductions for losses sustained from the sales of stock and real property by the petitioner to his brother, which were ordered by binding arbitration to separate the interests of the hostile brothers, were *183 properly disallowed by respondent under the provisions of
*37 FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
David L. Miller and Frances A. Miller (petitioners) are husband and wife who resided in Rydal, Pa., when they filed their petitioners in these cases. Their Federal income tax returns for 1976 and 1977 were filed with the Internal Revenue Service Center, Philadelphia, Pa.
David L. Miller (petitioner) and I. Marvin Miller (Marvin) are the natural sons of Charles and Miriam Miller. Charles Miller died in 1954. Under his will, all of his shares of stock in Charles Miller, Inc., being 20 of 21 outstanding shares, were left in equal shares to the petitioner and Marvin. The remaining share was owned by Miriam Miller. The corporation was engaged in the real estate and insurance brokerage business. Also left in equal shares to petitioner and Marvin was certain real estate located at 2254 North Broad Street in Philadelphia, which was the location of the principal office of the corporation. After certain specific bequests to family members, the balance of Charles Miller's property was left in trust to his widow.
Petitioner and Marvin jointly purchased additional parcels of real estate in Philadelphia. *38 This additional real estate, the stock in the corporation, and the real estate distributed under the Will of Charles Miller later became the subject of a dispute between the brothers.
Petitioner was a student when his father died. He then worked part-time in the family business. Subsequently, he became a lawyer and has engaged in the practice of law. Marvin had been active in the family business before his father's death and has remained active in the business until the present time.
In January 1971, a serious dispute arose between the brothers resulting from allegations by the petitioner that Marvin had *184 improperly used funds collected on behalf of third parties in order to cover losses in the operation of the family business. By October 1971, the relationship between them became so strained that they could not mutually resolve their differences. They then retained arbitrators, who subsequently decided that the only way to end the dispute between the brothers was to enter into a binding award by the terms of which the petitioner would be required to sell to Marvin three parcels of real estate and his stock in the corporation.
On July 24, 1973, the arbitrators issued *39 their report under the terms of which the brothers would sever their property interests as of that date. Both brothers took exceptions to the report, and on October 2, 1973, the arbitrators issued a supplemental report.
During the negotiation period, the brothers did not see each other socially and rarely spoke. Their strained relationship continued. They did not trust each other. Although petitioner is an attorney specializing in real estate and Marvin is in the real estate business, neither has referred any business to the other for several years.
Notwithstanding the issuance of the arbitrators' supplemental report, the brothers refused to abide by its terms until December 29, 1976, when, with certain modifications, the petitioner sold his stock in Charles Miller, Inc., to Marvin and his interests in the parcels of real estate at 2254 North Broad Street, 2222 North 15th Street, and 1248 W. Hazzard Street, all located in Philadelphia.
Petitioner has never reacquired an interest in the stock or properties he sold to Marvin. He has no control, directly or indirectly, over Marvin or the assets he sold to him.
On his Federal income tax return for 1976, the petitioner claimed a long-term*40 capital loss of $ 4,999 and three ordinary losses of $ 331, $ 2,274, and $ 382, totaling $ 2,987, resulting from the sales of the stock and the properties to his brother, Marvin.
In his notice of deficiency for 1976, the respondent disallowed the claimed deductions for the losses on the ground that they were not allowable under the provisions of
*185 OPINION
The issue here involves the application and interpretation of
*41 Petitioner contends that
We agree with respondent. In construing the language of
The forerunners of
It is true that a hardship may result in particular cases, as in this one, where the transaction is in entire good faith; and there is some indication in the history of the measure that the legislators were not unaware of that fact. However, it was the belief of the drafters that, on the whole, the measure would be fair to the great majority of taxpayers. Congress could have provided that no deduction should be allowed in respect of losses from intrafamily transactions unless they were bona fide. That it did not do. * * * We*44 could not, without indulging in judicial legislation, graft an exception upon the broad measure adopted by Congress.
See also
The scope of
*187
The pertinent legislative history lends support to this inference. The Congressional Committees, in reporting the provisions enacted in 1934, merely stated*45 that "the practice of creating losses through transactions between members of a family and close corporations has been frequently utilized for avoiding the income tax," and that these provisions were proposed to "deny losses to be taken in the case of [such] sales" and "to close this loophole of tax avoidance." Similar language was used in reporting the 1937 provisions. Chairman Doughton of the Ways and Means Committee, in explaining the 1937 provisions to the House, spoke of "the artificial taking and establishment of losses where property was shuffled back and forth between various legal entities owned by the same persons or person," and stated that "these transactions seem to occur at moments remarkably opportune to the real party in interest in reducing his tax liability but, at the same time allowing him to keep substantial control of the assets being traded or exchanged."
We conclude that the purpose of
We are clear as to this purpose, too, *46 that its effectuation obviously had to be made independent of the manner in which an intra-group transfer was accomplished, * * *
[Fn. refs. omitted; emphasis supplied.]
Subsequently, the courts have rejected attempts to challenge the broad scope of
The main thrust of petitioner's argument is that the hostile relationship between himself and Marvin disqualified them as "brothers" within the meaning of
Petitioner has cited no authority indicating that he and Marvin are not "brothers" within the meaning of
We reject the petitioner's argument that
The petitioner also argues that the term "brother" requires not only a blood relationship, "but a finding of social or economic affinity as well." He contends that the rationale behind the cases disallowing a deduction *49 in similar situations is that the relationship between family members arises to some kind of unity of interest. He then argues that the record demonstrates "hostility" *189 which in turn demonstrates that the unity of interest does not exist. Again we disagree. First, this interpretation of the term "brother" is an unsupported conclusion. Second, petitioner has failed to carry his burden of showing a lack of family unity throughout these transactions. The record shows that the dispute between the brothers was handled by and between members and close friends of the family and that, when available, resort to litigation was avoided in order to protect the family business. Third, although the petitioner recognizes the rationale of Congress in implementing
Finally, the petitioner points out that*50 a "family hostility" exception to the attribution rules of
*190 In the Robin Haft Trust case this Court said that "we believe that in view of the Supreme Court's opinion in Davis, the petitioners' reliance upon Squier and Bradbury is misplaced, and we hold that the applicability of the attribution rules is not affected by the circumstances [family fight] which led to the redemption."
Regardless of whether our views or those of the First Circuit are accepted with respect to family hostility in the application of
We think it is significant that
In our judgment it would violate the intent Congress manifested in enacting
*191 Accordingly, for the reasons previously stated, we hold that no deductions for losses sustained from sales or exchanges of property, directly or indirectly, between brothers are allowable, irrespective of the existence of hostility between them. It therefore follows that the petitioner is not entitled to a long-term capital loss carryover to the year 1977.
To reflect the concessions made by*54 the respondent and our conclusion with respect to the disputed issue,
Decisions will be entered under Rule 155.
Footnotes
1. All section references herein are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, unless otherwise indicated.↩
2.
SEC. 267 . LOSSES, EXPENSES, AND INTEREST WITH RESPECT TO TRANSACTIONS BETWEEN RELATED TAXPAYERS.(a) Deductions Disallowed. -- No deduction shall be allowed --
(1) Losses. -- In respect of losses from sales or exchanges of property (other than losses in cases of distributions in corporate liquidations), directly or indirectly, between persons specified within any one of the paragraphs of subsection (b).
* * * *
(b) Relationships. -- The persons referred to in subsection (a) are:
(1) Members of a family, as defined in subsection (c)(4);
* * * *
(c) Constructive Ownership of Stock. -- For purposes of determining, in applying subsection (b), the ownership of stock --
* * * *
(2) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family;
* * * *
(4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and↩