*1587 1. NET LOSS - HUSBAND AND WIFE. Where petitioner and his wife filed joint returns for 1923 and 1924 and separate returns for 1925, the business net loss of petitioner for 1923 should be computed in accordance with the rule laid down in Samuel G. Adams,19 B.T.A. 781">19 B.T.A. 781.
2. Id. The petitioner, filing a separate return in 1925, is entitled to bring forward and use as a deduction in determining his net income for 1925, the remainder of his net loss for 1923 which was not used in offsetting the income of petitioner and his wife shown on the single joint return which they filed for 1924. Kaiwiki Sugar Co., Ltd.,21 B.T.A. 997">21 B.T.A. 997; Farmers & Merchants Bank,21 B.T.A. 1383">21 B.T.A. 1383, followed.
*834 In this proceeding the petitioner seeks redetermination of a deficiency in income tax of $40,690.98 for the year 1925, only $9,389.44 of which is in controversy. The only issue is the amount of petitioner's statutory net loss for the year 1923*1588 allowable as a deduction in computing net taxable income for the year 1925. Petitioner and his wife filed joint returns for 1923 and 1924, and neither paid any tax for those years. For 1925 they filed separate returns and in computing the remaining part of the net loss of petitioner for 1923 which he might bring forward and have allowed as a deduction in computing his net income for 1925, the respondent arrived at a figure of $25,765.07 and used that as a deduction, whereas petitioner contends he is entitled to bring forward $69,490.34 of his statutory net loss for 1923 and use it as a deduction in determining his 1925 net income. At the hearing the respondent amended his answer and asked that the deficiency be increased on the ground that in computing petitioner's net income for 1925, respondent allowed as a deduction a statutory net loss of $25,765.07, whereas he should have allowed a deduction of only $13,222.17, as representing the correct allowance for such statutory net loss brought forward from 1923. Also, at the hearing, respondent was granted leave to amend his answer so as to allege in the alternative that petitioner was not entitled to bring forward any statutory net*1589 loss from 1923 and that respondent erred in allowing as a deduction the sum of $25,765.07 for such purpose and that petitioner's net income for 1925, as shown in the deficiency notice should be increased by the $25,765.07 erroneously allowed and that the deficiency should be increased accordingly.
FINDINGS OF FACT.
Facts were stipulated as follows:
William H. Shelmerdine is an individual with his residence at 269 West Walnut Lane, Germantown, Philadelphia, Pennsylvania, and his place of business at 421 Chestnut Street, Philadelphia, Pennsylvania.
The notice of deficiency (a copy of which was attached to the petition and marked Exhibit A) was mailed to the petitioner on October 18, 1927.
The deficiency shown by the Commissioner's letter dated October 18, 1927, is $40,690.98, and the total tax liability shown is $55,613.56. The tax previously assessed is $14,922.58.
For the calendar year 1923 the petitioner, William H. Shelmerdine, and his wife, Susannah R. Shelmerdine, filed with the proper Collector a joint return of income. The original and amended returns for such year will be introduced in evidence at the time of the hearing before the Board.
The correct loss*1590 of petitioner and his wife for the year 1923 on the basis of the joint return was $83,925.21. The separate items of income and deductions *835 for 1923 attributable to William H. Shelmerdine and Susannah R. Shelmerdine, respectively, are indicated in the following tabulation:
| Wm. H. Shelmerdine | Susannah R. Shelmerdine | |
| Income: | ||
| Directors' fees | * $300.00 | |
| Interest | 9,194.58 | * $2,100.90 |
| Bad debts recovered | * 150.43 | |
| Dividends | 129,475.04 | * 9,555.08 |
| Profit on sale of farm | * 9,503.75 | |
| $139,120.05 | $21,159.73 | |
| Deductions: | ||
| Interest paid | $95,960.86 | |
| Taxes paid | * 1,249.80 | |
| Other deductions | 7,718.98 | |
| Loss on rents | * $1,347.21 | |
| Loss on sale of | 128,236.02 | * 9,692.12 |
| securities | $233,165.66 | $11,039.33 |
| Income less deductions | $94,045.61 (loss) | $10,120.40 |
| Combined income | $83,925.21 (loss) | |
| less deductions |
Amounts in the above tabulation followed by "*" do not relate to the operation of a trade or business regularly carried on within the meaning of Section 204(a) of the Revenue Act of 1921, and Section 206(a) of the Revenue Acts of 1924 and 1926. The remaining amounts in the above tabulation (i.e., those not followed by "*" do*1591 relate to the operation of a trade or business regularly carried on, within the meaning of said sections. The said trade or business was regularly carried on during the said taxable year 1923 by Wm. H. Shelmerdine alone and not by Wm. H. Shelmerdine and Susannah R. Shelmerdine jointly.
For the calendar year 1924 the petitioner, William H. Shelmerdine, and his wife, Susannah R. Shelmerdine, filed with the proper Collector a joint return of income. Said return will be introduced in evidence at the time of the hearing before the Board. The correct net income of petitioner and his wife for the year 1924 on the basis of a joint return (excluding any deduction for net loss for 1923) was $70,703.09. The separate items of income and deductions for 1924 attributable to petitioner and his wife, respectively, are indicated in the following tabulation:
| Wm. H. Shelmerdine | Susannah R. Shelmerdine | |
| Income: | ||
| Directors' fees | $300.00 | |
| Interest | 9,058.28 | $3,388.72 |
| Profit - Sale of securities | 26,873.21 | |
| Dividends (Stock of | 168,064.25 | 9,759.22 |
| domestic corporations) | ||
| Capital net gain (Sale | 7,797.92 | |
| of securities) | ||
| $177,422.53 | $47,819.07 | |
| Deductions: | ||
| Rents (net) | $871.88 | |
| Loss on sale of securities | $26,728.91 | |
| Interest | 112,378.32 | |
| Taxes | 1,251.44 | |
| Bad debts | 10,977.22 | |
| Other deductions | 2,330.74 | |
| $153,666.63 | $871.88 | |
| Income less deductions | $23,755.90 | $46,947.19 |
| Combined income less | $70,703.09 | |
| deductions |
*1592 *836 Neither petitioner nor his wife, separately or jointly, paid any tax on the basis of the returns filed for 1923 or 1924 and the Commissioner has accepted said returns in so far as they reflect no tax liability.
The amount of net loss allowed by the respondent in his deficiency notice for the year 1925 as a statutory net loss deductible in computing petitioner's 1925 net income is $25,765.07, and the amount of such statutory net loss now claimed by petitioner on the basis of this stipulation as deductible from his income in 1925 is $69,490.34, instead of $72,212.26 as claimed in his petition.
In addition to the facts stipulated, we find the following:
For the year 1925 the petitioner filed a separate return of income.
On such return petitioner, in computing his net income, took as a deduction what he considered as the excess of his 1923 statutory net loss over his net income for the year 1924, computed without such deduction. The amount thus deducted and the amount claimed as a deduction in his petition were incorrectly computed, however, and the amount as recomputed by petitioner and now claimed, as stated in paragraph 8 of the stipulation, is $69,490.34. *1593 This amount is computed by petitioner as follows:
| Statutory net loss 1923 (as now claimed by petitioner) | $93,246.24 |
| Petitioner's net income for 1924 computed | 23,755.90 |
| without deduction for 1923 net loss | |
| Excess claimed as a deduction in computing income for 1925 | 69,490.34 |
In the deficiency notice respondent, in explanation of his denial of the statutory net loss claimed by petitioner as a deduction on his 1925 return and of his action in reducing the amount claimed by petitioner to $25,765.07, said:
A joint return was filed by yourself and wife in 1924 and your loss was applied against her net income of $46,947.19, resulting in no tax liability. You contend that this fact should not deprive you of the right to deduct the entire net loss against your income for 1925 for the reason that your wife had merely taken advantage of the privilege granted by the Revenue Act of 1924 in filing a joint return and benefiting from the excess deductions on your return. It is further contended that the filing of a joint return in 1924 did not make you and your wife one taxpayer as defined in the Revenue Act, as the Revenue Act speaks of individuals and not taxpayers*1594 and hence that Section 204 of the Revenue Act of 1924 as applied to your case means only yourself and not a combined return of yourself and wife.
This office is unable to concede your contentions. When a husband and wife file a joint return of income such return is treated as the return of a taxable unit and the income disclosed by the return is subject to both normal and surtax as though the return was that of a single individual. (See Solicitor's Opinion 90, Cumulative Bulletin 4, Page 236 and IT-1997 Cumulative Bulletin III-1, page 149.) In view of the fact that your wife benefited from your net loss in 1924 as a result of which she paid no tax on an income of $46,947.19, you cannot again benefit by the said net loss on your 1925 return in which year separate returns were filed.
*837 OPINION.
BLACK: Upon the facts which have been detailed in our findings of fact, the petitioner lays down the following propositions:
I. The net loss should be computed solely on the income and deductions of the petitioner.(a) The fact that in the year of the loss, i.e., 1923, the wife of the petitioner filed her return as a joint return with her husband does not change the*1595 method of computation prescribed in Section 204 so as to include her income and deductions in the computation.
(b) The method contended for by the petitioner does not result in a double deduction and is the result called for by the law and the intention of Congress.
II. The proper statutory net loss of the petitioner for 1923 is $93,246.24, computed in accordance with the provisions of Section 204(a) of the Revenue Act of 1921. III. Under the provisions of Sections 206(f) and (b) of the Revenue Act of 1924 the above net loss of $93,246.24 should be carried forward to 1924. IV. Under the provisions of Sections 204(e) and (b) of the Revenue Act of 1926, the amount of the petitioner's statutory net loss to be carried forward to the year 1925 is $69,940.34.From these propositions, petitioner in his pleadings and brief raises certain questions, which we will state and rule upon in their numerical order.
1. How shall a net loss be computed where it is sustained solely in the business of the husband when the husband and his wife file a joint return?
(a) Shall it be determined solely from the income and deductions of the taxpayer sustaining the loss, i.e., the husband" *1596 or,
(b) Shall it be determined from the income and deductions of both the husband and wife in spite of the fact that the wife had no connection with the business?
The Board has already passed on this question in , and our decision in that case has the effect of answering in the negative petitioner's question 1(a) and in the affirmative petitioner's question 1(b). We there said:
* * * Certainly, when it is considered that an election to file joint or separate returns gives to a husband and wife the privilege of adopting the method for a given year which is most advantageous to them, they should not be allowed to use such joint return for the purpose of fixing taxable net income, which may be advantageous to them, and then be allowed to disregard the joint return when it would be less advantageous to determine the "net loss" on the basis of such joint return. We find no statutory provision that would require such a result. On the contrary, we are of the opinion that when these petitioners elected to file joint returns they thereby elected to have all determinations of income and losses (for tax purposes) determined on the basis*1597 of these joint returns.
What would be the solution where the wife had sustained the loss, or where both the husband and wife had losses, and the joint returns in both instances had been filed in the name of the husband, are not questions now before us. Suffice it to say that in the situation now presented the individuals now seeking *838 the benefit of the "net loss" provisions are the only individuals involved in the joint returns who sustained losses, and the joint returns were filed by them. Under such circumstances we are of the opinion that in determining the "net loss" which each is permitted to carry forward and use as a deduction in computing net income for the subsequent year on a separate return, such determination must be made on the basis of a joint return which would require the business loss of the husbands to be reduced by the nontaxable income of the respective wives.
The second question raised by petitioner is stated as follows:
2. How shall such net loss be used when carried forward to the second year, in which year the husband and wife again filed a joint return?
(a) Shall the net loss be used in computing the net income of the husband (i.e. *1598 , the petitioner here) and the wife's income rendered nontaxable by being offset against the resulting loss? or,
(b) Shall the net loss be offset against the combined income of the husband and wife?
We think the answer to this question has also been given by us in As we pointed out in that case, when the husband and wife file a single joint return for a given taxable year, all their items of income and deductions are combined on the one single joint return and the resulting net income, if there is any, is taxable as one income. In the instant case, it has been stipulated that for the year 1924 the petitioner and his wife, Susannah R. Shelmerdine, filed a single joint return and that the correct net income of petitioner and his wife for the year 1924, on the basis of a joint return (excluding any deduction for net loss for 1923) was $70,703.09. However, the statute gives petitioner the right to bring forward any net loss incurred in the prior year in his trade or business and use it as a deduction in determining petitioner's net income for 1924. When effect is given to this statutory provision, it will be found that all of the $70,703.09*1599 income of petitioner and his wife for 1924 is offset by the deduction and petitioner still has some of the net loss for 1923 which he may carry forward into 1925 and use as a deduction in determining his net income for 1925.
Petitioner's third question is as follows:
3. How shall the amount of loss applicable to the third year (the taxable year here in question) be determined?
(a) Shall the petitioner use the amount of his 1923 net loss less his income for 1924 and apply the balance in computing his 1925 net income? or,
(b) Shall the petitioner use his 1923 net loss, less his income and that of his wife for 1924, and apply the balance in computing his 1925 net income? or,
(c) Does he lose the balance of his 1923 net loss in computing his 1925 net income because he filed a single return rather than a joint return for that year?
We have already answered question 3(a) in the negative in The effect of that decision was to say that the income of husband and wife filing a joint return is treated *839 as one consolidated income, and in arriving at that income petitioner's net loss for 1923 is used as a deduction against both*1600 incomes, instead of deducting such net loss from petitioner's gross income alone and carrying forward the remainder to use as a deduction in determining petitioner's net income for 1925.
To the same effect is . Of course, the situation of affiliated corporations combining their incomes and deductions in one consolidated return is not identical with the situation of a husband and wife combining their incomes and deductions in a single joint return, yet we think the situations are so similar as to make cases like Kaiwiki Sugar Co. in point.
To question 3(b) we answer, yes. That is the method which we consider we have already approved in , and Kaiwiki Sugar Co. The statutory net loss of petitioner in 1923 should be used as a deduction in computing the consolidated net income of petitioner and his wife in 1924, and the balance of such statutory net loss not used in offsetting income in 1924 should be carried forward to 1925.
To question 3(c) we answer, no. We must necessarily answer no to this question because we have answered yes to question 3(b). The answer to question 3(c) *1601 is made necessary by the fact that respondent at the hearing amended his answer so as to allege that, although in his deficiency notice he allowed petitioner a statutory net loss of $25,756.07 brought over from 1923, this was error, because such statutory net loss relates to a year when a single joint return was filed by husband and wife, and that petitioner filed a separate return in 1925, and that none of the statutory net loss can be brought over from a year when a single joint return was filed and used as a deduction in a year when petitioner files a separate return. Respondent moved that the deficiency be increased accordingly.
In , the Commissioner made the contention that the petitioner was not entitled to deduct its own statutory net loss in 1924, in determining its net income for 1925, because in 1924 it had filed a consolidated return with an affiliated association, whereas in 1925, it had filed a separate return.
We denied the Commissioner's contention and held that petitioner was entitled to bring forward its own statutory loss incurred in 1924 (none of it having been used to offset the income of its affiliated*1602 association because such association had no income) and use it as a deduction in determining petitioner's net income for 1925.
Following the principles laid down in ;, and ,*840 we hold that petitioner is entitled to bring forward into 1925, and use as a deduction in determining his net income for that year, that part of the statutory net loss of 1923 computed under the rule which we laid down in , which remains after using such statutory net loss as a deduction in determining the net income of petitioner and his wife under the single joint return filed in 1924.
Decision will be entered under Rule 50.