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Whitney v. Commissioner of Internal Revenue

October 3, 1934

WHITNEY
v.
COMMISSIONER OF INTERNAL REVENUE



Petition for Review from the United States Board of Tax Appeals.

Author: Davis

Before DAVIS, Circuit Judge, and CLARK and JOHNSON, District Judges.

DAVIS, Circuit Judge.

This petition for review involves a deficiency in income taxes for the year 1927.The questions here are whether or not the petitioner may deduct from his gross income certain dues and contributions paid, as a member, to the New York Stock Exchange and losses sustained in operating a racing stable.

During 1927, the petitioner was a partner in the brokerage firm of Richard Whitney & Co. He and two other partners were members of the New York Stock Exchange. The rules of the Exchange required individuals to own seats, but permitted an individual to assign his seat to his firm for its use. This was done by the petitioner and his partners and, under the partnership agreement, the firm paid all the dues and assessments on the seats owned by the firm members.

In 1927, Richard Whitney & Co. paid a total of $1,981.86 to the Exchange on behalf of the three seats held by its members. Of this amount $1,019.83 was the proportion charged to the petitioner by the partnership under the agreement that all charges of the Exchange on members' seats should be paid by the partnership. It should be noted that this sum charged to the petitioner does not represent the dues and assessments on the seat owned by him, but the share chargeable to him in proportion to his interest in the firm. That is so for the reason that members of partnerships are assessed for income tax on their distributive shares of the net income of the partnership. Section 218, Revenue Act 1926 (26 USCA § 959).

From the record it appears that the Stock Exchange charged the petitioner a total of $970 for his seat in 1927. That amount represents $800 for dues and $170 for contributions to the Gratuity Fund of the Exchange.

The constitution of the Stock Exchange requires each member to pay dues, not to exceed $1,000 annually, to be used for current expenses or capital investment as determined by the Governing Committee of the Exchange or to be subject to suspension or expulsion. The record shows that the books of the Exchange treated the dues paid by the petitioner as capital contributions.

The constitution of the Exchange provides that each member shall contribute $10 to the family of a deceased member. That is called the Gratuity Fund. During 1927, the petitioner was required to make payments of $170 to the fund, but his bills from the Exchange showed a credit in the fund of $79.67 for some reason not appearing, and he therefore made net payments on this account of only $90.33.

The Commissioner and the Board of Tax Appeals held the petitioner accountable in his return for the sum of $1,019.83. The record is not entirely clear, but so far as we understand it, the petitioner's seat was assessed $800 for dues and $170 for contributions to the Gratuity Fund.

The petitioner contends that he is entitled to a deduction of $1,019.83 for ordinary and necessary expenses paid during the taxable year in carrying on his trade or business as a broker, "including * * * rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title." Section 214 (a) (1), Revenue Act 1926, 26 USCA § 955 (a) (1).

The sum of $1,019.83, which the petitioner claims as a deduction, represents the proportion chargeable to him of the payments made in 1927 by the partnership for the seats assigned to it by the partners. The petitioner, himself, was obligated to the Exchange in 1927 for his own seat for a total of $970, of which $800 was allocated to his seat and $170 to the Gratuity Fund. The difference between the sum charged to him by the partnership and the total of his obligations to the Exchange is $49.83. He is entitled to deduct this difference from his gross income as an ordinary and necessary expense of carrying on business for 1927.

But the charges against his membership of $970 stand in a different light. The membership was not partnership property. It belonged to the petitioner and was merely used by the partnership.

The petitioner contends that it is immaterial as to what the Stock Exchange does with the dues under section 214 ...


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