The question decisive of this case is whether, under §§ 23 and 101 of the Revenue Act of 1928, 45 Stat. 791, 799, 811, 26 U.S.C.A. §§ 23, 101, upon a liquidation of a corporation, stockholders' losses from their investment in its stock held for more than two years are ordinary losses deductible in full from gross income, or capital losses, 12 1/2% of which is deductible under § 101 from the tax as computed without regard to such losses.
The decedent in each of these cases made an investment represented by shares of stock in a corporation. Upon complete liquidation of the corporation, more than two years later, the total liquidating dividends on the stock amounted to less than the cost of the investment. In their income tax returns for 1929 petitioners deducted from gross income the losses of their respective decedents. The commissioner ruled that the losses were capital net losses of which only 12 1/2% was deductible, as provided by § 101, and he accordingly found deficiencies, which petitioners paid.
In the present suits, brought by petitioners in the Court of Claims to recover the payments of the deficiencies as overpayments of 1929 tax, recovery was denied. 21 F.Supp. 361. We granted certiorari, 305 U.S. 581, 59 S.Ct. 69, 83 L.Ed. --, to resolve a conflict between the decision below and that of the Circuit Court of Appeals for the Ninth Circuit in Chester N. Weaver Co. v. Commissioner, 97 F.2d 31, certiorari granted, 305 U.S. 585, 59 S.Ct. 95, 83 L.Ed. --, which arose under related sections of the 1932 Revenue Act.
Section 23(e) of the 1928 Act, 26 U.S.C.A. § 23, declares that 'In computing net income there shall be allowed as deductions * * * losses sustained during the taxable year * * * (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *.' And subsection (g), 45 Stat. 800, provides: 'The basis for determining the amount of deduction for losses sustained * * * shall be the same as is provided in section 113 for determining the gain or loss from the sale or other disposition of property.'
These provisions of § 23 are qualified and restricted by § 101, which prescribes rates of tax applicable to capital net gains and the extent to which capital net losses are deductible in arriving at net taxable income. Section 101(c)(1) and (2) of the Revenue Act of 1928, 26 U.S.C.A. § 101, defines 'capital gain' as a 'gain from the sale or exchange of capital assets' and 'capital loss' as a 'deductible loss resulting from the sale or exchange of capital assets.' Section 101(c)(3) and (4), 26 U.S.C.A. § 101, declares: "Capital deductions' means such deductions as are allowed by section 23 for the purpose of computing net income, and are properly allocable to or chargeable against capital assets sold or exchanged during the taxable year * * *;' and " ordinary deductions' means the deductions allowed by section 23 other than capital losses and capital deductions.' By § 101(c)(5) and (6), 26 U.S.C.A. § 101, a 'capital net gain' or 'loss', results from the sale of 'capital assets', which are defined by § 101(c)(8), 26 U.S.C.A. § 101, as 'property held by the taxpayer for more than two years', not including 'stock in trade * * * or other property' held by the taxpayer 'primarily for sale in the course of his trade or business.'
Sections 23 and 101 place capital gains and losses as thus defined on a different basis from other types of gains and losses for the purpose of computing the tax. By § 101(a), 26 U.S.C.A. § 101 a capital net gain as defined by § 101(c)(5) may, at the option of the taxpayer, be assessed at the rate of 12 1/2% in lieu of all other taxes, and by § 101(b), 26 U.S.C.A. § 101, a capital net loss, defined by § 101(6) as 'the excess of the sum of the capital losses plus the capital deductions over the total amount of capital gain,' may be deducted, only to the extent of 12 1/2%, from the tax as computed without regard to the capital net loss. These sections, read together with §§ 12, 21 and 22, 26 U.S.C.A. §§ 12, 21, 22, presently to be discussed, thus provide a complete scheme for ascertaining capital gains and losses from the sale or exchange of property and for bringing them into the computation of the tax on net income, a scheme distinct from that applicable to other types of gains and losses resulting in ordinary net income, including those from sales and exchanges of property not capital assets.