McWilliams v. Commissioner
331 U.S. 694 (1947)

  • McWilliams managed the large independent estate of his wife, as well as his own. On a number of occasions, McWilliams sold stock from one account and on the very same say bought the same amount of stock for the other account at the same price.
    • Even though both transactions were made independently on the open market, effectively, McWilliams was just moving the shares from one account to the other.
  • When he filed his taxes, McWilliams claimed losses from the sale of shares and deducted them from gross income. The IRS disagreed.
    • The IRS argued that the tax code (then 26 U.S.C. 24(b), now 26 U.S.C. 267) prohibited deductions for losses from sales or exchanges or property, directly or indirectly, between members of a family.
    • McWilliams argued that the shares sold by one account were not the same exact shares bought by the other account, so 24(b) didn't apply. In addition, the sale wasn't made "between" Mr. and Mrs. McWilliams, they were two totally independent transactions.
      • McWilliams noted that both the sale and purchase were through a public market and to separate individuals.
  • The Tax Court found for McWilliams. The IRS appealed.
  • The Appellate Court reversed. McWilliams appealed.
  • The US Supreme Court affirmed.
    • The US Supreme Court found that the purpose of 24(b) was to stop taxpayers from being able realize tax losses on investments which they continue to own.
    • The Court found that Congress did not intend to leave a loophole that would make 24(b) inapplicable to stocks or other fungible property.
      • Fungible property is the sort of thing where one is exactly like the other. Even though the stock certificates McWilliams bought had different serial numbers than the ones he sold, effectively they were the same exact thing.
    • The Court looked to the specific wording on 24(b) and found that is prohibited inter-family sales either "directly or indirectly." The Court concluded that McWilliams' actions were an "indirect" sale.
  • Basically, 267 kicks in even if the sale isn't directly between the taxpayer and a family member. The important thing is whether the property was effectively transferred between the family members.