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All "property" is "capital assets," with three exceptions. The first is stock in trade or other property of a kind which would properly be included in the inventory; next comes property held primarily for sale to customers; and finally, property used in the trade or business of a character which is subject to allowance for depreciation. In the face of this language, although it may be true that a "stock in trade," taken by itself, should be treated as a "universitas facti," by no possibility can a whole business be so treated; and the same is true as to any property within the other exceptions. Congress plainly did mean to comminute the elements of a business; plainly it did not regard the whole as "capital assets."
Plaintiff Williams, and one, Reynolds, had for many years been engaged in a hardware business. The parties formed a partnership, of which plaintiff was entitled to two-thirds of the profits. The business was carried on until Reynolds’ death. Subsequently, plaintiff sold the business, where he suffered a loss upon his original two-thirds of the business. However, plaintiff made a small gain upon the one-third which he had bought from Reynolds' executrix. In his income tax return, plaintiff entered both as items of “ordinary income,” and not as transactions in capital assets. The Commissioner of Internal Revenue disallowed the same, and recomputed the tax accordingly. Plaintiff paid the deficiency and sued to recover it in the instant action. Plaintiff also sought to deduct from his income tax the amounts he paid to attorneys to secure the refund of the taxes paid. The lower court found that the business was a capital asset and the attorney costs were not tax deductible.
Was the business in question a capital asset?
The court reversed the judgment of the lower court, finding that Congress plainly did not intend a business to be regarded, as a whole, as a capital asset, because its stock in trade, property held for sale to customers, and depreciable business property were not classifiable as capital assets. In this case, plaintiff was selling fixtures, depreciable goodwill, and receivables about which defendant Collector of Internal Revenue had failed to argue their lack of depreciability. The court also held that a recent controlling decision established that attorney expenses were deductible.