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in “taxable income”, for many purposes capital gains and losses
are treated differently from other categories of income.
It is apparent from the foregoing that over the decades the
Congress has chosen to treat capital gains and losses differently
from other categories of income; this category of income has been
only partially integrated into the section 1 ground rules.
C. “Income That Does Not Exist”
Petitioners claim that the effect of the $3,000 loss
limitation is to tax them on “income that does not exist.” They
are mistaken. Petitioners are being taxed under section 1 only
on the aggregate of the other categories of income that they in
fact realized, recognized, and reported--their income that does
exist. Supra table 1.
The tax treatment of capital losses has varied over the
years. As discussed in Davis v. United States, 87 F.2d 323 (2d
Cir. 1937), section 23(r) of the Revenue Act of 1932, ch. 209, 47
Stat. 169, 183, allowed losses from the sale or exchange of
stocks and bonds held for less than 2 years only to the extent of
gains from the sale of such securities. The taxpayer in Davis
had $13,285 of what we now would call short-term capital losses,
which was greater than the amount of his net taxable income. 87
F.2d at 324. The taxpayer contended that, as a result, he did
not have net income for the taxable year, so that his “net
taxable income” was not income, and thus the tax on his net
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