## Facts

- John P. McWilliams managed both his own investments and his wife’s substantial separate estate; the spouses filed separate federal income tax returns.
- In 1940–1941, McWilliams instructed a broker to sell certain stocks from one spouse’s account and, at about the same time and price, buy the same number of shares of the same stocks for the other spouse’s account.
- McWilliams told the broker his purpose was to establish tax losses.
- The sales and purchases were executed on a stock exchange with unknown third-party counterparties; the purchasing spouse received different stock certificates than those sold by the other spouse.
- The spouses claimed the resulting losses as deductions; the Commissioner disallowed them under Internal Revenue Code § 24(b), which denies deductions for losses from sales or exchanges of property, directly or indirectly, between family members.
- The Tax Court allowed the deductions; the Sixth Circuit reversed; the Supreme Court granted review due to a circuit conflict and affirmed the Sixth Circuit.

## Issues

1. Whether coordinated exchange trades in which one spouse sells stock and the other spouse buys the same stock in the same quantities at about the same time and price are “sales or exchanges … directly or indirectly … between members of a family” under § 24(b).
2. Whether execution through a public exchange with anonymous counterparties and different certificates removes the transactions from § 24(b)’s loss-disallowance rule.

## Decision

- The Supreme Court affirmed the judgment disallowing the deductions.
- The Court held that § 24(b) applies to these coordinated spouse-to-spouse transactions even though each leg was executed on an exchange with unknown counterparties.
- Losses realized on such sales are nondeductible because the transactions are indirect intra-family sales or exchanges within § 24(b).

## Legal Principles

- § 24(b) is aimed at preventing taxpayers from selecting the timing of loss recognition through intra-family transfers that, in practical effect, keep the family’s investment position substantially unchanged.
- The statutory phrase “directly or indirectly” is read broadly and is not limited to direct transfers between family members or to situations where the identical property units (such as specific certificates) pass between them.
- Use of intermediaries or public-market mechanisms does not avoid related-party loss-disallowance rules when the transactions are coordinated to shift substantially identical positions within a family.
- § 24(b) operates as a categorical disallowance for covered related-party losses and is not conditioned on case-by-case inquiries into “good faith” or formal title-passing typical of earlier law.

## Conclusion

Coordinated husband-and-wife exchange trades designed to generate losses while shifting substantially identical stock positions within the family produce nondeductible losses under § 24(b), even when executed through a public market with anonymous counterparties and different certificates.


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