## Facts

- Kenneth David Perry and Linda Ruth Perry filed joint federal income tax returns for 2001 and 2003 reporting long-term capital losses of $9,256.63 (2001) and $60,641.96 (2003).
- For each year, the Internal Revenue Code permitted only a $3,000 deduction of net capital loss against ordinary income for individual taxpayers, with the remaining loss carried forward to later years.
- The Perrys claimed capital-loss deductions exceeding the $3,000 annual limitation.
- The Commissioner of Internal Revenue issued notices of deficiency determining individual income-tax deficiencies of $2,465 for 2001 and $21,233.37 for 2003, based on limiting the deductible net capital loss to $3,000 for each year and making related computational adjustments.
- Kenneth Perry argued that denying a current deduction for the full amount of recognized capital losses caused tax to be imposed on income that “did not exist.”
- Perry contended that, because the limitation prevented full offset of capital losses against other income, the resulting tax was not a constitutionally valid “income tax” under the Sixteenth Amendment and would require apportionment as a direct tax.
- The Commissioner maintained that the Perrys were taxed only on income that was realized, recognized, and reported, and that Congress may limit deductions, including limiting the current deductibility of capital losses while allowing carryovers.

## Issues

1. Whether I.R.C. § 1211(b) limited the Perrys’ deduction for net capital losses to $3,000 for 2001 and 2003 (with any excess governed by carryover rules).
2. Whether the $3,000 limitation on net capital-loss deductions for individuals violated the Sixteenth Amendment by allegedly taxing “non-existent” income or converting the tax into a direct tax requiring apportionment.

## Decision

- The Tax Court sustained the Commissioner’s deficiency determinations for 2001 and 2003.
- The court held that I.R.C. § 1211(b) limited the Perrys’ deductible net capital loss to $3,000 in each year, with any remaining loss available only through carryover treatment.
- The court rejected Perry’s constitutional arguments, holding that Congress may restrict deductions and that the limitation on capital-loss deductions does not make the federal income tax unconstitutional under the Sixteenth Amendment.

## Legal Principles

- I.R.C. § 1211(b) limits an individual’s current deduction of net capital loss against ordinary income to $3,000 per taxable year.
- Excess net capital losses are not currently deductible beyond the statutory cap; they are addressed through the capital-loss carryover rules (generally under I.R.C. § 1212).
- Deductions are allowed only to the extent Congress provides; Congress may set conditions, limits, and timing rules for deducting losses.
- A statutory limit on deductions, including limits on capital-loss offsets, does not transform an income tax into an unapportioned direct tax and does not violate the Sixteenth Amendment.

## Conclusion

Perry v. Commissioner upheld the Commissioner’s deficiency determinations for 2001 and 2003 by applying the $3,000 annual limit on individuals’ net capital-loss deductions and rejecting the taxpayers’ claim that the limit unconstitutionally taxed “non-existent” income or required apportionment under the Sixteenth Amendment.


Perry v. Commissioner, T.C. Memo 2006-77, 91 T.C.M. 1031 (2006)