Merrill v. United States

• Decision Date: 03 June 1952
• Docket Number: No. 49846.,49846.
• Citation: 105 F. Supp. 379,122 Ct. Cl. 566
• Parties: MERRILL v. UNITED STATES.
• Court: U.S. Claims Court

105 F. Supp. 379

122 Ct. Cl. 566

MERRILL v. UNITED STATES.

No. 49846.

United States Court of Claims.

June 3, 1952.

John J. Boland, New York City (Chadbourne, Hunt, Jaeckel & Brown, New York City, on the briefs), for plaintiff.

Joseph H. Sheppard, Washington, D. C. (Ellis N. Slack, Acting Asst. Atty. Gen., Andrew D. Sharpe, Washington, D. C., on the brief), for defendant.

Before JONES, Chief Judge, and LITTLETON, WHITAKER, MADDEN and HOWELL, Judges.

JONES, Chief Judge.

Plaintiff taxpayer is suing for a refund of taxes for the calendar years 1944 and 1945, in which he had a net income (including net capital gains) of $1,246,597.23, and $1,975,818.74, respectively. Section 12(g) of the Internal Revenue Code, 26 U.S.C.A. § 12(g), as constituted for the years in question, contained an effective tax rate limitation of 90 percent of the net income of the taxpayer, applicable to taxes imposed by sections 11 and 12. Recovery in this suit is dependent upon the application of section 12(g) to the alternative capital gains tax imposed by section 117(c) (2).

The following provisions of the Internal Revenue Code, 26 U.S.C.A. applicable to the taxable years 1944 and 1945, are involved in this case:

"Sec. 11. Normal tax on individuals. There shall be levied, collected, and paid for each taxable year upon the net income of every individual a normal tax of 3 per centum of the amount of the net income in excess of the credits against net income provided in section 25(a). For alternative tax which may be elected if adjusted gross income is less than $5,000, see Supplement T.

"Sec. 12. Surtax on individuals.

"(a) Definition of `surtax net income'. As used in this section the term `surtax net income' means the amount of the net income in excess of the credits against net income provided in section 25(b).

"(b) Rates of surtax. There shall be levied, collected, and paid for each taxable year upon the surtax net income of every individual the surtax shown in the following table:

Here are set out the rates of tax

"(c) Tax in case of capital gains or losses. For rate and computation of alternative tax in lieu of normal tax and surtax in the case of a capital gain or loss from the sale or exchange of capital assets held for more than 6 months, see section 117(c).

* * * * * *

"(g) Limitation on tax. The tax imposed by this section and section 11, computed without regard to the credits provided in sections 31, 32, and 35, shall in no event exceed in the aggregate 90 per centum of the net income of the taxpayer for the taxable year.

* * * * * *

"Sec. 117. Capital gains and losses.

* * * * * *

"(c) Alternative taxes.

* * * * * *

"(2) Other taxpayers. If for any taxable year the net long-term capital gain of any taxpayer (other than a corporation) exceeds the net short-term capital loss, there shall be levied, collected, and paid, in lieu of the tax imposed by sections 11 and 12, a tax determined as follows, if and only if such tax is less than the tax imposed by such sections:

"A partial tax shall first be computed upon the net income reduced by the amount of such excess, at the rates and in the manner as if this subsection had not been enacted, and the total tax shall be the partial tax plus 50 per centum of such excess. * * *"

Sections 11 and 12 imposed upon the net income of the individual taxpayer a normal tax and a surtax respectively. Section 117(c) (2) imposed an alternative tax "in lieu of the tax imposed by sections 11 and 12," if the alternative tax was less than the combined normal tax and surtax imposed by sections 11 and 12. The alternative tax imposed by section 117(c) (2) was available for any taxable year only to a taxpayer (other than a corporation) whose net long-term capital gains exceeded his net short-term capital losses for that year. Plaintiff met this requirement for the years 1944 and 1945.

Section 117(c) (2) provided for computation of the alternative tax as follows: the taxpayer would first reduce his net income by the amount by which his net long-term capital gains exceeded his net short-term capital losses. He would then compute a "partial tax" upon his net income so reduced.

By the terms of section 117(c) (2) this partial tax was to be computed "at the rates and in the manner as if this subsection 117(c) (2) had not been enacted." In other words by direction of section 117 (c) (2) it was then necessary to turn to sections 11 and 12 for the computation of the partial tax imposed by section 117(c) (2) upon the net income of the taxpayer reduced by the excess of his net long-term capital gains over his net short-term capital losses for the particular taxable year.

After computation of that partial tax, the taxpayer returned to section 117(c) (2) which then provided that his total alternative tax would be "the partial tax plus 50 per centum of such excess of net long-term capital gains over net short-term capital losses."

Thus sections 11 and 12 not only imposed the normal tax and surtax, but they also figured in the computation of the tax imposed by section 117(c) (2).

Section 12(g) provided that:

"The tax imposed by this section and section 11 * * * shall in no event exceed in the aggregate 90 per centum of the net income of the taxpayer for the taxable year."

It is plaintiff's contention where there is an alternative tax imposed by section 117(c) (2) that section 12(g) operates prior to the addition of the alternative partial tax to the capital gains tax, to limit the partial tax to 90 percent of the reduced or ordinary net income, i. e., of the figure exclusive of net capital gains taken as "net income" for the computation of the partial tax under sections 11 and 12.¹

Defendant concedes that section 12(g) is applicable to the computation of the alternative tax, but contends that it operates after the addition of the partial tax to the capital gains tax, to limit the total alternative tax to 90 percent of the total net income.

To support its position defendant points out that under plaintiff's contention his tax "would be only 89.5625 percent of his net income (for 1944) and there is no provision in the Internal Revenue Code for that rate of tax." This argument, however, ignores the fact that the rate finally arrived at is not a single rate expressly to be found in the Code but is a computed resultant of three separate rates (sections 11, 12, and 117) which are found in the Code and which must be applied under defendant's method of computation just as well as under the plaintiff's.

Defendant further points out that under plaintiff's contention section 12(g) would "be used as a tax reduction provision for all taxpayers whose actual net income included net capital gains" and that such would be completely contrary to Congressional intent.

In the first place, however, under plaintiff's contention section 12(g) would actually operate to reduce the tax only where a taxpayer's income would be in such a high bracket that the partial tax levied by section 117(c) (2) (and computed under sections 11 and 12) would exceed 90 percent of the taxpayer's net income exclusive of net capital gains. In the second place section 12(g) was intended as a relief measure for high-bracket income taxpayers, without regard to whether or not their income included net capital gains. Defendant's conclusion that such a result is improper in the particular instance where the alternative tax does not exceed 90 percent of his total net income is an assumption of the very point in issue. And the legislative history, as we shall point out later, is at best inconclusive as to the intended operation of section 12(g) upon the computation of the alternative tax imposed by section 117(c) (2).

Defendant further argues that —

"The sections of the Code which impose the tax here involved are section 11 (normal tax) and section 12(b) (surtax), and it is only after the tax imposed by those two sections has been constructed that section 12(g) is even taken into consideration and then only where the tax computed under the tax imposing sections exceeds ninety percent of the taxpayer's net income."

The fundamental fallacy in this argument is that the tax involved here is the alternative tax, which is not imposed by sections 11 and 12 as defendant states, but by section 117(c) (2) in lieu of the tax imposed by sections 11 and 12.

Defendant's statement overlooks the fact that there are three separate tax-imposing sections involved here — sections 11, 12, and 117 — and that section 12(g) by its very terms is a limitation on "the tax imposed by this section 12 and section 11." Section 12(g) is not independently operative to place any limitation on the tax imposed by section 117(c) (2). Section 12(g) is applicable to a computation of tax imposed by section 117 only to the extent that section 117 directs, and then only as an integral part of sections 11 and 12. Section 117 directs in effect that sections 11 and 12 be applied in the computation of the partial alternative tax, and section 12(g) is consequently applicable only to the partial tax computation. No justification appears for any other application of its provisions in this case.

Defendant also asserts that the term "net income" as used in section 12(g) would be deprived of its usual and generally accepted meaning if section 12(g) is to be applied to ordinary net income or net income as reduced by the excess of net long-term capital gains over net short-term capital losses under the section 117 partial tax. It must be remembered, however, that section 12(g) is an integral part of section 12, not an independant unrelated provision. The term "net income" as used in section 12(g) has the same meaning as used elsewhere in sections 11 and 12. Thus where sections 11 and 12 are made operative by section 117(c) (2) for purposes of computation of the partial tax, section 117(c) (2) says in effect that "net income" as used in sections 11 and 12 shall be considered to mean "net income exclusive of...