Pleasants v. United States, 43278.

• Decision Date: 04 April 1938
• Docket Number: No. 43278.,43278.
• Citation: 22 F. Supp. 964,86 Ct. Cl. 679
• Parties: PLEASANTS v. UNITED STATES.
• Court: U.S. Claims Court

22 F. Supp. 964

86 Ct. Cl. 679

PLEASANTS v. UNITED STATES.

No. 43278.

Court of Claims.

April 4, 1938.

COPYRIGHT MATERIAL OMITTED

Frederick Schwertner, of Washington, D. C. (Delafield, Thorne & Marsh, of New York City, Lowenhaupt, Waite & Stolar, of St. Louis, Mo., George H. Warrington, of Cincinnati, Ohio, and Wright & Rundle, of Pittsburgh, Pa., on the brief), for plaintiff.

Frederick E. S. Morrison, of Philadelphia, Pa. (Drinker, Biddle & Reath, of Philadelphia, Pa., on the brief), amicus curiæ.

John A. Rees, of Washington, D. C., and James W. Morris, Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D. C., on the brief), for the United States.

Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.

LITTLETON, Judge.

All of the sections hereinafter mentioned are found in the Revenue Act of 1932, unless otherwise stated. Section 23 (n), 26 U.S.C.A. § 23(n) and note, relating to charitable contributions, which is in substance the same as the provisions covering that subject incorporated in all the revenue acts beginning with section 1201(2) of the Revenue Act of October 3, 1917, 40 Stat. 330 provides as follows:

"In computing net income there shall be allowed as deductions: * * *

"(n) Charitable and Other Contributions. — In the case of an individual, contributions or gifts made within the taxable year to or for the use of: * * * (2) any corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual; * * * to an amount which in all the above cases combined does not exceed 15 per centum of the taxpayer's net income as computed without the benefit of this subsection."

Section 21, 26 U.S.C.A. § 21 and note, provides that the "`Net income' means the gross income computed under section 22, less the deductions allowed by section 23." Sections 11 and 12 relating to the tax on individuals impose a normal tax of 4 and 8 per cent. and a surtax ranging from 1 to 40 per cent. "upon the net income of every individual."

The question in this case is whether "the taxpayer's net income" mentioned in section 23(n), quoted above, means the net income which the statute subjects to the tax imposed by sections 11 and 12 — that is, the net amount upon which the taxpayer is liable for a tax, except for its reduction for charitable contributions — or whether "the taxpayer's net income," which section 23(n) makes the base for the calculation of the allowable deductions for charitable contributions, means the taxpayer's gross income less the deductions allowed by section 23 (other than charitable contributions) plus the deduction of the capital net loss which is not a permissible or allowable deduction under section 23 or any other section in determining "the net income" to be subjected to the tax imposed by sections 11 and 12, except under certain circumstances not material here, but which will hereinafter be referred to. It is our opinion that the net income specified in section 23(n) as the base for the calculation of the deduction for charitable contributions is, and was, intended by Congress to be the net amount upon which the taxpayer is taxable under sections 11 and 12 — i. e., $94,963.52. This was plaintiff's gross income less all permissible deductions. Where there is a "capital net loss" as defined by the statute, such loss, by express provision of the statute, is excluded and denied as a deduction in determining the net income to be subjected to the tax imposed. See section 101(c) (7), 26 U.S.C.A. § 101 note. The pertinent sections of the Revenue Act of 1932, so far as material here, are as follows:

"§ 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 equal to the sum of the following." 26 U.S.C.A. § 11 note.

"§ 12. Surtax on individuals. (a) Rates of Surtax. There shall be levied, collected, and paid for each taxable year upon the net income of every individual a surtax as follows." 26 U.S.C.A. § 12 note.

"§ 21. Net income. `Net income' means the gross income computed under section 22, less the deductions allowed by section 23." 26 U.S.C.A. § 21 and note.

"§ 22. Gross income. (a) General definition. `Gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal service, * * * or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property; * * * also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever." 26 U.S.C.A. § 22 and note.

"§ 23. Deductions from gross income. In computing net income there shall be allowed as deductions: (a) Expenses. * * * (b) Interest. * * * (c) Taxes generally. * * * (d) Taxes of shareholder paid by corporation. * * * (e) Losses by Individuals. Subject to the limitations provided in subsection (r) of this section in the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise * * * (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * * (j) Bad Debts. * * * (k) Depreciation. * * * (l) Depletion. * * * (n) Charitable and other contributions. In the case of an individual, contributions or gifts made within the taxable year to or for the use of: * * * (2) a corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual; * * * to an amount which * * * does not exceed 15 per centum of the taxpayer's net income as computed without the benefit of this subsection." 26 U.S.C.A. § 23 and note.

"§ 101. Capital Net Gains and Losses. (a) Tax in Case of Capital Net Gain. In the case of any taxpayer, other than a corporation, who for any taxable year derives a capital net gain (as hereinafter defined in this section), there shall, at the election of the taxpayer, be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined as follows: A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted and the total tax shall be this amount plus 12½ per centum of the capital net gain.

"(b) Tax in Case of Capital Net Loss. In the case of any taxpayer, other than a corporation, who for any taxable year sustains a capital net loss (as hereinafter defined in this section), there shall be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined as follows: a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted, and the total tax shall be this amount minus 12½ per centum of the capital net loss; but in no case shall the tax of a taxpayer who has sustained a capital net loss be less than the tax computed without regard to the provisions of this section.

"(c) Definitions. For the purposes of this title —

"(1) `Capital gain' means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921.

"(2) `Capital loss' means deductible loss resulting from the sale or exchange of capital assets.

"(3) `Capital deductions' means such deductions as are allowed by section 23 for the purpose of computing net income, and are properly allocable to or chargeable against capital assets sold or exchanged during the taxable year.

"(4) `Ordinary deductions' means the deductions allowed by section 23 other than capital losses and capital deductions.

"(5) `Capital net gain' means the excess of the total amount of capital gain over the sum of (A) the capital deductions and capital losses, plus (B) the amount, if any, by which the ordinary deductions exceed the gross income computed without including capital gains.

"(6) `Capital net loss' means the excess of the sum of the capital losses plus the capital deductions over the total amount of capital gain.

"(7) `Ordinary net income' means the net income, computed in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions.

"(8) `Capital assets' means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business." 26 U.S.C.A. § 101 note. (Italics supplied.)

The Commissioner of Internal Revenue held in his construction of sections 23(n) and 101 which, so far as this question is concerned, are the same as the related sections of the Revenue Acts of 1924, §§ 214, 208, 43 Stat. 269, 262, 1926, §§ 214, 208, 44 Stat. 26, 19, and 1928, § 23(n), 101, 26 U.S.C.A. § 23(n) and note, § 101 note, that if a taxpayer sustained a capital net loss which by express provision of the statute could not be taken as a deduction in computing taxable net income, such capital net loss must nevertheless be deducted from the net income which the statute specified should be subjected to the normal and surtaxes imposed by sections 11 and 12 in arriving at the net income for the purpose of applying the 15 per cent. limitation prescribed by ...