United California Bank v. United States

• Decision Date: 11 December 1978
• Docket Number: No. 77-1016,77-1016
• Citation: 99 S.Ct. 476,439 U.S. 180,58 L.Ed.2d 444
• Parties: UNITED CALIFORNIA BANK and Lillian Disney Truyens, Co-Executors of the Estate of Walter E. Disney, Petitioners, v. UNITED STATES
• Court: U.S. Supreme Court

58 L.Ed.2d 444

99 S.Ct. 476

439 U.S. 180

UNITED CALIFORNIA BANK and Lillian Disney Truyens, Co-Executors of the Estate of Walter E. Disney, Petitioners,

v UNITED STATES.

No. 77-1016.

Argued Oct. 4, 1978.

Decided Dec. 11, 1978.

Syllabus

The issue in this case involves the computation of the alternative income tax of a decedent's estate that had net long-term capital gains, a portion of which, pursuant to the decedent's will, was set aside for charitable purposes within the meaning of § 642(c) of the Internal Revenue Code of 1954. Under the provisions of the Code in effect during the years in question, taxpayers, including decedents' estates, with net long-term capital gains exceeding net short-term capital losses, paid either a "normal" income tax calculated by applying ordinary graduated rates to taxable income computed with a 50% capital-gains deduction permitted by § 1202 or, if it was a lesser sum, the alternative tax calculated under § 1201(b). In 1967 and 1968, petitioners, executors of an estate, realized long-term capital gains from the sale of securities included in the residue; there were no short-term capital losses. Petitioners set aside a portion of the long-term capital gains for the benefit of a specified charity as directed by the decedent's will. In the fiduciary income tax returns for 1967 and 1968, petitioners sought to use the alternative tax, and in computing this tax excluded from the long-term capital gains the portion set aside for charity. The District Director disallowed the exclusion, without which the alternative tax was higher than the normal tax, with the result that the latter tax was due. Additional taxes were assessed and paid, and this suit for refund followed. The District Court allowed the exclusion, but the Court of Appeals reversed. Held: The net long-term gains to which the alternative tax is applicable is reducible by the amount of the charitable set-asides in the years in question. Pp. 187-199.

(a) While charitable distributions or set-asides by an estate are not within the conduit system applicable to capital gains passing to noncharitable beneficiaries under §§ 661(a) and 662(a) of the Code whereby an estate's distributable income to such beneficiaries is taxable to them rather than to the estate, this does not mean that similar treatment may not be accorded to charitable distributions or set-asides deductible by the estate under § 642(c). Section 642(c) serves to extract income destined for charitable entities from an estate's taxable income and thus supplies a conduit for charitable contributions similar to that provided by §§ 661(a) and 662(a) for income passing to taxable distributees. The express exclusion, pursuant to § 663, from §§ 661(a) and 662(a) of those amounts deductible under § 642(c) does not refute conduit treatment of such amounts, but rather such exclusion merely prevents a second deduction for charitable set-asides and recognizes as well that they are accorded separate treatment elsewhere in the Code. Pp. 187-194.

(b) It is doubtful that Congress intended that an estate, which set aside part of its capital gain for charity, should pay a higher income tax than if the same portion of capital gain had been distributed to a taxable beneficiary or that the burden of the extra tax should be borne by the charities themselves or by the noncharitable residual legatees. The former allocation would contravene § 642(c), which permits deduction of charitable set-asides "without limitation," and would indirectly offend the tax exemption extended to charities by § 501. And allocating the burden to the noncharitable legatees would result in taxation of the capital gain accruing to their benefit at an effective rate higher than the 25% ceiling that § 1201 was intended to impose on the taxation of net long-term capital gains. Pp. 194-195.

(c) The legislative history of the 1954 Code is not incompatible with the general applicability of the conduit concept and in fact clearly indicates that Congress sought rigorously to adhere to the theory that an estate or trust in general is to be treated as a conduit through which income passes to the beneficiary. Pp. 195-196.

(d) A construction of the alternative tax that permits petitioners to exclude the charitable set-asides does not conflict with the decision in United States v. Foster Lumber Co., 429 U.S. 32, 97 S.Ct. 204, 50 L.Ed.2d 199. Pp. 197-199.

(e) The principle that currently distributable income is not to be treated "as the [estate's] income, but as the beneficiary's," whose "share of the income is considered his property from the moment of its receipt by the estate," Freuler v. Helvering, 291 U.S. 35, 41-42, 54 S.Ct. 308, 310-311, 78 L.Ed. 634, survived in substance in the 1954 Code. To treat charitable and noncharitable distributions of capital gain differently for the purpose of computing the alternative tax under § 1201(b) "stresses the form at the neglect of substance," and "the letter of § 1201(b) must yield when it would lead to an unfair and unintended result," Statler Trust Co. v. Commissioner of Internal Revenue, 361 F.2d 128, 131. P. 199.

563 F.2d 400, reversed.

Ronald E. Gother, Los Angeles, Cal., for petitioners.

M. Carr Ferguson, Washington, D. C., for respondent.

Mr. Justice WHITE delivered the opinion of the Court.

Under the provisions of the Internal Revenue Code of 1954 in effect during the years in question, taxpayers, including decedents' estates,¹ with net long-term capital gains exceeding net short-term capital losses, paid either a "normal" income tax calculated by applying ordinary graduated rates to taxable income computed with a 50% capital-gains deduction permitted by § 1202 of the Code or, if it was a lesser sum, the alternative tax calculated as directed by § 1201(b).² Under the latter section the taxable income for normal tax purposes was first reduced by the portion of the capital gain remaining in that figure, and the regular tax rates were then applied to the resulting amount. To this partial tax was added an amount equivalent to 25% of the "excess of the net long-term capital gain over the net short-term capital loss."

The issue here involves the computation of the alternative tax of a decedent's estate that had net long-term capital gains,³ a portion of which—pursuant to the terms of the decedent's will was "during the taxable year, paid or permanently set aside" for charitable purposes within the meaning of § 642(c), 26 U.S.C. § 642(c) (1964 ed.). That section permitted an estate to deduct "without limitation" amounts designated for charitable purposes by the controlling instrument, subject, however, to "proper adjustment . . . for any DEDUCTION ALLOWABLE TO THE ESTATE OR TRUST UNDER SECTION 1202 . . . ." ⁴

I

Walter E. Disney, who died in 1966, left 45% of the residue of his estate by will to a designated charitable trust. During the years 1967 and 1968, petitioners, executors of the estate, sold securities making up part of the residue of the estate, thereby realizing a long-term capital gain in the amount of $500,622.38 in 1967 and $1,058,018.43 in 1968. There were no short-term capital losses, but a net short-term capital gain of $16,944.16 was realized in 1967. Forty-five percent of the net long-term capital gain was set aside as part of the residue of the estate for the benefit of the specified charity. In their fiduciary income tax returns for these years, the executors sought to use the alternative tax prescribed by § 1201(b). In computing this tax, they excluded from the long-term capital gain to which the alternative tax was applicable the 45% portion of long-term gain permanently set aside for charity. The District Director disallowed this exclusion, without which the alternative tax was higher than the normal tax computed with the § 1202 capital-gains deduction. The normal tax rather than the alternative tax was therefore due. Additional taxes were assessed and paid, and this suit for refund followed.

Agreeing with the judgment of the Court of Appeals for the Second Circuit in Statler Trust v. Commissioner of Internal Revenue, 361 F.2d 128 (1966), the District Court sustained the executors' position that in computing the alternative tax under § 1201(b), any amount deductible by the estate from its gross income as being permanently set aside for charity could be excluded from the net long-term capital gain subject to the alternative tax. The Court of Appeals reversed, 563 F.2d 400 (CA9 1977), holding that the alternative tax was to be computed on the total excess of net long-term capital gains over net short-term capital losses, unreduced by any amount deductible by the estate as a charitable set-aside under § 642(c). The court expressly disagreed with the decision in Statler Trust, supra. We granted the executors' petition for certiorari, 435 U.S. 922, 98 S.Ct. 1483, 55 L.Ed.2d 514 (1978).

In this Court, as in the courts below, the parties agree on the method of calculating the normal tax but sharply disagree in regard to the proper computation of the alternative tax under § 1201(b). To illustrate, the normal tax for 1967 amounted to $88,000 in round figures.⁵ According to the executors, the alternative tax was $70,800,⁶ which, being a lesser amount than the normal tax, would be the amount due. The Government calculates the alternative tax to be $125,000 and thus insists that the normal tax in the amount of $88,000 was properly payable.⁷ As we have indicated, resolution of the issue turns on whether the net long-term gain to which the alternative tax is applicable is permissibly reducible by the amount of the charitable set-asides in the years in question. On this score, we agree with the executors and reverse the Court of Appeals.

II

The Government's position rests on what it deems to be the plain language of § 1201(b), which directs that the "excess of the net long-term capital gain over the net short-term capital loss" be taxed. This language,...