March 16, 1937
COMMISSIONER OF INTERNAL REVENUE
On Petition for Review of the Decision of the United States Board of Tax Appeals.
Before BUFFINGTON and THOMPSON, Circuit Judges, and MARIS, District Judge.
MARIS, District Judge.
This is a petition to review a decision of the Board of Tax Appeals determining a deficiency in income tax to be due by the petitioner for the year 1929. The Board found that the petitioner's taxable net income for that year before the allowance of any deduction for charitable contributions was $911,599.10. This amount represented ordinary income of $966,467.20, less a capital net loss for the year of $54,868.10. During the year the petitioner made contributions or gifts to persons and organizations within the classes specified and described in section 23(n) of the Revenue Act of 1928 (26 U.S.C.A. § 23(o) and note), in the total amount of at least $144,970.08. The petitioner concedes that he is not within the exceptions to the 15 per cent. limit on deduction for contributions set forth in section 120 of the Revenue Act of 1928 (26 U.S.C.A. § 120 and note).
The deduction for contributions claimed by the petitioner in his income tax return for 1929 was $131,200.84. The deduction allowed by the Commissioner in his initial determination of a deficiency was $202,162.06. On appeal to the Board of Tax Appeals the Commissioner contended that the amount of petitioner's allowable deduction for contributions was $136,739.87, which is 15 per cent. of $911,599.10. On the other hand, the contention of the petitioner was that $144,970.08, which is 15 per cent. of $966,467.20, was allowable as a deduction in computing ordinary net income subject to normal tax and surtaxes. The Board sustained the Commissioner's contention. Its decision determined a deficiency in income tax for the year in the amount of $1,975.26. The petitioner thereupon filed the present petition to review its decision.
The sole question for our consideration is whether the net income on which the 15 per cent. limitation for deduction of charitable contributions is computed under section 23(n) of the Revenue Act of 1928 (26 U.S.C.A. § 23(o) and note) is to be determined after deducting therefrom capital net losses sustained by the taxpayer, as the Commissioner contends, or whether such capital net losses are not to be taken into account, as the petitioner argues. This question depends for its decision upon the construction of certain of the provisions of the Revenue Act of 1928, 45 Stat. 791, which are set forth in full in the margin,*fn1 and it may be restated to be whether the amount of the deduction for charitable contributions is to be based on "net income" as defined in section 21 (26 U.S.C.A. § 21 and note) or "ordinary net income" as defined in section 101 (26 U.S.C.A. § 101 and note).
The Commissioner strongly urges that the decision of this question is controlled by Helvering v. Bliss, 293 U.S. 144, 55 S. Ct. 17, 19, 79 L. Ed. 246, 97 A.L.R. 207. In that case the question was presented whether the deduction for charitable contributions should be computed upon "net income" which included capital net gains or upon "ordinary net income" from which capital net gains were excluded. The Supreme Court held that capital net gains should be included in computing the 15 per cent. deduction. In delivering the opinion of the court Mr. Justice Roberts said, inter alia:
"For 'net income,' the base specified in section 23(n) * * * upon which the 15 per cent. deduction of charitable contributions is to be calculated, the petitioner would substitute 'ordinary net income' as defined in section 101. So to read the act would violate its plain terms and run counter to the history of the legislation. * * *
"Commencing with the Revenue Act of 1921 Congress, in order to encourage realization of profits on capital assets, saw fit to relieve gain thus derived of the heavy surtaxes then applicable, and to permit the payment of tax at a flat rate of 12 1/2 per cent. on so much of the taxpayer's income as represented the net gain from capital transactions. * * *
"In extending this relief to taxpayers, Congress might have modified the privilege theretofore existing with respect to charitable contributions, by directing that they should be deducted solely from capital net gain or should be apportioned and deducted ratably from ordinary net income and from capital net gain. The Acts, however, evince no such purpose. In the Act of 1928, as will be seen by reference to sections 21, 22 and 23 * * * supra, note 4, the statutory concept of net income is preserved. These sections are found in part 2 of title 1, which deals with 'Computation of Net Income.' Section 101, * * * on the other hand, is found under 'Supplemental Provisions,' and is captioned 'Supplement A -- Rates of Tax.' It is obviously directed to the matter of computation of tax on a portion of net income as defined in section 21. There is nothing novel in such a division of the statutory net income into parts for the purpose of applying different rates of tax, as witness the provisions fixing the rates on those portions of the entire net income attributable to dividends, earned income, interest on United States obligations, and gains from the sale of mines, and allowing credits for dependents.
"The plain requirements of section 101 are that in ascertaining ordinary net income there shall be excluded from the computation only items of capital gain, capital loss, and capital deductions. Charitable contributions covered by section 23(n) * * * obviously are not capital deductions as defined by section 101(c) (3), * * * but on the contrary are 'ordinary deductions' within the meaning of section 101(c) (4). * * *
"By the express words of section 23(n) charitable contributions are to be deducted to ascertain net income as defined in section 21; and nothing in section 101, which prescribes merely a method for segregating a portion of that net income for taxation at a special rate, in any wise alters the right of the taxpayer to take the deduction in accordance with section 23(n)."
The petitioner contends that that case is not conclusive here, since it involved capital net gain, while this involves capital net loss. It is true that section 101(a), 26 U.S.C.A. § 101 note, relates to capital net gain, while capital net loss is covered by section 101(b), 26 U.S.C.A. § 101 note, and that the provisions of the two subsections are somewhat different, one of the chief differences being that the provisions relating to capital net gain are optional, while those relating to capital net loss are compulsory. We do not think that those differences have any bearing on the question, however.
It is clear that "net income" as defined by section 21 (26 U.S.C.A. § 21 and note) and computed under sections 22 and 23 (26 U.S.C.A. §§ 22, 23 and notes) not only includes capital gains, but also is to be determined after the deduction of capital losses, since the latter are losses deductible from gross income under section 23(e), 26 U.S.C.A. § 23(e) and note. The Bliss Case holds that net income as so determined is to be used as the basis for computing the charitable deduction in cases involving capital net gains. The fact that both subdivisions (a) and (b) of section 101 refer to "ordinary net income," meaning in each case net income after the exclusion of all items of capital gain, capital loss, and capital deductions, when considered in the light of the fact that the words "ordinary net income" are not used with reference to the computation of the deduction for charitable contributions in either case, leads inevitably to the conclusion that this deduction is to be computed in the same manner in each case.
It follows that the construction placed by the Supreme Court on the capital net gain subsection applies equally to the capital net loss provision and that "net income" referred to in section 23(n) as a base for the computation of the 15 per cent. deduction for charitable contributions means net income computed under the provisions of section 23, that is, after the deduction, interalia, of all losses referred to in subdivision (e) of that section including all capital losses as defined in section 101.
This conclusion is supported by the fact that the Supreme Court in a footnote to its opinion in Helvering v. Bliss, supra, indicated by its reference to certain capital net loss cases decided by the Board of Tax Appeals (Elkins v. Commissioner, 24 B.T.A. 572, Livingood v. Commissioner, 25 B.T.A. 585) that it understood the rule announced in that case to apply to cases involving capital net loss as well as to those involving capital net gain. The same conclusion has recently been reached upon substantially similar facts by the Circuit Court of Appeals for the Seventh Circuit in Avery v. Commissioner, 84 F.2d 905. The Supreme Court denied certiorari (57 S. Ct. 231, 81 L. Ed. --) in the Avery Case December 7, 1936.
The decision of the Board of Tax Appeals is affirmed.