Amicus Curiae Brief — FTC v. RF Keppel & Bro., Inc.

Supreme Court brief1934

Ask Donna

What actually matters in this document.

Text

AUG 10 1934

+ OHANinS cLtent CAGFLEY

FILE COPY : .

OLeuk

Ra erm a

IN THE

Supreme Court of the Anited States

OCTOBER TERM, 1934

NO. 6

GUY T. HELVERING, COMMISSIONER OF

INTERNAL REVENUE, Petitioner,

Vs.

SUSAN DWIGHT BLISS

BRIEF AS AMICUS CURIAE

ON BEHALF OF AARON STRAUS

/ FREDERICK SCHWERTNER,

Counsel for Aaron Straus,

1000 National Press Building,

Washington, D. C.

UNITED PUBLISHING COMPANY INC.. 717 SIXTH ST, N. W.. WASHINGTON. D, C.

INDEX

' PAGE

PRELIMINARY STATEMENT . eenasner ee 1

QUESTIONS INVOLVED 2

sy ey | oy: ee 3

7mm StALUle .............. 4

IT ic Seiad ieasstengsesicinn ondsncinesmcsuuaeeaoeecene 11

A. The Courts Have Consistently Held That the

15 Per Cent Limitation on the Deduction for

Charitable Contributions Is To Be Measured

By a Taxpayer’s Total Net en veined

Capital Net Gain _ cei ve ee

Congress By Adopting Section 23 (n) Plainly

Evinced a Legislative Policy To Encourage

Charitable Contributions, and This Policy Was

Not Reversed In 1921 When the Capital Gain

Provisions Were Enacted_____...........-.-____________

The Term “Net Income,” As Used in Section

23 (n) Means the Net Income As Defined By

Sections 21, 22 and 23 and Includes A aims

De See

. It Was the Administrative Practice of the

Commissioner from 1921 To 1932 To Allow As

A Deduction Charitable Contributions Up To

15 Per Cent of a Taxpayer’s Total Net In-

come, Including Capital Net Gain...

The Capital Gain Provisions Do Not Serve

To Impair or Destroy the Deduction for Char-

I SEE is icdeeeipttecsemrtccrcseemeiccsnateene

. 21

PIEDERPR HER: p>

F. If the Statute Is At All Ambiguous and A

Doubt Exists, Such Doubt Is To Be Resolved

Against the Government.__. . _ 45

VI. CONCLUSION ee SIE

CITATIONS

CASES

PAGE

American Can Co. v. Bowers, 35 F. (2d) 882. ---s-« 23

Andrus et al. v. Burnet, 50 F. (2d) 382... sé

Benziger v. U.S., 193 U.S. 38 ee ee ee

Bliss, Susan Dwight, 27 B. T. A. 205 ae”

Bliss v. Commissioner, 68 F. (2d) 390. ssc ae

ee oe oe Ye ee ee

Brewster v. ee a; oe Oe ee

Burnet v. Harmel, 287 U. 8.103 ae

Church of Holy Trinity v. U. S., 143 U. S. 457. . Bl

Colgate, Mary, 27 B. T. A. 506 _ cae 12, 25

Copper — Mining Co. v. Arizona Board, 206 U. S.

474 ae —

Eisner | v. “Macomber, 252 V. ‘Ss. 189. EE a rer -.. Be

Bins. Matic D.. 21 5. T. A. S72 __._..__.._._._._ A,

ee. Cr ee se ee 12

een v. ees eee Gh 45

Harbison, Ralph W., 26 B. T. A. 896. 12, 25

Helvering v. Straus, 27 B. T. A. 1116 1, 4, 11, 33, 38

Helvering v. New York Trust Co., 78 L. ed. 960... —19

Igleheart v. Commissioner, 27 B. T. A. 1426... Peas 12

Komada & Co. v. U. S., 215 U. S. 392......_.. he stiiessatins 28

ro eS ee Re 8 ene 28

on Oe Beet. toe oe ee... 31

Awe Vv. co, TS U.S. 3 FT 46

McCaughn v. Hershey Chocolate Co., 283 U.S. 488. 28

McDonald v. Hovey, 110 U. 8. 619........................... 29

iil

Merchants’ Loan & Trust Co., Tr. v. Smietanka, 225

MM I ee A ce ee ore ne

National Lead Co. v. U. S., 252 U. S. 140 _. eas

N..¥. ™. &. & i. B. BR. Co. v. 1.C. €., 20 U. ‘Ss. 361. Wits

Old Colony R. R. Co. v. Commissioner, 284 U.S. 552 _

Poe v. Seaporn, 232 U. S&S. 101...

Reese, Augusta Bliss,,.30 B. T. A—

Robertson v. Downing, 127 U. S. 613...

Robinette v. Commissioner, 27 B. T. A. 1426

Sadowsky v. Anderson, 29 F. (2d) 677. coe |) A

— Coke & Coal Co. v. Commissioner, 57 F. a

10 ns

Universal Battery Co. Vv. _U. S., 281 U. ‘Ss. 580.

U.S. v. Baruch, 223 U.S. 191

U. S. v. Cerecedo Hermanos y ‘Compania, 209 U. S.

I eae a ne A oe ei oe Re

U. 8S. v. Dakota-Montana Oil Co., 288 U.S. 459.

v. &. ¥v. Fam one Bre., 206 1). 5. 146... tCSCS

Ri, ths Uy a, PR Oe es

U.S. v. Kirby, 74 U. S. 482 _

U.S. v. Philbrick, 120 U. S. 52. fe Faroe

U.S. v. Provident Trust Company, 78 L. ed. 510 ine

a. 0 eee, Bee 0.

White, Collector v. Atkins, 69 F. (2d) 960 eee ee

Woodward v. Commissioner, 27 B. T. A.1426

MISCELLANEOUS

Federal Tax Handbook (1932) by Robert H. seston

ery, pages 475-476.

Mimeograph 3931, Cumulative Bulletin. XL 1, p. 33,

Bureau of Internal Revenue 5 a,

Prentice-Hall Tax Service (1932), p. 14905.

Report No. 179, 68th Cong., 1st Sess., Committee on

ae ae

. 33

. 24

. 25

_ 39

’

;

’

Report No. 275, 67th Cong., Ist Sess., Senate Finance

RI ee ee

Report No. 398, 68th Cong., lst Sess., Senate Finance

CN eninge ee

Treasury Regulations 62, Articles 21, 251... 23, 26

Treasury Regulations 65, Articles 21, 251 onsttey Ot

Treasury Regulations 69, Article 21, 251 : 23, 27

Treasury Regulations 74, Articles 41, 261 aa. Ot

Treasury Regulations 77, Article 261 27

IN THE

Supreme Court of the Anited States

OCTOBER TERM, 1934

NO. 6

GUY T. HELVERING, COMMISSIONER OF

INTERNAL REVENUE, Petitioner,

vs.

SUSAN DWIGHT BLISS

BRIEF AS AMICUS CURIAE

ON BEHALF OF AARON STRAUS

Preliminary Statement

Aaron Straus is the appellee in the case of Guy T.

elvering, Commissioner of Internal Revenue, Appel-

lant v. Aaron Straus, 27 B.T.A. 1116, which is pending

after argument before the Court of Appeals of the

District of Columbia on the appellant’s petition for

review.

The issue in the Straus case is similar to that in the

Bliss case and involves a construction of Section 23 (n)

of the Revenue Act of 1928, which provides that in

computing net income contributions to charitable in-

stitutions shall be allowed as deductions from gross

income to an amount which does not exceed 15 per

centum of the taxpayer’s “net income,” as computed

before any allowance for contributions.

Aaron Straus in the year 1929 had a total net income

of $809,543.86, consisting of “ordinary net income,”

of $43,079.90, before any allowance for contributions,

and a “capital gain” of $766,463.96, before any allow-

ance for contributions. There were no items of capital

loss or capital deductions for the year 1929.

Aaron Straus donated to charitable institutions in

the year 1929 the sum of $144,695.04. The Commis-

sioner of Internal Revenue only allowed as a deduction

for such contributions the sum of $6,461.99, under his

theory which was first adopted in the year 1932 that

when a taxpayer has a “capital net gain,” and elects to

be taxed thereon at 12% per cent, the deduction for

charitable contributions is confined to 15 per cent of

his “ordinary net income.”

In a unanimous opinion by the full Board, it was

held that Aaron Straus was entitled to a deduction of

$121,431.78 for charitable contributions, such sum be-

ing 15 per cent of his total net income, before any al-

lowance for contributions.

Il.

Questions Involved

The questions involved are simple: What is the

meaning of the term “net income,” as used in Section

23 (n) of the Revenue Act of 1928? Does the net in-

come from the sale of investment property held more

than two years, denominated a “capital net gain,” by

Section 101 (c) (5) of the 1928 Act, form a part of

“net income,” as that term is used in Section 23 (n) ?

Did Congress by the adoption of the capital gain provi-

sions intend to invade Section 23 (n) with the result

that a taxpayer’s deduction for charitable contribu-

tions is either impaired or wholly destroyed?

It was the uniform administrative practice of the

Commissioner of Internal Revenue to allow charitable

contributions as deductions to the limit of 15 per cent

of a taxpayer’s total net income, including capital net

gain, from 1921, when the capital gain provisions were

originally adopted, to 1932, when he reversed his po-

sition.

III.

The Facts

The Bliss case involves the years 1928 and 1929, and

the issue as to the amount allowable as a deduction

for charitable contributions is common to both tax-

able years. It will suffice, therefore, to state the facts

with reference to the year 1928 only. During that

year, the taxpayer made charitable contributions in

the amount of $43,995.92. Her “ordinary net income,”

for the year 1928 before the deduction of the amount

of such contributions was $270,490.77, and her “cap-

ital net gain” was $211,544.82. The Commissioner of

Internal Revenue allowed as a deduction for charitable

contributions the sum of $40,573.62, being 15 per cent

of her “ordinary net income,” as computed before the

DRE OG RN BET Ce fF OR Me

PE 0 OE I A: oy Pa

eee

a STO RBI AMS 30 SAC

deduction for charitable contributions, and disallowed

as a deduction the balance of $3,422.30.

The destructive effect of the Commissioner’s con-

struction of the term “net income,” as used in Section

23 (n) of the 1928 Act to mean “ordinary net income,”

when a “capital net gain” is present is more glaringly

patent in the Straus case. In the Straus case, the tax-

payer is entitled to a deduction for charitable contri-

butions in the sum of $121,431.78 if his total net in-

come is used as a measuring rod. The Commissioner,

however, only allowed the sum of $6,461.99, which is

less than 1 per cent of the taxpayer’s total net income,

and disallowed as a deduction the balance of $114,-

969.79.

IV.

The Statute

The pertinenc portions of the Revenue Act of 1928

are as follows:

TITLE I—INCOME TAX

Sec. 23. Deductions from Gross Income

In computing net income there shall be allowed

as deductions:

Section 23 (n) Charitable and Other contribu-

tions. In the case of an individual, contributions

or gifts made within the taxable year to or for the

use of:

(1) the United States, any State, Territory,

or any political subdivision thereof, or the Dis-

trict of Columbia, for exclusively public pur-

poses ;

(2) any corporation, or trust, or community

chest, fund, or foundation, organized and op-

erated exclusively for religious, charitable, sci-

entific, literary, or educational purposes, or for

the prevention of cruelty to children or animals,

no part of the net earnings of which inures to

— of any private shareholder or indi-

vidual;

(3) the special fund for vocational rehabili-

tation authorized by Section 7 of the Voca-

tional Rehabilitation Act;

(4) posts or organizations of war veterans, or

auxiliary units or societies of any such posts, or

organizations, if such posts, organizations,

units, or societies are organized in the United

States or any of its possessions, and if no part

of their net earnings inures to the benefit of any

private shareholder or individual; or

(5) a fraternal society, order, or association,

operating under the lodge system, but only if

such contributions or gifts are to be used exclu- ;

sively for religious, charitable, scientific, liter-

ary, or educational purposes or for the preven- :

tion of cruelty to children or animals; :

does not exceed 15 per centum of the taxpayer's

net income as computed without the benefit of this

subsection. Such contributions or gifts shall be

allowable as deductions only if verified under rules

toan amount which in all the above cases combined

and regulations prescribed by the Commissioner,

with the approval of the Secretary. (For un-

limited deduction if contributions and gifts ex-

ceed 90 per centum of the net income, see Section

120.) (Italics supplied.)

PART II—COMPUTATION OF NET INCOME

Sec. 21. Net Income

“Net income” means the gross income com-

puted under Section 22, less the deductions allowed

by Section 23.

Sec. 22. Gross Income

(a) General definition. “Gross income” in-

cludes gains, profits, and income derived from

salaries, wages, or compensation for personal ser-

vice, of whatever kind and in whatever form paid,

or from professions, vocations, trades, businesses,

commerce, or sales, or dealings in property,

whether real or personal, growing out of the own-

ership or use of or interest in such 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. (Italics supplied.) * * *

(e) Determination of Gain or Loss. In the case

of a sale or other disposition of property, the gain

or loss shall be computed as provided in Sections

111, 112, and 113.

Sec. 23. Deductions from Gross Income

In computing net income there shall be allowed

as deductions:

(a) Expenses. All the ordinary and necessary

expenses paid or incurred during the taxable year

in carrying on any trade or business, including a

reasonable allowance for salaries or other com-

pensation for personal services actually ren-

dered; * * *

(b) Interest. All interest paid or accrued with-

in the taxable year on indebtedness, except on in-

debtedness incurred or continued to purchase or

carry obligations or securities (other than obliga-

tions of the United States issued after September

24, 1917, and originally subscribed for by the tax-

payer) the interest upon which is wholly exempt

from taxation under this title.

‘e) Taxes Generally. Taxes paid or accrued

within the taxable year, except—

(1) Income, war-profits, and excess-profits

taxes imposed by the authority of the United

States;

(2) so much of the income, war-profits, and

excess profits taxes imposed by the authority

of any foreign country or possession of the

United States as is allowed as a credit against

the tax under section 131; and

(3) taxes assessed against local benefits of a

kind tending to increase the value of the prop-

A am

Sager

: ;

SELLER TE YS F- eagees -

: meg D, oe a age OE Te WETNESS Ne. « “TTI RR Seeman ag Saeed

OT IE ANON OT tae A RBS Hy

PRE ee ae

erty assessed; but this paragraph shall not ex-

clude the allowance as a deduction of so much

of such taxes as is properly allocable to main-

tenance or interest charges.

For the purpose of this subsection, estate, inher-

itance, legacy, and succession taxes accrue on the

due date thereof, except as otherwise provided

by the law of the jurisdiction imposing such

taxes, and shall be allowed as a deduction only to

the estate. * * *

(d) Taxes of Shareholders Paid by Corpor-

(e) Losses by Individuals. In the case of an

individual, losses sustained during the taxable

year and not compensated for by insurance or

otherwise—

(1) if incurred in trade or business; or

(2) if incurred in any transaction entered

into for profit, though not connected with the

trade or business; or

(3) of property not connected with the trade

or business, if the loss arises from fires, storms,

shipwreck, or other casualty, or from theft.

(f) Losses by corporations. * * *; (g) Basis

for determining loss * * *; (h) Loss on sale of

stock or securities * * *; (i) Net Losses * * *;

’

(j) Bad debts * * *; (k) Depreciation * * *;

(1) Depletion * * *; (m) Basis for depreciation

and depletion * * *; (n) Charitable and other

contributions * * *; (0) Future expenses.in case

of casual sales of real property * * *; (p) Divi-

dends received by corporations * * *; (q) Pen-

sion trusts * * * . E

SUBTITLE C—SUPPLEMENTAL PROVISIONS

Supplement A—Rates of Tax

(Supplementary to Subtitle B, Part I)

Sec. 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 12% 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 in-

come at the rates and in the manner as if this

section had not been enacted, and the total tax

Be ttt te

SORA LS ioe BEART ales ii latsk sth tam SRR Rae TEN R Si inhale a

+t elem SUNG Sie if ersin'y

shall be this amount minus 1214 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 re-

gard to the provisions of this section.

(ec) Definitions. For the purpose of this title—

(1) “Capital gain” means taxable gain from

the sale or exchange of capital assets consum-

mated after December 31, 1921.

(2) “Capital loss’ means deductible loss re-

sulting from.the sale or exchange of capital

assets.

(3) “Capital deductions” means such deduc-

tions as are allowed by section 23 for the pur-

pose of computing net income, and are prop-

erly allocable to or chargeable against capital

assets sold or exchange during the taxable

year.

(4) “Ordinary deductions” means the deduc-

tions 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 ordi-

nary deductions exceed the gross income com-

puted 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 in-

come, computed in accordance with the provi-

sions of this title, after excluding all items of

capital gain, capital loss, and capital deduc-

tions.

(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 tax- x

able year, or property held by the taxpayer pri-

marily for sale in the course of his trade or

business. For the purposes of this defini- b

tion— * * *

(d) Collection and Payment of Tax. The total

tax determined under subsection (a) or (b) shall

be collected and paid in the same manner, at the

same time, and subject to the same provisions of

law, including penalties, as other taxes under this

title.

¥.

ARGUMENT

THE COURTS HAVE CONSISTENTLY HELD THAT.

THE 15 PER CENT LIMITATION ON THE DEDUC-

TION FOR CHARITABLE CONTRIBUTIONS IS TO

BE MEASURED BY A TAXPAYER’S TOTAL NET

INCOME, INCLUDING CAPITAL NET GAIN.

The unanimous opinion of the full Board in the

Straus case served to repudiate and overrule the deci-

sions of individual members in Ralph W. Harbison, 26

B.T.A. 896, Susan Dwight Bliss, 27 B.T.A. 205 and

Mary Colgate, 27 B.T.A. 506. The views expressed by

the full Board in the Straus case have been adopted by

the Courts in an unbroken line of decisions.

Bliss v. Commissioner of Internal Revenue,

(C.C.A. 2), Jan. 8, 1934, 68 F. (2d) 890;

White, Collector of Internal Revenue V. Atkins,

(C.C.A. 1), Mar. 14, 1934, 69 F. (2d) 960;

Blow et al. v U. S. (N.D. Tl.) Sept. 21, 1933,

5 F. Supp. 737. :

The Board has also followed its decision in the Straus

case in Robinette v. Commissioner, 27 B.T.A. 1426,

Igleheart-v. Commissioner, 27 B.T.A. 1426, Woodward

v. Commissioner, 27 B.T.A. 1426, decided by unpub-

lished memoranda opinions, Augusta Bliss Reese, de-

cided March 6, 1934, 30 B.T.A. —, and Irving Fisher,

decided April 20, 1934, 30 B.T.A. —.

There is no federal court ‘decision in any jurisdic-

tion which supports the respondent in his contention

that capital gain should be excluded from net income

in determining the 15% deduction for charitable con-

tributions.

Although necessarily classed as obiter dicta, it was

definitely recognized by the Circuit Court of Appeals

for the Second Circuit in Sadowsky v. Anderson, 29 F.

(2d) 677, decided December 10, 1928, affirming 25

F. (2d) 1014, certiorari denied 49 S. Ct. 346, 279 U. S.

849, 73 L. Ed. 992 that the 15% deduction for char-

itable contributions was not affected by the capital

gain provisions of the Revenue Act of 1921 (substan-

tially reenacted in the Revenue Act of 1928). In that

case the taxpayer was the owner of a clothing business

which he incorporated on June 6, 1919. He had other

sources of income. With respect to the income of the

business, he chose to be taxed for the year 1918 and

that portion of the year 1919 prior to incorporation

as if the income were that of a corporation. This was

permitted by Section 330 of the Revenue Act of 1918.

The question was whether the deduction for charitable

contributions was limited in amount of 15% of his net

income, including or excluding that part of his income

which was computed and taxed as corporate income

pursuant to Section 330. The Commissioner of In-

ternal Revenue refused to allow any deduction for

charitable contributions based on business income, be-

cause no such deduction was allowed corporations in

computing their net income under the Revenue Act

of 1918.

The Court decided in the Commissioner’s favor,

denying the deduction on business income which was

computed and taxed as that of a corporation, but the

following language in the opinion of Judge Augustus

N. Hand indicates the distinction which, applied to

the Bliss case, would result in granting the deduction

based upon net income inclusive of capital gain (p.

678) :

“The fact that the allowance of charitable gifts

was not cut off where income of individuals de-

rived from capital gains was taxed at special

rates under Section 206 of the Revenue Act of

1921 (42 Stat. 232), and that it was similarly

available where dividends of prior years were

received in 1917, or subsequent years, but taxed

at prior years’ rates cannot extend the deduction

eta TT es

to income derived from plaintiff’s clothing busi-

ness. The option in those cases related merely

to rates, and wus accompanied by no language

providing for the ‘computation’ of the income as

that of a corporation.”

In view of the fact that the Government is now on

the other side of the fance and is contending that the

capital gain provisions do cut down on the charitable

contributions, it is interesting to note the following

excerpt beginning on page 9 of the Government’s brief

in the Sadowsky case :

“4. That the plaintiff loses sight of the fact

that the income which is taxed at corporate rates

is not the income of the individual strictly, but the

income of trade or business treated as a corpora-

tion, is apparent: by the supposed analogies which

he offers in Support of his conclusion. Both in-

stances cited by lhim ( “capital gain provisions and

here, affect the method of computing net income,

nor did they deal with splitting an individual into

two distinct legal personalties, In each instance,

the net income was computed in accordance with

the provisions of the statute dealing with an in-

dividual. It lay with the taxpayer to decide

whether as to part of his income one rate or the

other would apply, but the whole income was

measured and determined by the provisions re-

lating to individuals. Here the net income from

the business is as Separate and distinct from the

net income from other sources of the individual

to the same extent as though the business had in

fact been incorporated and the plaintiff were its

*MY INSERTION.

sole strockholder. In the two instances cited,

therefore, there was every reason why the tax-

payer should be allowed a deduction up to 15%

of his income on account of his charitable con-

CONGRESS BY ADOPTING SECTION 23 (n)

THIS POLICY WAS NOT REVERSED IN 1921 WHEN

THE CAPITAL GAIN PROVISIONS WERE ENACTED.

In furtherance of the policy to encourage charitable

gifts, Congress also provided that for Federal estate

tax purposes the amount of all bequests to charitable

institutions shall be deducted from the value of the

th ig on eT ne

wre

OT PE En

gross estate. The purpose of the enactment of this

particular legislation was well recognized in U. §. y

Provident Trust Company, 78 L.ed. 510, 514, decided

February 5, 1934, wherein this Court, Speaking

through Mr. Justice Sutherland, made the following

pertinent observation:

“We have for consideration simply a statutory

provision exempting from a prescribed tax the

value of all bequests, ete., made to or for the use of

charitable organizations and those which are akin,

plainly evincing a legislative policy to encourage

such bequests. Edwards v. Slocum, 264 U. S. 61,

63, 68 L. ed. 564, 565, 44 S.Ct. 293. And, in that

view, we may well assume that Congress could

not have meant to leave its aim to be diverted by

a purely arbitrary presumption, which whether

applicable or not to Sustain another or different

policy, would deny the truth and subvert the

policy of this particular legislation. Compare

Humes v. United States, supra (276 U. S. at p.

494, 72 L. ed. 670, 48 S.Ct. 347) .”

When the capital gain provisions were adopted in

1921, it clearly was not within the mind of Congress

that the same would clash with the provisions per-

mitting a deduction for charitable contributions to

the extent of 15 per cent of a taxpayer’s net income.

It was not the aim of Congress by the adoption of the

capital gain provisions to in any manner impair or

wholly destroy the deduction for charitable contribu-

tions. The amount allowable as a deduction for

charitable contributions is governed by Section 23 (n),

and not by Section 101 which contains the capital gain

provisions. When the Commissioner seeks to read

into Section 23 (n) a further limitation so as to con-

fine the deduction to 15 per cent of a taxpayer’s ordi-

nary net income where part of his net income consists

of a capital net gain, he clearly is usurping a legisla-

tive function beyond his power. Such a position tends

to thwart or ‘defeat the policy of Congress to en-

courage charitable contributions, and produces in-

congruous results inconsistent with the legislative

purpose.

To illustrate the inequitable operation of the

statute under the Government’s present view, assume

three taxpayers made charitable contributions of

$30,000 each and had respective incomes as follows:

A B JB

Gain (or loss) from business...... ($100,000) $100,000 $200,000

Gain from sale of capital assets... 300,000 100,000 None

Net income (before a deduction

for contributions) ............. $200,000 $200,000 $200,000

In accordance with the provisions of Section 23 (n)

and the statutory definition of “net income,” which is

conclusive, there is an allowable deduction for contri-

butions, within the limitation, of $30,000 in each of

the above cases. However, following the Govern-

ment’s theory, the deduction is determined not by

the question of the amount of net income, exclusive

of a deduction for contributions, but by the kind of

net income realized. Under that view, A would be

allowed a deduction for contributions of zero, Ba

deduction of $15,000 and C a deduction of $30,000,

despite the fact that each has the same statutory net

income.

It is not to be presumed, without clear legislative

pronouncement to the contrary, that taxpayers hav-

ing the same economic and statutory net income are

to be treated so differently.

g Scr neers

Congress in enacting the capital gain provisions in

1921 sought to stimulate the conversion of capital

investments, and to remove the deterrent effect of

high surtax rates on such transactions. Under the

Revenue Act of 1921, the surtax rates ranged from

1% to 65% on incomes in excess of $5,000.00. Con-

gress was undoubtedly convinced that the high rates

of tax retarded sales of investment property with a

consequent loss of revenue to the Government. In

remedying this situation by the adoption of the cap-

ital gain provisions, Congress envinced no purpose to.

subvert its policy to encourage contributions to chari-

table organizations. The two policies are entirely

unrelated, and both of them may be effectually ac-

complished by a reasonable and sensible construction

of the statue.

The legislative purpose of the enactment of the

capital gain provisions was well stated by Mr. Justice

Stone, who delivered the opinion of the Supreme

Court of the United States in Burnet v. Harmel, de-

cided November 7, 1932, 287 U. §. 103,106, as follows:

“Before the Act of 1921, gains realized from

the sale of property were taxed at the same rates

as other income, with the result that capital

gains, often accruing over long periods of time,

were taxed in the year of realization at the high

rates resulting from their inclusion in the higher

surtax brackets. The provisions of the 1921

revenue act for taxing capital gains at a lower

rate, reenacted in 1924 without material change,

were adopted to relieve the taxpayer from these

excessive tax burdens on gains resulting from a

conversion of capital investments, and to remove

the deterrent effect of those burdens on such

conversions. House Report No. 350, Ways and

Means Committee, 67th Cong., Ist Sess. on the

Revenue Bill of 1921, p. 10; see Alexander v. King

(C. C. A. 10th) 74 A. L. R. 174, 46 F. (2d) 235,”

The legislative reasons for the adoption of the

capital gain provisions were also adverted to by Mr.

Justice Butler in Helvering v. New York Trust Co.,

78 L. ed. 960, 964, 54 S. Ct. 806, 809, decided May

28, 1934.

In Report No. 275, 67th Cong., Ist Sess., Senate

Finance Committee, covering the Revenue Bill of

1921, which for the first time introduced the capital

gain provisions, it is stated on the subject of deduc-

tions:

“Section 214 allows substantially the same de-

ductions in computing net income as are allowed

under existing law * * *,”

The Revenue Act of 1918 authorized a deduction

for charitable contributions to an amount not in ex-

cess of 15% of the taxpayer’s net income.

In the absence of any expression of legislative in-

tent to employ the capital gain provisions to cut down

the allowable deduction for charitable coritributions

or to change the meaning of the term “net income,”

we must presume that the plain meaning of Sections

21, 22 and 23 of the Revenue Act of 1928 has not been

abrogated.

When Congress makes a change in an existing

revenue act, it is the well established policy of the

oe Metsu: TEMES hemerpg neo eam aera yer I ENED ms

inet edineninnin apetnemennessenie oncemase, dienes

House Ways and Means Committee and the Senate

Finance Committee to explain the nature of the

change in their reports. When Congress proposed

the adoption of the capital gain provisions, the Sen-

ate Finance Committee expressly stated in its report

covering the Revenue Bill of 192} that the allowable

deductions are substantially the same as under ex-

isting law. If Congress had .any intention of im-

pairing or destroying the 15% deduction for chari-

table contributions when a taxpayer elected to be

taxed on his capital gain at 121%4%, it would have

used appropriate language in the act to effectuate

Such a purpose.

Congress not only used the term “net income”, in

Section 23 (n) of the Revenue Act of 1928 providing

for the 15% limitation on the deduction for charitable

contributions, but also employed the same term in

Section 120, allowing an unlimited deduction for

come, including taxes paid, and in Section 706 pro-

viding for a limited deduction for charitable contri-

butions to a trust in the year 1923. If the term “net

income”, as used in Sections 120 and 706 were con-

strued to mean net income, excluding capital gains,

it would obviously do violence to the plain legislative

purpose of the enactment of these Sections.

In Report No. 398, 68th Cong., Ist Sess., Senate

Finance Committee, covering the Revenue Act of

1924, it is stated on the subject of the unlimited de-

duction for charitable contributions (at p. 24) as

follows:

“Section 214 (a) (2) * * * The paragraph has

been further amended to provide that the limita-

tion upon the amount of deductions allowable

under this paragraph to 15 per cent of the tax-

payer’s net income shall not be applied, if the

taxpayer has for each of the 10 preceding years,

as well as the year in question, contributed an

amount equal to or exceeding 90 per cent of his

income to the organizations and for the purposes

Specified in this paragraph. This provision is

designed substantially to free from income taxa-

tion one who is habitually contributing to be-

nevolent organizations amounts equalling virtu-

aly his entire income.”

Congress in the use of the term “net income”, in

Sections 23 (n), 120 and 706 of the Revenue Act of

1928 obviously meant net income subject to tax, in-

cluding capital gains.

The “net income”, which is subject to tax under

the Revenue Act is a statutory concept. Section 2]

‘

eh Gem pene:

Fay OES IN: Ra ge PO ONES ate RE BM my

i ee i Duty

of the Revenue Act of 1928 defines “net income”, as

the gross income computed under Section 22, less

the deductions allowed by Section 23. Section 22 (a)

expressly provides that “gross income”, includes the

gain dérived from sales or dealings in property,

whether real or personal, and therefore no taxpayer

can hope to escape taxation of a capital gain by con-

tending that it falls without the purview of Section

22 (a). Section 22 (e) expressly covers the computa-

tion of the taxable gain in the case of a sale or other

disposition of property.

The computation of net income is made under Sec-

tions 21, 22 and 23 of the Revenue Act of 1928, and

not under the capital gain provisions.

The Treasury Regulations from 192] to 1932 have

recognized that income derived from the sale of

capital assets is part of the Statutory net income. In

Treasury Regulations 74 under the Revenue Act of

1928, it is stated (at p. 8):

“art. <i. Meaning of net income. The tax

imposed by the Act is upon the income. In the

computation of the tax various classes of income

must be considered:

“(a) Income (in the broad sense), meaning

all wealth which flows in to the taxpayer other

than as a mere return of capital. It includes

in the forms of income specifically described as

gains and profits, including gains derived from

the sale or other disposition of capital assets.

** * ” (Italics supplied. )

et Ee

ADE 8.

Article 21 of Regulations 62 under the 1921 Act,

Article 21 of Regulations 65 under the 1924 Act, and

Article 21 of Regulations 69 under the 1926 Act con-

tain identical language on this subject.

A capital gain aiso falls within the general and

accepted definition of income for taxation purposes

which the Supreme Court held to be “the gain derived

from capital, from labor, or from both combined.”

Eisner V. Macomber, 252 U. S. 189, 40 S. Ct.

189, 193, 64 L. Ed. 521, 9 A. L. R. 1570;

Merchants’ Loan & Trust Co., Tr Vv. Smietanka,

225 U.S. 509, 517, 41S. Ct. 886, 65 L. Ed. 751, 15

A. L. R. 1305.

See also American Can Co. v. Bowers, 35 F. (2d)

832, 834, certiorari denied, 281 U. S. 736, wherein it

is stated:

“Necessarily, net income, for tax purposes is a

conception of the income tax statute, and the

amount arrived at is ascertained by deducting

from the gross amount of income received by the

taxpayer from all sources the specified deductions

allowed to it by statute.”

IT WAS THE ADMINISTRATIVE PRACTICE OF

THE COMMISSIONER FROM 1921 TO 1932 TO ALLOW

AS A‘DEDUCTION CHARITABLE CONTRIBUTIONS

UP TO 15 PER CENT OF A TAXPAYER’S TOTAL NET

INCOME, INCLUDING CAPITAL NET GAIN.

As has been previously stated, all of the revenue acts

from 1917 to 1934 on the question involved limited the

TREE ee

deduction for charitable contributions to an amount

not in excess of 15% of the taxpayer’s net income be-

fore any allowance for contributions. The Government

now maintains that the introduction of the capital gain

provisions commencing with the Revenue Act of 1921

carried with it an exclusion of such gain from net in-

come in computing the 15% deduction for charitable

contributions, so that the administrative practice of

allowing a deduction to the extent of 15% of a tax-

payer’s net income under the Revenue Acts of 1917

and 1918 is not decisive.

However, this administrative practice of the Com-

missioner of Internal Revenue to allow a deduction for

contributions to the extent of 15% of a taxpayer’s net

income, including capital gains, continued throughout

the Revenue Act of 1921, 1924, 1926 and 1928, all of

which acts contained capital gain provisions in sub-

stantially the same language, down to January 27,

1932, when the Commissioner promulgated Mim. 3931,

Internal Revenue Bulletin XI-7, p. 2, of February 15,

1932, Cumulative Bulletin XI-1, p. 33. This mimeo-

graph was issued after the decision of the Board of

Tax Appeals in Hallie D. Elkins, 24 B. T. A. 572, (de-

cided November 3, 1931), which involved the determi-

nation of the deduction for charitable contributions

where the taxpayer sustained a capital net loss, a prob-

lem unlike the present one, and it was therein pro-

vided that pending final court decision in the Elkins

case, capital net gains are to be excluded in the audit

of returns for 1929 and subsequent years in arriving

at the net income subject to the 15% limitation in ascre-

taining the deduction for charitable contributions. The

capital net loss provisions first appeared in the Rev-

enue Act of 1924.

The Government, however, never prosecuted an ap-

peal from the decision of the Board in the Elkins case,

supra, and there is no case pending in court involving

the amount allowable as a deduction for charitable con-

tributions where the taxpayer sustained a capital net

loss, as far as this counsel is informed.

In Prentice-Hall Federal Tax Service for 1932, page

14905, par. 14910, it is stated:

“Fifteen per cent limitation for deductions ac-

count charitable contributions applies to total net

income inclusive of gain from sale of capital as-

sets. (Telegram to A. B. Trudgian, New York,

signed E. W. Chatterton, Deputy Commissioner,

dated February 6, 1923).”

This decision was promulgated under the Revenue

Act of 1921, which contained capital gain provisions

substantially the same as appear in the 1928 Act. This

decision was consistently followed by the Bureau of

Internal Revenue until the issuance of Mimeograph

3931 referred to above, all of which accounts for the

absence of any prior final court decision on the subject

involved. - -

In Ralph W. Harbison, 26 B. T. A. 896 (decided

August 29, 1932), Susan Dwight Bliss, 27 B. T. A. 205

(decided December 2, 1932 and Mary Colgate, 27 B. T.

A. 506 (decided December 30, 1932), the Commis-

sioner of Internal Revenue had allowed in his notices

of deficiencies in tax a deduction for charitable con-

tributions based on 15% of the taxpayers’ total net in-

come, including capital gains. The taxpayers appealed

to the Board on other issues, and the Commissioner

SELL METTLE ELOY TIC OES KI MT wey ra aR mo

in his answer, after changing his position on the 15%

deduction for contributions where part of the net in-

come consists of a capital gain, claimed an increased

deficiency on the theory that the 15% deduction was

limited to 15% of net income, excluding capital gains.

Under Section 272 (e) of the Revenue Act of 1928, if

an appeal is filed by a taxpayer with the Board, the

Commissioner in his answer may claim a deficiency in

tax greater than that asserted in his deficiency notice.

In the issuance of the notices of deficiencies in tax

in the Harbison, Bliss and Colgate cases, supra, the

Commissioner adhered to his long-continued adminis-

trative practice of allowing a deduction for contribu-

tions to the extent of 15% of a taxpayer’s total net in-

come, including capital net gain.

The decisions in these cases which upheld the Com-

missioner were written by three of the sixteen mem-

bers of the Board, and were subsequently repudiated

by the decision in the Straus case, which was decided

by the full Board in a unanimous opinion.

It was never contemplated by the Treasury Regula-

tions that if a taxpayer enjoyed a capital net gain, his

deduction for charitable contributions should be con-

fined to 15% of his ordinary net income.

In Article 251 of Regulations 62 under the Revenue

Act of 1921, it is provided in part as follows:

“Art. 251. Charitable contributions.—Contri-

butions or gifts within the taxable year are deduc-

tible to an aggregate amount not in excess of 15%

of the tovnaver’s net income, including such pay-

mam,” **:

The same language was repeated in Article 251 of

Regulations 65 under the 1924 Act, Article 251 of Reg-

ulations 69 under the 1926 Act, Article 261 of Regula-

tions 74 under the 1928 Act, and Article 261 of Regu-

lations 77 under the 1932 Act. There is no language in

the regulations which purports to confine the 15 per

cent limitation to ordinary net income where part of the

net income consists of a capital net gain.

This is clearly a case where the long-continued and

uniform departmental construction of the law should

be held controlling. Both the law and the regulations

provided that gains derived from the sale of capital

assets formed a part of net income subject to tax. In

the face of this administrative practice, Congress re-

enacted the capital gain provisions in essentially the

same form by the Acts of 1924, 1926 and 1928. Con-

gress has never at any time disapproved the admin-

istrative practice of permitting a deduction for char-

itable contributions to the extent of 15% of a tax-

payer’s total net income subject to tax, including capi-

tal net gains. The deduction for charitable contribu-

tions served as an inducement to taxpayers to donate

to charity, and many philanthropically minded tax-

payers contributed to charitable institutions subse-

quent to the enactment of the Revenue Act of 1921

large sums in excess of 15% of their ordinary net in-

come. They have parted with their money in reliance

of the law and the administrative practice thereunder.

It was the purpose of Congress to free from taxation

contributions up to 15% of a taxpayer’s total net in-

come. Congress was not interested in the characteriza-

tion of the net income under the Act. The net income

from investment property held more than two years

and taxed at 12144% was denominated a capital net

-- = OILY CNL EON RTE Ae ARE RR | A ohy

ears

gain, but it nevertheless formed a part of a taxpayer’s

taxable net income under the Act.

. It is fair to assume that if the departmental inter-

pretation which was a long-continued and consistent

one did not properly reffect the meaning and intent of

Congress, that body would have challenged and cor-

rected such holding instead of continually reenacting

the capital gain and charitable.contribution sections

in their existing language. Having refrained from

making any change in the provisions affecting the de-

duction for charitable contributions, it must be pre-

sumed that Congress was content with the Commis-

sioner’s administrative interpretation. This principle

of law has been consistently adhered to by the Su-

preme Court of the United States in a long line of

cases:

U.S. v. Dakota-Montana Oil Co., 288 U.S. 459;

McCaughn v. Hershey Chocolate Co., 283 U.S.

488, 492;

Poe v. Seaborn, 282 U.S. 101, 117;

Universal Battery Co. v. U. S., 281 U.S. 580;

Brewster Vv. Gage, 280 U.S. 327, 337;

National Lead Co. v. U. S., 252 U. S. 140;

Latimer v. U. S., 223 U.S. 501, 504;

U.S. v. Baruch, 223 U.S. 191, 199;

Komada & Co. v. U. S., 215 U. S. 392, 396;

U.S. v. Cerecedo Hermanos y Compania, 209

U. S. 337, 339;

Copper Queen Mining Co. v. Arizona Board, 206

U.S. 474, 479;

U.S. Vv. Falk and Bro., 204 U.S. 148, 152;

N.Y.,N.H.& H.R. R. Co. v. 1.C.C., 200 U. S.

361, 401;

Robertson Vv Downing, 127 U. S. 613;

U.S. v. Philbrick, 120 U. S. 52, 58;

McDonald v. Hovey, 110 U. S. 619, 629.

The principle of law enunciated by these cases oper-

ates with equal force for the benefit of the taxpayer as

well as the Commissioner of Internal Revenue.

The case of Hallie D. Elkins, 24 B. T. A. 572, in-

volved the determination of the amount of the deduc-

tion for charitable contributions where the taxpayer

sustained a capital net loss. In that case, the taxpayer

had an ordinary net income of $113,151.98 in the year

1924, exclusive of charitable contributions, and a cap-

ital net loss of $127,259.41. The taxpayer made char-

itable contributions of $8,632.65. Under the Revenue

Act of 1924, the ordinary net income was subjected to

a tax of $23,766.77, and a credit against this tax was

allowed under the Act to the extent of 1214% of the

capital net loss. There was no election under the Act

where the taxpayer came within the provisions of the

capital net loss section. The application of its provi-

sions was mandatory. While in that case, the loss was

in excess of the income, nevertheless the taxpayer was

required to pay a tax. The Commissioner refused to

allow any deduction for charitable contributions, be-

cause the taxpayer’s loss was in excess of her income.

his el Nich a SIFTER SPN mY NRL SOOT EEE UY IRE I STR TE

Trussell, who delivered the opinion of the Board, said

(at p. 276):

» «* * * The reasonable and, in our opinion, the

proper interpretation of the applicable sections of

the 1924 Act is that when Section 208 (c) is ap-

plied, as it must be in this case, the ‘ordinary net

income’ is the basis for determining the amount

deductible on account of charitable contributions.

* * * It is untenable to say that for the purpose

of computing a tax liability this petitioner has a

net income of $113,151.98 and that at the same

time she has no net income for the purpose of com-

puting the amount allowable as a deduction for

contributions.”

Apparently the Board adopted a liberal interpreta-

tion of the statute in order to avoid an absurd result

and to carry out the manifest policy of Congress of

aiding charity by allowing a limited deduction for con-

tributions. The problem presented by the Elkins case,

supra, is unlike the present one. The Government did

not prosecute any appeal from the Board’s decision

in the Elkins case, or in any case involving a state of

facts similar to those in the Elkins case, and it is there-

fore unnecessary for the Court to pass upon the valid-

ity of the decision of the Board in the Elkins case. Here,

the taxpayer was required to pay a tax on income de-

rived from a capital gain. It would also be untenable

to say in this case that the taxpayer must pay a tax on

duction for contributions.

There is a well established rule that a statute is not

to be given an interpretation which will lead to absurd

consequences inconsistent with the legislative purpose.

U.S. Vv. Katz, 271 U.S. 354, 357;

Lau Ow Bew v. U. S., 144 U.S. 47, 59;

Church of Holy Trinity v. U. S., 143 U.S. 457;

U.S. v. Kirby, 74 U.S. 482;

Stonega Coke & Coal Co. v. Commissioner of In-

ternal Revenue, 57 F. (2nd) 1030, 1021;

In the Katz case, supra, Mr. Justice Stone, who de-

livered the opinion of the Court, made the following

observation:

“All laws are to be given a sensible construc-

tion; and a literal application of a statute, which

would lead to absurd consequences, should be

avoided whenever a reasonable application can be

given to it, consistent with the legislative purpose.

See Hawaii v. Mankichi, 190 U. S. 197, 212, 47

L. ed. 1016, 1020, 23 Sup. Ct. Rep. 787, 12 Am.

Crim. Rep. 465, and cases there cited. In ascertain-

ing that purpose, we may examine the title of the

Act (United States v. Fisher, 2 Cranch, 358, 386,

2 L. ed. 304, 313; United States v. Palmer, 3

Wheat. 610, 631, 4 L. ed. 471, 477; Church of the

Holy Trinity v. United States, 143 U. S. 457, 462,

36 L. ed. 226, 229, 12 Sup. Ct. Rep. 516), the

source in previous legislation of the particular

provision in question ( United States v. Saunders,

22 Wall. 492, 22 L. ed. 736; Viterbo v. Friedlan-

A LAP ETS ANZ RL ad. 778. 7 Sun- Ct. Ren.

962; United States v. Morrow, 266 U.S. 531, 535,

69 L. ed. 425, 427, 45 Sup. Ct. Rep. 173), and the

legislative scheme or plan by which the general

purpose of the act is to be carried out. (See Platt

v. Union P. R. Co., 99 U.S. 48, 63, 64, 65, 25 L. ed.

;

424, 429; Bernier v. Bernier, 147 U.S. 242, 246,

37 L. ed. 152, 154, 13 Sup. Ct. Rep. 244).

In the decision of the instant case, it is not necessary

to pass upon the validity of the decision of the Board

in the Elkins case, supra. While the Commissioner pre-

viously acquiesced in the decision in the Elkins case, it

is his present administrative practice to include the

amount of a capital net loss in the computation of net

income for the purpose of Section 23 (n), and to dis-

allow any deduction for charitable contributions where

the capital net loss is in excess of ordinary net income

even though a taxpayer may be required to pay a tax.

In the case of a capital net gain, the amount thereof

constitutes the net income derived from the sale of

investment property held more than two years and

forms a part of net income subject to tax.

In the case of a capital net loss, the amount thereof

to the extent of 1214% is allowed as a credit against

the normal and surtaxes due on the ordinary net in-

come. The ordinary net income constitutes the net in-

come subject to tax, and against the tax due thereon,

there is allowable a credit of 121% of the capital net

loss.

It may be the view of this Court that the net income

subject to tax as computed before the deduction for

CULL ADU tae Ae craw WAL Whoo n Lan Antauminine the 14%

limitation on the deduction for charitable contribu-

tions and that the statute is not to be given a literal ap-

plication so that the beneficient purpose of Congress

may be effectually accomplished.

The Board in the Straus case avoided any expres-

sion of opinion as to the soundness of its decision in the

Elkins case, and merely stated:

“The cases involving capital net losses may or

may not be distinguishable from those involving

capital net gains. We express no opi%ien on that

subject, but confine ourselves strictiy to the ques-

tion before us.”

On the subject of the deduction for charitable con-

tributions, it is interesting to observe the comments of

Robert H. Montgomery in Federal Tax Handbook :

(1932) at pages 475-476 thereof : :

cot

‘s

ia)

fo)

ia)

io)

®,

ist)

ia)

‘Sh

ia)

io)

PRON NEA 0)

“ “Gross income’ as computed under Section 22

includes capital net gain but the deductions listed

under Section 23 do not include capital net loss.

“The Treasury formerly permitted the inclu-

sion of capital net gain to arrive at net income

for the purpose of computing the limitation (C. B.

cf reauired the He duction Arem. net ingame of

Com’r (24 B. T. A. 572) (NA) and Livingood,

Ex’r v. Com’r (25 B. T. A. 585), however, the

Board held that capital net losses should not be

taken into consideration in computing net income

—

—_

—

le)

—

LS)

—

—"

—

iw)

—_

—

ONT ReRYSY

for purposes of the limitation, inasmuch as cap-

ital net losses are not among the list of statutory

deductions from gross income in arriving at stat-

utory net income. In’view of this decision revers-

ing the established policy of the Treasury, the

Treasury issued a ruling (C. B. X. I-7-5386; Mim.

3931) denying the right of taxpayers to include

capital net gain in the computation of net income

for the purpose of applying the limitation, pend-

ing the outcome of its appeal in the Elkins case.

“In a decision just promulgated (Harbison v.

Com’r, 26 B. T. A.—, August 29, 1932) the Board

of Tax Appeals has taken a similar position to

that of the Treasury in Mim. 3931, supra, and has

held that in determining the 15 per cent limita-

tion for deduction of contributions the amount of

capital net gain should be excluded from ordi-

nary net income.

“The Board’s reasoning to justify its position

in this case is very weak, holding in effect that

when the taxpayer elects to report capital net gain

his tax liability is determined in two parts, the

capital net gains part not being ineluded in ‘net

income.’ This appears to be an incorrect inter-

pretation of ‘net income’) (Section 21) and the

provisions of Section 23 (n) relating to deductions

for contributions, etc.”

Since the above was written the three members of

the Board who rendered the decisions in the Harbison,

puss isno0d. Gelaate cases. sunra. reversed themselves by

concurring in the unanimous opinion in the Straus

case, and by following rule announced therein in later

cases.

THE CAPITAL GAIN PROVISIONS DO NOT SERVE

TO IMPAIR OR DESTROY THE DEDUCTION FOR

CHARITABLE CONTRIBUTIONS.

The objective of the capital gain provisions was to

expedite sales of investment property held by taxpay-

ers for more than two years which had been retarded

by the high surtaxes, as was well stated by Mr. Justice

Stone in Burnet v. Harmel, supra, and by Mr. Justice

Butler in Helvering v. New York Trust Co., supra. In

analyzing the capital gain provisions, the intention of

Congress and the object sought to be accomplished are

important factors.

Congress did not use any language in the capital

gain provisions according a flat rate of 1212 per cent

on the gain derived from the sale of capital assets to

indicate any intent to invade Section 23 (n) govern-

ing the deduction for charitable contributions with

the effect that the deduction is impaired or wholly

destroyed. Congress did not by the adoption of the

capital gain provisions of Section 101 intend to

ingraft into Section-23 (n) a further limitation limit-

ing the deduction to 15 per cent of a taxpayer’s ordi-

nary net income if he had a capital net gain.

Congress in furtherance of the policy to encourage

sales of investment property by according an optional

rate’ OL “1223 / per~ormtudid.voat intend to subvert

another policy to encourage charitable contributions.

The two policies are unrelated and both of them can

be effectually accomplished by placing upon the statu-

== eos Pod f

tory provisions a reasonable construction which will

serve the plain Congressional purpose. If it had

been the purpose of Congress to cut down on the

deduction for charitable contributions where a tax-

payer had a capital net gain, it would not have hidden

its intent in the capital gain provisions, but would

have used appropriate language in Section 23 (n)

which fixes the limitation on the deduction.

Section 101 does not purport to provide the stand-

ards by which net income is computed. “Net income”

has been defined by Sections 21, 22 and 23, and is com-

puted under those sections. Section 101 provides an

optional rate of tax on a capital net gain, and defines

that term. The evident purpose of Congress was to

carve out of a taxpayer’s total net income his net

income from the sale of investment property held

more than two years and give him an election to be

taxed thereon at 121% per cent. Congress, instead of

envincing an intent in Section 101 to impair or

destroy any deduction allowed a taxpayer by Section

23, was careful in its draftsmanship to preserve the

same.

Section 101 (c) (5) defines a “capital net gain” to

mean the excess of the total amount of capital gain

over the sum of (A) the capital deductions and cap-

ital losses, plus (B) the amount, if any, by which the

ordinary deductions exceed the gross income com-

puted without including capital gains.

All of these terms are defined in Section 101. There

is a substantial difference between the meaning of

the terms “capital gain,” and “capital net gain.”

Section 101 (c) (1) defines a “capital gain,” to mean

taxable gain from the sale or exchange of capital

assets consummated after December 31, 1921.

Section 101 (c) (8) defines “capital assets,” to

mean 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 tax-

payer 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.

Section 101 (c) (3) defines “capital deductions,” to

mean 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.

Section (101) (c) (2) defines a “capital loss,” to

mean a deductible loss resulting from the sale or

exchange of capital assets.

Section 101 (c) (4) defines “ordinary deductions,”

to mean the deductions allowed by Section 23 other

than capital losses and capital deductions.

The term “gross income,” as used in Section 101

(ec) (5) in association with the language “computed

without including capital gains,” undoubtedly means

the “gross income,” as defined by Section 22.

No part of the deductions allowed by Section 23 is

lost in the process of singling out the amount of the

oS rer Ree

bs PFO

ier PAO te

eee

capital net gain for the purpose of according the

same a flat tax of 12% per cent at the taxpayer’s

election.

The application of the capital gain provisions may

be illustrated by using the figures which are set

forth in the opinion in the Straus case. It was stip-

ulated in that case that the taxpayer had in the year

1929 a “capital gain,” of $766,463.96 as defined by

Section 101 (c) of the Revenue Act of 1928, but with-

out any allowance of a deduction for charitable con-

tributions. It was also stipulated that the taxpayer

had not items of capital deductions or capital losses.

It was also stipulated that the taxpayer had an “ordi-

nary net income,” of $43,079.90 as defined by Section

101 (c), but without any allowance of a deduction for

contributions as provided by Section 23 (n). The tax-

payer had a “gross income computed without includ-

ing capital gains,” of $159,831.87 and the amount of

the ordinary deductions without any deduction for

contributions was $116,751.97, making the difference

of $43,079.90. The taxpayer donated to charitable

institutions the sum of $144,695.04, and the Board

allowed the sum of $121,431.58, being 15 per cent of

the taxpayer’s total net income of $809,543.86, con-

sisting of ordinary net income of $43,079.90 and cap-

ital gain of $766,463.96, as computed before the deduc-

tion for contributioins.

Now, what is the amount of the taxpayer’s capital

net gain subject to the 1214% tax? Section 101 (c)

(5) clearly states that it is the excess of the amount

of capital gain over capital deductions and capital

losses plus the amount, if any, by which the ordinary

deductions exceed the gross income computing with-

out including capital gains. The amount of the cap-

ital gain is $766,463.96 and the taxpayer had no cap-

ital deductions or capital losses in the year 1929.

However, the ordinary deductions to which the tax-

payer was entitled in the year 1929 exceeded the gross

income computed without including capital gains.

Section 101 (c) (4) defines ordinary deductions to

mean the deductions allowed by Section 23 other than

capital losses and capital deductions. One of the de-

ductions allowed by Section 23 is for charitable con-

tributions limited only by 15% of the taxpayer’s net

income. Since the allowable amount for charitable

contributions is the sum of $121,431.58, and the tax-

payer only had a gross income, computed without in-

cluding capital gains, of $159,831.87 and the amount

of the ordinary deductions without any deductions

for contributions was $116,751.97, there was clearly

an excess of ordinary deductions over ordinary gross

income which under Section 101 (ec) (5) was permit-

ted to invade the “capital gain,” in arriving at the

“capital net gain,” subject to the 1214% tax. This is

a subject which apparently the Board did not con-

sider in its prior three decisions, but was given effect

to in the decision of the Straus case.

In Report No. 179, 68th Cong., 1st Sess., Committee

on Ways and Means, covering the Revenue Bill of

1924, it is stated at p. 19:

“Section 208. * * * In the bill paragraph (4)

is inserted, and the two succeeding paragraphs

are changed in order to revise the definition of

capital net gain so that the tax in cases where

there is a deficit in ordinary income will be

SE EGS re NE hS BSS ks nk a tne ee nt = i

12142% of an amount determined by subtracting

from the capital net gain the amount of the

deficit in ordinary net income. This provision is

in the interest of the taxpayer.”

The Board determined that the sum of $688,112.28

represented the amount of the “capital net gain,”

under Section 101 (c) (5) in the Straus case. This

was arrived at by subtracting from the “capital gain,”

of $766,463.96 the amount of $78,351.68, representing

the amount by which the “ordinary deductions,” ex-

ceeded the “gross income computed without includ-

ing capital gains.” Such gross income amounted to

$159,831.87 and the ordinary deductions without any

deduction for contributions totaled $116,751.97. The

Board allowed the sum of $121,481.58 as an “ordinary

deduction,” for charitable contributions. The ordi-

nary deductions therefore totaled $238,183.55, and ex-

ceeded the ordinary gross income by the sum of

$78,351.68. There were no items of capital deduction

or capital losses in the Straus case.

The Revenue Act of 1921 while it taxed specially a

capital net gain at 12!5%, it failed to expressly provide

for an invasion of capital gain where the ordinary

deductions exceeded the ordinary gross income.

Congress by the adoption of the capital gain provi-

sions did not expressly or impliedly intend to impair

or destroy the deduction for charitable contributions

to an amount not in excess of 15% of the taxpayer’s

net income provided for in Section 23 (n). By a care-

ful study of Section 101 (c), it is found that Congress

was careful in preserving to a taxpayer his usual and

ordinary deductions and commencing with the Rev-

enue Act of 1924, it was expressly provided that if

there was an excess of ordinary deductions over ordi-

nary gross income, such excess was to be subtracted

from the amount of capital gain, in arriving at the

amount of the capital net gain subject to the 1214 %

tax.

Section 101 makes no reference to any further

limitation on the deduction for charitable contribu-

tions contained in Section 23 (n). Section 101 (a)

authorizing a 1214% tax on capital net gains must

necessarily be read in the light of Section 101 (c) to

ascertain if Congress by the adoption of these provi-

sions impliedly intended to cut down the 15% limita-

tion contained in Section 23 (n).

Congress in defining a capital net gain in Section

101 (ce) (5) expressly provided that if the ordinary

deductions exceeded the gross income computed with-

out including capital gains, the excess was to be de-

deducted from the amount of the capital gain in de-

termining the capital net gain. We then pass to Sec-

tion 101 (¢) (4) to ascertain if the 15% deduction for

contributions is one of the ordinary deductions, and

find that “ordinary deductions,” means the deductions

allowed by Section 23 other than capital losses and

capital deductions. Section 23 expressly provides that

in computing net income there shall be allowed as a

deduction for charitable contributions an amount not

to exceed 15°’ of the taxpayer’s net income. It may

therefore be said that Congress expressly preserved

to a taxpayer as an ordinary deduction his charitable

contributions limited only by Section 23 (n). When

Congress in Section 101 (e) (7) provided that ‘ordi-

LA LORE ny

SS PSE? re re ee Ne TR Ae ee

worn

ee a ~inye

J ROD RN eer gn ee

— —w

SEED Ee AP Dh BSS RED

nary net income” means the net, computed in accord-

ance with the provisions of this title, after excluding

all items of capital gain, capital loss, and capital de-

ductions, it certainly did not intend to exclude the

ordinary deduction for charitable contributions not

in excess of 15% of a taxpayer’s net income. By ordi-

nary rules of grammar, the second clause, “computed

in accordance with the provisions of this title,”

merely explains and identifies what is meant by the

expression “net income.” “This title,” means Title I.

Net income computed in accordance with Title I is

obviously net income as defined in Section 21 of Title

I, i. e., gross income as defined in Section 22 less the

deductions allowed by Section 23. In other words,

Section 101 (c) (7), where it speaks of net income,

means the net income which has been computed in

accordance with Sections 21, 22 and 23, but “ordinary

net income,” means such net income after excluding

all items of capital gain, capital loss and capital de-

ductions, that is to say, after excluding capital net

gain or capital net loss. The only other possible con-

struction would be to pay no attention to the second

comma, between “title” and “after,” and attempt to

arrive at an anomalous net income by first excluding

items of capital gain, capital loss, and capital deduc-

tions. That, however, would not be net income and an

analysis of the provision can leave no doubt that one

must start with net income as computed in accordance

with Sections 21, 22 and 23 and then exclude all items

of capital gain, capital loss and capital deduction in

arriving at ordinary net income.

Section 101 (c) (7) does not in any sense, directly

or impliedly, invade Sections 23 ‘n), 120 or 706 deal-

ing with the deduction for charitable contributions. In

order to accomplish effectually the object of Congress

in computing a separate rate of tax on capital net gain,

Section 101 (c) (7) necessarily had to exclude all items

of capital gain, capital loss and capital deductions, but

the exclusion of these items does not carry with it an

exclusion of the ordinary deduction for charitable con-

tributions. To do so, is to read into Section 101 (ec)

(7) language which does not appear therein. It would

be just as sensible to exclude under Section 101 (c)

(7) a deduction for interest at«the rate of 6% per

annum which a taxpayer may have paid to a bank for a

loan to carry capital assets. The only limitation on the

deduction for charitable contributions is contained in

Section 23 (n) as applied to the instant case, and Con-

gress showed no purpose in the capital gain provisions

to impair or destroy this deduction.

As further evidence of the fact that Congress recog-

nized that capital gains were included in gross income

as that term is used in Section 22 in computing the net

income on which the deduction for contributions is

based, reference may again be made to Section 101 (c)

(5) which in part provided that in arriving at the

capital net gain, “the amount, if any, by which the

ordinary deductions exceed the gross income computed

without including capital gains,” was to be substracted

from the amount of the capital gain. Why should

Congress specify “gross income” computed without

including capital gains, unless where the term is used

without limitation, as in Section 22, “gross income”

includes capital gains?

A further clear indication that all items of gross

income and deductions that may be found in the statute

A. ePID

ee ee tee See

are included in Sections 22 and 23, is derived from the

fact that Sections 101 (ce) (3) and 101 (c) (4) show

clearly that the capital deductions and ordinary deduc-

tions are, together, those deductions found in

Section 23.

Summarizing the question of interpretation, it will

be seen that Congress has given a statutory definition

to the term “net income” as including all items of

gross income less all items of deductions, and neces-

sarily, therefore, the term must include both ordinary

net income and capital gain, as is shown conclusively

to be true by reference to Section 101 (¢c) (7) and

Sections 168 and 186.

Having defined the terms, the operating provisions

of Section 101 present no difficulty. Paragraph 101

(a) provides that in the case of any taxpayer, other

than a corporation, who derives a capital net gain,

there shall at the election of the taxpayer be paid in

lieu of other taxes a tax determined by first computing

a partial tax upon the basis of the ordinary net income

at the rates and in the manner as if Section 101 had

not been enacted, and by regarding the total tax as

such amount plus 121% of the capital net gain. There

is no suggestion here of recomputing net income; there

is simply a special provision for determining a tax

upon net income which includes or comprises capital

net gain. There is no more necessity for recomputing

net income than there would be where net income in-

cludes dividends, or interest on Government bonds. Cer-

tainly in view of the fact that Congress in Section

101 (a) provided that a partial tax shall be first com-

puted at the rates and in the manner as if this Section

had not been enacted, there was no intention of dis-

turbing the ordinary deduction for charitable

contributions.

It has been suggested that Congress meant to penal-

ize a taxpayer for taking advantage of the tax on

capital net gains. No such intention exists in the

statute, and the provision for the special taxation of

capital net gains was designed at least as much for the

benefit of the Government as of the taxpayers, it being

intended thereby to stimulate the sales of investment

property held by taxpayers more than two years which

were retarded by the high surtaxes.

IF THE STATUTE IS AT ALL AMBIGUOUS AND A

DOUBT EXISTS, SUCH DOUBT IS TO BE RESOLVED

AGAINST THE GOVERNMENT.

The Commissioner apparently was not in doubt

from 1921 to 1932 that the Act permitted a deduction

for charitable contributions to an amount not exceed-

ing 15% of the taxpayer’s net income, including capi-

tal gains, and it was not until the year 1932 that a

doubt existed in his mind as to the propriety of his

action. If it can be said that the Act is not clear and

is ambibuous on the subject of the deduction for char-

itable contributions, and a doubt as to its meaning

exists, such doubt must be construed most strongly

against the Government.

Gould v. Gould, 245 U.S. 151;

U.S. v. Updike, 281 U.S. 489;

x6 am anal erates

Aes Tce

Old Colony R. R. Co. v. Commissioner of Inter-

nal Revenue, 284 U.S. 552.

Further, the Courts apparently look with favor upon

the provisions in the Revenue Acts with respect to

charitable contributions and charitable exemptions,

because they have given these provisions a liberal con-

struction in order to effectuate the beneficient purpose

of Congress.

Lederer v. Stockton, 260 U.S. 3;

Benziger v. U. S., 193 U.S. 38, 55;

Andrus et al v. Burnet*Commissioner of Inter-

nal Revenue, 60 App. D. C. 182, 50 F. (2d) 332.

VI.

CONCLUSION

It is respectfully submitted that the term “net in-

come,” as used in Section 23 (n) means total net in-

come subject to tax, as computed before the deduction

for contributions, ant\includes a capital net gain. This

is in accordance with the law and the uniform depart-

mental practice from 1921, when the capital gain pro-

visions were originally enacted, to 1932, when the Com-

missioner reversed his position. Since Congress re-

enacted the provision governing the deduction for con-

tributions and the section dealing with capital gains in

essentially the same language by the Acts of 1924,

1926. and 1928 in the face of this practice, Congress

impliedly approved and adopted the administrative

construction and this should prevail until changed by

legislative action.

Congress by the adoption of the capital gain provi-

sions sought to accomplish the single purpose of stim-

ulating the sale of investment property which was re-

tarded by the high surtaxes, and in effectuating this

policy by Section 101, it evinced no purpose to subvert

another policy namely that of encouraging contribu-

tions to charitable institutions.

A “capital net gain,” as computed before the deduc-

tion for contributions is simply the net income derived

from the sale of investment property held by a tax-

payer for more than two years, and forms a part of

“net income,” as used in Section 23 (n). Such net

income was characterized or denominated by Congress

as “capital net gain,” but it nevertheless constitutes

income under the Act as that term is used in Sections

21, 22 and 23 (n).

It is submitted that the Act should be construed in

such a manner as will effectually accomplish the bene-

ficient purpose of Congress. ee

Respectfully submitted. ‘

FREDERICK SCHWERTNER,

Counsel for Aaron Straus,

1000 National Press Building,

Washington, D. C.

August, 1934.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.