Source: https://m.openjurist.org/305/us/357
Timestamp: 2019-12-07 05:15:29
Document Index: 178466511

Matched Legal Cases: ['§ 23', '§ 101', '§ 11', '§ 101', '§ 101', '§ 101', '§ 101', '§ 101', '§ 21', '§ 11', '§ 12', '§ 101', '§ 101']

305 US 357 United States v. Pleasants | OpenJurist
305 U.S. 357 - United States v. Pleasants
305 US 357 United States v. Pleasants
59 S.Ct. 281
83 L.Ed. 217
Argued Dec. 5, 1938.
The question is whether the 15 per centum allowed as a deduction for charitable contributions under Section 23(n) of the Revenue Act of 1932, 26 U.S.C.A. § 23, is to be calculated on the taxpayer's net income computed without regard to a capital net loss as to which special provision is made by Section 101(b), 26 U.S.C.A. § 101.
Section 23(n) provides that in computing net income there shall be allowed as a deduction from gross income—'In the case of an individual, contributions or gifts made within the taxable year to or for the use of: * * * to an amount which in all the above cases combined does not exceed 15 per centum of the taxpayer's net income as computed without the benefit of this subsection'.
Respondent in 1932 made charitable contributions to the amount of $3,496. His net income, irrespective of a capital net loss, was determined by the Commissioner to be $94,963.52. Upon that net income the Commissioner assessed the normal tax and surtax at the rates prescribed by Sections 11 and 12, 26 U.S.C.A. §§ 11, 12.1 Respondent contended that this was his net income as described in Section 23(n) and that as his charitable contributions were less than 15 per centum of that amount they were deductible in full in determining his normal tax and surtax. The Commissioner refused to allow the deduction.
The taxpayer had sustained a 'capital net loss', as defined in Section 101(c) (6), 26 U.S.C.A. § 101, of $154,921.98. The Commissioner ruled that 'Since the capital loss of $154,921.98 is in excess of adjusted ordinary net income of $94,963.52 (without contributions) there is no net income against which to make a deduction for contributions'.
Having paid the tax assessed by the Commissioner upon that theory, respondent filed his claim for a refund and on its rejection brought this suit in the Court of Claims. Judgment was rendered in his favor. 22 F.Supp. 964. Because of an asserted conflict with decisions of Circuit Courts of Appeals2 and with our ruling in Helvering v. Bliss, 293 U.S. 144, 55 S.Ct. 17, 79 L.Ed. 246, 97 A.L.R. 207, certiorari was granted, October 10, 1938, 305 U.S. 582, 59 S.Ct. 78, 83 L.Ed. —-.
'Capital net gains' and 'capital net losses' of individual taxpayers are the subject of special treatment under Section 101. In the case of a 'capital net gain', there is to be levied, at the election of the taxpayer, and in lieu of all other taxes imposed by the income tax title, a tax of 12 1/2 per centum of the capital net gain, to be added to the tax computed upon the basis of the 'ordinary net income'. Sec. 101(a), 26 U.S.C.A. § 101. In the case of a 'capital net loss', Section 101(b), 26 U.S.C.A. § 101, provides for a tax to be determined, also in lieu of other income taxes but irrespective of any election by the taxpayer, as follows: 'a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted, and the total tax shall be this amount minus 12 1/2 per centum of the capital net loss; but in no case shall the tax of a taxpayer who has sustained a capital net loss be less than the tax computed without regard to the provisions of this section'.
Section 101(c)(6), 26 U.S.C.A. § 101, defines 'capital net loss' as 'the excess of the sum of the capital losses plus the capital deductions over the total amount of capital gain'. Section 101(c)(7), 26 U.S.C.A. § 101, defines 'ordinary net income' as 'the net income, computed in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions'.
It will be observed that the provision for the limitation with respect to a capital net loss under Section 101(b) (unlike the provision in Section 101(a) as to a capital net gain) gives no option to the taxpayer.7 The limitation is explicit and must be followed as written. The limitation applies equally when there is no capital gain and hence nothing to be deducted from capital losses on that score.8 The limitation is applicable unless, as stated in the last clause of Section 101(b), a greater tax would result from not applying it.9 In the instant case there is no question that the limitation does apply and the Commissioner has applied it.
We have noted that the limitation of Section 101(b) is not applicable if the tax, computed without regard to that section, would be greater. The latter method of computation brings out the distinction clearly. For in that method the capital net loss is deducted from the ordinary net income in order to arrive at the total net income for the purpose of applying the normal tax and surtax rates. See illustration in Regulations 77, Article 503. But where the limitation of Section 101(b) governs, because the tax as otherwise computed would not be greater, capital losses are not deducted in determining the net income which is to be taxed, but are used only for the purpose of determining the specified offset against the tax on that net income. Id.
We are not impressed with the argument based on the provisions of Sections 21, 22 and 23, 26 U.S.C.A. §§ 21—23. True, Section 21 provides that 'net income' means gross income computed under Section 22 less the deductions allowed by Section 23. Section 22 defines gross income and Section 23 provides for deductions, including deductions for losses. But Sections 21, 22 and 23 are not to be construed so as to derogate from the special and explicit provisions of Section 101(b). Under the limitation of that section, as we have seen, the taxpayer is not permitted to deduct capital losses so as to reduce the net income subject to tax and his capital losses enter into the computation of his ultimate tax only through the deduction of 12 1/2 per centum of the capital net loss from the tax which is computed upon the net income ascertained irrespective of that loss.
There is nothing to the contrary in our decision in Helvering v. Bliss, supra. In that case there was a capital net gain. The net income of the taxpayer comprehended that net gain as well as his net income otherwise computed. We decided that it was his total net income which was to be regarded as the basis for the allowance under Section 23(n). We found nothing in Section 101, which in that application prescribed 'merely a method for segregating a portion of that net income for taxation at a special rate', that in any wise altered the right of the taxpayer to take the deduction in accordance with Section 23(n). Id., pages 150, 151, 55 S.Ct. page 20. Here, instead of a capital net gain, we have a capital net loss. There is no gain to be added to the taxpayer's net income otherwise computed, and thus that is the only net income taxable under the statute. To that net income, the provision of Section 23(n) appropriately applies. We observed in the Bliss Case that the exemption of income devoted to charity and the reduction of the rate of tax on capital gains 'were liberalizations of the law in the taxpayer's favor, were begotten from motives of public policy, and are not to be narrowly construed'. That observation is equally pertinent here.
The administrative construction invoked by the Government has not been of a sufficiently consistent character to afford adequate support for its contention.11
'§ 11. Normal tax on individuals.
'There shall be levied, collected, and paid for each taxable year upon the net income of every individual a normal tax equal to the sum of the following: * * *
'§ 12. Surtax on individuals. * * *
'(b) Rates of Surtax.—There shall be levied, collected, and paid for each taxable year upon the net income of every individual a surtax as follows: * * *.'
Avery v. Commissioner, 7 Cir., 84 F.2d 905; Lockhart v. Commissioner, 3 Cir., 89 F.2d 143; Heinz v. Commissioner, 3 Cir., 94 F.2d 832.
Revenue Act of 1924, Sec. 208(c), 43 Stat. 263.
Revenue Act of 1921, Sec. 206(a)(4), 42 Stat. 232.
Piper v. Willcuts, 8 Cir., 64 F.2d 813, 815, 816; 65th Cong.Rec. 2428; H.Rep. 179, 68th Cong., 1st Sess., p. 20.
Revenue Act of 1926, Sec. 208(c), 44 Stat. 20; 1928, Sec. 101(b), 26 U.S.C.A. § 101; 1932, Sec. 101(b), 26 U.S.C.A. § 101.
See Piper v. Willcuts, 8 Cir., 64 F.2d 813, 816; Hoffman v. Commissioner, 2 Cir., 71 F.2d 929.