Opinion ID: 349515
Heading Depth: 1
Heading Rank: 5

Heading: the relevant authorities.

Text: Taxpayer, in addition to Statler Trust, relies heavily on cases which have permitted the deduction under section 691(c) for estate taxes properly allocable to income in respect of a decedent against long-term capital gains in computing the alternative tax. Meissner v. United States, 364 F.2d 409, 176 Ct.Cl. 684 (1966); Read v. United States, 320 F.2d 550 (5th Cir. 1963); Sidles v. Commissioner of Internal Revenue, 65 T.C. 873 (1976). 9 We express no opinion with respect to the correctness of these decisions. They are, in any event, inapposite to the issue before us. It is true, of course, that these decisions adopt an approach that precludes the wastage of section 691(c) deductions in computing the alternative tax on capital gains and that the taxpayer here also seeks to avoid the wastage of a deduction in the same computation. The similarity between Meissner, Read, and Sidles and this case ends at that point, however. The charitable contribution deduction in Subchapter J dealing with the taxation of estates and trusts is carefully integrated into a very complex statutory pattern which, as already indicated, reflects a design inconsistent with the philosophy of the taxpayer's case. No such intricate fashioning appears with respect to the section 691(c) deduction. This section merely provides for a deduction for estate tax attributable to amounts regarded as income in respect of a decedent. It does not specify the manner in which the deduction is to be utilized. Moreover, the avoidance of complete double taxation under the estate and income tax of items of income in respect of a decedent, which is the purpose of the section 691(c) deduction, provides a forceful reason for permitting the utilization of the deduction in computing the alternative tax. This reason is not applicable in the case before us. In holding as we do we do not subject capital gains to double taxation nor do we eliminate the effectiveness of the charitable contribution deduction for estates and trusts. While we do preclude the reduction of the flat tax on capital gains in calculating the alternative tax by refusing to permit the capital gains to be reduced by amounts paid or permanently set aside to charity, we do so in accordance with both the letter and the spirit of the applicable provisions of the Code. In this respect we cannot improve on the words of Judge Dooling who, in his dissent in Statler Trust, said, The statute's effect is too plain to be supposed an inadvertent one, and it is far from being ungenerous. The alternatives are payment of the tax at ordinary rates on half the capital gain less the adjusted deduction for the part of it paid to charity or paying a tax on that same income amount equal to a quarter of the total capital gain. 361 F.2d at 133. 10 Essentially the same approach was taken in Weil v. Commissioner of Internal Revenue, 229 F.2d 593 (6th Cir. 1956). We, therefore, do not agree with the court in Statler Trust where, speaking through Judge Friendly, it characterized the Government's interpretation as both unfair and unintended. Id. at 131. It is, in fact, neither. The court's reliance on section 643(a)(3)'s inclusion of charitable payments and set asides from capital gains in distributable net income to evidence a pervasive reliance on a conduit principle for such charitable provisions is misplaced. Section 643(a)(3), as already indicated, is part of a structure which in its entirety unmistakably rejects the conduit principle for charitable payments and set asides. Its specific purpose is to retain capital gains so paid or set aside in distributable net income so as to permit the allocation of the benefits of the deduction among items of distributable net income in accordance with section 662(b) and the regulations thereunder. Treas.Reg. § 1.643(a)-5(b) (1960); § 1.662(b)-2 (1960). We are aware, of course, that any computation that reduces taxes on taxable beneficiaries because of charitable payments or set asides is directly advantageous to such beneficiaries and indirectly helpful to charities generally. While such a consideration in an exquisitely balanced situation might be controlling, the case before us is not such a situation. To permit such concerns to control here is contrary to the statute as written. We therefore reverse and direct that the taxes for the years 1967 and 1968 be computed as the Government insists. The refunds sought are denied. REVERSED. 1 The version of Section 1201(b) in effect at that time provides: Other taxpayers. If for any taxable year the net long-term capital gain of any taxpayer (other than a corporation) exceeds the net short-term capital loss, then, in lieu of the tax imposed by sections 1 and 511, there is hereby imposed a tax (if such tax is less than the tax imposed by such sections) which shall consist of the sum of (1) a partial tax computed on the taxable income reduced by an amount equal to 50 percent of such excess, at the rate and in the manner as if this subsection had not been enacted, and (2) an amount equal to 25 percent of the excess of the net long-term capital gain over the net short-term capital loss. 2 I.R.C. § 1202 authorizes a deduction by a taxpayer other than a corporation of 50 percent of the excess net long-term capital gain over net short-term capital loss in computing taxable income 3 I.R.C. § 642(c). The operation of this section requires a bit of explaining. It authorizes a deduction by an estate or trust for any amount of gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, permanently set aside for charity. This suggests the deduction should be $250,000; however, this would permit a charitable deduction and a section 1202 deduction which would eliminate the entire amount of net long-term capital gain from taxable income although only one-half of it was permanently set aside for charity. This result is foreclosed by the provision in section 642(c) which requires that proper adjustment of the deduction otherwise allowable . . . shall be made for any deduction allowable to the estate or trust under section 1202 . . . Treas.Reg. § 1.642(c)-3 (1960). See M. C. Ferguson, J. Freeland, & R. Stephens, Federal Income Taxation of Estates and Beneficiaries 372-73 (1970). That portion of the gain set aside for charity ($250,000) is reduced by that portion of it ($125,000 or one-half of the total) already deducted by reason of section 1202. The balance, $125,000, constitutes the section 642(c) deduction 4