Court Opinion

ID: 8875866
Source: CourtListenerOpinion
Date Created: 2022-11-26 19:01:06.841673+00
Date Added: 2024-06-11T17:06:19.656445
License: Public Domain

DOOLING, District Judge
(dissenting):
Section 663(a) (2) precludes treating the current distribution of a capital gain amount to charity as a deductible distribution under Section 661(a) to which the conduit treatment of Section 662(b) is accorded; an amount so paid out is a deduction in the trustee’s return under Section 642(c). The consequence, it would appear, is that the alternative tax on the trustee income, computed with allowance of the charitable deduction of § 642(c), is measured on the sum of the capital gain that the trustee retains for corpus and the capital gain that he pays out currently to charity. The retained corpus capital gain is, plainly, not so generously relieved of tax as it would have been if the statute had permitted the trustee to treat the charitable payment as distributable income under Section 661(a). But the Congress has, nevertheless, treated all similarly situated taxpayers alike in this respect, denying them any greater measure of relief from their tax liability by reason of the charitable nature of certain of their deductions than the relief which the present trust received at the hands of the Commissioner and the Tax Court and the relief that Weil received in the Sixth Circuit. Weil v. Commissioner, 6th Cir. 1956, 229 F.2d 593. The nature of the other deductions for which Weil received no capital gains tax relief did not affect the decision; it would have been the same had they all been charitable deductions.
To be sure in such a case as the present one the current distributable charitable amount must be viewed as vesting directly in charity at the instant the gain accrued to the trust and must not be thought of as accruing first to the trustee and then being devoted to charity by a separate and subsequent act of will on the trustee’s part. But the Congress by the tight and explicit structure of the Subchapter J provisions has denied to charitable payments out of trusts what would otherwise be the consequence of that analysis. The analysis reflects the fact that currently distributable charitable amounts would by their intrinsic nature be distributions and deductible as such in the trustee return under Section 661(a) but for the existence of Sections 663(a)(2) and 642(c) which convert them into deductions and deny them the character of distributions. 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 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. When the Congress has, manifestly, subtilized its treatment of a many threaded pattern, its clear words would seem a safer guide to meaning than invoking a purpose or spirit inferred from the more general structural features of a very complex enactment.
It would not seem that any analogy could be expected in the treatment of capital gains currently distributable to the taxable beneficiaries. To them apply Sections 651(a) and 661(a) governing trustee deductions for current distributions, as well as the key “conduit” sections 652(b) and 662(b). Nor does the inclusion in “distributable net income” of capital gains paid, set aside to, or used for charity, see Section 643(a) (3), appear to accord “conduit” treatment to those amounts. Section 663(a) (2) excludes them from the trustee’s distribution deductions under Sections 651 (a) and 661(a); the references to the deduction under Section 642(c) in Sections 662(a) (1) and 662(b), third sentence, make clear that inclusion of the charitable payment amounts in “distributable net income” under Section 643(a) (3) does not mean that in consequence they are to be treated as distributions or as being within the conduit principle; it rather implements an unrelated restraint by seeing to it that the inclusion of the gains in “distributable net income” *134functions only to restrain the operation of the ratable allocation principle of the conduit subsection, Section 662(b), so that tax exempt income items, and the like, are not over-allocated to the amounts that are distributions under Section 661 (a) and are within the conduit principle of 662(b). The conduit notion does not reach the charitable capital gains except for an intermediate step in applying conduit theory to Section 661(a) distributions that exclude capital gain currently distributable to charity.
As indicated, there would not appear here to be any tax imposed upon the charitable share of the capital gain, but only a diminished Section 1201(b) relief from the tax on the trustee retained capital gain. The provision in the compromise agreement for a retention from the charitable distribution for any tax deficiency allocable to it might, on that theory, have presented a question of the interpretation of the compromise agreement, and, if the alternative tax was not lower, a related question about the size of the charitable deduction for the purpose of making the tax computation at ordinary rates.