Benedict v. United States
This text of 81 F. Supp. 717 (Benedict v. United States) is published on Counsel Stack Legal Research, covering United States Court of Claims primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
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delivered the opinion of the court:
Under the terms of the fourth article of the will of John E. Andrus, creating a trust, 45% of the income of the trust, including the income, gains and profits derived from the sale or exchange of property of the trust, was required to be paid to the Surdna Foundation, Inc., a charitable corporation. [555]*555The balance of 55% of such, income was to be divided into certain stated amounts and paid to ten individuals (finding 2). As shown in finding 3, the trust had a gross income for the fiscal year ending April 30,1944, not including long-term capital gains, of $270,169.92 from which there were allowable deductions of $29,602.19, leaving a net balance of $240,567.73, which was a part of the income of the trust distributable to the beneficiaries named under the fourth article of the will. In addition, the trust had further income consisting of gains and profits totaling $60,374.01, which amount was likewise distributable, derived from the sale of certain properties of the trust. These properties consisted of capital assets within the meaning of Section 117 (a) and (b), Internal Revenue Code (26 U. S. C. 1946 Ed., § 117), and had been held by the trust for more than six months. After deduction of expenses, forty-five percent of the entire income of the trust of $300,941.74 was paid to or permanently set aside by the trustees for the Surdna Foundation.
The question presented is whether the trust is entitled, in computing the net income upon which it may be taxable, to deduct, under Sections 22 and 162, U. S. C. 1946 Ed., Title 26, 45% of the full amount of the gains and profits of $60,374.01, or only forty-five percent of one-half thereof or $30,187.01 by reason of the “Capital Gains” provisions of Section 117 (a) and (b), U. S. C. Title 26. The pertinent provisions of the Internal Revenue Code relating to the question are set forth below.1
[556]*556The defendant says with respect to the gains and profits of $60,374.01, that the trust is entitled to a deduction for charitable contributions of only 45% of $29,857.41 thereof ($30,187.01 less a carry-over of $329.60) by reason of the provisions of Section 117 (a) and (b), which section, defendant insists, defines “gross income” in the case of a “long-term capital gain” for the purpose of the deduction provided in Section 162, and limits the definition of “gross income” and “gain from the sale of property,” as set forth in Sections 22 (a) and (f), 162 (a) and 111 (a), respectively. We cannot agree. In our opinion the defendant’s attempt to limit the deduction for charitable purposes of “any part of the gross income, without limitation,” in part to net income, represents a narrow and strained construction of the several sections mentioned which, we think, was not in the mind of Congress or intended by it when the capital gains provisions of Section 117 were enacted. We think the principle announced in Helvering v. Bliss, 293 U. S. 144, and United States v. Pleasants, 305 U. S. 357, with reference to the intention of Congress not to place further limitations on charitable contributions and the limited purpose intended to be accomplished in connection with taxation of capital gains and deduction of capital losses, is applicable here and supports the plaintiffs’ claim. Sections 22 and 111, supra, define gains derived from the sale or disposition of property including capital assets. These gains, as so defined, must be reported [557]*557in the return and they are taxable as income in whole or in part under the capital gains provisions of Section 117, depending upon the length of time the assets had been held. The allowance under 162 (a) is out of total income rather than net taxable income. The liberal attitude of Congress as expressed in Section 117 with respect to the taxation of a capital gain by including only one-half thereof in net income, under certain circumstances, was not intended, in our opinion, to modify the definition of gross income. In this case the trust had a gain of $60,374.01 within the meaning and under the plain language of Sections 22 and 111, and, for the purpose of the deduction provided in Section 162 (a), that gain was a part of the gross income of the trust. The percentage limitation, set forth in Section 117, was enacted for the sole purpose of giving lighter tax treatment to certain capital gains and ought not to be read into Section 162 (a) for the purpose of limiting the amount of the deduction for charitable contributions. The original purpose intended by the capital gains provisions was retained. Section 162 (a), like Sections 22 and 111, deals with gross income and total gains and profits for the taxable year out of which the charitable contributions are made. Section 117 deals only .with net capital gain, net capital loss and net income which is to be subjected to the tax. The total gain of the taxpayer is nevertheless the gain defined by Sections 22 and 111, and must be considered and reported as gross income in the first instance. This must be true because Section 117 taxes the entire gain as net income under certain circumstances.
The total gain must be classified in the computation of net taxable income according to the periods through which the various assets have been held and this classification is made solely for the purpose of the special tax on capital gains, based on the adventitious point of how long the asset had been owned and held by the taxpayer before it was disposed of. Lockhart v. Commissioner, 1 T. C. 804, 807.
In our opinion the ordinary and natural meaning of the language of Sections 22 and 111, supra, support the views we have expressed above, and we cannot find in the language [558]*558of Section 117, or the reports of the Congressional committees thereon, any support for the position that Congress intended thereby to limit or modify the term “gross income,” as used in Sections 22 and 162 (a), for the purpose of determining the amount of the deduction for charitable contributions by estates or trusts. In our opinion the decision of the Tax Court in John E. Andrus Trust No. 1 v. Commissioner, 7 T. C. 573, which involved the same question we have here, was correct, and we are unable to concur in the decision of the Court of Appeals in Commissioner v. Central Hanover Bank & Trust Co., 163 Fed. (2d) 208, 210, in which the court said:
Accordingly the amount of long-term capital gain not taken into account under § 117 does not constitute gross income of the trust under § 22 (a). And, since the deduction allowed by § 162 (a) is restricted to payments made out of “gross income,” the deduction here must be limited to that portion of the charitable gift which was made out of statutory gross income.
We cannot escape the conclusion that the above holding limits the deduction for charitable contributions in part to net income. In our opinion Section 117 (a) (4) recognizes as gross income the entire gain defined by Sections 22 and 111, and then classifies such gain as a “long-term capital gain” for special treatment in computing net income only if the asset from which such total or gross gain was derived, had been held for more than 6 months.
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Cite This Page — Counsel Stack
81 F. Supp. 717, 112 Ct. Cl. 550, 37 A.F.T.R. (P-H) 798, 1949 U.S. Ct. Cl. LEXIS 21, Counsel Stack Legal Research, https://law.counselstack.com/opinion/benedict-v-united-states-cc-1949.