
    RUSH H. KRESS, EXECUTOR OF THE ESTATE OF SAMUEL H. KRESS v. THE UNITED STATES
    [Nos. 325-52, 417-54, 418-54.
    Decided March 5, 1958]
    
      
      Mr. Harman Hawkins, for the plaintiff. Messrs. Orwill V. W. Hawkins and Duer, Strong & Whitehead and Ernest D. Fiore, Jr. were on the briefs.
    
      Mrs. Eliedbeth B. Davis, with whom was Mr. Assistant Attorney Generad Charles K. Bice, for the defendant. Mr. James P. Garland was on the brief.
   MaddeN, Judge,

delivered the opinion of the court:

The plaintiff as executor sues for the recovery of income taxes paid by his testator, Samuel H. Kress, for the years 1946, 1947, and 1948. Samuel H. Kress will be referred to herein as “the taxpayer.”

Section 120 of the Internal Eevenue Code of 1989 provided, in effect, that if an individual made contributions to charity in the taxable year and in each of the ten preceding taxable years, which contributions in each year plus the amount of his income taxes and certain other taxes paid in that year exceeded 90 percent of his net income for that year as computed without the benefit of section 23 (o), then the 15 percent limit prescribed in section 23 (o) should not be applicable. Thus one who qualified under this statute could give all or no less than 90 percent of his income to charity, and deduct the entire amount so given from his taxable income, whereas the ordinary taxpayer could deduct charitable contributions only to the extent of 15 percent of his otherwise taxable income.

The instant suit is based on the proposition that for each of the ten years preceding the year 1946 and for the taxable year itself, Mr. Kress gave to charity amounts which, when the amounts of his income tases and certain other taxes were added to them, came to more than 90 percent of his net income. Whether he did or not depends, as to six of the years, on what his “net income” was, within the meaning of section 120, in those years. If his “net income” included the entire amount of his long term capital gains for those years, his charitable contributions plus his taxes did not amount to 90 percent of it. If, however, his net income included only that percentage of such capital gains as was taxable as income, the 90 percent requirement was complied with.

The plaintiff contends that the words “net income” as used in section 120 have the same meaning that they have in the tax statutes as a whole. Section 117 of the 1939 Internal Revenue Code relates to capital gains and losses. Paragraph (a) is devoted to definitions of terms as used in the income tax chapter. Paragraph (a) (4) defines “long term capital gain” as the gain from the sale or exchange of a capital asset held for more than six months “if and to the extent such gain is taken into account in computing net income.” Section 117 (b) as then written said that only 50 percent of the gain on the sale of a capital asset held for more than 6 months “shall be taken into account in computing net capital gain, net capital loss and net income.” [Italics added.]

The provisions of the Revenue Act of 1938 (52 Stat. 447) were the same except that they provided various percentages for various holding periods. For the years 1936 and 1937 there is no capital gains question in the instant case.

The Government points out that section 21 defines net income as gross income computed under section 22, less the deductions allowed by section 23; that section 22 provides that gross income includes, among many other things, gains and profits derived from sales or dealings in property. If net income is really what is left when the deductions allowed by section 23 are subtracted from all that the taxpayer has gained, including all of his long term capital gains, then of course the taxpayer who seeks to have the advantage of the 90 percent provision of section 120 must include all of his capital gains in his multiplicand.

If one takes section 21 literally and subtracts the section 23 deductions from the broadside inclusion of section 22, he arrives at a figure which is of no use to him in computing his income tax. On the tax return form he does not make that deduction. He first reduces his capital gains to the percentage which is taxable, then adds together that amount and his other, fully taxable items, and from the sum subtracts his section 23 deductions.

In United States v. Benedict, 338 U. S. 692, and Commissioner v. Central Hanover Bank, 163 F. 2d 208 (2d Cir.1947); cert. den. sub nom. Trust of Andrus v. Commissioner, 332 U. S. 830, the courts held that, in computing the percentages of gross income which a trust taxpayer may deduct under section 162 (a) for charitable contributions, the multiplicand must include only the taxable percentage of long term capital gain. The Government’s present position contradicts its position and that of the courts in the cases just cited. It is hardly possible that the words “net income” used in section 120 can include more than the words “gross income” in sections 23 (o) and 162 (a), particularly since section 120 contains a pointed reference to section 23 (o).

We think that the specific provision of section 117 (b) as to what percentage of capital gains are to be taken into account in computing net income must take priority over the broad general provisions of section 22. Section 22 does little more than list the items of income that are, in one way or another, to be dealt with in the statute. One must look to more specific provisions of the statutes to learn the details of how they are to be taxed.

The Government points out that section 120 was originally enacted at a time when capital gains were taxed at 100 percent. So long as that was true, there could of course be no question as to their 100 percent includibility in gross income and in net income. The later statutory exclusion of a percentage of the capital gain from taxability would seem, however, to have the same effect upon section 120 computations as would, for example, a statutory exclusion of dividends, or earned income, or salary received from a state.

The Government points out that the taxpayer did not in fact include even the 50 percent of his capital gains in his income taxable at graduated rates, but took advantage of the alternative method of paying a 25 percent tax on the entire amount of those gains. This method is permitted by section 117 (c). We think that section does not affect the specific definition of net income given in section 117 (b).

There is a special problem concerning the year 1938. The taxpayer paid income taxes and made charitable contributions in 1938 to the extent of more than 90 percent of his net income for the year. However, section 214 (e) of the Revenue Act of 1939, c. 247, 53 Stat. 862, retroactively increased the taxpayer’s net income for 1938 by more than $250,000. The taxpayer’s charitable contributions and income taxes paid in 1938 constituted less than 90 percent of this retroactively increased 1938 net income. The taxpayer did not, of course, have the power to make charitable contributions and tax payments in 1939, and have them treated as if they had been made in 1938. The plaintiff urges that the taxpayer, having fulfilled in 1938 the requirements of the law as it was in 1938, did not lose his partially acquired status under section 120 as a result of the retroactive statute.

The power of Congress to enact income tax laws with retroactive effect is clear. The instant problem is whether Congress intended its 1939 Act, undoubtedly retroactive as to the imposition and collection of additional taxes on 1938 income, to have the further effect of retroactively and irreparably breaking a chain of conduct which other legislation had invited and encouraged taxpayers to engage in. We feel reasonably certain that Congress had no such intention. Section 214 (e) did not, of course, mention section 120. Section 120 was literally complied with by the taxpayer’s actions in the actual year 1938. There is an element of fiction about a retroactive statute which particularly justifies an interpretation which will avoid unfair and unintended consequences.

Our conclusion is that the taxpayer met the requirements of section 120 for the ten years preceding his taxable year 1946, and for the years 1946,1947, and 1948, and the plaintiff is therefore entitled to recover, with interest as provided by law. It is not necessary for us to consider alternative arguments presented by the plaintiff.

We find that the plaintiff is entitled to recover, together with interest as provided by law, and judgment will be entered to that effect. The amount of recovery and the amount of offsets, if any, will be determined in further proceedings pursuant to Rule 38 (c).

It is so ordered.

Laramoee, Judge; LittletoN, Judge; and Jomas, Chief Judge, concur.

Whitakee, Judge, took no part in the consideration and decision of this case.

FINDINGS OF FACT

The court, having considered the evidence, the report of Commissioner Mastín G. White, and the briefs and arguments of counsel, makes findings of fact as follows:

1. (a) These suits were instituted by Samuel H. Kress (who will usually be referred to hereinafter as “the taxpayer”) to recover income taxes paid for the years 1946,1947, and 1948. The principal issue involved in the cases is whether, with respect to each of the years mentioned, the taxpayer was entitled under Section 120 of the Internal Revenue Code of 1939 to the benefit of an unlimited deduction for contributions and gifts to and for the use of organizations and purposes described in Section 23 (o) of the Internal Revenue Code of 1939.

(b) After filing these suits, the taxpayer died on September 22, 1955. Letters testamentary were duly issued to Rush H. Kress, the executor named in the taxpayer’s will, by an order of the Surrogate’s Court of New Tork County, New York, dated January 24, 1956. By an' order of the United States Court of Claims dated February 6,1957, Rush H. Kress, in his capacity as executor of the taxpayer’s estate, was substituted as the party plaintiff.

2. At all times pertinent to these cases, the taxpayer was a citizen of the United States of America, residing in the City, County, and State of New York.

3. The taxpayer caused estimates and returns of his income for the calendar years 1946, 1947, and 1948 to be duly prepared in accordance with the applicable statutes and regulations, and on forms furnished to him by the Commissioner of Internal Revenue. Thereafter, the taxpayer caused the returns to be duly and timely filed with the Collector of Internal Bevenue for the Second District of New York.

4. (a) Federal income taxes for the years in question were paid by the taxpayer to the Collector of Internal Bevenue for the Second District of New York, as follows:

1946_$1,056,774.11
1947_ 699,181.24
1948_ 508,013.28

(b) The sums of taxes referred to in paragraph (a) of this finding were paid over into the Treasury of the United States.

5. On February 27, 1950, the taxpayer duly and timely filed with the Collector of Internal Bevenue for the Second District of New York a claim for the refund of income tax paid for the calendar year 1946. The claim was in the amount of $1,010,866.47, or such greater amount as might be allowable under the law. It was based on the ground that, for the calendar year 1946, the taxpayer was entitled under Section 120 of the Internal Bevenue Code of 1939 to the benefit of an unlimited deduction for contributions and gifts to and for the use of organizations and purposes described in Section 23 (o) of the Internal Bevenue Code of 1939, because the amount of his contributions and gifts to and for the use of such organizations and purposes in 1946 and in each of the 10 preceding taxable years (i. e., 1945, 1944,1943,1942,1941,1940,1939,1938,1937, and 1936), plus the amount of his income taxes paid during each of such years, exceeded 90 per centum of his net income for each year, as computed without the benefit of Section 23 (o) of the Internal Bevenue Code of 1939 or the corresponding provisions of prior revenue acts.

6. On or about July 26, 1950, the Commissioner of Internal Bevenue rejected and disallowed the taxpayer’s claim for refund mentioned in finding 5. The taxpayer was promptly notified by registered mail of such action.

7. The taxpayer duly and timely filed with the Collector of Internal Bevenue for the Second District of New York on March 13, 1951 a claim for the refund of income tax paid for the calendar year 1947. The claim was in the amount of $288,914.02. It was based on the ground that, for the calendar year 1947, the taxpayer was entitled under Section 120 of the Internal Revenue Code of 1939 to the benefit of an unlimited deduction for contributions and gifts to and for the use of organizations and purposes described in Section 23 (o) of the Internal Revenue Code of 1939, because the amount of his contributions and gifts to and for the use of such organizations and purposes in 1947 and in each of the 10 preceding taxable years (1937-1946), plus the amount of his income taxes paid during each of such years, exceeded 90 per centum of his net income for each year, as computed without the benefit of Section 23 (o) of the Internal Revenue Code of 1939 or the corresponding provisions of prior revenue acts.

8. On or about December 3, 1952, the Commissioner of Internal Revenue rejected and disallowed the taxpayer’s claim for refund referred to in finding 7. The taxpayer was promptly notified by registered mail of such action.

9. On January 30,1952, the taxpayer duly and timely filed with the Collector of Internal Revenue for the Second District of New York a claim for the refund of the entire amount of the income tax paid for the calendar year 1948, i. e., $508,013.28. The claim was based on the ground that, for the calendar year 1948, the taxpayer was entitled under Section 120 of the Internal Revenue Code of 1939 to the benefit of an unlimited deduction for contributions and gifts to and for the use of organizations and purposes described in Section 23 (o) of the Internal Revenue Code of 1939, because the amount of his contributions and gifts to and for the use of such organizations and purposes in 1948 and in each of the 10 preceding taxable years (1938-1947), plus the amount of his income taxes paid during each of such years, exceeded 90 per centum of his net income for each year, as computed without the benefit of Section 23 (o) of the Internal Revenue Code of 1939 or (with respect to 1938) Section 23 (o) of the Revenue Act of 1938 (52 Stat. 447, 463).

10. On or about December 3, 1952, the Commissioner of Internal Revenue rejected and disallowed the taxpayer’s claim for refund mentioned in finding 9. The taxpayer was promptly notified by registered mail of such action.

11. Further claims were filed on March 15, 1956 by the taxpayer’s estate for the refund of income taxes paid by the taxpayer for the years 1946, 1947, and 1948. These claims asserted the same grounds for relief as the claims referred to in findings 5, 7, and 9, and they contained additional information. The additional information furnished in connection with each claim was to the effect that the taxpayer had died on September 22, 1955; that Kush H. Kress had been appointed executor of the taxpayer’s estate; and that under the terms of the taxpayer’s will:

* * * an amount in excess of the amount of this refund and all similar refunds due the taxpayer’s estate will be transferred to the Samuel H. Kress Foundation, the residuary beneficiary under said Will. The Samuel H. Kress Foundation is an organization described in Section 2055 of the Internal Kevenue Code of 1954. An amount equal to the amount of such transfer is deductible from the value of the gross estate under such section * * *.

12. In each of the years 1936,1937, 1939,1940,1941, 1946, and 1948, the taxpayer made contributions or gifts of the sort described in Section 23 (o) of the Internal Kevenue Code of 1939, or the corresponding provisions of prior revenue acts, and paid income taxes in amounts which together exceeded 90 per centum of his net income, as computed without the benefit of Section 23 (o) of the Internal Kevenue Code of 1939 or the corresponding provisions of prior revenue acts.

13. For each of the years 1942,1943,1944,1945, and 1947, the amount of the taxpayer’s net income, as computed without the benefit of any deduction under Section 23 (o) of the Internal Kevenue Code of 1939, was as follows:

1942- $916, 741.51
1943_ 908,269. 29
1944_ 941,414.12
1945- 970,465.35
1947- 1,248,145.98

14.For 1938, the amount of the taxpayer’s net income, as computed under the provisions of the Kevenue Act of 1938 before adding the $261,245.20 referred to in finding 15 and without the benefit of any deduction under Section 23 (o) of the Revenue Act of 1938 (52 Stat. 447,463), was $2,068,518.05.

15. The amount of the taxpayer’s net income for 1938 as stated in finding 14 — i. e., $2,068,518.05 — was increased by $261,245.20 to $2,329,763.25 in a report dated October 27, 1939 by an internal revenue agent, as a result of the application of the retroactive provisions of Section 214 (e) of the Revenue Act of 1939 (53 Stat. 862, 874), which was approved on June 20,1939, after the taxpayer’s return for 1938 had been filed.

16. For each of the years 1938, 1942,1943,1944,1945, and 1947, the taxpayer’s contributions or gifts of the sort described in Section 23 (o) of the Internal Revenue Code of 1939 or (with respect to 1938) Section 23 (o) of the Revenue Act of 1938 (52 Stat. 447,463) were as follows:

1938_$541, 472. 00
1942_'_ 218,103.75
1943_ 263,213.45
1944_ 238,268.76
1945_ 330,251.75
1947_ 531, 652. 30

17.For each of the years 1942,1943,1944, 1945, and 1947, the portion of capital gains excluded from the taxpayer’s net income (as set out in finding 13) by reason of Section 117 (b) of the Internal Revenue Code of 1939 was as follows:

1942_ $127,848.75
1943_ 159,425.16
1944_ 245, 361. 69
1945_ 375,401.12
1947_ 506,828. 09

18. For 1938, the portion of capital gains excluded from the taxpayer’s net income of $2,068,518.05 (as set out in finding 14) by reason of Section 117 (b) of the Revenue Act of 1938 (52 Stat. 447, 501), before the legislative change effected by Section 214 (e) of the Revenue Act of 1939 (53 Stat. 862, 874), was $136,986.20; and the portion of capital gains excluded from the 1938 net income of $2,329,763.25 (as set out in finding 15) after such change was $398,231.40.

19. In each of the years 1942, 1943, 1944, 1945, and 1947, the amount of income taxes paid for the current and preceding years by the taxpayer to the United States was as follows:

1942___$645,044.02
1943_ 623, 000. 00
1944_ 684,000. 00
1945_ 659,694.57
1947_ 733,397. 77

20. During 1938, the amount of income taxes paid by the taxpayer to the United States was $1,501,570.22, exclusive of the $221,738.36 referred to in finding 21.

21. (a) On March 12, 1937, the taxpayer duly filed a tentative Federal income tax return for the year 1936 with the Collector of Internal Revenue for the Second New York District pursuant to permission granted by the Commissioner of Internal Revenue. On May 14,1937, the taxpayer duly filed his final Federal income tax return for the year 1936 with the Collector of Internal Revenue for the Second New York District. He paid the tax shown to be due thereon, as follows:

March 13, 1937_$470, 000. 00
June 12,1937_ 341,343. 78
September 14, 1937_ 405, 671. 88
December 15, 1937_ 405,671. 88

(b) Prior to any audit of the returns mentioned in paragraph (a) of this finding, the taxpayer on December 23,1937 submitted to the Collector of Internal Revenue for the Second New York District an “amended return” for the year 1936 showing an additional tax of $221,738.36, together with a remittance in the amount of $231,971.74 (the amount of the additional tax shown on the amended return plus the estimated interest on such amount). The collector placed the remittance in his “suspense account” to the credit of the taxpayer.

(c) On February 15, 1938, the Commissioner of Internal Revenue signed and thereafter delivered to the Collector of Internal Revenue for the Second New York District the January 1938 assessment list. Assessment was made thereby against the taxpayer for income taxes in the amount of $221,738.36, with interest thereon of $10,269.83, or a total of $232,008.19. Thereafter, the collector applied against this assessment the $231,971.74 held in his “suspense account” to the credit of the taxpayer, leaving a balance due of $36.45, which was paid by the taxpayer in February 1938.

(d) The collector’s “suspense account”, sometimes referred to as his “unclassified collections account”, is an account in which he places all remittances against which he has no assessment on his books.

22. In each of the years 1938, 1942, 1943, 1944, 1945, and 1947, the amount of income taxes paid by the taxpayer to the State of New York was as follows:

1938_$193,229.75
1942_ 58, 549. 84
1943_ 34,355. 85
1944_ 41, 861.36
1945_ 50,292.40
1947_ 58,065.91

23. (a) There is set out in paragraph (d) of this finding a schedule showing the ratios for the years 1936 to 1948, both inclusive, of the taxpayer’s contributions plus income taxes to the taxpayer’s net income, computed without the benefit of any deduction under Section 23 (o) of the Internal Revenue Code of 1939 or the corresponding provisions of prior revenue acts, and showing the effects of the inclusion of one or more of the following figures as an adjustment to the taxpayer’s net income or taxes paid: •

full capital gains;
New York State income taxes; the additional tax payment of $221,738.36 referred to in finding 21; the additional income of $261,245.20 for 1938 arising from the retroactive application of Section 214 (e) of the Revenue Act of 1939 (see finding 15).

(b) The following is an explanation of the bases used in the schedule:

Basis #1 — Based upon net income as set forth in revenue agents’ reports and Federal income taxes.
Basis #2 — Basis #1 adjusted for State income taxes.
Basis _ #3 — Basis #1 adjusted for excluded portion of capital gains.
Basis #4 — Basis # 1 adjusted for excluded portion of capital gains and State income taxes.

(c) The following is an explanation of the variations shown in the schedule with respect to the years 1937 and 1938:

(1) Additional Federal income tax payment of $221,738.36 (see finding 21) included in 1938 and excluded from 1937.
(2) Additional income of $261,245.20 arising from retroactive application of Section 214 (e) of the Revenue Act of 1939 (see finding 15) excluded from 1938.

(d) The schedule is as follows:

Basis #t (percent) Basis #2 (percent) Basis US (percent) Basis fi (percent)
102. 65 174. 77 107. 50 183. 77 92. 25 144. 63 96.61 152. 07 CO COCO 05 05 r — 1 rH
165. 08 174. 07 136. 61 144. 05
87. 69 95.99 74. 89 81. 97 00 CO 05 r-i
97. 21 105. 50 83. 02 90. 10
98. 77 108. 11 92. 63 101. 40
109. 49 118. 83 102.69 111. 45
493. 18 500. 73 425. 37 431. 89 05 CO 05 t
153. 86 162. 60 143. 39 151. 54 © 05 t
507. 42 520. 59 357. 86 369. 73 TH 05 t
94.15 100. 54 82. 63 88. 23 t
97. 57 101. 35 83. 00 86. 22 CO 05
97. 97 102. 41 77.71 81. 24 ^ 05 t
102. 01 107. 19 73. 55 77. 29 lo rtf 05 t
156. 45 158. 98 115. 92 117. 80 CD t
101. 35 106. 01 72. 08 75. 39 1> 05 t
193. 55 199. 90 193. 46 199. 81 CO ■'&! 05 i-H

24. Under the terms of the taxpayer’s will, his entire residuary estate passes to the Samuel H. Kress Foundation, an organization of the sort described in Section 2055 of the Internal Revenue Code of 1954. Pursuant to the terms of the residuary clause, an amount in excess of the total amount of the taxes sued for in these cases has been distributed to the Foundation. The amount of such transfer is deductible from the value of the gross estate under section 2055.

CONCLUSION OK LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is entitled to recover, together with interest as provided by law, and judgment will be entered to that effect. The amount of recovery and the amount of offsets, if any, will be determined in further proceedings pursuant to Rule 38 (c).

In accordance with the opinion of the court and on a memorandum report of the commissioner as to the amount due ■thereunder, it was ordered May 7, 1958, that judgment for the plaintiff be entered for $1,853,281, together with interest thereon as provided by law. Such judgment represents a refund of income taxes for the years 1946, 1947 and 1948 in the respective amounts of $1,056,353.73, $288,914.02 and $508,013.25.  