
    HELEN W. BENEDICT AND FRANK B. SMITH, AS TRUSTEES, AND LELAND E. STOWELL AND UNITED STATES TRUST COMPANY OF NEW YORK AS SUCCESSOR TRUSTEES UNDER THE WILL OF JOHN E. ANDRUS, DECEASED v. THE UNITED STATES
    [No. 48463.
    Decided January 3, 1949]
    
    
      
      Mr. Theodore Pearson for tbe plaintiffs.
    
      Mr. William H. Harrar and Messrs. Rathbone, Perry, Kelley <& Drye were on the brief.
    
      Mrs. Elizabeth B. Davis, with whom was Mr. Assistant Attorney General Theron Lamar Oaudle, for tbe defendant. Mr. Andrew D. Sharpe and Mr. Lee A. Jackson were on tbe brief.
    
      
      Defendant's petition for writ of certiorari pending.
    
   Littleton, Judge,

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. The 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.

The 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 in 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 of 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.

Plaintiffs are entitled to recover, and, under finding 5, judgment will be entered in their favor for $4,962.43 with interest as provided by law. It is so ordered.

Howell, Judge/ Whitaker, Judge/ and Jones, Chief Judge, concur.

Madden, Judge,

dissenting:

I am unable to agree with the decision of the Court. My reasons are, in general, those given by the Court in Commissioner v. Central Hanover Bank and Trust Co., 163 Fed. (2d) 208. 
      
       Sbc. 22. Gross income
      (a) General Definition. — “Gross income” includes gains, profits, and income derived from * * * gales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property, * * *.
      (f) Determination of Gain or Loss. — In the case of a sale or other disposition of property, the gain or loss shall be computed as provided in section 111.
      Sec. 111. Determination of Amount of, and Recognition of, Gain or Loss (a) Computation of Gain or Loss. — The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 113 (b) for determining gain * * *.
      Sec. 117. Capital Gains and Losses
      (a) Definitions. — As used in this chapter—
      » » » * *
      (4) Long-Term Capital Gain. — The term “long-term capital gain” means gain from the sale or exchange of a capital asset held for more than 6 months. if and to the extent suela gain is taken into account in computing net income;
      (b) Percentage Taken Into Account. — In tie case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income:
      100 per centum if the capital asset has been held for not more than 6 months ;
      50 per centum if the capital asset has been held for more than 6 months.
      Sec. 162. Net income
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
      (a) There shall be allowed as a deduction (in lieu of the deduction for charitable, etc., contributions authorized by section 23 (o>) any part of the gross income, without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in section 23 (o), or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes * * *.
     