The question is whether the 15 per centum allowed as a deduction for charitable contributions under Section 23(n) of the Revenue Act of 1932, 26 U.S.C.A. § 23, is to be calculated on the taxpayer's net income computed without regard to a capital net loss as to which special provision is made by Section 101(b), 26 U.S.C.A. § 101.
Section 23(n) provides that in computing net income there shall be allowed as a deduction from gross income-'In the case of an individual, contributions or gifts made within the taxable year to or for the use of: * * * to an amount which in all the above cases combined does not exceed 15 per centum of the taxpayer's net income as computed without the benefit of this subsection'.
Respondent in 1932 made charitable contributions to the amount of $3,496. His net income, irrespective of a capital net loss, was determined by the Commissioner to be $94,963.52. Upon that net income the Commissioner assessed the normal tax and surtax at the rates prescribed by Sections 11 and 12, 26 U.S.C.A. §§ 11, 12. Respondent contended that this was his net income as described in Section 23(n) and that as his charitable contributions were less than 15 per centum of that amount they were deductible in full in determining his normal tax and surtax. The Commissioner refused to allow the deduction.
The taxpayer had sustained a 'capital net loss', as defined in Section 101(c) (6), 26 U.S.C.A. § 101, of $154,921.98. The Commissioner ruled that 'Since the capital loss of $154,921.98 is in excess of adjusted ordinary net income of $94,963.52 (without contributions) there is no net income against which to make a deduction for contributions'.
Having paid the tax assessed by the Commissioner upon that theory, respondent filed his claim for a refund and on its rejection brought this suit in the Court of Claims. Judgment was rendered in his favor. 22 F.Supp. 964. Because of an asserted conflict with decisions of Circuit Courts of Appeals and with our ruling in Helvering v. Bliss, 293 U.S. 144, 55 S.Ct. 17, 79 L.Ed. 246, 97 A.L.R. 207, certiorari was granted, October 10, 1938, 305 U.S. 582, 59 S.Ct. 78, 83 L.Ed. --.
'Capital net gains' and 'capital net losses' of individual taxpayers are the subject of special treatment under Section 101. In the case of a 'capital net gain', there is to be levied, at the election of the taxpayer, and in lieu of all other taxes imposed by the income tax title, a tax of 12 1/2 per centum of the capital net gain, to be added to the tax computed upon the basis of the 'ordinary net income'. Sec. 101(a), 26 U.S.C.A. § 101. In the case of a 'capital net loss', Section 101(b), 26 U.S.C.A. § 101, provides for a tax to be determined, also in lieu of other income taxes but irrespective of any election by the taxpayer, as follows: 'a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted, and the total tax shall be this amount minus 12 1/2 per centum of the capital net loss; but in no case shall the tax of a taxpayer who has sustained a capital net loss be less than the tax computed without regard to the provisions of this section'.
Section 101(c)(6), 26 U.S.C.A. § 101, defines 'capital net loss' as 'the excess of the sum of the capital losses plus the capital deductions over the total amount of capital gain'. Section 101(c)(7), 26 U.S.C.A. § 101, defines 'ordinary net income' as 'the net income, computed in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions'.
There is no doubt as to the purpose of this provision as to capital net losses which was first introduced in the Revenue Act of 1924. Prior to that time, and under the Revenue Act of 1921, capital losses were to be deducted from capital gains in the process of determining the 'capital net gain'. If capital deductions and capital losses were in excess of the capital gain, or if there were capital losses in the absence of capital gain, such losses were deductible as ordinary losses. We are told that the opportunity to minimize taxes by the practice of taking capital losses to offset ordinary net income constituted a particularly serious problem after the Act of 1921, which reduced the rate of tax on capital net gains. The results to the Treasury of that method of treating capital losses led to the adoption in the Act of 1924 of the plan for subjecting capital net losses to a limited rate in order to protect the revenues, a plan which was continued in the Revenue Acts of 1926, 1928 and 1932.