MR. JUSTICE ROBERTS delivered the opinion of the Court.
These cases present the question whether deductions on account of charitable contributions are to be taken from net income as defined by § 21, or from ordinary net income as defined by § 101 (c) (7), of the Revenue Act of 1928.
In 1928 respondent had a net income (before any deduction for contributions to charity) of approximately $500,000. Some $211,000 of this was gain from the sale of capital assets, upon which she elected to be taxed at the rate of 12 1/2, per cent. pursuant to § 101 of the Act. During the year she made charitable contributions, as defined in the statute, to the amount of approximately $44,000. In her return she deducted the amount of the contributions from her total net income. She paid tax on $211,000 of the net income, after the deduction, at the rate of 12 1/2 per cent, and on the balance at normal and surtax rates. The Commissioner of Internal Revenue ruled the respondent could not use the $500,000 of net income as a base on which to calculate the 15 per cent, deduction for charitable contributions, but must first subtract the $211,000 of net gain on sale of capital assets and use only the balance of $289,000 of ordinary net income. A reduction of the allowable deduction for charitable contributions to about $40,000, and a deficiency in tax paid of about $1,000, resulted. The Board of Tax Appeals sustained the Commissioner, but the Circuit Court of Appeals, by a divided court, reversed the Board.
For "net income," the base specified in § 23 (n) upon which the 15 per cent. deduction of charitable contributions
The scheme of all the Revenue Acts since that of 1916 has been to sweep all income of every sort, including capital gains, into what is denominated gross income and to authorize certain deductions therefrom in order to arrive at net income, — the base for calculation of the tax. In the Act of October 3, 1917,
The accomplishment of this purpose of applying two rates to two different kinds of net income, required new provisions as to the base for each rate. Section 101 of the Revenue Act of 1928 prescribes the method to be followed. So far as material it is set forth in the margin.
The plain requirements of § 101 are that in ascertaining ordinary net income there shall be excluded from the computation only items of capital gain, capital loss, and capital deductions. Charitable contributions covered by § 23 (n) obviously are not capital deductions as defined by § 101 (c) (3), but on the contrary are "ordinary deductions" within the meaning of § 101 (c) (4).
By the express words of § 23 (n) charitable contributions are to be deducted to ascertain net income as defined in § 21; and nothing in § 101, which prescribes merely a method for segregating a portion of that net income for taxation at a special rate, in any wise alters the right of the taxpayer to take the deduction in accordance with § 23 (n).
If the meaning of the Act were doubtful, we should still reach the same conclusion. The exemption of income
The judgments are
No. 8. Helvering, Commissioner of Internal Revenue. v. Colgate. Certiorari to the Circuit Court of Appeals for the Second Circuit. November 5, 1934. Judgment affirmed, per stipulation of counsel to abide the decision in No. 7.
Sec. 21. Net Income.
"Net income" means the gross income computed under section 22, less the deductions allowed by section. 23.
Sec. 22. Gross Income.
(a) General definition. — "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, traders, businesses, commerce, or sales, of dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.
Sec. 23. Deductions From Gross Income.
In computing net income there shall be allowed as deductions:
(n) Charitable and other contributions. — In the case of an individual, contributions or gifts made within the taxable year to or for the use of:
(2) any corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes. . . .
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. . . . (45 Stat. 797, 799, 801.)
Supplement A — Rates of Tax.
Sec. 101. Capital Act Gains and Losses.
(a) Tax in case of capital net gain. — In the case of any taxpayer, other than a corporation, who for any taxable year derives a capital net gain (as hereinafter defined in this section), there shall, at the election of the taxpayer, be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined 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 plus 12 1/2 per centum of the capital net gain.
(b) Tax in case of capital net loss. — In the case of any taxpayer, other than a corporation, who for any taxable year sustains a capital net loss (as hereinafter defined in this section), there shall be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined 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.
(c) Definitions. — For the purposes of this title. —
(1) "Capital gain" means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921.
(2) "Capital loss" means deductible loss resulting from the sale or exchange of capital assets.
(3) "Capital deductions" means such deductions as are allowed by section 23 for the purpose of computing net income, and are properly allocable to or chargeable against capital assets sold or exchanged during the taxable year.
(4) "Ordinary deductions" means the deductions allowed by section 23 other than capital losses and capital deductions.
(5) "Capital net gain" means the excess of the total amount of capital gain over the sum of (A) the capital deductions and capital losses, plus (B) the amount, if any, by which the ordinary deductions exceed the gross income computed without including capital gains.
(6) "Capital net loss" means the excess of the sum of the capital losses plus the capital deductions over the total amount of capital gain.
(7) "Ordinary net income" means the net income, computed in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions. (45 Stat. 811; U.S.C. Tit. 26, § 2101.)