Helvering v. Bliss/Opinion of the Court

by Owen J. Roberts

These cases present the question whether deductions on account of charitable contributions are to be taken from net income as defined by section 21, or from ordinary net income as defined by section 101(c)(7), of the Revenue Act of 1928. ^[1] Though the deductions claimed and disallowed in the two cases differ in amount, the principle involved is the same in both, and statement of the facts in No. 6 will suffice.

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 section 101 of the act (26 USCA § 2101). 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. ^[2] We granted certiorari (292 U.S. 617, 54 S.Ct. 715, 78 L.Ed. 1475).

For 'net income,' the base specified in section 23(n) (26 USCA § 2023(n) upon which the 15 per cent. deduction of charitable contributions is to be calculated, the petitioner would substitute 'ordinary net income' as defined in section 101. So to read the act would violate its plain terms and run counter to the history of the legislation.

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, ^[3] Congress, in order to encourage gifts to religious, educational and other charitable objects, granted the privilege of deducting such gifts from gross income, but limited the total deduction to 15 per cent. of the taxpayer's net income, calculated in the first instance without reference to the amount of such contributions. All of the later acts have contained a like provision. The acts provide that the taxpayer shall first deduct from gross income the total of all permissible deductions save that for contributions, thus arriving at a provisional net income, and then deduct therefrom his contributions, but in no event to an amount greater than 15 per cent. of the provisional net income. By the last mentioned operation the final net income-the base for calculation of the tax-is ascertained. The relevant sections of the Act of 1928 are typical. They are copied in the margin. ^[4]

Commencing with the Revenue Act of 1921 Congress, in order to encourage realization of profits on capital assets, saw fit to relieve gain thus derived of the heavy surtaxes then applicable, and to permit the payment of tax at a flat rate of 12 1/2 per cent. on so much of the taxpayer's income as represented the net gain from capital transactions. ^[5]

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. ^[6] In extending this relief to taxpayers, Congress might have modified the privilege theretofore existing with respect to charitable contributions, by directing that they should be deducted solely from capital net gain or should be apportioned and deducted ratably from ordinary net income and from capital net gain. The Acts, however, evince no such purpose. In the Act of 1928, as will be seen by reference to sections 21, 22 and 23 (26 USCA §§ 2021, 2022, 2023), supra, note 4, the statutory concept of the income is preserved. These sections are found in part 2 of title 1, which deals with 'Computation of Net Income.' Section 101 (26 USCA § 2101), on the other hand, is found under 'Supplemental Provisions,' and is captioned 'Supplement A-Rates of Tax.' It is obviously directed to the matter of computation of tax on a portion of net income as defined in section 21. There is nothing novel in such a division of the statutory net income into parts for the purpose of applying different rates of tax, as witness the provisions fixing the rates on those portions of the entire net income attributable to dividends, earned income, interest on United States obligations, and gains from the sale of mines, and allowing credits for dependents. ^[7]

The plain requirements of section 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 section 23(n), 26 USCA § 2023(n), obviously are not capital deductions as defined by section 101(c)(3), 26 USCA § 2101(c)(3), but on the contrary are 'ordinary deductions' within the meaning of section 101(c)(4), 26 USCA § 2101(c)(4).

By the express words of section 23(n) charitable contributions are to be deducted to ascertain net income as defined in section 21; and nothing in section 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 section 23(n).

If the meaning of the act were doubtful, we should still reach the same conclusion. The exemption of income devoted to charity and the reduction of the rate of tax on capital gains were liberalizations of the law in the taxpayer's favor, were begotten from motives of public policy, and are not to be narrowly construed. Nor should the reduction in the rate of tax on capital gain, first granted in the Revenue Act of 1921, be held to circumscribe the privilege granted in the earlier Acts, and retained in later ones, with respect to charitable contributions, unless that result be plainly required by the language used. As has been shown the statutes if read as written lead to a contrary result. Moreover, from 1923 to 1932 the Commissioner uniformly ruled that the deduction for charitable contributions was to be taken from net income before computation of the tax and hence in whole from ordinary net income. ^[8] The re-enactment in later Acts of the sections permitting the deduction indicate Congressional approval of this administrative interpretation.

The judgments are affirmed.

Notes

1. 45 Stat. 797, 811, U.S.C. Tit. 26, §§ 2021, 2101 (26 USCA §§ 2021, 2101(c) (7).
2. 68 F.(2d) 890. The opinion of the Circuit Court of Appeals in the Harbison Case is reported 68 F.(2d) 1004. The same result was reached in White v. Atkins, 69 F.(2d) 960 (C.C.A. 1), and in Blow v. United States, 5 F.Supp. 737 (D.C.N.D. Ill.). The rulings of the Board of Tax Appeals were at first in accordance with the petitioner's contention: Elkins v. Commissioner, 24 B.T.A. 572; Livingood v. Commissioner, 25 B.T.A. 585, and the instant cases, Harbison v. Commissioner, 26 B.T.A. 896; Bliss v. Com'r, 27 B.T.A. 205, and Colgate v. Com'r, 27 B.T.A. 506. Subsequently the full Board reached an opposite result in Straus v. Commissioner, 27 B.T.A. 1116. See, also, Robinette v. Commissioner, 27 B.T.A. 1426.
3. Section 1201, 40 Stat. 330.
4. Part II-Computation of Net Income.
5. Revenue Act of 1921, § 206, 42 Stat. 232; Revenue Act of 1924, § 208, 43 Stat. 262 (26 USCA § 939 note); Revenue Act of 1926, § 208, 44 Stat. 19 (26 USCA § 939 note).
6. Subtitle C-Supplemental Provisions.
7. See Sections 25, 31 and 102 of the Revenue Act of 1928, 45 Stat. 802, 804, 812 (26 USCA §§ 2025, 2031, 2102).
8. See Corp. Trust Co., Fed. Inc. Tax Service, 1924, par. 2033; I.T. 2104, Cum. Bull. III-2, p. 152; Mim. 3931, XI-1, C.B. 33.