THIRD: That said sum of $8,760.97 represents a capital loss upon the sale of 250 shares of Quincy Mining Company stock, which is properly deductible from capital gain and which is properly computed as follows: Original cost of petitioner of 250 shares Quincy Mining Co. stock in December 1916‒‒‒‒‒‒ Less dividends received during 1917 to 1920 inclusive, determined to have been paid out of surplus accumulated prior to March 1, 1913, $14.776 per share, on 250 shares-- Adjusted basis. Proceeds of sale by petitioner of said 250 shares Quincy Mining Loss, as adjusted,-. $22, 500.00 3, 694.00 $18,806.00 10, 045. 03 $8,760.97 FOURTH That the amount of charitable and other contributions made by petitioner during the year 1928 of a character deductible from net income subject to the limitations provided in Section 23 subdivision (n) of the Revenue Act of 1928, was $43,995.92. That the ordinary net income of petitioner before deduction of the amount of such contributions was $270,490.77. That the capital net gain was $211,544.82. That the total amount of said charitable and other contributions was deducted from gross income by petitioner in her return upon the claim that in determining the amount of 15 per cent of petitioner's net income for the year 1928 under Section 23 subdivision (n) of the Federal Revenue Act of 1928, ordinary net income and capital net gain should both be included, which contention is asserted by petitioner and denied by the Commissioner, and this stipulation shall not prejudice the rights of either petitioner or respondent as to the legality of such deduction in excess of 15% of ordinary net income. Taxable Year 1929 FIRST: That net income as determined in letter from the Commissioner of Internal Revenue to Susan Dwight Bliss, dated October 31, 1931, shall be reduced by the sum of $6,922.03 in the following particulars: (a) By allowance as a deduction of the amount of fees paid to the Trustees of the George T. Bliss Agency Account upon income from tax exempt securities---. (b) By allowance as a deduction of the amount of fees paid to others in Agency Account___ (c) By allowance as a deduction of the sum of $5,000 representing a loss on stock of Stevenson & Cameron which cost petitioner $5,000 and became worthless in the year 1929_-_ $1,653. 93 268.10 5,000.00 $6, 922.03 SECOND: That the amount of charitable and other contributions made by petitioner during the year 1929 of the character deductible from net income, subject to the limitations provided in Section 23, subdivision (n) of the Revenue Act of 1928, was $39,088.46. That the ordinary net income of petitioner before the deduction of such contributions was $247,571.83. That the capital net gain was $299,942.31. That the total amount of said charitable and other contributions was deducted from gross income by petitioner in her return upon the claim that in determining the amount of 15% of petitioner's net income for the year 1929 under Section 23, subdivision (n) of the Revenue Act of 1928, ordinary net income and capital net gain should both be included, which contention is asserted by petitioner and denied by the Commissioner, and that this stipulation shall not prejudice the rights of either petitioner or respondent as to the legality of such deduction in excess of 15% of ordinary net income. OPINION. TRAMMELL: This case was submitted upon the pleadings and certain stipulations of the parties, set out above as our findings of fact. The issues presented in the original pleadings have been disposed of by the stipulations, but in an amended answer the respondent alleges that the deficiencies as originally determined by him were understated because of the allowance of deductions for contributions in excess of 15 per cent of the petitioner's "ordinary net income " before deducting contributions, and asserts claim for increased deficiencies accordingly. The petitioner claimed deductions from gross income for each of the taxable years in excess of 15 per cent of her ordinary net income, but in amounts less than 15 per cent of her combined "ordinary net income" and "capital net gain." It is stipulated in effect that the amounts so claimed by the petitioner on account of contributions constitute allowable deductions within the purview, and subject to the limitations, of section 23 (n) of the Revenue Act of 1928, which provides that in computing "net income " there shall be allowed as deductions, among other things: (n) Charitable and other contributions.—In the case of an individual contributions or gifts made within the taxable year * * * to an amount which does not exceed 15 per centum of the taxpayer's net income as computed without the benefit of this subsection. * Thus, the issue presented is whether the maximum amount which an individual may deduct for contributions in computing net income is 15 per cent of "ordinary net income," or whether such maximum deduction may include also a corresponding percentage of "capital net gain." This question involves a construction of the provisions of the statute relating to net income and capital net gains. The Revenue Act of 1928 provides for the taxation of capital net gains as follows: [SEC. 101.] (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, 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 122 per centum of the capital net gain. [Italics supplied.] It follows from the above provisions of the statute that if an individual taxpayer derives a capital net gain and elects to have the tax computed at the special rate therein provided, as the petitioner in this case has done, the amount of such capital gain is excluded from gross income for the purpose of computing normal and surtaxes upon ordinary net income. Section 21 of said act defines "net income as meaning the gross income computed under section 22, less the deductions allowed by section 23, and the latter section provides in subsection (n) that in computing net income deductions for charitable contributions shall be allowed to an amount which does not exceed 15 per cent of the taxpayer's net income computed without such deductions. Hence, if the capital net gain has been excluded from gross income for the purpose of computing the tax thereon at the special rate provided, it can not at the same time form a part of the basis for computing the maximum deduction allowable for contributions. On the other hand, if the taxpayer does not elect to have the capital gain taxed at the special rate, it is then included in the gross income, and the charitable deduction would be computed on the basis of the resulting net income. This construction of the statute is further supported by the fact that section 101 (c) defines "ordinary net income " as meaning "the net income computed in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions." If capital gain is excluded from gross income, and capital deductions are also excluded in computing "ordinary net income," it is obvious that the term "net income " as used in section 23, which furnishes the basis for computing the maximum deduction for contributions, means "ordinary net income," and such deductions must be computed on the basis of net income from which all capital gain, capital loss and capital deductions have been excluded. Again, section 101 (c) defines "capital net gain" as meaning "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." Charitable contributions are not allowed as capital deductions, and can not be used in computing maximum deductions for charitable contributions. The taxpayer can not exclude capital gain from gross income for the purpose of getting the benefit of the lower rate of tax thereon, and at the same time include capital gain in gross income for the sole purpose of computing the maximum deduction for contributions. In the above provisions of the statute, we think Congress has clearly and designedly limited allowable deductions for charitable and other contributions to a maximum of 15 per cent of the ordinary net income computed upon the basis of excluding all items of capital gain, capital loss and capital deductions. The contention of the petitioner can not be sustained. The deficiencies will be redetermined accordingly, after giving effect to the stipulations of the parties on other points, as set out in our findings of fact. Judgment will be entered under Rule 50. GEORGE DRUMHELLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket Nos. 41515, 45752. Promulgated December 2, 1932. J. F. Watson, Esq., for the petitioner. These two proceedings, consolidated for hearing, arise upon a determination by the respondent of a deficiency in the petitioner's income tax for the calendar year 1925 of $955.59, only a portion of which is here in issue; and for the calendar year 1927 of $6,035.49, the whole of which is in issue. For 1925, the petitioner alleges that the respondent erred in including in his income the sum of $3,020, a corporation dividend paid in that year, claiming that one-half this amount was income received by him as executor of the estate of his deceased wife, Anna M. Drumheller. For 1927, the petitioner alleges that respondent erred in including in his income $33,886.24, making the same claim that this sum constituted undistributed income of his wife's estate. FINDINGS OF FACT. The petitioner is a farmer residing at Walla Walla, Washington. Prior to and during 1925 he and his wife, Anna Drumheller, owned as community property certain property, consisting of farming and grazing lands, farm machinery, livestock and other personalty, including 152 shares of stock in a hardware and farm supply business, the Whitehouse-Drumheller Company. Anna Drumheller died on October 1, 1925, leaving a will in which she named the petitioner sole residuary devisee and legatee of her one-half of the community estate, after the payment of four nominal bequests of $1 each to their four surviving children. By the same instrument she appointed petitioner the sole executor of her will, without bond, "to administer the same without the intervention of any court in so far as the same may be possible." The will was admitted to probate on October 20, 1925, the order providing: and that George Drumheller be and he is hereby appointed the executor under said last will and testament, and he is duly authorized and empowered to settle the estate of said deceased in accord with the terms of said will, without giving any bond, and without the intervention of any court insofar as the same can in any case be done. The order also appointed three appraisers of the estate and ordered that due notice to the creditors of the deceased and the estate be published in the Walla Walla Union for a period of five weeks. An inventory and appraisal of the community estate filed with the probate court on November 30, 1925, places the fair value of all the community realty and personalty at $653,086, the decedent's estate being one-half that sum, or $326,543. The community real estate was valued at $488,079. On December 11, 1925, notice was given to creditors. Within the time limited by law, claims in the amount of $657,592.83 were presented and filed. An order of the court filed June 11, 1931, shows that each of the claims had been approved by the executor and they were accordingly allowed and approved by the court. The obligations represented by these claims, including loans from banks, were incurred on behalf of the whole community estate. Petitioner had made payments on some of the obligations, but at the time of the hearing the obligations outstanding, including accrued interest, totaled over $690,000. No order of solvency or insolvency was ever filed, and at the time of the hearing no other proceedings had been had in the probate court and no other reports or orders filed. The clerk of the probate court certified on June 16, 1931, that the letters testamentary were still in full force and effect and probate proceedings still pending in the court. Prior to and after his wife's death the petitioner kept only one account book in which he included all receipts from the community property and all disbursements. After January 1, 1925, the account book was kept by an employee, George Malcolm. All the community money was carried in a bank account in the petitioner's name. He did not make any segregation between his own account and that of his wife, or, after her death, of her estate. He continued after his wife's death to handle the farm business exactly as he had done prior thereto. For 1927 he divided the total income received from the community property, reporting one-half as his own and one-half as income from the estate of his wife. Petitioner had been a stockholder in the Whitehouse-Drumheller Company for some years prior to 1925. The shares held were part of the community estate. The company paid its dividends for the year at the end of the calendar year. Petitioner kept an account at |