Before L. Hand, Swan, and Augustus N. Hand, Circuit Judges.
The taxpayers are trustees under a trust agreement executed by John E. Andrus, since deceased, under date of December 30, 1921. On March 15, 1942, they filed a Federal Income Tax Return for the year 1941, with the Collector of Internal Revenue for the Second District of New York.
The trust was created to continue during the lives of two designated persons and during their lives the income of the trust was to be distributed as provided in the agreement. At the death of the survivor of these individuals the corpus of the trust was to be distributed. This period during which the income was to be distributed is referred to as the 'Primary Trust Term.'
The trust agreement provided, among other things, that the trustees were:
'First: To collect and receive the dividends, interest, income, rents, issues and profits on or arising from the 'Trust Estate' (hereinafter called 'Income') and after paying therefrom all expenses of administration and all items which are hereafter provided to be paid out of Income or which the Trustees in their discretion shall determine to pay from Income, to pay the net amount of said Income as follows, viz:
'(a) Quarterly or at such other intervals as shall be convenient in the administration of the Trust Estate during the Primary Trust Term, the Trustee shall pay forty-five percent (45%) of such net income to Surdna Foundation, Inc., a charitable corporation, organized and existing under the laws of the State of New York, and on the termination of said Primary Trust Term the Trustees shall transfer, convey, assign and set over unto said Surdna Foundation, Inc., forty-five percent (45%) of all of the capital of the Trust Estate as it shall then exist, for its sole and absolute use and benefit forever.'
The balance of the income of this trust was to be distributed among a number of beneficiaries whose incomes were subject to income tax.
The Surdna Foundation, Inc., is a New York corporation organized for exclusive charitable purposes. Under the provisions of the trust agreement forty-five percent of the trust's net income for the year 1941 was paid or permanently set aside for the Surdna Foundation, Inc.
It is stipulated by counsel for both sides that during the year 1941 the long-term capital gain from assets held more than 24 months was $87,408.39. The long term capital loss from assets held more than 18 months, but not more than 24 months, was $2,461.25. Income, other than that arising from capital gains, was $16,769. Deductions, other than contributions, totalled $19,224.01. The total net long-term capital gain was $84,945.14. The net income of the trust prior to deduction for contributions was $82,490.52.
In returning for taxation the income received in the year 1941, the taxpayer reported charitable contributions of 45% of $82,490.52, namely, $37,120.74, and claimed that the amount paid or permanently set aside was deductible in full in computing taxable net income of the trust for the year 1941 under Sec. 162(a) of the Internal Revenue Code, 26 U.S.C.A.Int.Rev.Code, 162(a).*fn1 The Commissioner contends that the deduction of the amounts paid or permanently set aside to a charitable corporation is limited to 45% of the taxable income, i.e., the income after applying to the capital gains (and capital losses) the percentages prescribed by Sec. 117(b) of the Internal Revenue Code, 26 U.S.C.A.Int.Rev.Code, 117(b),*fn2 prior to the 1942 Amendment.
The Tax Court adopted the view taken by the taxpayer and from its decision the Commissioner has appealed. We think the Tax Court erred in holding that the taxpayer was entitled under Sec. 162(a) to deduct the full amount set aside or paid for charitable purposes. It is to be noted that Section 162(a) allows as a deduction for charitable contributions 'any part of the gross income, without limitation, which pursuant to the terms of the * * * 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) * * * .'
Section 22(a) of the Revenue Act, 26 U.S.C.A.Int.Rev.Code, 22(a), in its definition of 'gross income,' from which the deduction of charitable contributions is to be made under Section 162(a),*fn3 provides as follows:
'(a) General definition. 'Gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * , or from * * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property. * * * '
'Gains' as defined in Sec. 117(a)(4) and (5) include long-term capital gains 'from the sale or exchange of a capital assed held for more than 18 months, if and to the extent such gain ...