The Constitution of the United States of America: Analysis and Interpretation Part 218

Accordingly, one who in 1913 borrowed a sum of money to be repaid in German marks and who subsequently lost said money in a business transaction cannot be taxed on the curtailment of debt effected by using depreciated marks in 1921 to settle a liability of $798,144 for $113,688, the "saving" having been exceeded by a loss on the entire operation.[36]

DATES APPLICABLE IN COMPUTATION OF TAXABLE GAINS

With a frequency that for obvious reasons is progressively diminishing, the Court has also been called upon to resolve questions as to whether gains, realized after 1913, on transactions consummated prior to ratification of the Sixteenth Amendment are taxable, and if so, how such tax is to be determined. The Court's answer generally has been that if the gain to the person whose income is under consideration became such subsequently to the date at which the amendment went into effect; namely, March 1, 1913, and is a real and not merely an apparent gain, said gain is taxable. Thus, one who purchased stock in 1912 for $500 could not limit his taxable gain to the difference between $695, the value of the stock on March 1, 1913 and $13,931, the price obtained on the sale thereof in 1916; but was obliged to pay tax on the entire gain, that is, the difference between the original purchase price and the proceeds of the sale.[37] Conversely, one who acquired stock in 1912 for $291,600 and who sold the same in 1916 for only $269,346, incurred a loss and could not be taxed at all, notwithstanding the fact that on March 1, 1913, his stock had depreciated to $148,635.[38] On the other hand, although the difference between the amount of life insurance premiums, paid as of 1908, and the amount distributed in 1919, when the insured received the amount of his policy plus cash dividends apportioned thereto since 1908, const.i.tuted a gain, that portion of the latter which accrued between 1908 and 1913 was deemed to be an accretion of capital and hence not taxable.[39]

DEDUCTIONS; EXEMPTIONS, ETC.

Notwithstanding the authorization contained in the Sixteenth Amendment to tax income "from whatever source derived," Congress has been held not to be precluded thereby from granting exemptions.[40] Thus, the fact that "under the Revenue Acts of 1913, 1916, 1917, and 1918, stock fire insurance companies were taxed * * * upon gains realized from the sale * * * of property accruing subsequent to March 1, 1913," but were not so taxed by the Revenue Acts of 1921, 1924, and 1926, did not prevent Congress, under the terms of the Revenue Act of 1928, from taxing all the gain attributable to increase in value after March 1, 1913 which such a company realized from a sale of property in 1928. The const.i.tutional power of Congress to tax a gain being well established, Congress, was declared competent to choose "the moment of its realization and the amount realized"; and "its failure to impose a tax upon the increase in value in the earlier years * * * [could not]

preclude it from taxing the gain in the year when realized * * *"[41]

Congress is equally well equipped with the "power to condition, limit, or deny deductions from gross incomes in order to arrive at the net that it chooses to tax."[42] Accordingly, even though the rental value of a building used by its owner does not const.i.tute income within the meaning of the amendment,[43] Congress was competent to provide that an insurance company shall not be ent.i.tled to deductions for depreciation, maintenance, and property taxes on real estate owned and occupied by it unless it includes in its computation of gross income the rental value of the s.p.a.ce thus used.[44]

ILLEGAL GAINS AS INCOME

In United States _v._ Sullivan[45] the Court held, in 1927, that gains derived from illicit traffic in liquor were taxable income under the Act of 1921.[46] Said Justice Holmes for the unanimous Court: "We see no reason * * * why the fact that a business is unlawful should exempt it from paying the taxes that if lawful it would have to pay."[47] But in Commissioner _v._ Wilc.o.x,[48] decided in 1946, Justice Murphy, speaking for a majority of the Court, held that embezzled money was not taxable income to the embezzler, although any gain he derived from the use of it would be. Justice Burton dissented on the basis of the Sullivan Case. In Rutkin _v._ United States,[49] decided in 1952, a sharply divided Court cuts loose from the metaphysics of the Wilc.o.x case and holds that Congress has the power under Amendment XVI to tax as income monies received by an extortioner.

Notes

[1] Pollock _v._ Farmers' Loan & Trust Co., 157 U.S. 429 (1895); 158 U.S. 601 (1895).

[2] 28 Stat. 509.

[3] The Court conceded that taxes on Incomes from "professions, trades, employments, or vocations" levied by this act were excise taxes and therefore valid. The entire statute, however, was voided on the ground that Congress never intended to permit the entire "burden of the tax to be borne by professions, trades, employments, or vocations" after real estate and personal property had been exempted. 158 U.S. 601, 635 (1895).

[4] Springer _v._ United States, 102 U.S. 586 (1881).

[5] 13 Stat. 223 (1864).

[6] For an account of the Pollock decision _see_ pp. 319-320.

[7] 173 U.S. 509 (1899).

[8] 178 U.S. 41 (1900).

[9] 184 U.S. 608 (1902).

[10] Flint _v._ Stone Tracy Co., 220 U.S. 107 (1911).

[11] Brushaber _v._ Union P.R. Co., 240 U.S. 1 (1916); Stanton _v._ Baltic Min. Co., 240 U.S. 103 (1916); Tyee Realty Co. _v._ Anderson, 210 U.S. 115 (1916).

[12] Brushaber _v._ Union P.R. Co., 240 U.S. 1, 18-19 (1916).

[13] Stanton _v._ Baltic Min. Co., 240 U.S. 103, 112 (1916).

[14] Stratton's Independence _v._ Howbert, 231 U.S. 399 (1914); Doyle _v._ Mitch.e.l.l Bros. Co., 247 U.S. 179 (1918).

[15] Eisner _v._ Macomber, 252 U.S. 189 (1920); Bowers _v._ Kerbaugh-Empire Co., 271 U.S. 170 (1926).

[16] 247 U.S. 339, 344 (1918).--On the other hand, in Lynch _v._ Turrish, 247 U.S. 221 (1918), the single and final dividend distributed upon liquidation of the entire a.s.sets of a corporation, although equalling twice the par value of the capital stock, was declared to represent only the intrinsic value of the latter earned prior to the effective date of the amendment, and hence was not taxable as income to the shareholder in the year in which actually received. Similarly, in Southern P. Co. _v._ Lowe, 247 U.S. 330 (1918) dividends paid out of surplus acc.u.mulated before the effective date of the amendment by a railway company whose entire capital stock was owned by another railway company and whose physical a.s.sets were leased to and used by the latter was declared to be a nontaxable bookkeeping transaction between virtually identical corporations.

[17] 247 U.S. 347 (1918).

[18] 252 U.S. 189, 206-208 (1920).

[19] Eisner _v._ Macomber, 252 U.S. 189, 207, 211-212 (1920). This decision has been severely criticized, chiefly on the ground that gains accruing to capital over a period of years are not income and are not transformed into income by being dissevered from capital through sale or conversion. Critics have also experienced difficulty in understanding how a tax on income which has been severed from capital can continue to be labeled a "direct" tax on the capital from which the severance has thus been made. Finally, the contention has been made that in stressing the separate ident.i.ties of a corporation and its stockholders, the Court overlooked the fact that when a surplus has been acc.u.mulated, the stockholders are thereby enriched, and that a stock dividend may therefore be appropriately viewed simply as a device whereby the corporation reinvests money earned in their behalf. _See also_ Merchants' Loan & T. Co. _v._ Smietanka, 255 U.S. 509 (1921).

[20] Reconsideration was refused in Helvering _v._ Griffiths, 318 U.S.

371 (1943).

[21] United States _v._ Ph.e.l.lis, 257 U.S. 156 (1921); Rockefeller _v._ United States, 257 U.S. 176 (1921). _See also_ Cullinan _v._ Walker, 262 U.S. 134 (1923).

In Marr _v._ United States, 268 U.S. 536, 540-541 (1925) it was held that the increased market value of stock issued by a new corporation in exchange for stock of an older corporation, the a.s.sets of which it was organized to absorb, was subject to taxation as income to the holder, notwithstanding that the income represented profits of the older corporation and that the capital remained invested in the same general enterprise. Weiss _v._ Stearn, 265 U.S. 242 (1924), in which the additional value in new securities was held not taxable, was likened to Eisner _v._ Macomber, and distinguished from the aforementioned cases on the ground of preservation of corporate ident.i.ty. Although the "new corporation had * * * been organized to take over the a.s.sets and business of the old * * *, the corporate ident.i.ty was deemed to have been substantially maintained because the new corporation was organized under the laws of the same State with presumably the same powers as the old. There was also no change in the character of the securities issued," with the result that "the proportional interest of the stockholder after the distribution of the new securities was deemed to be exactly the same."

[22] Miles _v._ Safe Deposit & Trust Co., 259 U.S. 247 (1922).

[23] Koshland _v._ Helvering, 298 U.S. 441 (1936)

[24] Helvering _v._ Gowran, 302 U.S. 238 (1937).

[25] Helvering _v._ National Grocery Co., 304 U.S. 282, 288-289 (1938).

In Helvering _v._ Mitch.e.l.l, 303 U.S. 391 (1938) the defendant contended the collection of 50% of any deficiency in addition to the deficiency alleged to have resulted from a fraudulent intent to evade the income tax amounted to the imposition of a criminal penalty. The Court, however, described the additional sum as a civil and not a criminal sanction, and one which could be const.i.tutionally employed to safeguard the Government against loss of revenue. In contrast, the exaction upheld in Helvering _v._ National Grocery Co., though conceded to possess the attributes of a civil sanction, was declared to be sustainable as a tax.

[26] 311 U.S. 46 (1940). _See also_ Crane-Johnson Co. _v._ Helvering, 311 U.S. 54 (1940).

[27] 311 U.S. 46, 53. Another provision of the Revenue Act, requiring undistributed net income of a foreign personal holding company to be included in the gross income of citizens or residents who are shareholders in such company, was upheld as const.i.tutional in Rodney _v._ Hoey, 53 F. Supp. 604, 607-608 (1944).

[28] Farmers Union Co-op Co. _v._ Commissioner of Int. Rev., 90 F. (2d) 488, 491, 492 (1937).

[29] Burk-Waggoner Oil a.s.so. _v._ Hopkins, 269 U.S. 110 (1925).

[30] 268 U.S. 628 (1925).

[31] Texas & P. Ry. Co. _v._ United States, 286 U.S. 285, 289 (1932); Continental Tie & Lumber Co. _v._ United States, 286 U.S. 290 (1932).

[32] Helvering _v._ Bruun, 309 U.S. 461, 468-469 (1940). _See also_ Hewitt Realty Co. _v._ Commissioner of Internal Revenue, 76 F. (2d) 880 (1935).

[33] Crane _v._ Commissioner, 331 U.S. 1, 15-16 (1947).

[34] The donor could not, "by mere gift, enable another to hold this stock free from * * * the right of the sovereign to take part of any increase in its value when separated through sale or conversion and reduced to possession."--Taft _v._ Bowers, 278 U.S. 470, 482, 484 (1929).

[35] Helvering _v._ Horst, 311 U.S. 112, 115-116 (1940).

[36] Bowers _v._ Kerbaugh-Empire Co., 271 U.S. 170 (1926).

[37] Goodrich _v._ Edwards, 255 U.S. 527 (1921).