# Plaintiffs Brief — Goodrich v. Edwards > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386004_0473%3A02 ## Record - **Collection:** Supreme Court brief - **Document type:** Plaintiffs Brief - **Published:** January 1, 1921 - **Citation:** 255 U.S. 527 ## Text J | FFB 28 1921 JAMES D. MAH Cc Supreme Court of the United States, OctToBerR TERM, 1920. No. 663. Davip M. Goopricn, Plaintiff in error, Wituiam H. Epwarps, United States Collector of Internal Revenue for the Second District of the State of New York. WRIT OF ERROR TO THE DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK. BRIEF FOR PLAINTIFF IN ERROR. WILuiAM D. GUTHRIE, LANGDON P. MARVIN, Henry M. Warp, HERBERT POPE, Rusu C. BUTLER, Of counsel for plaintiff in error. ER Ret LIN I bs a eee eet cag! oy oF Pt PO fh ee AIPA gee ta yor oe s AES SEE PES CRIN TB a INDEX T. Review of prior statutes and decisions of the eourt 1. The Income Tax Act of 1867. rite 2. The Corporntion Excise Tax Act of 1909... 4. The Inome Tax Act of 1913........ Il. The growth or inerement in value of real or personal property held for investment when realized by sale is not ‘income *’ within the meaning of the Sixteenth Amendment... . The meaning of the word ‘‘ineome’’...... B. Gray v. Darlington, 15 Wall. 63.... ae (. Meaning of the word ‘‘ineome’’ in the law of trusts D. The British eases . Perr meV Pre i The definition of income established when the Sixteenth Amendment was adopted Terrrorer ' F. Realized increase or inerement in the value of an invest mont is mot **ipoome’’.. wo. oko cece IN. The Income Tax Law of 1916 does not levy a tax upon the growth or increment in value of capital assets when realized _) A, MEET ET oP err errr capital investments ........... are js ; B. The changes in phraseology in the Act of 1916 do not in dicate any intent so to broaden the seope of the ineome tax as to inelnde realized increment as an item of tax PE EG Ol de Siri bab £ Wik 6a dee ood eine mon speeth as exelusive of realized inerement shonld he deemed to he the meaning of that word in the Act of RE Sue arse eg ee tall F. The construction adopted and enforced by the Commis (7. The contention of the Government hased on practical eon. IV. As the sale or conversion of the stoek of the Goodrich Company represented an actual loss, no part of the proceeds was tax able as income of the taxpayer .. ae ele eidé ca MUNI 504.55 sutras ta'e'ebe sh oeuan INDEX TO APPENDIX Comparison of Income Tax Acts of 1913 and 1916. Texts of Income Tax Acta of the Civil War period, 1861-1867, so far 21 42! 47 53 ii TABLE OF CASES CITED PAGE Anderson r. Forty-Two Broadway Co., 239 U. s. , Ee 9, 38 Assets Co., Ltd., v. Forbes (1897), 3 Tax Cases, 542; 24 Rettie 578.. 31 Barnes’ Income Tax Practiee in South Africa (1919), pp. 137-140. . 35 7 Bedwell’s Australasian Judicial Dictionary (1920), p. 76........... 35 Bennet v. See Wevtscincctscoverseccecs nn 26 Black on Income Taxes, 4 ed. see. MR Mleturentchevsordekuces... 30, 50 Boardman r. ety WO, G+. .05,.6... Bohemians Club r. Acting Federal Commissioner of Taxation (1918), 24 Commonwealth Law I OD sceverdtenccesanceresees.., 35 Breadner (Commissioner of Taxation) on The Business Profits War Tax Act and The Income War Tax Act, GW eitindcodesic. ct... 35 Brewster v. Ne ONO TOE Bevcnrecaviecesccccc 41 Californian Copper Syndicate, Ltd. v. Harris (1904), 5 Tax Cases caren eV Cac MENUeE Rn arononitradcnivieenesiere’ ccler 31, 32 Carpenter vr. PR TE, Whoo cocvcrexcscaccs.. 27 Chieago, B. & Q. R. R. Co. v. Wy 8 OR OU ce rccccceccs,. 26 Commissioner of Taxes v. Booyesen’s Estate, Ltd., South African eet SIU Wen seccccesc. 35 Commissioner of Taxes v. Melbourne Trust, Ltd. (1914), A. C. 1001. 31 Cyclopedia of Law and Procedure, vol. 39, p. 444. vol. 40, p. 1788.. 27 Doyle v. Mitchell Brothers Co., 247 U. 8. 179................ 10, 38, 39, 62 Eidman v. cmew eng SS 46, 63 Eisner v. Macomber, 252 U.S. Py sis eta 18, 21, 23, 38, 39, 40, 41, 62 Eldorado Coal and Mining Co. v. Mager, No. 609, October Term, NCR ein stpnereresaveesseacecuse ce 1, 30, 56 English & American Encyclopedia (2 ed.), Vol. 28, Pe Bit becerece 27 Evans v. Gore, 253 U. 8. Peri sabbuseretivicdsertiessccl 21, 23 Ex parte Bain, 121 U. IP Metwaniccduowsceviniowesdaesentcar 37 Flint rv. Stone Vilciondrtsredsteoadan tmatean 10, 11, 38 Gibbons v. Mahon, 136 U. MMe veneeeidescvevevcecesessJca: 28,41 Gould vr. yo hg A Shae ate dabids 45, 59, 63 Graham’s Estate, 198 Pa. St. 216 27 8, 13, 15, 18, 24, 25, 26, 35, 38, 41, 42, 44, 57, 58 Gulf Oil Co. v. mpg ge haat detain dade 15 Guthrie’s Trustee r. WG OR ie scccicccrsscc 27 Hawaii v. a Dow Se 64 Hays v. Gauley Mountain wat Go, S67. G. tgp...” 10, 38 Holy Trinity Church v. United States, 143 U. s. i vveieeeess 64 Houghton v. Payne, 194 W. §. DU eebbirerseisehidlecinsec.. 59 Hudson’s Bay Co., Ltd. r. Stevens (1909), 5 Tax Cases, 424...... 31, 33 hE se lg i dd a 27 Inland Revenue v. Western Steamship Co. ( 1907), 44 Se. L. R. 715... 36 Interstate Commerce Commission vr, B. & O. R. R. Co., 145 U. s. 263 30 Interstate Commerce Commission rv. Del., L. & W. R. R. Co., 220 BT Pretoria trattowemiecuersercceresorrccn om te 31 Kepner rv. United ee OUR icavsreeckchete cis, 25 Knowlton vr. SE eM Mecrirsesevcecesiec 56, 64 eek oe Oe © Se nerve 13, 14 Lynch v. Turrish, 247 U. §. 221, PF } iii PAGE MeCoach rv. Minehill & Schuylkill Haven R. R. Co., 228 U. 8. 295.... 11 MeCulloch v. Maryland, 4 Wheat. 316..........................' 23 MeDonald v. Hovey, 110 U. 8 619....................07°7°7°""" 31 McLachlan v. Commissioner of Taxes (1912), South Australian Law MD UE Sekt hs tirevedenicwncssierasrceasicucseosiercesc.., 35 Maryland Casualty Co. v. United States, 251 U. 8. 342............ 48 Meteet 68 Gowy, 05 BH. Y. 666.........00cceceeesse.... 7 Mente v. Eisner, 266 Fed. 161 (No. 447, Oct. Term, 1920)........ 15, 49 Mercer v. Buchanan, 132 Fed. ou hf... S>eepeaaeenee Merchants’ Loan and Trust Co. v. Smietanka, No. 608 October Term, WEE Neko eRuentieeedeWasdseteevivepuccerrecdcencccc. 1, 29, 55, 56 Meeritt ©. Cameron, 187 U. &. 542.....................000°) 58 Mooney v. Commissioners of Taxation (1905), 3 Commonwealth Law ee Gs GOK, © BOR... ercccsscosereeseceseess.... 35 Hoet"s Metate, 207 Pi, Bt. 466... . 2... cece ccccccceeoceess.. 27 NS ED oir ecnvivecinreeercceccscs 12 Norfolk Southern R. R. Co. r. Chapman, 244 U. 8. 276............. 25 Outeault v. Appleby, 36 N. J. Bt Petwbandeeesbartuesr acco. o. 27 Parker v. Johnson, 37 N. J. Pe MN GUvinatietieocaceetonesesic. 27, 28 Peabody c. Eisner, 247 U. 8. 347.......................000077°"" 13, 14 Pickett v. United States, 216 U.S. 456.............01. 77° 777°°"" 64 Pollock v. Farmers’ Loan & Trust Co., 157 U. 8. 429; 158 U. 8. 601. 11,22 Pontifex’s Canadian Income Tax, EE Mat edi dkindetceedaeni cued. 35 Royal Insurance Co. v. Watson, 3 Tax Dye Fivnscuvecacuc 36 Savings Bank v. United States, 19 Wall. 297 rere re 59 Scoble v. Secretary of State for India (100% » B.C. OOD... cee 31 Shiels v. Commissioner of Taxes (1912), South Australian Law Rep. nivineddyGon aswel icavieu 35 Mocmm s. Ames, 19 BT 401... 27 im © Meme, 8 MA O8,,..........,.5............. 18, 27 Smith v. Westinghouse Brake Co. (| 44s Pas Cases 357......... 36 South Carolina v. United States, 199U S 497.00 37 Southern Pacifie Co. v. Lowe. 247 US 44 14, 15, 24, 58 Spreckels Sugar Refining Co. v. MeClain, 192 U8 397 Ere fey 12 Stratton’s Independence v. Howbert, 231 U. 8. 399 ves mneis 24, 37, 64 Stott o. Hoddinott, 7 Tax Cases 85.....................0°°°°°™ 36 Studebaker v. Perry, 184 U.S. 258... (eee eine ea Wdwedes 59 Taxation Commissioners v. Mooney (1907), A. C. 342............ 31, 33 Tebrau (Johore) Rubber Syndicate, Ltd. v. Farmer (1910), 5 Tax SOU EN Ntintdasuswardnicebawdebedéyseeucrcoks cord ct 31, 33 Se Oe UNO Be We Ds raaiac sbvcndckcascacvcis ce 27 Towne v. Eisner, 242 Fed. FR Oe We Oe Behe cane ebeecs io 28, 29 United States rv. Cleveland, &e., Ry. Co., 247 U. 8. 195............ 10, 38 United States v. Delaware & Hudson Co., 213 U. 8. 366........... 63 United States v. Jin Fuey ., .. 1S 9 ” Seeeeeeeteaest 63 United States v. Kirby, 7 Wall. 482................... 077777777" United States v. Oregon-Washington R. & Nav. Co., 251 Fed. 211.... 24 United States v. Palmer, 3 Wheat. 610..........................7 64 United States v. Standard Brewery, 251 U. 8. 210................. 63 United States v. Steever, 222 U. 8. 167.................00770777" 60 United States v. Tanner, 147 U. 8. 661.....................000°7" 58 United States v. Whitridge, 231 U. 8. 144..........2. 0° 577' 7777 38 Walsh v. Brewster, No. 742, October Sy Geter deeeeddepe news 1, 2, 41 Watney v. Musgrave, 1 Tax DN PU esidetedweccdcued ouces cc. 36 Webb v. Australian Deposit & Mortgage Bank, Ltd. (1910), 11 Com- NE OP GA) GD. cnc cecsredcnvcsccevesveccenress.. 35 OLE ns He SET oe: . a SUPREME COURT OF THE UNITED STATES, Ocroprr Tex, 1920. No. 663. Davipv M. Goopgicn, vs. Wutiam H. Epwaxps, United States Collector of Internal Revenue for the Second District of the State of New York. Plaintiff in error, WRIT OF ERROR TO THE DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK. BRIEF FOR PLAINTIFF IN ERROR. This case comes before the court on writ of error to the District Court of the United States for the Southern District of New York to review a judgment entered on December 17, 1920, sustaining a demurrer to the com- plaint on the ground of insufficiency. The facts pleaded and all inferences of fact to be drawn from the facts pleaded are, therefore, admitted. The plaintiff in error was plaintiff below. STATEMENT. The complaint on its face presents the same question of constitutional law as is presented in Merchants’ Loan and Trust Company v. Smietanka, No. 608, and Eldorado Coal and Mining Company v. Mager, No. 609, of the pres- ent term, now under advisement, and also involved in Walsh v. Brewster, No. 742 of the present term, namely, whether the growth or increment in value of property held for investment and constituting part of the taxpayer's capital, is, when realized by the sale a or conversion of such property, taxable as income un der the Sixteenth Article of Amendment to the Consti. tution of the United States. The case also presents the question of construction of the Income Tax Law of 1916, as to whether or not a gain realized upon such sale by an individual investor is ineluded within the terms of that act as an item of taxable income. The case farther presents a question of construction, not involved in the other cases now under advisement, as to whether, when a loss has in fact been sustained by the taxpayer upon e the sale of property acquired prior to March Ist, 1913, he is nevertheless taxable upon the difference between the price realized upon the sale and the value of the prop. erty upon March Ist, 1913, the selling price being lower than the price or value at the time of actual acquisition. In Walsh v. Brewster similar questions are involved with respect to investments acquired in 1899, and 1906, and sold in 1916, some at a profit and others at the same price at which they were purchased prior to March 1, 1913. The plaintiff made his return and paid a tax on his concededly taxable income on May 10, 1917; but the Commissioner of Internal Revenue assessed an adddi- tional income tax, and the defendant made demand for payment of this additional tax on May 6, 1920. The plaintiff paid under duress and protest on May 15, 1920, the sum of $3,490.87 on account of the additional tax so assessed (record, p. 6). On August 6, 1920, the plain- tiff filed his application for a refund of the additional tax so paid, which was denied by the Commissioner on October 26, 1920, and this action was thereupon duly brought against the Collector (pp. 6, 10). The proceeds of the sale of two lots of securities are involved. Of the total of the tax of $3,490.87 so paid un- 4 . dor said reassessment, the sum of £145.91 wasn bawed upon alleged income in the form of alleged gain amount ing to the sum of $120,710.75 claimed by the Comin sioner to have been derived by the plaintiff from the aale in 1916 of 3,600 shares of the common stock of the B . Goodrich Company, a New York corporation (py. 6, 7), and the remainder (viz. ALG) wax bawed by the Com missioner upon alleged income in the form of gain amounting to $13,206.22, derived by the plaintiff from the sale in 1916 of 1.000 shares of wtock of the United Verde Extension Mining Company bought in 1912 ax an investment (pp. 6, 9). It was conceded below in and by the demurrer that the plaintiff was not at any of the tines alleged in the complaint “in any sense engaged in the bu«iness of Imy ing or selling stocks, bonds, or other mewmrition’’ (py. Ty: that the shares of capital stock of the Goodrich Conmpany were reecived by him in May, 192, upon a reoryanina tion, in exchange for stork acquare”d by him in or prior to 1907 partly through gift ane partly through inheritances from his mother, aud that the shares of the Mining Com pany were aquired in 1912 through aUbeeription aud pus chase for investment (pp. 7, 9). The queetions pre sented, therefore, arise solely in connertion with property held as investment and in no wenn, as the demurrer admits (p. 5), in connection with the transaction of a trade or business. The facts with respect toe the stork of the Goodrich Company are as follows (pp. 7-9): The plaintiff's father, B. F. Goodrich, died in Au. gust, 1855, owning several thousand shares of stock of the B. F. Goodrich Company, a corporation of the State of Ohio. By his will he bequeathed thie stock to hin ‘4 widow, the plaintiff's mother. During her lifetime she gave the plaintiff « part of the shares of said stock, and on her death in 1907 bequeathed to him by her will other shares of said stock. The plaintiff continued to hold the same until May, 1912, when the Ohio Company was re- organized, and the business and assets transferred to a new corporation organized under the laws of the State of New York with the same name. The plaintiff thereupon exchanged his shares of stock in the Ohio corporation for shares of stock in the New York corporation and cash. (0 the date of such exchange, shares of this stock in the New York corporation were of the fair market value of #1 per share. The plaintiff sold 3,000 shares of said stock of the New York Goodrich Company, se reecived by him in May, 1912, on various dates in 1916 between February and July, at a total price of $269,346.25, the average price received on said sales being $74.82 per share, and the prices being in cach instance less than $8] per share. The total value of the said 3,600 shares in May, 1912, was $291,600, and the plaintiff upon the sale thereof received $22,253.75 less than such value. On March 1, 1913, certain shares of said stock were sold on the New York Stock Exchange at an average price of about $41.25 per share. The Commissioner of Internal Revenue on this basis com- puted and determined the total fair market value on March 1, 1913, of the 3,600 shares so sold to be $145,625.50, and held that, with respect to the sale of said 3,600 shares of stock, the plaintiff in the year 1916 received a taxable gain equal to the difference between the market value of said stock on March 1, 1913, viz., $148,635.50, and the total sale price in 1916, viz, $269,346.25, and was, therefore, taxable on the sum of $120,710.75 as “net income.” With reepect, consequently, to the shares of steck of the Goodrich Company, there was no growth or increment or accretion or gain whatever in value from the time of acquisition by the plaintiff wutil the time of sale, but, on the contrary, a depreciation or shrinkage in value, liqui- dated upon the sale in the sum of $22,253.75, which in fact comstituted a lows to the plaintiff. The facts with respect to the sale of the shares of stock of the United Verde Extension Mining Company are as follows (p. 9); During the year 1912 the plaintiff subscribed for and bought for investment 1,000 shares of the capital stock of said miuing company at fifty cents per share, making a total purchase price of $500, and on March 7, 1916, sold them for the sum of $12,991.22. On March 1, 1912, the stock of said mining company was quoted on the New York Stock Exchange at an average price of 69'. cents per share, and the Commissioner found this price to be the fair market value of said stock as of Mareh 1, 1913, aml the total market value on said date of said 1,000 shares to be $695. The Commissioner thereupon as- seseed an income tax against the difference between said valuation on March 1, 1912, and the «ale prece realized, amounting te $13,296.22, such sum representing the growth or increment in value of said investment from March 1, 1913, to the date of sale, March 7, 1916, and with respect to the same the plaintiff paid a tax of £44.96 (p. 6). The controlling and conceded facts in the case at bar are, therefore, (1) that the plaintifl acquired and at all times held the securities in question as investments, and not in connection with the transaction of any trade or business carried on for gain or profit, (2) that on the a fioodrich Company's stock there was no gain whatever but an actual loss or dimunition of capital growing out of the ownership or use of or interest in such property, amd (3) that the gain or profit realized on the Min ing Company's stock was the result of the growth, in. erement, or inerense in value of a capital asset owned and held for investment sinee 1912. Jn an appendix to this brief the relevant and perti nent provisions of the Income Tax Laws of 1913 (48 Stat, 166) and 1916 (39 Stat. 756), are printed in parallel columns with appropriate variations of type to denote the difference in phraseology. ASHIGNMENT OF BRRORS. 1. That the court below erred in sustaining the de murrer of the defendant. 2. That the court below erred in ruling that the said Act of Congress of September 4, 1916, as construed hy it, was constitutional and within the taxing power delegated to Congress in and by the Sixteenth Article of Amend ment to the Constitution of the United States. 3. That the court below erred in ruling that any part of the proeceds of the sale of the shares of the cap- ital stock of the Goodrich Company constituted net income taxable under said Act of Congress. 4. That the court below erred in ruling that any part of the proceeds of the sale of the shares of the cap- ital stock of the United Verde Mining Company consti- tuted net income taxable under said Act of Congress. - nt Cea Trees, —_ I. Revirw OF PRIOR STATUTES AND DEC ISIONS OF THE COURT, Before discussing the question of the true meaning and scope of the term “incomes, from whatever source derived”? contained in the Sixteenth Article of Amend- ment to the Constitution of the United States and its equivalent in the Act of 1916, it may be useful to review the prior statutes and decisions of this court in cases which involved questions of increase in value of capital investments. These cases arose respectively under three faxing laws of Congress, viz., (1) the Income Tax Act of 1867 (14 Stat. 471, 478, ©. 169), (2) the Corporation Excise Tax Act of 1900 (26 Stat. 11, ¢. 6), and (3) the Income Tax Act of 1913 (38 Stat. 166, ©. 16). (1) The Income Tax Act of 1867 provided as fol- lows (p. 478): “That there shall be levied, collected, and paid annually upon the gains, profits, and income of every person residing in the United States, or of any citizen of the United States residing abroad, whether derived from any kind of property, rents, interest, dividends, or salaries, or from any pro fession, trade, employment, or vocation, carried on in the United States, or elsewhere, or from any other source whatever, a tax of five per centum on the amount so derived over one thousand dollars, and a like tax shall be levied, collected, and paid annually upon the gains, profits, and income of every business, trade, or profession carried on in the United States by persons residing without the United States, and not citizens thereof. And the tax herein provided for shall he assessed, col- lected, and paid upon the gains, profits, and in come for the year ending the thirty-first day of December next preceding the time for levying, col lecting, and paying said tax. 8 ‘‘In estimating the gains, profits, and income of any person, there shall be included all income derived from interest upon notes, bonds, and other securities of the United States; profits real- ized within the year from sales of real estate pur- chased within the year, or within two years pre- vious to the year for which income is estimated; . . all other gains, profits, and income de- rived from any source whatever.’’ This court held in Gray vy. Darlington, 15 Wall. 63, that the provisions above quoted did not include or tax an advance in the value of property during a series of years, although the entire amount of the advance had been realized in the taxable year by a sale of the prop- erty and conversion of the investment into money. Mr. . . 5 Justice Field, delivering the opinion of the court, among 4 other things, said (at p. 66) : . . ° ‘ ‘*The mere fact that property has advanced in ri value between the date of its aequisition and sale a does not authorize the imposition of the tax on i the amount of the advance. Mere advance in value in no sense constitutes the gains, profits, or income : specified by the statute. It constitutes and can be p treated merely as increase of capital.’’ 4 In so deciding the court reached the same conclusion 4 by substantially similar reasoning as was reached by the ; courts in Mngland in construing the Income Tax Law of 3 that country and it likewise recognized, as the English 3 courts have done, the distinction between a trader and = ; ss 4 merchant on the one hand realizing a gain or profit in « his business and an investor on the other hand realizing a gain or profit on an isolated transaction unconnected with his trade or business, which distinetion is fully dis- : cussed in the cases cited below under point II. , In Lynch v. Turrish, 247 U.S. 221, the court followed > Gray v. Darlington, and quoting from that case among other things said (at p. 230) : = 9 ‘‘This case has not been since questioned or modified. ‘The Government feels the impediment of the case and attempts to confine its ruling to the exact letter of the Act of March 2, 1867, and thereby dis- tinguish that act from the Act of 1913 and give to the latter something of retrospective effect. Op- posed to this there is a presumption, resistless except against an intention imperatively clear. The Government, however, makes its view depend upon disputable differences between certain words of the two acts. It urges that the Act of 1913 makes the income taxed one ‘arising or accruing’ in the preceding calendar year, while the Act of 1867 makes the income one ‘derived’. Granting that there is a shade of difference between the words, it cannot be granted that Congress made that shade a criterion of intention and committed the construction of its legislation to the disputes of purists. Besides, the contention of the Gov- ernment does not reach the principle of Gray v. Darlington, which is that the gradual advance in the value of property during a series of years in no just sense can be ascribed to a particular year, not therefore as ‘arising or accruing’, to meet the challenge of the words, in the last one of the years, as the Government contends, and taxable as income for that year or when turned into cash. Indeed, the case decides that such advance in yalue is not income at all, but merely increase of capital and not subject to a tax as income.” (2) It is not necessary to quote the language of the Corporation Excise Tax Law of 1909. As has been re- peatedly pointed out by the court, that act “was not in any proper sense an ineome tax law, nor intended as such, but was an excise upon the conduct of business ina corporate capacity, the tax being measured by reference to the income in a manner prescribed by the act itself”’ (Anderson v. Forty-Two Broadway Co., 239 U. 8. 69, 72, citing previous cases.) Hence, it follows that the deci. sions under the Act of 1909 are not in point as to the REL CPI TOOK COURT MELE TIE MOE HE HLT REL AE 10 true meaning of the term ‘‘income’’ in an income tax statute or constitutional provision. The excise upon the conduct of business in a corporate capacity could prop- erly be measured by either capital or income, gross or net, and include in such measure or standard, items not in their essence income at all. Flint v. Stone Tracy Co., 220 U. S. 107. This fully distinguishes the cases arising under the Act of 1909, such e.g. as Doyle v. Mitchell Brothers Co., 247 U. S. 179; Hays v. Gauley Mountain Coal Co., 247 U. S. 189, and United States v. Cleveland éc. Ry. Co., 247 U. S. 195. Moreover, the Act of 1909 was construed by this court in these cases as taxing cor- porations not upon all income received during the tax- able year but ‘‘by a measure based upon the gainful re- turns from their business operations and property from the time the act took effect’? and “conveying rather the idea of gain or increase arising from corporate activities’’ (Doyle v. Mitchell Brothers Co., at pp. 183 and 185), and therefore as excluding income that accrued before that date (Hays v. Gauley Mountain Coal Co., at p. 192). In thus construing the Act of 1909 as excluding gains or profits or income accruing prior to January 1, 1909, the court was not defining the term ‘‘income’? in any sense beyond that applicable to the construction of the act then under consideration, nor was it intimating that increase in value of capital assets accruing prior to Janu- ary 1, 1909, would not be income whilst a similar increase in value accruing after that date would be income. The Act of 1909 would have levied a constitutional excise tax if it had been measured by the entire receipts or the gross income of corporations without regard to when gains or profits had accrued, for what was taxed was not gains or profits or income as such but ‘‘the particular privilege of —— 11 doing business in a corporate capacity’’ (Flint vy. Stone Tracy Co., 220 U. 8. 107, 151). Therefore, the fact that Congress saw fit to adopt a measure for the excise tax it then levied, which included only gains accruing after a fixed date and excluded those accruing before that date, has little or no logical bearing or relevancy upon the question as to what does or does not constitute “‘income”’ within the meaning of the Sixteenth Amendment or with- in the intent of Congress in levying a direct tax without apportionment upon ‘‘incomes, from whatever source de- rived.’’ The Corporation Tax of 1909 was expressly sustained only upon the ground that it was not in any respect a direct tax; or stated in other words, it was sustained only because it was an excise and not an in- come tax within the meaning of the latter term as com- monly and currently understood and as passed upon in Pollock v. Farmers Loan & Trust Co., 157 U.S. 429; 158 U.S. 601. Of course, the selling of property by a corpo- ration whether at a profit or a loss was the doing of busi- ness in a corporate capacity, and it was immaterial that the property sold was held by the corporation as a sepa- rate investment. The point that the word ‘‘income’’ in the Act of 1909 meant gain or increase arising solely from corporate ac- tivities is further elucidated by the opinion of the court in McCoach v. Minehill & Schuylkill Haven R. R. Co., 228 U. 8. 295, 305-306, where it was held that the tax was not imposed upon a corporation not engaged in active busi- ness, though in the receipt of a large net income, The recent Income Tax Laws have specifically dealt with net income, and in no case have they sought to tax the gross receipts or gross income of the taxpayer. Thus, in one clause of section 1 of the Act of 1916 the phrase — a i oe ee 12 is ‘‘entire net income”’ (a), whilst in the following clause it reads ‘‘total net income’’ (b), but both refer to such part of the proceeds of sales, or dealings in real or per- sonal property as does not represent capital but is in- dependently ‘‘derived from capital, from labor, or from both combined.’’ A tax on gross income from all sales wonld not be valid as an income tax,* although a tax would be valid if levied as an excise tax on the carrying on of a business or trade or profession, measured by gross in- come. Spreckels Sugar Refining Co. v. McClain, 192 U. 8. 397, 413. (3) The Income Tax Act of 1913, the first Income Tax Law under the Sixteenth Amendment, provided in par. A, subdiv. 1 (38 Stat. 166, c. 16) as follows (see appen- dix) : ‘That there shall be levied, assessed, collected and paid annually upon the entire net income aris- ing or accruing from all sources in the preceding calendar year.’’ . . . ete. It will be noted that in the Act of 1913 as well as in the Sixteenth Amendment, substantially the same formu- la was adopted as was contained in the Act of 1867. The phrase ‘‘all income derived from any souree whatever” in the Act of 1867 became ‘‘incomes, from whatever source derived”’ in the Amendment, and the phrases levying the tax in the Acts of 1867 and 1913 are substantially and in effect the same, and especially so in the feature that the tax was to be levied ‘‘ annually upon the entire net income arising or accruing from all sources in the preceding calendar year.’’ The substitution of the words ‘‘arising or accruing’’ for the term ‘‘derived’’ involved but a neg- ligible ‘‘shade of difference,’’ as was pointed out in Lynch v. Turrish, supra. As we have seen, the Act of 1913 came before the court * In Nicol v. Ames, 173 U. 8. 509, 521, the court recognized that a tax on all sales would be ‘‘really and practically upon property.’’ "4 LILI LE LLL LON LEBEN PF ee HI ies 19 13 for construction in Lynch v. Turrish, 247 U. 8. 221, ina case involving an advance in value of corporate assets and the distribution of the proceeds among the stockholders. It was then held that the rule in Gray v. Darlington ap- plied and was controlling, clearly upon the ground that the provisions of the Act of 1913 were substantially the same as those of the Act of 1867, and that a mere advance in value realized on the conversion into money of an exist- ing capital investment did not constitute income within the meaning of either act. It is true that the gain or profit in that case actually accrued before the Act of 1913 be- came effective, but that feature was emphasized only as bearing upon the intent of Congress and the construc- tion of the statute. There is nothing in the reasoning of the opinion to indicate that, in the opinion of the court, if the advance had taken place or accrued after March Ist, 1913, the nature of the item would have been thereby changed from capital into net income and a different rule of law have been applicable. If in its nature essen- tially capital before the Act of Congress or the adoption of the Amendment, it certainly must continue to be capital thereafter. This should follow quite clearly and indisputably when it is recalled that in the eases of Lynch v. Hornby and Peabody v. Eisner, 247 U. 8. 339 and 347, both argued at the same time as Lynch vy. Turrish, and decided on the same day, it was held that it was immaterial and irrelevant that a surplus out of which corporate dividends were paid or payable had accumulated prior to the Act of 1913, because dividends from investments in stock ‘are commonly reckoned as dividends, and are expended as such by the stockholders without regard to whether they are declared from the most recent earnings, or from a surplus accumulated from the earnings of the past, or are based upon the increased value of the property of the corporation”’ (p. 344). The a —$<—. basic and controlling difference between the two classes of cases was that in those like Lywch v. Turrish the trans- action was not the declaration and payment of a dividend in the common understanding of that term or in the or- dinary course of the business of a corporation, but was a conversion or transmutation of capital Assets into money for final distribution among stockholders as capi- tal, whilst in cases like Lynch v. Hornby and Peabody vy. Kisner, the transactions constituted the declaration and payment of dividends in the ordinary, current and com. mon acceptation of that term, and it was quite immaterial when the net earnings out of which the dividends were paid or payable had accrued to the corporation. The case of Southern Pacific Co. vy. Lowe, 247 U.S. 330, also arose under the Aet of 1913. The facts were pe- culiar, but the fundamental inquiry was as to the nature of accumulations and increase in value of corporate assets prior to January Ist, 1913. The Government con- tended that as a dividend of the amount of these accumn- lations had actually been declared and practically paid in 1914, it constituted part of the corporation's gross ‘‘income”’’ in the sense of something coming in, realized, received, arising, or accruing during the taxable term, and could not, therefore, be treated as capital assets instead of income. Answering this contention, the court said (at p. 335): 14 ‘‘We must reject in this case, as we have re- jected in cases arising under the Corporation Eyx- cise Tax Act of 1909 (Doyle v. Mitchell Brothers Co., ante, 179, and Hays v. Gauley Mountain Coal Co., ante, 189) the broad contention submit- ted in behalf of the Government that all receipts —everything that comes in—are income within the proper definition of the term ‘gross income’, and that the entire proceeds of a conversion of capital assets, in whatever form and under whatever cir- — 15 cumstances accomplished, should be treated as income. Certainly the term ‘income’ has no r meaning in the 1913 Act than in that of 1909 (see Stratton’s Independence vy. Howbert, 231 U. 8. 399, 416, 417), and for the present pur- we assume there is no difference in its mean- ing as used in the two acts. This being so, we are bound to consider accumulations that accrued to a corporation prior to January 1, 1913, as being capital, not income, for the purposes of the act. And we perceive no adequate ground for a dis. tinction, in this regard, between an accumulation of surplus earnings, and the increment due to an appreciation in value of the assets of the tax- ane (See also Gulf Oil Co. v. Lewellyn, 248 . 8.71.) There can be no doubt that if increase or increment in value of a capital investment became income whenever realized by conversion into money or other property, or in other words, if what was essentially a part of capital was changed in its nature and substance by the mere act of conversion or realization, the conclusions reached in the cases of Gray v. Darlington, Lynch v. Turrish and Southern Pacific Co. v. Lowe, were erroneous. As discussed below, an examination of the Acts of 1913 and 1916 will show that Congress had clearly in mind that gains and profits or losses resulting or aceru- ing from the trade or business of a taxpayer were to be regarded and treated as distinct and separate from gains and profits or losses resulting or accruing from isolated transactions* or capital investments not connected with the carrying on of any trade or business. The Act of * The phrase ** isolated transactions,’’ to characterize transactions sep arate and apart from a aw regular trade or business, seems to have Treasu under the Act of 1913 16 1916, moreover, for the first time introduced among the provisions as to allowable deductions, the following : ‘Fifth. In transactions entered into for profit but not connected with his business or trade, the losses actually sustained therein ing the year to an amount not exceeding the arising therefrom.”’ Clearly, if Congress had not then had in mind the subject of gains and profits or losses resulting from transactions independent of business or trade, no such provision would have been inserted. It will further be noted that reference was made not to all transactions of the taxpayer not connected with his business or trade, but only to those ‘“‘entered into for profit,’’ language which plainly differentiated investments acquired for in- come from more or less speculative ‘‘transactions en- tered into for profit.’’ Under the Act of 1916, therefore, every taxpayer had to cover in his income tax return and the Government was called upon to investigate and differentiate the fol. lowing among other items: (1) The entire net income received or derived from any source whatever. (2) Net income received from ‘‘the transaction of any business carried on for gain or profit.”’ (3) Losses actually sustained during the year, ‘‘in- curred in his business or trade.’’ (4) Losses actually sustained during the year ‘in transactions entered into for profit but not connected with his business or trade. . . . to an amount not ex- ceeding the profits arising’’ from similar transactions. Capital losses, however, were not generally allowed to be deducted, because, it is proper and reasonable to infer, under neither the Act of 1916, nor the Act of 1913 —-_- rr — 17 upon which it was based, was it intended to tax the pro- eceds of capital assets sold at an increase over their cost any more than such proceeds were taxed under the Act of 1867. The Government concedes that, of course, nothing is now income which was not income before the adoption of the Sixteenth Amendment and that mere increase in value, while it remains such, is not income but still capital. It urges, however, that an amount equal to any increase in value of property held for investment becomes income as soon as and whenever the investment is converted into cash or into other property. In other words, the conten- tion is that although the entire investment is clearly capi- tal while unconverted, a part becomes income upon con- version to the extent of any realized gain or profit. The fundamental difference between the Government and the plaintiff is principally one of definition. If the term “‘inecomes’’ in the Sixteenth Amendment and the statutes now in question means ‘‘all receipts—everything that comes in,”’ then clearly even the proceeds of invest- ments sold at a loss would be receipts and would be money coming in. This view having been rejected as unsound, a narrower sense or meaning of the term ‘‘income’’ must necessarily be accepted. The Government, therefore, sug- gests a meaning which it alleges obtains in current speech and common understanding, and contends that such mean. ing includes the realization by sale or conversion of increase in value of property held for investment. There are three definitions by the court itself, as a result of the process of inclusion and exclusion, to which reference should be made, viz. : (1.) **Mere advance in value in no sense con- stitutes the gains, profits, or income i the statute. It constitutes and can treated ah i) ae : | 5: =i i | He zn a aaa Hal! Ht the shares and if it be part of the shares them- selves then, whilst it may be profit, it is in no sense income.”’ It is true that there are various other dictionary mean- ings of the term ‘‘income'’, some broad and some narrow and some usual and others rare or obsolete; but the cur- rent meaning in common speech ix what the court has ree. ognized and stated in the above quotations. A man not engaged in the business of buying and selling, say, real estate, who hax held such property, it may be his home, for a series of many years, and who then sells it at an inerease over what he paid, would not reasonably or sen- sibly regard or treat the gain thus made as income. He would net ordinarily inelude any part of the proceeds of such an isolated transaction, perhaps the only one of its kind in many years or a life time, as part of his annual imeome. (im the contrary, if commonly prudent and con- servative, he would regard and treat it as still an integral part of his permanent capital, to be used, if necessary, to offset or meet past or future capital losses, or to replace what he had sold with property equal in value or pro- ducing equal income. Again: a man not engaged in the business of dealing in bonds and stocks, who had purchased securities for in- vestment and not for speculation, who looked for safety of investment and certainty of return and not for profit on a sale or conversion thereof, would not reasonably or sensibly regard or treat an inerease in value of a par- ticular security when realized by le or conversion, as part of his annual income. On t! rary, if ordinarily cautious and conservative, he w. card and treat it as still an integral part of his capital, to be used, if neces- sary, to offset and meet past or future depreciation and omg capital losses in respect of other securities, or to replace what he had sold with other income producing securities. Or, to take the case of an inheritance: a man inheriting a homestead or securities (as the plaintiff inherited the Goodrich stock in the case at bar) and years afterwards selling the same, could not reasonably regard or treat any part of the proceeds as income accruing during the year of the sale. It would all be still part of the capital he had inherited, and no part of it would be income within any reasonable meaning or acceptation of the term. Stated in other words, the current meaning of the word ‘‘income’’ in common speech and according to com- mon understanding is the return or gain which is period- ically or annually derived from capital or from labor or from both combined, and not the extraordinary gain or profit which may be derived from an isolated sale of property held through a series of years for investment and in no sense connected with the taxpayer’s business or bought by him for speculation or profit. Such an in- crease in value of an investment unrealized is always and properly regarded by private investors as essentially part of capital, and they do not regard or treat it as. changed into income merely because it has been converted into money, it may be for the sole purpose of substituting another income-producing investment. The authorities discussed below, it is submitted, es- tablish the correctness of this conception of the current meaning and understanding of the term ‘‘income’’ as used in the Sixteenth Amendment and the Act of 1916. 20 — Il. THE GROWTH OR INCREMENT IN VALUE OF REAL OR PER- SONAL PROPERTY HELD FOR INVESTMENT, WHEN REALIZED BY SALE, IS NOT “‘INCOME”’ WITHIN THE MEANING OF THE SIX- TEENTH AMENDMENT, The Sixteenth Article of Amendment to the Constitu- tion of the United States, which was declared to be duly ratified on February 25, 1913 (37 Stat. 1785), provides as follows: ‘‘The Congress shall have power to lay and col- lect taxes on incomes, from whatever source de- rived, without apportionment among the several States, and without regard to any census or enum- eration.’’ The Sixteenth Amendment added nothing to the sub- ject matters theretofore taxable by the Congress, but merely dispensed with the requirement of apportionment as to one class of direct taxes, namely, taxes on incomes derived from the ownership of property. It clearly limits the taxing power of Congress thereunder to ‘‘incomes”’, and it does not authorize or permit an unapportioned tax levy upon capital in any form whatever or under any de- vice. A tax levy that takes part of the principal or capital of a property asset of the taxpayer is necessarily a tax on property as distinguished from a tax on income derived from property, and is consequently a direct tax, which must constitutionally be apportioned. The reason- ing which supports this conclusion is comprehensively and accurately stated by Mr. Justice Van Devanter in Evans v. Gore, 253 U. 8. 245, 261-3, and by Mr. Justice Pitney in Eisner v. Macomber, 252 U. S. 189, 206. In the latter case, the learned Justice reviewed the effect and scope of the Sixteenth Amendment in the following language : 22 ‘*As repeatedly held, this did not extend the taxing power to new subjects, but merely removed the necessity which otherwise might exist for an apportionment among the States of taxes laid on income, Brushaber vy. Union Pacific R. R. Co., 240 U.S. 1, 17-19; Stanton v. Baltic Mining Co., 240 U. S. 103, 112, et seq.; Peck & Co. v. Lowe, 247 U.S, 165, 172-173. ‘*‘A proper regard for'its genesis, as well as its very clear language, requires also that this Amendment shall not be extended by loose con- struction, so as to repeal or modify, except as applied to income, those provisions of the Con- stitution that require an apportionment according to population for direct taxes upon property, real and personal, This limitation still has an appro- priate and important function, and is not to be overriden by Congress or disregarded by the courts. ‘‘In order, therefore, that the clauses cited from Article | of the Constitution may have proper force and effect, save only as modified by the Amendment, and that the latter may also have proper effect, it becomes essential to distinguish between what is and what is not ‘income’, as the term is there used; and to apply the distinction, as cases arise, according to truth and substance, without regard to form. Congress cannot by any definition it may adopt conclude the matter, since it cannot by legislation alter the Constitution, from which alone it derives its power to legislate, and within whose limitations alone that power can be lawfully exercised.”’ The requirement of apportionment imposed in and by sections 2 and 9 of Article I of the Constitution, there- fore, remains in undiminished force and effect in respect of everything theretofore embraced within it, except only ’ Direct taxes on capital and as to ‘‘taxes on incomes.’ the proceeds of capital still may not be constitutionally laid without apportionment. Pollock vy. Farmers’ Loan & Trust Co,, 158 U. 8S. 601, 637. The extent to which the Constitution remains operative in this relation, and the Tay ene” een RE SE RE PERE | OI roe — 23 extent to which the Amendment must be accorded super- vening effect, are both to be determined only as it is made apparent what is ‘‘income’’ and what is not ‘*income’’, within the meaning of that term as employed in the Six- teenth Amendment and in the light of the fact that other constitutional provisions equally obligatory (Evans y. (ore, supra) require that every tax on property, as dis- tinguished from income derived from property, must be apportioned, A. As stated by this court in Kisner vy. Macomber, it is, in construing the Sixteenth Amendment, ‘‘ essential to dis- tinguish between what is and what is not ‘income’ , as the term is there used, and to apply the distinction, as cases arise, according to truth and substance, without regard to form’. Constitutional provisions relating to the ordi- nary affairs of life necessarily must speak the current arene as then commonly understood; otherwise they “would probably never be understood by the publie’’ (McCulloch v. Maryland, 4 Wheat. 316, 407); and where, as in the Sixteenth Amendment, the provision plainly con- cerns the every day activities of men, it must be manifest that its purport and effect were intended to be re: adily solvable by the ordinary understanding of those to whom it was addressed. There is nothing to indieate that the members of the Congress that proposed the Amendment to the States or the state legislatures that ratified it understood the term ‘‘incomes’’ in any other than its commonly understood and judicially defined mean- ing. Indeed, while with respect to stock dividends, as is pointed out in the dissenting opinions of Mr. Justice Holmes and of Mr. Justice Brandeis i in Kisner v. 24 Macomber (252 U.S. 220, 234, Mr. Justice Day concur- ring in the former and Mr. Justice Clarke in the latter), the law was by no means well settled in all the States that such dividends were capital and not income, with respect to increment of value realized upon the sale of property held for investment there was complete unanimity in holding that it was essentially capital and not income. These considerations enable us immediately to lay to one side the suggestion, heretofore made by some judges and earnestly urged by the Government, that the term ‘income’? embraces ‘‘everything that comes in’’ (see, e. g., United States v. Oregon-Washington R. & Nav. Co. 251 Fed. 211, 212-3, 214; Southern Pacific Co. v. Lowe, 247 U.S. 330, 335), and the further suggestion that in the science of political economy or theoretical accounting the word has a peculiar, artificial, or technical meaning. Stratton’s Independence v. Howbert, 231 U. S. 399, 414; Lynch v. Turrish, 247 U.S. 221, 227, 228. The former sug- gestion rests upon the bare etymological derivation of the word—an element which controls and influences common usage very slightly; and the latter yields to distinctions and doctrines of economists all but unknown to the ordinary individual, and which this court has de- ’ elared are ‘‘such refinements [as] can hardly be deemed to have entered into the legislative purpose’’ (Stratton’s Independence v. Howbert, supra). Manifestly, no sub- stantial aid is to be derived from such lines of inquiry. Prior to the adoption of the Amendment the meaning of the word income had been judicially defined by this court in Gray v. Darlington, by the highest courts of many of the States in the law of estates and trusts, and by the courts of Great Britain and of the British Dominions and Colonies in construing their Income Tax laws, as 5 Ae ak Bk aaa Rae aed IEW FLOR NLS IONIAN STE Y le rm 25 excluding increment of value realized upon the sale of property held for investment. Probably no source is more enlightening than the decisions of the courts con- struing the term in question, for ‘it is a well-settled rule of construction that language used in a statute [or con- stitution] which has a settled and well-known meaning, sanctioned by judicial decision, is presumed to be used in that sense by the legislative body.”’ Kepner v. United States, 195 U.S. 100, 124; Norfolk Southern R.R. Co. v. Chapman, 244 U.S. 276, 280-1. B. In Gray v. Darlington, 15 Wall. 63, decided in 1872, the question arose under the Income Tax Law of 1867, which levied a tax ‘‘upon the gains, profits, and income of every person . . . whether derived from any kind of property ... or from any other source whatever.’’ It appeared there that the plaintiff had in 1865 acquired some United States bonds in exchange for United States Treasury notes as an investment, and not in the course of any business, and that he had disposed of them in 1869 at an advance of $20,000 over the original cost of the notes. The Government attempted to tax this sum under the Income Tax Law of 1867 as ‘‘gains, profits and income’’; but this court overruled its contention, and Mr. Justice Field speaking for the court used the follow- ing language (pp. 65, 66) : ‘“‘The question presented is whether the ad- vance in the value of the bonds, during this period of four years, over their cost, realized by their sale, was subject to taxation as gains, profits, or income of the plaintiff for the year in which the bonds were sold. The answer which should be given to this question does not, in our judgment, admit of any doubt. The advance in the value of property dur- ing a series of years can, in no just sense, be con- 26 sidered the gains, profits, or income of any one par- ticular year of the series, although the entire amount of the advance be at one time turned into money by a sale of the property. . . . ‘The mere fact that property has advanced in value between the date of its acquisition and sale does not authorize the imposition of the tax on the amount of the advance. Mere advance in value in no sense constitutes the gains, profits, or income specified by the statute. It constitutes and can be treated merely as increase of capital,’’ It will be noted that the court was then speaking of an advance in value which had been actually realized by sale within the taxable year. To the same effect as Gray v. Darlington, was the opinion of Mr. Justice Grier ren- dered in 1865, Bennet v. Baker (footnote to 15 Wall. 67), and the judgment of the Cireuit Court in Chicago, B. & Q. R. R. Co. v. Page, 1 Biss. 461, 466, decided in 1864. And, as shown above at pp. 8-9, in Lynch v. Turrish, 247 U.S. 221, decided in June, 1918, this court followed and ap- proved the ruling in Gray v. Darlington. It must reasonably be presumed that Congress, when it proposed the Sixteenth Amendment, and the state legislatures, when they ratified it, intended to adopt this judicial interpretation and definition of the word income. The conclusion is, therefore, fully warranted that both those who proposed the Sixteenth Amendment and those who ratified it understood and appreciated the foree and effect of the decision of this court in Gray v. Darlington, and acted upon the belief that such a delib- erate and authoritative definition of ‘‘inecome’’ and *‘eap- ital’’ for purposes of taxation would constitute at once the measure and the limitation of the extension of the power of Congress ‘‘to lay and collect taxes on incomes . without apportionment,’’ so as not to conflict with IGOR SS PLETE IIE LEI MG ES LRA HG NET FS wn the constitutional provisions requiring direct taxes on 27 property to be apportioned. C. Particularly must it be apparent that this was the understanding of the state legislatures, since they knew that it was universally held to be the law in the United States that a gain realized by a trustee upon the sale of a part of the corpus or principal of a trust fund consti- tuted capital or principal and not income, and belonged to the remainderman and not to the life-tenant, when the life-tenant was, by the express terms of the instrument creating the trust, entitled to all ‘‘income’’ arising from the trust estate. Mercer y. Buchanan, 132 Fed. 901, 508, 137 Fed. 1019; Graham’s Estate, 198 Pa. St. 216; Neel’s Estate (No. 2), 207 Pa. St. 446; Matter of Gerry, 103 N. Y. 445, 450; Thayer vy. Burr, 201 N. Y. 155, 157-8; Boardman vy. Mansfield, 79 Conn. 634; Car- penter v. Perkins, 83 Conn. 11, 20; Outcault v. Appleby, 36 N. J. Eq. 73, 78; Parker vy. Johnson, 37 N. J. Eq. 366, 368 ; Guthrie’s Trustee v. Akers, 157 Ky. 649, 651; Slocum v. Ames, 19 R. I. 401; Smith v. Hooper, 95 Md. 16; In re Armitage (1893), 3 Ch. 337, 346; 28 Eng. & Am. Eneye. of L. & P. (2nd ed.) p. 917; 39 Cyc. 444; 40 id. 1788. The rule upon the subject is accurately stated by Prof. Irvine in his article on ‘‘Trusts’”’ in the Cyclopedia of Law and Procedure, as follows (vol. 39, p. 444): ‘“‘As instruments creating trusts frequently provide for the payment of income to one set of beneficiaries, and the corpus to another set, it often becomes necessary to decide what is ineluded within the term ‘capital,’ and what within ‘in- come.’ In general, the capital or corpus of the trust estate includes not only the property which originally comes into the trustee’s hands, but its — increase in value and whatever eubsequenthly takes its place and representa its henee it includes the money, including the profits, derived from a anle of stock, bonds, or other property of the truet ex tate, a common illustration of this being where the trustee, in order to protect the estate, buys in pe ted at a foreclosure or other judicial aale and subsequently reselle it at a profit,’ 2M Parker v. Johnson, 87 N. 3. Faq. 206, 068, was a cone precisely like the one whieh Prof. Levine designated ae “a common illustration” of the rule, and the Chancellor there said, referring to a profit realized upon the sale of a portion of the principal of a trust estate, that “The profit [thus made} is not income 1 was made hy the trustee in the process of convert ing the investment, and, like a premium realized on the sale of government bonds in which the funds might be invested, it belongs to the fund.’ The clear distinction between income and capital made and observed in cases affecting the rights of life tenants and remaindermen was, it ia proper to as sume, familiar to most legislators. A large part of the invested capital of every community ia held in truest enh ject to legal and equitable life estates with remainder over. Plainly, therefore, it is reasonable to assume that those who ratified the Amendment understood the word “incomes”? in the light of ite settled meaning in one of the commonest of legal relations. That this common and familiar distinction did not directly appertain to taxation, is quite immaterial. In deed, this court has 60 held. The learned district judge in Towne v. Eisner, 242 Fed. 702, 704 ef seq., atternpted to distinguish the rule laid down in Gibbone vy. Mahon, 136 U. 8. 549, in respect of life-tenant and remainder man, by refusing to give it force and effect in cases in- volving income taxation. But this court reversed the my oo holding of the district Judge npon this precise pont, and treated as decisive the cule that the stock dividend there in question constituted rapital and not income ae between life tenant and remaimnderman, saying in ite opinion by Mr. Justice Noles (245 US. at pp. 426): “Notwithstanding the thoughtful disenzecion that the cnse received below we cannot doubt that the dividend was capital as well for the purposes of the Income Tax Law ac for distribution het ween tenant for life and remainderman "' No other reenlt would he in aerordance with logir And this will at onee be apparent if we asenme, for the moment, that an imerense remlized hy the sale of a part of the corpus of a trust estate, is taxable ne income, Under the settled rule of law, that inerease wonld heowne part of the capital of the trast and ultimately helong to the remainderman and not the life tenant There ia in this snpposititions ease no diffenity in an derstanding that such an inerense ie easentially capatal and remains capital when transmnted hy sale inte money, and the case of the Merchants Loan & Trust Company as Trustee of Kyersom, No. (8, new ander advisement presents that very qnestion. When the trnst relation disassoriates income from capital and places the en joyment of each in a separate individnal, it ie easy to perceive that growth of capital assecta ia not an der snch cireumatances ineome, even when the proeeee of investment and reinvestment at some period of time operates to convert the principal inte cash for reinvestment. But, manifestly, what ia capital and what is income, az hetween the life-tenant and remainderman in the case supposed, ie not altered in ita essential char acter and natare and tarned from one claas inte another merely because both the remainder and the life estate a a re a 30 happen to be vested in the same individual at the same time, which is the case where property is owned outright by an individual as in the case at bar or by a corporation as in the Eldorado case, No, 609. Logically, there is in either of such cases no more justification for requiring income taxes to be paid out of capital, than there would be for depriving a life-tenant of a part of his income in order to pay for a benefit derived by the remainderman, or in depriving the latter of part of his capital to pay an alleged income tax, when he is the recipient of no in- come whatever. D. For many years prior to the adoption of the Six- teenth Amendment, the British courts had held and have since continued to hold that eapital in any form, whether the realized increment of value upon the sale of property by an individual or of capital assets by a corporation, is not taxable as income under the British income tax laws which have been in force since 1842. This British authority is peculiarly important in view of the well-known fact that American income tax legislation came to us from England and has always been in large part patterned after the English enact- ments (Black on Income Taxes, 4th ed., sec, 30): and it should, therefore, reasonably be presumed that both the Sixteenth Amendment and the Income Tax Acts were framed in the light of the British precedents, and *“*that Congress, in adopting the language of the English act, had in mind the constructions given to these words by the English courts, and intended to incorporate them into the statute’’ (Interstate Commerce Com. v. B.€ O. RK. R., 31 145 U.S. 263, 284). See also Interstate Commerce Com. v. Del, Le d& WR. OR, 220 UL 8. 240, 253-4; McDonald y. Hovey, 110 U.S. 619, 628. Both in 199, when the Sixteenth A mendment was pro- posed by Congress to the several States, and in 1913, when it was finally ratified, it was the settled law in Great Britain that the growth or increment in value of invest- ments, or of the capital assets of a corporation, when real. ized by sale or other disposition (as distinguished from profits so realized where such sale is the taxpayer's trade or business) was principal or capital and not ineome within the scope of the income taxing laws of Great Britain and the British Dominions. Assets Co., Ltd. v. Forbes (1897—Court of Exchequer, Scotland), 3 Tax Cases 542, 048; 24 Rettie 578, 586; Scoble v. Secre- tary of State for India (1903—House of Lords) [1903] A. C. 29, affirming [1902] 1 K. B. 494; Californian Copper Syndicate, Ltd. v. Harris ( 1904— Exchequer, Scotland), 5 Tax Cases 159, 165-6, 167; Taxation Commissioners vy. Mooney (1907—Privy Council), [1907] A. (. 342, 350; Hudson's Bay Co., Ltd. v. Stevens (1909—Court of Ap- peal), 5 Tax Cases 424, 436, 437, 440: Tehran (Johore) Rubber Syndicate, Ltd. v. Farmer (1910—Exchequer, Seotland), 5 Tax Cases 658, 664-5; Commissioner of Taxes v. Melbourne Trust, Ltd. (1914—Privy Council), [1914] A. C. 1001, 1010, In Assets Co., Ltd. vy. Forbes, supra, decided in 1897, Lord Young said: “*I wish to give expression to the doubt which I entertain, and which I understand is shared by Lord Trayner very strongly, as to the cases in which we hold that a gain made by the sale of roperty at a price more than was paid for it may be regarded as income. . . . I should say that I have really no doubt that any person, or any com- pany making a trade of purchasing and welling in vestments, will be liable in Income Tax upon any profit which ix made by that trade... . Mut it i another proposition altogether that, where that i not a trade, « gain or lox upon the purchase andl re-sale of property comes within the menning o! the Income Tax Acts. Take even proper traders. if proper traders ell their old premines and buy new ones, and sell the old premises at a higher price than they paid for them, investing in the pur chase of the site and the erection of new premie: « the price which they got, 1 «henld say it wae o totally antenable proposition that anything in «x cess of what they had paid for the old PTO see perhaps 20 vears before, and whieh they got at a better time, that any excess upon the priee whieh they paid at the better time is income within the a trade, would then come within the region of In come Tax.”’ In the case of Californian Copper Syndicate, Ltd. + Harris, supra, decided in 1904, Lord Justice Cleric stated the rule as follows: **It is quite a well settled principle in dealing With questions of assessment of Income Tax. that where the owner of an ordinary investment chonees to realise it, and obtains a greater price for + than he originally acquired it at, the enhance Price is not profit in the sense of Scheigle I) of the Income Tax Act of 1442 assessable t4 Income Tax. Bat it is equally well established thar «=. hanced values obtained from realisation or cor version of securities mar he «6 assessable. where what is done is not merely a realisation or chang of investment. bat an act done in what is truly the CArrring on. or carrring oct. of a business.” _—— And Lard Trayner conenrring declared that the ease then before the court was not ‘the enae of a company eelling part of ite property for a higher price than it had paid for it, and keeping that price ae part of ite capital, nor a case of a cnnpany merely changing the investment of jta “ ne capital te pecumary advantage’ (5 Taz Caeee at p 167) In Varatem Commenimer« « Mowncy, oapra, derided by the Privy Connell in 1977, it appeared that the tax payer had realized a profit on the eale of a mine in which he had invested, and it waa held that thie profit wae not sohbet te tazation, lard Marmnaghten saying that the Privy Counesilora agreed with the court telow that “A change in the form of property ty a per wom whe does not trafic in that kind of property tannet te regarded aa preelacing inoue ‘acatle ander the Inevane Taz Acta The case of Nudes bay Co, Ltd + Stenens, supra. Aeevwied in the Coart of Agpeal in 10%), again preanted he Qeestion if as Mhfrt an 42° SHV ING a Very larze afew sar,* of tax: tat the comet acinerer te the aot ther} prin “iple, Lard Jaatior Farwell aaying ‘it ia well aettier! that menme. not Capital. ia tazable arnler the Ineume Tax Arta it in lear, therefore, that a man who aeile hia land or pitares, of yeweia. 1a act enargeatle with meame tax on the gurehase-money of om the differenes ‘wlween the amount ‘hat he gave and the amount that he rereiverd for them. Bat if matead of deal- ing with hia property a4 owner he embarka on 4 trae, then fe Genomes hatle ws gay. aot on the ‘Torte Of ale OFlices Wer ourehase oriees, but on the annual grofita or gains arming from nich ‘rade M aaeeTanang Weh thew omee< wil ao fonht ‘we Mts enmeuleraton. — And nm Tetra (Jonare, Rabher tmdivate Lia + Parmer, repre, deewlerdt the following crear 10) in the Court of Eaeneqner of Seotiand. where a cabher somoané = os : eer eERRe yaya 54 sold out all its property at a profit, Lord Salvesen spoke as follows: “Tam unable to distinguish the position of the Appellants from that of a person who acquires a property by way of investment and who realises it afterwards at a profit. It is well settled that in such a case the profit is not part of the person's annual income liable to be assessed for income tax but results from an appreciation of his capital. No doubt if it is part of his business to deal in land or investments, any profits which in the course of that business he realises form part of his in come; but the mere fact that a person or company has invested funds in the purchase of an estate which has subsequently appreciated and so hag realised a profit on his purchase does not make that profit liable to assessment. Here the Appel. lant Company was formed primarily to acquire and develop a certain estate mentioned in the Memorandum and any other estates suitable for the cultivation of rubber; and to carry on the business of developing and cultivating the said es. tates. ‘‘No doubt power was also taken to sell any part of the undertaking and property of the Com. pany; and [ assume that the promoters of the Syndicate had in view from the first that it might become expedient to do so; but [ am unable to in fer from this fact, taken along with the ultimate sale of the entire assets to a new company, that it was part of the trade of the Syndicate to purchase and sell lands. ‘‘The fallacy of the view taken by the Commis sioners is further apparent from the fact that the profit which ultimately results from an apprecia- tion of value is not necessarily referable to the particular year in which it is realised. ‘*In the case before us it is no doubt true that the Syndicate only existed a little more than a year; but that does not in the least affect the ques- tion whether the profits were made by way of an- nual income or resulted from appreciation of capi- tal. Suppose the Company had been in existence for ten years before it sold its whole property at a ee ee i — a profit, how could it be said that the profit, «eo made was income of the last year in which it ex isted?"’ The striking resemblance between the reasoning of this opinion and that contained in the opinion of thie court in Gray v. Darlington, 15 Wall. 63, will at once be per ceived; and like Gray vy, Darlington, the Dritich author ties make it quite clear that the advanee in the value of an investment realized otherwise than in the course of trade or business, ‘is not ineome at all, but merely in crease of capital and not subject to a tax as income.” The rule to this effect, thus settled in England anv Scotland, also prevails in the British Colonies and Dorin ions. As to Canada, see Pontifex 's Canadian Income Tax, p. 23, and Breadner (Commissioner of Taxation) om The Business Profits War Tax Act and The Income War Tax Act, p. 18; as to Australia, eee Rerlwell's \wstrala sian Judicial Dictionary (1920), p 76; Moonee ©. Com missioners of Taration (1905), 3 Commonwealth Law Rep, 221, 228-9 (Griffith, ©. J), alirmed (1907) A. © 32, Webb v. Australian Deposit d Mortgage BR, Lad. ¢ 1910). I) od, 223, 227 (Griffith, ©. J.) ; Bohemians ¢ tah «, Actos Federal Commissioner of Tasation (DIS), 24 ud WM. MeLachlan v. Commissioner of Taree, (12) South \we tralian Law Rep. 188 (Way, Cb): Shiels (Pibhe free for the Bank of Adelaide) +. Commissioner of Vase: [1912] id, 175; and as to South Afrioa, eee Marnes’ le come Tax Practice in South Afriea (1919). pp. 7 0, Commissioner of Taxes ¥. Roowesrn’s Ketate, Lid. South African Law Rep. (1918) App. Div. 576 The following extract from Rodwell '« work, abowe re ferred to, accurately atates the law pon the pount ae bebe. not only in Australia, to whieh thie hook parteularly — — Mw 36 refers, but in all the British Colonies and Dominions as well (p. 76): ‘*The term ‘income’ as used in N. S. W. Land and Income Tax Assessment Act, 1898, includes ‘profits, gains, rent, interests, salaries, wages, al- lowances, premiums, stipends, charges and annui- ties’ (sect. 68). The proceeds of property sold are primd facie capital and not income, and the term ‘profits’ does not include the difference be- tween the cost price of property and the price at which it is afterwards sold, unless the buying and selling of such peasy. is the ordinary business of the person alleged to be a taxpayer. Per Grif- fith, C. J.: Mooney v. Commissioners of Taxation (1905), 3 C. L. R. at pp. 228-299 . , affirmed, (1907] A.C. 342... ollowed, Bohemians Club v. Acting Federal Commissioner of Tavation (1918), 24 C. L. R. 334; McLachlan v. Commis. sioner of Taxes, Rymill (Public Officer for Ca- nowie Pastoral Co., Ltd.) v. Commissioner of Taxes [1912] S. A. L, R. 138,’’ [citing p. 77 also,} Griffith, C. J. in Webb v. Australian Deposit & Mortgage Bank, Ltd. (1910), 11 C. L. R. at p. 227, and Shiels (Public Officer for the Bank o Ade- es v. Commissioner of Tazes, (1912] S. A. L. . 175, It is equally well settled by the decisions of the Brit- ish courts that under their income tax laws capital losses are not deductible. Smith vy. Westinghouse Brake Co., 2 Tax Cas. 357 (1888); Inland Revenue v. Western Steamship Co., 44 Se. L. R. 715 (1907) ; Royal Insurance Co. v, Watson, 3 Tax Cas, 500; Stott y. Hoddinott, 7 Tax Cas. 85; Watney v. Musgrave, 1 Tax Cas. 272. F. Prior, therefore, to 1909 when the Sixteenth Amend- ment was proposed and 1913 when it was finally adopted, the word ‘‘income’’ was generally understood and had been quite generally defined as having a meaning distinct — — a “Us Omens > viene ROR 37 from, and exclusive of, the increment of value realized upon the sale of property held for investment, by an indi- vidual, or the capital assets of a corporation. ‘‘In the construction of the language of the Constitution . . . we are to place ourselves as nearly as possible in the condi- tion of the men who framed that instrument”? (Ex parte Bain, 121 U.S. 1, 12) and ‘that which it meant when adopted it means now”? (South Carolina v. United States, i99 U.S. 437, 448). So regarded, it is submitted that the terms of the Sixteenth Amendment could not in the period from 1909 to 1913 have been understood by Congress or the state legislatures as including within the power to tax *‘incomes’’ without apportionment, the power so to tax the growth or increment of value constituting capital accretions realized as a result of a change in investments made otherwise than in the course of the conduct of a trade or business, Certainly, it was not intended to au- thorize or permit the taxation of capital under the guise of taxing income. If the views expressed by this court subsequent to 1913 be analyzed, this conclusion is strongly reinforced. The tax laid upon corporations by the Corporation Ex- cise Tax Act of August 5, 1909, (36 Stat. 11, 112, e. 6, see. 38) was, as shown above, an excise imposed upon the privilege of doing business in corporate form, and it was measured by income to the extent and in the special sense defined in the statute itself. The so-called ‘*income’?’ which measured this tax was not and was not intended to be the ‘income’? signified and intended in and by the Sixteenth Amendment, and it has been repeatedly recog- nized by this court that the senses in which the terms were used are different in the two cases, The court de- clared in Stratton’s Independence y. Howbert, 231 U. §. 399, 414, 416, that— 38 **As has been repeatedly remarked, the Corpo- ration Tax Act of 1909 was not intended to be and is not in any proper sense an income tax law.’’ See also Flint y. Stone Tracy Co., 220 U. 8. 107, 150, 165; United States v. Whitridge, 231 U. 8. 144, 147, 149; Anderson v. Forty-Two Broadway Co., 239 U. 8. 69, 72; Doyle v. Mitchell Brothers Co., 247 U.S. 179, 183; Hays v. Gauley Mountain Coal Co., 247 U. S. 189, 193, and United States v. Cleveland C. C. & St. L. Ry. Co., 247 U.S. 195. Where, on the other hand, a true income tax act was involved and capital profits were realized upon the change of an investment under circumstances in no wise related to the carrying on of business, as in Gray v. Darlington, 15 Wall. 63; or where under a true income tax law cap- ital profits were realized, not in the course of the busi- ness, but upon the winding-up and termination thereof, which is after all but another mode or form of changing an investment, as was the case in Lynch v. Turrish, 247 U. S. 221, the court in each instance refused to consider such an increment of value when realized by sale or con- version as any part of taxable income, and declared that it remained capital, despite its conversion or transmuta- tion into cash. And this court has recently stated that ‘‘enrichment through increase in value of capital invest- ment is not income in any proper meaning of the term” (Eisner v. Macomber, 252 U. S. at pp. 214-5), F. An increase or increment in the value of an invest- ment, not made or held as a part of any trade or business transaction, is plainly ‘‘a gain accruing to capital’’ and a ‘‘growth or mcrement of value in the investment,”’ 29 within the definition of the court in Eisner y. Macomber, supra. Inno proper sense does it proceed from the prop- erty, as do rents, interest, dividends and other familiar forms of income; and such a gain, when realized, cannot properly be described as ‘severed from the eapital’’ for it remains an integra] part of the capital as much as if it had not been converted, Before conversion into money, no one would question that the property, so held as an investment merely, was capital, although it then included the enhancement of value, and that it was not taxable except by the rule of apportionment. Bearing in mind that the Sixteenth Amendment is not to be ‘‘extended by loose construc- tion’? and that it is ‘essential to distinguish between what is and what is not ‘income’ . . - according to truth and substance, without regard to form’’ (Eisner y. Ma- comber, 252 U.S. at p. 206), we must find some distinet benefit to the taxpayer as income directly attributable to the conversion, before it can be declared that what the taxpayer now has is, not merely his capital, but income instead. Otherwise, the mere fact of conversion, that is, the form alone, would prevail over the substance and be made the decisive factor. Yet the court has declared, although in considering the Act of 1909, that ‘‘subse- quent change of form by conversion into money did not change the essence’’ (Doyle y, Mitchell Brothers Co., 247 U.S. at p. 187). Let us suppose the situation of an in- vestor who desired to change his investments and to accomplish that result either by sale and new purchase or by exchange. In each instance, his efforts to change his capital from one form of investment and transfer it to another—not as a matter of business or trade, but solely as a change in the form of his investments—would = SRO BHO TENT INT iio 40 result in a loss of capital, exacted under the guise of an income tax, and would constitute a plain penalty upon capital imposed simply because of a change in the form of the taxpayer’s capital investments. Mere conversion of capital investments and change into money cannot, therefore, be determinative, even though more money is thus act ually brought to hand than was originally put into the investment several years be- fore. Otherwise, Lynch vy. T urrish, 247 U. S. 221, was wrongly decided. There the taxpayer withdrew, upon the dissolution of his company, more money than he had put in, but only as much as his interest in the property in which he had his investment was then actually worth. All this was held to be capital and not income, despite the fact that it was received in money and was the out- come of a conversion. It is true that it was stated in the opinion of the court in Eisner v. Macomber, 252 U. S. at p. 212, that— ‘It is said that a stockholder may sell the new shares acquired in the stock dividend; and so he may, if he can find a buyer. It is equally true that if he does sell, and in doing so realizes a profit, such profit, like any other, is income, and so far as it may have arisen since the Sixteenth Amendment is taxable by Congress without apportionment.”’ This was plainly an obiter dictum, and was probably the result of concessions made in the briefs of counsel upon the original hearing and the application for a rehearing as well as upon the rehearing. The proposition advanced in argument that realized capital profits were income was not involved in the case, was not disputed, and, being ir- relevant, was not disputable. It was advanced by the taxpayer’s counsel and, naturally, as it was for the advan- tage of the revenue was not disputed by the Government. Unless limited to sales of such stock in the course of 41 business transactions, this statement was inconsistent with Gray v. Darlington, 15 Wall. 63, Gibbons v. Mahon, 136 U. S. 549, and Lynch vy. Turrish, 247 U.S. 221, and with the decisions of the state courts and of the courts of (ireat Britain and the British Dominions cited above, as well as with the reasoning in Eisner y. Macomber it- self. The inconsistency will be immediately apparent if we assume that Mrs. Macomber had received the divi- dend stock in question as a trustee, Such stock would then, of course, have constituted a part of the principal of the trust fund and belonged as such to the remainder- man and not to the life-tenant (Gibbons vy. Mahon, supra) ; and it would still have constituted part of the corpus or capital if thereafter turned into cash, and the life-tenant would, in that event, still be entitled to no participation whatever in any of the proceeds of the sale. Neverthe- less, according to the dictum quoted above, an income tax would have been payable in respect of this conversion of capital assets and change in the form of the investment of the trust estate. But, manifestly, the remainderman, who is not entitled to any income and only to capital, ought not to be required to pay a tax upon ‘‘income’’; and, equally plainly, the life-tenant, who is entitled to the whole in- come but has not received any part of this converted stock dividend because, as to him, it constitutes capital, should not be called upon to pay a tax upon gains ac- cruing to and received by another. This evident anomaly indicates the fallacy inherent in the passage quoted from the opinion in Eisner v. Macomber. The foregoing views have recently found acceptance and approval in the case of Brewster v. Walsh, decided on December 16, 1920, by District Judge Thomas of Con- necticut, 268 Fed. 207, now before this court for review sub nom. Walsh v. Brewster, No. 742. 42 * It, therefore, follows that the word ‘‘j income’’ had 4 well-established, clearly defined and unambiguous mean ing at the time of the consideration and adoption of the Sixteenth Amendment, that this meaning excluded real. ized increase or increment of value investments, that the thorize a tax upon tion realized on cor on the sale of capital Sixteenth Amendment does wot an- capital growth, increment, or aceroe- version of a permanent investment, and that if the Income Tax Law of 1916 can be const rued as imposing such a tax, it is in that respect unconstitu. tional amd void. Il. Tue Ixcome Tax Law or 1916 DOES NOT LEVY A Tax UPON THE GROWTH OF INCREMENT IN VALUE OF CAPITAL ASSETS WHEN REALIZED BY SALE. A. The Act of 1913 did not tax merease in value of capital investments. The framers of the original Ineo tober 3, 1913 (¢. 16, 38 Stat. 166 well the rule declared in the ease of Gray vy. Darling- ton by this court and the English cases cited and dis. cussed above. Indeed, reference to the debates in Con. gress will show not only a clear understanding that in- crement in value of property held for investment was not in its nature income, but that it was not the intention of Congress in the Act of 1913 to tax realized increment of capital investments. Thus, on April 26, 1913, the Income Tax Bill (H. RB. 3321) was before the House of Representatives as Com- mittee of the whole House on the state of the Union. (Congressional Record April 26, 1913.) Mr. Hull (the me Tax Law of Oc. ) understood perfectly 43 draftsman of the income tax provisions) was explaining the bill in detail, and with reference to the Sixteenth Amendment, when the following occurred (Cong. Ree. vol, 50, part 1, at p. 513): “Mr. Hull. 1 will say to the gentleman frankly that it has been held in construing all these laws that I have observed, that unless the unearned in- crement is expressly made income it ix not con- sidered income in any sense of the word but sim- ply increase of value or capital . . . Mr, Mann. What I real y wanted to get at was not that, but whether it would relate back so as to cover all profit. Su pose a man bought property many years ago which probably last year was worth as much as it is this year. He sells it this year. What are his profits? How does he arrive at what his profits are? Mr. Hull. My judgment would be that as to an eceasional purchase of real estate by one not a dealer or one making the buying and selling a busi- ness this bill would we apply to profits on sales where the land is purchased and sold during the same year. Mr. Mann. 1 hope that statement will remain in the Record.’’ And at page 506 we find: “Mr. Hull. The rulings of the Treasury De- pariment and the decisions of the courts of this country with respect to similar provisions of the old income tax laws and also the English rules of construction, all essential portions of which will be embraced in the Treasury regulations, will make clear the distinction between taxable profits or in- come on the one hand and capital or principal on the other.’’ So far as appears this view as to the Act of 1913 was not modified by Congress in connection with the Act of 1916. On the contrary, in the debate in the Senate on August 30, 1916 (53 Cong. Rec., part 13, p. 13407, et seq.) the question of taxing increase in value of capital invest- ments was debated and the holding of this court in Gray v. Darlington read. Thereupon Senator Hitchcock said: 44 “I still am not able to understand it. I will put a case to the Senator. Suy a man has pu in a certain year dauke or bonds and two / egg thereafter there is an advance of $20,000. Is man just taxed for one year only on the profit made? “‘Mr. Clarke of Arkansas: He is not taxed at all on that because it ceases to be income and be- comes capital.’’ The entire debate is quoted in the appendix, and whilst it is somewhat confusing, it is not improbable that the view of Senator Clarke, that an advance in value of stocks or bonds was capital, was acquiesced in by Senate and House. At any rate, the ruling of this court in Gray v. Darling. ton was clearly brought to the attention of the Senate in August, 1916, and nevertheless the language adopted was substantially the same as that used in the Acts of 1867 and 1913. Surely, if it had been the intention then to tax increase in value of capital investments, clear and unambiguous language would have been used, in order to overcome *‘a presumption, resistless except against an in- tention imperatively clear’’ (Mr. Justice MeKenna in Lynch v. Turrish, 247 U. 8. at p. 230). In neither the Act of 1913, nor the Act of 1916 was the growth or increment or increase of value of prop- erty held for investment expressly made income and taxed as such. As Mr. Hull stated in 1913, the rule of statutory construction, which he correctly gathered from the decisions discussed under point Il, supra, was that ‘‘unless the unearned increment is expressly made income it is not considered income in any sense of the word but simply increase of value or capital.”’ Hence, if we had no constitutional provision command- ing that essentially direct taxes (such as a tax on the 4 proceeds of the sale of property or the substitute there. for) should be apportioned, the rule of construction would reasonably be that no part of the proceeds of the sale of property held for investment and not in connection with the carrying on of a business or trade would be tax- able as income unless expressly made so. However, logically a statute could not make that income which was not so in its very nature except as fixing a standard by which to measure a tax. If the original asset as cap- ital could not be taxed except by the rule of apportion- ment, then manifestly it should logically follow that the proceeds of or substitutes for such capital assets were not taxable exeept by apportionment. But however this may he, there can be no doubt that according to many authorities the increment or ac- eretion in value of capital assets when realized had gen- erally not been treated as coming within the term ‘‘in- come”’ unless expressly made so by the taxing statute, assuming arguendo only that Congress could, as the British Parliament could, make that income for the pur- poses of an income tax law which was not in truth and substance income at all. The statute before the court does not purport to make such inerement or accretion in- come; it is very doubtful whether Congress intended to treat it as such, and it should not now be made «o by ad- ministrative or judicial interpretation. So far as ap- pears, Congress had no such specific intent and may have contemplated and intended quite the contrary. The principles which should govern this point are succinctly stated by Mr. Justice McReynolds in the case of Gould v. Gould, 245 U. S. 151, 153, speaking for the unanimous court, in the following language : **In the interpretation of statutes levying taxes it is the establi rule not to extend their pro- ——— Ca ad ed I ER WA, Ree, 46 visions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In ease of doubt they are construed most strongly inst the Government, and in favor of the citizen. United States v. Wigglesworth, 2 Story 369; Amer- wan Net & Twine Co. v. Worthington, 141 U. 8. 468, 474; Benziger v. United States, 192 U. 8. 38, 55. “*. . . The use of the word itself in the defini- tion of ‘income’ causes some obscurity, but we are unable to assert that alimon ~~ to a divorced wife under a decree of court falls fairly within any of the terms employed.’’ If the court was thus unable to assert that annual pay- ments of alimony received by a divorced wife fell fairly within the terms of the Income Tax Law of 1913, it must a fortiori be unable to assert that the realized increment or accretion of value of property held for investment falls fairly within any of the terms employed in that act or in the act of 1916, which in this respect is substantially the same. The grave doubts which reasonably exist both as to the intent of Congress, as well as to the constitutional power to tax such increment at all except by apportion- ment, should be resolved in favor of the taxpayer. The Congress well knew, for it had been repeatedly admon- ished by this court, that it was bound to express its in- tention to tax increment of value of property held for investment in clear and unambiguous language. Thus, in Eidman v. Martinez, 184 U. 8. 578, 583, Mr. Justice Brown speaking for the court said: “It is an old and familiar rule of the English courts, applicable to all forms of taxation, and particularly special taxes, that the sovereign is bound to express its intention to tax in clear and unambiguous language, and that a liberal construc- tion be given to words of exception confining the 47 operation of duty. Warrington v. Furbor, 8 Kast, 242, 247; Williams vy. Sangar, 10 Kast, 66, 69; Denn vy. Diamond, 4 B. & C. 243, 245; Tomkins vy. Ashby, 6 B. & C. 541; Doe v. Snaith, 8 Bing. 146, 152; Wroughton vy, Turtle, 11 M. & W. 961, 567; Gurr v. Scudds, 11 Exch. 190, though the rule re- garding exemptions from general laws may be dif- ferent. Cooley on Taxation, 146; In Matter of Enston, 113 N.Y. 174, 177.”’ B. The changes in phraseology in the Act of 1916 do not indicate any intent so to broaden the scope of the income tax as to include realized increment as an item of taxable imcome. In the appendix the corresponding relevant portions of the Acts of 1913 and 1916 are printed in parallel col- umns, with appropriate variations in type to denote new matter added and old matter omitted or modified. From an inspection and comparison of the two acts, it will appear that the change which has a direct bearing upon the topic now under discussion was that in the Act of 1916 the phrase ‘‘entire net ineome received in the pre- ceding calendar year from all sources’’ is used in place of the phrase in the Act of 1913, ‘entire net income aris- ing or accruing from all sources in the preceding calen- dar year.”’ **Received,’’ however, is a word of narrower, not broader, scope than “arising or accruing.’’ Income which is earned or due may be said to ‘“‘arise”’ or ‘ac- cerue’’ and hence be within the Act of 1913, but the same income would not be within the Act of 1916 unless in fact received within the year by the taxpayer. Familiar in- stances are interest on real estate mortgages due late in = PEPE NE TRO 1 EERE GTA NT: ee a eee EE eT «oe eens 48 the calendar year but not actually paid until the follow. ing year, and interest on corporate bonds or other obli- gations not paid when accrued but subsequently collected. Instances could be multiplied, but those suggested are sufficiently typical, and in themselves afford an adequate explanation for the change in verbiage. Whilst there is, of course, a shade of difference, the substance is the same so far as the present question is concerned. Lynch y, Turrish, 247 U.S. at p. 230, and Maryland Casualty Co. v. United States, 251 U. S. 342, 345, In the Act of 1916 a new subdivision (see, 2 subd. (c), is added as follows: _ “For the purpose of ascertaining the gain de- rived from the sale or other disposition of prop- erty, real, personal, or mixed, acquired before March first, nineteen hundred and thirteen, the fair market value of such property as of Mareh first, nineteen hundred and thirteen, shall be the basis for determining the amount of such gain derived.” This subdivision, however, is limited by section 1 and the preceding subdivision (a) of section 2. By the for- mer the tax is imposed on ‘‘net income,’’ by the latter net income is specified and defined in precisely the same words as in the Act of 1913. Subdivision (c) must, there- fore, be construed as applicable only to such gains derived from sales or dealings in property as are taxed, Subdi- vision (c) does not impose any tax, but merely states the basis of determining or computing the tax already im- posed. A new subdivision (Fifth) of section 5 is added allow. ing as an additional deduction— ‘*In transactions entered into for profit bat not connected with his (the taxpayer's) business or trade, the losses actually sustained therein during the year to an amount not exceeding the profits arising therefrom.’’ — Under the Act of 1913 there is no similar provision. Mente v. Eisner, 266 Fed. 161 (C. C. A. 2ed Cir; cortio: rari denied by this court October Lith, 1990, No. 447). Far from this provision indicating any infest to tas realized increment, the only reasonable inference ie di- rectly to the contrary, The two acts plainly taxed as is- come gains derived from transactions entered inte fer profit, in the purchase and sale of ral of personal property outside of the taxpayer's regular becineces, or otherwise emtered into for promt, each as the usual speculations in securities on a stock exchange, prw- duce exchange, board of trade, otc, or speculative par. chases and sales of real estate as distingwiched from im- vestments, It is a matter of common knowledge Ukat the great bulk of transactions on the exchanges are of this speculative nature, and they are entirely distinet from the purchase or acquisition of securities for pormament investment. Under the Act of 1913 losses were eet do ductible unless the taxpayer coukd establich that the ae ture of his transactions was such as to comstitwte © trade” and come within the term es ' a ea. sustained dering the year ie Subdivision Fifth of scetion 5 was caavted te enable the taxpayer to deduct losses resulting from ottlhes “transactions entered into for profit bet got comaeuted with his business or trade."’ Thc ehemtty excbmded teens actions entered into for investmeet and eet arodhe dy font profit, It was, therefore, evidently the inteet in the Act of 1916 to make the dedhactiome allowed pur) passow willy the constituents of taxable income The fact that Domace cet side of business wre allowed only foo thee Domeithed eethend 50 is strongly indicative that capital profits realized on the sale of investments were not being taxed. Cc, The well settled meaning of the word “income” in common speech, as exclusive of realized increment, should be deemed to be the meaning of that word in the Act of 1916, The intent of the act ix plainly to tax the annually recurrent income of a taxpayer, The great mass of the people who invest their savings in real estate and in the purchase of investment securitics productive of in- come certainly do not regard realized increase of value in such investments ax “income”. The realization of profit through sale is rarely the controlling motive in making such investments, They are not strictly entered into for profit but for investment. Safety and interest or dividends are the impelling factors, Under the Act of 1916 a loss sustained by the taxpayer on the sale of his home is not deductible, Is it not almost inconceivable that Congress would have taxed as income the profit real. ined by « householder or investor upon the sale of his home or of the securitics representing his savings, with. out using language imperatively clear, when not permit. ting the deduction of losses in similar transactions! The rule to be applied to the construction of the Acts of 1913 and 1916 ix stated in Black on Income Taxes, 4th Exl, See. 30, p. 26, as follows: “It is another and ancient rale in the const ruc- tion of statutes that the meaning of a doubtful worl or rase may be ascertained by references the ng of other words or phrases with which it is associated, and that, where several things are referred to they are presumed to be of the same clase when connected 4 copulative 51 unless a contrary intent clearly appears. For ex- ample all the acts of Congress on the subject of income taxation, from 1862 to the present time, have associated together the words ‘gains’, ‘profits’ and ‘income’ as descriptive of the sub- ject taxed, and the same is true of the income tax aws of some of the States. These words may be traced far back in the history of English taxa- tion. The original income tax law of that coun- try, enacted in 1799 imposed a tax on ‘income’ by that name, but the acts of 1842 and 1853 intro- duced the associated terms ‘profits and gains’ whence they were apparently borrowed by Con- gress in framing the Act of 1862 aid have since persisted in use. Applying the rule above stated we are justified in asserting the following prin- ciples as applicable to the interpretation of the phrase in question. If it is doubtful whether or hot a particular fund or acquisition is taxable as ‘income’ under the statute, it is not taxable unless it is income in the nature of ‘gain’ or ‘profit’. If any item is clearly included in the description of ‘gains’ yet it is not taxable unless it is a gain in the nature of incomes or profits. And although the disputed item may be certainly a profit in one sense of the word, yet it is not taxable unless it be a profit accruing by way of gain or income.” D. The provisions of the Act of 1916 with regard to de- ductions are inconsistent with the inclusion of realized in- crement as an item of taxable income, Broadly speaking the deductions allowed are all such as relate to true income and not such as relate to isolated transactions and instances of the realization of increment of value on investments, Under section 5 of the Act of 1916, the ** Deductions Allowed"’ include (see appendix for quotation in full) the following: le i en i eh. eee =~ “ee ~ © 52 (1) Necessary expenses of the business or trade; (2) interest; (3) taxes; (4) ‘‘losses actually sus- tained during the year incurred in his business or trade’’ . . . (5) losses to an amount not exceeding the profit in ‘transactions entered into for profit’’; (6) worthless debts; (7) ‘‘a reasonable allowance for the exhaustion, wear and tear of property aris- ing out of its use or employment in the business or trade’’, and (8) a special provision for oil and gas wells. Then follow a prohibition of allowance of deductions, namely, ‘*No deduction shall be allowed for any amount paid out for new buildings, permanent improve- ments, or betterments,’’ and a further prohibition of the deduction of the expense of restoring property for which an allowance was or had been made. e It is further to be noted that in the usual case of the sale of a taxpayer’s home, or other real property, free- hold or leasehold, held for investment, which is not used in his business or trade, there is no deduction allowed for exhaustion, wear and tear, and that no loss on the sale of a home, or of property acquired by gift or inherit- ance is deductible in fixing net income. If it was intended to tax realized increment of value in investment property, there was a remarkable over- sight in failing to provide for its taxation in the many instances where after the increment of value has accrued title to the property passed by gift, devise, bequest, or in- heritance, and the property was then sold, without reali- zation of further advance in value, by the donee, devisee, legatee, or heir. Obviously, by a mere gift of property — CORRE LVR EVEN VIP: EI NTR ET ae ET RET II NEN OER OUT — which had greatly increased in value the collection of any tax on the amount of such increase could be prevented. 53 E. Full meaning and effect can be given to all the terms and provisions of the Act of 1916 through the construc- tion advocated, namely, that realized increment of value was not included as an item of taxable income. It is submitted that it has been decided by this court that the general expression ‘gains, profits and income from any source whatever’’, or its equivalent, contained in the acts of 1867 and 1913, did not include realized in- crease or increment of value of property held for invest- ment, and that these general words could have ample scope if held to embrace only gains and profits properly and accurately within the current meaning of the term “income.’’ So likewise as to the term ‘sales or dealings in property,’’ it is submitted that its true intent and meaning is ‘‘income derived from sales or dealings in property’’, and does not include the conversion or trans- mutation into money or other property of a capital in- vestment because the proceeds do not represent income. In other words, the controlling factor is not the sale or the dealing in property, for we are not discussing an ex- cise tax, but income realized from such a transaction, that is to say, what is properly to be denominated income as distinguished from capital. The words of the statute have an apt and appropriate function with respect to trade or business transactions and speculations, which will give adequate force and ef- fect to the provision without necessarily including a gain — realized upon the increase in value of a capital invest- ment. The distinction between the former and the latter is quite clear. Annual net profits of a business or trade are ascertained after deducting all the expenses and losses of the business from the gross aggregate of profits and other income, 2nd this surplus alone constitutes the an- nual net income of such business or trade, regardless of the value of particular assets or of the profit or loss on particular transactions. But a gain derived from an iso- lated sale of an investment is in a totally different class and to be treated according to different rules. It is not part of the annual or other net income of a taxpayer in any proper or reasonable sense, but a profit resulting from an isolated and unusual transaction. All the other terms of section 2 (a) of the act clearly relate to true income, and do not cover realized incre- 54 ment. F. The construction adopted and enforced by the Com- missioner of Internal Revenue results in hardship, injus- tice and unreasonable discrimination among classes of taxpayers. As examples of hardship and inequality attention may be called to the following instances: (a) While in the case of a going business, or in trans- actions entered into for profit, losses are deductible, they are not deductible in other transactions, however much capital may thereby have become impaired. (b) In the case of property held for a long period by an investor, or as an investment of trust funds by a fidu- ciary, losses are not deductible under the Act of 1916 be- a 4 7 : ag ~ REALE DRE MGI OOTP ECON GBs. POAT S HF eons 5 ¥ wey 55 cause such transactions are not ‘‘entered into for profit.’’ Hence, in the usual instance of losses incurred in one year on the sale of investments and profits realized in other years, or vice versa, the losses could not be deducted but the profits would be taxed and not allowed to be offset as against losses theretofore sustained. (c) Under the progressively graded rates of tax, a tax upon the realization of the increment of value may be levied at a rate out of all proportion to the increment if apportioned pro rata during the period of accrual. This point has become of the greatest practical importance un- der the act of 1918. That it results in great hardship and injustice under the Act of 1917 is shown by the enormous tax exacted from the Ryerson Trust (No. 608) where the $700,000 profit conceded to have accrued over a period of four years and to belong to an undetermined number of beneficiaries, was taxed as a single income for one year without any deductions, The sole theory upon which income taxes on incre- ment of value are being levied is that such increment is not taxable as income until realized, and that, although it accrues from year to year during a series of years, it is not unjust that it should be taxed when actually real- lized by sale. This theory might work fairly if the inere- ment were then apportioned over the period of accrual, retroactively, with appropriate provision for deductions of decrease in value of similar investments. This would be both fair and feasible. The act before the court, how- ever, has no such provisions. The graded rates of super- tax make the tax, when the increment of value is real- ized, out of all proportion as compared with the rate dur- ing the period of accrual, so that, as in the Ryerson case, the tax was at least ten times higher than it would have been if apportioned to the years when it actually accrued Se ey ee ae ee TE RE pape: > ewe ELTA a one _ 6 5D 56 among the beneficiaries entitled to the capital profit real- ized. The rule to be applied under such circumstances js stated by the court in Knowlton vy. Moore, 178 U.8. 41, 77, as follows: ‘*We are, therefore, bound to give heed to the rule, that where a particular construction of a statute will occasion great inconvenience or pro- duce inequality and injustice, that view is to be avoided if another and more reasonable interpreta- tion is present in the statute. Bate Refrigerating Co. v. Sulzeberger, 157 U.S. 1, 37; Wilson v. Rous- seau, 4 How. 646, 680; Bloomer vy. McQuewan, 14 How. 539, 553; Blake v. National Banks, 23 Wall. 307, 320; United States v. Kirby, 7 Wall. 482, 486."" G. The contention of the Government based on practical construction is not well founded. A contention made by the Government in the Ryerson Trustee and Eldorado cases (Nos. 608 and 609) will doubtless be repeated in the case at bar, namely, that the Treasury Department in 1914-1915 ruled that realized in- crement was included under the Act of 1913 as an item of taxable income and assessed and collected income tax accordingly, and that this practical construction must be deemed to have been adopted by Congress by the enact- ment of the Act of 1916 in substantially the same lan- guage as the Act of 1913. This contention, however, is somewhat inconsistent with the Government's further position that by substituting the word “‘received’’ for the words ‘‘arising and accruing’? the whole scope and meaning of the act were in this respect clearly changed. In answer to the contention based on practical con- struction it is submitted that there is no authority in 57 support of this contention applicable to the present situ- ation, namely, a ruling by a department of the Govern- ment in direct violation of a decision of this court upon the exact point of construction in question, rendered many years prior to the departmental ruling, and never ques- tioned by the courts but followed by a decision of this court directly to the contrary of the departmental ruling. Gray Vv. Darlington, the authority of which has never been questioned, is directly the opposite of the departmental ruling on this point, and in 1918 this court in Lyuch v. Turrish, construing the Act of 1913 with respect to which such ruling was made, held the ruling to be erroneous. Furthermore, the very point as to the adoption of a de- partmental construction by the subsequent reenactment of the law so construed was necessarily involved, though not passed upon by this court, in Gray v. Darlington. The first federal income tax law enacted by Congress was that of 1861 (12 Stat. 309). This law was re-enacted, with changes in rate, in 1862 (12 Stat. 473); a similar law with further changes in rate was enacted in 1864 (13 Stat. 223, 281) and amended in 1865 (13 Stat. 469-479), and in 1867 (14 Stat. 471, 477), sections 116 and 117 of the act of 1864 were amended in the form quoted above at page 7 of this brief. In the appendix, the relevant portions of each of these earlier acts are printed. On comparing their phraseology, it will be noted that the four acts in so far as relevant are substantially iden- tical. The last one of the series, that of 1867, was con- strued in Gray v. Darlington, decided in 1872. At the time of its enactment the practical construction, of taxing realized increment as income, had been enforced for some five or six years. As early as May, 1863, the Commis. sioner of Internal Revenue had ruled as follows: a a 58 **No. 110. Gains or profits realized from the sale of property during the year 1862, which prop- erty was purchased before the excise law went into yy shall be returned as income for the year 1 vee ** Losses incurred in the prosecution of the busi- ness are a fair offset to gains derived from business but not from those portions of income derived from fixed investments, such as bonds, mortgages, rents, and the like.’’ ( Rulings of Internal Revenue I*e-- partment, 1871, Government Printing Office.) * Yet this court in Gray v. Darlington, decided in 1872, ignored these definite and long established rulings of the Department. That an erroneous construction by a department is in no way binding on the court was not only recognized in Lynch v. Turrish and Southern Pacific Co. v. Lowe, 247 U. 8. 221 and 330, but directly ruled in Merritt vy. Cameron, 137 U. 8. 542, 552; United States v. Tanner, 147 U. 8. 661, 663; Houghton v. Payne, 194 U. 8. 88; Savings Bank vy. United States, 19 Wall. 227, and Studebaker v. Perry, 184 U. 8. 258, 269. In the case last cited the court said: **The doctrine invoked is a useful one but its application should be restricted to cases in which the construction involved is really one of doubt and where those to be affected have relied on the practical construction, and rights have accrued by reason of such reliance.’”’ ° were the In- teres Jo Department publiched by the Office of 59 IV. As THE SALE OR CONVERSION OF THE STOCK OF THE Goop- RICH COMPANY REPRESENTED AN ACTUAL L088, NO PART OF THE PROCEEDS WAS TAXABLE AS INCOME OF THE TAXPAYER. Assuming, arguendo, that increase in value of capital when realized by sale is taxable as income under the Six- feenth Amendment and the Act of 1916, it is nevertheless submitted that no part of the proceeds of the sale of the stock of the Goodrich Company was taxable because such sale resulted not in any gain but in an actual loss to the taxpayer. The record in the ease at bar conclusively establishes that the plaintiff did not receive or realize any gain or profit whatever from the sale of the shares of the capital stock of the Goodrich Company, but as matter of fact sustained a loss or diminution of capital value of $22,253, instead of a gain or profit of $120,700 (pp. 8, 9). Section 2 of the Income Tax Law of 1916 provides that ‘‘the net income of a taxable person shall include gains, profits, and income derived from sales or dealings in property,’’ etc. The addition of the word **income”’ to the words ‘gains, profits,” however, added nothing, and never should have been employed, for it served no useful purpose. It would, of course, be absurd to define income as being income. Mr. Justice McReynolds pointed out in the case of Gould v. Gould, 245 U. 8. 151, 153, with respect to the word ‘‘income”’ in the Act of October 3, 1913, 38 Stat. 144, 166, that ‘‘the use of the word itself in the definition of ‘income’ causes some obscurity.’’ PO OO PEWS af yd 60 There should be no difficulty in concluding that within long recognized canons of statutory construction the gen- eral word ‘‘income’’ following the enumeration of the specific words ‘‘gains’’ and ‘‘profits’’ must be restricted to things of the same kind, ejusdem generis, as those spe- cifically enumerated. As Mr. Justice Lurton said in United States v. Stever, 222 U. S. 167, 174: ‘*In such circumstances, unless there is a clear manifestation to the contrary, general words, not specific or limited, should be construed as appli- cable to cases or matters of like kind with those described by the particular words.”’ This view is strongly reinforced by the fact that in the same section of the Act of Congress, the provision of section 2 in relation to March first, 1913, speaks only of gain, and that no reference is made to profits or income. The maxim expressio unius est exclusio alterius would seem to be clearly applicable. The language employed would then exclude ‘‘profits and income,’’ if they mean something other or broader than ‘‘gains,’’ and must be confined to the single subject of ‘‘gains.’’ Such was un- doubtedly the intention, for the provision actually reads as follows: **(c) For the purpose of ascertaining the gain derived from the sale or other disposition of prop- erty, real, personal, or mixed, acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such gain derived.’’ Obviously if the words ‘‘net income’’ in the preceding subdivision (a) of the same section had been intended to mean something different from ‘‘gains’’ and ‘‘profits’’, RY PN z eS eT EIT PLS OUT Sey EE Se —e the same terminology would have been used and repeated in subdivision (c). It follows that, if we are to reject the rule of ejusdem generis and to hold that by the use of the word ‘‘income,’’ as employed in subdivision (a) of section 2, it was intended 61 to reach and cover something different from ‘*gains’’ or ‘‘profits,’’ then it must necessarily follow that income other than a gain does not come within the purview of subdivision (c) of the same section because the term ‘‘in- come’’ was not repeated there, and that there was, there- fore, no authority to apply the standard of market price or value as of March first, 1913, as distinguished from the market price or value when the plaintiff acquired the stock of the New York Goodrich Company in May, 1912. It would then result that if there was no gain at all, but in fact and truth an actual loss or diminution of capital, as in the case at bar, the statutory provision enacted “for the purpose of ascertaining the gain derived from the sale,’’ ete., and “determining the amount of such gain derived”? would not apply. To hold otherwise would be to re-write the statute in a way quite beyond the power of any court and to at- tribute to the law-making power an intent which would in many instances be unfair, unjust and oppressive to tax- payers who had received no gain or profit whatever and, indeed, nothing that would come reasonably within the “natural and obvious sense”’ of the word income authori- tatively defined as ‘‘the gain derived from capital, from labor, or from both combined”’ (Doyle v. Mitchell Brothers Co., 247 U.S. at p. 185; Eisner vy. Macomber, 252 U. S. at p. 207). The Closing clause of the amended 62 provision, namely, that it ‘shall be the basis for deter. mining the amount of such gain derived,” plainly evi. dences the idea that the test or standard fixed in the sub division should apply only where there was a“ gam de rived,”’ and not where there was actually a loss sustained Congress could not arbitrarily create a fietitions **gain,’’ where none in fact existed, in order to levy an income tax on the transaction, when in final analysis such 4 tax would have to be paid clearly out of diminished capital and therefore be an unapportioned property tax as distinguished from an income tax. To constitute a gain there must, of course, be a realization of profit by sale over the cost of the property when acquired. The two dates—of acquisition and sale—and the value on each of them are essential clemonts, Congress could pot fix an arbitrary date of acquisition so as to charge the tax payer with a fictitious cost any more than it could fix as arbitrary date of sale or conversion. Plainly, the par pose of the provision in question was te eogtegate the amount of gain accruing after the adoption of the Six teenth Amendment from any gain accruing before, only when a gain had actually accrued and been realized The fact that the date of March first, 1912, ix adopted in the Act of 1916 likewise for the parpore of determining a loss, that is, ‘‘the basis for determining the amoent of such loss sustained,”’ is immaterial, because the allow ance of the deduction of losses actually sustained ic wholly a statutory concession, and Congress might, ae it did in the Income Tax Act of 1913, « 16, 38 Stat. 108, limit the losses allowable and exelade altogether as o deduction capital losses not sustained ip carrying on & business or trade. tar payable wabely im peepuut of waguitiel wn wat aif Whe gin cools of capetal Al amy fate, There aie womanly ~ garenn dowbts wpom that score.” fe sath @ ease Whe walle ie Mie Comet is fo wend & comecibacinon wiivth weigit gousdlew o eames even of chombttal cometituticonalliny (Eval Saline & Somes ond Brewery, 31 U. 8. 200, 230; Veined Staten « dee Pare Mog, 241 U, & 204, 01; Dedied States © Beliewer & Hedvoe Co, 130, & TE), tered he nae 4 sometnnrion Which Will wrod came dommes, ill suecnadbite er Moteonee cupaallly Wel cette be Me val) Wied ae aeaite as to the intent of & tae lew willl he sesuud te Bese af the taxpayer, CGonld ©, Gowld, 245 0 & ER. Badwee « Martiore, 184 U_ &. S08, Se. Maren, it bhwe tewm the Renge wettaihibiclhind putin ait this court to Hienit gemeead terme, cath ae thw wore Oe comme” tm the came at Dine, ce ae nll he Rend fe inuhmeltion PET ERROR, oF am ald rorenOnIN. ded Re wumeloneN @ Matate aevwglling te He epiieit and gull wnomdiing Re ite Metter whemewee the bettew wohl vumdin it ew amie ow Wo eemmmame Ue Climgiwee datemedind be Rae wee” gee” when Wee im Fart need ret an eumeed eee Thee, ie DM edied Siete © Kote, Wel ot eee We Aeectinnw Wehd Ae@inud he velo on the Poilhowang Mongpenge AB Dawe child gemmiee 4 comedies Henaeroiees —— 64 tion. General terms should be so limited in their application as not to lead to injustice, oppression, or an absurd consequence. It will always, there. fore, be presumed that the legislature intended ex. ceptions to its language, which would avoid re- sults of this character. The reason of the law in such cases should prevail over its letter.’’ See also Stratton’s Independence v. Howbert, 231 U.S. 399, 414; Hawaii y. Mankichi, 190 U. 8. 197, 212; * aly Trimty Church v. United States, 143 U. S. 457, 4oy; Pickett v. United States, 216 U. 8. 456, 461; Knowlton y. Moore, 178 U.S. 41, 77; United States v. Palmer, 3 Wheat. 610, 631. It follows, therefore, that it is reasonably to be pre- sumed that Congress did not intend to levy a tax on any- thing except ‘‘gains’’ actually received by the taxpayer. The standard of March first, 1913, was adopted and fol- lowed solely for the benefit of the taxpayer, so as to ex- clude ‘‘gains’’ which had accrued prior to that date. As- suming that increase in value of capital investments could be and was intended to be taxed as income, then the clause now in question was a concession to the taxpayer so as to exclude from taxation as income increases in value which had accrued prior to March first, 1913. ConcLusion. For the reasons indicated above, it is submitted (1) that growth, increment, or accretion in value of property held for investment and then sold is essentially capital and not income, (2) that it was not the intention of Con- gress to tax such growth, increment, or accretion in value in and by the Act of 1916, and (3) that the test of market price or value on March first, 1913, is applicable only iN i La hw ee ete ees a 65 where there has in fact been a gain, and not where there has been in fact a loss of capital. The [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386004_0473%3A02. Public record. Not legal advice.