Federal Income and Estate Tax Laws

Amendment 16:581 The Congress shall have power to lay and collect taxes on incomes, 582 from whatever source derived, without appor

Bankers Trust Co. v. Edwards (Col.), (D. C., S. D. N. Y. 1923) 292 Fed. 793.

580 (p) The Act of 1913 was not wanting in "due process of law" in permitting individuals but not corporations to deduct from gross income dividends received from corporations taxed under the Act. Brushaber v. U. P. R. R. Co., (1916) 240 U. S. 1; Stanton v. Baltic Mining Co., (1916) 240 U. S. 103.

580 (q) Sec. 226 (c) of the Act of 1921 was not unconstitutional as taxing as income that which was not income under the Sixteenth Amendment. Bankers Trust

Co. v. Edwards (Col.), (D. C., S. D. N. Y. 1923) 292 Fed. 793.

580 (r) Sec. 226 (c) of the Act of 1921 was not unconstitutional as violative of the Fifth Amendment, in that it operated to determine the net income of decedents by a rule different from that of living persons by denying the former substantial deductions accorded to the latter, and in that it taxed a decedent a substantially larger amount than a living person on exactly the same amount of net income. Bankers Trust Co. v. Edwards (Col.), (D. C., S. D. N. Y. 1923) 292 Fed. 793.

580 (s) Sec. 226 (c) of the Act of 1921 was not unconstitutional, although by placing the income of decedents on an annual basis, the surtax was higher. The rates imposed were uniform. Every taxpayer under the same circumstances paid the same tax, and, therefore, there was no discrimination. Bankers Trust Co. v. Edwards (Col.), (D. C., S. D. N. Y. 1923) 292 Fed. 793.

580 (t) The Acts of 1917 and 1918 did not deprive corporations organized under the laws of one of the United States of "due process of law," in requiring them to pay a war excess profits tax and an income and excess profits tax under said Acts, respectively, on income derived from Porto Rico, although citizens of Porto Rico were not taxable under said Acts. Porto Rico Coal Co. v. Edwards (Col.), (D. C., S. D. N. Y. 1921) 275 Fed. 104.

580 (u) A tax of 72% on the net income falling within the last bracket and an average tax of 50% on the entire net income, imposed by the Act of 1918, did not deprive the taxpayer of his property 66 without due process of law'' as guaranteed by the Fifth Amend ment. Towne v. McElligott (Act. Col.), (D. C., S. D. N. Y. 1921) 274 Fed. 960.

580 (v) The Act of 1918 did not deprive domestic corporations of their property without due process of law'' as guaranteed by the Fifth Amendment, because they were required to pay a tax on their net income derived from the exportation of goods from the U. S. and the sale thereof in foreign countries, although foreign corporations which imported such goods from the U. S. to and sold them in such foreign countries, escaped the tax. National Paper & Type Co. v. Edwards (Col.), (D. C., S. D. N. Y. 1923) 292 Fed. 633.

580 (w) The Acts of 1916 and 1917 were not unconstitutional because retroactive. U. S. v. Boss & Peat Automobile Co. et al., (D. C., D. Oregon 1922) 285 Fed. 410; U. S. v. McHatton et al., (D. C., D. Mont. 1920) 266 Fed. 622.

581 (a) The Sixteenth Amendment to the Constitution does not add new objects of taxation; it merely permits the taxation of incomes without apportionment. Brushaber v. U. P. R. R. Co., (1916) 240 U. S. 1; Stanton v. Baltic Mining Co., (1916) 240 U. S. 103; Tyee Realty Co. v. Anderson, (1916) 240 U. S. 115; Peck & Co. Inc. v. Lowe (Col.), (1918) 247 U. S. 165; Eisner v. Macomber, (1920) 252 U. S. 189; Brewster

tionment among the several States, and without regard to any census or enumeration.

v. Walsh (Col.), (D. C., D. Conn. 1920) 268 Fed. 207; Evans v. Gore (Col.), (1920) 253 U. S. 245, affirming Id., (D. C. W. D. Kentucky 1919) 262 Fed. 550; and Graham v. Miles (Col.), (D. C., D. Md. 1922) 284 Fed. 878.

581 (b) The effect of the Sixteenth Amendment was not to grant power to Congress to tax incomes because that power it always had. Kerbaugh-Empire Co. v. Bowers, (Col.), (D. C., S. D. N. Y. 1924), 300 Fed. 938. 581 (c) The Sixteenth Amendment converted a tax on income from a direct to an indirect tax. Cook v. Tait (Col.), (D. C., D. Md. 1923) 286 Fed. 409.

582 (a) A stock dividend declared from surplus which accrued after March 1, 1913, was not income to the stockholder, and, hence, not taxable under the Act of 1916. "We are clear that not only does a stock dividend really take nothing from the property of the corporation and add nothing to that of the shareholder, but * shows he has not realized or received any income in the transaction.' A stockholder's interest in the corporation_evidenced by surplus or stock dividends is capital. To the extent, therefore, that the Act of 1916 imposes a tax upon stock dividends without apportionment, it is unconstitutional. Eisner (Col.) v. Macomber, (1920) 252 U. S. 189; Walsh (Col.) v. Brewster, (1921) 255 U. S. 536, affirming Id., (D. C., D. Conn. 1920) 268 Fed. 207.

582 (b) Income may be defined as the gain derived from capital, from labor, or from both combined,' provided it be understood to include profit gained through a sale or conversion of capital assets. Eisner (Col.) v. Macomber, (1920) 252 U. S. 189.

582 (c) Alimony received by a divorced wife under order of court, was not taxable income to her under the Act of 1913. Gould v. Gould, (1917) 245 U. S. 151.

582 (d) Income" within the meaning of the Sixteenth Amendment must be taken in the common understanding of the term. "Income is after severance separate and apart from the capital. It is as separate and apart from the capital as the fruit from the tree, the crops from the land after severance, or the waters in the outlet stream after passing out of the reservoir. It is something which has grown out of or issued from capital, leaving the capital unimpaired and intact.' Gavit v. Irwin (Col.), (D. C., N. D. N. Y. 1921) 275 Fed. 643.

582 (e) A stock dividend declared from surplus accrued prior to March 1, 1913, was not taxable income to the stockholder under the Act of 1913. "A stock dividend really takes nothing from the property of the corporation and adds nothing to the interests of the shareholders. The corporation is no poorer and

the stockholder is no richer than they were before." Towne v. Eisner (Col.), (1918) 245 U. S. 418, reversing Id., (D. C., S. D. N. Y. 1917) 242 Fed. 702; Lormis (Col.) v. Wattles, (C. C. A., Eighth Cir. 1920) 266 Fed. 876.

582 (f) Income means that which has come in, just as expenditures mean what has been paid out or goes out." Pitney v. Duffy (Ex.-Col.), (D. C., D. N. J. 1923) 291 Fed. 621.

582 (g) Income includes gains and profits derived through the sale or conversion of capital assets, whether done by a dealer or trader, or casually by a non-trader, as by a trustee in the course of changing investments. Act of 1918. Miles (Col.) v. Safe Deposit & Trust Co., (1922) 259 U. S. 247, affirming Id., (D. C., D. Md. 1921) 273 Fed. 822.

582 (h) Anything which accrued prior to March 1, 1913, was part of the taxpayer's principal when" the Act of 1913 became effective. Ú. S. v. Guinzburg, (C. C. A., Second Cir. 1921) 278 Fed. 363.

582 (i) A dividend declared prior to March 1, 1913, although payable subsequent thereto, constituted capital to the stockholders on March 1, 1913, the effective date of the Sixteenth Amendment, and not income at the date of payment, under the Act of 1913. U. S. v. Guinzburg, (C. C. A., Second Cir. 1921) 278 Fed. 363.

582 (j) Under the Act of 1918, the proceeds of an insurance policy payable to a corporation were not taxable income to such corporation, where the policy was taken on the life of its president for a term of five years, the premiums paid by the corporation, and where the evidence was that the insured was the managing head of the corporation, that he was a man of ability and a valuable asset to the corporation, and that his management produced returns from the business which before his management the company had not earned. The proceeds of such policy were in the nature of an indemnity for the loss sustained by the corporation by reason of the death of the insured, and were not income within the definition of that term by the Supreme Court. The Supplee-Biddle Hardware Co. v. U. S., (1923) 58 Ct. Cl. 343.

582 (k) Income of a railway corporation operated by a receiver appointed in foreclosure proceedings may be subjected to an income tax by Congress. U. S. v. Chicago & Eastern Illinois Railway Co., (D. C., N. D. Ill. 1924) 298 Fed. 779.

582 (1) Beginning in 1911 a corporation borrowed money from a German bank. The corporation advised

the New York agent of the German bank its requirements in dollars. The agent cabled the German bank for the equivalent in marks. The latter cabled its agent the marks requested and the agent then drew a check in favor of the corporation in dollars. The notes given by the corporation called for the payment of the loan in German marks or their equivalent in United States gold coin at prime bankers' rate in the city of New York for cable transfer to Berlin. The corporation advanced this money to a subsidiary corporation, which used it for construction purposes. The subsidiary sustained great losses through these operations and deducted the same in its income tax returns during the years 1913 to 1918, inclusive. By September 1, 1913, the corporation had paid a part of this indebtedness to the German bank and on that date gave a new note payable on April 1, 1915, for the balance of such unpaid loan. The old outstanding notes were surrendered and cancelled by the German bank. The new note was payable to the corporation's own order in German marks or their equivalent in United States gold coin, as were the original notes. Only a portion of this note was paid on or before maturity. In 1921 the corporation was compelled to pay this unpaid balance with interest to the Alien Property Custodian. This settlement was made at a rate slightly above the prevailing current rate of exchange. The corporation discharged this obligation for approximately $80,000, which represented approximately $770,000 originally. The transaction resulted in no income to the corporation either within the purview of the Sixteenth Amendment or the Act of 1921. Kerbaugh-Empire Co. v. Bowers, (Col.), (D. C., S. D. N. Y. 1924), 300 Fed. 938.