CHAPTER 42 CONSTITUTIONALITY OF THE LAW It is not the purpose of this chapter to discuss exhaustively the constitutional questions which might exist with respect to the present internal revenue laws, but to point out certain features of such laws with respect to which questions of constitutionality have been raised, and also to point out briefly a few general principles which may have a bearing upon the constitutionality of provisions of the Revenue Act of 1918. It is a long established principle vital to our constitutional system that a court is not authorized to adjudge a statute unconstitutional where the question as to its constitutionality is at all doubtful, and that unless the statute is plainly and palpably unconstitutional, it will be upheld. Instead of seeking for excuses for holding acts of the legislative power void by reason of their conflict with the constitution the effort should be made to reconcile them, if possible, and not to hold the laws invalid unless the opposition between the constitution and the laws be such that the court feels a clear and strong conviction of their incompatibility with each other. Unless it be impossible to avoid it, a general revenue statute should never be declared inoperative in all its parts because a particular part, relating to a distinct subject, is invalid. It is an elementary principle that the same statute may be in part constitutional and in part unconstitutional, and that if the parts are wholly inde 1 Booth v. Illinois, 184 U. S. 431; Fletcher v. Peck, 6 Cranch 87; Brown v. Wallace, 161 U. S. 591; U. S. v. Delaware & H. Co., 213 U. S. 366. pendent of each other that which is constitutional may stand and that which is unconstitutional will be rejected. It is only when different clauses of an act are so dependent upon each other that it is evident the Legislature would not have enacted one of them without the otheras when the two things provided are necessary parts of one system-that the whole Act will fall with the invalidity of one clause. When there is no such connection and dependency, the Act will stand, though different parts of it are rejected. A different rule might be disastrous to the financial operation of the government and produce the utmost confusion in the business of the entire country.2 It will be noted that the Revenue Act of 1918 provides expressly that if any clause, sentence, paragraph or part shall for any reason be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair or invalidate the remainder of the act, but shall be confined in its operation to the clause, sentence, paragraph or part directly involved in the controversy in which the judgment is rendered.3 Power of Congress to Levy Income Taxes. The Sixteenth Amendment to the Federal Constitution authorized Congress "to lay and collect taxes on incomes from whatever source derived, without apportionment." As Chief Justice White has said, this amendment does not confer power to levy income taxes in a generic sense or to limit and distinguish between one kind of income tax and another, but the whole purpose was to relieve all income taxes, when imposed, from apportionment; in short, doing away with the principle upon which the case 5 holding the 1894 Law unconstitutional was decided. The amendment places no limitation as to the nature and character of the income taxes which it authorizes. Con 2 Field v. Clark, 143 U. S. 649; Rainey v. U. S., 232 U. S. 308. 3 Revenue Act of 1918, § 1401. 4 Brushaber v. Union Pacific R. R. Co., 240 U. S. 1. 5 Pollock v. Farmers Loan & Trust Co., 157 U. S. 429; 158 U. S. gress derives from the Constitution its powers "to lay and collect taxes, duties, imposts and excises." This power is exhaustive and embraces every conceivable power of taxation, limited only by the constitutional provisions that "all duties, imposts and excises shall be uniform, throughout the United States," that "direct taxes shall be apportioned among the several states" and that "no capitation or other direct tax, shall be laid, unless in proportion to the census. 199 The Sixteenth Amendment removed the limitation of apportionment, but did not enlarge the power of Congress. Taxing Gains and Profits from Sale of Property. The decision in Gray v. Darlington 10 has sometimes been mentioned as placing a limitation on the power of Congress to tax profits arising from the sale of capital assets, on the ground that the word "income" as used in the Sixteenth Amendment was used in the sense in which it had theretofore been defined in this case.11 The facts in Gray v. Darlington were that Darlington, who was apparently neither a merchant nor a trader, in 1865, being the owner of certain United States Treasury notes, exchanged them for United States bonds. Two years later the Income Tax Law of 1867 was enacted, and in 1869, two years after the incidence of the tax, he sold the bonds at an advance of $20,000 over the cost of the notes. Upon this amount was levied a tax of five per centum as gains, profits and 6 Constitution of the United States, Art. 1, § 8. 7 Id. Art. 1, § 8, Cl. 1. 8 Id. Art. 1, § 2, Cl. 3. 9 Id. Art. 1, § 9, Cl. 4. 10 Gray v. Darlington, 15 Wall. 63. 1166* The word income must be presumed to have been used in the constitutional amendment (16th) in the sense in which the Supreme Court had theretofore defined it, if a judicial definition had been clearly given." Towne v. Eisner, 242 Fed. 702. In reversing this decision (245 U. S. 418) the Supreme Court expressed no disapproval of the statement quoted from the opinion of the lower court, and Judge Hand's remark seems to be a correct statement in general. See also Western Union Tel. Co. v. Julian, 169 Fed. 166. income of the year 1869. Darlington paid the tax under protest and sued to recover, and prevailed. While the only question before the court was the extent to which Congress had intended by the Act of 1867 to tax gains, profits and income and the decision hinged on a consideration of the particular language of the 1867 Law, the court defined the term income more generally perhaps than was necessary. It is said in part: "The question presented is whether the advance 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 during a series of years can, in no just sense, be considered the gains, profits or income of any one particular 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 statute looks, with some exceptions, for subjects of taxation only to annual gains, profits and income. Its general language is 'that there shall be levied, collected and paid annually upon the gains, profits and income of every person,' derived from certain specified sources a tax of five per cent., and that this tax shall be 'assessed, collected, and paid upon the gains, profits, and income for the year ending the 31st of December next preceding the time for levying, collecting, and paying said tax.' 12 This language has only one meaning, and that is that the assessment, collection, and payment prescribed are to be made upon the annual products or income of one's property or labor, or such gains or profits as may be realized from a business transaction begun and completed during the preceding year. There are exceptions, as already intimated, to the general rule of assessment thus prescribed. One of these exceptions is expressed in the 12 14 Stat. at Large, pp. 477, 478, § 13 statute, and relates to profits upon sales of real property, requiring, in the estimation of gains, the profits of such sales to be included where the property has been purchased, not only within the preceding year, but within the two previous years. Another exception is implied from the provision of the statute which requires all gains, profits, and income derived from any source whatever, in addition to the sources enumerated, to be included in the estimation of the assessor. The estimation must, therefore, necessarily embrace gains and profits from trade and commerce, and these, for their successful prosecution, often require property to be held over a year. In the estimation of gains of any one year the trader and merchant will, in consequence, often be compelled to include the amount received upon goods sold over their cost which were purchased in a previous year. Indeed, in the estimation of the gains and profits of a trading or commercial business for any one year, the result of many transactions have generally to be taken into account which originated previously. Except, however, in these and similar cases, and in the cases of sales of real property, the statute only applies to such gains, profits, and income as are strictly acquisitions made during the year preceding that in which the assessment is levied and collected. 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. The rule adopted by the officers of the revenue in the present case would justify them in treating as gains of one year the increase in the value of property extending through any number of years, through even the entire century. The actual advance in value of property over its cost may, in fact, reach its height years before its sale; the value of the property may, in truth, be less at the time of the sale than at any previous period in ten |