"As has been repeatedly remarked, the Corporation Tax Act of 1909 was not intended to be and is not, in any proper sense, an income tax law. This Court had decided in the Pollock case that the income tax law of 1894 amounted in effect to a direct tax upon property, and was invalid because not apportioned according to populations, as prescribed by the Constitution. The Act of 1909 avoided this difficulty by imposing not an income tax, but an excise tax upon the conduct of business in a corporate capacity, measuring, however, the amount of tax by the income of the corporation, with certain qualifications prescribed by the act itself. [Flint v. Stone Tracy Co. 220 U. S. 107; McCoach v. Minehill Co., 228 U. S. 295; United States v. Whitridge (decided at this term, ante, P. 144)]

"The sale outright of a mining property might be fairly described as a mere conversion of the capital from land into money. But when a company is digging pits, sinking shafts, tunneling, drifting, stoping, drilling, blasting, and hoisting ores, it is employing capital and labor in transmuting a part of the realty into personalty, and putting it into marketable form. The very process of mining is, in a sense, equivalent in its results to a manufacturing process. And, however the operation shall be described, the transaction is indubitably "business" within the fair meaning of the Act of 1909, and the gains derived from it are properly and strictly the income from that business; for "income" may be defined as the gain derived from capital, from labor, or from both combined, and here we have combined operations of capital and labor. As to the alleged inequality of operation between mining corporations and others, it is, of course, true that the revenues derived from the working of mines result to some extent in the exhaustion of the capital. But the same is true of the earnings of the human brain and hand when unaided by capital, yet such earnings are commonly dealt with in legislation as income. So it may be said of many manufacturing corporations that are clearly subject to the Act of 1909, especially of those that have to do with the production of patented articles; although it may be foretold from the beginning that the manufacture will be profitable only for a limited time at the end of which the capital value of the plant must be subject to material depletion, the annual gains of such corporations are certainly to be taken as income for the purpose of measuring the amount of the tax."

"...Included in the right of personal liberty and the right of private property - partaking of the nature of each - is the right to make contracts for the acquisition of property. Chief among such contracts is that of personal employment, by which labor and other services are exchanged for money or other forms of property. If this right be struck down or arbitrarily be interfered with, there is a substantial impairment of liberty in the long-established constitutional sense. The right is as essential to the laborer as to the capitalist, to the poor as to the rich; for the vast majority of persons have no other honest way to begin to acquire property, save by working for money."

"Again the situation is aptly illustrated by the various acts taxing income derived from property of every kind and nature, which were enacted beginning in 1861 and lasting during what may be termed the Civil War period. It is not disputable that these latter taxing laws were classed under the head of excises duties and imposts because it was assumed that they were of that character. ...And this practical construction came in theory to be the accepted one since it was adopted without dissent by the most eminent of text writers..."

"the duty would arise to disregard form and consider substance alone, and hence subject the tax to the regulation as to apportionment which otherwise as an excise would not apply to it."

"such taxes were removed from the great class of excises, duties and imposts subject to the rule of uniformity and were placed (incorrectly) under the other or direct class."

"The Amendment... excludes the criterion ...for the purpose of destroying the classifications of the Constitution by taking an excise (the income tax) out of the class to which it inherently belongs and transferring it to a class in which it cannot be placed consistently with the requirements of the Constitution."

"We are of opinion, however, that the confusion is not inherent, but rather arises from the conclusion that the 16th Amendment provides for a hitherto unknown power of taxation; that is, a power to levy an income tax which, although direct, should not be subject to the regulation of apportionment applicable to all other direct taxes. And the far-reaching effect of this erroneous assumption will be made clear by generalizing the many contentions advanced in argument to support it..."

"[Taxation of "income" is] in its nature an excise entitled to be enforced as such unless and until it was concluded that to enforce it would amount to accomplishing the result which the requirement as to apportionment of direct taxation was adopted to prevent, in which case the duty would arise to disregard form and consider substance alone, and hence subject the tax to the regulation as to apportionment which otherwise as an excise would not apply to it..."
(Quoting and reiterating language in its ruling in Pollock v. Farmer's Loan and Trust.)

"But it clearly results that the proposition and the contentions under it, if acceded to, would cause one provision of the Constitution to destroy another: that is, they would result in bringing the provisions of the Amendment exempting a direct tax from apportionment into irreconcilable conflict with the general requirement that all direct taxes be apportioned. Moreover, the tax authorized by the Amendment, being direct, would not come under the rule of uniformity applicable under the Constitution to other than direct taxes, and thus it would come to pass that the result of the Amendment would be to authorize a particular direct tax not subject either to apportionment or to the rule of uniformity... This result ...would create radical and destructive changes in our constitutional system and multiply confusion."

"In the matter of taxation, the Constitution recognizes these two great classes of direct and indirect taxes and lays down two rules by which their imposition must be governed namely: The rule of apportionment as to direct taxes and the rule of uniformity as to duties, imposts and excises."

"It is clear on the face of this text (the 16th Amendment) that it does not purport to confer power to levy income taxes in a generic sense - an authority already possessed and never questioned - or to limit and distinguish between one kind of income taxes and another, but that the whole purpose of the Amendment was to relieve all income taxes when imposed from apportionment from a consideration of the sources whence the income was derived."

"The contention that the Amendment treats a tax on income as a direct tax although it is relieved from apportionment and is necessarily therefore not subject to the rule of uniformity as such rule only applies to taxes which are not direct, thus destroying the two great classifications which have been recognized and enforced from the beginning, is also wholly without foundation"

"The fact that taxation on income was in its nature an excise entitled to be enforced as such... that taxes on such income had been sustained as excise taxes in the past."

"The Amendment contains nothing repudiating or challenging the ruling in the Pollock case."

"...the conclusion reached in the Pollock Case did not in any degree involve holding that income taxes generically and necessarily came within the class of direct taxes on property, but, on the contrary, recognized the fact that taxation on income was in its nature an excise entitled to be enforced as such unless and until it was concluded that to enforce it would amount to accomplishing the result which the requirement as to apportionment of direct taxation was adopted to prevent in which case the duty would arise to disregard form and consider substance alone and hence subject the tax to the regulation as to apportionment which otherwise as an excise would not apply to it. Nothing could serve to make this clearer than to recall that in the Pollock Case, in so far as the law taxed incomes from other classes of property than real estate and invested personal property, that is, income from 'professions, trades, employments, or vocations', its validity was recognized; indeed, it was expressly declared that no dispute was made upon that subject, and attention was called to the fact that taxes on such income had been sustained as excise taxes in the past."

"...The confusion... arises from the conclusion that the Sixteenth Amendment provides for a hitherto unknown power of taxation; that is, a power to levy an income tax which, although direct, should not be subject to the regulation of apportionment applicable to all other direct taxes... an erroneous assumption... The purpose of the Amendment was... to accomplish the result intended; that is, the prevention of the resort to the sources from which a taxed income was derived in order to cause a direct tax on the income to be a direct tax on the source itself, and thereby take an income tax out of the class of excises, duties, and imposts, and place it in the class of direct taxes."

"The provisions of the Sixteenth Amendment conferred no new power of taxation, but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged, and being placed in the category of direct taxation subject to apportionment by a consideration of the sources from which the income was derived..."

"...it is the established rule not to extend taxing statutes beyond the clear import of the language used or to enlarge their operations so as to embrace matters not specifically pointed out. The Court further stated that in case of doubt the taxing statutes are construed most strongly against the Government, and in favor of those upon who the tax is sought to be laid."

"Whatever difficulty there may be about a precise and scientific definition of 'income', it imports, as used here, something entirely distinct from principle or capital either as a subject of taxation or as a measure of the tax; conveying rather the idea of gain or increase arising from corporate activities."

Southern Pacific Co. v. Lowe
No. 462
Argued March 4, 5, 6, 1918
Decided June 3, 1918

ERROR TO THE DISTRICT COURT OF THE UNITED STATES
FOR THE SOUTHERN DISTRICT OF NEW YORK


Syllabus
Accumulations that accrued to a corporation through surplus earnings or appreciation in property value, before the adoption of the Sixteenth Amendment (February, 1913), and the effective date (March, 1913), of the Income Tax Act of 1913 (Act October 3, 1913, c. 16, 38 Stat. 166), are to be regarded as its capital, not as its income for the purposes of that act.
[...]

We must reject in this case, as we have rejected in cases arising under the Corporation Excise Tax Act of 1909 (Doyle v. Mitchell Brothers Co., ante, 247 U. S. 179, and Hays v. Gauley Mountain Coal Co., ante, 247 U. S. 189), the broad contention submitted 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 circumstances accomplished, should be treated as gross income. Certainly the term "income" has no broader meaning in the 1913 act than in that of 1909 (see Stratton's Independence v. Howbert, 231 U. S. 399, 231 U. S. 416-417), and, for the present purpose, we assume there is no difference in its meaning as used in the two acts.

"Grant the validity of this law, and all that Congress would need to do, hereafter, in seeking to take over to its control any one of the great number of subjects of public interest, jurisdiction of which the states have never parted with, and which are reserved to them by the Tenth Amendment, would be to enact a detailed measure of complete regulation of the subject and enforce it by a so-called tax upon departures from it. To give such magic to the word 'tax' would be to break down all constitutional limitation of the powers of Congress and completely wipe out the sovereignty of the states."

It should be noted, too, that the court, speaking of the extent of the taxing power, used these cautionary words (8 Wall, 541):

"The Sixteenth Amendment must be construed in connection with the taxing clauses in the original Constitution and the effect attributed to them before the Amendment was adopted."

"A proper regard for its genesis... require that the (16th) Amendment shall not be extended by loose construction... so as to repeal or modify... those provisions of the Constitution that require an apportionment... for direct taxes upon property, real and personal [And wages and dividends are personal property]. This limitation still has an appropriate and important function, and is not to be overridden by Congress or disregarded by the courts."

"Congress cannot by any definition it may adopt conclude what "income" is, 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."

"After examining dictionaries in common use (Bouv. L.D.; Standard Dict.; Webster's Internat. Dict.; Century Dict.), we find little to add to the succinct definition adopted in two cases arising under the Corporation Tax Act of 1909 (Stratton's Independence v. Howbert, 231 U. S. 399, 415; Doyle v. Mitchell Bros. Co., 247 U. S. 179, 185), "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, to which it was applied in the Doyle case, p P. 183-185."

"The word 'income' as used in the Amendment does not include a stock dividend since such a dividend is capital and not income and can be taxed only if the tax is apportioned among the several states..."

No. 608.

Argued Jan. 11 and 12, 1921.
Decided March 28, 1921.

There remains the question, strenuously argued, whether this gain in four years of over $700,000 on an investment of about $500,000 is 'income' within the meaning of the Sixteenth Amendment to the Constitution of the United States.

The question is one of definition, and the answer to it may be found in recent decisions of this Court.

The Corporation Excise Tax Act of August 5, 1909 (36 Stat. 11, 112), was not an income tax law, but a definition of the word 'income' was so necessary in its administration that in an early case it was formulated as 'A gain derived from capital, from labor, or from both combined.' Stratton's Independence v. Howbert, 231 U.S. 399, 415 , 34 S. Sup. Ct. 136, 140 (58 L. Ed. 285).

This definition, frequently approved by this court, received an addition, in its latest income tax decision, which [255 U.S. 509, 518] is especially significant in its application to such a case as we have here, so that it now reads:

'Income may be defined as a gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through sale or conversion of capital assets.' Eisner v. Macomber, 252 U.S. 189, 207 , 40 S. Sup. Ct. 189, 193 (64 L. Ed. 521), 9 A. L. R. 1570.

The use made of this definition of 'income' in the decision of cases arising under the Corporation Excise Tax Act of August 5, 1909, and under the Income Tax Acts, is, we think, decisive of the case before us. Thus, in two cases arising under the Corporation Excise Tax Act:

[Hays v. Gauley Mountain Coal Co., 247 U.S. 189 , 38 Sup. Ct. 470 and United States v. Cleveland, Cincinnati, Chicago & St. Louis Railway Co., 247 U.S. 195 , 38 Sup. Ct. 472]

It is obvious that these decisions in principle rule the [255 U.S. 509, 519] case at bar if the word 'income' has the same meaning in the Income Tax Act of 1913 that it had in the Corporation Excise Tax Act of 1909, and that it has the same scope of meaning was in effect decided in Southern Pacific Co. v. Lowe, 247 U.S. 330, 335 , 38 S. Sup. Ct. 540, where it was assumed for the purposes of decision that there was no difference in its meaning as used in the act of 1909 and in the Income Tax Act of 1913 (38 Stat. 114). There can be no doubt that the word must be given the same meaning and content in the Income Tax Acts of 1916 and 1917 that it had in the act of 1913. When to this we add that in Eisner v. Macomber, supra, a case arising under the same Income Tax Act of 1916 which is here involved, the definition of 'income' which was applied was adopted from Stratton's Independence v. Howbert, supra, arising under the Corporation Excise Tax Act of 1909, with the addition that it should include 'profit gained through sale or conversion of capital assets,' there would seem to be no room to doubt that the word must be given the same meaning in all of the Income Tax Acts of Congress that was given to it in the Corporation Excise Tax Act, and that what that meaning is has now become definitely settled by decisions of this Court.

"[Income] must be given the same meaning, in all the Income Tax Acts of Congress that it was given in the Corporate Excise Tax Act [of 1909], and what that meaning is has become definitely settled by the decisions of this court. In determining the definition of the word 'income' thus arrived at, this court has consistently refused to enter into the refinements of lexicographers or economists, and has approved in the definitions quoted, what it believes to be the commonly understood meaning of the term which must have been in the minds of the people when they adopted the Sixteenth Amendment to the Constitution."

"The Sixteenth Amendment simply does not authorize the Congress to tax as 'incomes' every sort of revenue a taxpayer may receive. As the Supreme Court noted long ago, the 'Congress cannot make a thing income which is not so in fact.'"

...