1. A provision in a will creating a trust that accretions of
selling value shall be considered principal and not income cannot
render them nontaxable under the income tax law. P.
255 U. S.
516.
2. A trustee, invested by will with full dominion over an
estate, in trust to pay the net income to the testator's widow for
life, and afterwards to use it for the benefit of his children and
to pay over their shares as they reached a certain age, sold
certain corporate stock, part of the original assets, for a price
greater than their cash
Page 255 U. S. 510
value on March 1, 1913.
Held (no earlier value being
involved) that the gain after March 1, 1913, was taxable a income,
for the year when the sale was made, to the trustee as a "taxable
person," under the Income Tax Law of September 8, 1916, as amended
by the Law of October 3, 1917. P.
255 U. S. 516.
Cf. Goodrich v. Edwards, post, 255 U. S. 527;
Walsh v. Brewster, post, 255 U. S. 536.
3. Income, within the meaning of the Sixteenth Amendment, the
Income Tax Act of 1913, 1916, 1917, and the Corporation Tax Act of
1909, is a gain derived from capital, from labor, or from both
combined, including profit gained through sale or conversion of
capital assets. P.
255 U. S. 517.
Eisner v. Macomber, 252 U. S. 189,
252 U. S.
207.
4. It includes the gain from capital realized by a single
isolated sale of property held as an investment, as well a profit
realized by sales in a business of buying and selling such
property. P.
255 U. S. 520.
Gray v.
Darlington, 15 Wall. 63, and
Lynch v.
Turrish, 247 U. S. 221,
distinguished.
Affirmed.
The case is stated in the opinion.
Page 255 U. S. 514
MR. JUSTICE CLARKE delivered the opinion of the Court.
A writ of error brings this case here for review of a judgment
of the District Court of the United States for the Northern
District of Illinois sustaining a demurrer to a declaration in
assumpsit to recover an assessment of taxes for the year 1917 made
under warrant of the Income Tax Act of Congress approved September
8, 1916 (39 Stat. c. 463, p. 756), as amended by the act approved
October 3, 1917, c. 63, 40 Stat. 300. Payment was made under
protest, and the claim to recover is based upon the contention that
the fund taxed was not "income" within the scope of the Sixteenth
Amendment to the Constitution of the United States, and that the
effect given by the lower court to the act of Congress cited
renders it unconstitutional and void. This is sufficient to sustain
the writ of error.
Towne v. Eisner, 245 U.
S. 418.
Arthur Ryerson died in 1912, and the plaintiff in error is
trustee under his will of property the net income of which was
directed to be paid to his widow during her life and after her
death to be used for the benefit of his children, or their
representatives, until each child should arrive at 25 years of age,
when each should receive his or her share of the trust fund.
The trustee was given the fullest possible dominion over the
trust estate. It was made the final judge as to what "net income"
of the estate should be, and its determination in this respect was
made binding upon all parties interested therein, "except that it
is my will that stock
Page 255 U. S. 515
dividends and accretions of selling values shall be considered
principal, and not income."
The widow and four children were living in 1917.
Among the assets which came to the custody of the trustee were
9,522 shares of the capital stock of Joseph T. Ryerson & Son, a
corporation. It is averred that the cash value of these shares, on
March 1, 1913, was $561,798, and that they were sold for
$1,280,996.64, on February 2, 1917. The Commissioner of Internal
Revenue treated the difference between the value of the stock on
March 1, 1913, and the amount for which it was sold on February 2,
1917, as income for the year 1917, and upon that amount assessed
the tax which was paid. No question is made as to the amount of the
tax if the collection of it was lawful.
The ground of the protest, and the argument for the plaintiff in
error here, is that the sum charged as "income" represented
appreciation in the value of the capital assets of the estate which
was not "income" within the meaning of the Sixteenth Amendment, and
therefore could not constitutionally be taxed, without
apportionment, as required by § 2, clause 3, and by § 9, clause 4,
of Article I of the Constitution of the United States.
It is first argued that the increase in value of the stock could
not be lawfully taxed under the act of Congress because it was not
income to the widow, for she did not receive it in 1917, and never
can receive it, that it was not income in that year to the
children, for they did not then, and may never, receive it, and
that it was not income to the trustee, not only because the will
creating the trust required that "stock dividends and accretions of
selling value shall be considered principal and not income," but
also because. in the "common understanding." the term "income" does
not comprehend such a gain or profit as we have here, which it is
contended is really an accretion to capital. and therefore not
constitutionally taxable under
Eisner v. Macomber,
252 U. S. 189.
Page 255 U. S. 516
The provision of the will may be disregarded. It was not within
the power of the testator to render the fund nontaxable.
Assuming for the present that there was constitutional power to
tax such a gain or profit as is here involved, are the terms of the
statute comprehensive enough to include it?
Section 2(a) of the act of September 8, 1916 (39 Stat. 757, 40
Stat. 300, 307, § 212), applicable to the case, defines the income
of "a taxable person" as including
"gains, profits, and income derived from . . . sales, or
dealings in property, whether real or personal, growing out of the
ownership or use of or interest in real or personal property . . .
or gains or profits and income derived from any source
whatever."
Plainly the gain we are considering was derived from the sale of
personal property, and very certainly the comprehensive last clause
"gains or profits and income derived from any source whatever" must
also include it if the trustee was a "taxable person" within the
meaning of the act when the assessment was made.
That the trustee was such a "taxable person" is clear from §
1204(1)(c) of the Act of October 3, 1917, 40 Stat. 331, which
requires that
"trustees, executors . . . and all persons, corporations, or
associations, acting in any fiduciary capacity shall make and
render a return of the income of the person, trust, or estate for
whom or which they act, and be subject to all the provisions of
this title which apply to individuals."
And § 2(b) of the Act of September 8, 1916,
supra,
specifically declares that the
"income received by estates of deceased persons during the
period of administration or settlement of the estate, . . . or any
kind of property held in trust, including such income accumulated
in trust for the benefit of unborn or unascertained persons, or
persons with contingent interests, and income held for
Page 255 U. S. 517
future distribution under the terms of the will or trust shall
be likewise taxed, the tax in each instance, except when the income
is returned for the purpose of the tax by the beneficiary, to be
assessed to the executor, administrator, or trustee, as the case
may be."
Further, § 2(c) clearly shows that it was the purpose of
Congress to tax gains, derived from such a sale as we have here, in
the manner in which this fund was assessed, by providing that,
"for the purpose of ascertaining the gain derived from the sale
or other disposition of property, real, personal, or mixed,
acquired before March 1, 1913, the fair market price or value of
such property as of March 1, 1913, shall be the basis for
determining the amount of such gain derived."
Thus, it is the plainly expressed purpose of the act of Congress
to treat such a trustee as we have here as a "taxable person" and,
for the purposes of the act, to deal with the income received for
others precisely as if the beneficiaries had received it in
person.
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, c. 6, 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 "the gain derived from capital, from
labor, or from both combined."
Stratton's Independence v.
Howbert, 231 U. S. 399,
231 U. S.
415.
This definition, frequently approved by this Court, received an
addition in its latest income tax decision which
Page 255 U. S. 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,
252 U. S.
207.
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:
In
Hays v. Gauley Mountain Coal Co., 247 U.
S. 189, a coal company, without corporate authority to
trade in stocks, purchased shares in another coal mining company in
1902 which it sold in 1911, realizing a profit of $210,000. Over
the same objection made in this case, that the fund was merely
converted capital, this Court held that so much of the profit upon
the sale of the stock as accrued subsequent to the effective date
of the act was properly treated as income received during 1911, in
assessing the tax for that year.
In
United States v. Cleveland, Cincinnati, Chicago & St.
Louis Railway Co., 247 U. S. 195, a
railroad company purchased shares of stock in another railroad
company in 1900 which it sold in 1909, realizing a profit of
$814,000. Here, again, over the same objection, this Court held
that the part of the profit which accrued subsequent to the
effective date of the act was properly treated as income received
during the year 1909 for the purposes of the act.
Thus, from the price realized from the sale of stock by two
investors, as distinguished from dealers, and from a single
transaction, as distinguished from a course of business, the value
of the stock on the effective date of the tax act was deducted, and
the resulting gain was treated by this Court as "income" by which
the tax was measured.
It is obvious that these decisions in principle rule the
Page 255 U. S. 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,
247 U. S. 335,
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. 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.
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 believed 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.
Doyle v. Mitchell Brothers Co., 247 U.
S. 179,
247 U. S. 185;
Eisner v. Macomber, 252 U. S. 189,
252 U. S.
206-207. Notwithstanding the full argument heard in this
case and in the series of cases now under consideration, we
continue entirely satisfied with that definition, and, since the
fund here taxed was the amount realized from the sale of the stock
in 1917, less the capital investment
Page 255 U. S. 520
as determined by the trustee as of March 1, 1913, it is palpable
that it was a "gain or profit" "produced by" or "derived from" that
investment, and that it "proceeded" and was "severed" or rendered
severable from it by the sale for cash, and thereby became that
"realized gain" which has been repeatedly declared to be taxable
income within the meaning of the constitutional amendment and the
acts of Congress.
Doyle v. Mitchell Brothers Co. and
Eisner v. Macomber, supra.
It is elaborately argued in this case, in No. 609,
Eldorado
Coal & Mining Co. v. Harry W. Mager, Collector, etc.,
submitted with it, and in other cases since argued that the word
"income," as used in the Sixteenth Amendment and in the Income Tax
Act we are considering, does not include the gain from capital
realized by a single isolated sale of property, but that only the
profits realized from sales by one engaged in buying and selling as
a business -- a merchant, a real estate agent, or broker --
constitute income which may be taxed.
It is sufficient to say of this contention that no such
distinction was recognized in the Civil War Income Tax Act of 1867,
c. 169, 14 Stat. 471, 478, or in the Act of 1894, c. 349, 28 Stat.
509, 553, declared unconstitutional on an unrelated ground; that it
was not recognized in determining income under the Excise Tax Act
of 1909, as the cases cited
supra show; that it is not to
be found, in terms, in any of the income tax provisions of the
Internal Revenue Acts of 1913, 1916, 1917, or 1919; that the
definition of the word "income" as used in the Sixteenth Amendment,
which has been developed by this Court, does not recognize any such
distinction; that, in departmental practice for now seven years,
such a rule has not been applied, and that there is no essential
difference in the nature of the transaction or in the relation of
the profit to the capital involved, whether the sale or conversion
be a single isolated transaction or one of many.
Page 255 U. S. 521
The interesting and ingenious argument, which is earnestly
pressed upon us, that this distinction is so fundamental and
obvious that it must be assumed to be a part of the "general
understanding" of the meaning of the word "income" fails to
convince us that a construction should be adopted which would, in a
large measure, defeat the purpose of the amendment.
The opinions of the courts in dealing with the rights of life
tenants and remaindermen in gains derived from invested capital,
especially in dividends paid by corporations, are of little value
in determining such a question as we have here, influenced as such
decisions are by the terms of the instruments creating the trusts
involved and by the various rules adopted in the various
jurisdictions for attaining results thought to be equitable. Here,
the trustee, acting within its powers, sold the stock, as it might
have sold a building, and realized a profit of $700,000, which at
once became assets in its possession free for any disposition
within the scope of the trust, but, for the purposes of taxation,
to be treated as if the trustee were the sole owner.
Gray v.
Darlington, 15 Wall. 63, much relied upon in
argument, was sufficiently distinguished from cases such as we have
here in
Hays v. Gauley Mountain Coal Co., 247 U.
S. 189,
247 U. S. 191.
The differences in the statutes involved render inapplicable the
expressions in the opinion in that case (not necessary to the
decision of it) as to distinctions between income and increase of
capital.
In
Lynch v. Turrish, 247 U. S. 221,
also much relied upon, it is expressly stated that, "according to
the fact admitted, there was no increase after that date [March 1,
1913], and therefore no increase subject to the law." For this
reason, the questions here discussed and decided were not there
presented.
The British income tax decisions are interpretations of statutes
so wholly different in their wording from the
Page 255 U. S. 522
acts of Congress which we are considering that they are quite
without value in arriving at the construction of the laws here
involved.
Another assessment on a small gain realized upon a purchase,
made in 1914, of bonds which were duly called for redemption and
paid in 1917, does not present any questions other than those which
we have discussed, and therefore it does not call for separate
consideration.
The judgment of the district court is
Affirmed.
MR. JUSTICE HOLMES and MR. JUSTICE BRANDEIS, because of prior
decisions of the Court, concur in the judgment.