1. Profit realized upon the sale of stocks held as an investment
is income, and so much of it as accrued after March 1, 1913, is
taxable under the Income Tax Laws of 1916, 1917, and the Sixteenth
Amendment. P.
255 U. S. 534.
Merchants' Loan & Trust Co. v. Smietanka, ante,
255 U. S. 509.
2. The statute imposes the income tax on the proceeds of a sale
of personal property to the extent only that gains are derived
therefrom by the vendor, and § 2(c) is applicable only where a gain
over the original capital investment has been realized after March
1, 1913. P.
255 U. S.
535.
Reversed in part, affirmed in part.
The case is stated in the opinion.
Page 255 U. S. 533
MR. JUSTICE CLARKE delivered the opinion of the Court.
The plaintiff in error sued the defendant, a collector of
internal revenue, to recover income taxes assessed in 1920 for the
year 1916 and paid under protest to avoid penalties. A demurrer to
the complaint was sustained, and the constitutional validity of a
law of the United States is so involved that the case is properly
here by writ of error.
Towne v. Eisner, 245 U.
S. 418.
Two transactions are involved.
(1) In 1912, the plaintiff in error purchased 1,000 shares of
the capital stock of a mining company for which he paid $500. It is
averred that the stock was worth $695 on March 1, 1913, and that it
was sold in March, 1916, for $13,931.22. The tax which the
plaintiff in error seeks to recover was assessed on the difference
between the
Page 255 U. S. 534
value of the stock on March 1, 1913, and the amount for which it
was sold.
(2) The plaintiff in error, being the owner of shares of the
capital stock of another corporation, in 1912 exchanged them for
stock in a reorganized company of the then value of $291,600. It is
averred and admitted that, on March 1, 1913, the value of this
stock was $148,635.50, and that it was sold in 1916 for
$269,346.25. Although it is thus apparent that the stock involved
was of less value on March 1, 1913, than when it was acquired, and
that it was ultimately sold at a loss to the owner, nevertheless
the collector assessed the tax on the difference between the value
on March 1, 1913, and the amount for which it was sold.
The plaintiff in error seeks to recover the whole of these two
assessments.
The same contention is made with respect to each of these
payments as was made in No. 608,
Merchants' Loan & Trust
Co. v. Smietanka, ante, 255 U. S. 509,
viz., that the amounts realized from the sales of the
stocks were, in their inherent nature, capital, as distinguished
from income, being an increment in value of the securities while
owned and held as an investment, and therefore not taxable under
the Revenue Act of 1916 (39 Stat. 756), as amended in 1917 (40
Stat. 300), or under any constitutional law.
With respect to the first payment. It is plain that this
assessment was on the profit accruing after March 1, 1913, the
effective date of the act, realized to the owner by the sale after
deducting his capital investment. The question involved is ruled by
No. 608,
supra, and the amount was properly taxed.
As to the second payment. The government confesses error in the
judgment with respect to this assessment. The stock was sold in the
year for which the tax was assessed for $22,253.75 less than its
value when it was
Page 255 U. S. 535
acquired, but for $120,710.75 more than its value on March 1,
1913, and the tax was assessed on the latter amount.
The act under which the assessment was made provides that the
net income of a
"taxable person shall include
gains, profits, and
income derived from . . . sales or dealings in property, whether
real or personal . . . or
gains or profits and income
derived from any source whatever."
9 Stat. 757; 40 Stat. 300, 307.
Section 2(c) of this same act provides that
"for the purpose of ascertaining the gain derived from the sale
or other disposition of property, 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."
And the definition of "income" approved by this Court is:
"'The
gain derived from capital, from labor, or from
both combined,' provided it be understood to include profits gained
through sale or conversion of capital assets."
Eisner v. Macomber, 252 U. S. 189,
252 U. S.
207.
It is thus very plain that the statute imposes the income tax on
the proceeds of the sale of personal property to the extent only
that gains are derived therefrom by the vendor, and we therefore
agree with the Solicitor General that, since no gain was realized
on this investment by the plaintiff in error, no tax should have
been assessed against him.
Section 2(c) is applicable only where a gain over the original
capital investment has been realized after March 1, 1913, from a
sale or other disposition of property.
It results that the judgment of the district court as to the
first assessment, as we have described it, is affirmed, that as to
the second assessment it is reversed, and the case
Page 255 U. S. 536
is remanded to that court for further proceedings in conformity
with this opinion.
Reversed in part.
Affirmed in part.
MR. JUSTICE HOLMES and MR. JUSTICE BRANDEIS, because of prior
decisions of the Court, concur only in the judgment.