The advance in the value of personal property during a series of
years does not constitute 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.
Accordingly, when bonds of the United States were sold by the
owner, after being held by him four years, at an advance of $20,000
over their cost to him, it was
held that this amount was
not taxable as "gains, profits, or income" of the owner for the
year in which the sale was made, under the amendatory Internal
Revenue Act of March 2, 1867.
An act of Congress of March 2, 1867, [
Footnote 1] provides that
"There shall be levied, collected, and paid
annually
upon the gains, profits, and income of every person, . . . whether
derived from any kind of property, rents, interest, dividends, or
salaries, or from any profession, trade, employment, or vocation, .
. . or from any other source whatever, . . . a tax of five
percentum on the amount so derived over $1,000. . . . And the tax
herein provided for 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."
The same section also provides (with some exceptions not
important to be mentioned), that
"In estimating the gains, profits, and income of any person,
there shall be included all incomes derived from interest upon
notes, bonds, and other securities of the United States, profits
realized within the year from sales of real estate purchased within
the year, or within two years previous to the year for which income
is estimated, . . . and all other gains, profits, and income
derived from any source whatever."
In this state of statutory law, W. Darlington brought the
present action against W. C. Gray Collector of Internal
Page 82 U. S. 64
Revenue, to recover the sum of $1,000, alleged to have been
illegally assessed and collected under the said law as gains,
profits, and income of him, the said Darlington, for the year 1869.
It appeared from the allegations of the declaration, that in 1865,
the plaintiff, being then the owner of certain United States
Treasury notes, exchanged them for United States five-twenty bonds;
that in 1869, he sold these bonds at an advance of $20,000 over the
cost of the Treasury notes, and that upon this amount the assistant
assessor of the United States for the collection district in
Pennsylvania within which the plaintiff resided, assessed a tax of
five percent, alleging it to be gains, profits, and income of the
plaintiff for that year; that on appeal to the assessor of the
district, and to the Commissioner of Internal Revenue, this
assessment was affirmed, and was transmitted to the defendant, as
collector of the district, for enforcement; and that upon the
latter's demand, with notice that, unless paid, he would collect
the same with penalty and interest, the tax was paid by the
plaintiff under protest.
To the declaration, setting forth substantially the facts above
stated, the defendant demurred. The demurrer was overruled by the
circuit court, and judgment given in favor of the plaintiff for the
amount paid by him, with interest and costs. The defendant brought
the case to this Court on writ of error, and assigned as error the
overruling of the demurrer.
MR. JUSTICE FIELD delivered the opinion of the Court.
In 1865, the plaintiff, being the owner of certain United States
Treasury notes, exchanged them for United States five-twenty bonds.
In 1869, he sold these bonds at an advance of twenty thousand
dollars over the cost of the Treasury notes, and upon this amount
the assistant assessor of the United States for the collection
district in Pennsylvania,
Page 82 U. S. 65
within which the plaintiff resided, assessed a tax of five
percent, alleging it to be gains, profits, and income of the
plaintiff for that year. On appeal to the assessor of the district,
and to the Commissioner of Internal Revenue, this assessment was
affirmed, and it was transmitted to the defendant, as collector of
the district, for enforcement. Upon the latter's demand the tax was
paid by the plaintiff under protest, and the present action was
brought to recover back the money.
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 anyone 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 percent, 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. [
Footnote 2]"
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
Page 82 U. S. 66
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 anyone 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 anyone
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 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 years,
yet, if the amount received
Page 82 U. S. 67
exceed the actual cost of the property, the excess is to be
treated, according to their views, as gains of the owner for the
year in which the sale takes place. We are satisfied that no such
result was intended by the statute.
Judgment affirmed.
Dissenting: THE CHIEF JUSTICE, and JUSTICES CLIFFORD and
BRADLEY.
[NOTE -- In view of the divided state of the court in giving
judgment in the above case, it may not be uninteresting to the
reader to know that from a letter, entitled to credit, in the
possession of the Reporter, it appears that the point decided in
the case, had been ruled in the same way in the Third Circuit, by
the late MR. JUSTICE GRIER, in the case of
Bennet v.
Baker, tried on the 7th of April, 1865; the late honored
Justice having been, says the letter, "very clear and emphatic in
his opinion."]
[
Footnote 1]
14 Stat. at Large 477-478.
[
Footnote 2]
14 Stat. at Large 477-478, ยง 13.
