1. Under par. (2), § 202 of the Revenue Act of 1921, where one
who purchased shares of stock after February 28, 1913, gave them to
another after December 31, 1920, when their market value had
increased over the investment, and the donee afterwards sold them
at a price still higher, the gain taxable to the donee is the
difference between the price realized by him and the price paid by
the donor. P.
278 U. S.
481.
Page 278 U. S. 471
2. In such case, Congress has power under the Sixteenth
Amendment to treat the entire increase in value, when separated
from the investment by the sale, as income of the donee. P.
278 U. S.
482.
20 F.2d 561, affirmed.
Certiorari, 275 U.S. 520, to judgments of the circuit court of
appeals reversing judgments in favor of the present petitioners, 15
F.2d 890, in actions against the Collector to recover money paid as
income taxes.
Page 278 U. S. 478
MR. JUSTICE McREYNOLDS delivered the opinion of the Court.
Petitioners, who are donees of stocks, seek to recover income
taxes exacted because of advancement in the market value of those
stocks while owned by the donors. The facts are not in dispute.
Both causes must turn upon the effect of paragraph (2), § 202,
Revenue Act 1921 (c. 136,
Page 278 U. S. 479
42 Stat. 227, 229), which prescribes the basis for estimating
taxable gain when one disposes of property which came to him by
gift. The records do not differ essentially, and a statement of the
material circumstances disclosed by No. 16 will suffice.
During the calendar years 1921 and 1922, the father of
petitioner, Elizabeth C. Taft, gave her certain shares of Nash
Motors Company stock, then more valuable than when acquired by him.
She sold them during 1923 for more than their market value when the
gift was made.
The United States demanded an income tax reckoned upon the
difference between cost to the donor and price received by the
donee. She paid accordingly, and sued to recover the portion
imposed because of the advance in value while the donor owned the
stock. The right to tax the increase in value after the gift is not
denied.
Abstractly stated, this is the problem:
In 1916, A purchased 100 shares of stock for $1,000, which he
held until 1923, when their fair market value had become $2,000. He
then gave them to B, who sold them during the year 1923 for $5,000.
The United States claim that, under the Revenue Act of 1921, B must
pay income tax upon $4,000, as realized profits. B maintains that
only $3,000 -- the appreciation during her ownership -- can be
regarded as income; that the increase during the donor's ownership
is not income assessable against her within intendment of the
Sixteenth Amendment.
The district court ruled against the United States; the circuit
court of appeals held with them.
Act of Congress approved November 23, 1921, Chap. 136, 42 Stat.
227, 229, 237 --
"Sec. 202. (a) That the basis for ascertaining the gain derived
or loss sustained from a sale or other disposition of property,
real, personal, or mixed, acquired after February 28, 1913, shall
be the cost of such property; except that --"
"(1) . . . "
Page 278 U. S. 480
"(2) In the case of such property, acquired by gift after
December 31, 1920, the basis shall be the same as that which it
would have in the hands of the donor or the last preceding owner by
whom it was not acquired by gift. If the facts necessary to
determine such basis are unknown to the donee, the Commissioner
shall, if possible, obtain such facts from such donor or last
preceding owner, or any other person cognizant thereof. If the
Commissioner finds it impossible to obtain such facts, the basis
shall be the value of such property as found by the Commissioner as
of the date or approximate date at which, according to the best
information the Commissioner is able to obtain, such property was
acquired by such donor or last preceding owner. In the case of such
property acquired by gift on or before December 31, 1920, the basis
for ascertaining gain or loss from a sale or other disposition
thereof shall be the fair market price or value of such property at
the time of such acquisition."
"Sec. 213. That for the purposes of this title (except as
otherwise provided in § 233) the term 'gross income' --"
"(a) Includes gains, profits, and income derived from salaries,
wages, or compensation for personal service . . . or gains or
profits and income derived from any source whatever. The amount of
all such items (except as provided in subdivision (e) of § 201)
shall be included in the gross income for the taxable year in which
received by the taxpayer, unless, under methods of accounting
permitted under subdivision (b) of § 212, any such amounts are to
be properly accounted for as of a different period; but"
"(b) Does not include the following items, which shall be exempt
from taxation under this title;"
"
* * * *"
"(3) The value of property acquired by gift, bequest, devise, or
descent (but the income from such property shall be included in
gross income). . . . "
Page 278 U. S. 481
We think the manifest purpose of Congress expressed in paragraph
(2), § 202,
supra, was to require the petitioner to pay
the enacted tax.
The only question subject to serious controversy is whether
Congress had power to authorize the exaction.
It is said that the gift became a capital asset of the donee to
the extent of its value when received, and therefore when disposed
of by her no part of that value could be treated as taxable income
in her hands.
The Sixteenth Amendment provides:
"The Congress shall have power to lay and collect taxes on
incomes, from whatever source derived, without apportionment among
the several states, and without regard to any census or
enumeration."
Income is the thing which may be taxed -- income from any
source. The amendment does not attempt to define income or to
designate how taxes may be laid thereon, or how they may be
enforced.
Under former decisions here, the settled doctrine is that the
Sixteenth Amendment confers no power upon Congress to define and
tax as income without apportionment something which theretofore
could not have been properly regarded as income.
Also, this Court has declared:
"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."
Eisner v. Macomber, 252 U. S. 189,
252 U. S. 207.
The "gain derived from capital," within the definition, is
"not a gain accruing to capital, nor a growth or increment of
value in the investment, but a gain, a profit, something of
exchangeable value proceeding from the property, severed from the
capital however invested, and coming in -- that is, received or
drawn by the claimant for his separate use, benefit and
disposal."
United States v. Phellis, 257 U.
S. 156,
257 U. S.
169.
Page 278 U. S. 482
If, instead of giving the stock to petitioner, the donor had
sold it at market value, the excess over the capital he invested
(cost) would have been income therefrom and subject to taxation
under the Sixteenth Amendment. He would have been obliged to share
the realized gain with the United States. He held the stock -- the
investment -- subject to the right of the sovereign to take part of
any increase in its value when separated through sale or conversion
and reduced to his possession. Could he, contrary to the express
will of Congress, by mere gift enable another to hold this stock
free from such right, deprive the sovereign of the possibility of
taxing the appreciation when actually severed, and convert the
entire property into a capital asset of the donee, who invested
nothing, as though the latter had purchased at the market price?
And, after a still further enhancement of the property, could the
donee make a second gift with like effect, etc.? We think not.
In truth, the stock represented only a single investment of
capital -- that made by the donor. And when, through sale or
conversion, the increase was separated therefrom, it became income
from that investment in the hands of the recipient subject to
taxation according to the very words of the Sixteenth Amendment. By
requiring the recipient of the entire increase to pay a part into
the public treasury, Congress deprived her of no right and
subjected her to no hardship. She accepted the gift with knowledge
of the statute and, as to the property received, voluntarily
assumed the position of her donor. When she sold the stock, she
actually got the original sum invested, plus the entire
appreciation and out of the latter only was she called on to pay
the tax demanded.
The provision of the statute under consideration seems entirely
appropriate for enforcing a general scheme of lawful taxation. To
accept the view urged in behalf of petitioner undoubtedly would
defeat, to some extent, the
Page 278 U. S. 483
purpose of Congress to take part of all gain derived from
capital investments. To prevent that result and insure enforcement
of its proper policy, Congress had power to require that, for
purposes of taxation, the donee should accept the position of the
donor in respect of the thing received. And, in so doing, it acted
neither unreasonably nor arbitrarily.
The power of Congress to require a succeeding owner, in respect
of taxation, to assume the place of his predecessor is pointed out
by
United States v. Phellis, 257 U.
S. 156,
257 U. S.
171:
"Where, as in this case, the dividend constitutes a distribution
of profits accumulated during an extended period and bears a large
proportion to the par value of the stock, if an investor happened
to buy stock shortly before the dividend, paying a price enhanced
by an estimate of the capital plus the surplus of the company, and
after distribution of the surplus, with corresponding reduction in
the intrinsic and market value of the shares, he were called upon
to pay a tax upon the dividend received, it might look in his case
like a tax upon his capital. But it is only apparently so. In
buying at a price that reflected the accumulated profits, he, of
course, acquired as a part of the valuable rights purchased the
prospect of a dividend from the accumulations -- bought 'dividend
on,' as the phrase goes -- and necessarily took subject to the
burden of the income tax proper to be assessed against him by
reason of the dividend if and when made. He simply stepped into the
shoes, in this, as in other respects, of the stockholder whose
shares he acquired, and presumably the prospect of a dividend
influenced the price paid, and was discounted by the prospect of an
income tax to be paid thereon. In short, the question whether a
dividend made out of company profits constitutes income of the
stockholder is not affected by antecedent transfers of the stock
from hand to hand. "
Page 278 U. S. 484
There is nothing in the Constitution which lends support to the
theory that gain actually resulting from the increased value of
capital can be treated as taxable income in the hands of the
recipient only so far as the increase occurred while he owned the
property. And
Irwin v. Gavit, 268 U.
S. 161,
268 U. S. 167,
is to the contrary.
The judgment below is
Affirmed.
THE CHIEF JUSTICE took no part in the consideration or decision
of these causes.