U.S. Supreme Court Merchants' Loan & Trust Co. v. Smietanka, 255 U.S. 509 (1921)
Merchants' Loan & Trust Co. v. Smietanka
Argued January 11, 12, 1921
Decided March 28, 1821
255 U.S. 509
ERROR TO THE DISTRICT COURT OF THE UNITED STATES
FOR THE NORTHERN DISTRICT OF ILLINOIS
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
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.
The case is stated in the opinion.
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
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 .
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
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
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."
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
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
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.
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
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
MR. JUSTICE HOLMES and MR. JUSTICE BRANDEIS, because of prior decisions of the Court, concur in the judgment.