I am not a Tax Lawyer, Nor do I play Dan Evans on the internet.
I am not a Certified Public Accountant, Nor do I play Paul Thomas on the internet.
I am not an Enrolled Agent, Nor do I play Richard Macdonald on the internet.
Go look it up for yourself.

U.S. Federal Income Tax

Subjugation by taxation

Corporate Profit is a "Return on Investment"

Table of Contents

Merchants' Loan & Trust Co. v. Smietanka, 255 U.S. 509 (1921)

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

        Just as in the Eisner case on the previous page, this case calls into question the meaning of "income" used in the Sixteenth Amendment.

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 "investment" was 9,522 shares of capital stock.  In other words, 9,522 shares of ownership in Joseph T. Ryerson & Son, a corporation.

        The figures given for the capital and the return on its investment totals 1.2 million dollars... In 1913 dollars.  The "return on investment" was "$700,000" above the "invested" "$500,000".

        The question to be answered by this Supreme Court is whether this "gain" is "income" according to the Sixteenth Amendment.

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, 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 'A gain derived from capital, from labor, or from both combined.' Stratton's Independence v. Howbert

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.' Eisner v. Macomber

        The Truncated Corporate Context:
[Corporate] 'income' may be defined as the [corporate] gain derived from capital, from labor, or from both combined, provided it be understood to include [corporate] profit gained through a sale or conversion of [corporate] capital assets

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, 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., Eisner v. Macomber.

        This Court ... has approved, ... what it believed to be the commonly understood meaning of the term ... in the minds of the people when they adopted the Sixteenth Amendment to the Constitution. 

        Words sometimes have multiple meanings.  Determining which meaning is the meaning being used can sometimes be problematic.  It is the problematic nature of such meanings that allows for double-entendre puns such as the Disney company; known for it's G-rated kid's movies, is making a movie where the bad guys snatched a pussy and put it in a box.  (If you don't understand the joke, go ask your mommy if you are old enough to have it explained to you.)

        In my debates with the Status Quo Brigade, this issue of the understood and common meaning of "income" has been subject to much debate.  The person giving the most argument on this issue provided links to online dictionaries of what is supposed to be from the era (circa) of 1913.  Some of my best ammunition in these debates comes from my opponents.  In this case, after looking at the word "income" presented, I looked at a few of the other words that relate to the word "income" and provide context for the word and the era.

3. That gain which proceeds from labor, business, property, or capital of any kind, as the produce of a farm, the rent of houses, the proceeds of professional business, the profits of commerce or of occupation, or the interest of money or stock in funds, etc.; revenue; receipts; salary; especially, the annual receipts of a private person, or a corporation, from property; as, a large income.
Webster's Dictionary  1913 edition  (Page: 745)

6. That which comes in to a person as payment for labor or services rendered in some office, or as a gain from lands, business, the investment of captial, etc.; receipts or emoluments regularly accruing, either in a given time, or, when unqualified, annually; the annual receipts of a person or a corporation; revenue: as, an income of five thousand dollars; his income has been reduced the income from the business is small.

Synonym. Income, Revenue, Value, Profit. Revenue is the income of a government or state, without reverence to expenditures; Profit is the gain made upon any business or investment when both the receipts and the expenditures are takein into account. Property may have value and yield neither income nor profit.
Century Dictionary Online   1913? edition

        In the back of my mind is the thought that somewhere on the internet, I read something about how the tax and the amendment was promoted as a "soak the rich" scheme.  The rich would be those who lived off of the "return" from their "investments" either as interest payments, or dividend payments not having to lift a finger to do manual labor.  If true, this decidedly tips the balance of what is meant by "income" to "Return on Investment" also called "profit".

"Specifically, the advantage or gain resulting to the owner of capital from its employment in any undertaking";
"As used in political economy, profit means what is left of the product of industry after deducting the wages, the price of raw materials, and the rent paid in the production, and is considered as being composed of three parts-- interest, risk or insurance, and wages of superintendence."
Century Dictionary Online   1913? edition

        The Century Dictionary Online under the definition of "profit" (shown above) has these examples:

"The revenue derived from labour is called wages; that derived from stock, by the person who manages or employes it, is called profit. Adam Smith, Wealth of Nations, 1.7.";
Century Dictionary Online   1913? edition

prof·it n. 2. The return received on a business undertaking after all operating expenses have been met. 3. Often profits. a. The return received on an investment after all charges have been paid. b. The rate of increase in the net worth of a business enterprise in a given accounting period. c. Income received from investments or property. d. The amount received for a commodity or service in excess of the original cost.
American Heritage Electronic Dictionary

        Returning to the Merchant's case:

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.

        Income is gain or profit derived from that Investment severed or severable from the investment.  In other words, income is the "Return on Investment".

        Since profit is a "Return on Investment" and since profit is also the gain made by a corporate business, logic dictates that the profit to the owner of the corporation is a "Return on Investment".  A corporate business is "owned" by owning "shares".  One becomes an owner of a corporation by purchasing stock shares.  Purchasing stock shares is the act of investing property for a "return on investment".

        A dividend is a payout of corporate profit to the corporation's shareholders.  A "shareholder" is "One who owns a share or shares of stock in a company; a stockholder."

Internal Revenue Code
Sec. 316. Dividend defined
(a) General rule

For purposes of this subtitle, the term "dividend" means any distribution of property made by a corporation to its shareholders -
(1) out of its earnings and profits accumulated after February 28, 1913, or
(2) out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.

        I was curious about how the current tax code handles the taxes of the corporation as an entity in regard to paying dividends, plus the tax code definition of a "dividend" will be what the tax code acts upon, regardless of the dictionary meaning, so I went and found the above definition.  A bonus digression is that the date in IRC section 316(a)(1) jumped out at me because of the following reason:

U.S. Constitution Footnote:
The sixteenth amendment to the Constitution of the United States was proposed to the legislatures of the several States by the Sixty-first Congress on the 12th of July, 1909, and was declared, in a proclamation of the Secretary of State, dated the 25th of February, 1913, to have been ratified...

Office of the Law Revision Counsel, U.S. House of Representatives

         End digression.

        While the truncation of [corporate] context, appears to change the 1909 tax act definition, it really does not if the "return on investment" is the thing actually taxed; Since corporate gain or profit is actually a "return on investment"...

        When one looks at the "truth and substance, without regard to form"...

Eisner v. Macomber, 252 U.S. 189 (1920)

In order, therefore, that the clauses cited from article 1 of the Constitution may have proper force and effect, save only as modified by the amendment, and that the latter also may have proper effect, it becomes essential to distinguish between what is and what is not 'income,' as the term is there used, and to apply the distinction, as cases arise, according to truth and substance, without regard to form.

        ... All five court cases defining 16th Amendment Income are the same.

        Income can only be the gain or the profit that IS the "Return On Investment."

        How do I know I'm correct on this?  Page 2580 of the House Congressional Record dated March 27, 1943.

Next Page

Table of Contents