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