U.S. Supreme Court Bailey v. Drexel Furniture Co., 259 U.S.
20 (1922) Bailey v. Drexel Furniture
Company No. 657 Argued March 7, 8,
1922 Decided May 15, 1922 259 U.S.
20 ERROR TO THE DISTRICT COURT OF THE
UNITED STATES FOR THE WESTERN DISTRICT OF NORTH
CAROLINA Syllabus 1. An act of Congress which clearly, on its face, is designed to
penalize, and thereby to discourage or suppress, conduct the
regulation of which is reserved by the Constitution exclusively to
the States, cannot be sustained under the federal taxing power by
calling the penalty a tax. P. 259 U. S. 37 . Veazie Bank v.
Fenno , 8 Wall. 533; McCray v. United
States, 195 U. S. 27 ; Flint v. Stone Tracy Co., 220 U.
S. 107 , and United States v. Doremus, 249 U. S. 86 ,
distinguished. Page 259 U. S. 21 2. Title XII of the Revenue Act of February 24, 1919, c. 18, 40
Stat. 1138, entitled "Tax on Employment of Child Labor," provides
that any person operating (a) any mine or quarry in which children
under the age of sixteen years have been employed or permitted to
work during any portion of the taxable year, or (b) any mill,
cannery, workshop or factory in which children under the age of
fourteen years have been employed or permitted to work, or children
between the ages of fourteen and sixteen have been employed or
permitted to work more than eight hour in any day, or more than six
days in any week, or after 7 o'clock P.M. or before 6 o'clock A.M.,
during any portion of the taxable year, shall pay for such taxable
year an excise equivalent to ten percent of the entire net profits
received or accrued for such year from the sale or disposition of
the product of his mine or other establishment, but relieves from
liability one who employs a child believing him to be above the
specified ages, relying on a certificate issued under authority of
a board consisting of the Secretary of the Treasury, the
Commissioner of Internal Revenue and the Secretary of Labor, or
under the laws of a State designated by them. Provision is made for
inspection of the mines, etc., by or under authority of the
Commissioner of Internal Revenue, or by or under authority of the
Secretary of Labor upon request of the Commissioner, and
obstruction of such inspections is made punishable by fine and
imprisonment. Held unconstitutional. P. 259 U. S.
34 .

															276 Fed. 452, affirmed.

															Error to a judgment of the District Court for the plaintiff in
an action against an internal revenue collector to recover the
amount of a tax previously paid under protest. Page 259 U. S. 34 MR. CHIEF JUSTICE TAFT delivered the opinion of the Court.

															This case presents the question of the constitutional validity
of the Child Labor Tax Law. The plaintiff below, the Drexel
Furniture Company, is engaged in the manufacture of furniture in
the Western District of North Carolina. On September 20, 1921, it
received a notice from Bailey, United States Collector of Internal
Revenue for the District, that it had been assessed $6,312.79 for
having during the taxable year 1919 employed and permitted to work
in its factory a boy under fourteen years of age, thus incurring
the tax of ten percent on its net profits for that year. The
Company paid the tax under protest, and after rejection of its
claim for a refund, brought this suit. On demurrer to an amended
complaint, judgment was entered for the Company against the
Collector for the full amount with interest. The writ of error is
prosecuted by the Collector direct from the District Court under §
238 of the Judicial Code.

															The Child Labor Tax Law is Title XII of an act entitled "An Act
To provide revenue, and for other purposes", approved February 24,
1919, c. 18, 40 Stat. 1057, 1138. The heading of the title is "Tax
on Employment of Child Labor". It begins with § 1200, and includes
eight sections. Section 1200 is as follows:

															"SEC. 1200. That every person (other than a bona fide boys' or
girls' canning club recognized by the Agricultural Department of a
State and of the United States) operating (a) any mine or quarry
situated in the United States in which children under the age of
sixteen years have been employed or permitted to work during any
portion of the taxable year; or (b) any mill, cannery, workshop,
factory, or manufacturing establishment situated in the United
States in which children under the age of fourteen years have been
employed or permitted to Page 259 U. S. 35 work, or children between the ages of fourteen and sixteen have
been employed or permitted to work more than eight hours in any day
or more than six days in any week, or after the hour of seven
o'clock post meridian, or before the hour of six o'clock ante
meridian, during any portion of the taxable year, shall pay for
each taxable year, in addition to all other taxes imposed by law,
an excise tax equivalent to 10 percentum of the entire net profits
received or accrued for such year from the sale or disposition of
the product of such mine, quarry, mill, cannery, workshop, factory,
or manufacturing establishment."

															Section 1203 relieves from liability to the tax anyone who
employs a child, believing him to be of proper age, relying on a
certificate to this effect issued by persons prescribed by a Board
consisting of the Secretary of the Treasury, the Commissioner of
Internal Revenue and the Secretary of Labor, or issued by state
authorities. The section also provides in paragraph (b) that

															"the tax imposed by this title shall not be imposed in the case
of any person who proves to the satisfaction of the Secretary that
the only employment or permission to work which but for this
section would subject him to the tax has been of a child employed
or permitted to work under a mistake of fact as to the age of such
child, and without intention to evade the tax."

															Section 1206 gives authority to the Commissioner of Internal
Revenue, or any other person authorized by him, "to enter and
inspect at any time any mine, quarry, mill, cannery, workshop,
factory, or manufacturing establishment." The Secretary of Labor,
or any person whom he authorizes, is given like authority in order
to comply with a request of the Commissioner to make such
inspection and report the same. Any person who refuses entry or
obstructs inspection is made subject to fine or imprisonment or
both. Page 259 U. S. 36 The law is attacked on the ground that it is a regulation of the
employment of child labor in the States -- an exclusively state
function under the Federal Constitution and within the reservations
of the Tenth Amendment. It is defended on the ground that it is a
mere excise tax levied by the Congress of the United States under
its broad power of taxation conferred by § 8, Article I, of the
Federal Constitution. We must construe the law and interpret the
intent and meaning of Congress from the language of the act. The
words are to be given their ordinary meaning unless the context
shows that they are differently used. Does this law impose a tax
with only that incidental restraint and regulation which a tax must
inevitably involve? Or does it regulate by the use of the so-called
tax as a penalty? If a tax, it is clearly an excise. If it were an
excise on a commodity or other thing of value, we might not be
permitted under previous decisions of this court to infer solely
from its heavy burden that the act intends a prohibition, instead
of a tax. But this act is more. It provides a heavy exaction for a
departure from a detailed and specified course of conduct in
business. That course of business is that employers shall employ in
mines and quarries children of an age greater than sixteen years;
in mills and factories, children of an age greater than fourteen
years, and shall prevent children of less than sixteen years in
mills and factories from working more than eight hours a day or six
days in the week. If an employer departs from this prescribed
course of business, he is to pay to the Government one-tenth of his
entire net income in the business for a full year. The amount is
not to be proportioned in any degree to the extent or frequency of
the departures, but is to be paid by the employer in full measure
whether he employs five hundred children for a year, or employs
only one for a day. Moreover, if he does not know the child is
within the named age limit, he is not to pay; Page 259 U. S. 37 that is to say, it is only where he knowingly departs from the
prescribed course that payment is to be exacted. Scienter is associated with penalties, not with taxes. The employer's
factory is to be subject to inspection at any time not only by the
taxing officers of the Treasury, the Department normally charged
with the collection of taxes, but also by the Secretary of Labor
and his subordinates, whose normal function is the advancement and
protection of the welfare of the workers. In the light of these
features of the act, a court must be blind not to see that the
so-called tax is imposed to stop the employment of children within
the age limits prescribed. Its prohibitory and regulatory effect
and purpose are palpable. All others can see and understand this.
How can we properly shut our minds to it?

															It is the high duty and function of this court in cases
regularly brought to its bar to decline to recognize or enforce
seeming laws of Congress, dealing with subjects not entrusted to
Congress, but left or committed by the supreme law of the land to
the control of the States. We cannot avoid the duty even though it
require us to refuse to give effect to legislation designed to
promote the highest good. The good sought in unconstitutional
legislation is an insidious feature because it leads citizens and
legislators of good purpose to promote it without thought of the
serious breach it will make in the ark of our covenant or the harm
which will come from breaking down recognized standards. In the
maintenance of local self-government, on the one hand, and the
national power, on the other, our country has been able to endure
and prosper for near a century and a half.

															Out of a proper respect for the acts of a coordinate branch of
the Government, this court has gone far to sustain taxing acts as
such, even though there has been ground for suspecting from the
weight of the tax it was intended to destroy its subject. But, in
the act before Page 259 U. S. 38 us, the presumption of validity cannot prevail, because the
proof of the contrary is found on the very face of its provisions.
Grant the validity of this law, and all that Congress would need to
do, hereafter, in seeking to take over to its control anyone of the
great number of subjects of public interest, jurisdiction of which
the States have never parted with, and which are reserved to them
by the Tenth Amendment, would be to enact a detailed measure of
complete regulation of the subject and enforce it by a so-called
tax upon departures from it. To give such magic to the word "tax"
would be to break down all constitutional limitation of the powers
of Congress and completely wipe out the sovereignty of the
States.

															The difference between a tax and a penalty is sometimes
difficult to define, and yet the consequences of the distinction in
the required method of their collection often are important. Where
the sovereign enacting the law has power to impose both tax and
penalty, the difference between revenue production and mere
regulation may be immaterial, but not so when one sovereign can
impose a tax only, and the power of regulation rests in another.
Taxes are occasionally imposed in the discretion of the legislature
on proper subjects with the primary motive of obtaining revenue
from them and with the incidental motive of discouraging them by
making their continuance onerous. They do not lose their character
as taxes because of the incidental motive. But there comes a time
in the extension of the penalizing features of the so-called tax
when it loses its character as such and becomes a mere penalty with
the characteristics of regulation and punishment. Such is the case
in the law before us. Although Congress does not invalidate the
contract of employment or expressly declare that the employment
within the mentioned ages is illegal, it does exhibit its intent
practically to achieve the latter result by adopting the criteria
of wrongdoing and imposing its principal consequence on those who
transgress its standard. Page 259 U. S. 39 The case before us cannot be distinguished from that of Hammer v. Dagenhart, 247 U. S. 251 .
Congress there enacted a law to prohibit transportation in
interstate commerce of goods made at a factory in which there was
employment of children within the same ages and for the same number
of hours a day and days in a week as are penalized by the act in
this case. This court held the law in that case to be void. It
said:

															"In our view, the necessary effect of this act is, by means of a
prohibition against the movement in interstate commerce of ordinary
commercial commodities, to regulate the hours of labor of children
in factories and mines within the States, a purely state
authority."

															In the case at the bar, Congress in the name of a tax which, on
the face of the act, is a penalty seeks to do the same thing, and
the effort must be equally futile.

															The analogy of the Dagenhart Case is clear. The
congressional power over interstate commerce is, within its proper
scope, just as complete and unlimited as the congressional power to
tax, and the legislative motive in its exercise is just as free
from judicial suspicion and inquiry. Yet when Congress threatened
to stop interstate commerce in ordinary and necessary commodities,
unobjectionable as subjects of transportation, and to deny the same
to the people of a State in order to coerce them into compliance
with Congress' regulation of state concerns, the Court said this
was not, in fact, regulation of interstate commerce, but rather
that of State concerns, and was invalid. So here, the so-called tax
is a penalty to coerce people of a State to act as Congress wishes
them to act in respect of a matter completely the business of the
state government under the Federal Constitution. This case
requires, as did the Dagenhart case, the application of
the principle announced by Chief Justice Marshall in McCulloch v.
Maryland , 4 Wheat. 316, 17 U. S. 423 ,
in a much quoted passage: Page 259 U. S. 40 "Should Congress, in the execution of its powers, adopt measures
which are prohibited by the Constitution, or should Congress, under
the pretext of executing its powers, pass laws for the
accomplishment of objects not intrusted to the government, it would
become the painful duty of this tribunal, should a case requiring
such a decision come before it, to say that such an act was not the
law of the land."

															But it is pressed upon us that this court has gone so far in
sustaining taxing measures the effect or tendency of which was to
accomplish purposes not directly within congressional power that we
are bound by authority to maintain this law.

															The first of these is Veazie Bank v.
Fenno , 8 Wheat. 533. In that case, the validity of
a law which increased a tax on the circulating notes of persons and
state banks from one percentum to ten percentum was in question.
The main question was whether this was a direct tax to be
apportioned among the several States "according to their respective
numbers" This was answered in the negative. The second objection
was stated by the Court:

															"It is insisted, however, that the tax in the case before us is
excessive, and so excessive as to indicate a purpose on the part of
Congress to destroy the franchise of the bank, and is, therefore,
beyond the constitutional power of Congress."

															To this the Court answered (p. 21 U. S.
548 ):

															"The first answer to this is that the judicial cannot prescribe
to the legislative departments of the government limitations upon
the exercise of its acknowledged powers. The power to tax may be
exercised oppressively upon persons, but the responsibility of the
legislature is not to the courts, but to the people by whom its
members are elected. So if a particular tax bears heavily upon a
corporation, or a class of corporations, it cannot, for that reason
only, be pronounced contrary to the Constitution. " Page 259 U. S. 41 It will be observed that the sole objection to the tax there was
its excessive character. Nothing else appeared on the face of the
act. It was an increase of a tax admittedly legal to a higher rate,
and that was all. There were no elaborate specifications on the
face of the act, as here, indicating the purpose to regulate
matters of state concern and jurisdiction through an exaction so
applied as to give it the qualities of a penalty for violation of
law, rather than a tax.

															It should be noted, too, that the Court, speaking of the extent
of the taxing power, used these cautionary words (p. 21 U. S.
541 ):

															"There are, indeed, certain virtual limitations, arising from
the principles of the Constitution itself. It would undoubtedly be
an abuse of the power if so exercised as to impair the separate
existence and independent self-government of the States, or if
exercised for ends inconsistent with the limited grants of power in
the Constitution."

															But, more than this, what was charged to be the object of the
excessive tax was within the congressional authority, as appears
from the second answer which the Court gave to the objection. After
having pointed out the legitimate means taken by Congress to secure
a national medium or currency, the Court said (p. 549):

															"Having thus, in the exercise of undisputed constitutional
powers, undertaken to provide a currency for the whole country, it
cannot be questioned that Congress may, constitutionally, secure
the benefit of it to the people by appropriate legislation. To this
end, Congress has denied the quality of legal tender to foreign
coins, and has provided by law against the imposition of
counterfeit and base coin on the community. To the same end,
Congress may restrain, by suitable enactments, the circulation as
money of any notes not issued under its own authority. Without this
power, indeed, its attempts to secure Page 259 U. S. 42 a sound and uniform currency for the country must be
futile."

															The next case is that of McCray v. United States, 195 U. S. 27 . That,
like the Veazie Bank case, was the increase of an excise
tax upon a subject properly taxable in which the taxpayers claimed
that the tax had become invalid because the increase was excessive.
It was a tax on oleomargarine, a substitute for butter. The tax on
the white oleomargarine was one-quarter of a cent a pound, and on
the yellow oleomargarine was first two cents and was then by the
act in question increased to ten cents per pound. This court held
that the discretion of Congress in the exercise of its
constitutional powers to levy excise taxes could not be controlled
or limited by the Courts because the latter might deem the
incidence of the tax oppressive, or even destructive. It was the
same principle as that applied in the Veazie Bank case.
This was that Congress, in selecting its subjects for taxation,
might impose the burden where and as it would, and that a motive
disclosed in its selection to discourage sale or manufacture of an
article by a higher tax than on some other did not invalidate the
tax. In neither of these cases did the law objected to show on its
face, as does the law before, us the detailed specifications of a
regulation of a state concern and business with a heavy exaction to
promote the efficacy of such regulation.

															The third case is that of Flint v. Stone Tracy Co., 220 U. S. 107 . It
involved the validity of an excise tax levied on the doing of
business by all corporations, joint stock companies, associations
organized for profit having a capital stock represented by shares,
and insurance companies, and measured the excise by the net income
of the corporations. There was not in that case the slightest doubt
that the tax was a tax, and a tax for revenue, but it was attacked
on the ground that such a tax could be made excessive, and thus
used by Congress to destroy the existence Page 259 U. S. 43 of state corporations. To this, this court gave the same answer
as in the Veazie Bank and McCray cases. It is not
so strong an authority for the Government's contention as they
are.

															The fourth case is United States v. Doremus, 249 U. S. 86 . That
involved the validity of the Narcotic Drug Act, 38 Stat. 785, which
imposed a special tax on the manufacture, importation and sale or
gift of opium or coca leaves or their compounds or derivatives. It
required every person subject to the special tax to register with
the Collector of Internal Revenue his name and place of business,
and forbade him to sell except upon the written order of the person
to whom the sale was made on a form prescribed by the Commissioner
of Internal Revenue. The vendor was required to keep the order for
two years, and the purchaser to keep a duplicate for the same time,
and both were to be subject to official inspection. Similar
requirements were made as to sales upon prescriptions of a
physician and as to the dispensing of such drugs directly to a
patient by a physician. The validity of a special tax in the nature
of an excise tax on the manufacture, importation and sale of such
drugs was, of course, unquestioned. The provisions for subjecting
the sale and distribution of the drugs to official supervision and
inspection were held to have a reasonable relation to the
enforcement of the tax, and were therefore held valid.

															The court said that the act could not be declared invalid just
because another motive than taxation, not shown on the face of the
act, might have contributed to its passage. This case does not
militate against the conclusion we have reached in respect of the
law now before us. The court there made manifest its view that the
provisions of the so-called taxing act must be naturally and
reasonably adapted to the collection of the tax, and not solely to
the achievement of some other purpose plainly within state
power. Page 259 U. S. 44 For the reason given, we must hold the Child Labor Tax Law
invalid, and the judgment of the District Court is Affirmed. MR. JUSTICE CLARKE dissents.


U.S. Supreme Court Burnet v. Sanford & Brooks Co., 282
U.S. 359 (1931) Burnet v. Sanford & Brooks
Company No. 31 Argued December 5, 8,
1930 Decided January 5,
1931 282
U.S. 359 CERTIORARI TO THE CIRCUIT COURT OF
APPEALS FOR THE FOURTH
CIRCUIT Syllabus 1. In its income tax returns for 1913-16, the taxpayer included
in gross income for each year payments received in that year under
a dredging contract with the United States and deducted for each
year expenditures made by the taxpayer during that year in
performing the contract. The sum of the expenditures exceeded the
sum of the payments received. The work was abandoned, and, in 1920,
as the result of a suit on the contract for breach of warranty, the
taxpayer received from the United States as compensatory damages an
amount equal to such excess. It did not appear that the taxpayer
ever filed returns on the accrual basis, or otherwise sought the
benefit of the statutory provision in that regard or of Treasury
regulations which, with respect to certain long-term contracts,
allowed report of all receipts and expenditures on account of a
particular contract in the year in which the work was completed, or
report each year of the estimated profit corresponding to estimated
expenditures of that year. Held: (1) That, under the Revenue Act of 1918, the money received in
1920 was properly included by the Commissioner as part of the gross
income for that year in ascertaining the taxable income for that
year. P. 282 U. S.
363 .

															(2) That a judgment in effect eliminating this money from the
1920 computation upon the condition that the taxpayer amend the
earlier returns by omitting therefrom the deductions of related
expenditures, was erroneous. P. 282 U. S. 362 et seq. 2. Receipts from the conduct of a business enterprise are to be
included in the taxpayer's return as a part of gross income,
regardless of whether the particular transaction results in net
profit. P. 282 U. S.
364 .

															3. The excess of gross income over deductions in this case does
not any the less constitute net income for the taxable period
because the taxpayer, in an earlier period, suffered net losses in
its business which were in some measure attributable to
expenditures made to produce the net income of the later period. Id. Page 282 U. S. 360 4. The familiar and practical system of taxing annually the net
income resulting from all transactions within the tax year, rather
than the gains derived from particular transactions, is sustained
by the Sixteenth Amendment. P. 282 U. S.
365 .

															35 F.2d 312 reversed.

															Certiorari, 281 U.S. 707, to review a judgment reversing an
order of the Board of Tax Appeals which sustained an assessment of
income and profits taxes. Page 282 U. S. 361 MR. JUSTICE STONE delivered the opinion of the Court.

															In this case, certiorari was granted, 281 U.S. 707, to review a
judgment of the court of appeals for the Fourth Circuit, 35 F.2d
312, reversing an order of the Board of Tax Appeals, 11 B.T.A. 452,
which had sustained the action of the Commissioner of Internal
Revenue in making a deficiency assessment against respondent for
income and profits taxes for the year 1920.

															From 1913 to 1915, inclusive, respondent, a Delaware corporation
engaged in business for profit, was acting for the Atlantic
Dredging Company in carrying out a contract for dredging the
Delaware River, entered into by that company with the United
States. In making its income tax returns for the years 1913 to
1916, respondent added to gross income for each year the payments
made under the contract that year, and deducted its expenses paid
that year in performing the contract. The total expenses exceeded
the payments received by $176,271.88. The tax returns for 1913,
1915, and 1916 showed net losses. That for 1914 showed net
income.

															In 1915, work under the contract was abandoned, and in 1916 suit
was brought in the Court of Claims to recover for a breach of
warranty of the character of the material Page 282 U. S. 362 to be dredged. Judgment for the claimant, 53 Ct.Cls. 490, was
affirmed by this Court in 1920. United States v. Atlantic
Dredging Co., 253 U. S. 1 . It held
that the recovery was upon the contract, and was "compensatory of
the cost of the work, of which the government got the benefit."
From the total recovery, petitioner received in that year the sum
of $192,577.59, which included the $176,271.88 by which its
expenses under the contract had exceeded receipts from it, and
accrued interest amounting to $16,305.71. Respondent having failed
to include these amounts as gross income in its tax returns for
1920, the Commissioner made the deficiency assessment here
involved, based on the addition of both items to gross income for
that year.

															The court of appeals ruled that only the item of interest was
properly included, holding, erroneously, as the government
contends, that the item of $176,271.88 was a return of losses
suffered by respondent in earlier years, and hence was wrongly
assessed as income. Notwithstanding this conclusion, its judgment
of reversal and the consequent elimination of this item from gross
income for 1920 were made contingent upon the filing by respondent
of amended returns for the years 1913 to 1916, from which were to
be omitted the deductions of the related items of expenses paid in
those years. Respondent insists that, as the Sixteenth Amendment
and the Revenue Act of 1918, which was in force in 1920, plainly
contemplate a tax only on net income or profits, any application of
the statute which operates to impose a tax with respect to the
present transaction, from which respondent received no profit,
cannot be upheld.

															If respondent's contention that only gain or profit may be taxed
under the Sixteenth Amendment be accepted without qualification, see Eisner v. Macomber, 252 U. S. 189 ; Doyle v. Mitchell Brothers Co., 247 U.
S. 179 , the question remains whether the gain or profit
which is the Page 282 U. S. 363 subject of the tax may be ascertained, as here, on the basis of
fixed accounting periods, or whether, as is pressed upon us, it can
only be net profit ascertained on the basis of particular
transactions of the taxpayer when they are brought to a
conclusion.

															All the revenue acts which have been enacted since the adoption
of the Sixteenth Amendment have uniformly assessed the tax on the
basis of annual returns showing the net result of all the
taxpayer's transactions during a fixed accounting period, either
the calendar year or, at the option of the taxpayer, the particular
fiscal year which he may adopt. Under §§ 230, 232 and 234(a) of the
Revenue Act of 1918, 40 Stat. 1057, respondent was subject to tax
upon its annual net income, arrived at by deducting from gross
income for each taxable year all the ordinary and necessary
expenses paid during that year in carrying on any trade or
business, interest and taxes paid, and losses sustained, during the
year. By §§ 233(a) and 213(a), gross income

															"includes . . . income derived from . . . business . . . or the
transaction of any business carried on for gain or profit, or gains
or profits and income derived from any source whatever."

															The amount of all such items is required to be included in the
gross income for the taxable year in which received by the
taxpayer, unless they may be properly accounted for on the accrual
basis under Section 212(b). See United States v. Anderson, 269 U. S. 422 ; Aluminum Castings Co. v. Rotzahn, ante, p. 282 U. S. 92 .

															That the recovery made by respondent in 1920 was gross income
for that year within the meaning of these sections cannot, we
think, be doubted. The money received was derived from a contract
entered into in the course of respondent's business operations for
profit. While it equalled, and in a loose sense was a return of,
expenditures made in performing the contract, still, as the Board
of Tax Appeals found, the expenditures were Page 282 U. S. 364 made in defraying the expenses incurred in the prosecution of
the work under the contract, for the purpose of earning profits.
They were not capital investments, the cost of which, if converted,
must first be restored from the proceeds before there is a capital
gain taxable as income. See Doyle v. Mitchell Brothers Co.,
supra, p. 247 U. S.
185 .

															That such receipts from the conduct of a business enterprise are
to be included in the taxpayer's return as a part of gross income,
regardless of whether the particular transaction results in net
profit, sufficiently appears from the quoted words of § 213(a) and
from the character of the deductions allowed. Only by including
these items of gross income in the 1920 return would it have been
possible to ascertain respondent's net income for the period
covered by the return, which is what the statute taxes. The excess
of gross income over deductions did not any the less constitute net
income for the taxable period because respondent, in an earlier
period, suffered net losses in the conduct of its business which
were in some measure attributable to expenditures made to produce
the net income of the later period. Bowers v. Kerbaugh-Empire Co., 271 U.
S. 170 , on which respondent relies, does not support its
position. In that case, the taxpayer, which had lost, in business,
borrowed money, which was to be repaid in German marks, and which
was later repaid in depreciated currency, had neither made a profit
on the transaction nor received any money or property which could
have been made subject to the tax.

															But respondent insists that, if the sum which it recovered is
the income defined by the statute, still it is not income, taxation
of which without apportionment is permitted by the Sixteenth
Amendment, since the particular transaction from which it was
derived did not result in any net gain or profit. But we do not
think the amendment is to be so narrowly construed. A taxpayer may
be in receipt of net income in one year and not in another. Page 282 U. S. 365 The net result of the two years, if combined in a single taxable
period, might still be a loss, but it has never been supposed that
that fact would relieve him from a tax on the first, or that it
affords any reason for postponing the assessment of the tax until
the end of a lifetime, or for some other indefinite period, to
ascertain more precisely whether the final outcome of the period,
or of a given transaction, will be a gain or a loss.

															The Sixteenth Amendment was adopted to enable the government to
raise revenue by taxation. It is the essence of any system of
taxation that it should produce revenue ascertainable, and payable
to the government, at regular intervals. Only by such a system is
it practicable to produce a regular flow of income and apply
methods of accounting, assessment, and collection capable of
practical operation. It is not suggested that there has ever been
any general scheme for taxing income on any other basis. The
computation of income annually as the net result of all
transactions within the year was a familiar practice, and taxes
upon income so arrived at were not unknown, before the Sixteenth
Amendment. See Bowers v. Kerbaugh-Empire Co., supra, p. 271 U. S. 174 ; Pacific Insurance Co. v.
Soule , 7 Wall. 433; Pollock v. Farmers' Loan
& Trust Co., 158 U. S. 601 , 158 U. S. 630 .
It is not to be supposed that the amendment did not contemplate
that Congress might make income so ascertained the basis of a
scheme of taxation such as had been, in actual operation, within
the United States before its adoption. While, conceivably, a
different system might be devised by which the tax could be
assessed, wholly or in part, on the basis of the finally
ascertained results of particular transactions, Congress is not
required by the amendment to adopt such a system in preference to
the more familiar method, even if it were practicable. It would not
necessarily obviate the kind of inequalities of which respondent
complains. If losses from particular transactions were to be set
off against Page 282 U. S. 366 gains in others, there would still be the practical necessity of
computing the tax on the basis of annual or other fixed taxable
periods, which might result in the taxpayer's being required to pay
a tax on income in one period exceeded by net losses in
another.

															Under the statutes and regulations in force in 1920, two methods
were provided by which, to a limited extent, the expenses of a
transaction incurred in one year might be offset by the amounts
actually received from it in another. One was by returns on the
accrual basis under Section 212(b), which provides that a taxpayer
keeping accounts upon any basis other than that of actual receipts
and disbursements, unless such basis does not clearly reflect its
income, may, subject to regulations of the Commissioner, make its
return upon the basis upon which its books are kept. See United
States v. Anderson, and Aluminum Castings Co. v. Routzahn,
supra. The other was under Treasury Regulations (Article 121
of Reg. 33 of Jan. 2, 1918, under the Revenue Acts of 1916 and
1917; Article 36 of Reg. 45, April 19, 1919, under the Revenue Act
of 1918) providing that, in reporting the income derived from
certain long-term contracts, the taxpayer might either report all
of the receipts and all of the expenditures made on account of a
particular contract in the year in which the work was completed or
report in each year the percentage of the estimated profit
corresponding to the percentage of the total estimated expenditures
which was made in that year.

															The court of appeals said that the case of the respondent here
fell within the spirit of these regulations. But the court did not
hold, nor does respondent assert, that it ever filed returns in
compliance either with these regulations, or Section 212(b), or
otherwise attempted to avail itself of their provisions; nor, on
this record, do any facts appear tending to support the burden,
resting on the taxpayer, of establishing that the Commissioner
erred in failing to Page 282 U. S. 367 apply them. See Niles Bement Pond Co. v. United States, 281 U. S. 357 , 281 U. S.
361 .

															The assessment was properly made under the statutes. Relief from
their alleged burdensome operation, which may not be secured under
these provisions, can be afforded only by legislation, not by the
courts. Reversed.


U.S. Supreme Court Taft v. Bowers, 278
U.S. 470 (1929) Taft v. Bowers Nos. 16 and 17 Argued April 26, 1928 Reargued October 9,
1928 Decided February 18,
1929 278
U.S. 470 CERTIORARI TO THE CIRCUIT COURT OF
APPEALS FOR THE SECOND
CIRCUIT Syllabus 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.


U.S. Supreme Court Brushaber v. Union Pacific R. Co., 240 U.S. 1 (1916) Brushaber v. Union Pacific Railroad
Company No. 140 Argued October 14, 15,
1915 Decided January 24,
1916 240 U.S.
1 APPEAL FROM THE DISTRICT COURT OF
THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW
YORK Syllabus Under proper averments, a stockholder's suit to restrain a
corporation from voluntarily paying a tax charged to be
unconstitutional is not violative of Rev.Stat. § 3224, and the
district court has jurisdiction to entertain the action. Pollock v. Farmers' Loan & Trust Co., 157 U.
S. 429 .

															In this case -- that of a stockholder against a corporation to
restrain the latter from voluntarily paying the income tax imposed
by the Tariff Act of 1913 -- the defendant corporation notified the
government of the pendency of the action and the United States was
heard as amicus curiae in support of the constitutionality
of the Act.

															The Sixteenth Amendment was obviously intended to simplify the
situation and make clear the limitations on the taxing power of
Congress and not to create radical and destructive changes in our
constitutional system.

															The Sixteenth Amendment does not purport to confer power to levy
income taxes in a generic sense, as that authority was already
possessed, Page 240 U. S. 2 or to limit and distinguish between one kind of income tax and
another, but its purpose is to relieve all income taxes when
imposed from apportionment from consideration of the source whence
the income is derived.

															The Income Tax provisions of the Tariff Act of 1913 are not
unconstitutional by reason of retroactive operation, the period
covered not extending prior to the time when the Amendment was
operative, nor are those provisions unconstitutional under the due
process provision of the Fifth Amendment, nor do they deny due
process of law, nor equal protection of the law by reason of the
classifications therein of things or persons subject to the
tax.

															The provisions for collecting income at the source do not deny
due process of law by reason of duties imposed upon corporations
without compensation in connection with the payment of the tax by
others.

															The uniformity of taxation required by the federal Constitution
is geographical. Knowlton v. Moore, 178 U. S.
41 .

															The Fifth Amendment is not a limitation upon the taxing power
conferred upon Congress by the Constitution.

															Arguments as to the expediency of levying a tax which is within
the power of Congress to levy are beyond judicial cognizance.

															When there are differences between the subjects that are taxed,
Congress does not transcend the limit of its taxing power by taxing
them differently.

															A want of due process of law does not arise from want of wisdom
in Congress in levying taxes, and thus give the courts power to
overrule the action of Congress by declaring it to be
unconstitutional.

															The facts, which involve the construction of the Sixteenth
Amendment and other provisions of the Constitution of the United
States, and the constitutionality of the income tax provisions of
the Tariff Act of October 9, 1913, are stated in the opinion. Page 240 U. S. 9 MR. CHIEF JUSTICE WHITE delivered the opinion of the Court.

															As a stockholder of the Union Pacific Railroad Company, the
appellant filed his bill to enjoin the corporation from complying
with the income tax provisions of the tariff act of October 3, 1913
(§ II., c. 16, 38 Stat. 166). Because of constitutional questions
duly arising, the case is here on direct appeal from a decree
sustaining a motion to dismiss because no ground for relief was
stated.

															The right to prevent the corporation from returning and paying
the tax was based upon many averments as to the repugnancy of the
statute to the Constitution of the United States, of the peculiar
relation of the corporation to the stockholders, and their
particular interests resulting from many of the administrative
provisions of the assailed act, of the confusion, wrong, and
multiplicity Page 240 U. S. 10 of suits and the absence of all means of redress which would
result if the corporation paid the tax and complied with the act in
other respects without protest, as it was alleged it was its
intention to do. To put out of the way a question of jurisdiction,
we at once say that, in view of these averments and the ruling in Pollock v. Farmers' Loan & Trust Co., 157 U.
S. 429 , sustaining the right of a stockholder to sue to
restrain a corporation under proper averments from voluntarily
paying a tax charged to be unconstitutional on the ground that to
permit such a suit did not violate the prohibitions of § 3224
Rev.Stat. against enjoining the enforcement of taxes, we are of
opinion that the contention here made that there was no
jurisdiction of the cause, since to entertain it would violate the
provisions of the Revised Statutes referred to, is without merit.
Before coming to dispose of the case on the merits, however, we
observe that the defendant corporation having called the attention
of the government to the pendency of the cause and the nature of
the controversy and its unwillingness to voluntarily refuse to
comply with the act assailed, the United States, as amicus
curiae, has at bar been heard both orally and by brief for the
purpose of sustaining the decree.

															Aside from averments as to citizenship and residence, recitals
as to the provisions of the statute, and statements as to the
business of the corporation, contained in the first ten paragraphs
of the bill, advanced to sustain jurisdiction, the bill alleged
twenty-one constitutional objections specified in that number of
paragraphs or subdivisions. As all the grounds assert a violation
of the Constitution, it follows that, in a wide sense, they all
charge a repugnancy of the statute to the Sixteenth Amendment,
under the more immediate sanction of which the statute was
adopted.

															The various propositions are so intermingled as to cause it to
be difficult to classify them. We are of opinion, however, Page 240 U. S. 11 that the confusion is not inherent, but rather arises from the
conclusion that the Sixteenth Amendment provides for a hitherto
unknown power of taxation -- that is, a power to levy an income tax
which, although direct, should not be subject to the regulation of
apportionment applicable to all other direct taxes. And the
far-reaching effect of this erroneous assumption will be made clear
by generalizing the many contentions advanced in argument to
support it, as follows: (a) The Amendment authorizes only a
particular character of direct tax without apportionment, and
therefore if a tax is levied under its assumed authority which does
not partake of the characteristics exacted by the Amendment, it is
outside of the Amendment, and is void as a direct tax in the
general constitutional sense because not apportioned. (b) As the
Amendment authorizes a tax only upon incomes "from whatever source
derived," the exclusion from taxation of some income of designated
persons and classes is not authorized, and hence the
constitutionality of the law must be tested by the general
provisions of the Constitution as to taxation, and thus again the
tax is void for want of apportionment. (c) As the right to tax
"incomes from whatever source derived" for which the Amendment
provides must be considered as exacting intrinsic uniformity,
therefore no tax comes under the authority of the Amendment not
conforming to such standard, and hence all the provisions of the
assailed statute must once more be tested solely under the general
and preexisting provisions of the Constitution, causing the statute
again to be void in the absence of apportionment. (d) As the power
conferred by the Amendment is new and prospective, the attempt in
the statute to make its provisions retroactively apply is void
because, so far as the retroactive period is concerned, it is
governed by the preexisting constitutional requirement as to
apportionment.

															But it clearly results that the proposition and the
contentions Page 240 U. S. 12 under it, if acceded to, would cause one provision of the
Constitution to destroy another; that is, they would result in
bringing the provisions of the Amendment exempting a direct tax
from apportionment into irreconcilable conflict with the general
requirement that all direct taxes be apportioned. Moreover, the tax
authorized by the Amendment, being direct, would not come under the
rule of uniformity applicable under the Constitution to other than
direct taxes, and thus it would come to pass that the result of the
Amendment would be to authorize a particular direct tax not subject
either to apportionment or to the rule of geographical uniformity,
thus giving power to impose a different tax in one state or states
than was levied in another state or states. This result, instead of
simplifying the situation and making clear the limitations on the
taxing power, which obviously the Amendment must have been intended
to accomplish, would create radical and destructive changes in our
constitutional system and multiply confusion.

															But let us by a demonstration of the error of the fundamental
proposition as to the significance of the Amendment dispel the
confusion necessarily arising from the arguments deduced from it.
Before coming, however, to the text of the Amendment, to the end
that its significance may be determined in the light of the
previous legislative and judicial history of the subject with which
the Amendment is concerned, and with a knowledge of the conditions
which presumptively led up to its adoption, and hence of the
purpose it was intended to accomplish, we make a brief statement on
those subjects.

															That the authority conferred upon Congress by § 8 of Article I
"to lay and collect taxes, duties, imposts and excises" is
exhaustive and embraces every conceivable power of taxation has
never been questioned, or, if it has, has been so often
authoritatively declared as to render it necessary only to state
the doctrine. And it has also never Page 240 U. S. 13 been questioned from the foundation, without stopping presently
to determine under which of the separate headings the power was
properly to be classed, that there was authority given, as the part
was included in the whole, to lay and collect income taxes. Again,
it has never moreover been questioned that the conceded complete
and all-embracing taxing power was subject, so far as they were
respectively applicable, to limitations resulting from the
requirements of Art. I, § 8, cl. 1, that "all duties, imposts and
excises shall be uniform throughout the United States," and to the
limitations of Art I., § 2, cl. 3, that "direct taxes shall be
apportioned among the several states," and of Art. I, § 9, cl. 4,
that "no capitation, or other direct, tax shall be laid, unless in
proportion to the census or enumeration hereinbefore directed to be
taken." In fact, the two great subdivisions embracing the complete
and perfect delegation of the power to tax and the two correlated
limitations as to such power were thus aptly stated by Mr. Chief
Justice Fuller in Pollock v. Farmers' Loan & Trust Co.,
supra, at 157 U. S.
557 :

															"In the matter of taxation, the Constitution recognizes the two
great classes of direct and indirect taxes, and lays down two rules
by which their imposition must be governed, namely, the rule of
apportionment as to direct taxes, and the rule of uniformity as to
duties, imposts, and excises."

															It is to be observed, however, as long ago pointed out in Veazie Bank v.
Fenno , 8 Wall. 533, 75 U. S. 541 ,
that the requirements of apportionment as to one of the great
classes and of uniformity as to the other class were not so much a
limitation upon the complete and all-embracing authority to tax,
but in their essence were simply regulations concerning the mode in
which the plenary power was to be exerted. In the whole history of
the government down to the time of the adoption of the Sixteenth
Amendment, leaving aside some conjectures expressed of the
possibility of a tax lying intermediate between the two great
classes and embraced Page 240 U. S. 14 by neither, no question has been anywhere made as to the
correctness of these propositions. At the very beginning, however,
there arose differences of opinion concerning the criteria to be
applied in determining in which of the two great subdivisions a tax
would fall. Without pausing to state at length the basis of these
differences and the consequences which arose from them, as the
whole subject was elaborately reviewed in Pollock v. Farmers'
Loan & Trust Co., 157 U. S. 429 , we
make a condensed statement which is in substance taken from what
was said in that case. Early the differences were manifested in
pressing, on the one hand, and opposing, on the other, the passage
of an act levying a tax without apportionment on carriages "for the
conveyance of persons," and when such a tax was enacted, the
question of its repugnancy to the Constitution soon came to this
Court for determination. Hylton v. United
States , 3 Dall. 171. It was held that the tax came
within the class of excises, duties, and imposts, and therefore did
not require apportionment, and while this conclusion was agreed to
by all the members of the Court who took part in the decision of
the case, there was not an exact coincidence in the reasoning by
which the conclusion was sustained. Without stating the minor
differences, it may be said with substantial accuracy that the
divergent reasoning was this: on the one hand, that the tax was not
in the class of direct taxes requiring apportionment, because it
was not levied directly on property because of its ownership, but
rather on its use, and was therefore an excise, duty, or impost,
and on the other, that, in any event, the class of direct taxes
included only taxes directly levied on real estate because of its
ownership. Putting out of view the difference of reasoning which
led to the concurrent conclusion in the Hylton case, it is
undoubted that it came to pass in legislative practice that the
line of demarcation between the two great classes of direct taxes,
on the one hand, and excises, duties, and Page 240 U. S. 15 imposts, on the other, which was exemplified by the ruling in
that case was accepted and acted upon. In the first place this is
shown by the fact that, wherever (and there were a number of cases
of that kind) a tax was levied directly on real estate or slaves
because of ownership, it was treated as coming within the direct
class and apportionment was provided for, while no instance of
apportionment as to any other kind of tax is afforded. Again, the
situation is aptly illustrated by the various acts taxing incomes
derived from property of every kind and nature which were enacted
beginning in 1861, and lasting during what may be termed the Civil
War period. It is not disputable that these latter taxing laws were
classed under the head of excises, duties, and imposts because it
was assumed that they were of that character inasmuch as, although
putting a tax burden on income of every kind, including that
derived from property real or personal, they were not taxes
directly on property because of its ownership. And this practical
construction came in theory to be the accepted one, since it was
adopted without dissent by the most eminent of the text writers. 1
Kent, Com. 254, 256; 1 Story, Const. § 955; Cooley, Const.Lim. 5th
ed. *480; Miller on the Constitution 237; Pomeroy's Constitutional
Law § 281; Hare, Const.Law, Vol. 1, 249, 250; Burroughs on Taxation
502; Ordronaux, Constitutional Legislation 225.

															Upon the lapsing of a considerable period after the repeal of
the income tax laws referred to, in 1894, an act was passed laying
a tax on incomes from all classes of property and other sources of
revenue which was not apportioned, and which therefore was, of
course, assumed to come within the classification of excises,
duties, and imposts which were subject to the rule of uniformity,
but not to the rule of apportionment. The constitutional validity
of this law was challenged on the ground that it did not fall
within the class of excises, duties, and imposts, Page 240 U. S. 16 but was direct in the constitutional sense, and was therefore
void for want of apportionment, and that question came to this
Court and was passed upon in Pollock v. Farmers' Loan &
Trust Co., 157 U. S. 429 ; 158 U. S. 158 U.S.
601. The Court, fully recognizing in the passage which we have
previously quoted the all-embracing character of the two great
classifications, including, on the one hand, direct taxes subject
to apportionment, and on the other, excises, duties, and imposts
subject to uniformity, held the law to be unconstitutional in
substance for these reasons: concluding that the classification of
direct was adopted for the purpose of rendering it impossible to
burden by taxation accumulations of property, real or personal,
except subject to the regulation of apportionment, it was held that
the duty existed to fix what was a direct tax in the constitutional
sense so as to accomplish this purpose contemplated by the
Constitution. (157 U.S. 157 U. S.
581 .) Coming to consider the validity of the tax from
this point of view, while not questioning at all that in common
understanding it was direct merely on income and only indirect on
property, it was held that, considering the substance of things, it
was direct on property in a constitutional sense, since to burden
an income by a tax was, from the point of substance, to burden the
property from which the income was derived, and thus accomplish the
very thing which the provision as to apportionment of direct taxes
was adopted to prevent. As this conclusion but enforced a
regulation as to the mode of exercising power under particular
circumstances, it did not in any way dispute the all-embracing
taxing authority possessed by Congress, including necessarily
therein the power to impose income taxes if only they conformed to
the constitutional regulations which were applicable to them.
Moreover, in addition, the conclusion reached in the Pollock case did not in any degree involve holding that
income taxes generically and necessarily came within the class Page 240 U. S. 17 of direct taxes on property, but, on the contrary, recognized
the fact that taxation on income was in its nature an excise
entitled to be enforced as such unless and until it was concluded
that to enforce it would amount to accomplishing the result which
the requirement as to apportionment of direct taxation was adopted
to prevent, in which case the duty would arise to disregard form
and consider substance alone, and hence subject the tax to the
regulation as to apportionment which otherwise as an excise would
not apply to it. Nothing could serve to make this clearer than to
recall that, in the Pollock case, insofar as the law taxed
incomes from other classes of property than real estate and
invested personal property -- that is, income from "professions,
trades, employments, or vocations" (158 U.S. 158 U. S. 637 )
-- its validity was recognized; indeed, it was expressly declared
that no dispute was made upon that subject, and attention was
called to the fact that taxes on such income had been sustained as
excise taxes in the past. Id., p. 158 U. S. 635 .
The whole law was, however, declared unconstitutional on the ground
that to permit it to thus operate would relieve real estate and
invested personal property from taxation, and

															"would leave the burden of the tax to be borne by professions,
trades, employments, or vacations, and in that way what was
intended as a tax on capital would remain, in substance, a tax on
occupations and labor"

															( id., p. 158 U. S. 637 )
-- a result which, it was held, could not have been contemplated by
Congress.

															This is the text of the Amendment:

															"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."

															It is clear on the face of this text that it does not purport to
confer power to levy income taxes in a generic sense -- an
authority already possessed and never questioned -- Page 240 U. S. 18 or to limit and distinguish between one kind of income taxes and
another, but that the whole purpose of the Amendment was to relieve
all income taxes when imposed from apportionment from a
consideration of the source whence the income was derived. Indeed,
in the light of the history which we have given and of the decision
in the Pollock case, and the ground upon which the ruling
in that case was based, there is no escape from the conclusion that
the Amendment was drawn for the purpose of doing away for the
future with the principle upon which the Pollock case was
decided -- that is, of determining whether a tax on income was
direct not by a consideration of the burden placed on the taxed
income upon which it directly operated, but by taking into view the
burden which resulted on the property from which the income was
derived, since, in express terms, the Amendment provides that
income taxes, from whatever source the income may be derived, shall
not be subject to the regulation of apportionment. From this in
substance it indisputably arises, first, that all the contentions
which we have previously noticed concerning the assumed limitations
to be implied from the language of the Amendment as to the nature
and character of the income taxes which it authorizes find no
support in the text, and are in irreconcilable conflict with the
very purpose which the Amendment was adopted to accomplish. Second,
that the contention that the Amendment treats a tax on income as a
direct tax although it is relieved from apportionment and is
necessarily therefore not subject to the rule of uniformity as such
rule only applies to taxes which are not direct, thus destroying
the two great classifications which have been recognized and
enforced from the beginning, is also wholly without foundation
since the command of the Amendment that all income taxes shall not
be subject to apportionment by a consideration of the sources from
which the taxed income may be derived Page 240 U. S. 19 forbids the application to such taxes of the rule applied in the Pollock case by which alone such taxes were removed from
the great class of excises, duties, and imposts subject to the rule
of uniformity, and were placed under the other or direct class.
This must be unless it can be said that, although the Constitution,
as a result of the Amendment, in express terms excludes the
criterion of source of income, that criterion yet remains for the
purpose of destroying the classifications of the Constitution by
taking an excise out of the class to which it belongs and
transferring it to a class in which it cannot be placed
consistently with the requirements of the Constitution. Indeed,
from another point of view, the Amendment demonstrates that no such
purpose was intended, and, on the contrary, shows that it was drawn
with the object of maintaining the limitations of the Constitution
and harmonizing their operation. We say this because it is to be
observed that, although from the date of the Hylton case,
because of statements made in the opinions in that case, it had
come to be accepted that direct taxes in the constitutional sense
were confined to taxes levied directly on real estate because of
its ownership, the Amendment contains nothing repudiation or
challenging the ruling in the Pollock case that the word
"direct" had a broader significance, since it embraced also taxes
levied directly on personal property because of its ownership, and
therefore the Amendment at least impliedly makes such wider
significance a part of the Constitution -- a condition which
clearly demonstrates that the purpose was not to change the
existing interpretation except to the extent necessary to
accomplish the result intended -- that is, the prevention of the
resort to the sources from which a taxed income was derived in
order to cause a direct tax on the income to be a direct tax on the
source itself, and thereby to take an income tax out of the class
of excises, duties, and imposts, and place it in the class of
direct taxes. Page 240 U. S. 20 We come, then, to ascertain the merits of the many contentions
made in the light of the Constitution as it now stands -- that is
to say, including within its terms the provisions of the Sixteenth
Amendment as correctly interpreted. We first dispose of two
propositions assailing the validity of the statute on the one hand
because of its repugnancy to the Constitution in other respects,
and especially because its enactment was not authorized by the
Sixteenth Amendment.

															The statute was enacted October 3, 1913, and provided for a
general yearly income tax from December to December of each year.
Exceptionally, however, it fixed a first period embracing only the
time from March 1, to December 31, 1913, and this limited
retroactivity is assailed as repugnant to the due process clause of
the Fifth Amendment, and as inconsistent with the Sixteenth
Amendment itself. But the date of the retroactivity did not extend
beyond the time when the Amendment was operative, and there can be
no dispute that there was power by virtue of the Amendment during
that period to levy the tax, without apportionment, and so far as
the limitations of the Constitution in other respects are
concerned, the contention is not open, since, in Stockdale
v. Atlantic Ins. Co. , 20 Wall. 323, 87 U. S. 331 ,
in sustaining a provision in a prior income tax law which was
assailed because of its retroactive character, it was said:

															"The right of Congress to have imposed this tax by a new
statute, although the measure of it was governed by the income of
the past year, cannot be doubted; much less can it be doubted that
it could impose such a tax on the income of the current year,
though part of that year had elapsed when the statute was passed.
The joint resolution of July 4th, 1864, imposed a tax of five
percent upon all income of the previous year, although one tax on
it had already been paid, and no one doubted the validity of the
tax or attempted to resist it. " Page 240 U. S. 21 The statute provides that the tax should not apply to enumerated
organizations or corporations, such as labor, agricultural or
horticultural organizations, mutual savings banks, etc., and the
argument is that as the Amendment authorized a tax on incomes "from
whatever source derived," by implication it excluded the power to
make these exemptions. But this is only a form of expressing the
erroneous contention as to the meaning of the Amendment, which we
have already disposed of. And, so far as this alleged illegality is
based on other provisions of the Constitution, the contention is
also not open, since it was expressly considered and disposed of in Flint v. Stone Tracy Co., 220 U.
S. 107 , 220 U. S.
173 .

															Without expressly stating all the other contentions, we
summarize them to a degree adequate to enable us to typify and
dispose of all of them.

															1. The statute levies one tax called a normal tax on all incomes
of individuals up to $20,000, and from that amount up, by
gradations, a progressively increasing tax, called an additional
tax, is imposed. No tax, however, is levied upon incomes of
unmarried individuals amounting to $3,000 or less, nor upon incomes
of married persons amounting to $4,000 or less. The progressive tax
and the exempted amounts, it is said, are based on wealth alone,
and the tax is therefore repugnant to the due process clause of the
Fifth Amendment.

															2. The act provides for collecting the tax at the source -- that
is, makes it the duty of corporations, etc., to retain and pay the
sum of the tax on interest due on bonds and mortgages, unless the
owner to whom the interest is payable gives a notice that he claims
an exemption. This duty cast upon corporations, because of the cost
to which they are subjected, is asserted to be repugnant to due
process of law as a taking of their property without compensation,
and we recapitulate various contentions as to discrimination
against corporations and against individuals Page 240 U. S. 22 predicated on provisions of the act dealing with the
subject.

															(a) Corporations indebted upon coupon and registered bonds are
discriminated against, since corporations not so indebted are
relieved of any labor or expense involved in deducting and paying
the taxes of individuals on the income derived from bonds.

															(b) Of the class of corporations indebted as above stated, the
law further discriminates against those which have assumed the
payment of taxes on their bonds, since, although some or all of
their bondholders may be exempt from taxation, the corporations
have no means of ascertaining such fact, and it would therefore
result that taxes would often be paid by such corporations when no
taxes were owing by the individuals to the government.

															(c) The law discriminates against owners of corporate bonds in
favor of individuals none of whose income is derived from such
property, since bondholders are, during the interval between the
deducting and the paying of the tax on their bonds, deprived of the
use of the money so withheld.

															(d) Again, corporate bondholders are discriminated against
because the law does not release them from payment of taxes on
their bonds even after the taxes have been deducted by the
corporation, and therefore if, after deduction, the corporation
should fail, the bondholders would be compelled to pay the tax a
second time.

															(e) Owners of bonds the taxes on which have been assumed by the
corporation are discriminated against because the payment of the
taxes by the corporation does not relieve the bondholders of their
duty to include the income from such bonds in making a return of
all income, the result being a double payment of the taxes, labor
and expense in applying for a refund, and a deprivation of the use
of the sum of the taxes during the interval which elapses before
they are refunded. Page 240 U. S. 23 3. The provision limiting the amount of interest paid which may
be deducted from gross income of corporations for the purpose of
fixing the taxable income to interest on indebtedness not exceeding
one half the sum of bonded indebtedness and paid-up capital stock
is also charged to be wanting in due process because discriminating
between different classes of corporations and individuals.

															4. It is urged that want of due process results from the
provision allowing individuals to deduct from their gross income
dividends paid them by corporations whose incomes are taxed, and
not giving such right of deduction to corporations.

															5. Want of due process is also asserted to result from the fact
that the act allows a deduction of $3,000 or $4,000 to those who
pay the normal tax -- that is, whose incomes are $20,000 or less --
and does not allow the deduction to those whose incomes are greater
than $20,000 -- that is, such persons are not allowed, for the
purpose of the additional or progressive tax, a second right to
deduct the $3,000 or $4,000 which they have already enjoyed. And a
further violation of due process is based on the fact that, for the
purpose of the additional tax no second right to deduct dividends
received from corporations is permitted.

															6. In various forms of statement, want of due process, it is
moreover insisted, arises from the provisions of the act allowing a
deduction for the purpose of ascertaining the taxable income of
stated amounts, on the ground that the provisions discriminate
between married and single people, and discriminate between
husbands and wives who are living together and those who are
not.

															7. Discrimination and want of due process result, it is said,
from the fact that the owners of houses in which they live are not
compelled to estimate the rental value in making up their incomes,
while those who are living in rented houses and pay rent are not
allowed, in making up their taxable income, to deduct rent which
they have Page 240 U. S. 24 paid, and that want of due process also results from the fact
that, although family expenses are not, as a rule, permitted to be
deducted from gross, to arrive at taxable, income, farmers are
permitted to omit from their income return certain products of the
farm which are susceptible of use by them for sustaining their
families during the year.

															So far as these numerous and minute, not to say in many respects
hypercritical, contentions are based upon an assumed violation of
the uniformity clause, their want of legal merit is at once
apparent, since it is settled that that clause exacts only a
geographical uniformity, and there is not a semblance of ground in
any of the propositions for assuming that a violation of such
uniformity is complained of. Knowlton v. Moore, 178 U. S. 41 ; Patton v. Brady, 184 U. S. 608 , 184 U. S. 622 ; Flint v. Stone Tracy Co., 220 U.
S. 107 , 220 U. S. 158 ; Billings v. United States, 232 U.
S. 261 , 232 U. S.
282 .

															So far as the due process clause of the Fifth Amendment is
relied upon, it suffices to say that there is no basis for such
reliance, since it is equally well settled that such clause is not
a limitation upon the taxing power conferred upon Congress by the
Constitution; in other words, that the Constitution does not
conflict with itself by conferring, upon the one hand, a taxing
power, and taking the same power away, on the other, by the
limitations of the due process clause. Treat v. White, 181 U. S. 264 ; Patton v. Brady, 184 U. S. 608 ; McCray v. United States, 195 U. S. 27 , 195 U. S. 61 ; Flint v. Stone Tracy Co., 220 U.
S. 107 , 220 U. S. 158 ; Billings v. United States, 232 U.
S. 261 , 232 U. S. 282 .
And no change in the situation here would arise even if it be
conceded, as we think it must be, that this doctrine would have no
application in a case where, although there was a seeming exercise
of the taxing power, the act complained of was so arbitrary as to
constrain to the conclusion that it was not the exertion of
taxation, but a confiscation of property -- that is, a taking Page 240 U. S. 25 of the same in violation of the Fifth Amendment, or, what is
equivalent thereto, was so wanting in basis for classification as
to produce such a gross and patent inequality as to inevitably lead
to the same conclusion. We say this because none of the
propositions relied upon in the remotest degree presents such
questions. It is true that it is elaborately insisted that,
although there be no express constitutional provision prohibiting
it, the progressive feature of the tax causes it to transcend the
conception of all taxation and to be a mere arbitrary abuse of
power which must be treated as wanting in due process. But the
proposition disregards the fact that, in the very early history of
the government, a progressive tax was imposed by Congress, and that
such authority was exerted in some, if not all, of the various
income taxes enacted prior to 1894 to which we have previously
adverted. And over and above all this, the contention but
disregards the further fact that its absolute want of foundation in
reason was plainly pointed out in Knowlton v. Moore, 178 U. S. 41 , and
the right to urge it was necessarily foreclosed by the ruling in
that case made. In this situation, it is, of course, superfluous to
say that arguments as to the expediency of levying such taxes, or
of the economic mistake or wrong involved in their imposition, are
beyond judicial cognizance. Besides this demonstration of the want
of merit in the contention based upon the progressive feature of
the tax, the error in the others is equally well established either
by prior decisions or by the adequate bases for classification
which are apparent on the face of the assailed provisions; that is,
the distinction between individuals and corporations, the
difference between various kinds of corporations, etc., etc. Knowlton v. Moore, supra; Flint v. Stone Tracy Co., supra;
Billings v. United States, supra; 76 U. S. Commonwealth, 9 Wall. 353; National Safe Deposit Co. v.
Illinois, 232 U. S. 58 , 232 U. S. 70 . In
fact, comprehensively surveying all the contentions Page 240 U. S. 26 relied upon, aside from the erroneous construction of the
Amendment which we have previously disposed of, we cannot escape
the conclusion that they all rest upon the mistaken theory that,
although there be differences between the subjects taxed, to
differently tax them transcends the limit of taxation and amounts
to a want of due process, and that, where a tax levied is believed
by one who resists its enforcement to be wanting in wisdom and to
operate injustice, from that fact in the nature of things there
arises a want of due process of law and a resulting authority in
the judiciary to exceed its powers and correct what is assumed to
be mistaken or unwise exertions by the legislative authority of its
lawful powers, even although there be no semblance of warrant in
the Constitution for so doing.

															We have not referred to a contention that, because certain
administrative powers to enforce the act were conferred by the
statute upon the Secretary of the Treasury, therefore it was void
as unwarrantedly delegating legislative authority, because we think
to state the proposition is to answer it. Field v. Clark, 143 U. S. 649 ; Buttfield v. Stranahan, 192 U. S. 470 , 192 U. S. 496 ; Oceanic Steam Navigation Co. v. Stranahan, 214 U.
S. 320 . Affirmed.