282 U.S. 216 (1931), 22, Willcuts v. Bunn

Docket Nº:No. 22
Citation:282 U.S. 216, 51 S.Ct. 125, 75 L.Ed. 304
Party Name:Willcuts v. Bunn
Case Date:January 05, 1931
Court:United States Supreme Court

Page 216

282 U.S. 216 (1931)

51 S.Ct. 125, 75 L.Ed. 304




No. 22

United States Supreme Court

Jan. 5, 1931

Argued December 2, 1930




1. The profits derived by an investor in municipal bonds from their sale by him at a higher price are taxable as income under the Revenue Act of 1924. P. 223.

2. Federal taxation of such profits is not unconstitutional as a tax on state instrumentalities. So held where it did not appear that the bonds had been issued at a discount so that the gain derived from their resale could be considered to be in lieu of interest. P. 224.

3. The power to tax is no less essential to our governmental system than the power to borrow money. To preserve the latter, it is not necessary to cripple the former by exempting subjects which fall within the general application of nondiscriminatory tax laws, where their taxation lays no direct burden upon a governmental instrumentality, and exerts only a remote, if any, influence upon the exercise of the functions of government. P. 225.

4. In the case of the bonds of a state or its political subdivisions, the subject held to be exempt from federal taxation is the principal and interest of the bonds. Such obligations being contracts of the state or subdivision, a tax upon the amounts payable by their terms has been regarded as bearing directly upon the exercise of the governmental borrowing power. P. 226.

5. But sales of such bonds by their owners, after they have been issued, are transactions distinct from the governmental contracts in the bonds, and the profits on such sales are in a different category of income from the interest payable on the bonds. P. 227.

6. Sales of such bonds by those who have invested in them cannot be deemed inseparably connected with the exercise of the borrowing power of the state, so as to make immune from federal taxation the profits of the sales. P. 228.

7. Before the power of Congress to lay the excise in question can be denied as imposing a burden upon the state's borrowing power, it must be made to appear that the burden is real, not imaginary; substantial, not negligible. Pp. 230, 234.

Page 217

8. The assertion that such taxes operate to burden governmental power to borrow is at variance with uniform and long established practice. The history of income tax legislation is persuasive, if not controlling, upon this question of practical effect. Pp. 232, 234.

35 F.2d 29, reversed.

Certiorari, 280 U.S. 551, to review a judgment affirming a recovery by the present respondent in his suit against the Collector for money paid the latter, under protest, as an additional income tax.

Page 223

HUGHES, J., lead opinion

MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.

The respondent, Charles W. Bunn, in the years 1919 and 1920 purchased for cash, as investments, bonds issued by various counties and cities in the State of Minnesota. In January, 1924, he sold these bonds, realizing a net profit of $736.26. Upon this net profit, less a net loss of $41.20 suffered by him on similar bonds held less than two years, the Commissioner of Internal Revenue determined an additional income tax in the amount of $85.44. The plaintiff paid this amount to the Collector under protest, and claimed a refund upon the ground that the tax was illegal because assessed upon income from municipal bonds. The claim was rejected, and this suit was brought against the Collector to recover the money paid.

The complaint, alleging these facts, charged that the Revenue Act of 1924, if thus applied, was unconstitutional and void in that the tax was laid upon the instrumentalities of states. Demurrer to the complaint was overruled by the district court, and, the defendant having declined to plead further, judgment was entered for the plaintiff. The judgment was affirmed by the circuit court of appeals and this Court granted a writ of certiorari.

The Revenue Act of 1924 (c. 234, § 213, 43 Stat. 253, 267, 268, U.S.Code Tit. 26, § 954) clearly authorized the

Page 224

tax. The Act included in the term "gross income" the grains and profits derived from "sales, or dealings in property, whether real or personal." See Irwin v. Gavit, 268 U.S. 161, 166. The Act gave an express exemption to "interest upon the obligations of a state, territory, or any political subdivision thereof," but this exemption was not extended to profits realized on the sale of such obligations, and the statement of the Government is not challenged that it has been the uniform practice of the Treasury Department in administering the federal income tax acts in include in taxable income the gain derived from the sale of state and municipal bonds.

The authority of the Congress to lay a tax on the profit realized by an investor from the sale or conversion of capital assets in general is not open to dispute, and is not disputed. That is a matter of governmental policy, and not of constitutional power.1 The question raised here is not because the securities sold were capital assets, but because they were governmental in character.

The question is further limited by the fact that it does not appear that the securities were issued at a discount, so that the gain derived could be considered to be in lieu of interest. Whatever questions might arise in cases of that sort are not now before the court.2 The present case is simply one of profit obtained from purchase and sale, without qualification by any special circumstances.

The well established principle is invoked that a tax upon the instrumentalities of the states is forbidden by

Page 225

the federal Constitution, the exemption resting upon necessary implication in order effectively to maintain our dual system of government.3 The familiar aphorism is

that, as the means and instrumentalities employed by the general government to carry into operation the powers granted to it are exempt from taxation by the states, so are those of the states exempt from taxation by the general government.

Ambrosini v. United States, 187 U.S. 1, 7. And a tax upon the obligations of a state or of its political subdivisions falls within the constitutional prohibition as a tax upon the exercise of the borrowing power of the state. Pollock v. Farmers' Loan & Trust Company, 157 U.S. 429, 584-586; id., 158 U.S. 601, 618; National Life Insurance Company v. United States, 277 U.S. 508, 521.

The limitation of this principle to its appropriate applications is also important to the successful working of our governmental system. The power to tax is no less essential than the power to borrow money, and, in preserving the latter, it is not necessary to cripple the former by extending the constitutional exemption from taxation to those subjects which fall within the general application of nondiscriminatory laws, and where no direct burden is laid upon the...

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