Gavit v. Irwin

• Decision Date: 22 August 1921
• Citation: 275 F. 643
• Parties: GAVIT v. IRWIN, Internal Revenue Collector.
• Court: U.S. District Court — Northern District of New York

275 F. 643

GAVIT v. IRWIN, Internal Revenue Collector.

United States District Court, N.D. New York.

August 22, 1921

Neile F. Towner, of Albany, N.Y., for plaintiff.

Dennis B. Lucey, U.S. Atty., of Ogdensburg, N.Y., for defendant.

COOPER District Judge.

By the will of Anthony N. Brady, deceased, he divided his estate into six equal parts, and devised one-sixth of his estate in trust to his executors, who were thereby made trustees. The trustees were directed to apply so much of the income and profits from such one-sixth as in their discretion they thought necessary for the support and maintenance of decedent's granddaughter, Marcia Ann Gavit, daughter of the plaintiff herein, and to divide the remainder of the income of such one-sixth, not necessary for the support of the granddaughter, into two parts, one of said parts to be paid to the plaintiff during his life, but not longer than the infancy of the daughter Marcia Ann Gavit, and not longer than her natural life should she die before attaining the age of 21 years.

During the tax years of 1913, 1914, and 1915, the plaintiff received certain sums of money under the provisions of the Brady will upon which he has been required to pay, as normal tax, additional tax, and penalties, the sum of $21,602.16. He paid this under protest, and appealed to the Commissioner of Internal Revenue, who decided against him, and the plaintiff has now brought this action to recover such amount of taxes, with interest.

The question before the court, arising upon a demurrer to the complaint, is whether or not the moneys so received by the plaintiff under the aforesaid provisions of the Brady will are taxable as income, within the meaning of the Income Tax Act of October 3, 1913 (38 Stat. 114). The provisions of this act, so far as applicable, are as follows:

'Section II.

'A. Subdivision 1. That there shall be levied, assessed, collected, and paid annually upon the entire net income arising or accruing from all sources on the preceding calendar year to every citizen of the United States, whether residing at home or abroad, and to every person residing in the United Staes, though not a citizen thereof, a tax 1 per centum per annum upon such income. * * *

'Subdivision 2. In addition to the income tax provided under this section (herein referred to as the normal income tax) there shall be levied, assessed, and collected upon the net income of every individual an additional income (herein referred to as the additional tax) of 1 per centum per annum upon the amount by which the total net income exceeds $20,000 and does not exceed $50,000. (Here follows percentages of additional tax.)' * * * all the provisions of this section relating to individuals who are chargeable with the normal income tax, so far as they are applicable and are not inconsistent with this subdivision of paragraph A. shall apply to the levy, assessment, and collection of the additional tax imposed under this section.'

'B. That * * * the net income of a taxable person shall include * * * gains or profits and income derived from any source whatever, including the income from but not the value of property acquired by gift, bequest, devise, or descent.'

'D. * * * Guardians, trustees, * * * and all persons, * * * acting in any fiduciary capacity, shall make and render a return of the net income of the person for whom they act, subject to this tax, coming into their custody or control and management, and be subject to all the provisions of this section which apply to individuals. * * *

'E. * * * All persons, * * * in whatever capacity acting, including * * * trustees acting in any trust capacity, * * * having the control, receipt, custody, disposal, or payment of interest, rent, salaries, wages, * * * or other fixed or determinable annual gains, profits, and income of another person exceeding $3,000 for any taxable year, other than dividends on capital stock, or from the net earnings of corporations and jointstock companies or associations subject to like tax, who are required to make and render a return in behalf of another, as provided herein, to the collector of his, her, or its district, are hereby authorized and required to deduct and withhold from such annual gains, profits, and income such sum as will be sufficient to pay the normal tax imposed thereon by this section, and shall pay to the officer of the United States Government authorized to receive the same; and they are each hereby made personally liable for such tax. * * * The plaintiff contends that the moneys thus received by him are not income, under the provisions of the act of 1913, especially in view of the provisions of subdivision B of such act, and that, even if they come under the act of 1913, they are not income within the meaning of the Sixteenth Amendment to the Constitution of the United States, and that the statute is unconstitutional.

The courts have held that income, within the meaning of the Constitution and the Income Tax Act passed pursuant to the Sixteenth Amendment, must be taken in the common understanding of the term. Eisner v. Macomber, 252 U.S. 189, 40 Sup.Ct. 189, 64 L.Ed. 521, 9 A.L.R. 1570. Income, as laid down by the United States Supreme Court, within the purview of the Constitution, is defined as:

' * * * The gain derived from capital, from labor, or from both combined, provided it be understood to include profits gained through a sale or conversion of capital assets. ' Eisner v. Macomber, 252 U.S. 189, citing Stratton Ind. v. Howbert, 231 U.S. 399, 415, and Doyle v. Mitchell Bros. Co., 247 U.S. 179, 185.

In the same case (Eisner v. Macomber) the relation of capital to income is expressed as follows:

'The fundamental relation of 'capital' to 'income' has been much discussed by the economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time.'

Since the moneys received by plaintiff were not income from labor, nor from labor and capital combined, nor from the sale or conversion of capital assets, we have only to do with income received from capital. Income, as now considered, is, after the severance, separate and apart from the capital; it is as separate and apart from the capital as the fruit from the tree, the crops from the land after severance, or the waters in the outlet stream after passing out of the reservoir. It is something which has grown out of or issued from capital, leaving the capital unimpaired and intact. Having these considerations in mind, it cannot be said that these moneys received by the plaintiff arose from any capital of his. So far as appears from the pleadings in this case, he had no land, trees, or reservoir to produce crops, fruit, or outlet water-- no capital of any kind whatever.

If the Income Tax Law of 1913, therefore, is intended only to tax the income, which is the fruit of the taxpayer's labor, or the income from the taxpayer's capital, in which he has a present ownership (or at least a vested future interest, meantime receiving the income or the gain from the sale or conversion of the taxpayer's capital assets), then the money received by the plaintiff is not income as to him, because he has not and never will have the slightest ownership, present or future, vested or contingent, in the capital producing this income. If this is income, therefore, it is the income, not of the capital of the plaintiff, but of the capital of a portion of the Brady estate, which capital will never be that of the plaintiff.

There is nothing in the act of 1913 which taxes income which is not the income of the citizen or the individual sought to be taxed. The levy, assessment, and payment is upon the net income of a 'citizen.' Section A, subdivision 1. 'Individuals' are chargeable with the normal and the additional income tax. Section A, subdivision 2. The return required by section A, subdivision 2, is a personal return. An estate is not a 'citizen' nor a 'person.' There is nothing in the act of 1913 which shows any intent to tax...