Laughlin v. Alliance Ins Co of Philadelphia Insurance Co of State of Pennsylvania v. Laughlin, s. 548

• Decision Date: 16 May 1932
• Docket Number: 547,Nos. 548,s. 548
• Citation: 76 L.Ed. 1083,286 U.S. 244,52 S.Ct. 538
• Parties: MacLAUGHLIN, Collector of Internal Revenue, v. ALLIANCE INS. CO. OF PHILADELPHIA. INSURANCE CO. OF STATE OF PENNSYLVANIA v. MacLAUGHLIN, Collector of Internal Revenue
• Court: U.S. Supreme Court

286 U.S. 244

52 S.Ct. 538

76 L.Ed. 1083

MacLAUGHLIN, Collector of Internal Revenue,

v ALLIANCE INS. CO. OF PHILADELPHIA.

INSURANCE CO. OF STATE OF PENNSYLVANIA

v. MacLAUGHLIN, Collector of Internal Revenue.

Nos. 548, 547.

Argued April 13, 14, 1932.

Decided May 16, 1932.

Mr. Robert T. McCracken, of Philadelphia, Pa., for insurance companies.

[Argument of Counsel from page 245 intentionally omitted] The Attorney General and Mr. Thomas D.Thacher, Sol. Gen., of Washington, D. C., for MacLaughlin.

[Argument of Counsel from page 246 intentionally omitted] Mr. Justice STONE delivered the opinion of the Court.

Appellee in No. 548, a Pennsylvania stock fire and marine insurance corporation, brought the present suit in the District Court of Eastern Pennsylvania, to recover income tax for the year 1928, alleged to have been illegally exacted. Under the Revenue Acts of 1913, 1916, 1917, and 1918, stock fire insurance companies were taxed upon their income, including gains realized from the sale or other disposition of property, accruing subsequent to March 1, 1913; but, by the Revenue Acts of 1921, 1924, and 1926, gains of such companies, from the sale or other disposition of property, were not subject to tax, and losses similarly incurred were not deductible from gross income.

Supplement G of the Revenue Act of May 29, 1928, 45 Stat. 791, 844, c. 852, § 204(a)(1), 26 USCA § 2204(a)(1), effective as of January 1st of the year, taxed the income of insurance companies, and by section 204(b)(1), applicable to insurance companies other than life or mutual, gross income was defined as including 'gain during the taxable year from the sale or other disposition of property.' In 1928 appellant received a profit from the sale of property acquired before that year, upon which the Commissioner assessed a tax computed, on the basis prescribed by section 113 of the act (26 USCA § 2113), by including in the taxable income all the gain attributable to increase in value after March 1, 1913, and realized in 1928. The District Court held that only the accretion of gain after January 1, 1928, was taxed, and gave judgment in the company's favor for the tax collected in excess of the amount so computed. 49 F.(2d) 361. On appeal, the Court of Appeals for the Third Circuit certified a question to this Court under section 239 of the Judicial Code, as amended by the Act of February 13, 1925 (28 USCA § 346), as follows:

'Under the Revenue Act of 1928, is the basis to be used by an insurance company (other than a life or mutual insurance company) in computing 'gain during the taxable year from the sale or other disposition of property,' acquired before and disposed of after January 1, 1928, its fair market value as of January 1, 1928, the effective date of the Act?'

The company contends that so much of the gain as accrued before the effective date of the taxing act was capital, which could not constitutionally be taxed under the Sixteenth Amendment, and that in any case the constitutionality of a tax upon the previously accrued gain is so doubtful as to require the taxing act to be construed as not authorizing such a levy.

In No. 547, decided by the same District Court, and involving similar facts and the same taxing statutes, the Court of Appeals for the Third Circuit certified the following question:

'If the basis to be used by an insurance company (other than a life or mutual insurance company) in computing 'gain during the taxable year from the sale or other disposition of property', acquired before and disposed of after January 1, 1928, the effective date of the Revenue Act of 1928, be the fair market value of such property as of March 1, 1913, or other basis provided by section 113 of the Act, is the quoted provision (Section 204(b)(1), clause (B) unconstitutional because it taxes capital?'

The tax under this and earlier revenue acts was imposed upon net income for stated accounting periods, here the calendar year 1928, see Burnet v. Sanford & Brooks Co., 282 U. S. 359, 363, 51 S. Ct. 150, 75 L. Ed. 383, and it is only gain realized from the sale or other disposition of property, which is included in the taxable income. Realization of the gain is the event which calls into operation the taxing act, although part of the profit realized in one accounting period may have been due to increase of value in an earlier one. While increase in value of property, not realized as gain by its sale or other disposition, may, in an economic or bookkeeping sense, be deemed an addition to capital in a later period, see Merchants' Loan & Trust Co. v. Smietanka, 255 U. S. 509, 41 S. Ct. 386, 65 L. Ed. 751, 15 A. L. R. 1305, it is nevertheless a gain from capital investment which, when realized, by conversion into money or other property, constitutes profit which has consistently been regarded as income within the meaning of the Sixteenth Amendment and taxable as such in the period when realized, see Lynch v. Hornby, 247 U. S. 339, 38 S. Ct. 543, 62 L. Ed. 1149; Merchants' Loan & Trust Co. v. Smietanka, supra; Eldorado Coal & Mining Co. v. Mager, 255 U. S. 522, 41 S. Ct. 390, 65 L. Ed. 757; Goodrich v. Edwards, 255 U. S. 527, 41 S. Ct. 390, 65 L. Ed. 758; Walsh v. Brewster, 255 U. S. 536, 41 S. Ct. 392, 65 L. Ed. 762; Taft v. Bowers, 278 U. S. 470, 49 S. Ct. 199, 73 L. Ed. 460, 64 A. L. R. 362; Lucas v. Alexander, 279 U. S. 573, 49 S. Ct. 426, 73 L. Ed. 851, 61 A. L. R. 906; Willcuts v. Bunn, 282 U. S. 216, 51 S. Ct. 125, 75 L. Ed. 304.

Here there is no question of a tax on enhancement of value occurring before March 1, 1913, the effective date of the income tax act of that year, for the collector asserts no right to tax such increase in value. The fact that a part of the taxed gain represented increase in value after that date, but before the present taxing act, is without significance. Congress, having constitutional power to tax the gain, and having established a policy of taxing it, see Milliken v. United States, 283 U. S. 15, 22, 23, 51 S. Ct. 324, 75 L. Ed. 809, may choose the moment of its realization and the amount realized, for the incidence and the measurement of the tax. Its failure to impose a tax upon the increase in value in the earlier years, assuming without deciding that it had the power, cannot preclude it from taxing the gain in the year when realized, any more than in any other case, where the tax imposed in upon realized, as distinguished from accrued, gain. If the gain became capital by virtue of the increase in value in the years before 1928, and so could not be taxed as income, the same would be true of the enhancement of value in any one year after the adoption of the taxing act, which was realized and taxed in another. But the constitutionality of a tax so applied has been repeatedly affirmed and never questioned. The tax being upon realized gain, it may constitutionally be imposed upon the entire amount of the gain realized within the taxable period, even though some of it represents enhanced value in an earlier period before the adoption of the taxing act. Cooper v. United States, 280 U. S. 409, 50 S. Ct. 164, 74 L. Ed. 516; compare Taft v. Bowers, 278 U. S. 470, 49 S. Ct. 199, 73 L. Ed. 460, 64 A. L. R. 362. See, also, Glenn v. Doyal, 285 U. S. 526, 52 S. Ct. 404, 76 L. Ed.—(March 21, 1932) dismissing per curiam, for want of a substantial federal question, an appeal from a decision of the Georgia Supreme Court (reported sub nom. Norman v. Bradley, 173 Ga. 482, 160 S. E. 413), that a state income tax on the profits realized from a sale of corporate stocks, after the passage of the act, was constitutional, though the gains had accrued prior to its enactment.

Doyle v. Mitchell Brothers Co., 247 U. S. 179, 38 S. Ct. 467, 62 L. Ed. 1054, and Hays v. Gauley Mountain Coal Co., 247 U. S. 189, 38 S. Ct. 470, 62 L. Ed. 1061, on which the the constitutionality, of the Corporation Excise kthe constitutionality, of the Corporation Excise Tax Act of 1909 (36 Stat. 112), and considerations which, in Lynch v. Turrish, 247 U. S. 221, 38 S. Ct. 537, 62 L. Ed. 1087, and Southern Pacific Co. v. Lowe, 247 U. S. 330, 38 S. Ct. 540, 62 L. Ed. 1142, led to the construction of the income tax act of 1913 as not embracing gains accrued before the effective date of that act, are not present here.

We think it clear that the Revenue Act of 1928 imposed the tax on the entire gain realized within the taxable year. Section 204(b)(1) of Supplement G, 26 USCA § 2204(b)(1), which includes gain from the sale of property in the gross income of insurance companies (other than life or mutual), states no method of computing the gain. But the 1928 act, like its predecessors, prescribed in other sections, §§ 111-113 (26 USCA §§ 2111-2113), that taxable gains from the sale of property should be determined by deducting from the net sales price the cost or the fair market value on March 1, 1913, if acquired before that date. There provisions are general in their terms, without any stated exception, and on their face are applicable alike to all gains from the sale of property taxed by the act. They either control the computation of the gain referred to in section 204(b)(1), or the word 'gain' in that section, construed without their aid, must be taken in its ordinary sense as embracing the difference between net cost and net selling price, and so upon established principles would include in the taxable realized gain all which had accrued since the effective date of the Income Tax Act of 1913, the first enactment adopted under the Sixteenth Amendment. See Eisner v. Macomber, 252 U. S. 189, 207, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570; Merchants' L. & T. Co. v. Smietanka, supra, pages 519, 520 of 255 U. S., 41 S. Ct. 386. For present purposes, the Revenue Act of 1928 must be regarded as substantially an amendment and continuation of the act of 1913.

The taxpayers insist that the omission from section 204(b)(1) of any reference to sections 111-113, in...