Merchants Loan Trust Co v. Smietanka

• Decision Date: 28 March 1921
• Docket Number: No. 608,608
• Citation: Merchants Loan Trust Co v. Smietanka, 255 U.S. 509, 41 S.Ct. 386, 65 L.Ed. 751, 15 A. L. R. 1305 (1921)
• Parties: MERCHANTS' LOAN & TRUST CO. v. SMIETANKA
• Court: U.S. Supreme Court

255 U.S. 509

41 S.Ct. 386

65 L.Ed. 751

MERCHANTS' LOAN & TRUST CO.

v SMIETANKA.

No. 608.

Argued Jan. 11 and 12, 1921.

Decided March 28, 1921.

Mr. Albert M. Kales, of Chicago, Ill., for plaintiff in error.

[Argument of Counsel from pages 509-512 intentionally omitted] Mr. Solicitor General Frierson, for defendant in error.

[Argument of Counsel from pages 512-514 intentionally omitted] Mr. Justice CLARKE delivered the opinion of the Court.

A writ of error brings this case here for review of a judgment of the District Court of the United States for the Northern District of Illinois, sustaining a demurrer to a declaration in assumpsit to recover an assessment of taxes for the year 1917, made under warrant of the Income Tax Act of Congress, approved September 8, 1916 (39 Stat. c. 463, p. 756), as amended by the act approved October 3, 1917 (40 Stat. c. 63, p. 300). Payment was made under protest, and the claim to revover is based upon the contention that the fund taxed was not 'income' within the scope of the Sixteenth Amendment to the Constitution of the United States, and that the effect given by the lower court to the act of Congress cited renders it unconstitutional and void. This is sufficient to sustain the writ of error. Towne v. Eisner, 245 U. S. 418, 38 Sup. Ct. 158, 62 L. Ed. 372, L. R. A. 1918B, 254.

Arthur Ryerson died in 1912, and the plaintiff in error is trustee under his will of property the net income of which was directed to be paid to his widow during her life and after her death to be used for the benefit of his children, or their representatives, until each child should arrive at 25 years of age, when each should receive his or her share of the trust fund.

The trustee was given the fullest possible dominion over the trust estate. It was made the final judge as to what 'net income' of the estate should be, and its determination in this respect was made binding upon all parties interested therein, 'except that it is my will that stock dividends and accretions of selling values shall be considered principal and not income.'

The widow and four children were living in 1917.

Among the assets which came to the custody of the trustee were 9,522 shares of the capital stock of Joseph T. Ryerson & Son, a corporation. It is averred that the cash value of these shares, on March 1, 1913, was $561,798, and that they were sold for $1,280,996.64, on February 2, 1917. The Commissioner of Internal Revenue treated the difference between the value of the stock on March 1, 1913, and the amount for which it was sold on February 2, 1917, as income for the year 1917, and upon that amount assessed the tax which was paid. No question is made as to the amount of the tax if the collection of it was lawful.

The ground of the protest, and the argument for the plaintiff in error here, is that the sum charged as 'income' represented appreciation in the value of the capital assets of the estate which was not 'income' within the meaning of the Sixteenth Amendment, and therefore could not constitutionally be taxed, without apportionment, as required by section 2, clause 3, and by section 9, clause 4, of article 1 of the Constitution of the United States.

It is first argued that the increase in value of the stock could not be lawfully taxed under the act of Congress because it was not income to the widow, for she did not receive it in 1917, and never can receive it, that it was not income in that year to the children for they did not then, and may never, receive it, and that it was not income to the trustee, not only because the will creating the trust required that 'stock dividends and accretions of selling value shall be considered principal and not income,' but also because in the 'common understanding' the term 'income' does not comprehend such a gain or profit as we have here, which it is contended is really an accretion to capital and therefore not constitutionally taxable under Eisner v. Macomber, 252 U. S. 189, 40 Sup. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570. The provision of the will may be disregarded. It was not within the power of the testator to render the fund nontaxable.

Assuming for the present that there was constitutional power to tax such a gain or profit as is here involved, are the terms of the statute comprehensive enough to include it?

Section 2(a) of the act of September 8, 1916 (39 Stat. 757), (40 Stat. 300, 307, § 212), applicable to the case, defines the income of 'a taxable person' as including 'gains, profits, and income derived from * * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property * * * or gains or profits and income derived from any source whatever.'

Plainly the gain we are considering was derived from the sale of personal property, and, very certainly the comprehensive last clause 'gains or profits and income derived from any source whatever,' must also include it, if the trustee was a 'taxable person' within the meaning of the act when the assessment was made.

That the trustee was such a 'taxable person' is clear from section 1204(1)(c) of the act of October 3, 1917 (40 Stat. 331), which requires that——

'Trustees, executors * * * and all persons, corporations, or associations, acting in any fiduciary capacity shall make and render a return of the income of the person, trust, or estate for whom or which they act, and be subject to all the provisions of this title which apply to individuals.'

And section 2(b) of the act of September 8, 1916, supra, specifically declares that the——

'income received by estates of deceased persons during the period of administration or settlement of the estate, * * * or any kind of property held in trust, including such income accumulated in trust for the benefit of unborn or unascertained persons, or persons with contingent interests, and income held for future distribution under the terms of the will or trust shall be likewise taxed, the tax in each instance, except when the income is returned for the purpose of the tax by the beneficiary, to be assessed to the executor, administrator, or trustee, as the case may be.'

Further, section 2(c) clearly shows that it was the purpose of Congress to tax gains, derived from such a sale as we have here, in the manner in which this fund was assessed, by providing that——

'For the purpose of ascertaining the gain derived from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, the fair market price or value of such property as of March 1, 1913, shall be the basis for determining the amount of such gain derived.'

Thus, it is the plainly expressed purpose of the act of Congress to treat such a trustee as we have here as a 'taxable person' and for the purposes of the act to deal with the income received for others precisely as if the beneficiaries had received it in person.

There remains the question, strenuously argued, whether this gain in four years of over $700,000 on an investment of about $500,000 is 'income' within the meaning of the Sixteenth Amendment to the Constitution of the United States.

The question is one of definition, and the answer to it may be found in recent decisions of this Court.

The Corporation Excise Tax Act of August 5, 1909 (36 Stat. 11, 112), was not an income tax law, but a definition of the word 'income' was so necessary in its administration that in an early case it was formulated as 'A gain derived from capital, from labor, or from both combined.' Stratton's Independence v. Howbert, 231 U. S. 399, 415, 34 Sup. Ct. 136, 140 (58 L. Ed. 285).

This definition, frequently approved by this court, received an addition, in its latest income tax decision, which is especially significant in its application to such a case as we have here, so that it now reads:

'Income may be defined as a gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through sale or conversion of capital assets.' Eisner v. Macomber, 252 U. S. 189, 207, 40 Sup. Ct. 189, 193 (64 L. Ed. 521), 9 A. L. R. 1570.

The use made of this definition of 'incone' in the decision of cases arising under the Corporation Excise Tax Act of August 5, 1909, and under the Income Tax Acts, is, we think, decisive of the case before us. Thus, in two cases arising under the Corporation Excise Tax Act:

In Hays v. Gauley Mountain Coal Co., 247 U. S. 189, 38 Sup. Ct. 470, 62 L. Ed. 1061, a coal company, without corporate authority to trade in stocks, purchased shares in another coal mining company in 1902, which it sold in 1911, realizing a profit of $210,000. Over the same objection made in this case, that the fund was merely converted capital, this court held that so much of the profit upon the sale of the stock as accrued subsequent to the effective date of the act was properly treated as income received during 1911, in assessing the tax for that year.

In United States v. Cleveland, Cincinnati, Chicago & St. Louis Railway Co., 247 U. S. 195, 38 Sup. Ct. 472, 62 L. Ed. 1064, a railroad company purchased shares of...