able value, proceeding from the property, severed from the capital, however received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal that is income derived from property, nothing else answers the description.

"The same fundamental conception is clearly set forth in the Sixteenth Amendment-'incomes, from whatever source derived'—the essential thought being expressed with a conciseness and lucidity and entirely in harmony with the form and style of the Constitution."

Another beneficial explanation of the term "income" is furnished by the Supreme Judicial Court of Massachusetts in the case of Thefry v. Putnam; 227 Mass. 522, 116 N. E. 904-907; wherein Chief Justice Rugg observes: "In its ordinary and popular meaning, 'income' is the amount of actual wealth which comes to a person during a given period of time. At any single moment a person scarcely can be said to have income. The word in most, if not all, connections involves time as an essential element in its measurement or definition. It thus is differentiated from capital or investment, which commonly means the amount of wealth which a person has on a fixed date."

It will, therefore, be seen that "income" is to be contradistinguished from "capital;" one being the gains or profits which are derived by the taxpayer during a period certain, the other being the wealth which is owned by the taxpayer at a certain time. It will also be seen that such income is not "derived" by the increase in value of capital owned but only by the receipt of something separated from the capital and flowing from it by reason of its ownership, sale or use. For example, if A owns and rents a house which cost him $10,000 and which increases over a five year period, to a value of $15,000, that increase in value will not be considered income as long as A continues to own the house, but the rents received by A from his tenant would be income for they are gains flowing from the property as distinguished from the increase in capital value which has not been realized.

Realized Income: When the capital asset is sold, however, at a price in excess of its cost or is exchanged for

6

something of greater exchangeable value the increment or increase in value is realized and becomes, at that time, "income" within the meaning of the term. The reason for this is well stated by the Supreme Court which observed that "since the fund here taxed was the amount realized from the sale * less the capital investment

it is palpable that it was a 'gain or profit' 'produced by' or 'derived from' that investment, and that it 'proceeded' and was 'severed,' or rendered severable, from it by the sale for cash, and thereby became that 'realized gain' which has been repeatedly declared to be taxable income within the meaning of the constitutional amendment and the acts of Congress.""

With these general ideas of the nature of "income" in mind, it is possible to take up the consideration of the development of income taxes in the United States and the various classifications of income.

Classification of Income: Income, for tax purposes, may be given a number of different classifications. As to the availability of such income for taxation it may be classified as taxable or non-taxable; as to whether Congress has exercised its power to tax, exempt or non-exempt; as to its measurement for the application of tax rates, gross or net; as to form, actual or constructive; and as to the method or time of reporting, received or accrued. These classes will be considered in the separate chapters of this series of articles.

CHAPTER II.

AVAILABILITY OF INCOME FOR TAXATION
BY CONGRESS.

The Development of Constitutional Limitations: In considering the availability of income for taxation by the Federal Legislature it is necessary, in order to arrive at an understanding of the power of Congress to levy such a tax, to examine the historical development of Federal taxation beginning with the adoption of the Constitution, and to 'Doyle v. Mitchell Bros. Co., 247 U. S. 279; Merchant's Loan & Trust Co. v. Smietanka, 255 U. S. 509; Eldorado Coal & Mining Co. v. Mager, Collector, 255 U. S. 522; Hays v. Gauley Mountain Coal Co., 247 U. S. 189.

'Merchant's Loan & Trust Co. v. Smietanka, supra.

follow the trend of opinion as expressed by the Supreme Court in the leading tax cases commencing with the Hylton Case in 1796 and ending, perhaps, with the Macomber Case, cited above. For the purposes of this article such a review must of necessity be brief, if brevity is possible when considering such a subject.

The provisions of the original Constitution were four in number and are as follows:

"(1) Representatives and direct taxes shall be apportioned among the several states, which may be concluded within this Union, according to their respective number, which shall be determined by adding to the whole number of free persons, including those bound to service for a term of years and excluding Indians not taxed, three-fifths of all other persons." Article 1, No. 2, Cl. 3.

"(2) Congress shall have power to lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defense and general welfare of the United States, but all duties, imposts and excises shall be uniform throughout the United States." Article 1, No. 8, Cl. 1.

"No. (3) No capitation or other direct tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken." Article 1, No. 9, Cl. 5.

"(4) No tax or duty shall be laid on articles exported from any state." Article 1, No. 9, Cl. 5.

By these provisions there was delegated to Congress an extensive power to tax which is subject to only one express exception and two limitations. Congress cannot tax exports, and it must impose indirect taxes by the rule of uniformity and direct taxes by the rule of apportionment." In other words, indirect taxes; which are in the form of excises, etc., not laid directly on persons or property; shall be so levied as to be geographically uniform throughout the United States, while direct taxes; which are poll taxes or taxes laid on property because of ownership; are to be apportioned among the states in accordance with each state's population.

In 1794 Congress levied, without regard to apportionment, a tax on carriages "for the conveyance of persons." This Revenue Act was considered by the Supreme Court, before it had hardly become organized, in the case 'Licensed Tax Cases, 5 Wall. 462.

of Hylton v. United States, 3 Dallas 171. Alexander Hamilton argued the case for the government and in his brief contended that the only direct taxes were capitations, or poll taxes, and taxes on lands and buildings. He also referred to the prior British statutes which included taxes on carriages as excises and not as direct taxes. The case was decided in December, 1796, Justices Chase, Iredell and Paterson all writing opinion which held the tax to be indirect in nature and therefore constitutional. Mr. Justice Wilson concurred in the decision.

Each of the Justices took care to state that it was not necessary, in the case before the court, to determine the nature of direct taxes generally, but nevertheless, in their opinion, the framers of the Constitution had contemplated only two direct taxes; that is, poll taxes and taxes on land. Mr. Justice Paterson observed in this connection that; "I never entertained a doubt, that the principal, I will not say, the only, objects, that the framers of the Constitution contemplated as falling within the rule of apportionment, were a capitation tax and a tax on land." He concluded that: "All taxes on expenses or consumption are indirect taxes. A tax on carriages is of this kind, and of course is not a direct tax."

The first recognized direct tax was laid in 1798, when war with France was supposed to be unavoidable and the amount thereof was apportioned among the states according to population and then collected by an assessment upon "dwelling houses, lands and slaves." During the War of 1812 the Act of August 2, 1813, laid a tax of three millions of dollars which was properly apportioned in accordance with the terms of the Constitution. This was followed by the act of January 9, 1815, which laid a direct tax of six millions of dollars which was collected in the same manner as under the previous acts. The next direct tax was levied by the Act of August 6, 1861, at the beginning of the Civil War, which imposed a tax of twenty millions of dollars, and, in addition, provided for the taxation of certain incomes. This was followed by eight other acts, which levied taxes upon incomes derived from property and vocations, the last of which was approved on July 14, 1870. One of these acts was considered in Pacific Insurance Co. v. Soule; 7 Wall. 433; in which Mr. Justice Swayne observed:

"The taxing power is given in the most comprehensive terms. The only limitations imposed are: That direct taxes, including the capitation tax shall be apportioned; that duties, imposts, and excises shall be uniform; and that no duties shall be imposed upon articles exported from any State. With these exceptions, the exercise of the power is, in all respects, unfettered."

"If a tax on carriages (referring to the Hylton Case) kept for his own use by the owner, is not a direct tax, we can see no ground upon which a tax upon the business of an insurance company can be held to belong to that class of revenue charges."

The Act of June 30, 1864, one of the Civil War Income Tax Acts, came before the Supreme Court in Springer v. United States, 102 U. S. 586, and it was argued therein that the tax assessed by the statutes, which included rents from realty and, in the case before the court, interest received on United States Bonds, was a direct tax. The court reviewed at some length the legislative and judicial history of direct taxes as distinguished from indirect taxes and concluded:

66# * That direct taxes, within the meaning of the Constitution, are only capitation taxes, as expressed in that instrument, and taxes on real estate; and that the tax of which the plaintiff in error complains is within the category of an excise or duty."

All of these taxes, it must be noted, were levied in times of national exigency and, in the case of the Income Tax acts growing out of the Civil War, were "abandoned after that war was ended as soon as it could safely be done."sa

The Pollock Case: After the repeal of the Act of 1870 no further taxes were passed which might be considered as direct taxes until the latter part of the nineteenth century when, "in a time of profound peace," the Act of August 15, 1894, was passed, which provided:

"There shall be assessed, levied, collected, and paid

* Railroad Company v. Collector, 100 U. S. 595.