24 not intended that a power should be given in one part of the Constitution and taken away in another." Neither is it affected by the Fourteenth Amendment which requires, as concerns the states only, that no citizens shall be denied the equal protection of the laws. It is also to be noted that the apparent lack of uniformity caused by the taxing of some classes of citizens and the exemption of others does not bring the Tax Statute within the prohibition of Section 8 of Article 1 of the Constitution which provides that all "duties, imposts, and excises shall be uniform throughout the United States." The uniformity guaranteed by this clause of the Constitution is a geographical uniformity and provides merely that no tax shall be levied against citizens in one state which is not also levied against citizens of the same class in every other state.25 In the exercise of this discretionary power Congress has passed the various Revenue Acts and has, in each of them, exempted certain kinds of income from taxation, and in a number of instances has provided that certain classes of taxpayers should not be subject to the taxes imposed. These apparent discriminations have been held to be within the power of Congress and not to affect the validity of the acts.25a We shall now consider the classes of income which have been specifically exempted from taxation; and for this purpose shall consider Section 213 (b) of the Revenue Act of 1924, the present income tax act, because it includes all the exempted classes of income mentioned in the earlier of the modern acts, in addition to some additional classes. Income Exempted by Congress, Generally: Section 213 (b) of the Revenue Act excludes specifically from gross income a number of items which we have heretofore considered as being beyond the authority of Congress to tax. Thus, the section specifically mentions the income accruing to a state from any public utility or the exercise of any governmental function and also interest from state obligations. These expressions may be considered merely as legislative Flint v. Stone Tracy Company, 220 U. S. 107, 31 Sup. Ct. 342. 25 Knowlton v. Moore, 178 U. S. 41, 40 Sup. Ct. 747; Camp Bird v. Howbert, 248 U. S. 590, 30 Sup. Ct. 7; LaBelle Iron Works v. United States, 256 U. S. 377, 41 Sup. Ct. 508. 25a Brushaber v. Union Pacific Railroad Company, supra. recognition of the constitutional protection of such income from Federal taxation. Payments Not in the Nature of "Income:" Other classes of payments specifically mentioned by this section deal with accretions which are not in their very nature "income," as the term is understood, because not derived from the rendition of services nor from the use or ownership of capital. Under this class may be included gifts, devises or bequests,26 the return to the insured of insurance premiums previously paid out and damages received for personal injury;27 all of which have been treated elsewhere in this article. Proceeds From Life Insurance Policies Upon the Death of the Insured: It is doubtful if the amounts received by a beneficiary upon the death of the insured could be considered by Congress as income within the meaning of the term but no necessity for a decision of this question has arisen as such payments have always been expressly exempted, "not to indicate," as observed by the Supreme Court, "That they would otherwise be included in the income to be taxed, but only to make clear that the gross income does not include them."28 Securities Issued Under the Farm Loan Acts: This exemption from taxation is in recognition of the provisions of the Federal Farm Loan Act of July 17, 1916, as amended by act of March 4, 1923, wherein it was provided that "United States v. Merriam, 263 U. S. 179, 44 Sup. Ct. 69. * Park v. Gilligan, 293 Fed. 129. * United States v. Supplee-Biddle Hardware Company, 265 U. S. 189; wherein the Court stated: "Life insurance in such a case is, like that of fire and marine insurance, a contract of indemnity. * It is a substitution of money value for something permanently lost, either in a house, a ship or a life," and, if the decision of the District Court for the Western District of Pennsylvania in Frick et al, v. Lewellyn, involving a question of estate taxes, is to be accepted, such proceeds would be definitely excluded from income, as a matter of definition, for in that case the court held that Congress was without authority to tax the proceeds of a life insurance policy because such a tax amounted to a direct tax other than an income tax, which must be apportioned among the states. Such apportionment would not be necessary if such proceeds were "income" for then the Sixteenth amendment would control. Neither can it be said that such proceeds constitute gains "derived from capital or from labor" but rather an indemnity in money for a loss due to death. For instance, who could say that a widow, deprived of her maintenance and support by the death of her husband, derived any "income" because she received an amount of money as life in surance. Federal land banks, Federal intermediate credit banks, and national farm loan associations, including the capital and reserve or surplus therein and the income derived therefrom should be exempt from taxes except taxes upon real estate. The exemption also extends to mortgages executed to these institutions as well as to the interest from bonds issued and dividends paid by them. Income of Foreign Governments: Subdivision 5 of Section 213 (b) exempts from taxation "the income of foreign governments received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments, or from interest on deposits in banks in the United States of moneys, belonging to such foreign governments, or from any other source within the United States." By regulation,29 the Treasury Department has also held that the salaries, fees or wages of ambassadors and ministers of such foreign countries shall also be exempt as well as any wages, fees and salaries of foreign consular officers or employees. There is no provision of the law providing such an exemption but it is perhaps well founded in that the embassies of foreign nations are, as a matter of international law, foreign soil and it is not altogether unreasonable to assume that the salaries and other official fees of such representatives are derived, not in the United States, but on such foreign soil. Thus, the representatives being aliens residing on foreign soil, it follows that their income is not derived in this country. This, it is true, is a rather imaginative theory upon which to base the department's exemption but it does not appear to be wholly unwise in that it avoids friction with or insult to foreign governments. Amount Received as Damages, Insurance or Workman's Compensation for Personal Injury: Here again is an item, which, while specially exempted, does not appear to fall within the meaning of the term income. The payments received are in the form of indemnification for personal loss and cannot be considered as income.30 This class of payments includes the receipts under health or accident insurance policies, under the various state Workmen's Compensation acts or as damages recovered by settlement or gift for personal injuries sustained. Interest From United States Obligations: Interest received from obligations of the United States issued after September 1, 1917, are only exempt to the extent provided in the respective Acts authorizing the issue thereof. All of these acts cannot be considered in this article and for information the reader must be referred to Article 80, of Treasury Regulations 65, which covers specifically the liberty and victory notes issued as a result of the late war. The exemption of Treasury certificates of indebtedness depends upon the provisions of the particular acts authorizing their issuance. Other Classes of Exempt Incomes: Among the other classes of income specifically exempted by the Revenue Act of 1924 are such items as the rental value of dwelling house furnished a minister of the gospel as a part of his compensation dividends from mutual building and loan societies; compensation or allowances under the World War Veterans Act of 1924, which repealed the War Risk Insurance Act and the Vocational Rehabilitation Act; dividends received from corporations organized under the China Trade Act and the receipts from shipowners protection and indemnity associations where such associations are not organized for profit. All of these exemptions constitute the allowance of special benefits to taxpayers by the proper exercise of Congressional discretion. Exempt Taxpayers: The various revenue acts also exempt from taxation numerous classes of taxpayers, such as agricultural societies and fraternal associations, but as the purpose of this article is to consider the concept of "income" and not the status of taxpayers, that subject will not be considered. Having thus considered generally the nature of "income" as the term is used in the Constitutional Amendment and in the various Revenue Acts and having considered the historical development of constitutional law in America as it affects the imposition of federal taxes on income, we are prepared to take up in detail the various classes of income which have been taxed by Congress by the passage of the modern Income Tax Acts. This consideration, however, must necessarily be quite voluminous and will be made the subject of the succeeding article of this series. OUTLINE OF COURSE OF LECTURES ON FEDERAL TAXATION* BY H. B. MCCAULEY, Professor of Federal Taxation, The purpose of this course is to set out the broad general principles underlying federal taxation, a brief presentation of the historical background of the present federal revenue system, and finally to give a working knowledge of the more recent revenue laws, particularly the income and profits tax laws, the cases under which are now before the Bureau of Internal Revenue, and in the courts together with the procedure before the Bureau of Internal Revenue, the United States Board of Tax Appeals and the Courts. The broad fundamentals of federal taxing powers are very well established in the decided cases which are cited and discussed in considering these foundations of the federal revenue system. Many of the more recent revenue measures have not yet been judicially construed and in considering these acts, the department rulings and regulations will be considered especially in the light of decided cases under analogous legislation of earlier periods. The administration of the federal taxing measures considered involve the application of practically every branch of law and it would be impossible to attempt in this course to do more than indicate to the student, by giving him a working knowledge of the federal statutes, the situations in which general legal principles are involved, taking time to discuss at length only those decisions which may be classified as purely tax cases. Textbooks to be Used and References. Students are required to procure the 1920 edition of Federal Revenue Laws, published by the Government Printing Office, together with copies of the 1921 and 1924 revenue acts and regulations No. 62. * A number of these syllabi have appeared in previous issues of the "Review." Others will continue to be published from time to time as an aid to those students desiring to extend their research work. |