Internal revenue tax

“ Far more regular has been the productiveness of the internal revenue taxes imposed by the United States. To meet these fluctuations of revenue from certain sources, as well as to meet fluctuations in the need for money, the financial system of every nation needs some elastic element, some tax whose productiveness can be reduced or augmented, as the case may be. ”

“ But to recognize the increment in value as affecting earnings and profits would no more harmonize with the taxless character of the transaction than to treat a realized gain as doing so. The same policy which carries over the transferor's basis for purposes of the corporation's income tax, § 113 (a) (8) , requires carrying it over for determining the taxability of its distributions as the Commissioner's regulation directs: gains and losses are to be brought into earnings and profits at the time and 'to the extent' that they are recognized under § 112. ”

“ The very essence of taxable income, as that concept is used in Section 22 (a) , is the accrual of some gain, profit or benefit to the taxpayer. This requirement of gain, of course, must be read in its statutory context. Not every benefit received by a taxpayer from his labor or investment necessarily renders him taxable. Nor is mere dominion over money or property decisive in all cases. In fact, no single conclusive criterion has yet been found to determine in all situations what is a sufficient gain to support the imposition of an income tax. ”

“ Circumstances wholly fortuitous may determine the year in which income, whenever earned, is taxable, and may thus affect the amount of tax. Receipt of income or accrual of the right to receive it within the tax year is the test of taxability, not the time it has taken the taxpayer to earn it nor the duration of his investments which have finally resulted in profit. ”

“ It is taking too much liberty even with tax provisions to read out a defining clause that Congress has written in merely because Congress permitted desirable revenue to escape the tax collector's net. The only judicial problem is whether the proceeds constitute a type of income which Congress has designated as taxable. That type must have the characteristic of being "fixed or determinable annual or periodical gains, profits, and income." A lump-sum payment for an exclusive property right, transferable and transferred by the taxpayer, simply does not meet that qualification. ”

“ To say that there is no sale because there is no risk-shifting and that there is no risk-shifting because the price to be paid is payable only from the income produced by the business sold, is very little different from saying that because business earnings are usually taxable as ordinary income, they are subject to the same tax when paid over as the purchase price of property. This argument has rationality but it places an unwarranted construction on the term 'sale,' is contrary to the policy of the capital gains provisions of the Internal Revenue Code, and has no support in the cases. ”

“ A taxpayer, having chosen to report his taxable income from installment sales on the installment cash receipts plan, thereby spreading its gross earnings and profits from such sales over a number of years and avoiding high tax rates, was not permitted to obtain a further reduction by shifting to an accrual plan and treating uncollected balances on these installment sales as though they had actually been received in the year of the sale. ”

“ Prior to 1934, as now, personal holding companies were liable for the regular corporation income taxes under Title I of the Revenue Acts and they, like all other corporations, were subject to additional tax upon an accumulation of profits where there was present a purpose of avoiding surtaxes upon shareholders. ”

“ If a dividend is declared, it must be paid, however the deduction is made, from what is left after the corporation has paid taxes upon its earnings. The differences in the two methods of deduction are to be found only in the formal bookkeeping data which, in the British system, are communicated to the stockholders, not for the purpose of laying or collecting the tax which the corporation has already paid or must pay, but to aid the stockholders in computing their surtax and in securing the benefit of any refund of the tax. ”

“ The tax on imports, though {424} apparently meeting the approval of a majority of the American people, makes, upon the whole, a rather expensive system of taxation, and it is questionable whether sufficient revenue can be raised from this source properly to support the government without seriously interfering with our foreign commerce. The internal revenue has many unsatisfactory phases. The income tax has been added to an imperfect system of taxation, instead of being substituted for the antiquated personal-property tax. ”

“ Congressional intent to tax such earnings and profits on their distribution cannot be prevented by the fact of an intervening reorganization or liquidation. [13]
The operation of the Sansome rule on the taxation of corporate distributions is brought into high relief by consideration of the economic relation between a parent corporation and its subsidiary. Congress requires that earnings and profits, current or accumulated, be taxed to the recipients thereof as dividends on their distribution. ”

“ In this manner the taxpayer will be taxed only on the net, rather than the gross, income produced by the depreciable asset in accordance with the general congressional scheme to tax only net income. It was not, however, the intent of Congress to enable the taxpayer to recover more than his actual net investment and thereby to convert ordinary income into a capital gain through excessive depreciation. 'Congress intended by the depreciation allowance not to make taxpayers a profit thereby, but merely to protect them from a loss.' Massey Motors v. ”

“ Each of the corporations having itself paid or become liable to pay the British tax on the profits thus distributed, no further exaction at the 'standard' (normal) rate was due the British government on account of the distribution from either the stockholders or the corporation. [1] Only in the case of individuals whose income exceeds a stated amount is a surtax levied. ”

“ But this specification is not enough to restrict the effect of the general provisions of these acts which impose a tax on the income, including capital gains, of taxpayers. The use of the word cost does not preclude the computation and assessment of the taxable gains on the basis of the value of property, rather than its cost, where there is no purchase by the taxpayer, and thus no cost at the controlling date. ”

“ The background and development of the particular provisions before us emphasize the congressional purpose to tax this type of income. They disclose the full familiarity of Congress with this general type of transaction. Throughout the history of our federal income taxes since the Sixteenth Amendment to our Constitution, the Revenue Acts have expressly subjected to taxation the income received by nonresident alien individuals from sources within the United States. ”

“ The weakness of taxpayers' position lies in the fact that not every gain growing out of a transaction concerning capital assets is allowed the benefits of the capital gains tax provision. Those are limited by definition to gains from 'the sale or exchange' of capital assets. ”

“ That tax was designed to reach profits held by the corporation which as a consequence could not be taxed as dividends in the hands of stockholders. An intracorporate agreement is simply one way of keeping profits in the corporation's treasury so that the tax collector cannot reach them. ”

“ The revenue acts have consistently adhered to that policy in taxing the income of a partner. Since the partner is entitled to profits only upon a partnership accounting at the end of an accounting period, his profits become subject to income tax when and as they are thus ascertained. ”

“ In the internal revenue legislation Congress has not simply prescribed that certain articles shall pay a tax, but has provided a series of rules and regulations for the manufacture and sale of such articles, including therein directions as to the size and form of packages, and such other matters as in its best judgment were necessary or advisable for the purposes of effectually securing the payment of the tax imposed. ”

“ The Sansome rule itself, as applied to earnings and profits, has never been thought to be controlled by ordinary corporate accounting concepts; its uniform effect is to treat for tax purposes as earnings or profits assets which are properly considered capital for many if not most corporate purposes, and it has long been a commonplace of tax law that similar divergences often occur. ”

“ The statutes of Congress designed to tax income actually earned because of the capital and efforts of each individual member of a joint enterprise are not to be frustrated by state laws which for state purposes prescribe the relations of the members to each other and to outsiders. ”

“ Finally respondent contends that § 44 merely conferred upon it a privilege to defer payment of income tax on its tax-'recognized' profits realized from installment sales until the unpaid installment obligations were collected.
The congressional reports on § 115 (l) do not provide support for the idea that gains not included in taxable income under the taxpayer's method of accounting may nevertheless be considered 'realized' and 'recognized' for computing tax adjustments or deductions so long as they might have entered into such computations under a different method of accounting. ”

“ Percentage depletion allows an arbitrary deduction to compensate for exhaustion of the asset, regardless of cost incurred or any investment which the taxpayer may have made. The Commissioner, however, would assess to respondents as ordinary income the entire amount of all rental payments made by the Institute, regardless of the accumulated values in the corporation which the payments reflected and without regard for the present policy of the tax law to allow the taxpayer to realize on appreciated values at the capital gains rates. ”

“ The majority opinion faults the Commissioner for having 'commingled two distinct * * * concepts of tax accounting depreciation of an asset through wear and tear or gradual expiration of useful life and fluctuations in the value of that asset through changes in price levels or market values.' In my opinion these two concepts, as used in the Internal Revenue Code, are necessarily commingled and it is unrealistic to expect that one can be isolated from the other. ”

“ For instance, a corporation keeping its books and filing its income tax return under sections 41, 42, and 43 on the cash receipts and disbursements basis may not use the accrual basis in determining earnings and profits; a corporation computing income on the installment basis as provided in section 44 shall, with respect to the installment transactions, compute earnings and profits on such basis ”

“ By thus restricting the income tax to those specific types of income to which the withholding procedure had previously applied, Congress automatically relieved nonresident alien individuals from the taxation of their income from certain sales of real or personal property, previously taxed. This Amendment, on the other hand, retained and increased the tax on the very kind of income that is before us. It also increased the portion of such income to be withheld at ts source to meet the new and higher flat rate of tax. ”

“ The undistributed profits tax, which was not continued by Congress after 1938, was a surtax at graduated rates upon corporate profits not distributed during the tax year by way of dividends. Section 26 (c) allowed credits designed to afford relief where the payment of dividends is prevented by certain contract provisions. Subdivision (c) (1) of the section allowed such a credit where a distribution of earnings would violate a 'provision of a written contract executed by the corporation * * * which provision expressly deals with the payment of dividends.' (Italics supplied.) ”

“ Treating the matter as a problem of statutory construction for our independent judgment, we hold that a distribution, pursuant to a reorganization, of earnings and profits 'has the effect of the distribution of a taxable dividend' within § 112 (c) (2) . As is true of other teasing questions of construction raised by technical provisions of Revenue Acts the matter is not wholly free from doubt. But these doubts would have to be stronger than they are to displace the informed views of the Tax Court. ”

“ The requirement of consolidated returns was 'based upon the principle of levying the tax according to the true net income and invested capital of a single business enterprise, even though the business is operated through more than one corporation.' Treasury Regulations No. ”

“ The other two companies declared the dividend in the amount distributed to stockholders and certified that it was 'free of tax.' The certificates of the latter did not purport to show any deduction of tax from a gross dividend, but did indicate the amount of the tax appropriate to the dividend and showed the same net return to stockholders as if the tax had been deducted from a computed gross dividend. ”

“ Fixed and determinable income, from a tax standpoint, may be received either in annual or other payments without altering in the least the need or the reasons for taxing such income or for withholding a part of it at its source. One advance payment to cover the entire 28-year period of a copyright comes within the reason and reach of the Revenue Acts as well as, or even better than, two or more partial payments of the same sum.
Article 143-2 of Treasury Regulations 101, issued under the Revenue Act of 1938, provided:
"The income need not be paid annually if it is paid periodically ”