What is Income

7/27/2019 What is Income

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What is income?Last Updated Thursday, 06 October 2011 09:15

Some Basics

The subject of the various prior and current income tax acts, income, has always been directly

connected to a particular phrase: gains, profits, and income. For example, the 1894 act, titled

"An Act To reduce taxation, to provide revenue for the Government, and for other purposes,"

approved August 27, 1894, 28 Stat. 509, ch. 349, provided as follows:

SEC. 27. That from and after the first day of January, eighteen hundred and ninety-five, anduntil the first day of January, nineteen hundred, there shall be assessed, levied, collected, and

paid annually upon the gains, profits, and income received in the preceding calendar year by

every citizen of the United States, whether residing at home or abroad, and every person

residing therein, whether said gains, profits, or income be derived from any kind of property,

rents, interest, dividends, or salaries, or from any profession, trade, employment, or vocation

carried on in the United States or elsewhere, or from any other source whatever, ***.

This tax was declared unconstitutional in the Pollock case when the Supreme Court declared itto be a direct tax that failed to comply with the apportionment requirement of the Constitution.

See Pollock v. Farmers' Loan & Trust Co. , 157 U.S. 429, 15 S.Ct. 673, aff. reh., 158

U.S. 601

, 15 S.Ct. 912 (1895).

In 1909, Congress proposed for ratification by the States the Sixteenth Amendment, the federal

income tax amendment. At the same time, it adopted the Corporate Excise Tax of 1909, 36

Stat. 112, 38, which was in essence an income tax. This tax was found constitutional as an

excise tax in Flint v. Stone Tracy Co. , 220 U.S. 107, 31 S.Ct. 342, 349 (1911).

A couple of years later in Stratton's Independence, Ltd. v. Howbert, 231 U.S. 399, 415, 34

S.Ct. 136 (1913), a case involving the 1909 act, the Supreme Court defined income as the

gains

derived from capital, from labor, or from both combined.

After the alleged ratification of the Sixteenth Amendment, Congress adopted in October, 1913,

the first federal income tax based thereon. In reference to the subject of this tax, income, this

act, titled "An Act To reduce tariff duties and to provide revenue for the Government, and for

other purposes," 38 Stat. 114, 167, ch. 16, imposed this tax as follows:

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B. That, subject only to such exemptions and deductions as are hereinafter allowed, the net

income of a taxable person shall include gains, profits, and income derived from salaries,

wages, or compensation for personal service of whatever kind and in whatever form paid, orfrom professions, vocations, businesses, trade, commerce, or sales, or dealings in property,

whether real or personal, growing out of the ownership or use of or interest in real or personal

property, also from interest, rent, dividends, securities, or the transaction of any lawful business

carried on for gain or profit, or gains or profits and income derived from any source whatever,

including the income from but not the value of property acquired by gift, bequest, devise, or

descent:

Like the challenge made to the 1909 Corporate Excise Tax Act, a challenge was also made tothe constitutionality of this 1913 income tax act. The Supreme Court in Brushaber v. Union

Pacific Railroad Co. ,

240 U.S. 1, 36 S.Ct. 236 (1916), declared that the federal income tax was, in a constitutional

sense, an excise tax. See also

Hale v. Iowa State Bd. of Assessment and Review

, 302 U.S. 95, 106 (1937) ("Finally, and even more conclusively, decisions of our own court

forbid us to stigmatize as unreasonable the classification of a tax upon net income as something

different from a property tax, if not substantially an excise. People ex rel. Clyde v. Gilchrist, 262

U.S. 94 , 43 S.Ct. 501; New York ex rel. Cohn v. Graves, 300 U.S. 308 , 57 S.Ct. 466, 108

A.L.R. 821; Brushaber v. Union Pacific R.R. Co., 240 U.S. 1 , 36 S.Ct. 236, L.R.A.1917D, 414,Ann.Cas. 1917B, 713, all point in that direction.").

A few months after the decision in Brushaber, Congress repealed the 1913 income tax act and

enacted a new federal income tax. See "An Act To increase the revenue, and for other

purposes," 39 Stat. 756, 757, ch. 463. This act followed its predecessors and defined income as

follows:

INCOME DEFINED.

SEC. 2. (a) That, subject only to such exemptions and deductions as are hereinafter allowed,

the net income of a taxable person shall include gains, profits, and income derived from

salaries, wages, or compensation for personal service of whatever kind and in whatever form

paid, or from professions, vocations, businesses, trade, commerce, or sales, or dealings in

property, whether real or personal, growing out of the ownership or use of or interest in real or

personal property, also from interest, rent, dividends, securities, or the transaction of any

business carried on for gain or profit, or gains or profits and income derived from any source

whatever:

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A year later, Congress amended the 1916 act via the 1917 act. See "An Act To provide revenue

to defray war expenses, and for other purposes", 40 Stat. 300, 329, ch. 63. Again, the phrase,

gains, profits, and income, appeared in this act:

SEC. 1200. That subdivision (a) of section two of such Act of September eighth, nineteen

hundred and sixteen, is hereby amended to read as follows:

"(a) That, subject only to such exemptions and deductions as are hereinafter allowed, the net

income of a taxable person shall include gains, profits, and income, derived from salaries,

wages, or compensation for personal service of whatever kind and in whatever form paid, or

from professions, vocations, businesses, trade, commerce, or sales, or dealings in property,

whether real or personal, growing out of the ownership or use of or interest in real or personal

property, also from interest, rent, dividends, securities, or the transaction of any businesscarried on for gain or profit, or gains or profits and income derived from any source whatever."

The Revenue Act of 1918, titled "An Act To provide revenue, and for other purposes", 40 Stat.

1057, ch. 18, contained this "gains, profits, and income" phrase:

GROSS INCOME DEFINED.

SEC. 213. That for the purposes of this title (except as otherwise provided in section 233) the

term gross income

(a) Includes gains, profits, and income derived from salaries, wages, or compensation for

personal service (including in the case of the President of the United States, the judges of the

Supreme and inferior courts of the United States, and all other officers and employees, whether

elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof,

or the District of Columbia, the compensation received as such), of whatever kind and in

whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or

dealings in property, whether real or personal, growing out of the ownership or use of or interestin such property; also from interest, rent, dividends, securities, or the transaction of any


whatever.

The Revenue Act of 1921 was adopted by Congress on November 23, 1921. See "An Act To

reduce and equalize taxation, to provide revenue, and for other purposes," 42 Stat. 227,

237-38, ch. 136. It contained this phrase:

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SEC. 213. That for the purposes of this title (except as otherwise provided in section 233) the

term gross income(a) Includes gains, profits, and income derived from salaries, wages, or compensation for

personal service (including in the case of the President of the United States, the judges of the

Supreme and inferior courts of the United States, and all other officers and employees, whether

elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof,

or the District of Columbia, the compensation received as such), of whatever kind and in

whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or

dealings in property, whether real or personal, growing out of the ownership or use of or interest

in such property; also from interest, rent, dividends, securities, or the transaction of any


whatever.

The Revenue Act of 1924 was adopted by Congress on June 2, 1924. See "An Act To reduce

and equalize taxation, to provide revenue, and for other purposes," 43 Stat. 253, 267, ch. 234. It

contained this phrase:


SEC. 213. For the purposes of this title, except as otherwise provided in section 233

(a) The term gross income includes gains, profits, and income derived from salaries,

wages, or compensation for personal service (including in the case of the President of the

United States, the judges or the Supreme and inferior courts of the United States, and all other

officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or

any political subdivision thereof, or the District of Columbia, the compensation received as

such), of whatever kind and in whatever form paid, or from professions, vocations, trades,

businesses, commerce, or sales, or dealings in property, whether real or personal, growing out

of the ownership or use of or interest in such property; also from interest, rent, dividends,securities, or the transaction of any business carried on for gain or profit, or gains or profits and

income derived from any source whatever.

The Revenue Act of 1926, titled "An Act To reduce and equalize taxation, to provide revenue,

and for other purposes," 44 Stat. 9, 23-24, ch. 27, contained this phrase:

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GROSS INCOME DEFINED

SEC. 213. For the purposes of this title, except as otherwise provided in section 233

(a) The term gross income includes gains, profits, and income derived from salaries,

wages, or compensation for personal service (including in the case of the President of the

United States, the judges of the Supreme and inferior courts of the United States, and all otherofficers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or

any political subdivision thereof, or the District of Columbia, the compensation received as

such), of whatever kind and in whatever form paid, or from professions, vocations, trades,

businesses, commerce, or sales, or dealings in property, whether real or personal, growing out

of the ownership or use of or interest in such property; also from interest, rent, dividends,

securities, or the transaction of any business carried on for gain or profit, or gains or profits and

income derived from any source whatever.

The Revenue Act of 1928, titled "An Act To reduce and equalize taxation, provide revenue, and

for other purposes," 45 Stat. 791, 797, ch. 852, contained this phrase:

SEC. 22. GROSS INCOME.

(a) General definition.Gross income includes gains, profits, and income derived from

salaries, wages, or compensation for personal service, of whatever kind and in whatever form

paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings inproperty, whether real or personal, growing out of the ownership or use of or interest in such

property; also from interest, rent, dividends, securities, or the transaction of any business

carried on for gain or profit, or gains or profits and income derived from any source whatever.

The Revenue Act of 1932, titled "An Act To provide revenue, equalize taxation, and for other

purposes," 47 Stat. 169, 178, ch. 209, contained this phrase:


(a) GENERAL DEFINITION.Gross income includes gains, profits, and income derived

from salaries, wages, or compensation for personal service, of whatever kind and in whatever

form paid, or from professions, vocations, trades businesses, commerce, or sales, or dealings in

property, whether real or personal, growing out of the ownership or use of or interest in such


carried on for gain or profit, or gains or profits and income derived from any source whatever. In

the case of Presidents of the United States and judges of courts of the United States takingoffice after the date of the enactment of this Act, the compensation received as such shall be

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included in gross income; and all Acts fixing the compensation of such Presidents and judges

are hereby amended accordingly.


purposes," 48 Stat. 680, 686-87, ch. 277, contained this phrase:


(a) GENERAL DEFINITION. Gross income includes gains, profits, and income derived


form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealingsin property, whether real or personal, growing out of the ownership or use of or interest in such



the case of Presidents of the United States and judges of courts of the United States taking

office after June 6, 1932, the compensation received as such shall be included in gross income;

and all Acts fixing the compensation of such Presidents and judges are hereby amended

accordingly.




(a) GENERAL DEFINITION.Gross income includes gains, profits, and income derived


form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealingsin property, whether real or personal, growing out of the ownership or use of or interest in such





and all Acts fixing the compensation of such Presidents and judges are hereby amended

accordingly.


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(a) GENERAL DEFINITION.'Gross income' includes gains, profits, and income derived


form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings

in property, whether real or personal, growing out of the ownership or use of or interest in such





and all Acts taxing the compensation of such Presidents and judges are hereby amendedaccordingly.

And finally, the 1939 Internal Revenue Code (53A, Statutes at Large) contained this phrase:

SEC. 22. GROSS INCOME.(a) GENERAL DEFINITION.Gross income includes gains, profits, and income derived


form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings

in property, whether real or personal, growing out of the ownership or use of or interest in such


carried on for gain or profit, or gains or profits and income derived from any source whatever.

The cases defining income have defined this word essentially as gains. See Stratton'sIndependence, Ltd. v. Howbert

,

231 U.S. 399, 415, 34 S.Ct. 136 (1913) (for income may be defined as the gains derived from

capital, from labor, or from both combined, and here we have combined operations of capital

and labor.);

Doyle v. Mitchell Bros. Co.

, 247 U.S. 179, 185, 38 S.Ct. 467 (1918)(Whatever difficulty there may be about a precise and

scientific definition of income, it imports, as used here, something entirely distinct from principal

or capital either as a subject of taxation or as a measure of the tax; conveying rather the idea of

gain or increase arising from corporate activities. As was said inStratton's Independence v. Howbert

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, 231 U.S. 399, 415: Income may be defined as the gain derived from capital, from labor, or

from both combined.");

Eisner v. Macomber

, 252 U.S. 189, 207, 40 S.Ct. 189 (1920)(Income may be defined as the gain derived from

capital, from labor, or from both combined,' provided it be understood to include profit gainedthrough a sale or conversion of capital assets.);

Goodrich v. Edwards

, 255 U.S. 527, 535, 41 S.Ct. 390 (1921)(And the definition of 'income' approved by this Court

is: The gain derived from capital, from labor, or from both combined,' provided it be understood

to include profits gained through sale or conversion of capital assets.'

Eisner v. Macomber

, 252 U.S. 189, 207, 40 S. Sup. Ct. 189, 193 (64 L. Ed. 521, 9 A. L. R. 1570).);

Bowers v. Kerbaugh-Empire Co

.

, 271 U.S. 170, 174, 46 S.Ct. 449 (1926)(income may be defined as gain derived from capital,from labor, or from both combined, including profit gained through sale or conversion of

capital.);

CIR v. Culbertson

, 337 U.S. 733, 740, 69 S.Ct. 1210 (1949)(This is after all, but the application of an often

iterated definition of income the gain derived from capital, from labor, or from both

combined.); and

CIR v. Glenshaw Glass Co.

, 348 U.S. 426, 431, 75 S.Ct. 473 (1955)(defined income as accessions to wealth, clearly

realized.). See also

Noel v. Parrott, 15 F.2d 669, 672 (4th Cir. 1926)(It has been expressly decided that income, within the

meaning of the Sixteenth Amendment and the Income Tax Acts passed pursuant thereto, is a

gain derived from capital, from labor, or from both combined, including profit gained through

sale or conversion of capital assets.). Other lower courts that have defined income simply by

quoting

Eisner

are

CIR v. Simmons Gin Co.

, 43 F.2d 327, 328 (10th Cir. 1930);

Bass v. Hawley, 62 F.2d 721, 723 (5th Cir. 1933);

Drier v. Helvering,

72 F.2d 76, 77 (D.C.Cir. 1934);

Central R. Co. of New Jersey v. CIR,

79 F.2d 697, 699 (3rd Cir. 1935);

Hawke v. CIR

, 109 F.2d 946, 949 (9th Cir. 1940);

National Bank of Commerce of Seattle v. CIR

, 115 F.2d 875, 876 (9th Cir. 1940);

Sprouse v. CIR,122 F.2d 973, 975 (9th Cir. 1941);

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McKnight v. CIR

, 127 F.2d 572, 573 (5th Cir. 1942);

Cheley v. CIR

, 131 F.2d 1018, 1020 (10th Cir. 1942);

Meyer v. CIR, 383 F.2d 883, 891 (8th Cir. 1967);

In re Givens Estate

, 323 Pa. 456, 462, 185 A. 778 (1936);

State v. Flenner

, 236 Ala. 228, 231, 181 So. 786 (1938); and

Schuette v. Wisconsin Tax Comm.,

234 Wis. 574, 586, 292 N.W. 9 (1940). See also

Dallas Transfer & Terminal Warehouse Co. v. CIR

, 70 F.2d 95, 96 (5th Cir. 1934)(Taxable income is not acquired by a transaction which does not

result in the taxpayer getting or having anything he did not have before. Gain or profit isessential to the existence of taxable income. A transaction whereby nothing of exchangeable

value comes to or is received by a taxpayer does not give rise to or create taxable income.);

Hirsch v. CIR

, 115 F.2d 656, 657 (7th Cir. 1940);

Connor v. United States

, 439 F.2d 974, 980 (5th Cir. 1971)(We agree with the District Court that there must be gain

before there is income within the meaning of the sixteenth amendment.);

Beard v. South Carolina Tax Comm.

, 230 S.C. 357, 368, 95 S.E.2d 628 (1956) (the word income as used in a tax statute is to be

taken in its ordinary sense of gain or profit.);Plasse v. Comm. of Revenue Services,

49 Conn. Sup. 38, 40, 858 A.2d 919 (Conn.Super. 2003)("Income may be defined as the gain

derived from capital, from labor, or from both combined, provided it be understood to include

profit gained through a sale or conversion of capital assets."); and

Weiss v. McFadden

,

353 Ark. 868, 876, 120 S.W.3d 545 (2003))(income for purposes of income taxation may be

defined as the gain derived from capital, from labor, or from both combined.).

Here is an interesting test for students of the federal income tax to perform. Download the

searchable old tax acts: the Revenue Act of 1918 through the 1939 Code, the 1954 Code, and

the 2002 version of the 1986 Code. Search these income tax acts for the phrase gains, profits,

which will thus find all references to this phrase, gains, profits, and income. Why does this

search demonstrate a certain pattern in the tax acts, with particular emphasis on non-resident

aliens and foreign corporations?

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What is Income