2065

SIXTEENTH AMENDMENT 

INCOME TAX 

CONTENTS

Page

Income Tax ................................................................................................................................. 2067 

History and Purpose of the Amendment .......................................................................... 2067 

Income Subject to Taxation ............................................................................................... 2068 

Corporate Dividends: When Taxable ......................................................................... 2069 

Corporate Earnings: When Taxable ........................................................................... 2072 

Gains: When Taxable .................................................................................................. 2074 

Income from Illicit Transactions ................................................................................ 2076 

Deductions and Exemptions ....................................................................................... 2076 

Diminution of Loss ...................................................................................................... 2077 

2067

1 157 U.S. 429 (1895); 158 U.S. 601 (1895). 

2 Ch. 349, § 27, 28 Stat. 509, 553. 

3The Court conceded that taxes on incomes from ‘‘professions, trades, employments, or vocations’’ levied by this act were excise taxes and therefore valid. The 

entire statute, however, was voided on the ground that Congress never intended to 

permit the entire ‘‘burden of the tax to be borne by professions, trades, employments, or vocations’’ after real estate and personal property had been exempted, 158 

U.S. at 635. 4Springer v. United States, 102 U.S. 586 (1881). 

5 Ch. 173, § 116, 13 Stat. 223, 281 (1864). 

6For an account of the Pollock decision, see ‘‘From the Hylton to the Pollock 

Case,’’ supra. 

INCOME TAX 

SIXTEENTH AMENDMENT 

The Congress shall have power to lay and collect taxes on 

incomes, from whatever source derived, without apportionment 

among the several States, and without regard to any census or 

enumeration.

INCOME TAX 

History and Purpose of the Amendment 

The ratification of the Sixteenth Amendment was the direct 

consequence of the Court’s decision in 1895 in Pollock v. Farmers’ 

Loan & Trust Co., 1 whereby the attempt of Congress the previous 

year to tax incomes uniformly throughout the United States 2 was

held by a divided Court to be unconstitutional. A tax on incomes 

derived from property, 3 the Court declared, was a ‘‘direct tax’’ 

which Congress under the terms of Article I, § 2, and § 9, could 

impose only by the rule of apportionment according to population. 

Scarcely fifteen years earlier the Justices had unanimously sustained 4 the collection of a similar tax during the Civil War, 5 the

only other occasion preceding the Sixteenth Amendment in which 

Congress had ventured to utilize this method of raising revenue. 6

During the interim between the Pollock decision in 1895 and 

the ratification of the Sixteenth Amendment in 1913, the Court 

gave evidence of a greater awareness of the dangerous consequences to national solvency which that holding threatened, and 

partially circumvented the threat, either by taking refuge in redefinitions of ‘‘direct tax’’ or, and more especially, by emphasizing, 

virtually to the exclusion of the former, the history of excise taxVerDate Apr<15>2004 14:51 Aug 18, 2004 Jkt 077500 PO 00000 Frm 00001 Fmt 8222 Sfmt 8222 C:\CONAN\CON050.SGM PRFM99 PsN: CON050
2068 AMENDMENT 16—INCOME TAX 

7 173 U.S. 509 (1899). 

8 178 U.S. 41 (1900). 

9 184 U.S. 608 (1902). 

10Flint v. Stone Tracy Co., 220 U.S. 107 (1911). 11 Brushaber v. Union Pac. R.R., 240 U.S. 1 (1916); Stanton v. Baltic Mining 

Co., 240 U.S. 103 (1916); Tyee Realty Co. v. Anderson, 240 U.S. 115 (1916). 12 Brushaber v. Union Pac. R.R., 240 U.S. 1, 18–19 (1916). 13Stanton v. Baltic Mining Co., 240 U.S. 103, 112 (1916). 14Stratton’s Independence, Ltd. v. Howbert, 231 U.S. 399 (1913); Doyle v. 

Mitchell Bros. Co., 247 U.S. 179 (1918). 15 Eisner v. Macomber, 252 U.S. 189 (1920); Bowers v. Kerbaugh-Empire Co., 

271 U.S. 170 (1926). 

ation. Thus, in a series of cases, notably Nicol v. Ames, 7 Knowlton

v. Moore, 8 and Patton v. Brady, 9 the Court held the following taxes 

to have been levied merely upon one of the ‘‘incidents of ownership’’ 

and hence to be excises: a tax which involved affixing revenue 

stamps to memoranda evidencing the sale of merchandise on commodity exchanges, an inheritance tax, and a war revenue tax upon 

tobacco on which the hitherto imposed excise tax had already been 

paid and which was held by the manufacturer for resale. 

Under this approach the Court thus found it possible to sustain a corporate income tax as an excise ‘‘measured by income’’ on 

the privilege of doing business in corporate form. 10 The adoption of 

the Sixteenth Amendment, however, put an end to speculation 

whether the Court, unaided by constitutional amendment, would 

persist along these lines of construction until it had reversed its 

holding in the Pollock case. Indeed, in its initial appraisal 11 of the 

Amendment it classified income taxes as being inherently ‘‘indirect.’’ ‘‘[T]he command of the amendment that all income taxes 

shall not be subject to apportionment by a consideration of the 

sources from which the taxed income may be derived, forbids the 

application to such taxes of the rule applied in the Pollock case by 

which alone such taxes were removed from the great class of excises, duties, and imports subject to the rule of uniformity and were 

placed under the other or direct class.’’ 12 ‘‘[T]he Sixteenth Amendment conferred no new power of taxation but simply prohibited the 

previous complete and plenary power of income taxation possessed 

by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged.’’ 13

Income Subject to Taxation 

Building upon definitions formulated in cases construing the 

Corporation Tax Act of 1909, 14 the Court initially described income 

as the ‘‘gain derived from capital, from labor, or from both combined,’’ inclusive of the ‘‘profit gained through a sale or conversion 

of capital assets’’; 15 in the following array of factual situations it 

AMENDMENT 16—INCOME TAX 2069

16 247 U.S. 339, 344 (1918). On the other hand, in Lynch v. Turrish, 247 U.S. 

221 (1918), the single and final dividend distributed upon liquidation of the entire 

assets of a corporation, although equaling twice the par value of the capital stock, 

was declared to represent only the intrinsic value of the latter earned prior to the 

effective date of the Amendment, and hence was not taxable as income to the shareholder in the year in which actually received. Similarly, in Southern Pacific Co. v. 

Lowe, 247 U.S. 330 (1918), dividends paid out of surplus accumulated before the effective date of the Amendment by a railway company whose entire capital stock was 

owned by another railway company and whose physical assets were leased to and 

used by the latter was declared to be a nontaxable bookkeeping transaction between 

virtually identical corporations. 17 247 U.S. 347 (1918). 18 252 U.S. 189, 206–08 (1920). 

subsequently applied this definition to achieve results that have 

been productive of extended controversy. 

Corporate Dividends: When Taxable.—Rendered in conformity with the belief that all income ‘‘in the ordinary sense of the 

word’’ became taxable under the Sixteenth Amendment, the earliest decisions of the Court on the taxability of corporate dividends 

occasioned little comment. Emphasizing that in all such cases the 

stockholder is to be viewed as ‘‘a different entity from the corporation,’’ the Court in Lynch v. Hornby, 16 held that a cash dividend 

equal to 24 percent of the par value of the outstanding stock and 

made possible largely by the conversion into money of assets 

earned prior to the adoption of the Amendment, was income taxable to the stockholder for the year in which he received it, notwithstanding that such an extraordinary payment might appear ‘‘to 

be a mere realization in possession of an inchoate and contingent 

interest . . . [of] the stockholder . . . in a surplus of corporate assets 

previously existing.’’ In Peabody v. Eisner, 17 decided on the same 

day and deemed to have been controlled by the preceding case, the 

Court ruled that a dividend paid in the stock of another corporation, although representing earnings that had accrued before ratification of the Amendment, was also taxable to the shareholder as 

income. The dividend was likened to a distribution in specie. 

Two years later the Court decided Eisner v. Macomber, 18 and

the controversy which that decision precipitated still endures. Departing from the interpretation placed upon the Sixteenth Amendment in the earlier cases, i.e., that the purpose of the Amendment 

was to correct the ‘‘error’’ committed in the Pollock case and to restore income taxation to ‘‘the category of indirect taxation to which 

it inherently belonged,’’ Justice Pitney, who delivered the Court’s 

opinion in the Eisner case, indicated that the sole purpose of the 

Sixteenth Amendment was merely to ‘‘remove the necessity which 

otherwise might exist for an apportionment among the States of 

taxes laid on income.’’ He thereupon undertook to demonstrate how 

2070 AMENDMENT 16—INCOME TAX 

19 252 U.S. at 211-12. This decision has been severely criticized, chiefly on the 

ground that gains accruing to capital over a period of years are not income and are 

not transformed into income by being dissevered from capital through sale or conversion. Critics have also experienced difficulty in understanding how a tax on income which has been severed from capital can continue to be labeled a ‘‘direct’’ tax 

on the capital from which the severance has thus been made. Finally, the contention 

has been made that in stressing the separate identities of a corporation and its 

stockholders, the Court overlooked the fact that when a surplus has been accumulated, the stockholders are thereby enriched, and that a stock dividend may therefore be appropriately viewed simply as a device whereby the corporation reinvests 

money earned in their behalf. See also Merchants’ L. & T. Co. v.Smietanka, 255 U.S. 

509 (1921). 20 Reconsideration was refused in Helvering v. Griffths, 318 U.S. 371 (1943). 

what was not income, but an increment of capital when received, 

could later be transmitted into income upon sale or conversion and 

could be taxed as such without the necessity of apportionment. In 

short, the term ‘‘income’’ acquired to some indefinite extent a restrictive significance. 

Specifically, the Court held that a stock dividend was capital 

when received by a stockholder of the issuing corporation and did 

not become taxable without apportionment, that is, as ‘‘income,’’ 

until sold or converted, and then only to the extent that a gain was 

realized upon the proportion of the original investment which such 

stock represented. ‘‘A stock dividend,’’ Justice Pitney maintained, 

‘‘far from being a realization of profits to the stockholder, . . . tends 

rather to postpone such realization, in that the fund represented by 

the new stock has been transferred from surplus to capital, and no 

longer is available for actual distribution . . . not only does a stock 

dividend really take nothing from . . . the corporation and add 

nothing to that of the shareholder, but . . . the antecedent accumulation of profits evidenced thereby, while indicating that the shareholder is richer because of an increase of his capital, at the same 

time shows [that] he has not realized or received any income in’’ 

what is no more than a ‘‘bookkeeping transaction.’’ But conceding 

that a stock dividend represented a gain, the Justice concluded 

that the only gain taxable as ‘‘income’’ under the Amendment was 

‘‘a gain, a profit, something of exchangeable value proceeding from 

the property, severed from the capital however invested or employed, and coming in, being ‘derived,’ that is, received or drawn 

by the recipient [the taxpayer] for his separate use, benefit, and 

disposal; . . . .’’ Only the latter in his opinion, answered the description of income ‘‘derived’’ from property, whereas ‘‘a gain accruing 

to a capital, not a growth or an increment of value in the investment’’ did not. 19

Although steadfastly refusing to depart from the principle 20

which it asserted in Eisner v. Macomber, the Court in subsequent 

AMENDMENT 16—INCOME TAX 2071

21 United States v. Phellis, 257 U.S. 156 (1921); Rockefeller v. United States, 

257 U.S. 176 (1921). See also Cullinan v. Walker, 262 U.S. 134 (1923). 

In Marr v. United States, 268 U.S. 536, 540–41 (1925), it was held that the increased market value of stock issued by a new corporation in exchange for stock of 

an older corporation, the assets of which it was organized to absorb, was subject to 

taxation as income to the holder, notwithstanding that the income represented profits of the older corporation and that the capital remained invested in the same general enterprise. Weiss v. Stearn, 265 U.S. 242 (1924), in which the additional value 

in new securities was held not taxable, was likened to Eisner v. Macomber, and distinguished from the aforementioned cases on the ground of preservation of corporate 

identity. Although the ‘‘new corporation had . . . been organized to take over the 

assets and business of the old . . . , the corporate identity was deemed to have been 

substantially maintained because the new corporation was organized under the laws 

of the same State with presumably the same powers as the old. There was also no 

change in the character of the securities issued,’’ with the result that ‘‘the proportional interest of the stockholder after the distribution of the new securities was 

deemed to be exactly the same.’’ 

Under existing law, however, when a taxpayer exchanges all of the outstanding 

stock for a minor percentage of the total shares of a larger corporation, plus cash, 

the gain to be recognized in full is not limited to the cash but embraces the excess 

of the sum of the market value of the stock acquired plus the cash over the cost 

of the original stock plus the expenses of the sale. Turnbow v. Commissioner, 368 

U.S. 337 (1961). 

22Miles v. Safe Deposit Co., 259 U.S. 247 (1922). 

23Koshland v. Helvering, 298 U.S. 441 (1936). 

decisions has, however, slightly narrowed the application thereof. 

Thus, the distribution, as a dividend, to stockholders of an existing 

corporation of the stock of a new corporation to which the former 

corporation, under a reorganization, had transferred all its assets, 

including a surplus of accumulated profits, was treated as taxable 

income. The fact that a comparison of the market value of the 

shares in the older corporation immediately before, with the aggregate market value of those shares plus the dividend shares immediately after, the dividend showed that the stockholders experienced no increase in aggregate wealth was declared not to be a 

proper test for determining whether taxable income had been received by these stockholders. 21 On the other hand, no taxable income was held to have been produced by the mere receipt by a 

stockholder of rights to subscribe for shares in a new issue of capital stock, the intrinsic value of which was assumed to be in excess 

of the issuing price. The right to subscribe was declared to be analogous to a stock divided, and ‘‘only so much of the proceeds obtained upon the sale of such rights as represents a realized profit 

over cost’’ to the stockholders was deemed to be taxable income. 22

Similarly, on grounds of consistency with Eisner v. Macomber, the 

Court has ruled that inasmuch as it gave the stockholder an interest different from that represented by his former holdings, a dividend in common stock to holders of preferred stock, 23 or a dividend 

2072 AMENDMENT 16—INCOME TAX 

24 Helvering v. Gowran, 302 U.S. 238 (1937). 25 Helvering v. National Grocery Co., 304 U.S. 282, 288–89 (1938). In Helvering 

v. Mitchell, 303 U.S. 391 (1938), the defendant contended the collection of fifty per 

cent of any deficiency in addition to the deficiency alleged to have resulted from a 

fraudulent intent to evade the income tax amounted to the imposition of a criminal 

penalty. The Court, however, described the additional sum as a civil and not a 

criminal sanction, and one whch could be constitutionally employed to safeguard the 

Government against loss of revenue. In contrast, the exaction upheld in Helvering

v. National Grocery Co., though conceded to possess the attributes of a civil sanction, was declared to be sustainable as a tax. 26 311 U.S. 46 (1940). See also Crane-Johnson Co. v. Helvering, 311 U.S. 54 

(1940). 27 311 U.S. at 53. 

in preferred stock accepted by a holder of common stock 24 was income taxable under the Sixteenth Amendment. 

Corporate Earnings: When Taxable.—On at least two occasions the Court has rejected as untenable the contention that a tax 

on undistributed corporate profits is essentially a penalty rather 

than a tax or that it is a direct tax on capital and hence is not exempt from the requirement of apportionment. Inasmuch as the exaction was permissible as a tax, its validity was held not to be impaired by its penal objective, namely, ‘‘to force corporations to distribute earnings in order to create a basis for taxation against the 

stockholders.’’ As to the added contention that, because liabilty was 

assessed upon a mere purpose to evade imposition of surtaxes 

against stockholders, the tax was a direct tax on a state of mind, 

the Court replied that while ‘‘the existence of the defined purpose 

was a condition precedent to the imposition of the tax liability, . 

. . [did] not prevent it from being a true income tax within the 

meaning of the Sixteenth Amendment.’’ 25 Subsequently, in 

Helvering v. Northwest Steel Mills, 26 this appraisal of the constitutionality of the undistributed profits tax was buttressed by the following observation: ‘‘It is true that the surtax is imposed upon the 

annual income only if it is not distributed, but this does not serve 

to make it anything other than a true tax on income within the 

meaning of the Sixteenth Amendment. Nor is it true . . . that because there might be an impairment of the capital stock, the tax 

on the current annual profit would be the equivalent of a tax upon 

capital. Whether there was an impairment of the capital stock or 

not, the tax . . . was imposed on profits earned during . . .—a tax 

year—and therefore on profits constituting income within the 

meaning of the Sixteenth Amendment.’’ 27

Likening a cooperative to a corporation, federal courts have 

also declared to be taxable income the net earnings of a farmers’ 

cooperative, a portion of which was used to pay dividends on capital stock without reference to patronage. The argument that such 

AMENDMENT 16—INCOME TAX 2073

28Farmers Union Co-op v. Commissioner, 90 F.2d 488, 491, 492 (8th Cir. 1937). 29 Burk-Waggoner Ass’n v. Hopkins, 269 U.S. 110 (1925). 30 268 U.S. 628 (1925). 31Texas & Pacific Ry. Co. v. United States, 286 U.S. 285, 289 (1932); Continental Tie & L. Co. v. United States, 286 U.S. 290 (1932). 32 15 U.S.C. § 78p. 33General American Investors Co. v. Commissioner, 348 U.S. 434 (1955). 34 Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955). 

earnings were in reality accumulated savings of its patrons which 

the cooperative held as their bailee was rejected as unsound for the 

reason that ‘‘while those who might be entitled to patronage dividends have . . . an interest in such earnings, such interest never 

ripens into an individual ownership . . . until and if a patronage 

dividend be declared.’’ Had such net earnings been apportioned to 

all of the patrons during the year, ‘‘there might be . . . a more serious question as to whether such earnings constituted ‘income’ [of 

the cooperative] within the Amendment.’’ 28 Similarly, the power of 

Congress to tax the income of an unincorporated joint stock association has been held to be unaffected by the fact that under state 

law the association is not a legal entity and cannot hold title to 

property, or by the fact that the shareholders are liable for its 

debts as partners. 29

Whether subsidies paid to corporations in money or in the form 

of grants of land or other physical property constitute taxable income has also concerned the Court. In Edwards v. Cuba Railroad, 30 it ruled that subsidies of lands, equipment, and money paid 

by Cuba for the construction of a railroad were not taxable income 

but were to be viewed as having been received by the railroad as 

a reimbursement for capital expenditures in completing such 

project. On the other hand, sums paid out by the Federal Government to fulfill its guarantee of minimum operating revenue to railroads during the six months following relinquishment of their control by that government were found to be taxable income. Such 

payments were distinguished from those excluded from computation of income in the preceding case in that the former were neither bonuses, nor gifts, nor subsidies, ‘‘that is, contributions to capital.’’ 31 Other corporate receipts deemed to be taxable as income include the following: (1) ‘‘insiders profits’’ realized by a director and 

stockholder of a corporation from transaction in its stock, which, as 

required by the Securities and Exchange Act, 32 are paid over to the 

corporation; 33 (2) money received as exemplary damages for fraud 

or as the punitive two-thirds portion of a treble damage antitrust 

recovery; 34 and (3) compensation awarded for the fair rental value 

of trucking facilities operated by the taxpayer under control and 

possession of the Government during World War II, for in the last 

2074 AMENDMENT 16—INCOME TAX 

35 Commissioner v. Gillette Motor Co., 364 U.S. 130 (1960). 36 Helvering v. Bruun, 309 U.S. 461, 469 (1940). 37 309 U.S. at 468, 469. 38 Crane v. Commissioner, 331 U.S. 1, 15–16 (1947). 39The donor could not, ‘‘by mere gift, enable another to hold this stock free from 

. . . [the] right . . . [of] the sovereign to take part of any increase in its value when 

separated through sale or conversion and reduced to possession.’’ Taft v. Bowers, 

278 U.S. 470, 482, 484 (1929). However, when a husband, as part of a divorce settlement, transfers his own corporate stock to his wife, he is deemed to have exchanged 

the stock for the release of his wife’s inchoate, marital rights, the value of which 

are presumed to be equal to the current, market value of the stock, and, accordingly, 

he incurs a taxable gain measured by the difference between the initial purchase 

price of the stock and said market value upon transfer. United States v. Davis, 370 

U.S. 65 (1962). 

instance the Government never acquired title to the property and 

had not damaged it beyond ordinary wear. 35

Gains: When Taxable.—‘‘Although economic gain is not always taxable as income, it is settled that the realization of gain 

need not be in cash derived from the sale of an asset.’’ 36 Thus,

when through forfeiture of a lease a landlord became possessed of 

a new building erected on his land by the outgoing tenant, the resulting gain to the former was taxable to him in that same year. 

‘‘ . . . The fact that the gain is a portion of the value of the property 

received by the . . . [landlord] does not negative its realization. . 

. . [Nor is it necessary] to recognition of taxable gain that . . . [the 

landlord] should be able to sever the improvement begetting the 

gain from his original capital.’’ Hence, the taxpayer was incorrect 

in contending ‘‘that the Amendment does not permit the taxation 

of such [a] gain without apportionment amongst the states.’’ 37 Consistent with this holding, the Court has also ruled that when an 

apartment house was acquired by bequest subject to an unassumed 

mortgage and several years thereafter was sold for a price slightly 

in excess of the mortgage, the basis for determining the gain from 

that sale was the difference between the selling price, 

undiminished by the amount of the mortgage, and the value of the 

property at the time of the acquisition, less deductions for depreciation during the years the building was held by the taxpayer. The 

latter’s contention that the Revenue Act, as thus applied, taxed 

something which was not revenue was declared to be unfounded. 38

As against the argument of a donee that a gift of stock became 

a capital asset when received and that therefore, when disposed of, 

no part of that value could be treated as taxable income to said 

donee, the Court has declared that it was within the power of Congress to require a donee of stock, who sells it at a profit, to pay 

income tax on the difference between the selling price and the 

value when the donor acquired it. 39 Moreover, ‘‘the receipt in cash 

or property . . . not [being] the only characteristic of realization of 

AMENDMENT 16—INCOME TAX 2075

40 Helvering v. Horst, 311 U.S. 112, 115–16 (1940). 

The Court was also called upon to resolve questions as to whether gains, realized after 1913, on transactions consummated prior to ratification of the Sixteenth 

Amendment are taxable, and if so, how such tax is to be determined. The Court’s 

answer generally has been that if the gain to the person whose income is under consideration became such subsequent to the date at which the amendment went into 

effect, namely, March 1, 1913, and is a real, and not merely an apparent, gain, said 

gain is taxable. Thus, one who purchased stock in 1912 for $500 could not limit his 

taxable gain to the difference, $695, the value of the stock on March 1, 1913 and 

$13,931, the price obtained on the sale thereof, in 1916; but was obliged to pay tax 

on the entire gain, that is the difference between the original purchase price and 

the proceeds of the sale, Goodrich v. Edwards, 255 U.S. 527 (1921). Conversely, one 

who acquired stock in 1912 for $291,600 and who sold the same in 1916 for only 

$269,346, incurred a loss and could not be taxed at all, notwithstanding the fact 

that on March 1, 1913, his stock had depreciated to $148,635. Walsh v. Brewster, 

255 U.S. 536 (1921). On the other hand, although the difference between the 

amount of life insurance premiums paid as of 1908, and the amount distributed in 

1919, when the insured received the amount of his policy plus cash dividends apportioned thereto since 1908, constituted a gain, that portion of the latter which accrued between 1908 and 1913 was deemed to be an accretion of capital and hence 

not taxable. Lucas v. Alexander, 279 U.S. 473 (1929). 

However, a litigant who, in 1915, reduced to judgment a suit pending on February 26, 1913, for an accounting under a patent infringement, was unable to have 

treated as capital, and excluded from the taxable income produced by such settlement, that portion of his claim which had accrued prior to March 1, 1913. Income 

within the meaning of the Amendment was interpreted to be the fruit that is born 

of capital, not the potency of fruition. All that the taxpayer possessed in 1913 was 

a contingent chose in action which was inchoate, uncertain, and contested. United 

States v. Safety Car Heating Co., 297 U.S. 88 (1936). 

Similarly, purchasers of coal lands subject to mining leases executed before 

adoption of the Amendment could not successfully contend that royalties received 

during 1920–1926 were payments for capital assets sold before March 1, 1913, and 

hence not taxable. Such an exemption, these purchasers argued, would have been 

in harmony with applicable local law whereunder title to coal passes immediately 

to the lessee on execution of such leases. To the Court, on the other hand, such 

leases were not to be viewed ‘‘as a ‘sale’ of the mineral content of the soil’’ inasmuch 

as minerals ‘‘may or may not be present in the leased premises, and may or may 

not be found [therein]. . . . If found, their abstraction . . . is a time consuming operation and the payments made by the lessee . . . do not normally become payable 

as the result of a single transaction. . . .’’ The result for tax purposes would have 

been the same even had the lease provided that title to the minerals would pass 

income to a taxpayer on the cash receipt basis,’’ it follows that one 

who is normally taxable only on the receipt of interest payments 

cannot escape taxation thereon by giving away his right to such income in advance of payment. When ‘‘the taxpayer does not receive 

payment of income in money or property, realization may occur 

when the last step is taken by which he obtains the fruition of the 

economic gain which has already accrued to him.’’ Hence an owner 

of bonds, reporting on the cash receipts basis, who clipped interest 

coupons therefrom before their due date and gave them to his son, 

was held to have realized taxable income in the amount of said 

coupons, notwithstanding that his son had collected them upon maturity later in the year. 40

2076 AMENDMENT 16—INCOME TAX 

only ‘‘on severance by the lessee.’’ Bankers Coal Co. v. Burnet, 287 U.S. 308 (1932); 

Burnet v. Harmel, 287 U.S. 103, 106–107, 111 (1932). 41 274 U.S. 259 (1927). 42 42 Stat. 227, 250, 268. 43 274 U.S. at 263. Profits from illegal undertakings being taxable as income, 

expenses in the form of salaries and rentals incurred by bookmakers are deductible. 

Commissioner v. Sullivan, 356 U.S. 27 (1958). 44 Rutkin v. United States, 343 U.S. 130 (1952). Four Justices, Black, Reed, 

Frankfurter, and Douglas, dissented. 45 James v. United States, 366 U.S. 213, 219 (1961) (overruling Commissioner 

v. Wilcox, 327 U.S. 404 (1946)). 46 Brushaber v. Union Pac. R.R., 240 U.S. 1 (1916). 47MacLaughlin v. Alliance Ins. Co., 286 U.S. 244, 250 (1932). 

Income from Illicit Transactions.—In United States v. Sullivan, 41 the Court held that gains derived from illicit traffic were 

taxable income under the act of 1921. 42 Said Justice Holmes for 

the unanimous Court: ‘‘We see no reason . . . why the fact that a 

business is unlawful should exempt it from paying the taxes that 

if lawful it would have to pay.’’ 43 Consistent therewith, although 

not without dissent, the Court ruled that Congress has the power 

to tax as income moneys received by an extortioner, 44 and, more 

recently, that embezzled money is taxable income of an embezzler 

in the year of embezzlement. ‘‘When the taxpayer acquires earnings, lawfully or unlawfully, without the consensual recognition, express or implied, of an obligation to repay and without restriction 

as to their disposition, ‘he has received income . . . , even though 

it may still be claimed that he is not entitled to retain the money, 

and even though he may still be adjudged liable to restore its 

equivalent.’’’ 45

Deductions and Exemptions.—The authorization contained 

in the Sixteenth Amendment to tax income ‘‘from whatever source 

derived’’ does not preclude Congress from granting exemptions. 46

Thus, the fact that ‘‘under the Revenue Acts of 1913, 1916, 1917, 

and 1918, stock fire insurance companies were taxed . . . upon 

gains realized from the sale . . . of property accruing subsequent 

to March 1, 1913,’’ but were not so taxed by the Revenue Acts of 

1921, 1924, and 1926, did not prevent Congress, under the terms 

of the Revenue Act of 1928, from taxing all the gain attributable 

to increase in value after March 1, 1913, which such a company realized from a sale of property in 1928. The constitutional power of 

Congress to tax a gain being well established, Congress was declared competent to choose ‘‘the moment of its realization and the 

amount realized’’; and ‘‘its failure to impose a tax upon the increase 

in value in the earlier years . . . [could not] preclude it from taxing 

the gain in the year when realized . . . .’’ 47 Congress is equally well 

equipped with the ‘‘power to condition, limit, or deny deductions 

from gross incomes in order to arrive at the net that it chooses to 

AMENDMENT 16—INCOME TAX 2077

48 Helvering v. Independent Life Ins. Co., 292 U.S. 371, 381 (1934); Helvering 

v. Winmill, 305 U.S. 79, 84 (1938). 49 A tax on the rental value of property so occupied is a direct tax on the land 

and must be apportioned. Helvering v. Independent L. Ins. Co., 292 U.S. 371, 378– 

79 (1934). 50 292 U.S. at 381. Expenditures incurred in the prosecution of work under a 

contract for the purpose of earning profits are not capital investments, the cost of 

which, if converted, must first be restored from the proceeds before there is a capital 

gain taxable as income. Accordingly, a dredging contractor, recovering a judgment 

for breach of warranty of the character of the material to be dredged, must include 

the amount thereof in the gross income of the year in which it was received, rather 

than of the years during which the contract was performed, even though it merely 

represents a return of expenditures made in performing the contract and resulting 

in a loss. The gain or profit subject to tax under the Sixteenth Amendment is the 

excess of receipts over allowable deductions during the accounting period, without 

regard to whether or not such excess represents a profit ascertained on the basis 

of particular transactions of the taxpayer when they are brought to a conclusion. 

Burnet v. Sanford & Brooks Co., 282 U.S. 359 (1931). 

The grant on denial of deductions is not based on the taxpayers’ engagement 

in constitutionally protected activities, and, accordingly, no deduction is granted for 

sums expended in combating legislation, enactment of which would destroy taxpayer’s business. Cammarano v. United States, 358 U.S. 498 (1959). 

Likewise, when tank truck owners, either intentionally for business reasons or 

unintentionally, violate state maximum weight laws, and incur fines, the latter are 

not deductible, for fines are penalties rather than tolls for the use of highways, and 

Congress is not to be viewed as having intended to encourage enterprises to violate 

state policy. Tank Truck Rentals v. Commissioner, 356 U.S. 30 (1958); Hoover Express Co. v. United States, 356 U.S. 38 (1958). 51Millinery Corp. v. Commissioner, 350 U.S. 456 (1956). 

tax.’’ 48 Accordingly, even though the rental value of a building used 

by its owner does not constitute income within the meaning of the 

Amendment, 49 Congress was competent to provide that an insurance company shall not be entitled to deductions for depreciation, 

maintenance, and property taxes on real estate owned and occupied 

by it unless it includes in its computation of gross income the rental value of the space thus used. 50

Also, a taxpayer who erected a $3,000,000 office building on 

land, the unimproved worth of which was $660,000, and who subsequently purchased the lease on the latter for $2,100,000 is entitled 

to compute depreciation over the remaining useful life of the building on that portion of $1,440,000, representing the difference between the price and the unimproved value, as may be allocated to 

the building; but he cannot deduct the $1,440,000 as a business expense incurred in eliminating the cost of allegedly excessive rentals 

under the lease, nor can he treat that sum as a prepayment of rent 

to be amortized over the 21-year period that the lease was to run. 51

Diminution of Loss.—Mere diminution of loss is neither gain, 

profit, nor income. Accordingly, one who in 1913 borrowed a sum 

of money to be repaid in German marks and who subsequently lost 

the money in a business transaction cannot be taxed on the curtailment of debt effected by using depreciated marks in 1921 to settle 

2078 AMENDMENT 16—INCOME TAX 

52 Bowers v. Kerbaugh-Empire Co., 271 U.S. 170(1926). 

a liability of $798,144 for $113,688, the ‘‘saving’’ having been exceeded by a loss on the entire operation. 52