Source: https://supreme.justia.com/cases/federal/us/286/244/
Timestamp: 2019-04-22 10:44:32+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 286 › McLaughlin v. Alliance Insurance Co.
McLaughlin v. Alliance Insurance Co.
1. While increase in value of property not realized as gain by it sale or other disposition may, in an economic or bookkeeping sense, be deemed an addition to capital in a later period, it is nevertheless a gain from capital investment which, when realized by conversion into money or other property, constitutes income within the meaning of the Sixteenth Amendment, taxable a such in the period when realized. P. 286 U. S. 249.
2. The tax being upon realized gain, it may constitutionally be imposed upon the entire amount of the gain realized within the taxable period, even though some of it represents enhanced value in an earlier period before the adoption of the taxing act. P. 286 U. S. 250.
3. Gains realized by stock fire insurance companies from sale or other disposition of property, accruing after March 1, 1913, were taxable as income under the revenue acts of 1913-1918, but not under those of 1921-1926. The Act of 1928 taxed their income and by § 204(b) defined their gross income as including "gain during the taxable year from sale or other disposition of property." Held, that the tax under the 1928 Act is on the entire gain realized within the taxable year, to be determined, pursuant to §§ 111-113, by deducting from the net selling price the cost of the property sold, or the fair market value on March 1, 1913, if acquired before that date. P. 286 U. S. 251.
basis, and, in No. 548, it held the tax invalid because computed on the basis of value on March 1, 1913, or other basis as provided by § 113 of the Act, and not on the basis of value as of January 1, 1928. See 49 F.2d 361.
Appellee in No. 548, a Pennsylvania stock fire and marine insurance corporation, brought the present suit in the District Court of Eastern Pennsylvania to recover income tax for the year 1928 alleged to have been illegally exacted. Under the Revenue Acts of 1913, 1916, 1917, and 1918, stock fire insurance companies were taxed upon their income, including gains realized from the sale or other disposition of property, accruing subsequent to March 1, 1913; but, by the Revenue Acts of 1921, 1924, and 1926, gains of such companies, from the sale or other disposition of property, were not subject to tax, and losses similarly incurred were not deductible from gross income.
"Under the Revenue Act of 1928, is the basis to be used by an insurance company (other than a life or mutual insurance company) in computing 'gain during the taxable year from the sale or other disposition of property,' acquired before and disposed of after January 1, 1928, its fair market value as of January 1, 1928, the effective date of the Act?"
The company contends that so much of the gain as accrued before the effective date of the taxing act was capital, which could not constitutionally be taxed under the Sixteenth Amendment, and that, in any case, the constitutionality of a tax upon the previously accrued gain is so doubtful as to require the taxing act to be construed as not authorizing such a levy.
"If the basis to be used by an insurance company (other than a life or mutual insurance company) in computing 'gain during the taxable year from the sale or other disposition of property,' acquired before and disposed of after January 1, 1928, the effective date of the Revenue Act of 1928, be the fair market value of such property as of March 1, 1913, or other basis provided by § 113 of the Act, is the quoted provision (Section 204(b)(1), clause (B)) unconstitutional because it taxes capital?"
The tax under this and earlier revenue acts was imposed upon net income for stated accounting periods, here the calendar year 1928, see Burnet v. Sanford & Brooks Co., 282 U. S. 359, 282 U. S. 363, and it is only gain realized from the sale or other disposition of property which is included in the taxable income. Realization of the gain is the event which calls into operation the taxing act, although part of the profit realized in one accounting period may have been due to increase of value in an earlier one. While increase in value of property, not realized as gain by its sale or other disposition, may, in an economic or bookkeeping sense, be deemed an addition to capital in a later period, see Merchants' Loan & Trust Co. v. Smietanka, 255 U. S. 509, it is nevertheless a gain from capital investment which, when realized, by conversion into money or other property, constitutes profit which has consistently been regarded as income within the meaning of the Sixteenth Amendment and taxable as such in the period when realized, see Lynch v. Hornby, 247 U. S. 339; Merchants' Loan & Trust Co. v. Smietanka, supra; Eldorado Coal & Mining Co. v. Mager, 255 U. S. 522; Goodrich v. Edwards, 255 U. S. 527; Walsh v. Brewster, 255 U. S. 536; Taft v. Bowers, 278 U. S. 470; Lucas v. Alexander, 279 U. S. 573; Willcuts v. Bunn, 282 U. S. 216.
the Act, was constitutional, though the gains had accrued prior to its enactment.
Doyle v. Mitchell Brothers Co., 247 U. S. 179, and Hays v. Gauley Mountain Coal Co., 247 U. S. 189, on which the the taxpayers rely, involved the construction, not the constitutionality, of the Corporation Excise Tax Act of 1909, and considerations which, in Lynch v. Turrish, 247 U. S. 221, and Southern Pacific Co. v. Lowe, 247 U. S. 330, led to the construction of the income tax act of 1913 as not embracing gains accrued before the effective date of that act, are not present here.
Act of 1928 must be regarded as substantially an amendment and continuation of the Act of 1913.
"Subtitle A -- Introductory provisions."
"Subtitle B -- General provisions."
"The application of the General Provisions and of Supplements A to D, inclusive, to each of the following special classes of taxpayers, shall be subject to the exceptions and additional provisions found in the Supplement applicable to such class, as follows: . . . (c) Insurance companies -- Supplement G. . . ."
It would be going very far in the circumstances to say that the mere omission from § 204 of a cross-reference to the definition of gain in §§ 111-113, made applicable by the general provisions of the Act, not only excluded that definition from § 204, but substituted a different one not specifically mentioned in that or any other section. The gain taxed by § 204(b)(1) is therefore that defined by §§ 111-113, which may constitutionally be taxed.
Both questions as answered "No."
* Together with No. 547, Insurance Company of Pennsylvania v. MacLaughlin, Collector of Internal Revenue.
It is true that §§ 204(c), 205, and 206, relating to allowed deductions from gross income, define the deductions by specific cross-references to like deductions defined in the general provisions of other sections, but as the listed deductions were intended to be exclusive, and as those allowed to insurance companies differ in many respects from those allowed to other corporations, it was an appropriate, if not necessary, precaution, in enumerating them, to describe those which were allowed, either by repeating the appropriate language contained in the general sections or to incorporate it by reference. No such precaution was necessary with respect to § 204(b). The "gain" included in gross income by that section was adequately defined by §§ 111-113, made applicable, by § 4 of Subtitle A, to the provisions of Supplement G.
See Report of the Joint Committee on Internal Revenue Taxation, December 22, 1927, Document No. 139, 70th Cong., 1st Sess., p. 2, appendix p. 7; Report of the Committee on Ways and Means, December 17, 1927, H.R. No. 2, 70th Cong., 1st Sess., pp. 1, 2, 11, 12; Report of Committee on Finance, Sen.Rep. No. 960, May 1, 1928, 70th Cong., 1st Sess. pp. 17, 18. Although the bill, as originally introduced, did not contain the provision for taxing gains of stock fire insurance companies, the bill was amended by the addition of § 204(b)(1)(B) to Supplement G, for the declared purpose of placing such insurance companies on the same basis as mutual companies, which were already taxed upon gains from the sale or other disposition of property. Cong.Rec. May 21, 1928, vol. 69, part 9, p. 9337; Conference Report No. 1882, p. 18.
Neither § 204, which deals with the taxation of insurance companies other than life or mutual, nor the other provisions of Supplement G contain any directions concerning such essential parts of a system of taxation as the filing of returns, time of payment, or penalties for nonpayment, and no express reference is made to the obviously applicable general provisions touching upon these matters. Sections 52, 56, 146. Other important and necessarily applicable general provisions, not included or referred to in Supplement G, may be found in §§ 105, 118, 141, 142, 271-277. The provision in § 207 of Supplement G that "gross income shall not be determined in the manner provided in § 119" is a plain indication that the general provisions contained in § 119 would apply to insurance companies in the absence of the express exception.

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