1981 U.S. Tax Ct. LEXIS 3 | Tax Ct. | 1981
Lead Opinion
OPINION
Respondent determined a deficiency of $11,206.60 in petitioners’ Federal income taxes for 1976. The sole issue for our decision is whether that portion of gain from the sale of property, which is attributable solely to inflation, is income within the meaning of the 16th Amendment.
All the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. The pertinent facts are summarized below.
Petitioners Arthur K. Hellermann and V. Louise Heller-mann resided in Milwaukee, Wis., when they filed their joint return for 1976. They resided in Hendersonville, Tenn., when they filed their petition and amended petition herein.
Petitioners purchased four buildings in 1964 for $93,312. They sold the buildings in 1976 for $264,000, and reported a capital gain of $170,688 on their 1976 return. They paid the appropriate capital gain taxes, but failed to compute or pay the additional minimum tax on items of tax preference as required by sections 55 to 58,1.R.C. 1954.
Respondent contends that petitioners are liable for the minimum tax because capital gain is an item of tax preference under section 57(a)(9)(A).
Petitioners claim that much of their reported gain on the sale of the four buildings was due to inflation. They point out that the Consumer Price Index (CPI)
Petitioners assert that they should not be taxed on their nominal gain, but only on their economic gain. They argue that the portion of their nominal gain which is attributable solely to inflation does not constitute taxable income within the meaning of the 16th Amendment. Instead, they contend that, economically speaking, such gain is a return of capital. As they correctly observe, tax on a return of capital is a direct tax, subject to apportionment.
Respondent rejects as irrelevant petitioners’ use of the CPI, or other measures of inflation, to calculate taxable income. He contends that nominal capital gain is taxable income whether or not such gain represents an increase in economic value. We agree with respondent, and therefore, need not decide whether the CPI is an appropriate measure with which to adjust taxable income.
We note at the outset that we have several times denied taxpayers deductions for losses due to inflation, on grounds that the tax law is not written to account for inflation.
We reject petitioners’ contention that nominal gain is not taxable income within the meaning of the 16th Amendment
The cases reviewing the Gold Reserve Act of 1934, Norman v. Baltimore & Ohio Railroad Co., supra, Nortz v. United States, supra, and Perry v. United States, supra, further extended the power of Congress with respect to the currency. These cases challenged the Gold Reserve Act of 1934
the aggregate of the powers granted to the Congress, embracing the powers to lay and collect taxes, to borrow money, to regulate commerce with foreign nations and among the several States, to coin money, regulate the value thereof, and of foreign coin, and fix the standards of weights and measures, and the added express power "to make all laws which shall be necessary and proper, for carrying into execution” the other enumerated powers. [Norman v. Baltimore & Ohio Railroad Co., supra at 303, citing Juilliard v. Greenman, 110 U.S. 421, 439-440 (1884).]
Under this implicit constitutional authority, the Court concluded that Congress could choose "a uniform monetary system, and * * * reject a dual system, with respect to all obligations within the range of the exercise of its constitutional authority.” (Emphasis added.) Norman v. Baltimore & Ohio Railroad Co., supra at 316.
Petitioners concede that Congress has the power to require that the income tax be paid in dollars as legal tender, but argues that it does not have the power to measure gain in terms of dollars, because such dollars do not have a constant value. Given the reasoning behind the holding of the Legal Tender Cases, supra, and Norman v. Baltimore & Ohio Railroad Co., supra, we must disagree. Dollars have constant legal value under the uniform monetary system created by Congress.
As our second ground for rejecting petitioners’ arguments, we rely upon the doctrine of common interpretation. As was stated by Judge Learned Hand, "[the] meaning [of income] is * * * to be gathered from the implicit assumptions of its use in common speech.” United States v. Oregon-Washington R. & Nav. Co., 251 F. 211, 212 (2d Cir. 1918). Thus, the meaning of income is not to be construed as an economist might, but as a layperson might. Petitioners received many more dollars for the buildings than they had paid for them. The extra dollars they received are well within the common perception of income, even though each 1976 dollar received represents less purchasing power than each 1964 dollar paid. Petitioners’ nominal gain may or may not equal their real gain in an economic sense. Nonetheless, neither the Constitution nor tax laws "embody perfect economic theory.” See Weiss v. Wiener, 279 U.S. 333, 335 (1929).
Based on the foregoing, we find that petitioners’ nominal gain represented a change in legal value. Thus, petitioners’ nominal gain is taxable income within the meaning of the 16th Amendment. Accordingly, we hold that petitioners are liable for the minimum tax as determined by respondent. Further, because petitioners have not sustained their burden of proving that they had a lesser capital gain on sale of the buildings than they reported, there is no overpayment of income taxes to which they are entitled.
Decision will be entered for the respondent.
This section was amended for taxable years ending after Oct. 31,1978. We are concerned with it as it existed in 1976.
This index is prepared by the Bureau of Labor Statistics. It measures economy-wide changes in the prices of goods and services as represented by the change in price of a fixed "market basket” of such consumer goods and services. L. Seidler & D. Carmichael, Accountant’s Handbook 24.9 (1981).
In June 1964, when petitioners purchased the buildings, the CPI for urban wage earners was 92.9. In December 1976, when they sold the buildings, it was 174.3.
The calculations they made to reach this result were based on the following two formulas:
(1) CPI in December 1976
-X 1964 Purchase price = Purchase price inflated
CPI in June 1964 to 1976 doUars
(2) 1976 Sales price - Purchase price inflated to 1976 dollars = True gain on 1976
sale
U.S. Const, art. I, sec. 2, cl. 3. See also U.S. Const, art. I, sec. 9, cl. 4.
For a general discussion of the effects of inflation and use of economic indicators, see Note, "Inflation and the Federal Income Tax,” 82 Yale L.J. 716 (1973).
Sibla v. Commissioner, 68 T.C. 422, 430-431 (1977); Gajewski v. Commissioner, 67 T.C. 181, 193-194 (1976); Cunningham v. Commissioner, T.C. Memo. 1981-365; Milkowski v. Commissioner, T.C. Memo. 1981-225.
“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.”
Hxold Reserve Act of 1934,48 Stat. 337.
In some instances, this and other courts have treated rare gold and silver coins as property, not as legal tender, and thus have determined gain on receipt or exchange of such coins based upon the coins’ fair market value rather than their legal value. See, e.g., Cal. Federal Life Insurance Co. v. Commissioner, 76 T.C. 107 (1981); Joslin v. United States, an unreported case (C.D. Utah 1981, 81-2 USTC par. 9643), affd. (10th Cir., Dec. 9,1981,81-2 USTC par. 9813); Cordner v. United States, an unreported case (C.D. Cal. 1980, 45 AFTR 2d 80-1677, 80-1 USTC par. 9441). In this case, there was no evidence that petitioners received anything other than paper dollars which were concededly legal tender.