The Forty-fourth Amendment to the Constitution of this Commonwealth, approved and ratified by the people in November, 1915, is in these words: “Full power arid authority are hereby given and granted to the General Court to impose and levy a tax on income in the manner hereinafter provided. Such tax may be at different rates upon income derived from different classes of property, but shall be levied at a uniform rate throughout the Commonwealth upon incomes derived from the same class of property. The General Court may tax income not derived from property at a lower rate than income derived from property, and may grant reasonаble exemptions and abatements. Any class of property the income from which is taxed under the provisions of this article may be exempted from the imposition and levying of proportional and reasonable assessments, rates and taxes as at present authorized by the Constitution. This article shall not be construed to limit the power of the General Court to impose and levy reasonable duties and excises.” The inquiry raised on this record chiefly concerns the meaning of “income” as that word is used in the grant of power to the General Court to “impose and levy a tax on income.”
The Constitution of Massachusetts is a frame of governmеnt for a sovereign power. It was designed by its framers and accepted by the people as an enduring instrument, so comprehensive and general iri its terms that a free, intelligent and moral body of citizens might govern themselves under its beneficent provisions through radical changes in social, economic and industrial conditions. It declares only fundamental principles as to the form of government and the mode in which it shall be exercised. Certain great powers are conferred and some limita
The cases at bar raise four main questions:
(1) Are excesses of gains over losses in the purchase and sale of intangible personal property by one not engaged in the business of dealing in such property taxable as income?
(2) Are gains derived from the sale of rights to subscribe for new shares of stock to be issued by an existing corporation taxable as income?
(3) Is a stock dividend, declared and issued by a corporation after the statute went into effect, out of an accumulation of profits earned and invested in its business before the statute was enacted, taxable as income?
(4) Is a cash dividend declared and paid after the statiite went into effect out of profits earned before the statute took effect, taxable as income?
1. We proceed to the discussion of the first main question.
Pursuant to the grant of power given by the Forty-fourth Amendment, the income tax law, St. 1916, c. 269, was enacted. It is provided by § 5 that “Income of the following classes received by any inhabitant of this Commonwealth, during the calendar year prior to the assessment of the tax, shall be taxed as follows: ...(c) The excess of the gains over the losses received by the taxpayer from the purchases or sales of intangible personal property, whether or not the said taxpayer is engaged in the business of dealing in such property, shall be tаxed at the rate of three per cent per annum. ...” The act took effect so
The defendant Putnam on January 1, 1916, owned certain shares of stock in corporations, which he sold during the calendar year 1916 at sums in excess of the prices given in the “Approved Valuation” bulletin, so that the net profits realized exceeded his total losses. He also bought certain stocks during the year 1916 and sold them during the same year at a profit. It is contended on his behalf that these gains do riot constitute “income” within the meaning of that word in the, Forty-fourth Amendment.
The Forty-fourth Amendment was adopted by the General Court and by it proposed to the people after prolonged study and at the end of various efforts under the grant of pоwer to tax contained in c. 1, § 1, art. 4 of the Constitution to establish a general and extensive income tax. Numerous resolves of the Legislature have been passed from time to time extending over many years, providing for the investigation of the subject of taxation by special commissions and committees. The reports from these sources were voluminous and most, if not all of them, suggested some form of tax on incomes from investments. Advisory opinions to the General Court or one of its branches by the justices of-this court touching particular phases of the matter are to be found in Opinions of the Justices,
“Income” like most other words has different meanings dependent upon the connection in which it is used and the result intended to be accomplished. One purpose of its use in the Forty-fourth Amendment doubtless was to distinguish property flowing out of an original investment from that which in its inherent nature is permanent investment, already subject to the ample taxing power of c. 1, § 1, art. 4. But that is not its exclusive signification in the amendment. In its ordinary and popular meaning, “income” is the amount of actual wealth which comes to a person during a given period of time. At any single moment a person scarcely can be said to have income. The word in most, if not all, connections involves time as an essential element in its measurement or definition. It thus is differentiated from capital or investment, which commonly means the amount of wealth which a person has on a fixed date. Income may be derived from capital invested or in use, from labor, from the exercise of skill, ingenuity or sound judgment, or from a combination of any or all of these factors. One of the most recent of its definitions is “the gain derived from capital, from labor, or from both combinéd.” Strainton’s Independence, Ltd. v. Howbert,
The gains and profits made as a result of carrying on a business of buying and selling goods had been held to be taxable as income under the tax law long before the adoption of the Forty-fourth Amendment. Wilcox v. County Commissioners,
If the word “incomes” or the words “gain, profit and income” had been used, it hardly would be contended that the intendment of the amendment was not comprehensive. But in the framing of constitutions words naturally are employed in a compendious sense as expressive of general ideas rather than of the
The fair and almost irresistible conclusion from all these considerations is that the word “income” in the Forty-fourth Amendment has a generic meaning and includes gains, profits and revenues.
The gains received from sales of stocks come within the definitions of “income” heretofore stated. They are derived from the аpplication of sagacity to the use of capital in making purchases and resales at an advance. The transactions could not be carried out except by the use of capital and the profit is derived directly from the capital in combination with skill in selecting the time for purchase and for sale.
It is true that in some other connections profits and gains arising from the increase in value of investments and realized by sale are treated as a part of the principal and not as income. That is so of trust estates. But, as has been pointed out, it is not true where business is conducted which consists of making sales and purchases. Williams v. Milton,
A vеry different question would arise if the attempt were made to tax as income the increase in value of the capital investment in intangibles which had accrued to the owner from a date of purchase long anterior to the enactment of the tax act. Such a construction of a statute would not be adopted except as the imperative result of unequivocal words, and even then serious questions might arise as to the validity of such an act. See Gray v. Darlington,
The argument against the validity of the tax, as likely to cause confusion in keeping accounts of trustees and others and in making divisions and apportionments, is based merely on convenience and cannot be regarded as of much weight. Illustrations were put in argument and readily can be imagined of instances where hardship may be wrought by this decision. But that is likely to be true of every general rule of law and particularly of tax statutes.
These reasons lead to the conclusion that the tax upon gains in excess of losses arising from sales of stock during the year 1916 is a tax upon income and not upon principal.
In reaching this conclusion we are not unmindful of decisions of other jurisdictions more or less apparently at variance. See for еxample, Gray v. Darlington,
The incomе tax act does not violate the provisions of the Forty-fourth Amendment so far as concerns this item of income. It does not levy a tax at a different rate upon incomes derived from the same class of property. The rate levied upon gains from the sales of intangible personal property is three per cent, § 5 (c), while that upon the dividends from stock and interest on bonds and notes is six per cent, § 2. But these two sources of income do not belong to the same class. When a classification is made of property for purposes of taxation, the question is, as was said in Nicol v. Ames,
The question was somewhat argued at the bar whether the tax authorized by the Forty-fourth Amendment and levied by the instant statute is wholly a property tax, as was said in Opinion of the Justices,
2. The second question is whether gains derived from the sale of rights to subscribe for new shares of stock to be issued by a corporation are taxable as income.
The respondent Putnam received during 1916 proceeds from the sale of rights, declared in that year, to subscribe to shares of new stock in corporations in which he was a stockholder previous to 1916.
The same reasons which already have been stated, as to the right to treat gains in excess of losses from purchases and sales of intangible personal property as subject to an income tax, lead to the conclusion that gains arising from the sale of rights to subscribe for new stock issued by corporations may also be treated as income by the General Court for purposes of taxation under the Forty-fourth Amendment. Such rights are themselves a species of intangible property. They come to the stockholder as a gratuity. They are a new thing of value which he did not possess before. The amount for which he sells them is a gain.
In the management of trusts as between a life tenant and remainderman rights to subscribe for stock, Atkins v. Albree,
But, however that may be, it is manifest that there is no inherent, necessary and immutable reason why stock dividends should always be treated as capital. This is apparent because in several jurisdictions they are treated either in whole or in part as income and not as capital. Matter of Osborne,
It seems imрossible to say, when a kind of gain is in many States held even as between life tenant and remainderman to be income and not capital, that the word “income,” used in an amendment to the Constitution adopted for the express purpose of enabling a tax to be levied broadly on all that rightly may be described as income, should be construed as excluding such gains simply because this court has held that it was not income in a single branch of law while numerous other courts have held the contrary even upon that point. However strong such an argument might be when urged as to the interpretation of a statute, it is not of prevailing force as to the broad considerations involved in the interpretation of an amendment to the Constitution
The rights to subscribe for stock, when sold and converted into cash, rightly may be treated as taxable as a gain on the sale of intangibles under § 5 (c) of the income tax act. These rights commonly are represented by certificates and pass by indorsement. They are a species of intangible property. They are not ^regarded ordinarily as a profit from the prosecution of the business, but are an inherent and constituent part of the shares. Atkins v. Albree,
The question whether rights to subscribe for stock, which are exercised by subscription, are taxable as income is not raised on this record and is not decided.
3. The third question is whether a stock dividend, declared and paid after the statute went into effect out of profits earned before it took effect, is taxable as income. The respondent Garfield received during 1916 a stock dividend declared in that year on shares of stock in corporations owned by her before that time.
The stock" dividends in the Garfield case were declared out of an accumulation of earnings which before 1916 had been invested in permanent additions to the plants of the corporations involved. It is urged that these earnings, therefore, had become •■a part of capital before 1916 and hence cannot in the nature of things be taxed as income. It is true that, in instances of this sort arising between life tenant and remainderman, the fact that the surplus of a corporation has been used in permanent increases of the property devoted to the business of the corporation is oftentimes of significance. Minot v. Paine,
The contention that stock dividends are not taxable as income, because in this Commonwealth they are treated as capital and not as income аs between life tenant and remainderman, has been disposed of by what has been said already in discussing the second question here raised respecting the taxability as income of rights to subscribe for new shares of stock.
The stock dividends, so far as regards the source from which they come to the stockholder and the impassive nature of his receipt of them, are derived from the same class of property from which are derived ordinary dividends and rightly may be classified with them under § 2 of the income tax act. The two should be taxed, as they are in the statute, at the same rate.
So far as there may be anything at variance with this conclusion in Lynch v. Turrish, 236 Fed. Rep. 653;
Therefore, in this particular the income tax act is not in conflict with the requirements of the Forty-fourth Amendment as to uniformity of rate on incomes derived from the same class of property.
4. The fourth question is whether a cash dividend declared
The respondent Putnam received during 1916 an extra cash dividend of thirty-three and one third per cent on certain shares of corporate stock owned by him before 1916, which was declared out of undistributed earnings accrued before March, 1913.
It is the general and long established rule in this Cоmmonwealth that cash dividends received on corporate stock are to be treated as income and not as capital. Talbot v. Milliken,
The decision upon the first three main questions is by a majority of the court, and is unanimous upon the fourth question. It follows that in each case the entry must be
Peremptory writ of mandamus to issue.