Gray v. Darlington
82 U.S. 63, 15 Wall. 63, 21 L.Ed. 45 (1872)
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Rule of Law:
Under early income tax statutes, a mere increase in the capital value of property accrued over several years, realized upon its sale, does not constitute "annual gains, profits, or income" taxable in the single year of sale, unless the statute specifically provides for such long-term capital appreciation.
Facts:
- In 1865, the plaintiff owned United States treasury notes.
- In 1865, the plaintiff exchanged these treasury notes for United States five-twenty bonds.
- In 1869, the plaintiff sold the five-twenty bonds for $20,000 more than the original cost of the treasury notes.
- An assistant assessor for the United States assessed a 5% tax on this $20,000 advance, classifying it as gains, profits, and income of the plaintiff for that year.
- The assessment was affirmed by the assessor of the district and the Commissioner of Internal Revenue.
- The defendant, a collector for the district, demanded the tax from the plaintiff.
- The plaintiff paid the demanded tax under protest.
Procedural Posture:
- An assistant assessor of the United States assessed a 5% tax on the plaintiff's $20,000 advance from the sale of bonds.
- The plaintiff appealed this assessment to the assessor of the district.
- The district assessor affirmed the assessment.
- The plaintiff further appealed the assessment to the Commissioner of Internal Revenue.
- The Commissioner of Internal Revenue affirmed the assessment.
- The assessment was then transmitted to the defendant, the collector of the district, for enforcement.
- The plaintiff paid the demanded tax under protest.
- The plaintiff filed an action in court to recover the money paid.
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Issue:
Does an increase in the value of personal property, such as bonds, accrued over multiple years and realized through sale, qualify as taxable "gains, profits, and income" for the single year in which the sale occurs under a statute focusing on annual taxation?
Opinions:
Majority - Justice Field
No, an increase in the value of personal property like bonds, accrued over multiple years and realized through sale, does not qualify as taxable "gains, profits, and income" for the single year in which the sale occurs under a statute focusing on annual taxation. The Court reasoned that the statute specifically targets "annual" gains, profits, and income, meaning products or gains realized from transactions "begun and completed during the preceding year," or where income is strictly an acquisition made during the preceding year. Mere appreciation in value over several years, even when realized by sale, is considered an "increase of capital," not "gains, profits, or income" for a single year. The Court acknowledged limited exceptions for real property (up to two previous years) and general trade/commerce (where property may be held over a year for business prosecution), but found this bond sale did not fit these exceptions. To treat multi-year appreciation as income of a single year upon sale would be inconsistent with the statute's annual focus and was not the legislative intent.
Dissenting - The Chief Justice, Justice Clifford, and Justice Bradley
No reasoning provided in the excerpt for the dissenting opinion.
Analysis:
This case is a seminal interpretation of early federal income tax law, particularly regarding the timing and nature of taxable income. It established a crucial distinction between capital appreciation (increase of capital) and taxable income under statutes focused on "annual" gains, thereby precluding taxation of multi-year appreciation as income in a single year of sale. While later tax laws (especially after the 16th Amendment) explicitly taxed capital gains, this decision highlighted the inherent difficulties in taxing capital appreciation under an annual income framework and underscored the need for statutory clarity in defining taxable events and income types. It set a precedent for strict construction of tax statutes regarding the temporal dimension of income.
