Federal income tax was first introduced under the Revenue Act of 1861 to help pay for the Civil War.
In the Springer v. United States case of 1881,[1] the Supreme Court upheld the tax regime then in force.
[2] In response, the Sixteenth Amendment, proposed in 1909 and becoming law in 1913, cancelled the "apportionment" requirement for income taxes.
Later decisions, however, have tended to limit this view of "severability," and to uphold the federal statutes as exertions of the power of Congress to tax.
The income tax raised little revenue, and was viewed as a supplement to more traditional forms of property taxation.
[5] Article I, Section 8, Clause 1 of the United States Constitution (the "Taxing and Spending Clause"), specifies Congress's power to impose "Taxes, Duties, Imposts and Excises," but Article I, Section 8 requires that, "Duties, Imposts and Excises shall be uniform throughout the United States.
In it, he explains that the wording of the "Necessary and Proper" clause should serve as guidelines for the legislation of laws regarding taxation.
The provisions were Article I, Section 8, Clause 1, which provides that "all Duties, Imposts and Excises shall be uniform throughout the United States"[13] and Article I, Section 9, Clause 4, which provides: "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.
Therefore in Pollock, the Court overruled a portion of the Springer decision by expanding the definition of direct taxes.
This amendment reads as follows: 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.
Subsequently, the U.S. Supreme Court in 1916 upheld the constitutionality of the Revenue Act of 1913 in the case of Brushaber v. Union Pacific Railroad Company, 240 U.S. 1 (1916).
The Court held that the Act was constitutional based on the following: 1) there was power by virtue of the Sixteenth Amendment to levy the tax without apportionment; 2) the due process clause of the Fifth Amendment is not a limitation upon Congress's taxing power; and 3) the statute did not violate the uniformity clause of Article I, Section 8 of the Constitution.
"Gross income" includes gains, profits, and income derived from salaries, wages or compensation for personal service (including personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatsoever.
This case provided the Court with a forum to try to interpret exactly what Congress intended to include in the sparse Section 22 definition of "income."
First, the Revenue Act of 1916 expressly stated that a "stock dividend shall be considered income, to the amount of the cash value.
As noted by the Court: In order, therefore, that the clauses cited from Article 1 of the Constitution may have proper force and effect, save only as modified by the Amendment, and that the latter also may have proper effect it becomes essential to distinguish between what is and what is not "income" as the term is there used; and to apply the distinction, as cases arise, according to truth and substance, without regard to form.
[22]As a starting point, the Court defined income succinctly by reference to the dictionary and to two earlier cases [23] as follows: "Income may be defined as the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets.
A number of commentators contended that the Court in Eisner v. Macomber had gone too far in overturning a statute taxing stock dividends (the 1916 Act) that many perceived as being fair and equitable.
Henry Simons, a noted tax scholar of the time, in his treatise, observed the following: Actually, an utterly trivial issue was made the occasion for injecting into our fundamental law a mass of rhetorical confusion which no orderly mind can contemplate respectfully, and for giving constitutional status to naive and ridiculous notions about the nature of income and the rationale for income taxes.
In Hawkins v. Commissioner, the Internal Revenue Service argued that compensatory damages received by the taxpayer by way of settlement of a suit for injury to personal reputation and health caused by defamatory statements constituting libel or slander were taxable.
The Board noted that the injury was "wholly personal and nonpecuniary," and that the remedy simply attempts to make the individual whole.
[27] Realizing that the "one size fits all" definition of income in Eisner v. Macomber was too broad, the U.S. Supreme Court reconsidered the idea of severability in Helvering v.
The court held that, "gain may occur as a result of exchange of property, payment of the taxpayer's indebtedness, relief from a liability, or other profit realized from the completion of a transaction.
For example, in Commissioner v. Glenshaw Glass Co., the Court ruled that punitive damages recovered under a violation of anti-trust laws were included in gross income, and that the language of Section 22 (now Internal Revenue Code Section 61) clearly showed the intent of Congress to exert "the full measure of its taxing power.