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.
In Helvering v. National Grocery Company, the Court rejected the contention that a tax on undistributed corporate profits is essentially a penalty or a direct tax on capital subject to apportionment.1 Because the exaction was permissible as a tax, its penal objective, which was “to force corporations to distribute earnings in order to create a basis for taxation against the stockholders,” did not impair its validity.2 The Court rejected the contention that the tax was a direct tax on a state of mind because liability was assessed upon a mere purpose to evade imposition of surtaxes against stockholders. The Court held that, while “the existence of the defined purpose was a condition precedent to the imposition of the tax liability,” that “[did] not prevent it from being a true income tax within the meaning of the Sixteenth Amendment.” 3 Subsequently, in Helvering v. Northwest Steel Mills,4 the Court addressed the constitutionality of the undistributed profits tax, observing:
It is true that the surtax is imposed upon annual income only if it is not distributed, but this does not serve to make it anything other than a true tax on income within the meaning of the Sixteenth Amendment. Nor is it true . . . that because there might be an impairment of the capital stock, the tax on the current annual profit would be the equivalent of a tax upon capital. Whether there was an impairment of the capital stock or not, the tax . . . was imposed on profits earned during a definite period—a tax year—and therefore on profits constituting income within the meaning of the Sixteenth Amendment.5
Similarly, the Court has held Congress’s power to tax the income of an unincorporated joint stock association to be unaffected by the fact that, under state law, the association is not a legal entity and cannot hold title to property, or by the fact that the shareholders are liable for its debts as partners.6
Whether subsidies paid to corporations in money or in the form of grants of land or other physical property constitute taxable income has also concerned the Court. In Edwards v. Cuba Railroad,7 the Court ruled that subsidies of lands, equipment, and money paid by Cuba to construct a railroad were not taxable income but should be viewed as having been received by the railroad as a reimbursement for capital expenditures in completing such project.
On the other hand, sums the Federal Government paid to fulfill its guarantee of minimum operating revenue to railroads during the six months following relinquishment of their control by that government were found to be taxable income. Such payments were distinguished from those excluded from computation of income in the preceding case in that the former were neither bonuses, nor gifts, nor subsidies, “that is, contributions to capital.” 8 Other corporate receipts deemed to be taxable as income include: (1) “insiders profits” realized by a director and stockholder of a corporation from transaction in its stock, which, as required by the Securities and Exchange Act,9 are paid over to the corporation;10 (2) money received as exemplary damages for fraud or as the punitive two-thirds portion of a treble damage antitrust recovery;11 and (3) compensation awarded for the fair rental value of trucking facilities operated by the taxpayer under control and possession of the government during World War II, for in the last instance the government never acquired title to the property and had not damaged it beyond ordinary wear.12
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Footnotes
- 1
- Helvering v. National Grocery Co., 304 U.S. 282 (1938).
- 2
- Id. at 288.
- 3
- Id. at 288–89. In Helvering v. Mitchell, 303 U.S. 391 (1938), the defendant contended that the collection of 50% of any deficiency in addition to the deficiency alleged to have resulted from a fraudulent intent to evade the income tax amounted to the imposition of a criminal penalty. The Court, however, described the additional sum as a civil and not a criminal sanction, and one which could be constitutionally employed to safeguard the Government against loss of revenue. In contrast, the exaction upheld in Helvering v. National Grocery Co., though conceded to possess the attributes of a civil sanction, was held to be sustainable as a tax.
- 4
- 311 U.S. 46 (1940). See also Crane-Johnson Co. v. Helvering, 311 U.S. 54 (1940).
- 5
- 311 U.S. at 53.
- 6
- Burk-Waggoner Ass’n v. Hopkins, 269 U.S. 110 (1925).
- 7
- 268 U.S. 628 (1925).
- 8
- Texas & Pacific Ry. v. United States, 286 U.S. 285, 289 (1932); Continental Tie & L. Co. v. United States, 286 U.S. 290 (1932).
- 9
- 15 U.S.C. § 78p.
- 10
- General American Investors Co. v. Commissioner, 348 U.S. 434 (1955).
- 11
- Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).
- 12
- Commissioner v. Gillette Motor Co., 364 U.S. 130 (1960).