There were two essential reasons why the tax on income imposed on Mrs. Macomber was struck down. One reason was because it turned out to be a direct tax and requires apportionment.
The other reason was because the tax on income imposed upon Mrs. Macomber did not meet the meaning of income as found in the Sixteenth Amendment.
In EISNER v. MACOMBER , 252 U.S. 189 (1920) the SCOTUS gave the characteristics defining “income” as follows:
**“After examining dictionaries in common use (Bouv. L. D.; Standard Dict.; Webster’s Internat. Dict.; Century Dict.), we find little to add to the succinct definition adopted in two cases arising under the Corporation Tax Act of 1909 (Stratton’s Independence v. Howbert, 231 U.S. 399, 415 , 34 S. Sup. Ct. 136, 140 [58 L. Ed. 285]; Doyle v. Mitchell Bros. Co., 247 U.S. 179, 185 , 38 S. Sup. Ct. 467, 469 [62 L. Ed. 1054]), ‘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, to which it was applied in the Doyle Case, 247 U.S. 183, 185 , 38 S. Sup. Ct. 467, 469 (62 L. Ed. 1054). **
Brief as it is, it indicates the characteristic and distinguishing attribute of income essential for a correct solution of the present controversy. The government, although basing its argument upon the definition as quoted, placed chief emphasis upon the word ‘gain,’ which was extended to include a variety of meanings; while the significance of the next three words was either overlooked or misconceived. ‘Derived-from- capital’; ‘the gain-derived-from-capital,’ etc. Here we have the essential matter: not a gain accruing to capital; not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and coming in, being ‘derived’-that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal- that is income derived from property. Nothing else answers the description.”
An essential passage in the court’s opinion is “. . . but a gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and coming in . . . “
So, all money that comes in is not “income” within the meaning of the 16th Amendment. It must be a gain or profit “severed from the capital, however invested or employed, and coming in.”
In fact “profits“ or “gains, are calculated by deducting all necessary expenses and outlay from gross receipts …the remaining portion being “profits” and or “gain“, which is the subject of taxation under the 16th amendment.
It should also be noted that the income from a business which is wholly illegal was held subject to income tax in United States v. Sullivan, 274 U.S. 259. Nevertheless, it was necessary to determine what that income was, and the cost of an illegal purchase of liquor was subtracted from proceeds of the illegal sale of the liquor in order to arrive at the gain from the illegal transaction which were subjected to income tax in that case.
And, in Sullenger vs. Commissioner, the Court allowed the business owner [who made illegal purchases of meat] to deduct the cost of meat purchased at a higher price then set by the Office of Price Administration, a World War II price control agency, which he then resold for profit. The “income” from those sales was being taxed which was at issue in the case. The Court went on to cite Sullivan and concluded: “No authority has been cited for denying to this taxpayer the cost of goods sold in computing his profit, which profit alone is gross income for income tax purposes.”
The point being, even crooks engaged in illegal activities may deduct their outlays and expenses in computing a “profit” which is then taxed. But the way things are today, wage earning people have been conned and are getting shafted because they do not deduct their necessary expenses and outlays to compute a profit or gain such as transportation to and from work, the cost of food which fuels their body during working hours, the cost of medical expenses which are essential to health so they may work and provide their labor, nor is there a calculation for wage earners to deduct the most important outlay they make in pursuit of earning a wage___ eight hours of their lives each day which is the “capital” they invest ___ the value of which the employer deducts from gross receipts and not the employee who has invested this most sacred property in pursuit of a wage.
And what did one of our founding fathers think about taxing a working person’s wage?
“……with all these blessings, what more is necessary to make us a happy and a prosperous people? Still one thing more, fellow-citizens—a wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement and shall not take from the mouth of labor the bread it has earned. This is the sum of good government, and this is necessary to close the circle of our felicities“._____ Thomas Jefferson, First Inaugural Address
So yes, Moonshine, you are right in pointing to the definition of income within the meaning of the 16th Amendment as a cause for the Court striking down the tax imposed upon Mrs. Macomber. It did not fit the definition of “income” as found in the 16th Amendment.
JWK
