U. S. 509, ante, 751, 41 Sup. Ct. Rep. | extent only that gains are derived there386], viz., that the amounts realized from from by the vendor; and we therefore the sales of the stocks were, in agree with the Solicitor General that their inherent nature, capital as dis- since no gain was realized on this intinguished from income, being an in- vestment by the plaintiff in error, no tax crement in value of the securities while should have been assessed against him. owned and held as an investment, and Section 2 (e) is applicable only where therefore not taxable under the Rev- a gain over the original capital investenue Act of September 8, 1916 (39 Stat. ment has been realized after March 1, at L. 756, chap. 463), as amended Octo- 1913, from a sale or other disposition of ber 3, 1917 (40 Stat. at L. 300, chap. 63, property. Comp. Stat. § 6336aa, Fed. Stat. Anno. Supp. 1918, p. 336), or under any constitutional law.

With respect to the first payment. It is plain that this assessment was on the profit accruing after March 1, 1913, the effective date of the act, realized to the owner by the sale after deducting his capital investment. The question involved is ruled by No. 608, supra, and the amount was properly taxed.

It results that the judgment of the District Court as to the first assessment, as we have described it, is affirmed; that as to the second assessment it is reversed; and the case [536] is remanded to that court for further proceedings in conformity with this opinion. Reversed in part. Affirmed in part.

Mr. Justice Holmes and Mr. Justice the court, concur only in the judgment. Brandeis, because of prior decisions of

As to the second payment. The government confesses error in the judgment with respect to this assessment. stock was sold in the year for which the tax was assessed for $22.253.75 less than JAMES J. WALSH, Collector of Internal

The

its value when it was [535] acquired, but for $120,710.75 more than its value on March 1, 1913, and the tax was assessed on the latter amount.

Revenue, Plff. in Err.,

V.

FREDERICK F. BREWSTER.

(See S. C. Reporter's ed. 536–539.) Error to district court Federal quesconstitutionality of income

tion
tax.

The act under which the assessment was made provides that the net income of a taxable person shall include "gains, profits, and income derived from 1. The Federal Supreme Court has jusales, or dealings in property, whether risdiction of a writ of error to a district real or personal or gains or court to review a judgment in favor of a profits and income derived from any taxpayer in a suit to recover back Federal source whatever." 39 Stat. at L. 757, income taxes where the claim to recover i chap. 463, Comp. Stat. § 6336b, Fed. based upon the contention that the fund Stat. Anno. Supp. 1918, p. 312; 40 Stat. | taxed was not income within the scope of at L. 300, 307, chap. 63, Comp. Stat. §. S. Const., 16th Amend., and that to con 6336 m, Fed Stat. Anno. Supp. 1918, p. 349.

Section 2 (c) of this same act provides that "for the purpose of ascertaining the gain derived from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, the fair market price or value of such property as of March 1, 1913, shall be the basis for determining the amount of such gain derived."

And the definition of "income" approved by this court is: "A gain derived from capital, from labor, or from both combined, provided it be understood to include profits gained through sale or conversion of capital assets." Eisner v. Macomber; 252 U. S. 189, 207, 64 L. ed. 521, 528, 9 A.L.R. 1570, 40 Sup. Ct. Rep. 189.

It is thus very plain that the statute imposes the income tax on the proceeds of the sale of personal property to the

Note.-On direct review in Federal Supreme Court of judgments of district or circuit courts-see notes to Gwin v. United States, 46 L. ed. U. S. 741; B. Altman & Co. v. United States, 56 L. ed. U. S. 894, and Berkman v. United States, 63 L. ed. U. S. 877.

As to constitutionality of income taxsee notes to Alderman v. Wells, 27 L.R.A. (N.S.) 864, and State ex rel. Bolens v. Frear, L.R.A.1915B, 569.

As to income tax on sales of property -see note to State ex rel. Bundy v. Ny gaard, L.R.A.1917E, 566.

On stock dividends as income-see notes to Holbrook v. Holbrook, 12 L.R.A. (N.S.) 768; Newport Trust Co. v. Van Rensselaer, 35 L.R.A. (N.S.) 563; Re Osborne, 50 L.R.A. (N.S.) 510; Re Heaton, L.R.A.1916D, 211; Trefry v. Putnam, L.R.A.1917F, 814; Towne v. Eisner, L.R.A.1918D, 254; and Eisner v. Macomber, 9 A.L.R. 1594.

255 U. S.

strue the Federal income tax legislation as | Argued March 10 and 11, 1921.
imposing such taxes would render it un-
constitutional and void.

[For other cases, see Appeal and Error, 938-
989, in Digest Sup. Ct. 1908.]
Internal revenue income tax - ac-
cretions of selling values.

2. The gain derived from a single, iso-
lated sale of personal property which has
appreciated in value during a series of
years, is income within the meaning of the
16th Amendment to the Federal Constitu-
tion.

[For other cases, see Internal Revenue, III.
b, in Digest Sup. Ct. 1908.]
Internal revenue

income tax - ac-
cretions of selling values.

3. Taxable income under the Federal
Income Tax Act of September 8, 1916, as
amended by the Act of October 3, 1917,
includes the gain derived from the sale of
personal property which has appreciated
in value during a series of years over its
market value on March 1, 1913, if acquired
before that date.

[For other cases, see Internal Revenue, III.
b, in Digest Sup. Ct. 1908.]
Internal revenue
income tax - ac-
cretions of selling values.

4. Only where, and to the extent that, a gain over the original investment is realized upon a sale of property acquired before March 1, 1913, and worth less on that date than when acquired, can there be any taxable income arising out of such sale, assessable under the Income Tax Act of September 8, 1916, as amended by the Act of October 3, 1917, since this legislation plainly imposes the income tax on the proceeds of sales of personal property to the extent only that gains are derived therefrom by the vendor.

IN

March 28, 1921.

Decided

'N ERROR to the District Court of the United States for the District of Connecticut to review a judgment in favor of a taxpayer in a suit to recover back certain Federal income taxes. Reversed in part and affirmed in part, and cause remanded for further proceedings.

See same case below, 268 Fed. 207. The facts are stated in the opinion. Solicitor General Frierson argued the cause and filed a brief for plaintiff in er

ror.

For his contentions, see his briefs as reported in Merchants' Loan & T. Co. v. Smietanka and Goodrich v. Edwards, ante, 751, 758.

Mr. Henry F. Parmelee argued the cause and filed a brief for defendant in

error.

Mr. William D. Guthrie also argued the cause for defendant in error.

Mr. H. Edgar Barnes filed a brief as amicus curiæ.

Mr. Justice Clarke delivered the opinion of the court:

In this case the defendant in error

sued the plaintiff in error, a collector of internal revenue, to recover income taxes for the year 1916, assessed in 1918, and which were paid under protest

[For other cases, see Internal Revenue, III. to avoid penalties. The defendant b, in Digest Sup. Ct. 1908.]

answered, the case was tried upon an Internal revenue income tax ac-agreed statement of facts, and judgment cretions of selling value interest on was rendered in favor of the taxpayer, cost price. the defendant in error. The case is properly here by writ of error. v. Eisner, 245 U. S. 418, 62 L. ed. 372, L.R.A.1918D, 254, 38 Sup. Ct. Rep. 158.

5. A purchaser of bonds through an underwriting agreement under which he did not receive any interest upon the amount paid prior to the allotment of the bonds to him, some years later, is not entitled to have interest for the time so elapsed added as a part of the cost to him of such bonds, when computing the taxable income under the Federal income tax legislation, arising out of the sale of such bonds at a profit. [For other cases, see Internal Revenue, III. b, in Digest Sup. Ct. 1908.]

Internal revenue — income tax stock

dividends.

6. Congress was given no power by the Income Tax Amendment to the Federal Constitution to tax, without apportionment, as income of a stockholder in a corporation, a stock dividend made lawfully and in good faith against accumulated profits earned by the corporation since the adoption of such Amendment. Such dividends are not income.

Towne

The defendant in error was not a trader or dealer in stocks or bonds, but occasionally purchased and sold one or the other for the purpose of changing

his investments.

Three transactions are involved.

The first relates to bonds of the International Navigation Company, purchased in 1909, for $191,000, and sold in 1916 for the same amount. The market value of these bonds on March 1, 1913, was $151,845, and the tax in dispute was assessed on the difference between this amount and the amount for which they were sold in 1916; viz., $39,155.

The trial court held that this apparent gain was capital assets, and not [For other cases, see Internal Revenue, I. b; taxable income under the 16th AmendIII. b, in Digest Sup. Ct. 1903.]

[No. 742.]

ment to the Constitution of the United States, and rendered judgment in favor

of the defendant in error for the amount | should be refunded to the defendant in of the tax which he had paid.

The ground upon which this part of the judgment was justified below is held to be erroneous in No. 608, Merchants' Loan & T. Co. v. Smietanka, this day decided [255 U. S. 509, ante, 751, 41 Sup. Ct. Rep. 386], but, since the owner of the stock did not realize any gain on his original investment by the sale in 1916, the judgment was right in this respect, and under authority of the opinion and judgment in No. 663, Goodrich v. Edwards, [538] also rendered this day [255 U. S. 527, ante, 758, 41 Sup. Ct. Rep. 390], this part of the judgment is affirmed.

was

error.

It results that as to the profit realized upon the second transaction, as indicated in this opinion, the judgment of the District Court is reversed; but as to the other transactions [539] it is affirmed for the reasons and upon the grounds herein stated.

Judgment reversed in part, affirmed in part, and case remanded.

Mr. Justice Holmes and Mr. Justice Brandeis, because of prior decisions of the court, concur only in the judgment.

PANY, Appt.,

V.

180.)

(No.

The second transaction involved the purchase in 1902 and 1903 of bonds of SOUTHERN IOWA ELECTRIC COMthe International Mercantile Marine Company for $231,300, which were sold in 1916 for $276,150. This purchase CITY OF CHARITON, Iowa, et al. made through an underwriting agreement such that the purchaser did not receive any interest upon the amount paid prior to the allotment to him of the bonds in 1906, and he claimed that interest upon the investment for CITY OF FAIRFIELD, Iowa, et al.

IOWA ELECTRIC COMPANY, Appt.,

V.

(No.

the time which so elapsed should be added as a part of the cost to him of the

bonds. But this claim was properly re

jected by the trial court under authority

189.)

of Hays v. Gauley Mountain Coal Co. MUSCATINE
247 U. S. 189, 62 L. ed. 1061, 28 Sup. Ct.
Rep. 470.

It is stipulated that the market value CITY OF MUSCATINE, Iowa, et al. (No.

of these bonds on March 1, 1913, was $164,480, and the collector assessed the tax upon the difference between the selling price and this amount; but since the gain to the taxpayer was only the difference between his investment of $231,300 and the amount realized by the sale, $276,150, under authority of No. 663, Goodrich v. Edwards, this day decided, he was taxable only on $44,850.

The district court, however, held that any gain realized by the sale was a mere conversion of capital assets, and was not income which could lawfully be taxed. In this respect the court fell into error. The tax was properly assessed, but only upon the difference between the purchase and selling price of the bonds, as stated.

The third transaction related to stock in the Standard Oil Company of California, received through the same stock dividend involved in Eisner v. Macomber, 252 U. S. 189, 64 L. ed. 521, 9 A.L.R. 1570, 40 Sup. Ct. Rep. 189. The district court, upon authority of that case, properly held that the assessment made and collected upon this dividend

190.)

(See S. C. Reporter's ed. 539–546.)

Constitutional law — due process of law -rate regulation

confiscation.

1. Although governmental agencies having authority to deal with the subject may fix and enforce reasonable rates to be

paid public utility corporations for the
services rendered by them, that power does
not include the right to fix rates which
are so low as to be confiscatory of the
property of such corporation.
[For other

cases, see Constitutional Law, 608-628, in Digest Sup. Ct. 1908.]

Note. As to what constitutes due process of law, generally-see notes to People v. O'Brien, 2 L.R.A. 255; Kuntz v. Sumption, 2 L.R.A. 655; Re Gannon, L.R.A. 224; Gilman v. Tucker, 13 L.R.A. 5 L.R.A. 359; Ulman v. Baltimore, 11 304; Pearson v. Yewdall, 24 L. ed. U. S. 436, and Wilson v. North Carolina, 42 L. ed. U. S. 865.

On power of municipality, apart from contract, to regulate the rates to be charged by public service corporationssee notes to Bluefield Waterworks & Improv. Co. v. Bluefield, 33 L.R.A. (N.S.)

due process of law versed and remanded for further procontracts fixing rates ceedings.

Southern District of Iowa to review decrees enforcing rates fixed in franchises of public service corporations. Re759, and St. Marys v. Hope Natural Gas 10 L.R.A. (N.S.) 859, 107 N. W. 944; Co. 43 L.R.A. (N.S.) 994.

Detroit v. Detroit Citizens' Street R. Co. 184 U. S. 368, 46 L. ed. 592, 22 Sup. Ct. Rep. 410; Cleveland v. Cleveland City R. Co. 194 U. S. 517, 48 L. ed. 1102, 24 Sup. Ct. Rep. 756; Columbus R. Power & Light Co. v. Columbus, 249 Bel-U.S. 399, 63 L. ed. 669, 6 A.L.R. 1648, P.U.R.1919D, 239, 39 Sup. Ct. Rep. 349; Tipton v. Tipton Light & Heating Co.

contract, but granting the power to fix, regulate, and control rates, is in accord with the declarations of the Iowa supreme court.

Home Teleph. & Teleg. Co. v. Los Angeles, 211 U. S. 265, 53 L. ed. 176, 29 Sup. Ct. Rep. 50; Milwaukee Electric R. & Light Co. v. Railroad Commission, 238 U. S. 174, 59 L. ed. 1254, P.U.R.1915D, 591, 35 Sup. Ct. Rep. 820. Where there is delegated to a city the power to make a binding contract for a rate to be charged consumers throughout the life of a franchise, the consumer becomes beneficially interested, and the city could not raise such rate without the consumer's consent.

Walton v. Proutt, 117 Ark. 388, L.R.A.1915D, 917, 174 S. W. 1152; Pond v. New Rochelle Water Co. 183 N. Y. 330, 1 L.R.A.(N.S.) 958, 76 N. E. 211, 5 Ann. Cas. 504.

erse City v. Citizens' Teleph. Co. 195 Mich. 373, 161 N. W. 986; Omaha Water Co. v. Omaha, 12 L.R.A.(N.S.) 736, 77 C. C. A. 267, 147 Fed. 1, 7 Ann. Cas. 614; Woodburn v. Public Service Commission, 82 Or. 114, L.R.A.1917C, 98, P.U.R.1917B, 967, 161 Pac. 391, Ann. Cas. 1917E, 996; State ex rel. Tacoma R. & Power Co. v. Public Service Commission, 101 Wash. 601, P.U.R.1018E, 277, 172 Pac. 890; State ex rel. Webster v. Superior Ct. 67 Wash. 37, L.R.A. 1915C, 287, 120 Pac. 861, Ann. Cas. 1913D, 78; Dawson v. Dawson Teleph. Co. 137 Ga. 62, 72 S. E. 508; Cedar Rapids Gaslight Co. v. Cedar Rapids, 223 U. S. 655, 56 L. ed. 594, 32 Sup. Ct. Rep. 389.

Cities can be delegated both the right to regulate and contract.

State ex rel. Indianapolis Traction & Terminal Co. v. Lewis, 187 Ind. 564, P.U.R.1918F, 113, 120 N. E. 129; Re Muncie Electric Light Co. (Ind.) P.U.R. 1918B, 200; Re Gary & Interurban R. Co. (Ind.) P.U.R.1918A, 95; Manitowoc v. Manitowoc & N. Traction Co. 145 Wis. 13, 140 Am. St. Rep. 1056, 129 N. W. 925; Salt Lake City v. Utah Light & Traction Co. 52 Utah, 210, P.U.R.1918F, 337, 173 Pac. 558; Quinby v. Public Service Commission, 223 N. Y. 244, 3 L.R.A. 685, P.U.R.1918D, 30, 119 N. E. 433; Knoxville Gas Co. v. Knoxville, 253 Fed. 223; Los Angeles v. Los Angeles City Water Co. 177 U. S. 558, 44 L. ed. 886, 20 Sup. Ct. Rep. 736; Knoxville Water Co. v. Knoxville, 189 U. S. 436, 47 L. ed. 891, 23 Sup. Ct. Rep. 531.

The United States Supreme Court will, in the construction of a state statute granting powers to a municipality, follow the interpretations given to such statutes by the highest court of the state. Old Colony Trust Co. v. Omaha, 230 U. S. 100, 57 L. ed. 1410, 33 Sup. Ct. Rep. 967; Claiborne County v. Brooks, 111 U. S. 400, 28 L. ed. 470, 4 Sup. Ct. Rep. 489; Milwaukee Electric R. & Light Co. v. Railroad Commission, 238 U. S. 174, 59 L. ed. 1254, P.U.R.1915D, 591, 35 Sup. Ct. Rep. 820; Freeport Water Co. v. Freeport, 180 U. S. 587, 45 L. ed. 679, 24 Sup. Ct. Rep. 493; Richmond v. Smith, 15 Wall. 429, 21 L. ed. 200; Burgess v. Seligman, 107 U. S. 20, 27 L. ed. 359, 2 Sup. Ct. Rep. 10; Independent School Dist. v. Le Mars City Watering that there is no contract. & Light Co. 131 Iowa, 14, 10 L.R.A. Beach v. Wakefield, 107 Iowa, 591, 76 (N.S.) 859, 107 N. W. 944; Tipton v. Tipton Light & Heating Co. 176 Iowa, 224, 157 N. W. 844; Iowa R. & Light Co. v. Jones Auto Co. 182 Iowa, 982, 164 N. W. 780; Williams v. Iowa Falls Electric Co. 185 Iowa, 493, 170 N. W. 815.

Mr. J. W. Kridelbaugh argued the cause, and, with Mr. H. W. Byers, filed a brief for appellees:

The submitting of the proposition with. the ordinance containing the maximum rate clause attached, and the accepting of that proposition and enactment of the ordinance on the part of the city, and acceptance thereof on the part of the company, constituted a contract which the city was authorized to make.

The utilities are estopped from claim

N. W. 688, 78 N. W. 197; Fidelity Ins. Co. v. German Sav. Bank, 127 Iowa, 591, 103 N. W. 958; Muncie Natural Gas Co. v. Muncie, 160 Ind. 97, 60 L.R.A. 822, 66 N. E. 436; State Bd. of Agri. v. Citizens Street R. Co. 47 Ind. 407, 17 Am. Rep. 702; Belfast v. Belfast Water Co. 115 Me. 234, L.R.A.1917B, 908, P.U.R. 1917A, 317, 98 Atl. 738.

The court is not bound to follow the construction placed on the statute by the Iowa court.

Iowa R. & Light Co. v. Jones Auto Co. 182 Iowa, 982, 164 N. W. 780; Des Moines Street R. Co. v. Des Moines Broad-Gauge Street R. Co. 73 Iowa, 513, 33 N. W. 610, 35 N. W. 602; Burgess v. Seligman, 107 U. S. 20, 27 L. ed. 359, 2 Sup. Ct. Rep. 10.

Knoxville Gas Co. v. Knoxville, 253 Fed. 220; Noblesville v. Noblesville Gas Improv. Co. 157 Ind. 162, 60 N. E. 1032; Mr. John A. Reed argued the cause, Traverse City v. Michigan R. Commission (Mich.) P.U.R.1918F, 752; Trav- and, with Messrs. William Chamberlain

255 U. S.