strue the Federal income tax legislation as | Argued March 10 and 11, 1921. Decided imposing such taxes would render it unconstitutional and void. [For other cases, see Appeal and Error, 938- ac 2. The gain derived from a single, isolated 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 Constitution. [For other cases, see Internal Revenue, III. b. in Digest Sup. Ct. 1908.] Internal revenue income tax - accretions 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. - ac 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. March 28, 1921. '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 interest on answered, the case was tried upon an income tax - ac-agreed statement of facts, and judgment was rendered in favor of the taxpayer, the defendant in error. The case is Towne 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. b, in Digest Sup. Ct. 1908.] Internal revenue cretions of selling value · cost price. 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, Internal Revenue, III. b, in Digest Sup. Ct. 1908.] Internal revenue dividends. see 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. 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 The trial court held that this apparincome. ent 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. 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. was 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 LIGHTING V. COMPANY, 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.) Constitutional law - due process of law versed and remanded for further procontracts fixing rates ceedings. tion. confisca 4. Municipal corporations in Iowa have no power, under the rate regulation provisions of Iowa Code, 1897, § 725, to contract with public service corporations as to rates in franchise ordinances so as to permit the enforcement of such rates if they are so low as to be confiscatory. [Nos. 180, 189, and 190.] Argued January 26 and 28, 1921. April 11, 1921. See same case below, 256 Fed. 929. Mr. Emmet Tinley argued the cause, The city of Chariton, in adopting the ordinance granting the franchise in question, including therein a section prescribing the maximum rates to be charged for current furnished to consumers, exercised its legative power to regulate, control, and fix rates under the provisions of § 725 of the 1913 Supplement to the Code of Iowa, and expressed the will of the city under the conditions then existing. The city did not then possess the power to abrogate the power of government delegated to it by the legislature of the state, to regulate the rates to be charged in the future under changed conditions; and did not possess the power to enter into a binding contract to fix maximum rates to be charged throughout the life of the grant. Barnes v. District of Columbia, 91 U. S. 540, 23 L. ed. 440. The supreme court of Iowa, construing Decided § 725 of the Code by an unbroken line of decisions, holds that cities have not the power to fix, by contract, the maximum rates to be charged for electric current; but that the power granted is a continuing power to regulate rates, which power must not be abridged by contract. Independent School Dist. v. Le Mars City Water & Light Co. 131 Iowa, 14, 759, and St. Marys v. Hope Natural Gas 10 L.R.A. (N.S.) 859, 107 N. W. 944; THR * Co. 43 L.R.A.(N.S.) 994. Re On right to reduce rates of public service corporations fixed by franchise or charter-see note to Benwood v. Public Service Commission, L.R.A.1915C, 261. On returns to which public service cor porations are entitled-see note to Bellamy v. Missouri & N. A. R. Co. L.R.A. 1915A, 5. On jurisdiction of public utilities commission over rates as limited by constitutional or statutory power of municipality to regulate utilities-see note to Welsbach Street Lighting Co. v. Public Utilities Commission, L.R.A.1918D, 315. On right of public service corporation to judicial relief from contract rates which have become inadequate see notes to Columbus R. P. & Light Co. v. Columbus, 6 A.L.R. 1659, and Lenawee County Gas & E. Co. v. Adrian, 10 A.L.R. 1335. 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 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. 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; Selkirk v. Sioux City Gas & E. Co. Iowa, 176 N. W. 301; Woodward v. Iowa, R. & Light Co. Iowa, 178 N. W. 549; Ottumwa R. & Light Co. v. Ottumwa, Iowa, -, 173 N. W. 270, 178 N. W. 905. The holding of the Supreme Court of the United States in construing statutes not delegating the power to fix rates by 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.1918E, 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. N. W. 688, 78 N. W. 197; Fidelity Ins. Tipton Light & Heating Co. 176 Iowa, Co. v. German Sav. Bank, 127 Iowa, 591, 224, 157 N. W. 844; Iowa R. & Light 103 N. W. 958; Muncie Natural Gas Co. Co. v. Jones Auto Co. 182 Iowa, 982, 164 v. Muncie, 160 Ind. 97, 60 L.R.A. 822, N. W. 780; Williams v. Iowa Falls Elec- 66 N. E. 436; State Bd. of Agri. v. Cititric Co. 185 Iowa, 493, 170 N. W. 815. zens 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. 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 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; Traverse City v. Michigan R. CommisMr. John A. Reed argued the cause, sion (Mich.) P.U.R.1918F, 752: Trav- and, with Messrs. William Chamberlain 255 U. S. and Ralph Maclean, filed a brief for appellant in No. 189: The power of municipalities to contract must be conferred in express terms by act of the legislature, or must be indispensable to the exercise of a power expressly conferred by act of the legislature. defined cases it may be made by legislative authority, is a very grave act, and the surrender itself, as well as the authority to make it, must be closely scrutinized. No other body than the supreme legislature has the authority to make such a surrender, unless the authority is clearly delegated to the municipality by the supreme legislature. The general powers of a municipality or of any other political subdivision of the state are not sufficient. Specific authority for that purpose is required. Home Teleph. & Teleg. Co. v. Los Angeles, 211 U. S. 265, 53 L. ed. 176, 29 Sup. Ct. Rep. 50; Williams v. Iowa Falls Electric Co. 188 Iowa, 493, P.U.R.1919C, 501, 170 N. W. 816; Rogers Park Water Co. v. Fergus, 178 Ill. 578, 53 N. E. 363, 180 U. S. 624, 630, 45 L. ed. 702, 706, 21 Sup. Ct. Rep. 490; 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, 599, 611, 45 L. ed. 679, 688, 693, 24 Sup. Ct. Rep. 493; Marquis v. Polk County Teleph. Co. 100 Neb. 140, 158 N. W. 927; Brummitt v. Ogden Waterworks Co. 33 Utah, 302, 93 Pac. 834; Zanesville v. Zanesville Gaslight Co. 47 Ohio St. 1, 23 N. E. 55, 59; Portland R. Light & P. Co. v. Portland, 201 Fed. 125; Puget Sound Traction Light & P. Co. v. Reynolds, 223 Fed. 375. Heins v. Lincoln, 102 Iowa, 77, 71 N. W. 189; Akron v. McElligott, 166 Iowa, 297, 147 N. W. 774, Ann. Cas. 1916E, 692; Ottumwa R. & Light Co. v. Ottumwa, Iowa, 178 N. W. 905; Mitchell v. Dakota Cent. Teleph. Co. 246 U. S. 396, 62 L. ed. 793, 38 Sup. Ct. Rep. 362; Knoxville Gas Co. v. Knoxville, P.U.R.1920B, 901, C. C. A. 261 Fed. 283; Knoxville Water Co. v. Knoxville, 200 U. S. 22, 50 L. ed. 353, 26 Sup. Ct. Rep. 224; Blair v. Chicago, 201 U. S. 400, 50 L. ed. 801, 26 Sup. Ct. Rep. 427; Home Teleph. & Teleg. Co. v. Los Angeles, 211 U. S. 265, 273, 274, 53 L. ed. 176, 182, 183, 29 Sup. Ct. Rep. 50; Pioneer Teleph. & Teleg. Co. v. State, 33 Okla. 724, 127 Pac. 1073; Minneapolis v. Minneapolis Street R. Co. 215 U. S. 417, 54 L. ed. 259, 30 Sup. Ct. Rep. 118; 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; Rogers Park Water Co. v. Fergus, 180 U. S. 624, 45 L. ed. 702, 21 Sup. Ct. Rep. 490, 178 Ill. 578, 53 N. E. 363; Omaha Water Co. v. Omaha, 12 L.R.A. (N.S.) 736, 77 C. C. A. 267, 147 Fed. 1, 8 Ann. Cas. 614; Brummitt v. Ogden Waterworks Co. 33 Utah, 303, 93 Pac.utes. 828; Rosencrans v. United States, 165 U. S. 263, 41 L. ed. 710, 17 Sup. Ct. Rep. 302; United States v. Jackson, 75 C. C. A. 41, 143 Fed. 787. No power to fix or to contract for rates can be implied. Lewisville Natural Gas Co. v. State, 135 Ind. 49, 21 L.R.A. 734, 34 N. E. 702; Becker v. Keokuk Waterworks, 79 Iowa, 422, 18 Am. St. Rep. 377, 44 N. W. 694; Cedar Rapids Water Co. v. Cedar Rapids, 118 Iowa, 234, 91 N. W. 1081; Mills v. Chicago, 127 Fed. 731; Williams v. Iowa Falls Electric Co. 185 Iowa, 493, P.U.R.1919C, 501, 170 N. W. 815. All doubtful expressions of the grant are to be resolved against the power to contract. Ottumwa R. & Light Co. v. Ottumwa, Iowa, 178 N. W. 905; Knoxville Gas Co. v. Knoxville, P.U.R.1920B, 901, C. C. A., 261 Fed. 283. The surrender by contract, of a power of government, though in certain well Section 725 of the Code confers express powers on municipalities over gas rates, and thereby eliminates the subject from the implied powers of general stat Rosencrans v. United States, 165 U. S. 257, 41 L. ed. 708, 17 Sup. Ct. Rep. 302; United States v. Jackson, 75 C. C. A. 41, 143 Fed. 788; Keokuk v. Scroggs, 39 Iowa, 447; McBride v. Des Moines City R. Co. 134 Iowa, 405, 109 N. W. 618; Jackson v. Chicago, R. I. & P. R. Co. 102 C. C. A. 159, 178 Fed. 432; Jackson v. Cravens, 151 C. C. A. 193, 238 Fed. 119; Walla Walla v. Walla Walla Water Co. 172 U. S. 1, 43 L. ed. 341, 19 Sup. Ct. Rep. 77. The only Iowa statutes relating to the conferring of power upon municipalities to grant gas franchises to private persons or corporations, and the regulating of rates for gas service furnished by authority of such franchises, are §§ 720 and 721 of the 1913 Supplement to the Code, which authorize the granting of such franchises, and require that they be approved by a majority vote of the legal voters, and § 725, which confers power upon city councils to regulate and fix |