Extremely difficult tax question ...

[Gregg]

Well, maybe he is, sucking his thumb and pissing himself, like a baby....

[wserra]

No, you're not sleeping like a baby tonight.

Actually, he probably is. The trolling is going well.

[jcolvin2]

If you're referring to Max Sobel Wholesale Liquors v. Commissioner, 69 T.C. 477 (1977), aff'd, 630 F.2d 670 (9th Cir. 1980), I don't see where the Supreme Court heard that case.

You are correct. Max Sobel did not go to the Supreme Court. I was stuck at an airport (delayed flight) and my memory was faulty.

[Cpt Banjo]

Mary disputes this treatment. She argues that the new law is unconstitutional. Mary argues that under the U.S. Constitution, Congress cannot tax, as income, something that is not income.

The IRS agrees that the $75,000 receipt is not income within the meaning of the Sixteenth Amendment, but the IRS argues that under the Constitution as amended, the Congress has the power to tax the receipt as income even though it is not really income.

Mary takes the government to court.

In court, who wins? Mary? Or the government?

Let's change the facts slightly. Instead of engaging in an exchange, suppose Mary had sold her asset for $75,000. She would then argue that taxing the $75,000 as income is equivalent to taxing her capital and that under Macomber such a tax is an unapportioned direct tax on her capital and is therefore unconstitutional.

But suppose Congress, instead of repealing the basis provisions and treating the gross receipts as income, had simply imposed a sales tax (a type of excise) on the transaction and provided that the tax was to be paid by the seller. Or suppose it went further and defined a "sale" as any transaction in which a seller receives cash or any other property, thereby covering exchanges as well as cash sales. What possible argument could Mary make against such a tax? Does it really turn on how Congress drafts the statute?

[Famspear]

Mary disputes this treatment. She argues that the new law is unconstitutional. Mary argues that under the U.S. Constitution, Congress cannot tax, as income, something that is not income.

The IRS agrees that the $75,000 receipt is not income within the meaning of the Sixteenth Amendment, but the IRS argues that under the Constitution as amended, the Congress has the power to tax the receipt as income even though it is not really income.

Mary takes the government to court.

In court, who wins? Mary? Or the government?

Let's change the facts slightly. Instead of engaging in an exchange, suppose Mary had sold her asset for $75,000. She would then argue that taxing the $75,000 as income is equivalent to taxing her capital and that under Macomber such a tax is an unapportioned direct tax on her capital and is therefore unconstitutional.

Based on the status of judicial precedent today, I argue that Mary would probably lose. The holding in Macomber does not support her position. The tax would not be a tax on her capital (her property) in the sense of a "direct tax" (as that term is used in Article I of the Constitution). That is, the tax would not be a tax on property by reason of its ownership.

But suppose Congress, instead of repealing the basis provisions and treating the gross receipts as income, had simply imposed a sales tax (a type of excise) on the transaction and provided that the tax was to be paid by the seller. Or suppose it went further and defined a "sale" as any transaction in which a seller receives cash or any other property, thereby covering exchanges as well as cash sales. What possible argument could Mary make against such a tax? Does it really turn on how Congress drafts the statute?

Same answer as above. In economic substance, such a tax would be neither a capitation nor a tax on property by reason of its ownership. Under current judicial precedent, Mary would lose.

If instead Congress were to take what was really, in economic substance, either (A) a capitation, or (B) a tax on property by reason of its ownership, and falsely "label" it as (for example) a "sales tax" or a "transfer tax" or an "income tax" -- but without apportioning the tax as provided in Article I -- that would be a different matter.

[Cpt Banjo]

Based on the status of judicial precedent today, I argue that Mary would probably lose. The holding in Macomber does not support her position. The tax would not be a tax on her capital (her property) in the sense of a "direct tax" (as that term is used in Article I of the Constitution). That is, the tax would not be a tax on property by reason of its ownership.

Mary would argue that the proceeds of the sale were a return of her capital and that taxing her proceeds is taxing her capital. Although Macomber has been limited by the Court, it's noteworthy that the Court recognized the case as bearing on the distinction between capital and income:

Nor can we accept respondent's contention that a narrower reading of 22 (a) is required by the Court's characterization of income in Eisner v. Macomber, 252 U.S. 189, 207 , as "the gain derived from capital, from labor, or from both combined." The Court was there endeavoring to determine whether the distribution of a corporate stock dividend constituted a realized gain to the shareholder, or changed "only the form, not the essence," of [348 U.S. 426, 431] his capital investment. Id., at 210. It was held that the taxpayer had "received nothing out of the company's assets for his separate use and benefit." Id., at 211. The distribution, therefore, was held not a taxable event. In that context - distinguishing gain from capital - the definition served a useful purpose. But it was not meant to provide a touchstone to all future gross income questions. Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430-431 (1955) (footnote omitted and emphasis added)

The government, on the othe hand, would argue that the tax on the sales proceeds is a tax on the conversion of her capital into cash or other property that is significantly different from the stock dividend Mrs. Macomber received. Her investment was still tied up in the corporation, while Mary's has been converted into cash or other non-corporate property -- i.e., a different "essence".

Alternatively, the government could make an argument that it didn't make in Macomber: that the tax on the sales proceeds is really a gross receipts tax. After all, if the Court can turn what Congress clearly intended to be a penalty into a tax (see National Federation of Independent Business v. Sebelius), it can use the same legerdemain to turn a tax on proceeds treated as income into a gross receipts tax.

I agree with you that Supreme Court dicta (based upon the Pollock case) has said that a tax on the mere ownership of property is a direct tax, and that because of this Senator Warren's proposed wealth tax would be unconstitutional, despite the views of some law professors.