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have recently changed their commercial law, have not adopted the Spanish Code of Commerce; they have turned rather to "the Uniform Regulation and Convention approved at the Hague in 1912

generally and rightly considered the most complete and perfect embodiment of civil law principles as applied to bills of exchange.'

Of course the latter never could displace the Uniform Negotiable Instruments Law, and the hope of uniformity seems to lie in the gradual extension of that most successful achievement in Anglo-American Codification.

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Part Two

By HUGH C. BICKFORD, LL. M., (National University), formerly

Editor of The Review and Associate Tax Counsel of the Firm of
Patterson, Teele and Dennis.


Classes of Income

I ,

N the preceding article of this series the general nature

of the term "income", as the term is used in the Sixteenth Amendment to the Constitution, was considered and an historical outline of the development of constitutional law in America, as it has affected the imposition of Federal taxes on such income, was undertaken. Having, therefore, become familiar with the limitations and restrictions upon the power of Congress to tax gains and profits, it is possible to discuss, in detail, the different classes of income which have been made the express objects of taxation in the modern Revenue Acts. These classes are numerous and vastly different in nature and we shall, therefore, find it convenient to discuss them in the order in which they appear in the present law, the Revenue Act of 1926. Section 213 (a) of this Statute provides:

"The term 'gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including in the case of the President of the United States, the judges of the Supreme and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia, the compensation received as such) of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever."

Section 233 (a) provides that:

“In the case of a corporation subject to the tax imposed by section 230 the term 'gross income' means the gross income as defined in sections 213 except that mutual marine insurance companies shall include gross premiums collected and received by them less amounts paid for reinsurance."

Simplified, these provisions of the Revenue Act define "gross income” as the “gains, profits, and income derived" from any of the following sources:

(1) Salaries, wages, or compensation for personal serv


(2) Income, gains or profits from any profession, business, vocation or trade;

(3) Gains from sales or other dealings in property; (4) Interest, rents or dividends;

(5) Profits from any transaction of business entered into for profit; and

(6) Miscellaneous income "derived from any source whatever."

Compensation from personal services: The salaries, wages and commissions which comprise the first class of income mentioned in Section 213 (a) constitute, perhaps, the principal source of revenue of the vast majority of American citizens and, for that reason, are the most easily understood. The legal concept of such salaries and wages is, with some few distinctions, the same as the commonly understood meaning of the words. Thus, for purposes of taxation, this provision of the Revenue Act includes money and all kinds of property received for the rendition of services of any kind whatever, whether they be the weekly stipend of the wage earner, the commissions of the traveling salesman or the stated salary of the executive.' In one comparatively recent case, the Court stated: “We think Congress contemplated and intended to cover payments under contracts of employment expressed or implied, and intended the taxing statute to reach all forms of payment for services rendered." The essential factor, the Court stated, is that the remuneration received "must be a consideration for work performed or to be performed, and

. it must be compensation derived from or flowing from labor." ;

The chief difficulty in connection with this type of income is one of distinction rather than one of substance. For example, the Revenue Act exempts from taxation the "value of property acquired by gift, bequest, devise, or inheritance.” There are, accordingly, many cases which arise wherein it is extremely difficult to determine whether the amount of money or the property received is, in fact, compensation for services or a bequest or gratuitous gift. In Merriam v. United States, quoted above, the taxpayer had received, under a will, the sum of $250,000. Under the

а provisions of the same will he was, with two other legatees, appointed as executor, subject to the provision that "the bequests herein

are in lieu of all compensation or commissions to which they would otherwise be entitled as executors or trustee." The Government contended that the amount received was in the nature of compensation for services as an executor under the will, and attempted to levy a tax thereon. The Supreme Court, however, in reviewing the case, stated: “The distinction to be drawn is between compensation fixed by will for services to be rendered by the executor and a legacy to one upon the implied condition that he shall clothe himself with the character of executor. In the former case, he must perform the service to earn the compensation. In the latter case he need do no more than in good faith comply with the condition in order to receive the bequest; and in that view, the


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1 "Salaries" have been defined as the compensation for regular em. ployment; Benedict v. U. S., 176 U. S. 357; 20 Sup. Ct. 458; 44 D. Ed. 503; while wages are generally applied for manual labor; Matter of Stryker, 158 N. Y. 526, 53 N. E. 525.

· Merriam v. United States, 282 Fed. 856; affirmed, U. S. v. Merriam, 263 U. S. 179, 44 Sup. Ct. 69.

further provision that the bequest shall be in lieu of commissions is, in effect, nothing more than an expression of the testator's will that the executor shall not receive statutory allowances for the services he may render.” The Court held that the payment was, in fact, a legacy and not a compensation dependant upon services to be rendered, and the receipt thereof was not, therefore, taxable as income derived from salaries, wages or compensation for personal services.'

Another troublesome distinction under this heading arises in that class of cases wherein it is difficult to determine whether a payment is intended as a gift or as compensation for services. This difficulty is increased by the fact that the motive behind many gifts is the intention that the payment shall be in the nature of a reward for some services faithfully performed in the past. Thus, in a very recent case, a corporation was in process of dissolution, and its properties were to be sold. As a result of the transfer it was apparent that its president would lose his position which he had long and faithfully filled. The stockholders, evidently wishing to reward his faithful service, voted him the sum of $35,000, which was subsequently paid to him out of the proceeds from the sale of the business. The Treasury Department contended that this past consideration negatived the idea that it might be considered as a gift, and this conception was upheld by the Board of Tax Appeals in the first decision rendered by that body. The District Court, however, looked to the established legal definition of gifts, the opinion stating, in part, that: “The essential elements of a gift are an intention to deliver, gratuitously and without legal consideration, and a delivery either actual or constructive, of the thing given." It was then held that, there being an intention to deliver the amount “gratuitously and without legal consideration," and also a delivery, the receipt therefore was, in fact, and in law, a gift and not taxable. The principal distinction,

" therefore, between gifts, on the one hand, and compensa

.U. S. v. Merriam, supra.
* Appeal of John H. Parrett, 1 B. T. A. 1.
* Parrott v. Noel, Collector, Fed. Not yet reported.

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