have adopted somewhat similar tactics and have thereby greatly depreciated their standing in the eyes of the profession. There seems to be something contagious about a loud noise. We stand at the door of the circus tent and listen to the charm of the barker and straightway are imbued with the idea that if we stand in front of our own doors and bark the crowd will gather and success will come crowding upon us.

In the office of this magazine we have an interesting file of socalled educational pamphlets produced by institutions engaged in the gentle art of angling. If it ever becomes necessary to give horrible illustrations this file will furnish material. There seems to have been nothing in the way of bad taste which has been overlooked and all in the name of education.

The matter has its humorous side but it has also a serious side. It is almost impossible to prevent false advertising-there are so many degrees of falsity and it is so easy to keep just within the law. If all magazines, newspapers and other vehicles of advertisement would exercise a rigorous censorship of this class of advertising much good could be done, but even then there is always the circular letter-devised by some peculiarly ingenious limb of Satan-which can be sent far and wide and will always bring a certain amount of return.

What is the result? Is it not found in the failure of nearly 87 per cent of candidates in the last examinations? Is it not found also in the great number of men who write to the office of this magazine asking for suggestions as to when and where they can obtain employment and laying claim to efficiency by virtue of having studied such and such a course? Is it not found in the increasing skepticism with which the wary portion of the public is beginning to regard all accounting courses both worthy and unworthy?

There are worthy schools and the JOURNAL is glad to do them honor. They should be supported and they are deserving of success-but they are hindered by the other kind of schools. Public discrimination seems to be the only remedy, and possibly now that money is not so easy to get students of accounting will exercise on their own behalf a little more common sense.

Income-tax Department

EDITED BY STEPHEN G. RUSK

The decision of the United States district court of Connecticut, handed down by District Judge Thomas, December 16, 1920, in the case of Brewster versus Walsh is causing such widespread interest that it is thought advisable to publish it in its entirety in THE JOURNAL OF ACCOUNTANCY.

Until this decision is upheld by the United States supreme court taxpayers will be expected to make their returns as heretofore, as if the decision had not been rendered, but it may be advisable to make claims for abatement of the tax on sale of capital assets pending the final adjudication of this

matter.

The commissioner of internal revenue has addressed a letter to the collectors under date of February 10, 1921, in which he states that the bureau will continue to collect the tax upon gains and profits realized from the sale of capital assets unless and until the supreme court shall hold that provision of the law unconstitutional.

From the above-mentioned letter it appears that "the same question is involved in the Eldorado and Ryerson cases which were argued in the supreme court some weeks ago." The court has not handed down a decision in these cases.

Treasury decision No. 3119 contains some interesting information re-. garding estate tax under the revenue act of Sept. 8, 1916, applying to transfers of property in contemplation of death. It comprehends a decision by Circuit Judge Knappen in the United States circuit court of appeals, sixth circuit, in Schwab, Executor, versus Doyle.

The regulations relative to amortization allowances have been revised and clarified by the department of internal revenue and they are amended by treasury decision No. 3123.

Some interesting theories are set forth in a decision handed down by Circuit Judge Knappen in the case of the Nashville, Chattanooga & St. Louis Railway Company versus United States.

The portion which will be found especially interesting to accountants is that in which the judge states that "the depreciation which may be deducted in determining net income is the decrease in intrinsic value due to wear, tear, decay, obsolescence, etc., of the physical property suffered during the year as distinguished from the market value."

This seems to differ from the accepted theory that physical property has a known period of years of usefulness and that its cost, less salvage value at end of its usefulness, is the amount that depreciates, and that this depreciation may be charged against income in equal annual instalments.

It will be seen, however, in this particular case that there had been testimony by "competent witnesses of railway experience" that the "service life

of any normally operated and normally and well maintained railroad is perpetual * Hence there may be no conflict between the ruling

* *"

in this case and the accepted theory of depreciation.

(Decision)

Revenue act of 1916

Increase in value of capital assets when realized by sale or other disposition, by one not a trader or dealer therein, is not income, and hence is not taxable as such.

DISTRICT COURT OF THE UNITED STATES
District of Connecticut

This action arises under the income-tax law of 1916. Plaintiff seeks to recover of the defendant, who is collector of internal revenue for the district of Connecticut, $17,689.13, which amount the plaintiff paid to the government under protest, as an additional income tax assessed against him for the year ending December 31, 1916. The plaintiff further claims that there is also due him the additional sum of $67.66 which the government concedes was an overpayment of normal tax and is rightly due the plaintiff, so that the total amount claimed by the plaintiff is $17,756.79. Trial by jury was waived and the case was tried to the court.

The facts were stipulated. It appears that plaintiff is not now nor was he during the times mentioned herein, a member of any stock exchange, or of any similar organization or association engaged in the business of trading in, buying or selling securities. Neither was he in any way engaged in the business of buying or selling stocks and bonds otherwise than occasionally making purchases of stocks and bonds for investment purposes, and occasionally making sales of such stocks and bonds for the purpose of changing the character of his investments. It further appears that there are three transactions involved in the main points raised in this suit.

The first transaction concerns the bonds of the International Navigation Company. In 1899 the plaintiff acquired certain interest-bearing bonds of that company of the face value of $191,000 in exchange for other securities of the same corporation, and during the year 1916 he sold the same bonds for $191,000. On March 1, 1913, these bonds were quoted in the market at 792% of their face value, so that on that day the market value of the bonds was $151,845. The tax sought to be collected by the government on this transaction is based upon the difference between the sale price and the market price of the bonds on March 1, 1913, to wit: $39,155, which amount the commissioner taxed as income for the year 1916, and is part of the tax paid under protest which plaintiff seeks to recover in this suit.

The second transaction concerns certain bonds of the International Mercantile Marine Company. In 1903, plaintiff, as a member of an underwriting syndicate, was granted an allotment of mortgage bonds of the face value of $257,000, in return for which he paid the company at that time $231,300 in cash, but the bonds thus allotted were not delivered to the plaintiff until April, 1906 when he received them with nothing by way of interest on the amount of cash he had turned over to the company in 1903. The plaintiff

claims that interest at 6% for three years on $231,300 is properly an element of cost and attributable thereto.

It becomes necessary at this point to digress from a statement of the facts and first dispose of plaintiff's claim for interest on this transaction, in order to determine what the bonds actually cost the plaintiff, as the actual cost must be determined before consideration can be given to the plaintiff's claims respecting the tax the commissioner assessed and which plaintiff paid under protest, pursuant to such assessment. Plaintiff's claim that interest computed from date of payment in 1903 to date of receipt of bonds in 1906, and added to the cash paid for the bonds represents the real cost of the bonds to the plaintiff is untenable.

In Hays v. Gauley Mountain Coal Co., 247 U. S. 189, one of the questions there presented was whether the respondent should be allowed to add interest to the amount of cash it had paid in 1902 for certain shares of the capital stock of another mining company which shares it sold in 1911, but the supreme court held that there was "no merit in the contention that interest should be added to the purchase price in order to ascertain its cost," so that I find that the actual cost of these bonds to the plaintiff was $231,300.

From the stipulation it further appears that the plaintiff sold the bonds in 1916 for $276,150, part of them having been sold at 107% and part at 1072. But on March 1, 1913, the market quotation and market value of these bonds was 64 bid and 641⁄2 asked and at such quotation had an actual market value of $164,480. On this transaction the plaintiff failed to make an income tax return as to any profit or gain by him obtained on the sale of these bonds and was later assessed an additional tax of $111,670 on the ground that this was the representative gain shown by the difference between $164,480, the value of said bonds as indicated by the market quotation of March 1, 1913, and $276,150, the price which plaintiff received from the sale of the bonds in 1916. The tax which was assessed on this transaction by the commissioner, and paid under protest, and which is part of the tax here sought to be recovered was levied upon the sum of $111,670, which amount the government claims represents the income received from the sale of these bonds and which amount, as stated above, was the difference between the market value of the bonds on March 1, 1913, and the sum received for them when sold in 1916.

The third transaction relates to a stock dividend declared by the Standard Oil Company of California, in which company the plaintiff owned 1330 shares of its capital stock. In 1916 the plaintiff received 665 shares of stock of said company as a stock dividend declared against a surplus,18.0754% of which had been earned after March 1, 1913. The government claims that the plaintiff derived $12,019.41 taxable income therefrom, but this claim has been decided adversely to the government in Eisner v. Macomber, 252 U. S. 180 [¶ 2575], where the identical stock dividend was under consideration, so that the plaintiff, upon that authority, is entitled to recover for the tax assessed and collected in connection with this transaction.

The discussion is therefore narrowed to two transactions, those pertaining to

The International Navigation Company bonds,

The International Mercantile Marine Company bonds, both of which the plaintiff owned on and before March 1, 1913, and which he sold in 1916, in accordance with the conditions above set forth. So that the sole inquiry here is whether the difference in the amounts between the value of investment securities on March 1, 1913, and the amounts received for such securities when sold in 1916 is taxable income within the income-tax law of 1916? (39 Stat. c. 463, pp. 756, 757.)

The discussion of this proposition revolves around the sixteenth amend

ment of the constitution and the legislation passed by the congress after the ratification of the amendment.

The sixteenth amendment to the constitution provides:

"The congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." The pertinent sections of the statute passed by the congress to carry the amendment into effect provide:

"Sec. 1. (a) That there shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all sources by every individual, a citizen or resident of the United States, a tax of two per centum upon such income."

"Sec. 2. (b) That, subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, businesses, trade, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property, also from interest, rent, dividends, securities, or the transactions of any business carried on for gain or profit, or gains or profits and income derived from any source whatever: provided, that the term 'dividends' as used in this title shall be held to mean any distribution made or ordered to be made by a corporation, joint-stock company, association, or insurance company, out of its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in stock of the corporation, joint-stock company, association, or insurance company, which stock dividend shall be considered income, to the amount of its cash value."

It is thus apparent that the statute specifically imposes a tax upon net income which "shall include gains, profits, and income derived from sales or dealings in property," and then provides :

"(c) For the purpose of ascertaining the gain derived from the sale or other disposition of property, real, personal, or mixed, acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property, as of March first nineteen hundred and thirteen, shall be the basis for determining the amount of such gain derived."

It is the contention of the plaintiff that the statute is unconstitutional in so far as it taxes as income the increased value of investments when realized by sale, and that such a tax is a direct tax upon capital or property not authorized by the sixteenth amendment and not a tax upon income. In other words, that such gains do not come within the definition of income as the word is used in the sixteenth amendment.

On the other hand, it is the contention of the government that such gains do constitute income properly taxable under the income-tax law of 1916.

We are therefore brought to a consideration of the scope of the sixteenth amendment, because there is no question but that prior to the adoption of this amendment the congress had no power whatever to tax as income gains arising from the sale of property where the owner thereof was not a dealer or trader in such property so as to justify an excise tax upon his business.

In support of this, reference is made to the decision of the supreme