court in Pollock v. Farmer's Loan & Trust Co., 158 U. S. 601. The conclusion stated by Chief Justice Fuller, on page 637, is as follows:

"Taxes on personal property, or on the income of personal property, are likewise direct taxes," and that "the tax imposed by Sections twenty-seven to thirty-seven, inclusive, of the act of 1894, so far as it falls on the income of real estate and of personal property, being a direct tax within the meaning of the constitution, and, therefore, unconstitutional and void because not apportioned according to representation, all those sections are necessarily invalid.”

In Eisner v. Macomber, supra-Mr. Justice Pitney, speaking of the Pollock case, said on page 205:

"It was held that taxes upon rents and profits of real estate and upon returns from investments of personal property were in effect direct taxes upon the property from which such income arose, imposed by reason of ownership; and that congress could not impose such taxes without apportioning them among the states according to population, as required by article I, section 2, clause 3, and section 9, clause 4, of the original constitution."

The sixteenth amendment does not extend the taxing power to new subjects. In Evans v. Vore, 253 U. S. 245, at page 262 [¶ 2738], Mr. Justice Van Devanter in delivering the opinion of the supreme court said:

"Thus the genesis and words of the amendment unite in showing that it does not extend the taxing power to new or excepted subjects, but merely removes all occasion otherwise existing for an apportionment among the states of taxes laid on income, whether derived from one source or another."

-

And again in Eisner v. Macomber, supra, at page 206, Mr. Justice Pitney, in discussing the scope of the amendment, said:

"As repeatedly held, this did not extend the taxing power to new subjects, but merely removed the necessity which otherwise might exist for an apportionment among the states of taxes laid on income. Brushaber v. Union Pacific R. R. Co., 240 U. S. 1, 17-19; Stanton v Baltic Mining Co., 240 U. S. 103, 112 et seq.; Peck & Co. v. Lowe, 247 U. S. 165, 172-173.

"A proper regard for its genesis, as well as its very clear language, requires also that this amendment shall not be extended by loose construction, so as to repeal or modify, except as applied to income, those provisions of the constitution that require an apportionment according to population for direct taxes upon property, real and personal. This limitation still has an appropriate, and important function, and is not to be overridden by congress or disregarded by the courts.

"In order, therefore, that the clauses cited from article I of the constitution may have proper force and effect, save only as modified by the amendment, and that the latter also may have proper effect, it becomes essential to distinguish between what is and what is not 'income,' as the term is there used; and to apply the distinction, as cases arise, according to truth and substance, without regard to form. Congress can not by any definition it may adopt conclude the matter, since it cannot by legislation alter the constitution, from which alone it derives its power to legislate, and within whose limitations alone that power can be lawfully exercised."

In the case at bar it therefore "becomes essential to distinguish between what is and what is not 'income' as the term is used in the sixteenth amendment and to apply the distinction according to truth and substance without regard to form," in order that article I of the original

constitution, section 2, clause 3, and section 9, clause 4, may have proper force and effect save only as modified by the sixteenth amendment.

The question therefore is simply this:-Is a gain in value realized from the sale of property income?

Insisting with great earnestness, with persuasive argument and the citation of cases alleged to be in support of its argument, the government contends that the answer is-Yes. The plaintiff, with equal forcefulness, contends that the answer is-No.

But the cases relied upon by the government arose under the corporation tax act of 1909, and not under the income tax law. The corporation tax act of 1909, as held by the Supreme Court in Stratton's Independence v. Howbert, 231 U. S. 399, 414, 416, was not an income tax law, and since gains by sales were specifically included as taxable, the cases decided under that act do not determine the definition of the word "income" within the sixteenth amendment and so are not apposite to the instant case. Mr. Justice Pitney, in the Stratton's Independence case, supra, on page 414, said:

"As has been repeatedly remarked, the corporation tax act of 1909 was not intended to be and is not in any proper sense an income tax law. This court had decided in the Pollock case that the income tax law of 1894 amounted in effect to a direct tax upon property, and was invalid because not apportioned according to population as prescribed by the constitution. The act of 1909 avoided this difficulty by imposing not an income tax, but an excise tax upon the conduct of business in a corporate capacity, measuring, however, the amount of tax by the income of the corporation, with certain qualifications prescribed by the act itself. Flint v. Stone-Tracy Co., 220 U. S. 107; McCoach v. Minehill Co., 228 U. S. 295; United States v. Whitridge (decided at this term, ante, p. 144).”

"As to what should be deemed 'income' within the meaning of Sec. 38, it of course need not be such an income as would have been taxable as such, for at that time (the sixteenth amendment not having been as yet ratified), income was not taxable as such by congress without apportionment according to population, and this tax was not so apportioned. Evidently congress adopted the income as the measure of the tax to be imposed with respect to the doing of business in corporate form because it desired that the excise should be imposed, approximately at least, with regard to the amount of benefit presumably derived by such corporation from the current operations of the government. In Flint v. Stone-Tracy Co., 220 U. S. 107, 165, it was held that congress in exercising the right to tax a legitimate subject of taxation as a franchise or privilege, was not debarred by the constitution from measuring the taxation by the total income, although derived in part from property, which, considered by itself, was not taxable. It was reasonable that congress should fix upon gross income, without distinction as to source, as a convenient and sufficiently accurate index of the importance of the business transacted.”

See also Anderson v. Forty-Two Broadway, 239 U. S. 69, 72; Stanton v. Baltic Mining Co., 240 U. S. 103, 114; Von Baumbach v. Sargent Land Co., 242 U. S. 503, 522; Doyle v. Mitchell Bros. Co., 247 U. S. 179, 183.

The question before us was passed upon by the supreme court under the income-tax law of 1867 in Gray v. Darlington, 15 Wallace 63, and this precise question has not been before the supreme court since that decision. There it was decided that under the Law of 1867 a gradual increase in value extending over a period of years could not be taxed as income for

the year in which it was realized by sale. Speaking for the court, Mr. Justice Field on page 65 said:

"The question presented is whether the advance in the value of the bonds, during this period of four years, over their cost, realized by their sale, was subject to taxation as gains, profits, or income of the plaintiff for the year in which bonds were sold. The answer which should be given to this question does not, in our judgment, admit of any doubt. The advance in the value of property during a series of years can, in no just sense, be considered the gains, profits, or income of any one particular year of the series, although the entire amount of the advance be at one time turned into money by a sale of the property. The statute looks, with some exceptions, for subjects of taxation only to annual gains, profits, and income."

And further on page 66:

"The mere fact that property has advanced in value between the date of its acquisition and sale does not authorize the imposition of the tax on the amount of the advance. Mere advance in value in no sense constitutes the gains, profits, or income specified by the statute. It constitutes and can be treated merely as increase of capital."

Respecting this decision, the supreme court in Lynch v. Turrish, 247 U. S. 221 [2351], speaking by Mr. Justice McKenna, said on page 230, after discussing Gray v. Darlington:

"This case has not been since questioned or modified," and meets the government's attempt to distinguish Gray v. Darlington, on page 230, in the following manner :

"The government, however, makes its view depend upon disputable differences between certain words of the two acts. It urges that the Act of 1913 makes the income taxed one 'arising or accruing' in the preceding calendar year, while the Act of 1867 makes the income one 'derived.' Granting that there is a shade of difference between the words, it cannot be granted that congress made that shade a criterion of intention and committed the construction of its legislation to the disputes of purists. Besides, the contention of the government does not reach the principle of Gray v. Darlington, which is that the gradual advance in the value of property during a series of years in no just sense can be ascribed to a particular year, not therefore as 'arising or accruing,' to meet the challenge of the words, in the last one of the years, as the government contends, and taxable as income for that year or when turned into cash. Indeed, the case decides that such advance in value is not income at all, but merely increase of capital and not subject to a tax as income."

The meaning of the word "incomes" in the sixteenth amendment is no broader than its meaning in the act of 1867. It was adopted in its present form, using only the words "incomes from whatever source derived" with the presumptive knowledge on the part of congress and the several state legislatures, of the meaning attributed thereto by the decisions of the various courts both state and federal.

It has been held repeatedly that gains realized from the sale of capital assets held in trust are not income, but are principal,-exactly as the securities were before they were sold, and that where a tenant for life is entitled to the entire net income of a fund, and the trustee realizes an advance in value by the sale of an investment, the life tenant is not entitled to the gain which is uniformly treated by the courts as an increment to principal and a part of the corpus of the trust.

The following are a few of the leading cases sustaining the doctrine

that the growth or increase of value when realized on the sale of an investment is accretion to capital and not income as between life tenant and remainderman. Boardman v. Mansfield, 79 Conn. 634; Carpenter v. Perkins, 83 Conn. 11, 20; Parker v. Johnson, 37 N. J. Eq. 366, 368; Outcault v. Appleby, 36 N. J. Eq. 74, 78; Matter of Gerry, 103 N. Y. 445; Thayer v. Burr, 201 N. Y. 155, 157, 158; Graham's Estate, 198 Pa. St. 216; Neel's Estate (No. 2) 207 Pa. St. 446; Lauman v. Foster, 157 Iowa 275; Slocum v. Ames, 19 R. I. 401; Jordan v. Jordan, 192 Mass. 337; Mercer v. Buchanan, 132 Fed. 501, 508.

These decisions had at the time of the adoption of the sixteenth amendment, established a definite meaning of the word "income" for the purpose of statutory and constitutional construction. It is difficult to see how the word "income" can have any different meaning when applied to the proceeds of an investment when held by a trustee, than when held by an individual, as the income-tax law specifically refers to funds held in trust. (Sec. 2 (b).)

In order to show the conclusions reached by the courts it will suffice to quote from only one of the cases to which reference is made supra. In Parker v. Johnson, 37 N. J. Eq. 366, the court said:

"The profit is not income. It was made by the trustee in the process of converting the investment, and, like a premium realized on the sale of government bonds in which the funds might be invested, it belongs to the fund. The trustee in this case is to keep the fund invested, and the tenant for life is entitled to the interest. It is clearly the duty of the trustee to apply the profits on one invesment to making up the losses on others."

So it seems that income from investments consists,-in the case of bonds, of interest; in the case of stocks, of dividends. There is no income from the sale of investments.

The conclusion seems imperative that the word "income" has a welldefined meaning, not only in common speech but also under judicial construction and this meaning does not include the increase in value of capital assets when realized upon a sale.

The following extract from the opinion of Mr. Justice Pitney in the Macomber case, supra, at page 206, is instructive:

"For the present purpose we require only a clear definition of the term 'income' as used in common speech, in order to determine its meaning in the amendment."

It seems to me apparent that the supreme court, in Towne v. Eisner, 245 U. S. 418, 426 [p. 2313], and in Eisner v. Macomber, supra, followed the doctrine enunciated in Gibbons v. Mahon, 136 U. S. 549, where it was held that a stock dividend is an accretion to capital and not income as between a life tenant and the remainderman and therefore held in the Towne case that a stock dividend was not income within the meaning of the income-tax law of 1913 and in the Macomber case that a stock dividend was not income within the meaning of the sixteenth amendment. As already stated, it is difficult to see why any different rule should be applied to the proceeds of an investment-purely a capital investment-when held by a trustee than when held by an individual.

Two pertinent points have been definitely established by the supreme court in Eisner v. Macomber, supra, page 214:

and

First:-"Enrichment through increase in value of capital investment is not income in any proper meaning of the term."

Second: If it requires conversion of capital in order to pay the

tax, it must follow that the tax is on capital increase and not on income, for on page 213, the court said:

"Yet without selling, the shareholder, unless possessed of other resources, has not the wherewithal to pay an income tax upon the dividend stock. Nothing could more clearly show that to tax a stock dividend is to tax a capital increase, and not income, than this demonstration that in the nature of things it requires conversion of capital in order to pay the tax."

Had the plaintiff possessed no resources other than the bonds which he sold, prior to the sale his capital would have been their then entire value. The increase since March 1, 1913, was capital increase. To collect the tax on this increase in value because the capital was converted into cash must of necessity diminish his capital to that extent. Before the sale all the plaintiff possessed was capital without any part of it constituting income. The sale of capital results only in changing its form and like the mere issue of a stock dividend, makes the recipient no richer than before. Gibbons v. Mahon, supra; Towne v. Eisner, supra; Eisner v. Macomber, supra.

The exact question presented in this case has not been before the supreme court since its decision in Gray v. Darlington, supra, nor did it arise in Eisner v. Macomber, supra. Notwithstanding certain passages in the opinion of the court in the Macomber case stating that when dividend stock is sold at a profit, the profit is taxable like other income,-which I consider, in view of all that has been written by the supreme court in a long line of income tax decisions, must mean that the profit derived from such transactions, if it is income, applies in the case of a trader and not in the case of an individual who merely changes his investments.

Therefore, under the authority of Gray v. Darlington, which is approved in Lynch v. Turrish, supra, I feel constrained to hold that the appreciation in value of the plaintiff's bonds, even though realized by sale, is not income taxable as such, and in reaching this conclusion I find support for it in the Macomber case where Mr. Justice Pitney says:

"Enrichment through increase in value of capital investment is not income in any proper meaning of the term."

It follows that the income-tax law of 1916, in so far as it attempts to tax such increase, is in conflict with the apportionment requirements of the first article of the constitution, being a direct tax and not apportioned among the several states according to population.

Counsel for plaintiff contended that the act should be so construed as to limit the tax to the actual increase from the dates of acquisition, although the value of such bonds was less on March 1, 1913, than when acquired prior thereto, in the event that the gain in value of the bonds when sold was taxable at all. In view of the decision that such increases are not income it becomes unnecessary to discuss the point.

The conclusion herein expressed has been reached only after a very careful consideration of all the respective claims presented by able counsel in exhaustive and persuasive briefs and with full appreciation of the admonition given by the supreme court in Nicol v. Ames, 173 U. S. 509, at page 514. This court fully appreciates that

"It is always an exceedingly grave and delicate duty to decide upon the constitutionality of an act of the congress of the United States." and that

"the duty imposed demands in its discharge the utmost deliberation and care and invokes the deepest sense of responsibility"—

as was said by Chief Justice Fuller in the opening paragraph of the opinion in Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601, at page 617.