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in installments was a grace which the Treasury Department extended to the taxpayer. The Revenue Act of 1926 for the first time adopted as its own the policy initiated by the Department by adding subdivision d, Section 212 and retroactively ratified the departmental action by Section 1208 (Federal Revenue Act of 1926).

Burnett v. S. & L. Bldg. Corp., 288

U. S. 406 (413).

The payment of $39,190 in 1930 represented no new gain. It did not increase petitioner's net worth by one dollar. It merely liquidated an outstanding asset which was in petitioner's possession at the beginning of the year. The payment did not conform to the definition of income which the illustrations at the head of this point suggest. It was not a lambkin. It was a mutton chop. It was not 1930 income.

POINT III

It was not within the power of the Legislature to impose an income tax on something which is not income but which is labelled as income by a fiction which the taxpayer is precluded from disputing.

In 1919, the legislature deleted from Section 214 the reference to the Federal return and substituted a direction to base the tax on entire net income for the calendar year as provided in Section 208, that is to say, on the total net income before deducting Federal taxes or losses sustained in earlier years (Sects. 214 and 208, subd. 3 as amended by Chapt. 628, Laws of 1919). The law makers could have intended nothing else

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than the abandonment of a standard which had proved unsatisfactory. The change added to the role which the word “presumably” plays, as used in Section 209. Net Federal income, though still to be reported, became a point of departure from which the commission must travel in search of reality, up or down, in whichever direction reality lies. The statement in the Barcalo opinion (227 N. Y. 64) that the Commission, while free to fix the true and correct income, may not change its nature or definition, had reference to the contention then being pressed that net income was the sum on which the Federal tax was calculated, that is to say, defined net income diminished by excess profits taxes. Nor must it be overlooked that at that time the Tax Law contained no Section 208, subdivision 3, that the law still pointed to the Federal return as the only tax base (Sect. 209 as amended by Chapt. 276, Laws of 1918). The Barcalo case must be read with contemporaneous decisions of the same Court. A blind adherence to the Federal definition of net income was never enjoined upon the commission. Though the Federal revenue laws expressly deducted dividends from gross before arriving at the statutory net and though Section 208 then contained no direction not to deduct dividends, our courts had refused to follow the Federal definition of net income with respect to income of that kind.

Peo. ex rel. Northern Finance Corp. v.

Law, 236 N. Y. 286;
Peo. ex rel. Standard Oil v. Law, 237

N. Y. 142 at page 149.

Taxation is no game of “heads I win tails you lose”. When the Court of Appeals held that the Commission may move from the “presumably” to be accepted Federal definition, it did not start the taxing authority travelling a one-way street. Since departure from a standard "presumably” valid may increase, it must also, if the facts are present decrease the tax. The Commission, using all available sources of information, searches for the true income of the year.

. Reality determines taxation. An income tax on something which the taxpayer, contrary to the fact, is precluded from showing not to be income is unconstitutional. And in the last analysis a tax measured by income is a tax on income.

Peo. ex rel. Alpha P. C. Co. v. Knapp,

230 N. Y. 48 at pages 56 and 57.

In Heiner v. Donan (285 U. S. 312) the Supreme Court held unconstitutional a provision making conclusive the presumption that a gift within two years of death is made in contemplation of death. The Court said, at page 325, that to impose a tax upon an assumption of fact which the taxpayer is forbidden to controvert is so arbitrary and unreasonable that it cannot stand under the 14th Amendment. The same doctrine was declared in Schlesinger v. Wisconsin (270 U. S. 230). A statute was condemned because it provided that, for the purpose of assessing a tax on the income of a married man, the separate income of the wife must conclusively be presumed to be his. The legislature could not by its fiat make the wife's income that of the husband.

Hoeper v. Tax Commission (284 U. S.

206).

Petitioner did not realize a capital gain of $39,190 in 1930. It had made no sale that year. The sum mentioned was no part of petitioner's 1930 income. As laid, the assessment can be sustained only if a taxpayer which has availed itself of a privilege granted by Federal law is precluded by the reference in Section 209 to the Federal income tax return from asserting the truth. That the petitioner may not be so precluded and that a tax measured by income may be levied only on what truly is income is established by the cases cited.

POINT IV

Whatever equities may influence the solution of a question of taxation point in petitioner's favor.

A. Double Taxation

Petitioner had already paid a tax on the gains which were partly liquidated in 1930. That tax was paid as part of the franchise tax paid by petitioner in 1923 and in 1926; on the same gains further taxes were paid in all later years to and including 1929. True, the taxes so paid do not appear as expressly measured by income. Actually they were so measured. The legislature exacts a tax on the capital gains of all corporations. In the case of realty corporations, however, the tax on gains is hidden. The net worth on which it is computed has in each case been increased by capital gains realized in that particular year. Not only that. Unless distributed as dividends, a net worth including that same capital gain is again taxed in the years following. That the tax, as a practical matter, is less than it would have been had petitioner been a business corporation in those years is not a condition which it lies within the province of the Commission to alter. The legislature intended that petitioner should pay a tax of one pro mill on its 1923 and its 1926 gains. The Commission may not increase that impost by what is, in effect, double taxation.

B.

The Assessment of 1927, 1928, 1929

When a sale is made, the sales consideration takes its place among assets. If a resultant gain is not to be returned to the government in its entirety, a deferred income liability must be set up to bring down net worth to a figure which will reflect only the reported portion of the gain. Petitioner, in its returns for the years 1927, 1928 and 1929 attempted to follow this accounting practice and, so, diminish the net worth and the resulting tax. The Commission rejected the setup, and fixed net worth and assessed the tax without reference to deferred income as a liability. In effect therefore, it ruled, for the purpose of increasing the tax to be paid by petitioner, that the entire gain had been made at once and that the assets which represented the gain must figure, undiminished by a counterentry, in determining the net worth. Having thus given the State the benefit of the entire gains as having been made in 1923 and in 1926, the Commission may not now, and again for the purpose of increasing the tax, say that the gains were not made until 1930.

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