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return, however, remained, as before, the sole measure of the tax base.

In April, 1919, this Court decided the case of People ex rel. Barcalo v. Knapp (187 A. D. 89, 175 N. Y. Supp. 337). Almost immediately thereafter, that is to say, on May 14th, 1919, Chapter 628 of the laws of that year became effective. Perhaps the taxpayer's contention in the Barcalo case had no part in bringing about the amendment. Certain it is that stability had departed from the Congressional definition of net income and that a less variable standard would appear to have become desirable. The manner in which Congress treated dividends may serve as illustrative. 1913–1916 Dividends were included in gross

and in net as well. 1917 From net, when established, ex

cess profits tax and dividends
are deducted to reach the tax

1918 Dividends appear neither

gross nor in net.
1919 Dividends included in gross and

then deducted before net is found.

* *

At any rate, the amendment of 1919 effected a radical change. Henceforth the tax was to be computed, not on the basis of net income as returned to the United States treasury department, but “upon the entire net income

for such

calendar year as defined in Section 208 of this Chapter" (Sect. 214). To Section 208 was now added a new subdivision 3 which provided that the term entire net income

“Means the total net income before any deductions have been made for taxes paid or to be paid to the government of the United States on either profits or net income or for losses sustained by the corporation in other fiscal or calendar years whether deducted by the government of the United States or not”.

By this change the word presumably which remained in Section 209 gained elasticity and importance. By Chapter 329 of the laws of 1924 subdivision 3 of Section 208 was again amended so as expressly and for the first time, to include dividends as part of the entire net corporate income. The Federal Statute permitted the deduction of dividends from gross.


The allegations of the petition not specifically denied by the answer or the return will be accepted as true and the facts thus conceded will be considered by this Court.

A denial, for instance, that the profits mentioned in paragraph 13th of the petition were realized in the year 1923 and that the tax mentioned in that paragraph was computed upon the basis of net income and profits (f. 84) is not a denial that in 1923 petitioner sold a parcel of land; that it reported a profit to the Federal authorities; that a Federal income tax was adjusted and paid upon part of that profit; that petitioner, as an Article 9 corporation, reported the profit in its entirety and that the franchise tax for that year was assessed upon a net worth which included that profit (ff. 30 to 32). Similar analysis is applicable to every denial contained in the answer except, possibly, denial number 1 (f. 82). Denial number 13 (f. 87), of course, is addressed to the obligatory statement of petitioner's grievance (f. 48) and raises no issue.

Article 78 of the Civil Practice Act recognizes the possibility of issues of fact arising in certiorari proceedings.

Section 1295, Civil Practice Act.

Even before the enactment of that article, the petition was more than a pro forma application to set procedure in motion. Facts stated in the writ or in the papers upon which it was granted, which the return admits or as to which it is silent became important, must be considered and have effect upon the hearing.

Peo. ex rel. Village of Brockport v. Sut

phin, 166 N. Y. 163 at page 170; Zurich G. A. & L. Ins. v. Board, 235

A. D. 473; 257 N. Y. S. 142.

Petition, answer and return partake of the nature of pleadings and will be read as pleadings are read. An answer, however, if not general, must be specific in its denials. A different version of the same transaction or a denial of allegations not found in the adversary's pleadings leaves that pleading as admitted.

Smith v. Coe, 170 N. Y. 162.

With the return, apart from the answer, petitioner has no quarrel. The return sets forth the proceedings before the Commission. The Commission had presented to it petitioner's contention, first, that the so-called deferred income item formed no part of the income of 1930 and, second, that the refusal to allow from the net worth on which Article 9 franchise taxes were assessed for the years 1927, 1928 and 1929 a deduction on account of this very deferred income, at a time when it had not been collected, rendered its inclusion in 1930 inequitable as well as contrary to law.

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Delay in the levying of a tax on capital gains does not make those gains income for the year in which the tax is paid within the meaning of the Tax Law.

Simultanenously with the receipt of the $39,190.00 two mortgages disappeared from petitioner's portfolio. Was that receipt income?

Apples are gathered. Income; the orchard stands unchanged. Wool is sheared. Income; the animal, protesting, bounds away. Wheat is harvested. Income; the field remains. Interest is received. Income; the debt is still owing. Dividends are declared. Income; factory wheels turn on, not a cog missing. Capital gains share with true income the essential feature that they may be severed and consumed, leaving their source unimpaired. They are an increase, not a dollar for dollar liquidation of an existing asset. But, except in the case of assets such as mines, which are in a class by themselves, never is that income which encroaches upon its source. The newly-born lamb is income. Not so the mutton chop.

Capital gains were realized when the two parcels were sold in 1923 and in 1926 respectively. The transactions were then in each instance complete. That the government would permit these gains to be reported and the tax to be paid in installments is beside the point. Immediately the sales were made, petitioner was possessed of cash and securities which had taken the place of the original investment, and which in addition, included the gain in its entirety. Its net worth had grown. It could have legitimately declared a dividend, if not in cash then in stock. True, it postponed to a later year payment of part of the tax to which the gain had made it subject. But the right to do that was a privilege granted by the government, a privilege attached to the tax, not to the source, a privilege which had to be claimed, a privilege which would have been forfeited had the taxpayer been delinquent in reporting the sale.

Tax Law, Section 358A;
Federal Revenue Act, Sect. 44, subd. b;
Strauss v. Commissioner, 33 B.T.A. 855;
Burnett v. St. Louis Building Corp., 288

U. S. 406;
Briarly v. Commissioner, 29 B.T.A. 256.

On the other hand, a capital loss may not be reported by installments at all.

Martin v. Commissioner, 61 Fed. (2nd)

Sacks v. Burnett, 66 Fed. (2nd) 223.

Nothing in any of the Federal Revenue laws suggests a definition which makes a gain that of any year other than the year in which the transaction was completed. In the Martin case (61 Fed. (2nd) 942), the Court expressly rules that a sale is complete and the result ascertained when title passes and the checks and evidences of debt are received in payment. Indeed, before 1926, Congress made no distinction whatever between credit and cash sales. The privilege of reporting the gain in sections and paying the tax

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