State Of New York et al v. Mnuchin et al

Filing 47

DECLARATION of Owen T. Conroy in Support re: 44 CROSS MOTION for Summary Judgment .. Document filed by State Of Connecticut, State Of New York, State of Maryland, State of New Jersey. (Attachments: # 1 Exhibit 1, # 2 Exhibit 2, # 3 Exhibit 3, # 4 Exhibit 4, # 5 Exhibit 5, # 6 Exhibit 6, # 7 Exhibit 7, # 8 Exhibit 8, # 9 Exhibit 9, # 10 Exhibit 10, # 11 Exhibit 11, # 12 Exhibit 12, # 13 Exhibit 13, # 14 Exhibit 14, # 15 Exhibit 15, # 16 Exhibit 16, # 17 Exhibit 17, # 18 Exhibit 18, # 19 Exhibit 19, # 20 Exhibit 20, # 21 Exhibit 21, # 22 Exhibit 22, # 23 Exhibit 23, # 24 Exhibit 24, # 25 Exhibit 25, # 26 Exhibit 26, # 27 Exhibit 27, # 28 Exhibit 28, # 29 Exhibit 29, # 30 Exhibit 30, # 31 Exhibit 31, # 32 Exhibit 32, # 33 Exhibit 33, # 34 Exhibit 34, # 35 Exhibit 35, # 36 Exhibit 36, # 37 Exhibit 37, # 38 Exhibit 38, # 39 Exhibit 39, # 40 Exhibit 40, # 41 Exhibit 41, # 42 Exhibit 42, # 43 Exhibit 43, # 44 Exhibit 44, # 45 Exhibit 45, # 46 Exhibit 46, # 47 Exhibit 47, # 48 Exhibit 48, # 49 Exhibit 49, # 50 Exhibit 50, # 51 Exhibit 51, # 52 Exhibit 52, # 53 Exhibit 53, # 54 Exhibit 54, # 55 Exhibit 55, # 56 Exhibit 56, # 57 Exhibit 57, # 58 Exhibit 58, # 59 Exhibit 59, # 60 Exhibit 60, # 61 Exhibit 61, # 62 Exhibit 62, # 63 Exhibit 63, # 64 Exhibit 64, # 65 Exhibit 65, # 66 Exhibit 66, # 67 Exhibit 67, # 68 Exhibit 68, # 69 Exhibit 69, # 70 Exhibit 70, # 71 Exhibit 71, # 72 Exhibit 72, # 73 Exhibit 73, # 74 Exhibit 74, # 75 Exhibit 75, # 76 Exhibit 76, # 77 Exhibit 77, # 78 Exhibit 78, # 79 Exhibit 79, # 80 Exhibit 80, # 81 Exhibit 81, # 82 Exhibit 82, # 83 Exhibit 83, # 84 Exhibit 84, # 85 Exhibit 85, # 86 Exhibit 86, # 87 Exhibit 87, # 88 Exhibit 88, # 89 Exhibit 89, # 90 Exhibit 90, # 91 Exhibit 91, # 92 Exhibit 92, # 93 Exhibit 93, # 94 Exhibit 94, # 95 Exhibit 95, # 96 Exhibit 96, # 97 Exhibit 97, # 98 Exhibit 98, # 99 Exhibit 99, # 100 Exhibit 100, # 101 Exhibit 101, # 102 Exhibit 102, # 103 Exhibit 103, # 104 Exhibit 104, # 105 Exhibit 105, # 106 Exhibit 106)(Conroy, Owen)

Exhibit 3

-·---

THE FEDERAL
INCOME TAX
•

i

BY' -

~

.' .

ROY G.'.BLAKEY
and

GLADYS C. BLAKEY
UNIVERSITY OF MINNESOTA

LONGMANS, GREEN AND CO.
LONDON • NEW YORK • TORONTO

.........._.____________

n~

~~

I
I

THE FEDERAL INCOME TAX
CHAPTER I

THE BEGINNINGS OF THE REVOLUTION INN A TION AL
TAXATION
A new era of national taxation was ushered into the United States
with the adoption of the Sixteenth (Income Tax) Amendment to
the Constitution, February 3, 1913. The first federal income taxes
were supplementary emergency measures of the Civil War period,1
but it was not possible for the United States to have a broad general
income tax as a main source of revenue, for peace times as well as
for war and other emergencies, until the adoption of the Sixteenth
Amendment.

ANTECEDENTS OF THE SIXTEENTH AMENDMENT

The two great battles which made that amendment possible were
fought in 1894-1895 and 1909-1913. The abortive income tax of
1894 (declared unconstitutional in 1895) had only a loose causal
connection with the Civil War income taxes; it was really the result
of a great equalitarian movement generated by two prolonged postwar depressions of great severity. Although frustrated for nearly
two more decades, the leaders of this democratic movement won in
1909 what later proved to be a decisive victory by forcing a conservative President and even more conservative congressional leaders
to submit a Constitutional amendment to the states and, also, by
forcing them to authorize an entering-wedge income tax under the
guise of an excise tax on corporations. These two 1909 income tax
measures were not originated by immediate and urgent fiscal
pressures, rather they were results of a no longer postponable confl.ict between holders of opposing economic interests and political
philosophies. The ratification of the amendment by three fourths
of the states - contrary to the expectations of the conservative
leaders - showed on which side the victory lay, and was followed
promptly by the adoption of a general income tax which included
the previous tax on corporations and much more besides.
1

An income tax was suggested during the War of

1812.

THE FEDERAL INCOME TAX

2

THE REVOL UTl

These short and simple laws were the forerunners of a series of
measures that were soon to multiply many fold the revenues of the
government, and to affect profoundly and permanently, not only
the national government, but also state and local governments, all
industry and finance in the United States and, consequently, the lives
of its millions of citizens.
The really new era which got well under way in 1909 and 1913
is the one with which this treatise is chiefly concerned, though a
brief account of what went before will assist in understanding why
and how this era came into existence, and will aid also in evaluating
the significance of later developments.

psychology of a people t
support of the national
tariff. There had not t
liquors since 1817 whe1
Furthermore, no one e:
difficult or .of long durat
RECEIPTS OF TH:

(I
Internai

Prior to the Civil War the national government was financed
chiefly by receipts from customs duties. Some revenue was received
from the sale of public lands and from a few temporary excise and
other internal taxes. (Table 1.) The tariff, although the main
source of revenue, was not ideal for several reasons, one of them
being that the yield fluctuated violently according to the condition
of business and bore little relation to the needs of the government.
At times the government faced a deficit. Then it borrowed, relying
on a hoped-for surplus some time in the future. At times the surplus
became embarrassing and tempted Congress to spend recklessly.
Twice at least, in the 183o's and again in the decade preceding the
panic of 1893, such surpluses were important factors contributing
to economic depressions, though other factors were more important
in the latter period.

Tear
-

1789-91
1800
18!0
1820
1830
1840
1850
1860
1865
1870
1880
1890
1900
1910
1919 e
1920
1930
1932 f
1937
1938
1939 g

THE CIVIL WAR TAXES

When the opening gun of the Civil War was fired on Fort Sumter,
the national government was neither financially nor psychologically
prepared for the long struggle. The panic of 1857 had left its mark
on business and the decline in receipts from customs had left a Treasury deficit. Disagreement as to financial policy between northern
and southern members of Congress and President Buchanan's apparent indifference or indecision forced the Treasury to borrow more
and more.
Even before the war broke out the national credit was so poor
that New York banks were reluctant to lend to the government.
For example, in December 1860 the Administration experienced
great difficulty in floating a $s,ooo,ooo issue of treasury notes bearing
123 interest. 2
In the first months after the outbreak of war neither Congress
nor the Secretary of the Treasury had much courage when it came
to imposing taxes, but perhaps it is difficult now to appreciate the
2

Customs
(including
tonnage
tax)b

$4.39
9.08
8.58
15.01
21 .92
13.50
39.67
53· 19
84.93
194·54
186.52
229.67
233. 16
333.68
184.46
322.90
587 .00
327. 75 b
486.36
359· 19
318.84

Income
and
Profits
'I'axes

........
........
........
........
........
........
........
........
$60.98

37.78

........
........
........
20.95
3,018. 78
3,945 ·95
2,410.99
1,057 .34
2,157.53
2,634.62
2,182.30

• Compiled from Report of th1
annual receipts, 1908-1939, see Ta
b Beginning in 1932, tonnage I
revenue.
•Includes sales of public lands,
and other postal revenues.
d Less than $wo,ooo.
•Included because it was the ye:
'Included because it was the ye:
•From Daily Statement of the 1

Aside from borrowing,
finance the war : (I) fiat
revenue system, that is, ex
sumption goods, licenses c
certain corporations ; and
the eloquent Morrill expla

36th Congress, 2d Session, House Miscellaneous Document 20, p. 3.

-

E TAX
untaxed garden, to rely
Adam, we have "all the
is the result of a deter;tern part of the United
: amendment to inc!_11_~e
tee on Ways and Means
E July 1861. Chairman
red himself the ruler of
the refusal to accept the
iuced. He proposed to
land apportioned among
additional amount by a
)tion as tea, coffee, and
1 members resented the
the country where land
l poor. They were fully
tariff, though concealed,
the bill that it was withof direct tax on land and
nore upon the indti.strial
as very simple and short;
as on gross or net income
ictions other than taxes.
gain (in regular ~ession)
)f 1 86 2 is interestmg not
Ltional income tax to be
c established the office of
law was revised again in
nd also to make its provits amended somewhat in
~n in 1867 and 1870 when
:ed according to source of
ywere
on income. of
over a personal exempt10n
ates citizens living abroad,
: securities. In the 1862

-33

lon, p. 1194.
the "rebel states" as well ~s on
em. In fact, the tax was a fallur;,
~turned to the states in the 1890 s,
>duce the Treasury surplus of that
-the rates of the protective tariff.
1

THE REVOLUTION IN NATIONAL TAXATION

5

law the rates were graduated according to the amount of income 3 3 on a person's income in excess of $600 and not in excess of
$10,000, and 53 on income in excess of $10,000. In the 1864
law the rates were 53 on income over $600 and not over $5000,
71123 on income over $5000 and not over $10,000, and 103 on income over $10,000. The next law, that of i865, taxed income in
excess of $5000 at 103. By 1867 the war was over and, although
the debt remained, Congressmen were eager to reduce the tax burden ; therefore, the personal exemption was increased to $1000 and
the rate lowered to 53. In i870 the exemption was raised to $2000
and the rate was reduced to 21123. 5
Several features of these laws were important as precedents for
later legislation. One was the direct dealing between the national
government and large numbers of individuals in the collection of
non-shiftable personal taxes ; another and somewhat opposite was
the partial adoption of the British "stoppage-at-the-source" method
of collecting the tax ; for example, on government salaries and certain corporation dividends and interest.
The concept of taxable net income was evolved gradually. In
drafting the first two laws members of Congress were not sure
whether gross or net income was what should be taxed. They were
afraid to say "net" income for fear that taxpayers would take out too
many personal expenses. 6 In the laws of i861 and i862 the only
specified deductions were ''national, state, and local taxes." The
law of i 864 allowed deductions for business expenses, interest, taxes,
rent - even rent paid for homes - but did not mention depletion
of natural resources, although this matter was debated. The law of
1866 and succeeding measures permitted the allowance of "losses
actually sustained during the year arising from fires, shipwreck, or
incurred in trade, and debts ascertained to be worthless but excluding all estimated depreciation of values." Much of the phraseology
of the Civil War laws was carried over into the laws written after
the adoption of the Sixteenth Amendment.
Members of Congress in the Civil War period were as puzzled as
those in recent times over the taxation of profits from sales of capital
assets. The law of 1864 taxed net profits realized from sales of real
estate purchased within the year for which income was estimated.
In i 867 an amendment was made to tax net profits from sales of real
estate purchased within two years previous to the year for which
income was estimated. Efforts to extend this provision to personal
property were unsuccessful.
Mention has been made of the establishment of the office of Com5 For rates and personal exemptions of other laws, see Chap. XXII below.
s Congressional Globe, 37th Congress, 1st Session, p. 315.