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sitand in changing such examederal Cor

methods. How a part of this change has come as a natural result of the growth of nationalism and the expansion of powers under the commerce clause is described. But special objections are directed against the expansion of federal powers under the eighteenth and nineteenth amendments.

Acts of Congress, as well as the decisions of federal courts, and the amending process itself in so far as these have been used in expanding federal powers and in changing the dual form of government are brought under condemnation. Such examples as the passage by Congress of the Child Labor Acts and the Federal Corporation tax are regarded as extreme instances of federal expansion contrary to the general principle of the dual form. Though the writer gives some interesting observations on the evident tendency in the United States for the national government to enlarge its functions with consequent restrictions upon the activities of the states, it is doubtful whether his analysis reaches the real crux of the problem of the growth of federal powers.

Very little attention is given to the historical steps in this growth in which Congress, the president and the courts have all participated. The tendency of the states to call upon Congress for financial aid and other assistance to do what obviously could be done by the states themselves, and the most sinister of all the methods affecting federal relations, the system of federal aid on a fiftyfifty basis are not given due consideration.

It appears that the author was primarily interested in certain special encroachments upon state powers. His pique seems directed especially against the efforts to control strong drink and to tax business interests. Perhaps the omissions noted and other obvious defects of the volume are due to the fact that it is in part comprised of a series of articles and essays previously prepared and published.

Since the outbreak of the war in 1914 there have been issued many treatises and monographs dealing with the weaknesses and defects in international law and suggesting a variety of plans for reform and reconstruction. "Democracy's International Law” is an interesting contribution to this series of works. The author, who has had experience in the practice of international law and has served as special arbiter in a number of important cases, aims to point out the chief defects in the present system of regulating international relations and to suggest various ways of placing international law upon a more reasonable and ideal plane. A large portion of all laws, it is observed, are mere rules of convenience. In this field great progress has been made in the development of rules and practices in the conduct of nations. As to the remaining part of law which is of a criminal character, and in which there is punishment for wrongful invasion of rights, Mr. Ralston finds international law in merely a beginning stage. The laws of war, he contends, are a misnomer, for war itself is beyond the pale of legality. The great difficulty, he thinks, is that war is usually treated as legitimate, while murder, arson and robbery are regarded as antisocial and punished as such. This treatment of war is based upon

what is regarded as a false and anarchistic theory of sovereignty, a theory which makes of the state a non-moral institution, for the ordinary principles of morality, honesty and fair dealing are, under this view, not considered as applicable to sovereigns. The so-called laws of war formulated under this theory are styled a “crystallization of wrongdoing.” It is thought to be as ridiculous to prepare a code of war as its seems to us now to prepare a code for duelling. International arbitration and the Court of International Justice are held to be restricted in their operations because of false theories of honor and vital interests among nations which are regarded as beyond adjudication or arbitration. It is contended that the same rules and laws as to right and morals which apply to the individual ought to apply to the state, that the theories of sovereignty which deny this principle must be discarded before there can be a development of a real international law.

Mr. Ralston appears to be not altogether respectful of professors of international law and of the teaching in the schools which is given under this designation. He believes that the failure to develop a real international law is to be attributed in large part to the efforts of the professors merely to describe existing conditions without any attempt to analyze underlying causes and principles. These observations, though not without foundation, evince an unfamiliarity with much of the present content and method in the teaching of this subject.

The writer seems to confine his attention almost entirely to the criminal phases of international relations and to ignore to a large extent rights and principles developed by judicial decisions and other agencies in the law and practices of peace time. With an idealized administration of municipal law in mind, evidently formulated from other sources and evidence than the existing methods of the administration of the criminal law, he proceeds to condemn the beginnings of international law in its criminal phases. Some of these criticisms, though exaggerated, point to defects in the conduct of international affairs which deserve greater consideration and a more systematic analysis on the basis of general principles of right and justice. University of Texas.

CHARLES GROVE HAINES.

ARTICLES IN PERIODICALS INDEPENDENCE OF PHILIPPINE JUDICIARY. H. Lawrence Noble. Am. Bar

Assoc. Journal VIII 267. LANGUAGE OF THE Law II. Urban H. Lavery. Am. Bar Assoc. Journal VIII

269. REMEDY FOR CRIME SITUATION Sought. Am. Bar Assoc. Journal VIII

278. FEDERAL TRADE COMMISSION. W. T. Holliday. Am. Bar Assoc. Journal

VIII 293. A PIONEER STUDY IN PROSECUTION. Am. Bar Assoc. Journal VIII 307. LIQUIDATION OF FEDERAL RAILROAD CONTROL. James C. Davis. Am. Bar

Assoc. Journal VIII 327. CONTEST OVER LATITUDE OF PATENT Rights. George Allan Smith. Am.

Bar Assoc. Journal VIII 355.

THE DOCTRINE OF THE Family AUTOMOBILE. Edward W. Hope. Am. Bar

Assoc. Journal VIII 359. CONTRIBUTIONS OF URBAN LIFE TO MODERN CIVILIZATION. Eugene McQuillin.

Am. Bar Assoc. Journal VIII 367. PROGRAM OF SOCIOLOGICAL JURISPRUDENCE. E. F. Albertsworth. Am. Bar

Assoc. Journal VIII 393. DECISION AND DICTUM. James Craig Peacock. Am. Bar Assoc. Journal

VIII 397. CO-OPERATIVE MARKETING Act. J. P. Chamberlain. Am. Bar Assoc. Journal

VIII 416. A LEGAL PRACTITIONER’s Mental EQUIPMENT. Theodore Francis Green.

Am. Bar Assoc. Journal VIII 420. Some EPIGRAMS OF John Owen. William Renwick Riddell. Am. Bar Assoc.

Journal VIII 431. The LAWYER AND THE JUDGE. Julius M. Mayer. Am. Bar Assoc. Journal

VIII 441. LEGAL ASPECTS OF FOREIGN TRADE. A. J. Wolfe. Am. Bar. Assoc. Journal

VIII 444. PROPOSAL TO MAKE CONGRESS SUPREME. Cordenio A. Severance. Am. Bar

Assoc. Journal VIII 459. LEGAL ASPECTS OF ALIEN LAND LEGISLATION ON THE PACIFIC Coast.

Maurice E. Harrison. Am. Bar Assoc. Journal VIII 467. ATTITUDE OF LAW. TOWARD BEAUTY, Henry P. Chandler. Am. Bar Assoc.

Journal VIII 470. FUNDAMENTALS OF GOVERNMENT. Frank 0. Lowden. Am. Bar Assoc.

Journal VIII 475. USING EVIDENCE OBTAINED BY ILLEGAL SEARCH AND SEIZURE John H. Wig

more. Am. Bar Assoc. Journal VIII 479. THE ENGLISH LAW OF PROPERTY Act, 1922. Orrin K. McMurray. Am. Bar

Assoc. Journal VIII 485. LANGUAGE OF THE LAW III. Urban Lavery. Am. Bar Assoc. Journal VIII

498. An INTERNATIONAL TRADE COMMISSION. Huston Thompson. Am. Bar Assoc.

Journal VIII 509. CAN CONGRESS Tax "Gross Income" UNDER SIXTEENTH AMENDMENT?

Henry C. Clark. Am. Bar Assoc. Journal VIII 513. Law Teaching: A SUGGESTION. Albert Levitt. Am. Bar Assoc Journal

VIII 516. FOREIGN COMMERCE AND THE LAW. A. J. Wolfe. Am. Bar Assoc. Journal

VIII 519. THE CONSTITUTION AND INDIVIDUALISM. Cordenio A. Severance. Am. Bar

Assoc. Journal VIII 535. THE WIDENING RANGE OF LAW. Lord Shaw of Dunfermline. Am. Bar

Assoc. Journal VIII 543. DEVELOPMENT OF LAW OF WATERS IN THE West. Lucien Shaw. Am. Bar

Assoc. Journal VIII 562. PROGRESS OF TUDICIAL POWER IN FRANCE. Henri Aubepin. Am. Bar Assoc.

Journal VIII 575. NON-PAR VALUE STOCK. Raymond F. Rice and Albert J. Harno. Am. L.

Rev. LVI 321. ORIGIN AND REASONS FOR THE CONSIDERATION RULE IN the Law of Con

TRACTS. George P. Alt. Am. L. Rev. LVI 345. VICE-PRESIDENCY OF THE UNITED STATES. Oliver P. Field. Am. L. Rev.

LVI 365. GOLDEN RULE AS A MAXIM OF THE MODERN Law of Water Rights. Rome G.

Brown. Am. L. Rev. LVI 401. ACCOUNTING OFFICERS OF THE UNITED STATES. O. R. McGuire. Am. L. Rev.

LVI 422. LAWYERS AND LEGISLATORS. Percy Werner. Am, L. Rev. LVI 481. UNIFORM STATE LAWS AND THE RULE OF STARE DECISIS. James M. Kerr.

Am. L. Rev. LVI 497. SOME POINTS ON THE LAW OF THE PRESS. Rome G. Brown. Am. L. Rev.

LVI 514.

ILLINOIS LAW REVIEW

Volume XVII

MARCH, 1923

Number 7

THE CAPITAL TRANSACTION UNDER THE

REVENUE ACT OF 1921

By FREDERICK A. Thulin The economist classifies increases into the following classes and subdivisions :

Class A: Increases inherently regular in nature: 1. By way of personal service, to-wit: salaries, commissions, fees, etc.; 2. By way of income from property-real, personal or mixed, to-wit, interest, dividends, royalties, rentals, etc.; 3. By way of merchandising or trading operations; 4. Miscellaneous.

Class B: Increases inherently irregular in nature: 1. By way of capital transactions.

A taxing statutel fixing rates of taxation, to be logical,? should

1. The late A. M. Kales, Esq., contended in the case of Merchants Loan & Trust Co. v. Smietanka 225 U. S. 509 that constitutionally a conversion of capital to another form of capital, although such converted form be in cash is a capital transaction and not taxable under any income tax act, but properly the matter for an excise tax. While Mr. Kales's contention was not sustained by the court, the principle was recognized legislatively along restricted lines in Section 202 of the Revenue Act of 1921.

The essence of a capital transaction, to-wit: conversion of principal in one form to principal in another form is illustrated thus :

STOCK (1) converted to CASH (2) converted to BONDS (3)
Present value . . . . $500,000

$500,000

Value ... $500,000 Income

Income .. 30,000 Basis ............ 100,000

The holder of the securities before and after the exchange receives $30,000 income on which he pays an income tax; to pay a tax on $400,000 for the conversion noted, absorbing a good share of the principal, seems mildly inequitable.

As hereinafter noted, the present act under certain circumstances recognizes the conversion principle if the cash element be absent; the act is narrow in that it attaches a mysterious value to cash or liquid credit as a check, because it is cash or a liquid credit, overlooking the principal nature of cash.

If cash is to be recognized as important, the equitable rule on capital transactions should be as follows: if the cash is traced to another capital asset within a reasonable time, no gain or loss is recognized, thus obviating the nice distinctions which only confuse the taxpayer.

2. The English and Canadian income tax acts recognize the capital increase and decrease and do not tax such increases or allow a deduction of decreases.

take cognizance of the economic differences as before classified.

The 1913 and 1916 Income Tax Acts did not attempt to follow any economic classification; the 1917 Act did classify, somewhat unfortunately, the subdivisions under class “A,” but followed the prior acts in reference to not segregating transactions in class “B”; the 1918 Act followed the 1913 and 1916 Acts.

The Revenue Act of 1921 follows the Revenue Act of 1918, in reference to class “A” increases, but does recognize that under certain conditions class “B” increases should be optionally segregated by the taxpayer and taxed at a different rate than at the rate pertaining to class “A” increases.

Under Section 206 of the Act, the conditions precedent imposed on the taxpayer to secure optional classification are the following:

First: The capital asset sold must have been acquired and held by the taxpayer for more than two years;

3. Section 210, paragraph b, Revenue Act of 1921, deals with a different surtax rate on certain types of capital transactions, although such transactions may not otherwise qualify as capital transactions

"In the case of a bona fide sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, the portion of the tax imposed by this section attributable to such sale shall not exceed, for the calendar year 1921, 20 per cent, and for each calendar year thereafter 16 per cent of the selling price of such property or interest."

For a further discussion and citation of regulations and other administrative decisions see Consolidated U. S. Income Tax Laws (p. 300) and annotations, published by Commerce Clearing House. This is the most pretentious collection of data presently published on the subject of federal income taxes.

For a discussion of the profit or loss on patents and other amortizable intangibles, see articles 14 and 167 of Regulations 45 and 62.

4. As before noted, the computation under the capital profit section is optional and is computed thus :

(1) Compute on the ordinary income and add 1242 per cent of the capital profit. To illustrate :

A's salary is.........
A's capital profit is.........

8.000
Normal and surtax on $20,000 equals

......... 1,720 1272 per cent of $8,000 equals....

.....$20,000

Total

...........$ 2,720 (2) Compute on total, ignoring the capital profit rate: Normal and surtax on $28,000 = $3,120.

(3) Compute 1272 per cent on total net income: 1272 per cent of $28,000= $3,500.

Inasmuch as the section provides that if Section 206 is used, in no case shall the tax be less than 1212 per cent of the total net income, to-wit: $3,500. In the foregoing illustration, the capital profit section is ignored and $3,120 is the tax.

There is a movement in Congress to amend Section 206 to limit as a deduction of capital loss 121/2 per cent of such loss: H. R. 13413, 67 Cong., 4th Session.

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