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(46 S. Ct.)

it, we find no reason to object, and to that | 2. Carriers extent it is affirmed.

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*The remaining portions of the decree must be eliminated. We think they were improvident and go materially beyond what the circumstances require. But whether or not they announce correct conclusions of law we do not decide. The matters to which they relate are left open and subject to further and future original consideration by any proper tribunal. While within his powers as the law then stood, the District Judge went very far when he entirely disregarded the views of the Circuit Judges who sat on the specially constituted court. The statute was materially changed by the Act of February 13, 1925, c. 229, 43 Stat. 936, 938 (Comp. St. Supp. 1925, § 1215), and now causes like this must be finally adjudicated by a court composed of three judges. To such a court we think the questions to which those portions of the decree relate ought to go before we undertake finally to pass upon them.

The approved portion of the decree will protect the company against immediate danger of serious injury, and if hereafter its rights are threatened by further unlawful interference, application for relief may be made to the proper specially constituted District Court.

With the indicated modifications the decree below is affirmed. All costs will be charged against the appellants.

Mr. Justice SANFORD concurs in the result.

(271 U. S. 124)

18(2)-Carrier's failure to ap

peal from decision of state Public Service Commission, holding lower rates reasonable, held not waiver of right to resist enforcement of subsequent reparation order (Transportation Act Feb. 28, 1920, § 208[a], being Comp. St. Ann. Supp. 1923, § 10071d).

Carrier's failure to appeal from decision of state Public Service Commission, holding lower rate than that charged on intrastate coal mination of federal control reasonable, and statshipments during six months following tering that on presentation of supporting data reparation would be awarded, held not a waiver of its right to resist enforcement of reparation order, as in violation of Transportation Act Feb. 28, 1920, § 208(a), being Comp. St. Ann. Supp. 1923, § 10071d.

In Error to the Supreme Court of the State of Pennsylvania.

Suit by the New York & Pennsylvania Company against the New York Central Railroad Company and another. Judgment for plaintiff was affirmed by the Supreme Court of Pennsylvania (126 A. 382, 281 Pa. 257), and defendants bring error and apply for certiorari. Writ of certiorari granted, writ of error dismissed, and judgment reversed.

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*Messrs. Parker McCollester, of New York City, Henry Wolf Bikle, of Philadelphia, Pa., and F. D. McKenney, of Washington, D. C., for plaintiffs in error.

Mr. Thomas Raeburn White, of Philadelphia, Pa., for defendant in error.

Mr. Justice HOLMES delivered the opinion of the Court.

[1] This is a suit brought in a court of Pennsylvania to recover the amount of alleged excess charges paid by the defendant in error for the carriage of coal in commerce within the State, and ordered by the Public Service Commission of Pennsylvania to be repaid by way of reparation. A judgment on (Argued April 13, 14, 1926. Decided April 26, the order in favor of the defendant in error

NEW YORK CENT. R. CO. et al. v. NEW
YORK & PENNSYLVANIA CO.

1926.) No. 230.

was affirmed by the Supreme Court of Pennsylvania. New York & Pennsylvania Co. v. New York Cent. R. Co., 126 A. 382, 281 Pa. I. Commerce 13-State Public Service Com- 257. The charges in question were for shipmission, without approval of Interstate Comments between March 1, 1920, and September merce Commission, could not by reparation 1, 1920, the six months following the terminaorder require repayment of part of freight charges on intrastate shipments during six months following federal control (Transportation Act Feb. 28, 1920, § 208 [a] being Comp. St. Ann. Supp. 1923, § 100714d).

tion of federal control of the railroads. The rates charged were those that were in effect on February 29, 1920. By section 208(a) of the Transportation Act 1920 (Act Feb. 28, 1920, c. 91; 41 Stat. 456, 464 [Comp. St. Ann. Transportation Act Feb. 28, 1920, § 208(a), Supp. 1923, § 100714d]), prior to September being Comp. St. Ann. Supp. 1923, § 100714d, 1, 1920, no such rate could be reduced unless prohibiting reduction of rates during six months the reduction was approved by the Interstate following termination of federal control, applied to intrastate as well as interstate ship- Commerce Commission, the six months *conments, and, without approval of Interstate cerned being the period during which the Commerce Commission, state Public Service United States guaranteed certain income to Commission could not by a reparation order require railroad to repay part of freight collected the railroads by section 209 (Comp. St. Ann. The Interstate on intrastate shipments during such period, on Supp. 1923, § 100714dd). ground that rates were excessive, thereby ef- Commerce Commission has not approved any fecting reduction of rates. reduction and therefore it is plain that the

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Writ of certiorari granted.
Writ of error dismissed.
Judgment reversed.

State Commission had no authority to inter-1 207, 214 (53 L. Ed. 765); Smith v. McCul meddle with the rates that it undertook to lough, 46 S. Ct. 338, 270 U. S. 456, 70 L. Ed. cut down. It is true that regulating rates 682, March 22, 1926. and awarding reparation are different matters. But the prohibition in the statute covers either method of reducing the pay received by the roads. The language of the statute and the reasons for the enactment too clearly apply to intrastate as well as to interstate rates, to admit debate. Missouri Pacific R. R. Co. v. Boone, 46 S. Ct. 341, 270 U. S. 466, 70 L. Ed. 688, March 22, 1926. Whether the rates were right, or were wrong as the State Court thinks, they could be UNION INSULATING & CONSTRUCTION changed only in one way. CO. v. UNITED STATES.

Mr. Justice SUTHERLAND took no part in the consideration or decision of this case.

(271 U. S. 121)

It may be that some of the questions before us would be proper matters for a writ (Submitted April 21, 1926. Decided April 26,

of error, but as the rights asserted under the statute of the United States are more fully open upon a writ of certiorari we shall consider the case upon the last mentioned writ.

[2] The State Courts were of opinion that the plaintiffs in error had waived their rights by their failure to appeal from a decision on an earlier complaint to the State Commission in which that Commission held that a lower rate was reasonable and stated that upon presentation of a petition accompanied by the supporting data reparation would be awarded for freight charges paid in excess of the rates thus fixed. Whether the federal rights asserted were lost in this way is open to examination here. Creswill V. Grand Lodge Knights of Pythias, 32 S. Ct. 822, 225 U. S. 246, 56 L. Ed. 1074; Ward v. Love County, 40 S. Ct. 419, 253 U. S. 17, 22, 64 L. Ed. 751; Davis v. Wechsler, 44 S. Ct. 13, 263 U. S. 22, 24, 68 L. Ed. 143.

1926.) No. 263.

1. United States 73-Government, agreeing to furnish contractor right of way, held not liable for expenditures by contractor in repairing right of way, or for labor in connection with derailments.

Government, agreeing to furnish construction contractor "necessary right of way for ingress and egress" to place of storage of materials, and to furnish equipment, including 10comotives, flat cars, etc., to be accepted by contractor as found, held not liable to contractor for expenditures in repairing railroad tracks running from site of work to storage yards, and for expenditures for labor in connection with

derailments.

2. United States

73-Government held not liable for damages for delay in arranging for contractor to start work.

Government held not liable for damages for

three days' delay in arranging for contractor to start work, where it was not shown that deun-lay was due solely to government, and where no protest was made at the time, nor any claim filed for nine months.

In our opinion the failure to appeal from the former order is no bar. We do not dertake to review the decision of the Supreme Court as to state procedure, but if the railroads were too late to argue their case

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before that *Court they are not too late to argue it here. There was no order in the former hearing before the State Commission that the railroads could have brought before us. This is the first moment when they have had a chance to raise what we regard as a perfectly clear point, as it is the first moment when their rights have been infringed. There now is an order which is in the teeth of the statute. It would not be reasonable to hold that they are precluded from getting the protection that this Court owes them, by their having failed to go as far as they now learn that they might have gone in a previous state proceeding which did not infringe their rights and which could not be brought here. "The judgment under review was the only final judgment

*

from which plaintiff in error could prosecute a writ of error, and until such final judg ment the case could not have been brought here for review." Chesapeake & Ohio Ry. Co. v. McCabe, 29 S. Ct. 430, 433, 213 U. S.

Appeal from the Court of Claims.

Suit by the Union Insulating & Construction Company against the United States. From a judgment for the United States in the Court of Claims (59 Ct. Cl. 582), claimant appeals. Affirmed.

Messrs. Edmund D. Adcock and George I. Haight, both of Chicago, Ill., for appellant.

Messrs. Solicitor General Mitchell, of Washington, D. C., and Assistant Attorney General Galloway, for the United States.

Mr. Chief Justice TAFT delivered the opinion of the Court.

The appellant sued the United States in the Court of Claims for $30,697.73, for breach of a contract made by it with the United States for certain construction work at the government nitrate plant No. 2 at Muscle

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Shoals, Ala. The work was done and the contract price paid. The amount here sued for was made up of nine claims for damages

For other cases see same topic and KEY-NUMBER in all Key-Numbered Digests and Indexes

(46 S. Ct.)

for breaches and extras. The Court of the contractor, and such ingress and egress Claims found against the claimant on every cause of action alleged. Appeal to this court relates to only two of them.

[1] The first is for $3,059.65, and is based on the alleged failure of the United States to furnish a right of way as stipulated in the contract for use in hauling materials to the place of construction.

After providing that the contractor should furnish certain materials for construction, the contract read:

were afforded it. The defective track on the right of way was evident to the contractor when it made the contract, and the reasonable construction of the contract is that the contractor, in order to avail itself of the right of way, with constant ingress and egress, took over the track as it was as part of the equipment for transportation, just as he did the locomotive and cars, and as it found it, with sole responsibility for placing it in working condition and maintaining it for its use. It

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"The United States of America to furnish at is clear that the Court of Claims was right its present location on the reservation at Unit-in rejecting this claim. ed States nitrate plant No. 2 all other construction materials, the contractor to perform all necessary labor required in transporting such materials to the proper place of for use in construction, the United States of America at all times to furnish the necessary right of way for ingress and egress to the place of present storage of such materials and the place of ultimate use in construction.

[2] The other claim was for damages for delay by the government in arranging for the contractor's start upon the *work. The contract provided that the work should be commenced on June 10, 1920, and by that time the contractor had its executive office force at the plant. The contractor was able to begin work on June 13. The delay resulted "The United States government further agrees to furnish to the contractor for the from the inability to get material issued to purpose of transporting materials and perform- the contractor. The actual amount expended ing the necessary construction work, such tools for salary and services to the persons kept and equipment including locomotives, flat cars, waiting was $360. No complaint and no prodump cars, hoisting engines, locomotive cranes, test were made by the contractor at the time, steam shovels, concrete mixers, air compres- and no claim was filed by the contractor unsors, automobile trucks, clam shell buckets, til March 14, 1921. The holding of the Court etc., as are now the property of the United of Claims was that, because it did not satisStates government and available at United States nitrate plant No. 2, and in such quanti-factorily appear that the delay was due wholties as in the discretion of the constructing ly to the government, and in view of the abquartermaster may be reasonably necessary for sence of a claim or protest for nine months such use in construction, and further may be thereafter, the claim should be rejected. We reasonably furnished by the United States gov- concur in this. ernment, without material detriment or incon- Judgment affirmed. venience to the United States government. The contractor to accept such equipment as is, and

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to assume all responsibility *for placing such equipment in first-class working condition, and the proper care and maintenance of such equipment, from the time it is turned over to him by the constructing quartermaster."

Finding No. 2 by the court is:

(271 U. S. 170)

BOWERS, Collector of Internal Revenue, v.
KERBAUGH-EMPIRE CO.

(Argued Jan. 25, 1926. Decided May 3, 1926.)

No. 173.

1. Internal revenue 2-Income tax amendment did not bring any new subject within taxing power, but removed necessity of apportionment among states of taxes on income (Const. Amend. 16; art. 1, § 2, cl. 3; art. 1, § 9, cl. 4).

"The right of way furnished by the United States consisted of railroad tracks running from the site of the work to the storage yards. These tracks were used by others, and were not in good condition when the plaintiff submitted its bid, nor were they in any worse condition when it began its work under the contract. The United States did not keep the tracks in good condition during the performance of the contract, but turned them over to the Const. Amend. 16, giving Congress power plaintiff for its use with the necessary rolling to levy and collect taxes on income, did not stock. The plaintiff expended the sum of bring any new subject within taxing power, but $705.50 for labor in repairing the tracks and removed necessity for apportionment among $700.66 for making repairs to equipment dam-states of taxes on income under article 1, § 2, aged by reason of the defective tracks; it also cl. 3. and section 9, cl. 4, and obliterated disexpended the further sum of $1,653.49 for la- tinction between taxes on income that are dibor in connection with derailments." rect taxes and those that are not.

2. Internal revenue 7.

gained through conversion or sale of capital.

What the government agreed to furnish "Income" is gain derived from capital, from was a right of way, not a railroad for trans-labor, or from both combined, including profit portation. It agreed that ingress and egress by this right of way should, at all times during the performance of the contract, be given 46 S.CT.-29

[Ed. Note.-For other definitions, see Words and Phrases, First and Second Series, Income.]

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3. Internal revenue 7-Transaction where- the amount of money of the United States by borrower of German marks repaid them applied for. Then he drew his check payable at time when they had fallen in value held not in dollars against the credit and gave it to to result in gain from capital or labor, so as defendant in error, and in exchange received to authorize income tax, where result of whole transaction for which money was bor- the promissory note of the latter payable in rowed was a loss (Const. Amend. 16; Reve-marks or their equivalent in gold coin of nue Act 1921 [Comp. St. Ann. Supp. 1923, § the United States. Prior to July 2, 1913, 24 63368a et seq.]). loans were made in this manner, amounting in all to $1.983,000. The equivalent in marks was 8,341,337.50. September 1, 1913, there remained unpaid 6,740,800 marks. The notes of defendant in error then, outstanding were amount was given. And when that note became due it was renewed. Partial payments were made and, by March 31, 1915, the principal was reduced to 3,216,445 marks.

Transaction whereby borrower of German marks repaid them at later time, when marks had fallen in value, did not result in gain from capital or labor, or from either of them, and was not income, within Const. Amend. 16, and Revenue Act 1921 (Comp. St. Ann. Supp. 1923, § 6336a et seq.), where result of whole transaction for which money was borrowed was a loss, since mere diminution of loss is not gain, profit, or income.

In Error to the District Court of the United States for the Southern District of New York.

surrendered and its new note for that

The several amounts from time to time borrowed by defendant in error were contemporaneously advanced to its subsidiary and were expended and lost in and about the performance of the construction contracts. These losses were sustained in 1913, 1914, 1916, 1917, and 1918, and were allowed as deductions in the subsidiary's income tax returns for those years. The excess of its losses over income was more than the

Action by the Kerbaugh-Empire Company against Frank K. Bowers, as Collector of Internal Revenue, Second District of New York. Defendant's motion to dismiss was denied, and decree entered for plaintiff (300 F. 938), and defendant brings error, under amount here claimed by plaintiff in error to Judicial Code, § 238 (Comp. St. § 1215), before | be income of defendant in error in 1921. the amendment of February 13, 1925 (43 Stat. 936, 938, c. 229). Affirmed.

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*through its New York representative, for loans to finance the work being done by its subsidiary. The bank agreed that it would make the loans by cabling to the credit of its New York representative German marks equivalent in dollars to the requirements of defendant in error, upon condition that the loans would be evidenced by notes payable as to principal and interest in marks or their equivalent in United States gold coin at prime bankers' rate in New York for cable transfers to Berlin. June 8, 1911, defendant in error advised the New York representative of the amount in dollars then needed; he notified his principal and it put to his credit in a New York bank marks equivalent to

*173

*After the United States entered the War the Deutsche Bank was an alien enemy. In 1921, on the demand of the Alien Property Custodian, defendant in error paid him $113,688.23 in full settlement of principal and interest owing on the note belonging to the bank. Of that amount $80,411.12 represented principal. The settlement was on the basis of 22 cents per mark. Measured by United States gold coin the difference between the value of the marks borrowed at the time the loans were made and the amount paid to the Custodian was $684,456.18. The Commissioner of Internal Revenue, notwithstanding the claim of defendant in error that the amount borrowed had been lost in construction operations carried on by it and its subsidiary, and that no income resulted from the transaction, held the amount to be income and chargeable to defendant in error for 1921. Excluding that item, the tax return for 1921 shows a deficit of $581,254.77.

The defendant in error by its complaint set forth the facts above stated and asserted

as it still insists-that the diminution in value of the marks was not income within the meaning of the Sixteenth Amendment, that the item in controversy is not within the Revenue Act, and that, if construed to include it, the act would be unconstitutional. Plaintiff in error moved to dismiss on the ground that the complaint failed to state facts sufficient to constitute a cause of action. The court denied the motion and gave judgment for defendant in error. KerbaughEmpire Co. v. Bowers (D. C.) 300 F. 938. This writ of error was taken under section 238, Judicial Code (Comp. St. § 1215), before

the amendment of February 13, 1925. Stat. 936, 938, c. 229.

(46 S. Ct.)
43] States v. Phellis, 257 U. S. 156, 169, 42 S. Ct.
63, 66 L. Ed. 180; Miles v. Safe Deposit Co.,

The question for decision is whether the 259 U. S. 247, 252, 253, 42 S. Ct. 483, 66 L. Ed. difference between the value of marks mea-923; United States v. Supplee-Biddle Co., sured by dollars at the time of payment to the Custodian and the value when the loans were made was income.

[1, 2] The Sixteenth Amendment declares that Congress shall have power to levy and

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265 U. S. 189, 194, 44 S. Ct. 546, 68 L. Ed. 970; Irwin v. Gavit, 268 U. S. 161, 167, 45 S. Ct. 475, 69 L. Ed. 897; Edwards v. Cuba Railroad, 268 U. S. 628, 633, 45 S. Ct. 614, 69 L. Ed. 1124. In determining what constitutes income substance rather than form is to be given controlling weight. Eisner v. Macomber, supra, 206 (40 S. Ct. 189).

*175

[3] *The transaction here in question did not result in gain from capital and labor, or from either of them, or in profit gained through the sale or conversion of capital. The essential facts set forth in the complaint are the loans in 1911, 1912, and 1913, the loss in 1913 to 1918 of the moneys borrowed, the excess of such losses over income by more than the item here in controversy, and payment in the equivalent of marks greatly depreciated in value. The result of the whole transaction was a loss.

Plaintiff in error insists that in substance and effect the transaction was a "short sale" of marks resulting in gain to defendant in

collect taxes on income, "from *whatever source derived" without apportionment among the several states, and without regard to any census or enumeration. It was not the purpose or effect of that amendment to bring any new subject within the taxing power. Congress already had power to tax all incomes. But taxes on incomes from some sources had been held to be "direct taxes" within the meaning of the constitutional requirement as to apportionment. Art. 1, § 2, cl. 3, § 9, cl. 4; Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601, 15 S. Ct. 912, 39 L. Ed. 1108. The Amendment relieved from that requirement and obliterated the distinction in that respect between taxes on income that are direct taxes and those that are not, and so put on the same basis all incomes "from whatever source derived." | error. But there is no similarity between Brushaber v. Union Pac. R. R., 240 U. S. 1, 17, 36 S. Ct. 236, 241 (60 L. Ed. 493, L. R. A. 1917D, 414, Ann. Cas. 1917B, 713). "Income" has been taken to mean the same thing as used in the Corporation Excise Tax Act of 1909 (36 Stat. 112), in the Sixteenth Amendment, and in the various revenue acts subsequently passed. Southern Pacific Co. v. Lowe, 247 U. S. 330, 335, 38 S. Ct. 540, 62 L. Ed. 1142; Merchants' L. & T. Co. v. Smietanka, 255 U. S. 509, 519, 41 S. Ct. 386, 65 L. Ed. 751, 15 A. L. R. 1305. After full consideration, this court declared that income may be defined as gain derived from capital, from labor, or from both combined, including profit gained through sale or conversion of capital. Stratton's Independence v. Howbert, 231 U. S. 399, 415, 34 S. Ct. 136, 58 L. Ed. 285; Doyle v. Mitchell Brothers Co., 247 U. S. 179, 185, 38 S. Ct. 467, 62 L. Ed. 1054; Eisner v. Macomber, 252 U. S. 189, 207, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570. And that definition has been adhered to and applied repeatedly. See, e. g., Merchants' L. & T. Co. v. Smietanka, supra, 518 (41 S. Ct. 386); Goodrich v. Edwards, 255 U. S. 527, 535, 41 S. Ct. 390, 65 L. Ed. 758; United

what was done and such a venture. A short seller borrows what he sells, and the purchase price goes to the lender and is retained as security for repayment. The seller receives nothing until he repays the loan. Such a transaction would not meet the requirements of defendant in error. It needed the money for use and received the amount borrowed and expended it.

The contention that the item in question is cash gain disregards the fact that the borrowed money was lost, and that the excess of such loss over income was more than the amount borrowed. When the loans were made and notes given, the assets and liabilities of defendant in error were increased alike. The loss of the money borrowed wiped out the increase of assets, but the liability remained. The assets were further diminished by payment of the debt. The loss was less than it would have been if marks had not declined in value; but the mere diminution of loss is not gain, profit, or income. Judgment affirmed.

Mr. Justice BRANDEIS concurs in the result.

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