What "Income" Means — and Why a Century of Case Law Hasn't Settled It

A word the Constitution doesn’t define

The Sixteenth Amendment, ratified in 1913, authorized Congress to “lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” It does not define “incomes.” Neither does the Internal Revenue Code, which uses the word hundreds of times and circumscribes it through §61’s enumeration of items “include[d]” in gross income — a list that begins with “all income from whatever source derived.” The definition is recursive.

This was not an oversight. The drafters of the amendment, the drafters of the 1913 Revenue Act that followed, and the courts that interpreted both proceeded on the assumption that “income” had a settled common-sense meaning that would resolve the edge cases as they arose. A century of case law has demonstrated that the assumption was wrong.

Eisner v. Macomber and the first attempt

The Supreme Court’s first sustained attempt at a definition came in Eisner v. Macomber, 252 U.S. 189 (1920), which held that a stock dividend was not “income” within the meaning of the Sixteenth Amendment. The Court offered a definition: income is “the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets.”

This formulation did three useful things and one unhelpful thing. It distinguished income from the underlying capital that produced it; it required a “realization” event before gain became income; and it captured both wages and investment returns within a single concept. The unhelpful thing it did was leave open the question of what “gain” means — which is precisely the ambiguity that the alternate-tax-theory community has been pressing for the past century.

Glenshaw Glass and the expansion

Thirty-five years later, Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955), widened the definition substantially. The Court held that punitive damages received in an antitrust suit were income, and offered a new formulation: income is “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.”

This is broader than Eisner. The Eisner formulation requires the “gain” to be “derived from capital, from labor, or from both combined” — a sourcing test. Glenshaw Glass drops the sourcing test and asks only whether wealth has accrued. A windfall, a found object, a punitive damages award — all qualify under Glenshaw Glass in ways that are difficult to fit within Eisner’s framework.

Whether this expansion is consistent with the original constitutional meaning of “income” is a question the Court has never directly addressed. The lower courts treat Glenshaw Glass as definitive. Academic commentary has noted the tension without resolving it. Boris Bittker — the dean of mid-century tax scholarship — acknowledged the problem and did not propose a solution.

Why the gap matters

If “income” means whatever Glenshaw Glass says it means, the Sixteenth Amendment authorizes a tax on essentially any economic event the legislature chooses to characterize as an accession to wealth. If “income” retains its Eisner meaning — gain derived from a source — then a number of modern tax provisions sit on shakier constitutional ground than the courts acknowledge.

The alternate-tax-theory community correctly identifies this gap. They typically overstate its consequences (no, this does not mean wages are untaxable), and they typically conflate it with separate issues (no, this is not about Federal Reserve Notes). But the underlying observation — that “income” has not received the careful definitional work the term needs to do — is correct.

Verdict

Unresolved. The doctrine is genuinely contested at the academic level even though the courts treat it as settled. Eisner and Glenshaw Glass are not consistent. The Court has chosen not to address the inconsistency. This is the kind of gap where honest analysis can disagree without either side being unreasonable, and it is the most fruitful territory for serious work in this area.

• income
• sixteenth-amendment
• glenshaw-glass
• eisner-v-macomber