dissenting: The principal question involved in these proceedings is whether capital gains resulting from the sale or redemption of bonds issued under the Federal Farm Loan Act of 1916 constitute income derived from the bonds within the meaning of the provisions of the act which expressly exempt such bonds “and the income derived therefrom” from Federal, state, municipal, and local taxation.
That capital gains constitute income derived from the investment was expressly pointed out by the Supreme Court in Eisner v. *1115Macomber, 252 U. S. 189, and Merchants Loan & Trust Co. v. Smietanka, 255 U. S. 509. In tbe former case the Court, after setting out its now classical definition of income, said by way of explanation and with particular reference to capital gains:
* * * Here we Rave the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being “derived,” that is, received or drawn by the recipient [the taxpayer] for his separate use, benefit, and disposal; that is income derived from property. Nothing else answers the description.
In the latter case the Court, in answering the contention that capital gam did not constitute income, used the following pertinent language:
* * * since the fund here taxed was the amount realized from the sale of the stock in 1917, less the capital investment as determined by the trustee as of March 1, 1913, it is palpable that it was a “gain or profit” “produced by,” or “derived from,” that investment, and that it “proceeded,” and was “severed” or rendered severable, from it, by the sale for cash, and thereby became that “realized gain” which has been repeatedly declared to be taxable income within the meaning of the constitutional amendment and the acts of Congress.
That capital gains do not constitute income derived from the act of sale or conversion of the capital investment was implicit in the decisions by the Supreme Court in the cases of Doyle v. Mitchell Brothers Co., 247 U. S. 179, and Lynch v. Turrish, 247 U. S. 221. In those cases, the Court held that capital gains accrued prior to the effective date of the Sixteenth Amendment, but only realized by sales occurring after such effective date, did not constitute taxable income. If the income had been derived from the act of sale (and not merely realized by it), instead of from the capital investment, it is evident that a different result would have been reached, since the act of sale occurred after the effective date of the Sixteenth Amendment, and, if the proceeds had been considered as income derived from such sales, they must have been held to be taxable income.
Respondent contends, however, that a dictum of the Supreme Court, contained in its opinion rendered in the case of Willcuts v. Bunn, 282 U. S. 216, must lead us to the conclusion that capital gains do not constitute income derived from the capital investment. That case held that the capital gains realized by a taxpayer on the purchase and sale of state bonds were subject to Federal income taxation, since the tax was not on the obligations of the state or on the investment therein, as such, and did not impose a substantial burden on the state’s borrowing power, and therefore, the tax was not interdicted by any constitutional implication.
*1116We do not consider that the dictum from Willcuts v. Bunn, supra, quoted in tbe majority opinion, intends to or does reverse tbe bold-ing by tbe Supreme Court either expressly or by implication in tbe cases wbicb are cited supra to tbe effect that capital gains constitute income derived from capital investments wbicb is merely realized by tbe sale or conversion of sucb investments. While the income may result from both the increase in the value of the investment, and its sale or conversion, the income, under the decided cases of tbe Supreme Court, is derived from the capital investment. This principle is recognized by the Supreme Court in MacLaughlin v. Alliance Insurance Co. of Philadelphia, 286 U. S. 244, 249, a case subsequent to Willcuts v. Bunn, supra, in which the Court used this language: “while increase in value of property, not realized as gain by its sale or other disposition, may, in an economic or bookkeeping sense, be deemed an addition to capital in a later period, * * * it is nevertheless a gain from capital investment which when realized Toy conversion into money or other property, constitutes profit which has consistently been regarded as income within the meaning of the Sixteenth Amendment and taxable as such in the period when realized.” [Italics ours.]
Applying this rule to the facts of the instant case, it is obvious that the income subject to the tax out of which arises the deficiency involved herein is income derived from Federal farm loan bonds, and is, therefore, exempt from taxation pursuant to the express provisions of section 26 of the Federal Farm Loan Act.
It should be borne in mind that we are here called upon to construe an express exemption. The case of Hubert De Stuers, 26 B. T. A. 201, construed an entirely different exemption. Therefore, that case is not in point, and is only “analogous” in that it construed an exemption. The statute in that case exempted the “principal and interest” of certain Government bonds. The question was whether a tax on capital gains resulting from the redemption at par of bonds which had been purchased at a discount might be considered as a tax upon the principal of the bonds. In the instant cases the question is whether capital gains constitute “income derived from” the bonds, an issue not present in the De Stuers case. The Phipps case and Igleheart case, cited as “analogous”, are even less pertinent.
The majority opinion indicates that the case of Willcuts v. Bunn may be considered as authority for the proposition that “there was serious doubt whether the Congress was authorized to exempt these obligations from capital gains taxes of states, localities, and municipalities.” It is difficult to understand how the majority opinion reaches this astonishing result, since that case in no way, inferen*1117tially or otherwise, dealt with the question of whether Congress had the power under the Constitution to exempt obligations by specific statutory provision from tax. That case was solely concerned with the question of whether, by reason of our Federal system of Government, there would be, by implication, a prohibition on the power of the United States to levy an income tax on capital gains derived from state bonds. The startling conclusion of the majority opinion that, when Congress expressly exempts from tax capital gains derived from bonds issued under its authority as instrumentalities of the United States, it is granting “an immunity possibly beyond its power” may only be explained by the fact that the conclusion is based upon an erroneous reading of the case of Willcuts v. Bunn.
The conclusion of the majority opinion that the word “income”, as used in section 26 of the Farm Loan Act, may have been used in order to include not only interest, but also periodic payments to bondholders by receivers of insolvent banks in liquidation of the principal of such bonds, together with accrued interest (the only claims which the bondholders would have for liquidation), presumes such a naive misconception of legal principles on the part of Congress as to be incredible.
For all of these reasons, I respectfully dissent.
Leech agrees with this dissent.