A Note on the Capital Gains Tax

Capital Gains Tax Rate Money Funds
Capital Gains

As the previous installment of Huddleston Tax Weekly made clear, our tax code draws a distinction between ordinary income and capital gains. In general, ordinary income is income derived throughout the course of running a business or trade; capital gains result from the sale of a “capital asset” (which is defined by the code). It is important for people to understand how their behavior will be classified because these classifications carry particular tax implications. In conjunction with criteria from the tax code, our common law also provides additional guidelines for classifying a given source of income.

The capital gains tax has long been the focus of controversy: many argue that its current low rate disproportionately benefits wealthy citizens and that it should be increased, while others contend that a lower rate actually stimulates more economic growth and that such growth benefits citizens of all socioeconomic levels. The evidence in favor of the latter position is considerable and should strike most objective observers as persuasive. The capital gains tax rate has fluctuated widely over the past several decades, and there is an unmistakable positive correlation between low rates and greater revenues generated from capital gains. This association may appear counterintuitive upon first glance, but a bit more scrutiny makes it very easy to understand: when the tax rate is high, people simply hold on to their assets and avoid paying the tax at a high rate; when the rate is low, people sell more frequently and this results in greater total revenues for the government.

Low rates also appear to influence stock market prices. The tax cuts in the 1980s, the late 1990s, and in 2003 all coincided with significant stock market gains. What’s more, there is also an association between reduced rates and business development as measured by initial public offerings (IPOs), money raised from IPOs and the money committed to venture capital firms. Investors are less willing to commit funds when capital gains tax rates are high; this agrees with common sense given that higher rates will result in smaller returns on investment.

Though lower capital gains tax rates do appear to provide greater benefits to the economy as a whole, there is no denying that such rates disproportionately benefit higher income levels. The clear majority of gains from capital asset sales are made by those with incomes above $200,000. Going forward, it appears that the debate on capital gains tax rates will be framed by this question: can our society accept the positive impact of lower rates even though lower rates tend to benefit wealthy individuals disproportionately?

References

Moore, Stephen. “Capital Gains Taxes.” David R. Henderson (ed.). Concise Encyclopedia of Economics. Indianapolis: Library of Economics and Liberty.

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Taxation in the Confederacy

Confederate Tax Act Revenue Taxation
Taxation in the Confederacy

Taxation in the Confederate States of America is a subject not often studied by either professional academics or laypeople. This is not at all surprising: there is a natural tendency to avoid giving deep attention to things considered deplorable, and since the legacy of the Confederacy is construed as wretched by so many people, it follows that a great many are ignorant of the details of Confederate society. Today, we will go against natural tendency and take a look at the tax acts passed by the rebel government in its attempt to raise revenue for the war.

Revenue derived from taxation made up only a very small part of the war fund for the South. In total, taxes constituted roughly 8.2 percent of the war account; this is less than half of the percentage contributed by taxes for the Union. Compared to the North, the Confederacy was slow to impose a “direct” tax on its population in large part because of its strong commitment to state’s rights and opposition to centralized government. As we will explore in detail below, the Confederate Congress passed two tax measures during the course of the war; neither of these measures generated sufficient income, and by the end of the war it was evident that financial trouble had played a substantial role in the demise of the South.

War Tax of 1861

At the beginning of the war, the Confederate government relied on tax revenue derived from international trade (i.e. tariffs and taxes on exports) and financial contributions from private citizens. These sources of funding started off well, but by the close of 1861 both had dried up almost entirely. The collapse of these sources prompted the Confederacy to impose a “War Tax” which was passed in August of 1861. The War Tax consisted of taxes on a number of items identified by the Treasury and a tax on real property greater than $500 in value.

In its first year (1862) of operation, the War Tax contributed a measly 5 percent of total war revenue. Not only was the tax relatively gentle in its basic terms, collection proved to be much more difficult than Confederate lawmakers had anticipated.

Agricultural Produce Tax of 1863

In response to the lackluster performance of the tax act of 1861, the Confederate Congress passed the Tithe Act – otherwise known as the Tax-in-Kind – in April of 1863. On top of the taxes imposed by the War Tax, the Tithe Act placed a tax of 10 percent on agricultural produce. The Tithe Act was referred to as the “tax-in-kind” because it was not paid in currency but with physical goods; under this act, 10 percent of the actual produce of plantation owners was handed over directly to the government, not 10 percent of their profits. Though it was plagued by implementation difficulties of its own, the produce tax was relatively successful and contributed a substantial portion of overall tax revenue in the remaining years of the conflict.

Controversy surrounded the tax-in-kind because it was interpreted as a direct tax by the Confederate Congress. Though they were in rebellion against the Union, the lawmakers of the Confederate Congress still adhered to the constitutional principle of apportionment for direct taxes and so many felt the Tithe Act unacceptable on this principle. The financial condition of the South ultimately tipped the scales and the act was passed out of sheer necessity.

References

Richard Burdekin and Farrokh Langdana, “War Finance in the Southern Confederacy, 1861-1865,” Explorations in Economic History, Vol. 30, No. 3, July 1993.

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A Quick Look at the Tea Act of 1773

British Tea Act Parliament America Company
The Tea Act of 1773

It has been noted before on Huddleston Tax Weekly that there is a strong tendency in contemporary society to associate taxes with things which are mundane, dull and boring. We’ve also noted that these associations are based on the conditions of our society at the present moment and would make little sense if based on conditions from previous eras. Throughout the bulk of recorded history, taxes have been closely tied to a host of exciting and oftentimes frightening things. With few exceptions, substantive changes in tax policy have accompanied sweeping changes to the existing social order, and the Tea Act of 1773 does not stray from this general rule.

As we will see, the significance of the Tea Act of 1773 stems mostly from the way it was received by the American colonists of the British Empire. The purpose of the act was not simply to generate revenue, but to provide confirmation of the power of the British Parliament to directly tax the American colonies. The act not only failed to achieve its intended goals but also sparked a reaction which ultimately altered the entire course of world history.

Historical Setting

The passing of the Tea Act was surrounded by a number of important political and business phenomena. One of the most pressing concerns of the British Parliament during this (pre-revolutionary) era was to have its power to tax the American colonies fully accepted by American colonists. This concern was among the driving forces behind the so-called Townshend Acts. The Townshend Acts consisted of a series of measures which dealt with a variety of issues relating to the administration of the American colonies. The first of these acts – the Revenue Act of 1767, also referred to simply as the Townshend Act – imposed a tax on tea (and several other items) imported to the colonies. The act forbade the colonists to purchase tea from any supplier other than Great Britain.

The Revenue Act was met with serious opposition from the American colonists who swiftly condemned the measure as a piece of blatant tyranny. Thenceforth the aim to legitimize the taxing power of the British Parliament over its colonies intensified.

Before the Tea Act, the British East India Company had been directed to sell its tea exclusively in London. Tea from the company which did make it to North America did so only through outside merchants who specialized in international sales. By the time the tea reached the market for American consumers, markups and the tax imposed by the Revenue Act made the tea an unattractive buy. As a consequence of these policies, an underground market developed in which foreign (Dutch) tea was smuggled into the colonies and sold at much lower prices. In addition to legitimizing the Parliament’s taxing power, the Tea Act was also passed with the aim of improving the financial condition of the East India Company and shutting down the flow of smuggled foreign tea.

The act contained these terms: the East India Company had the ability to ship its tea directly to North America; the company was no longer bound to sell its tea exclusively in London; duties on tea charged in Britain which were shipped out for international sale would either be refunded when exiting the country or not imposed; and finally, those receiving the company’s tea were required to pay a deposit up front following delivery.

Colonial Reaction

The British lawmakers in the Parliament had reason to believe that the Tea Act would produce favorable results: the tea sold by the East India Company was of higher quality than Dutch tea, and since its price had been lowered, the lawmakers could sensibly infer that the smuggled Dutch tea would lose its competitive advantage. Unfortunately for the British lawmakers, the act would be opposed not only by those colonists who continued to reject Parliament’s ability to lay the tax of the Revenue Act, but also by colonial merchants and underground businessmen who had a financial interest in preventing the ascendancy of the East India Company.

After the act was passed, the East India Company sent a number of ships to America in the hope of unloading its tea on the market; none of these ships was to unload its cargo successfully. Most famously, the ships which arrived at the ports in Boston were raided by irate colonists who tossed the company’s tea into the harbor. This incident came to be known as the “Boston Tea Party,” though it was referred to as the “Destruction of the Tea” in its own time. The colonial stance on the Parliament’s ability to impose taxes was clear, and the stage was set for the massive insurrection which was to eventually give birth to the sovereignty of the States.

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How War Shaped Modern U.S. Taxation

War Taxes Taxation United States Tax Policy Income
War & Taxes

The idea that war has in some sense impacted tax policy throughout our nation’s history should strike no one as being controversial. War and taxes have always had a close relationship, not only within the United States but across the whole globe. In fact, it is probably the case that taxes have played a role in just about every military conflict in history, though the role may not have always been overt and openly recognized. War is essentially a dispute over power, and since money is often a source of power it should surprise nobody that taxes are frequently looming in the background of such disputes.

What fewer people realize, however, is that war has arguably been the single greatest engine behind the development of U.S. tax structure since the outbreak of the War Between the States. As we will see, without war, our tax structure would likely be radically dissimilar from what it is today. The federal income tax may not have been established, and certainly the size of our government would be much smaller by comparison to what we have now.

The Birth of the Income Tax

The founders of the U.S. wished to limit the taxing power of their government and the Constitution was drafted in a fashion consistent with this desire. Up to 1861, the government of the United States had only collected excise taxes and taxes on foreign imports (tariffs); there was no controversy surrounding the income tax because no such tax had yet been imposed. This state of affairs, a state which had carried on stably for over seven decades after the writing of the Constitution, was disrupted by the War Between the States. Soon after the war broke out the Revenue Act of 1861 was passed and the first income tax was implemented on the American population. Two additional acts were passed subsequent to the act of 1861 which made modifications to the rate structure of the tax.

Though they were (supposedly) only intended as strictly wartime measures, the acts passed during the war produced an indelible precedent, and by 1894 the income tax had reemerged as part of the Wilson-Gorman Tariff Act. Whether the income tax would have been created in the absence of the War Between the States is a matter open to speculation. What is certain is that the war had a tremendous impact on the course of U.S. tax policy.

The First World War

The income tax provision of the Wilson-Gorman Tariff Act of 1894 was ruled unconstitutional by the Supreme Court with its decision in Pollock v. Farmers’ Loan & Trust Co. (1895). That ruling marked the beginning of a near two decade long hiatus during which the income tax disappeared. The income tax made its reappearance with the Revenue Act of 1913 which was developed after the taxing powers of the Congress were expanded through the sixteenth amendment.

Now, it may be untrue that the income tax itself did not reemerge as a direct consequence of the First World War; but there can be no questions of any sort that this war provided the impetus for the massive increases made to the rate structure of the income tax when it did return. When the U.S. entered the war the top rate of the income tax was changed from seven percent to an astounding sixty-seven percent; by the close of the war the top rate had been further increased to seventy-seven percent. Tax rates for individuals fluctuated after the war during the 1920s; by the end of the 1920s the top rate for individuals reached a low of 25 percent.

Rates for individuals were increased following the Great Depression and they would continue to remain high both during and long after the conclusion of the Second World War. The top rate for individuals would not fall below 30 percent until the late 1980s.

Again, we can only speculate about how U.S. tax policy would have developed without war. Was a federal income tax a historical inevitability? Would the rate structure of the income tax look dramatically different if war had not caused us to lean heavily on our wealthiest citizens and corporations? These questions can never be answered given how events have unfolded. One thing which is not open to speculation, however, is that our tax policy looks unrecognizably different than the way it looked at the time of the founding.

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United States v. E. C. Knight Co. & the Scope of the Sherman Antitrust Act

Business Monopoly Law Antitrust Act Commerce
The Regulation of Monopolies

One of the chief functions of our government is to ensure a fair and equitable market in which businesses may compete to offer goods and services to consumers. Our law has been developed and shaped in accord with this function. In order for free enterprise to flourish, our government must see that the marketplace is kept competitive and that attempts to obstruct or excessively limit competitiveness be swiftly eradicated. In the late nineteenth century, one particular law – the so-called Sherman Antitrust Act of 1890 – was passed with the purpose of promoting business competitiveness. The law forbade individuals from creating (or attempting to create) a monopoly of any part of the trade or commerce among the states or with foreign nations. This law stood in its original form until 1914 when it was expanded in scope by the Clayton Antitrust Act.

Very soon after the Sherman act was passed, disputes arose which required that the scope of the act be clarified. The case of the United States v. E. C. Knight Co. (1895) was one of these disputes. As we will see, the ruling of this case showed that the scope of the Sherman act was not so far-reaching that it could suppress a monopoly of the manufacture of a good.

Facts

E. C. Knight Company (the defendant) was acquired by the American Sugar Refining Company. This acquisition gave the company control over approximately 98 percent of the sugar refining industry. The U.S. government (plaintiff) attempted to utilize the provisions of the Sherman act to prevent the acquisition and thwart the creation of the virtual monopoly. The key question was whether the Sherman act allowed the government to interfere with a monopoly of the manufacture of a good as opposed to its distribution across state lines.

Law

The U.S. Constitution grants the Congress the power to regulate commerce among the states. The Sherman Antitrust Act included provisions which were ultimately in agreement with this basic power. The second section of the Sherman act reads as follows: “…Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony…”

The scope of the Sherman act clearly extends to monopolies of the distribution of a good; but did the Sherman act extend to monopolies of the manufacture of a good on a strictly local level?

Ruling

The court ruled that the Sherman act did not apply to this type of locally defined activity. However, since the acquisition resulted in a monopoly over the manufacture of a “necessity of life” (in the words of the court), this meant that the acquisition could be subject to individual state regulation.

In effect, the ruling of this case significantly curtailed the authority of the Congress to regulate the national economy as it declared manufacturing monopolies to be local matters. This restrictive view on Congressional authority to regulate commerce would remain unchanged until the late 1930s.

The case of the United States v. E. C. Knight Co. shows clearly some of the difficulties involved in trying to balance the ideals of a competitive marketplace and limited government. And for this reason the legacy of E. C. Knight Co. represents different things to people on different places of the ideological spectrum. However it is interpreted in any individual instance, there can be no denying its stature as a pivotal case in U.S. judicial history.

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The Rise of the Progressive Federal Income Tax System

Income Tax Federal Progressive Revenue
Progressive Federal Income Tax

Before we dive into the details of the Revenue Act of 1913 and the progressive tax system, let’s briefly go over what we’ve learned about the history of the income tax. During the War Between the States, the U.S. government imposed the first income tax in order to fund the Union army. This tax – which was brought about through the Revenue Act of 1861 – was conceived as an emergency measure and was not intended to continue after the war. Following the surrender at Appomattox, the income tax lingered around until about 1872, but it then disappeared for over twenty years. The income tax made its reappearance with the Wilson-Gorman Tariff Act of 1894, but the tax provision of this act was quickly struck down with the opinion stated in the case of Pollock v. Farmers’ Loan & Trust Co. (1895). This second hiatus was interrupted by the sixteenth amendment to the U.S. Constitution which consolidated the taxing power of the Congress by eliminating the rule of apportionment which had applied to direct taxes.

With the sixteenth amendment, the Congress was transformed into a monstrously powerful entity, a taxing giant free of traditional legalistic constraints. When historians of the future assess the relative importance of the many amendments to the Constitution, their assessment can be said to be accurate only if it includes the sixteenth amendment near the very top of the list.

On October 3, 1913, President Woodrow Wilson signed the Revenue Act of 1913 into law. Along with reducing tariff rates, the act instituted a progressive tax structure in which higher earning individuals had a greater tax liability. Just as the sixteenth amendment allowed, the tax could be collected on income derived from any source, no matter whether it be direct or indirect, without any requirement to apportion among the states according to population.

Original Tax Table

By current standards, the tax table created by the act of 1913 was remarkably gentle. Single filers who earned less than $3,000 were exempt, as were married filers who earned $4,000; adjusted for inflation, in 2016 these amounts would translate to approximately $73,100 for single filers and $97,500 for married filers. Single filers were required to pay one percent on earnings above $3,000 ($4,000 for married filers); income above $20,000 but below $50,000 was taxed at a rate of two percent; income above $50,000 but below $75,000 was taxed at a rate of three percent; income above $75,000 but below $100,000 was taxed at a rate of four percent; income above $100,000 but below $250,000 was taxed at a rate of five percent; income above $250,000 but below $500,000 was taxed at a rate of six percent; and all incomes above $500,000 were taxed at a rate of seven percent.

Subsequent Tax Acts

This tax table created by the Revenue Act of 1913 only lasted for three years. It was replaced by a new table contained in the Revenue Act of 1916. The tax table of the act of 1916 (which can be viewed in full here) doubled the lowest income tax rate from one percent to two percent, and it increased the highest tax rate to fifteen percent. The 1916 tax table lasted for only a single year as it was replaced by the War Revenue Act of 1917. Prompted by America’s entry into World War I, the act of 1917 greatly increased tax rates across all income levels in order to support the war effort. The 1917 act imposed a top rate of sixty-seven percent on income above $2,000,000.

The act of 1917 was superseded by the Revenue Act of 1918. This act saw a top rate of seventy-seven percent and this applied to all incomes above $1,000,000. The revenue derived from these wartime acts contributed approximately one-third of the total fund for World War I; eye-catching of itself, this fact is made all the more impressive considering that only about five percent of the population paid income taxes in 1918.

After the Great War, the Congress continued to make revisions to the tax structure. In the 1920s, four different tax acts were passed – the acts were passed in 1921, 1924, 1926 and 1928. The act of 1921 was noteworthy as it implemented a tax on corporate income of ten percent. This rate on corporate income was likewise revised and by the 1928 act the rate was increased to twelve percent. Though the scourge of war formed the basis for the transformation of the income tax, little interest was shown by the politicians in Washington in reducing the tax to pre-war rates.  And the decades following the 1920s would see a steady increase in the share of Americans filing tax returns. The federal income tax was firmly in place, supported by our nation’s political leaders and fully backed by constitutional law.

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Pollock v. Farmers’ Loan & Trust Co. and the Defeat of the Income Tax

Court Law Income Tax
The Supreme Court

In the previous installment of Huddleston Tax Weekly, brief reference was made to the case of Pollock v. Farmers’ Loan & Trust Company of 1895. The opinion in this case – which was a landmark decision in its time – held that the power granted by the Wilson-Gorman Tariff Act of 1894 to collect an income tax on interest, dividends and rents was unconstitutional. The opinion set forth in Pollock was effectively nullified by the sixteenth amendment, but if not for this amendment Pollock certainly would be regarded among the most important decisions in U.S. history. Given its significance as a historical matter, let’s look at the Pollock case in greater detail.

Facts

As we learned previously, the Wilson-Gorman measure imposed a 2 percent tax on income above $4,000. This tax was implemented in order to cover the deficit created from the reduced tariff rates put in place by the measure. After the measure was passed, the Farmers’ Loan and Trust Company (the defendant) announced to its shareholders that, in addition to paying the tax required by the law, it would furnish the names of the shareholders liable for the tax to the collector. Pollock (the plaintiff) owned only ten shares of stock in Farmers’ Loan, but he brought suit against the company to prevent it from paying the tax.

Law

Article 1, Section 2, Clause 3 of the U.S. Constitution holds that direct taxes are permissible but they must be apportioned among the states of the union based on population. If a tax is found to be classifiable as direct, then it must contain a provision to be properly apportioned in accord with this rule.

Ruling

The court (Supreme Court of the United States) ruled that the income tax imposed by the Wilson-Gorman act was a direct tax because of its substantial impact on personal property (i.e. stocks, bonds, etc.). Since it was a direct tax, it needed to be apportioned consistent with constitutional requirements. And because it was not apportioned in this manner it was invalid.

Pollock was an extremely important opinion because, in effect, it substantially curtailed the taxing power of the Congress. If every tax on income derived from property is regarded as a direct tax, then the rule of apportionment would need to be abandoned entirely to collect any tax other than excise taxes. This is precisely the function served by the sixteenth amendment: the sixteenth amendment holds that direct taxes need not be subject to the traditional rule of apportionment.

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The Birth & Growth of the Income Tax in the United States

Income Tax Congress Revenue Act
Income Tax

Most people are oblivious of the fact that the United States has not always consistently imposed an income tax. Most people assume that the Internal Revenue Service has existed in its current form forever. Though it is false, this assumption is not without reason: national governments have a well-earned reputation of being tax hungry entities. In reality, however, the U.S. has only consistently collected a tax on income since the passing of the sixteenth amendment in 1913. But though the U.S. has only regularly collected an income tax since after the sixteenth amendment, this does not mean that the U.S. government never collected such a tax earlier.

After the eruption of the Civil War, President Lincoln and the Congress passed the Revenue Act of 1861, and this act allowed the government to impose a tax on income to fund the war effort for the Union. The Revenue Act gave birth to a federal office in charge of collecting the tax, and this office was the embryonic form of the IRS.

The Revenue Act of 1861 grew out of necessity. The Union army needed additional funds in its struggle against the Confederacy. The 1861 act first put forth a rate of 3 percent on income above $800. This rate was subsequently discarded when the Revenue Act of 1862 was passed. The act of 1862 imposed a rate of 3 percent on income between $600 and $10,000, and 5 percent on income over $10,000. These rates were also later discarded and in 1864 a new act (the Revenue Act of 1864) imposed rates of 5 percent on income between $600 and $5,000, 7.5 percent on income between $5,000 and $10,000 and 10 percent on income above $10,000. These multiple acts provided the Union with a large source of its revenue: approximately 21 percent of Union funds were raised from income taxes.

Though it was only intended as a temporary measure during wartime, the income tax lingered for a bit after the Union declared victory. The various public projects associated with the Reconstruction era required funding, and so an income tax was collected until roughly 1872. But even though the tax expired around this time, a precedent was established, and in 1894 a peacetime income tax was included as a provision of the so-called Wilson-Gorman Tariff Act. The Wilson-Gorman act reduced the tariff rates set by a previous act, and proposed a 2 percent tax on income above $4,000 in order to cover the deficit. The income tax provision of the Wilson-Gorman measure was ruled unconstitutional by the Supreme Court in its opinion of Pollock v. Farmers’ Loan & Trust Co. in 1895, but the income tax eventually made its return with the sixteenth amendment.

To this day, opponents of the income tax continue to make arguments against its constitutionality, but none of these arguments have passed legal scrutiny. No matter what your position on the income tax, it is important to remember that even if this tax disappeared tomorrow we can be certain another one would take its place in double quick time.

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Dickinson v. Dodds & the Legal Importance of Time

Time Law Contract Formation Property
Legal Weight of Time

In so many areas of life, timing is of extreme importance. Timing is particularly important in the business world. As so many stock brokers and other businesspeople are aware, small portions of time can mean the difference between many thousands – and even millions – of dollars. Smart businesspeople know that most – if not all – sound business decisions involve an element of time: a sound decision is not solely about what transpires, but when something transpires as well.

Unsurprisingly, business contracts follow this same rule: our law recognizes that time is something which naturally carries value of itself. In contract parlance, time has bargaining power, and as such it can be used to provide consideration for an agreement. The case of Dickinson v. Dodds (1876) should be required reading for every business professional: in this famous case, an offer was extended for a certain period of time, but because nothing of value was given by the prospective buyer, the seller was free to withdraw the offer prematurely and give a new offer to a third party. Dickinson v. Dodds provides clear evidence of the legal significance of time in contract formation.

Facts

Dickinson (the buyer and plaintiff) received an offer from Dodds (the seller and defendant) regarding a piece of real property. Dodds offered to sell his property to Dickinson for a sum of £800. Dodds made the offer on Wednesday and verbally agreed to keep the offer open until 9 am on Friday. On Thursday, while Dickinson was still contemplating the offer, a third party (Mr. Berry) notified Dickinson that the property had already been sold to another party (Mr. Allan). Dickinson, believing that the original offer was still viable, met Dodds at a railway station at approximately 7 am on Friday and attempted to accept the price of £800 for the property. Dodds informed Dickinson that the property had indeed already been sold to the other party and that, although the original offer was apparently still open until Friday morning, acceptance was no longer possible.

Dickinson brought suit against Dodds (and Mr. Allan) in order to nullify the sale on the grounds that a valid offer was still “on the table.”

Law

In the formation of contracts, time has value, and therefore it must be bargained for in order for one party to benefit from it. Hence, if a buying party wishes to keep an offer open for a certain period of time while he contemplates its merits, he must give something of value in return otherwise there is no consideration for the period of time given by the selling party.

Ruling

The court (the Court of Appeal of the Chancery Division in England) ruled in favor of Dodds. Dickinson’s interpretation of the communication from Dodds, which held that a third party could not purchase the property until after 9 am on Friday morning, was false. Though, on the surface, it may have seemed like Dickinson had the exclusive privilege of buying the property until Friday morning, this was not actually the case because the element of time had not been bargained for.

Dickinson’s acceptance at approximately 7 am on Friday was invalid given the fact that he had already received reliable communication of acceptance by another party. Dickinson’s attempted acceptance on Friday morning was predicated on the assumption that Dodds was unable to extend an offer to a different party until after 9 am on Friday. This assumption was false.

The lesson is clear: the significance of time is such that it is encoded in our law. Businesspeople must be aware of the fact that time has this type of legal importance as they engage in business negotiations.

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Scutage: The Knight’s Tax of Feudal England

Medieval Feudal England Tax Knight
Feudal England

As has been discussed in an earlier installment of Huddleston Tax Weekly, taxes have not always been associated with calculators, receipts and refund checks. In point of fact, the history of tax is replete with all sorts of high-powered phenomena – armed rebellions, popular revolts and regime transformations. Here at HTC, we think it is pretty clear that taxation has evolved for the better; but, though this may be the case, we also think it is important to occasionally take a glance at the old tax practices of the past. By examining the history of tax we can be certain to avoid past mistakes; we can also get a sense of where some of our tax terminology comes from.

Beginnings

Like the geld, scutage was a medieval tax issued and collected principally in England. Scutage originally developed as a payment made by possessors of knight’s fees to opt out of military service. Feudal law enabled knights to acquire “fees” (sections of land) in exchange for military service. Knights who wished to avoid military service began offering sums of money to tenants-in-chief as a means of “buying out” of their obligation.

Scutage existed in this form as early as 1100 (the beginning of the reign of Henry I). Payments made by knights were useful to the crown in part because mercenaries became common during this era.

Decline

Though scutage initially developed as a straightforward transaction between knights and their tenants-in-chief, the English crown gradually began to extend scutage beyond this original purpose. The crown started to levy the tax on specific areas and at various points in time; importantly, the tax ceased its function as a monetary payment in exchange for release of military service. The king began to demand excessive sums from the population and as a consequence a rebellion broke out in 1215. This rebellion eventually led to the proclamation of the Magna Carta. Among other things, the Magna Carta attempted to prohibit the English crown from demanding oppressive sums in the form of scutage.

Scutage endured up to the reign of Edward III (ruled from 1327-1377). By that time, it had become common practice for scutage to be imposed by tenants-in-chief on their under-tenants. Under feudal law, the practice of subinfeudation allowed tenants-in-chief to give portions of their land to others in exchange for services (or payments). By the reign of Edward III, subinfeudation was so widespread and so rampant that assigning liability for scutage among the various under-tenants of a fee became a near impossible task. Under-tenants had already been absorbing the costs of scutage for centuries, but an excess number of under-tenants per fee made it difficult for this process to continue.

Though scutage gradually fell by the wayside, the English crown was not dismayed by its disappearance: the king simply used other tools to collect funds from his subjects.

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