DEPARTMENT OF REVENUE of the State of Florida, Appellant, v. LEADERSHIP HOUSING, INC., and Leadership Communities, Inc., Appellees, 343 So. 2d 611

OVERTON, Chief Justice. This cause is before this Court on direct appeal from a circuit court judgment which declared unconstitutional provisions of

Chapter 220, Florida Statutes (1975). We have jurisdiction. The issue concerns the validity of the state corporate income tax upon increases in the value of capital assets which occurred prior to November 2, 1971, but were not realized by the sale or transfer of the capital assets until after the effective date of the corporate income tax constitutional amendment and the enactment of the Florida Income Tax Code.

We reverse, holding that appreciation in value of a capital asset is not income until it is realized from a sale, exchange or other disposition of the asset, and that the present Florida corporate income tax on such capital gain is constitutional and proper. The voters of Florida adopted in 1924 a constitutional provision prohibiting any state income tax. That provision remained effectively unchanged until November 2, 1971, when the Florida Constitution was amended to permit imposition of a tax on the income of other than natural persons.

Following the amendment, the Florida Legislature enacted the Florida Income Tax Code,

Chapter 220, Florida Statutes (1975), which imposed an income tax commencing January 1, 1972, on other than natural persons. The corporate appellees commenced this action as a suit for declaratory and injunc-tive relief, seeking a declaration that their capital gains from appreciation of real estate accruing prior to the 1971 constitutional amendment and the enactment of the taxing legislation were constitutionally protected from taxation.

Appellees asserted first that the constitutional prohibition against the taxing of income existing prior to November 2, 1971, precludes the taxation as income of all appreciation in the value of assets accruing prior to that date. Second, the appellees asserted that the levy of an income tax by the State of Florida upon capital appreciation which accrued prior to November 2, 1971, but was realized after that date constitutes harsh, arbitrary, and oppressive taxation in violation of the Due Process Clauses of the Florida and Federal Constitutions. The trial court agreed with the appellees’ contentions and granted

summary judgment, holding: ***** * “2. The express constitutional prohibition against a state income tax, which was contained in the Florida Constitution until prospectively amended out on November 2, 1971, also prevents any Florida income tax upon increases in the value of property which occurred prior to November 2,1971, even though such increases in value might be realized through a sale or other taxable transfer of such property after the effective date of the Florida Income Tax Code,

Chapter 220 of the Florida Statutes. “3. The State of Florida did not have the constitutional power to enact a tax on income prior to November 2, 1971. Ap-predation in the value of property which occurred prior thereto continues to be constitutionally protected from taxation as income. The imposition of a tax upon such appreciation as income constitutes the retroactive operation of an income taxing statute, which retroactive operation impairs constitutionally vested rights without due process of law in violation of Amendment XIV,

Section 1 of the Constitution of the United States of America, and

Article I,

Section 9 of the Constitution of the State of Florida.” [Emphasis supplied] The trial court enjoined the Department of Revenue from levying income tax on the gains at issue, and it allowed the plaintiffs to exclude or deduct gains from their income in “an amount equal to the fair market value of such property as of November 2, 1971, for the purpose of restoring that amount to the Plaintiffs free of any Florida income tax.” From that judgment the State Department of Revenue brings this appeal.

The appellees’ first contention of unconstitutionality is based on their assertion that the constitutional income tax prohibition in effect from 1924 to 1971 was intended to apply to all income in the broadest sense of the term’. They argue appreciation in the value of property is such income, and that the authors and adopters of the constitutional prohibition intended that anything that partook of the nature of income would be protected from taxation.

The appellees admit that the effect of their construction and the trial court’s order would allow the Legislature to tax as income unrealized accretions in value to capital assets occurring after November 2, 1971, but they assume that the Florida Legislature would decline to tax it. We realize some authorities suggest appreciation constitutionally may be taxed as it accrues. See 1 Surrey & Warren, Federal Income Taxation, 816-18 and 822-32 (1972); Lowndes, Current Conceptions of Taxable Income, 25 Ohio St.L.J. 151 (1964). Nevertheless, we decline to hold that appreciation as it occurs is income.

Such a holding might well be a tax benefit for the appel-lees, but it could be a tax liability for many others. The appellees’ theory would also radically alter the cost bases of many capital assets, requiring such to be changed to the fair market value of the assets on the date of the removal of the constitutional prohibition, or the date of the statutory enactment of the Code. Unlike

Section 1053 of the Internal Revenue Code, 26 U.S.C. § 1053, and its predecessors, which awarded cost bases in such assets equal to the greater of either the actual cost of the asset or its fair market value as of the effective date of the first taxing statute, a judicial decision here would not automatically incorporate the option afforded by Congress in selecting the greater of the two bases. The practical effect of the judicial decision asked for by the appellees could require a downward valuation of assets which had depreciated, imposing greater tax liability on some taxpayers.

The entire issue in this case turns on the meaning of income with respect to capital appreciation. Economists and legal scholars are unable to agree whether appreciation in value of a capital asset is income to the asset holder as it accrues or later when it is realized by separation from capital. Compare, e. g., Lowndes, Current Conceptions of Taxable Income, supra, and H. Si-mons, Personal Income Taxation 88 (1938), with Mullock, The Constitutional Aspects of Realization, 31 U.Pitt.L.Rev. 615 (1970), and Seligman, 9 Am.Econ.Development 517 (1919).

The appellant contends that appreciation in value of capital assets is not income until it is realized at the time of disposition, adopting the definition of income in Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 64 L.Ed. 521 (1920). We agree and find the proper

interpretation is that capital appreciation is not true income until it has been separated from its capital. The separation from capital referred to as the doctrine of “realization” may occur on the receipt of money, other property or rights, or when some other economic benefit is enjoyed by the asset holder. This construction and

interpretation follow some economists’ theory of the relation of capital to income, specifically that the former is likened to the tree or the land and the latter the fruit or the crop. We approve of the appellant’s reliance on Eisner v. Macomber, supra, and its concept of when capital appreciation becomes income.

The definition contained therein is as follows: “. . . ‘Income may be defined as 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 . “. . . [It is] 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.” 252 U.S. at 207, 40 S.Ct. at 193. We recognize that the Eisner doctrine and definition has been developed to include as realized income such things as (1) the value of a lessee-erected improvement on realty upon reversion of the realty to the lessor, Helvering v. Bruun, 309 U.S. 461, 60 S.Ct. 631, 84 L.Ed. 864 (1940); (2) interest coupons detached from bonds and given as a gift, Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75 (1940); (3) property transferred by a husband to his wife in a property settlement connected with divorce, United States v.

Davis, 370 U.S. 65, 82 S.Ct. 1190, 8 L.Ed.2d 335 (1962). All the aforementioned circumstances constituted events upon which economic gains were enjoyed at the time of the events. No assertion is made in these cases that appreciation in and of itself is taxable. We reject appellees’ arguments that the appreciation became immunized from income taxation as it accrued by the Florida constitutional prohibition. We hold that bare appreciation is not income subject to income taxation. The citation by the United States Supreme Court to Eisner v. Macomber and its concept of realization recently in Ivan Allen Company v.

United States, 422 U.S. 617, 633, 95 S.Ct. 2501, 45 L.Ed.2d 435 (1975), further convinces us of the correctness of this position. We believe the realization doctrine is the fairest for all taxpayers. The second point asserted by the appel-lees is their contention that the tax is harsh and arbitrary. Holding as we do that there is no income until realization, this argument is without merit. In

summary, we hold that appreciation becomes income only upon the sale, exchange, or other disposition of the capital asset together with the accretions thereto, and that such realized gain is income in the year of disposition regardless of when it accrued. We reverse the trial, court, uphold the constitutionality of

Chapter 220 as it pertains to the taxation of capital gains accruing prior to November 2, 1971, and dissolve the injunctive order issued by the trial court in this cause. It is so ordered: SUNDBERG and HATCHETT, JJ., and MILLS, District Court Judge, concur. BOYD, J., concurs specially with an opinion. ROBERTS (Retired), J., dissents with an opinion, with which ADKINS, J., concurs. . Art. V, § 3(b)(1), Fla.Const. . “Sec. 11. No tax upon inheritances or upon the income of residents or citizens of this State shall be levied by the State of Florida, or under its authority . . Art. IX, § 11, Fla. Const. (1924). . “§ 5. Estate, inheritance and income taxes, "(

a) Natural Persons. No tax upon estates or inheritances or upon the income of natural persons who are residents or citizens of the state shall be levied by the state, or under its authority, in excess of the aggregate of amounts which may be allowed to be credited upon or deducted from any similar tax levied by the United States or any state. “(

b) Others. No tax upon the income of residents and citizens other than natural persons shall be levied by the state, or under its authority, in excess of 5% of net income, as defined by law, or at such greater rate as is authorized by a three-fifths (3/s) vote of the membership of each house of the legislature or as will provide for the state the maximum amount which may be allowed to be credited against income taxes levied by the United States and other states.

There shall be exempt from taxation not less than five thousand dollars ($5,000) of the excess of net income subject to tax over the maximum amount allowed to be credited against income taxes levied by the United States and other states. “(

c) Effective Date. This

section shall become effective immediately upon approval by the electors of Florida.” Art. VII, § 5, Fla. Const. . We recognize other courts have decided similar issues on different grounds, but the results have not varied greatly. See Norman v. Bradley, 173 Ga. 482, 160 S.E. 413 (1931); City National Bank of Clinton v. Iowa State Tax Commission, 251 Iowa 603, 102 N.W.2d 381 (1960); Shangri-La, Inc. v. State, 113 N.H. 440, 309 A.2d 285 (1973); Kellems v. Brown, 163 Conn. 478, 313 A.2d 53 (1972); Fidelity & Columbia Trust Co. v. Reeves, 287 Ky. 522, 154 S.W.2d 337 (1941); Fullerton Oil Co. v.

Johnson, 2 Cal.2d 162, 39 P.2d 796 (1934); Tiedemann v. Johnson, 316 A.2d 359 (Me.1974). But see Thorpe v. Mahin, 43 Ill.2d 36, 250 N.E.2d 633 (1969).