2 Eisner Vs Macomber

8/22/2016
Eisnerv.Macomber::252U.S.189(1920)::JustiaU.S.SupremeCourtCenter
Eisnerv.Macomber,252U.S.189(1920)
Eisnerv.Macomber
No.318
ArguedApril16,1919
RestoredtodocketforreargumentMay19,1919
RearguedOctober17,20,1919
DecidedMarch8,1920
252U.S.189
ERRORTOTHEDISTRICTCOURTOFTHEUNITEDSTATES
FORTHESOUTHERNDISTRICTOFNEWYORK
Syllabus
CongresswasnotempoweredbytheSixteenthAmendmenttotax,asincomeofthestockholder,withoutapportionment,astockdividendmade
lawfullyandingoodfaithagainstprofitsaccumulatedbythecorporationsinceMarch1,1913.P.252U.S.201.Townev.Eisner,245U.S.418[1].
TheRevenueActofSeptember8,1916,c.463,39Stat.756,plainlyevincesthepurposeofCongresstoimposesuchtaxes,andistothatextent
inconflictwithArt.I,2,cl.3,andArt.I,9,cl.4,oftheConstitution.Pp.252U.S.199,252U.S.217.
TheseprovisionsoftheConstitutionnecessarilylimittheextension,byconstruction,oftheSixteenthAmendment.P.252U.S.205.
https://supreme.justia.com/cases/federal/us/252/189/case.html
1/29
8/22/2016
Whatisorisnot"income"withinthemeaningoftheAmendmentmustbedeterminedineachcaseaccordingtotruthandsubstance,without
regardtoform.P.252U.S.206.
Incomemaybedefinedasthegainderivedfromcapital,fromlabor,orfrombothcombined,includingprofitgainedthroughsaleorconversionof
capital.P.252U.S.207.
Meregrowthorincrementofvalueinacapitalinvestmentisnotincomeincomeisessentiallyagainorprofit,initself,ofexchangeablevalue,
proceedingfromcapital,severedfromit,andderivedorreceivedbythetaxpayerforhisseparateuse,benefit,anddisposal.Id.
Astockdividend,evincingmerelyatransferofanaccumulatedsurplustothecapitalaccountofthecorporation,takesnothingfromthepropertyof
thecorporationandaddsnothingtothatoftheshareholderataxonsuchdividendsisataxancapitalincrease,andnotonincome,and,tobe
validundertheConstitution,suchtaxesmustbeapportionedaccordingtopopulationintheseveralstates.P.252U.S.208.
Affirmed.
Page252U.S.190
Thecaseisstatedintheopinion.
Page252U.S.199
MR.JUSTICEPITNEYdeliveredtheopinionoftheCourt.
Thiscasepresentsthequestionwhether,byvirtueoftheSixteenthAmendment,Congresshasthepowertotax,asincomeofthestockholderand
withoutapportionment,astockdividendmadelawfullyandingoodfaithagainstprofitsaccumulatedbythecorporationsinceMarch1,1913.
ItarisesundertheRevenueActofSeptember8,1916,39Stat.756etseq.,which,inouropinion(notwithstandingacontentionofthegovernment
thatwillbe
Page252U.S.200
noticed),plainlyevincesthepurposeofCongresstotaxstockdividendsasincome.*[2]
Thefacts,inoutline,areasfollows:
OnJanuary1,1916,theStandardOilCompanyofCalifornia,acorporationofthatstate,outofanauthorizedcapitalstockof$100,000,000,had
2/29
8/22/2016
OnJanuary1,1916,theStandardOilCompanyofCalifornia,acorporationofthatstate,outofanauthorizedcapitalstockof$100,000,000,had
sharesofstockoutstanding,parvalue$100each,amountinginroundfiguresto$50,000,000.Inaddition,ithadsurplusandundividedprofits
investedinplant,property,andbusinessandrequiredforthepurposesofthecorporation,amountingtoabout$45,000,000,ofwhichabout
$20,000,000hadbeenearnedpriortoMarch1,1913,thebalancethereafter.InJanuary,1916,inordertoreadjustthecapitalization,theboardof
directorsdecidedtoissueadditionalsharessufficienttoconstituteastockdividendof50percentoftheoutstandingstock,andtotransferfrom
surplusaccounttocapitalstockaccountanamountequivalenttosuchissue.Appropriateresolutionswereadopted,anamountequivalenttothe
parvalueoftheproposednewstockwastransferredaccordingly,andthenewstockdulyissuedagainstitanddividedamongthestockholders.
Defendantinerror,beingtheownerof2,200sharesoftheoldstock,receivedcertificatesfor1,100additional
Page252U.S.201
shares,ofwhich18.07percent,or198.77shares,parvalue$19,877,weretreatedasrepresentingsurplusearnedbetweenMarch1,1913,and
January1,1916.Shewascalledupontopay,anddidpayunderprotest,ataximposedundertheRevenueActof1916,baseduponasupposed
incomeof$19,877becauseofthenewshares,and,anappealtotheCommissionerofInternalRevenuehavingbeendisallowed,shebrought
actionagainsttheCollectortorecoverthetax.Inhercomplaint,sheallegedtheabovefactsandcontendedthat,inimposingsuchataxthe
RevenueActof1916violatedarticle1,2,cl.3,andArticleI,9,cl.4,oftheConstitutionoftheUnitedStates,requiringdirecttaxestobe
apportionedaccordingtopopulation,andthatthestockdividendwasnotincomewithinthemeaningoftheSixteenthAmendment.Ageneral
demurrertothecomplaintwasoverruledupontheauthorityofTownev.Eisner,245U.S.418[3],and,defendanthavingfailedtopleadfurther,final
judgmentwentagainsthim.Toreviewit,thepresentwritoferrorisprosecuted.
Thecasewasarguedatthelastterm,andrearguedatthepresentterm,bothorallyandbyadditionalbriefs.
Weareconstrainedtoholdthatthejudgmentofthedistrictcourtmustbeaffirmed,first,becausethequestionatissueiscontrolledbyTownev.
Eisner,suprasecondly,becauseareexaminationofthequestionwiththeadditionallightthrownuponitbyelaborateargumentshasconfirmed
theviewthattheunderlyinggroundofthatdecisionissound,thatitdisposesofthequestionherepresented,andthatotherfundamental
considerationsleadtothesameresult.
InTownev.Eisner,thequestionwaswhetherastockdividendmadein1914againstsurplusearnedpriortoJanuary1,1913,wastaxableagainst
thestockholderundertheActofOctober3,1913,c.16,38Stat.114,166,whichprovided(B,p.167)thatnetincomeshouldinclude"dividends,"
andalso"gainsorprofitsandincomederived
Page252U.S.202
fromanysourcewhatever."Suithavingbeenbroughtbyastockholdertorecoverthetaxassessedagainsthimbyreasonofthedividend,the
3/29
8/22/2016
fromanysourcewhatever."Suithavingbeenbroughtbyastockholdertorecoverthetaxassessedagainsthimbyreasonofthedividend,the
districtcourtsustainedademurrertothecomplaint.242F.702.Thecourttreatedtheconstructionoftheactasinseparablefromtheinterpretation
oftheSixteenthAmendmentand,havingreferredtoPollockv.Farmers'Loan&TrustCo.,158U.S.601[4],andquotedtheAmendment,
proceededveryproperlytosay(p.704):
"ItismanifestthatthestockdividendinquestioncannotbereachedbytheIncomeTaxActandcouldnot,eventhoughCongressexpressly
declaredittobetaxableasincome,unlessitisinfactincome."
Itdeclined,however,toaccedetothecontentionthat,inGibbonsv.Mahon,136U.S.549[5],"stockdividends"hadreceivedadefinitionsufficiently
cleartobecontrolling,treatedthelanguageofthisCourtinthatcaseasobiterdictuminrespectofthematterthenbeforeit(p.706),and
examinedthequestionasresnova,withtheresultstated.Whenthecasecamehere,afteroverrulingamotiontodismissmadebythe
governmentuponthegroundthattheonlyquestioninvolvedwastheconstructionofthestatute,andnotitsconstitutionality,wedealtuponthe
meritswiththequestionofconstructiononly,butdisposedofituponconsiderationoftheessentialnatureofastockdividenddisregardingthefact
thattheoneinquestionwasbaseduponsurplusearningsthataccruedbeforetheSixteenthAmendmenttookeffect.Notonlyso,butwerejected
thereasoningofthedistrictcourt,saying(245U.S.245U.S.426):
"Notwithstandingthethoughtfuldiscussionthatthecasereceivedbelowwecannotdoubtthatthedividendwascapitalaswellforthepurposesof
theIncomeTaxLawasfordistributionbetweentenantforlifeandremainderman.WhatwassaidbythisCourtuponthelatterquestionisequally
truefortheformer."
"Astockdividendreallytakesnothingfromthepropertyofthecorporation,andaddsnothingtothe
Page252U.S.203
interestsoftheshareholders.Itspropertyisnotdiminished,andtheirinterestsarenotincreased....Theproportionalinterestofeach
shareholderremainsthesame.Theonlychangeisintheevidencewhichrepresentsthatinterest,thenewsharesandtheoriginalsharestogether
representingthesameproportionalinterestthattheoriginalsharesrepresentedbeforetheissueofthenewones."
"Gibbonsv.Mahon,136U.S.549[6],136U.S.559560.Inshort,thecorporationisnopoorerandthestockholderisnoricherthantheywere
before.LoganCountyv.UnitedStates,169U.S.255[7],169U.S.261.Iftheplaintiffgainedanysmalladvantagebythechange,itcertainlywas
notanadvantageof$417,450,thesumuponwhichhewastaxed....Whathashappenedisthattheplaintiff'soldcertificateshavebeensplitup
ineffectandhavediminishedinvaluetotheextentofthevalueofthenew."
Thislanguageaptlyanswerednotonlythereasoningofthedistrictcourt,buttheargumentoftheSolicitorGeneralinthisCourt,whichdiscussed
4/29
8/22/2016
Thislanguageaptlyanswerednotonlythereasoningofthedistrictcourt,buttheargumentoftheSolicitorGeneralinthisCourt,whichdiscussed
theessentialnatureofastockdividend.Andif,forthereasonsthusexpressed,suchadividendisnottoberegardedas"income"or"dividends"
withinthemeaningoftheActof1913,weareunabletoseehowitcanbebroughtwithinthemeaningof"incomes"intheSixteenthAmendment,it
beingveryclearthatCongressintendedinthatacttoexertitspowertotheextentpermittedbytheamendment.InTownev.Eisner,itwasnot
contendedthatanyconstructionofthestatutecouldmakeitnarrowerthantheconstitutionalgrantratherthecontrary.
ThefactthatthedividendwaschargedagainstprofitsearnedbeforetheActof1913tookeffect,evenbeforetheamendmentwasadopted,was
neitherrelieduponnoralludedtoinourconsiderationofthemeritsinthatcase.Notonlyso,buthadweconsideredthatastockdividend
constitutedincomeinanytruesense,itwouldhavebeenheldtaxableundertheActof1913notwithstandingitwas
Page252U.S.204
baseduponprofitsearnedbeforetheamendment.Weruledatthesameterm,inLynchv.Hornby,247U.S.339[8],thatacashdividend
extraordinaryinamount,andinPeabodyv.Eisner,247U.S.347[9],thatadividendpaidinstockofanothercompany,weretaxableasincome
althoughbaseduponearningsthataccruedbeforeadoptionoftheamendment.Intheformercase,concerning"corporateprofitsthat
accumulatedbeforetheacttookeffect,"wedeclared(pp.247U.S.343344):
"Justaswedeemthelegislativeintentmanifesttotaxthestockholderwithrespecttosuchaccumulationsonlyifandwhen,andtotheextentthat,
hisinterestinthemcomestofruitionasincome,thatis,individendsdeclared,sowecanperceivenoconstitutionalobstaclethatstandsintheway
ofcarryingoutthisintentwhendividendsaredeclaredoutofapreexistingsurplus....Congresswasatlibertyundertheamendmenttotaxas
income,withoutapportionment,everythingthatbecameincome,intheordinarysenseoftheword,aftertheadoptionoftheamendment,including
dividendsreceivedintheordinarycoursebyastockholderfromacorporation,eventhoughtheywereextraordinaryinamountandmightappear
uponanalysistobeamererealizationinpossessionofaninchoateandcontingentinterestthatthestockholderhadinasurplusofcorporate
assetspreviouslyexisting."
InPeabodyv.Eisner,247U.S.349,247U.S.350[10],weobservedthatthedecisionofthedistrictcourtinTownev.Eisnerhadbeenreversed
"onlyuponthegroundthatitrelatedtoastockdividendwhichinfacttooknothingfromthepropertyofthecorporationandaddednothingtothe
interestoftheshareholder,butmerelychangedtheevidencewhichrepresentedthatinterest,"
andwedistinguishedthePeabodycasefromtheTownecaseuponthegroundthat"thedividendofBaltimore&Ohioshareswasnotastock
dividendbutadistributioninspecieofaportionoftheassetsoftheUnionPacific."
Therefore,Townev.Eisnercannotberegardedasturning
Page252U.S.205
5/29
8/22/2016
Page252U.S.205
uponthepointthatthesurplusaccruedtothecompanybeforetheacttookeffectandbeforeadoptionoftheamendment.Andwhatwehave
quotedfromtheopinioninthatcasecannotberegardedasobiterdictum,ithavingfurnishedtheentirebasisfortheconclusionreached.We
adheretotheviewthenexpressed,andmightrestthepresentcasetherenotbecausethatcaseintermsdecidedtheconstitutionalquestion,forit
didnot,butbecausetheconclusiontherereachedastotheessentialnatureofastockdividendnecessarilypreventsitsbeingregardedasincome
inanytruesense.
Nevertheless,inviewoftheimportanceofthematter,andthefactthatCongressintheRevenueActof1916declared(39Stat.757)thata"stock
dividendshallbeconsideredincome,totheamountofitscashvalue,"wewilldealatlengthwiththeconstitutionalquestion,incidentallytestingthe
soundnessofourpreviousconclusion.
TheSixteenthAmendmentmustbeconstruedinconnectionwiththetaxingclausesoftheoriginalConstitutionandtheeffectattributedtothem
beforetheamendmentwasadopted.InPollockv.Farmers'Loan&TrustCo.,158U.S.601[11],undertheActofAugust27,1894,c.349,27,28
Stat.509,553,itwasheldthattaxesuponrentsandprofitsofrealestateanduponreturnsfrominvestmentsofpersonalpropertywereineffect
directtaxesuponthepropertyfromwhichsuchincomearose,imposedbyreasonofownership,andthatCongresscouldnotimposesuchtaxes
withoutapportioningthemamongthestatesaccordingtopopulation,asrequiredbyArticleI,2,cl.3,and9,cl.4,oftheoriginalConstitution.
Afterwards,andevidentlyinrecognitionofthelimitationuponthetaxingpowerofCongressthusdetermined,theSixteenthAmendmentwas
adopted,inwordslucidlyexpressingtheobjecttobeaccomplished:
"TheCongressshallhavepowertolayandcollecttaxesonincomes,fromwhateversourcederived,withoutapportionmentamong
Page252U.S.206
theseveralstatesandwithoutregardtoanycensusorenumeration."
Asrepeatedlyheld,thisdidnotextendthetaxingpowertonewsubjects,butmerelyremovedthenecessitywhichotherwisemightexistforan
apportionmentamongthestatesoftaxeslaidonincome.Brushaberv.UnionPacificR.Co.,240U.S.1[12],240U.S.1719Stantonv.Baltic
MiningCo.,240U.S.1[13]03,240U.S.112etseq.Peck&Co.v.Lowe,247U.S.165[14],247U.S.172173.
Aproperregardforitsgenesis,aswellasitsveryclearlanguage,requiresalsothatthisamendmentshallnotbeextendedbylooseconstruction,
soastorepealormodify,exceptasappliedtoincome,thoseprovisionsoftheConstitutionthatrequireanapportionmentaccordingtopopulation
fordirecttaxesuponproperty,realandpersonal.Thislimitationstillhasanappropriateandimportantfunction,andisnottobeoverriddenby
6/29
8/22/2016
fordirecttaxesuponproperty,realandpersonal.Thislimitationstillhasanappropriateandimportantfunction,andisnottobeoverriddenby
Congressordisregardedbythecourts.
Inorder,therefore,thattheclausescitedfromArticleIoftheConstitutionmayhaveproperforceandeffect,saveonlyasmodifiedbythe
amendment,andthatthelatteralsomayhavepropereffect,itbecomesessentialtodistinguishbetweenwhatisandwhatisnot"income,"asthe
termisthereused,andtoapplythedistinction,ascasesarise,accordingtotruthandsubstance,withoutregardtoform.Congresscannotbyany
definitionitmayadoptconcludethematter,sinceitcannotbylegislationaltertheConstitution,fromwhichaloneitderivesitspowertolegislate,
andwithinwhoselimitationsalonethatpowercanbelawfullyexercised.
Thefundamentalrelationof"capital"to"income"hasbeenmuchdiscussedbyeconomists,theformerbeinglikenedtothetreeortheland,the
lattertothefruitorthecroptheformerdepictedasareservoirsuppliedfromsprings,thelatterastheoutletstream,tobemeasuredbyitsflow
duringaperiodoftime.Forthepresentpurpose,werequireonlyacleardefinitionoftheterm"income,"
Page252U.S.207
asusedincommonspeech,inordertodetermineitsmeaningintheamendment,and,havingformedalsoacorrectjudgmentastothenatureof
astockdividend,weshallfinditeasytodecidethematteratissue.
Afterexaminingdictionariesincommonuse(Bouv.L.D.StandardDict.Webster'sInternat.Dict.CenturyDict.),wefindlittletoaddtothesuccinct
definitionadoptedintwocasesarisingundertheCorporationTaxActof1909(Stratton'sIndependencev.Howbert,231U.S.399[15],231U.S.
415Doylev.MitchellBros.Co.,247U.S.179[16],247U.S.185),"Incomemaybedefinedasthegainderivedfromcapital,fromlabor,orfrom
bothcombined,"provideditbeunderstoodtoincludeprofitgainedthroughasaleorconversionofcapitalassets,towhichitwasappliedinthe
Doylecase,pp.247U.S.183185.
Briefasitis,itindicatesthecharacteristicanddistinguishingattributeofincomeessentialforacorrectsolutionofthepresentcontroversy.The
government,althoughbasingitsargumentuponthedefinitionasquoted,placedchiefemphasisupontheword"gain,"whichwasextendedto
includeavarietyofmeaningswhilethesignificanceofthenextthreewordswaseitheroverlookedormisconceived."Derivedfromcapital""the
gainderivedfromcapital,"etc.Here,wehavetheessentialmatter:notagainaccruingtocapitalnotagrowthorincrementofvalueinthe
investmentbutagain,aprofit,somethingofexchangeablevalue,proceedingfromtheproperty,severedfromthecapital,howeverinvestedor
employed,andcomingin,being"derived"thatis,receivedordrawnbytherecipient(thetaxpayer)forhisseparateuse,benefitanddisposal
thatisincomederivedfromproperty.Nothingelseanswersthedescription.
ThesamefundamentalconceptionisclearlysetforthintheSixteenthAmendment"incomes,fromwhateversourcederived"theessential
thoughtbeingexpressed
Page252U.S.208
7/29
8/22/2016
Page252U.S.208
withaconcisenessandlucidityentirelyinharmonywiththeformandstyleoftheConstitution.
Canastockdividend,consideringitsessentialcharacter,bebroughtwithinthedefinition?Toanswerthis,regardmustbehadtothenatureofa
corporationandthestockholder'srelationtoit.Werefer,ofcourse,toacorporationsuchastheoneinthecaseatbar,organizedforprofit,and
havingacapitalstockdividedintosharestowhichanominalorparvalueisattributed.
Certainlytheinterestofthestockholderisacapitalinterest,andhiscertificatesofstockarebuttheevidenceofit.Theystatethenumberofshares
towhichheisentitledandindicatetheirparvalueandhowthestockmaybetransferred.Theyshowthatheorhisassignors,immediateor
remote,havecontributedcapitaltotheenterprise,thatheisentitledtoacorrespondinginterestproportionatetothewhole,entitledtohavethe
propertyandbusinessofthecompanydevotedduringthecorporateexistencetoattainmentofthecommonobjects,entitledtovoteat
stockholders'meetings,toreceivedividendsoutofthecorporation'sprofitsifandwhendeclared,and,intheeventofliquidation,toreceivea
proportionateshareofthenetassets,ifany,remainingafterpayingcreditors.Shortofliquidation,oruntildividenddeclared,hehasnorightto
withdrawanypartofeithercapitalorprofitsfromthecommonenterpriseonthecontrary,hisinterestpertainsnottoanypart,divisibleor
indivisible,buttotheentireassets,business,andaffairsofthecompany.Norisittheinterestofanownerintheassetsthemselves,sincethe
corporationhasfulltitle,legalandequitable,tothewhole.Thestockholderhastherighttohavetheassetsemployedintheenterprise,withthe
incidentalrightsmentionedbut,asstockholder,hehasnorighttowithdraw,onlytherighttopersist,subjecttotherisksoftheenterprise,and
lookingonlytodividendsforhisreturn.Ifhedesirestodissociatehimself
Page252U.S.209
fromthecompany,hecandosoonlybydisposingofhisstock.
Forbookkeepingpurposes,thecompanyacknowledgesaliabilityinformtothestockholdersequivalenttotheaggregateparvalueoftheirstock,
evidencedbya"capitalstockaccount."Ifprofitshavebeenmadeandnotdivided,theycreateadditionalbookkeepingliabilitiesundertheheadof
"profitandloss,""undividedprofits,""surplusaccount,"orthelike.Noneofthese,however,givestothestockholdersasabody,muchlesstoany
oneofthem,eitheraclaimagainstthegoingconcernforanyparticularsumofmoneyorarighttoanyparticularportionoftheassetsoranyshare
inthemunlessoruntilthedirectorsconcludethatdividendsshallbemadeandapartofthecompany'sassetssegregatedfromthecommonfund
forthepurpose.Thedividendnormallyispayableinmoney,underexceptionalcircumstancesinsomeotherdivisibleproperty,andwhensopaid,
thenonly(excluding,ofcourse,apossibleadvantageoussaleofhisstockorwindingupofthecompany)doesthestockholderrealizeaprofitor
gainwhichbecomeshisseparateproperty,andthusderiveincomefromthecapitalthatheorhispredecessorhasinvested.
Inthepresentcase,thecorporationhadsurplusandundividedprofitsinvestedinplant,property,andbusiness,andrequiredforthepurposesof
thecorporation,amountingtoabout$45,000,000,inadditiontooutstandingcapitalstockof$50,000,000.Inthis,thecaseisnotextraordinary.The
profitsofacorporation,astheyappearuponthebalancesheetattheendoftheyear,neednotbeintheformofmoneyonhandinexcessof
8/29
8/22/2016
profitsofacorporation,astheyappearuponthebalancesheetattheendoftheyear,neednotbeintheformofmoneyonhandinexcessof
whatisrequiredtomeetcurrentliabilitiesandfinancecurrentoperationsofthecompany.Often,especiallyinagrowingbusiness,onlyapart,
sometimesasmallpart,oftheyear'sprofitsisinpropertycapableofdivision,theremainderhavingbeenabsorbedintheacquisitionofincreased
plant,
Page252U.S.210
equipment,stockintrade,oraccountsreceivable,orindecreaseofoutstandingliabilities.Whenonlyapartisavailablefordividends,thebalance
oftheyear'sprofitsiscarriedtothecreditofundividedprofits,orsurplus,orsomeotheraccounthavinglikesignificance.Ifthereafterthecompany
findsitselfinfundsbeyondcurrentneeds,itmaydeclaredividendsoutofsuchsurplusorundividedprofitsotherwiseitmaygoonforyears
conductingasuccessfulbusiness,butrequiringmoreandmoreworkingcapitalbecauseoftheextensionofitsoperations,andthereforeunableto
declaredividendsapproximatingtheamountofitsprofits.Thus,thesurplusmayincreaseuntilitequalsorevenexceedstheparvalueofthe
outstandingcapitalstock.Thismaybeadjusteduponthebooksinthemodeadoptedinthecaseatbarbydeclaringa"stockdividend."This,
however,isnomorethanabookadjustment,inessencenotadividend,butrathertheoppositenopartoftheassetsofthecompanyis
separatedfromthecommonfund,nothingdistributedexceptpapercertificatesthatevidenceanantecedentincreaseinthevalueofthe
stockholder'scapitalinterestresultingfromanaccumulationofprofitsbythecompany,butprofitssofarabsorbedinthebusinessastorenderit
impracticabletoseparatethemforwithdrawalanddistribution.Inordertomaketheadjustment,achargeismadeagainstsurplusaccountwith
correspondingcredittocapitalstockaccount,equaltotheproposed"dividend"thenewstockisissuedagainstthisandthecertificatesdelivered
totheexistingstockholdersinproportiontotheirpreviousholdings.This,however,ismerelybookkeepingthatdoesnotaffecttheaggregate
assetsofthecorporationoritsoutstandingliabilitiesitaffectsonlytheform,nottheessence,ofthe"liability"acknowledgedbythecorporationto
itsownshareholders,andthisthroughareadjustmentofaccountsononesideofthebalancesheetonly,increasing"capitalstock"attheexpense
of
Page252U.S.211
"surplus"itdoesnotalterthepreexistingproportionateinterestofanystockholderorincreasetheintrinsicvalueofhisholdingoroftheaggregate
holdingsoftheotherstockholdersastheystoodbefore.Thenewcertificatessimplyincreasethenumberoftheshares,withconsequentdilutionof
thevalueofeachshare.
A"stockdividend"showsthatthecompany'saccumulatedprofitshavebeencapitalized,insteadofdistributedtothestockholdersorretainedas
surplusavailablefordistributioninmoneyorinkindshouldopportunityoffer.Farfrombeingarealizationofprofitsofthestockholder,ittends
rathertopostponesuchrealization,inthatthefundrepresentedbythenewstockhasbeentransferredfromsurplustocapital,andnolongeris
availableforactualdistribution.
Theessentialandcontrollingfactisthatthestockholderhasreceivednothingoutofthecompany'sassetsforhisseparateuseandbenefitonthe
9/29
8/22/2016
contrary,everydollarofhisoriginalinvestment,togetherwithwhateveraccretionsandaccumulationshaveresultedfromemploymentofhis
moneyandthatoftheotherstockholdersinthebusinessofthecompany,stillremainsthepropertyofthecompany,andsubjecttobusinessrisks
whichmayresultinwipingouttheentireinvestment.Havingregardtotheverytruthofthematter,tosubstanceandnottoform,hehasreceived
nothingthatanswersthedefinitionofincomewithinthemeaningoftheSixteenthAmendment.
Beingconcernedonlywiththetruecharacterandeffectofsuchadividendwhenlawfullymade,welayasidethequestionwhether,inaparticular
case,astockdividendmaybeauthorizedbythelocallawgoverningthecorporation,orwhetherthecapitalizationofprofitsmaybetheresultof
correctjudgmentandproperbusinesspolicyonthepartofitsmanagement,andadueregardfortheinterestsofthestockholders.Andweare
consideringthetaxabilityofbonafidestockdividendsonly.
Page252U.S.212
Weareclearthatnotonlydoesastockdividendreallytakenothingfromthepropertyofthecorporationandaddnothingtothatofthe
shareholder,butthattheantecedentaccumulationofprofitsevidencedthereby,whileindicatingthattheshareholderisthericherbecauseofan
increaseofhiscapital,atthesametimeshowshehasnotrealizedorreceivedanyincomeinthetransaction.
Itissaidthatastockholdermaysellthenewsharesacquiredinthestockdividend,andsohemay,ifhecanfindabuyer.Itisequallytruethat,if
hedoessell,andindoingsorealizesaprofit,suchprofit,likeanyother,isincome,and,sofarasitmayhavearisensincetheSixteenth
Amendment,istaxablebyCongresswithoutapportionment.Thesamewouldbetruewerehetosellsomeofhisoriginalsharesataprofit.Butifa
shareholdersellsdividendstock,henecessarilydisposesofapartofhiscapitalinterest,justasifheshouldsellapartofhisoldstock,either
beforeorafterthedividend.Whatheretainsnolongerentitleshimtothesameproportionoffuturedividendsasbeforethesale.Hispartinthe
controlofthecompanylikewiseisdiminished.Thus,ifoneholding$60,000outofatotal$100,000ofthecapitalstockofacorporationshould
receiveincommonwithotherstockholdersa50percentstockdividend,andshouldsellhispart,hetherebywouldbereducedfromamajoritytoa
minoritystockholder,havingsixfifteenthsinsteadofsixtenthsofthetotalstockoutstanding.Acorrespondingandproportionatedecreasein
capitalinterestandinvotingpowerwouldbefallaminorityholdershouldheselldividendstock,itbeinginthenatureofthingsimpossibleforoneto
disposeofanypartofsuchanissuewithoutaproportionatedisturbanceofthedistributionoftheentirecapitalstockandalikediminutionofthe
seller'scomparativevotingpowerthat"rightpreservativeofrights"inthecontrolofacorporation.
Page252U.S.213
Yet,withoutselling,theshareholder,unlesspossessedofotherresources,hasnotthewherewithaltopayanincometaxuponthedividendstock.
Nothingcouldmoreclearlyshowthattotaxastockdividendistotaxacapitalincrease,andnotincome,thanthisdemonstrationthat,inthenature
ofthings,itrequiresconversionofcapitalinordertopaythetax.
Throughouttheargumentofthegovernment,inavarietyofforms,runsthefundamentalerroralreadymentionedafailuretoappraisecorrectly
10/29
8/22/2016
theforceoftheterm"income"asusedintheSixteenthAmendment,oratleasttogivepracticaleffecttoit.Thus,thegovernmentcontendsthat
thetax"isleviedonincomederivedfromcorporateearnings,"whenintruththestockholderhas"derived"nothingexceptpapercertificates,which,
sofarastheyhaveanyeffect,denyhimpresentparticipationinsuchearnings.Itcontendsthatthetaxmaybelaidwhenearnings"arereceived
bythestockholder,"whereashehasreceivednonethattheprofitsare"distributedbymeansofastockdividend,"althoughastockdividend
distributesnoprofitsthat,undertheActof1916,"thetaxisonthestockholder'sshareincorporateearnings,"whenintruthastockholderhasno
suchshare,andreceivesnoneinastockdividendthat"theprofitsaresegregatedfromhisformercapital,andhehasaseparatecertificate
representinghisinvestedprofitsorgains,"whereastherehasbeennosegregationofprofits,norhasheanyseparatecertificaterepresentinga
personalgain,sincethecertificates,newandold,arealikeinwhattheyrepresentacapitalinterestintheentireconcernsofthecorporation.
Wehavenodoubtofthepowerordutyofacourttolookthroughtheformofthecorporationanddeterminethequestionofthestockholder'sright
inordertoascertainwhetherhehasreceivedincometaxablebyCongresswithoutapportionment.But,lookingthroughtheform,
Page252U.S.214
wecannotdisregardtheessentialtruthdisclosed,ignorethesubstantialdifferencebetweencorporationandstockholder,treattheentire
organizationasunreal,lookuponstockholdersaspartnerswhentheyarenotsuch,treatthemashavinginequityarighttoapartitionofthe
corporateassetswhentheyhavenone,andindulgethefictionthattheyhavereceivedandrealizedashareoftheprofitsofthecompanywhichin
truththeyhaveneitherreceivednorrealized.Wemusttreatthecorporationasasubstantialentityseparatefromthestockholdernotonlybecause
suchisthepracticalfact,butbecauseitisonlybyrecognizingsuchseparatenessthatanydividendevenonepaidinmoneyorpropertycan
beregardedasincomeofthestockholder.Didweregardcorporationandstockholdersasaltogetheridentical,therewouldbenoincomeexcept
asthecorporationacquiredit,andwhilethiswouldbetaxableagainstthecorporationasincomeunderappropriateprovisionsoflaw,the
individualstockholderscouldnotbeseparatelyandadditionallytaxedwithrespecttotheirseveralsharesevenwhendivided,since,iftherewere
entireidentitybetweenthemandthecompany,theycouldnotberegardedasreceivinganythingfromit,anymorethanifone'smoneyweretobe
removedfromonepockettoanother.
Concedingthatthemereissueofastockdividendmakestherecipientnoricherthanbefore,thegovernmentneverthelesscontendsthatthenew
certificatesmeasuretheextenttowhichthegainsaccumulatedbythecorporationhavemadehimthericher.Therearetwoinsuperabledifficulties
withthis.Inthefirstplace,itwoulddependuponhowlonghehadheldthestockwhetherthestockdividendindicatedtheextenttowhichhehad
beenenrichedbytheoperationsofthecompanyunlesshehadhelditthroughoutsuchoperations,themeasurewouldnotholdtrue.Secondly,
andmoreimportantforpresentpurposes,enrichmentthroughincreaseinvalue
Page252U.S.215
ofcapitalinvestmentisnotincomeinanypropermeaningoftheterm.
Thecomplaintcontainsavermentsrespectingthemarketpricesofstocksuchasplaintiffheld,baseduponsalesbeforeandafterthestock
11/29
8/22/2016
dividend,tendingtoshowthatthereceiptoftheadditionalsharesdidnotsubstantiallychangethemarketvalueofherentireholdings.Thistends
toshowthat,inthisinstance,marketquotationsreflectedintrinsicvaluesathingtheydonotalwaysdo.Butweregardthemarketpricesofthe
securitiesasanunsafecriterioninaninquirysuchasthepresent,whenthequestionmustbenotwhatwillthethingsellfor,butwhatisitintruth
andinessence.
Itissaidthereisnodifferenceinprinciplebetweenasimplestockdividendandacasewherestockholdersusemoneyreceivedascashdividends
topurchaseadditionalstockcontemporaneouslyissuedbythecorporation.Butanactualcashdividend,witharealoptiontothestockholdereither
tokeepthemoneyforhisownortoreinvestitinnewshares,wouldbeasfarremovedaspossiblefromatruestockdividend,suchastheonewe
haveunderconsideration,wherenothingofvalueistakenfromthecompany'sassetsandtransferredtotheindividualownershipoftheseveral
stockholdersandtherebysubjectedtotheirdisposal.
Thegovernment'srelianceuponthesupposedanalogybetweenadividendofthecorporation'sownsharesandonemadebydistributingshares
ownedbyitinthestockofanothercompanycallsfornocommentbeyondthestatementthatthelatterdistributesassetsofthecompanyamong
theshareholders,whiletheformerdoesnot,andfornocitationofauthorityexceptPeabodyv.Eisner,247U.S.347[17],247U.S.349350.
Tworecentdecisions,proceedingfromcourtsofhighjurisdiction,arecitedinsupportofthepositionofthegovernment.
Page252U.S.216
SwanBreweryCo.,Ltd.v.Rex,[1914]A.C.231,aroseundertheDividendDutiesActofWesternAustralia,whichprovidedthat"dividend"should
include"everydividend,profit,advantage,orgainintendedtobepaidorcreditedtoordistributedamonganymembersordirectorsofany
company,"except,etc.Therewasastockdividend,thenewsharesbeingallottedamongtheshareholdersprorata,andthequestionwaswhether
thiswasadistributionofadividendwithinthemeaningoftheact.TheJudicialCommitteeofthePrivyCouncilsustainedthedividenddutyupon
thegroundthat,although"inordinarylanguagethenewshareswouldnotbecalledadividend,norwouldtheallotmentofthembeadistributionof
adividend,"yet,withinthemeaningoftheact,suchnewshareswerean"advantage"totherecipients.Therebeingnoconstitutionalrestriction
upontheactionofthelawmakingbody,thecasepresentedmerelyaquestionofstatutoryconstruction,andmanifestlythedecisionisnota
precedentfortheguidanceofthisCourtwhenactingunderadutytotestanactofCongressbythelimitationsofawrittenConstitutionhaving
superiorforce.
InTaxCommissionerv.Putnam,(1917)227Mass.522,itwasheldthattheFortyFourthamendmenttotheConstitutionofMassachusetts,which
conferreduponthelegislaturefullpowertotaxincomes,"mustbeinterpretedasincludingeveryitemwhichbyanyreasonableunderstandingcan
fairlyberegardedasincome"(pp.526,531),andthatunderit,astockdividendwastaxableasincome,thecourtsaying(p.535):
"Inessence,thethingwhichhasbeendoneistodistributeasymbolrepresentinganaccumulationofprofits,which,insteadofbeingpaidoutin
cash,isinvestedinthebusiness,thusaugmentingitsdurableassets.Inthisaspectofthecase,thesubstanceofthetransactionisnodifferent
12/29
8/22/2016
cash,isinvestedinthebusiness,thusaugmentingitsdurableassets.Inthisaspectofthecase,thesubstanceofthetransactionisnodifferent
fromwhatitwouldbeifacashdividendhadbeendeclaredwiththeprivilegeofsubscriptiontoanequivalentamountofnewshares."
Page252U.S.217
Wecannotacceptthisreasoning.Evidently,inordertogiveasufficientlybroadsweeptothenewtaxingprovision,itwasdeemednecessaryto
takethesymbolforthesubstance,accumulationfordistribution,capitalaccretionforitsopposite,whileacasewheremoneyispaidintothehand
ofthestockholderwithanoptiontobuynewshareswithit,followedbyacceptanceoftheoption,wasregardedasidenticalinsubstancewitha
casewherethestockholderreceivesnomoneyandhasnooption.TheMassachusettscourtwasnotunderanobligation,liketheonewhichbinds
us,ofapplyingaconstitutionalamendmentinthelightofotherconstitutionalprovisionsthatstandinthewayofextendingitbyconstruction.
Uponthesecondargument,thegovernment,recognizingtheforceofthedecisioninTownev.Eisner,supra,andvirtuallyabandoningthe
contentionthatastockdividendincreasestheinterestofthestockholderorotherwiseenricheshim,insistedasanalternativethat,bythetrue
constructionoftheActof1916,thetaxisimposednotuponthestockdividend,butratheruponthestockholder'sshareoftheundividedprofits
previouslyaccumulatedbythecorporation,thetaxbeingleviedasamatterofconvenienceatthetimesuchprofitsbecomemanifestthroughthe
stockdividend.Ifsoconstrued,wouldtheactbeconstitutional?
ThatCongresshaspowertotaxshareholdersupontheirpropertyinterestsinthestockofcorporationsisbeyondquestion,andthatsuchinterests
mightbevaluedinviewoftheconditionofthecompany,includingitsaccumulatedandundividedprofits,isequallyclear.Butthatthiswouldbe
taxationofpropertybecauseofownership,andhencewouldrequireapportionmentundertheprovisionsoftheConstitution,issettledbeyond
peradventurebypreviousdecisionsofthisCourt.
ThegovernmentreliesuponCollectorv.Hubbard,[18](1870)
Page252U.S.218
12Wall.1,whicharoseunder117oftheActofJune30,1864,c.173,13Stat.223,282,providingthat
"Thegainsandprofitsofallcompanies,whetherincorporatedorpartnership,otherthanthecompaniesspecifiedinthatsection,shallbeincluded
inestimatingtheannualgains,profits,orincomeofanyperson,entitledtothesame,whetherdividedorotherwise."
Thecourtheldanindividualtaxableuponhisproportionoftheearningsofacorporationalthoughnotdeclaredasdividendsandalthoughinvested
inassetsnotintheirnaturedivisible.Concedingthatthestockholderforcertainpurposeshadnotitlepriortodividenddeclared,thecourt
neverthelesssaid(p.79U.S.18):
"Grantallthat,stillitistruethattheownerofashareofstockinacorporationholdsthesharewithallitsincidents,andthatamongthoseincidents
istherighttoreceiveallfuturedividendsthatis,hisproportionalshareofallprofitsnotthendivided.Profitsareincidenttothesharetowhichthe
13/29
8/22/2016
istherighttoreceiveallfuturedividendsthatis,hisproportionalshareofallprofitsnotthendivided.Profitsareincidenttothesharetowhichthe
owneratoncebecomesentitledprovidedheremainsamemberofthecorporationuntiladividendismade.Regardedasanincidenttothe
shares,undividedprofitsarepropertyoftheshareholder,andassucharethepropersubjectofsale,gift,ordevise.Undividedprofitsinvestedin
realestate,machinery,orrawmaterialforthepurposeofbeingmanufacturedareinvestmentsinwhichthestockholdersareinterested,andwhen
suchprofitsareactuallyappropriatedtothepaymentofthedebtsofthecorporation,theyservetoincreasethemarketvalueoftheshares,
whetherheldbytheoriginalsubscribersorbyassignees."
InsofarasthisseemstoupholdtherightofCongresstotaxwithoutapportionmentastockholder'sinterestinaccumulatedearningspriorto
dividenddeclared,itmustberegardedasoverruledbyPollockv.Farmers'Loan&TrustCo.,158U.S.601[19],158U.S.627628,158U.S.637.
ConcedingCollectorv.Hubbardwasinconsistentwiththedoctrineofthatcase,becauseitsustainedadirecttaxuponpropertynotapportioned
Page252U.S.219
amongthestates,thegovernmentneverthelessinsiststhatthesixteenthAmendmentremovedthisobstacle,sothatnowtheHubbardcaseis
authorityforthepowerofCongresstolevyataxonthestockholder'sshareintheaccumulatedprofitsofthecorporationevenbeforedivisionby
thedeclarationofadividendofanykind.Manifestlythisargumentmustberejected,sincetheamendmentappliestoincomeonly,andwhatis
calledthestockholder'sshareintheaccumulatedprofitsofthecompanyiscapital,notincome.Aswehavepointedout,astockholderhasno
individualshareinaccumulatedprofits,norinanyparticularpartoftheassetsofthecorporation,priortodividenddeclared.
Thus,fromeverypointofview,wearebroughtirresistiblytotheconclusionthatneitherundertheSixteenthAmendmentnorotherwisehas
Congresspowertotaxwithoutapportionmentatruestockdividendmadelawfullyandingoodfaith,ortheaccumulatedprofitsbehindit,as
incomeofthestockholder.TheRevenueActof1916,insofarasitimposesataxuponthestockholderbecauseofsuchdividend,contravenesthe
provisionsofArticleI,2,cl.3,andArticleI,9,cl.4,oftheConstitution,andtothisextentisinvalidnotwithstandingtheSixteenthAmendment.
Judgmentaffirmed.
"TitleI.IncomeTax"
"PartI.OnIndividuals"
"Sec.2.(a)That,subjectonlytosuchexemptionsanddeductionsasarehereinafterallowed,thenetincomeofataxablepersonshallinclude
gains,profits,andincomederived,...alsofrominterest,rent,dividends,securities,orthetransactionofanybusinesscarriedonforgainorprofit,
orgainsorprofitsandincomederivedfromanysourcewhatever:Provided,thattheterm'dividends'asusedinthistitleshallbeheldtomeanany
distributionmadeororderedtobemadebyacorporation,...outofitsearningsorprofitsaccruedsinceMarchfirst,nineteenhundredand
thirteen,andpayabletoitsshareholders,whether,incashorinstockofthecorporation,...whichstockdividendshallbeconsideredincome,to
theamountofitscashvalue."
14/29
8/22/2016
theamountofitscashvalue."
MR.JUSTICEHOLMES,dissenting.
IthinkthatTownev.Eisner,245U.S.418[20],wasrightinitsreasoningandresult,andthat,onsoundprinciples,thestockdividendwasnot
income.ButitwasclearlyintimatedinthatcasethattheconstructionofthestatutethenbeforetheCourtmightbedifferentfromthatofthe
Constitution.245U.S.245U.S.425.Ithinkthattheword"incomes"intheSixteenthAmendmentshouldbereadin
Page252U.S.220
"asensemostobvioustothecommonunderstandingatthetimeofitsadoption."Bishopv.State,149Ind.223,230Statev.Butler,70Fla.102,
133.Foritwasforpublicadoptionthatitwasproposed.McCullochv.Maryland,[21]4Wheat.316,17U.S.407.Theknownpurposeofthis
Amendmentwastogetridofnicequestionsastowhatmightbedirecttaxes,andIcannotdoubtthatmostpeoplenotlawyerswouldsuppose
whentheyvotedforitthattheyputaquestionlikethepresenttorest.IamofopinionthattheAmendmentjustifiesthetax.SeeTaxCommissioner
v.Putnam,227Mass.522,532,533.
MR.JUSTICEDAYconcursinthisopinion.
MR.JUSTICEBRANDEISdeliveredthefollowingopinion,inwhichMR.JUSTICECLARKEconcurred.
Financiers,withtheaidoflawyers,devisedlongagotwodifferentmethodsbywhichacorporationcan,withoutincreasingitsindebtedness,keep
forcorporatepurposesaccumulatedprofits,andyet,ineffect,distributetheseprofitsamongitsstockholders.Onemethodisasimpleone.The
capitalstockisincreasedthenewstockispaidupwiththeaccumulatedprofits,andthenewsharesofpaidupstockarethendistributedamong
thestockholdersprorataasadividend.Ifthestockholderprefersreadymoneytoincreasinghisholdingofthestockinthecompany,hesellsthe
newstockreceivedasadividend.Theothermethodisslightlymorecomplicated..arrangementsaremadeforanincreaseofstocktobeoffered
tostockholdersprorataatpar,andatthesametimeforthepaymentofacashdividendequaltotheamountwhichthestockholderwillbe
requiredtopayto
Page252U.S.221
thecompany,ifheavailshimselfoftherighttosubscribeforhisprorataofthenewstock.Ifthestockholdertakesthenewstock,asisexpected,
hemayendorsethedividendcheckreceivedtothecorporation,andthuspayforthenewstock.Inordertoensurethatallthenewstockso
offeredwillbetaken,thepriceatwhichitisofferedisfixedfarbelowwhatitisbelievedwillbeitsmarketvalue.Ifthestockholderprefersready
moneytoanincreaseofhisholdingsofstock,hemaysellhisrighttotakenewstockprorata,whichisevidencedbyanassignableinstrument.In
thateventthepurchaseroftherightsrepaystothecorporation,asthesubscriptionpriceofthenewstock,anamountequaltothatwhichithad
15/29
8/22/2016
thateventthepurchaseroftherightsrepaystothecorporation,asthesubscriptionpriceofthenewstock,anamountequaltothatwhichithad
paidasacashdividendtothestockholder.
BothofthesemethodsofretainingaccumulatedprofitswhileineffectdistributingthemasadividendhadbeenincommonuseintheUnitedStates
formanyyearspriortotheadoptionoftheSixteenthAmendment.Theywererecognizedequivalents.Whetheraparticularcorporationemployed
oneortheothermethodwasdeterminedsometimesbyrequirementsofthelawunderwhichthecorporationwasorganizedsometimesitwas
determinedbypreferencesoftheindividualofficialsofthecorporation,andsometimesbystockmarketconditions.Whichevermethodwas
employed,theresultantdistributionofthenewstockwascommonlyreferredtoasastockdividend.Howthesetwomethodshavebeenemployed
maybeillustratedbytheactioninthisrespect(asreportedinMoody'sManual,1918Industrial,andtheCommercialandFinancialChronicle)of
someoftheStandardOilcompaniessincethedisintegrationpursuanttothedecisionofthisCourtin1911.StandardOilCo.v.UnitedStates,221
U.S.1[22].
(a)StandardOilCo.(ofIndiana),anIndianacorporation.IthadonDecember31,1911,$1,000,000capitalstock(allcommon),andalarge
surplus.OnMay15,
Page252U.S.222
1912,itincreaseditscapitalstockto$30,000,000,andpaidasimplestockdividendof2,900percentinstock.[Footnote1]
(b)StandardOilCo.(ofNebraska),aNebraskacorporation.IthadonDecember31,1911,$600,000capitalstock(allcommon),andasubstantial
surplus.OnApril15,1912,itpaidasimplestockdividendof331/3percent,increasingtheoutstandingcapitalto$800,000.Duringthecalendar
year1912,itpaidcashdividendsaggregating20percent,butitearnedconsiderablymore,andhadatthecloseoftheyearagainasubstantial
surplus.OnJune20,1913,itdeclaredafurtherstockdividendof25percent,thusincreasingthecapitalto$1,000,000.[Footnote2]
(c)TheStandardOilCo.(ofKentucky),aKentuckycorporation.IthadonDecember31,1913,$1,000,000capitalstock(allcommon)and
$3,701,710surplus.Ofthissurplus,$902,457hadbeenearnedduringthecalendaryear1913,thenetprofitsofthatyearhavingbeen$1,002,457
andthedividendspaidonly$100,000(10percent).OnDecember22,1913,acashdividendof$200persharewasdeclaredpayableonFebruary
14,1914,tostockholdersofrecordJanuary31,1914,andthesestockholderswereofferedtherighttosubscribeforanequalamountofnew
stockatparandtoapplythecashdividendinpaymenttherefor.Theoutstandingstockwasthusincreasedto$3,000,000.Duringthecalendar
years1914,1915,and1916,quarterlydividendswerepaidonthisstockatanannualrateofbetween15percentand20percent,butthe
company'ssurplusincreasedby$2,347,614,sothat,onDecember31,1916,ithadalargesurplusoverits$3,000,000capitalstock.On
December15,1916,thecompanyissuedacirculartothestockholders,saying:
"Thecompany'sbusinessforthisyearhasshowna
Page252U.S.223
16/29
8/22/2016
verygoodincreaseinvolumeandaproportionateincreaseinprofits,anditisestimatedthat,byJanuary1,1917,thecompanywillhaveasurplus
ofover$4,000,000.Theboardfeelsjustifiedinstatingthat,ifthepropositiontoincreasethecapitalstockisactedonfavorably,itwillbeproperin
thenearfuturetodeclareacashdividendof100percentandtoallowthestockholderstheprivilegeprorataaccordingtotheirholdings,to
purchasethenewstockatpar,theplanbeingtoallowthestockholders,iftheydesire,tousetheircashdividendtopayforthenewstock."
Theincreaseofstockwasvoted.Thecompanythenpaidacashdividendof100percent,payableMay1,1917,againofferingtosuch
stockholderstherighttosubscribeforanequalamountofnewstockatparandtoapplythecashdividendinpaymenttherefor.
Moody'sManual,describingthetransactionwithexactness,saysfirstthatthestockwasincreasedfrom$3,000,000to$6,000,000,"acash
dividendof100percent,payableMay1,1917,beingexchangedforoneshareofnewstock,theequivalentofa100percentstockdividend."But
laterinthereportgiving,ascustomaryintheManual,thedividendrecordofthecompany,theManualsays:"Astockdividendof200percentwas
paidFebruary14,1914,andoneof100percentonMay1,1197."And,inreportingspecificallytheincomeaccountofthecompanyforaseriesof
yearsendingDecember31,coveringnetprofits,dividendspaid,andsurplusfortheyear,itgives,astheaggregateofdividendsfortheyear1917,
$660,000(whichwastheaggregatepaidonthequarterlycashdividend5percentJanuaryandApril6percentJulyandOctober),andaddsina
note:"Inaddition,astockdividendof100percentwaspaidduringtheyear."[Footnote3]TheWallStreetJournalof
Page252U.S.224
May2,1917,p.2,quotesthe1917"high"priceforStandardOilofKentuckyas"375exstockdividend."
Itthusappearsthat,amongfinanciersandinvestors,thedistributionofthestock,bywhichevermethodeffected,iscalledastockdividendthatthe
twomethodsbywhichaccumulatedprofitsarelegallyretainedforcorporatepurposesandatthesametimedistributedasdividendsare
recognizedbythemtobeequivalents,andthatthefinancialresultstothecorporationandtothestockholdersofthetwomethodsaresubstantially
thesame,unlessadifferenceresultsfromtheapplicationofthefederalincometaxlaw.
Mrs.Macomber,acitizenandresidentofNewYork,was,intheyear1916,astockholderintheStandardOilCompany(ofCalifornia),a
corporationorganizedunderthelawsofCaliforniaandhavingitsprincipalplaceofbusinessinthatstate.Duringthatyear,shereceivedfromthe
companyastockdividendrepresentingprofitsearnedsinceMarch1,1913.Thedividendwaspaidbydirectissueofthestocktoheraccordingto
thesimplemethoddescribedabove,pursuedalsobytheIndianaandNebraskacompanies.In1917,shewastaxedunderthefederallawonthe
stockdividendsoreceivedatitsparvalueof$100ashare,asincomereceivedduringtheyear1916.Suchastockdividendisincome,as
distinguishedfromcapital,bothunderthelawofNewYorkandunderthelawofCalifornia,becauseinbothstateseverydividendrepresenting
profitsisdeemedtobeincome,whetherpaidincashorinstock.IthadbeensoheldinNewYork,wherethequestionaroseasbetweenlifetenant
andremainderman,Lowryv.Farmers'Loan&TrustCo.,172N.Y.137MatterofOsborne,209N.Y.450,andalso,wherethequestionarosein
mattersoftaxation,Peoplev.Glynn,
17/29
8/22/2016
mattersoftaxation,Peoplev.Glynn,
Page252U.S.225
130App.Div.332,198N.Y.605.IthasbeensoheldinCalifornia,wherethequestionappearstohavearisenonlyincontroversiesbetweenlife
tenantandremainderman.EstateofDuffill,58Cal.Dec.97,180Cal.748.
Itisconcededthat,ifthestockdividendpaidtoMrs.MacomberhadbeenmadebythemorecomplicatedmethodpursuedbytheStandardOil
CompanyofKentuckythatis,issuingrightstotakenewstockprorataandpayingtoeachstockholdersimultaneouslyadividendincash
sufficientinamounttoenablehimtopayforthisprorataofnewstocktobepurchasedthedividendsopaidtohimwouldhavebeentaxableas
income,whetherheretainedthecashorwhetherhereturnedittothecorporationinpaymentforhisprorataofnewstock.Butitiscontended
that,becausethesimplemethodwasadoptedofhavingthenewstockissueddirecttothestockholdersaspaidupstock,thenewstockisnotto
bedeemedincome,whethersheretaineditorconverteditintocashbysale.Ifsuchadifferentresultcanflowmerelyfromthedifferenceinthe
methodpursued,itmustbebecauseCongressiswithoutpowertotaxasincomeofthestockholdereitherthestockreceivedunderthelatter
methodortheproceedsofitssale,forCongresshas,bytheprovisionsintheRevenueActof1916,expresslydeclareditspurposetomakestock
dividends,bywhichevermethodpaid,taxableasincome.
TheSixteenthAmendment,proclaimedFebruary25,1913,declares:
"TheCongressshallhavepowertolayandcollecttaxesonincomes,fromwhateversourcederived,withoutapportionmentamongtheseveral
states,andwithoutregardtoanycensusorenumeration."
TheRevenueActofSeptember8,1916,c.463,2a,39Stat.756,757,provided:
"Thattheterm'dividends'asusedinthistitleshall
Page252U.S.226
beheldtomeananydistributionmadeororderedtobemadebyacorporation,...outofitsearningsorprofitsaccruedsinceMarchfirst,
nineteenhundredandthirteen,andpayabletoitsshareholders,whetherincashorinstockofthecorporation,...whichstockdividendshallbe
consideredincome,totheamountofitscashvalue."
Hitherto,powersconferreduponCongressbytheConstitutionhavebeenliberallyconstrued,andhavebeenheldtoextendtoeverymeans
appropriatetoattaintheendsought.Indeterminingthescopeofthepower,thesubstanceofthetransaction,notitsform,hasbeenregarded.
Martinv.Hunter,[23]1Wheat.304,14U.S.326McCullochv.Maryland,[24]4Wheat.316,17U.S.407,17U.S.415Brownv.Maryland,[25]12
Wheat.419,25U.S.446Craigv.Missouri,[26]4Pet.410,29U.S.433Jarroltv.Moberly,103U.S.580[27],103U.S.585587LegalTender
18/29
8/22/2016
Wheat.419,25U.S.446Craigv.Missouri,[26]4Pet.410,29U.S.433Jarroltv.Moberly,103U.S.580[27],103U.S.585587LegalTender
Case,110U.S.421[28],110U.S.444LithographCo.v.Sarony,111U.S.53[29],111U.S.58UnitedStatesv.RealtyCo.,163U.S.427[30],163
U.S.440442SouthCarolinav.UnitedStates,199U.S.437[31],199U.S.448449.IsthereanythinginthephraseologyoftheSixteenth
AmendmentorinthenatureofcorporatedividendswhichshouldleadtoadeparturefromtheserulesofconstructionandcompelthisCourtto
holdthatCongressispowerlesstopreventaresultsoextraordinaryasthatherecontendedforbythestockholder?
First.Theterm"income,"whenappliedtotheinvestmentofthestockholderinacorporation,had,beforetheadoptionoftheSixteenth
Amendment,beencommonlyunderstoodtomeanthereturnsfromtimetotimereceivedbythestockholderfromgainsorearningsofthe
corporation.Adividendreceivedbyastockholderfromacorporationmaybeeitherindistributionofcapitalassetsorindistributionofprofits.
Whetheritistheoneortheotherisinnowayaffectedbythemediuminwhichitispaid,norbythemethodormeansthroughwhichtheparticular
thingdistributedasadividendwasprocured.Ifthe
Page252U.S.227
dividendisdeclaredpayableincash,themoneywithwhichtopayitisordinarilytakenfromsurpluscashinthetreasury.But(ifthereareprofits
legallyavailablefordistributionandthelawunderwhichthecompanywasincorporatedsopermits)thecompanymayraisethemoneyby
discountingnegotiablepaper,orbysellingbonds,scriporstockofanothercorporationtheninthetreasury,orbysellingitsownbonds,scripor
stocktheninthetreasury,orbysellingitsownbonds,scriporstockissuedexpresslyforthatpurpose.Howthemoneyshallberaisediswhollya
matteroffinancialmanagement.Themannerinwhichitisraisedinnowayaffectsthequestionwhetherthedividendreceivedbythestockholder
isincomeorcapital,norcanitconceivablyaffectthequestionwhetheritistaxableasincome.
Likewisewhetheradividenddeclaredpayablefromprofitsshallbepaidincashorinsomeothermediumisalsowhollyamatteroffinancial
management.Ifsomeothermediumisdecidedupon,itisalsowhollyaquestionoffinancialmanagementwhetherthedistributionshallbe,for
instance,inbonds,scriporstockofanothercorporationorinissuesofitsown.Andifthedividendispaidinitsownissues,whyshouldtherebea
differenceinresultdependentuponwhetherthedistributionwasmadefromsuchsecuritiestheninthetreasuryorfromotherstobecreatedand
issuedbythecompanyexpresslyforthatpurpose?Sofarasthedistributionmaybemadefromitsownissuesofbonds,orpreferredstock
createdexpresslyforthepurpose,itclearlywouldmakenodifference,inthedecisionofthequestionwhetherthedividendwasadistributionof
profits,thatthesecuritieshadtobecreatedexpresslyforthepurposeofdistribution.Ifadividendpaidinsecuritiesofthatnaturerepresentsa
distributionofprofits,Congressmay,ofcourse,taxitasincomeofthestockholder.Istheresultdifferentwherethesecuritydistributediscommon
stock?
Page252U.S.228
Supposethatacorporationhavingpowertobuyandsellitsownstockpurchases,intheintervalbetweenitsregulardividenddates,withmoneys
derivedfromcurrentprofits,someofitsowncommonstockasatemporaryinvestment,intendingatthetimeofpurchasetosellitbeforethenext
19/29
8/22/2016
derivedfromcurrentprofits,someofitsowncommonstockasatemporaryinvestment,intendingatthetimeofpurchasetosellitbeforethenext
dividenddateandtousetheproceedsinpayingdividends,butlater,deemingitinadvisableeithertosellthisstockortoraisebyborrowingthe
moneynecessarytopaytheregulardividendincash,declaresadividendpayableinthisstockcananyonedoubtthat,insuchacase,the
dividendincommonstockwouldbeincomeofthestockholderandconstitutionallytaxableassuch?SeeGreenv.Bissell,79Conn.547Lelandv.
Hayden,102Mass.542.Andwoulditnotlikewisebeincomeofthestockholdersubjecttotaxationifthepurposeofthecompanyinbuyingthe
stocksodistributedhadbeenfromthebeginningtotakeitoffthemarketanddistributeitamongthestockholdersasadividend,andthecompany
actuallydidso?And,proceedingashortstepfurther,supposethatacorporationdecidedtocapitalizesomeofitsaccumulatedprofitsbycreating
additionalcommonstockandsellingthesametoraiseworkingcapital,butafterthestockhasbeenissuedandcertificatesthereforaredelivered
tothebankersforsale,generalfinancialconditionsmakeitundesirabletomarketthestock,andthecompanyconcludesthatitiswiserto
husband,forworkingcapital,thecashwhichithadintendedtouseinpayingstockholdersadividend,and,instead,topaythedividendinthe
commonstockwhichithadplannedtosellwouldnotthestocksodistributedbeadistributionofprofits,andhence,whenreceived,beincomeof
thestockholderandtaxableassuch?Ifthisbeconceded,whyshoulditnotbeequallyincomeofthestockholder,andtaxableassuch,ifthe
commonstockcreatedbycapitalizingprofitshadbeenoriginallycreatedfortheexpresspurposeofbeingdistributed
Page252U.S.229
asadividendtothestockholderwhoafterwardsreceivedit?
Second.Ithasbeensaidthatadividendpayableinbondsorpreferredstockcreatedforthepurposeofdistributingprofitsmaybeincomeand
taxableassuch,butthatthecaseisdifferentwherethedistributionisincommonstockcreatedforthatpurpose.Variousreasonsareassignedfor
makingthisdistinction.Oneisthattheproportionofthestockholder'sownershiptotheaggregatenumberofthesharesofthecompanyisnot
changedbythedistribution.Butthatisequallytruewherethedividendispaidinitsbondsorinitspreferredstock.Furthermore,neither
maintenancenorchangeintheproportionateownershipofastockholderinacorporationhasanybearinguponthequestionhereinvolved.
Anotherreasonassignedisthatthevalueoftheoldstockheldisreducedapproximatelybythevalueofthenewstockreceived,sothatthe
stockholder,afterreceiptofthestockdividend,hasnomorethanhehadbeforeitwaspaid.Thatisequallytruewhetherthedividendbepaidin
cashorinotherpropertyforinstance,bonds,scrip,orpreferredstockofthecompany.Thepaymentfromprofitsofalargecashdividend,and
evenasmallone,customarilylowersthethenmarketvalueofstockbecausetheundividedpropertyrepresentedbyeachsharehasbeen
correspondinglyreduced.Theargumentwhichappearstobemoststronglyurgedforthestockholdersisthat,whenastockdividendismade,no
portionoftheassetsofthecompanyistherebysegregatedforthestockholder.Butdoestheissueofnewbondsorofpreferredstockcreatedfor
useasadividendresultinanysegregationofassetsforthestockholder?Ineachcase,hereceivesapieceofpaperwhichentitleshimtocertain
rightsintheundividedproperty.Clearly,segregationofassetsinaphysicalsenseisnotanessentialofincome.Theyear'sgainsofapartneris
taxableasincomealthoughtherelikewiseno
Page252U.S.230
segregationofhisshareinthegainsfromthatofhispartnersishad.
20/29
8/22/2016
Theobjectionthattherehasbeennosegregationispresentedalsoinanotherform.Itisarguedthat,untilthereisasegregation,thestockholder
cannotknowwhetherhehasreallyreceivedgains,sincethegainsmaybeinvestedinplantormerchandiseorotherproperty,andperhapsbe
laterlost.Butisnotthisequallytrueoftheshareofapartnerintheyear'sprofitsofthefirmor,indeed,oftheprofitsoftheindividualwhois
engagedinbusinessalone?Andisitnottruealsowhendividendsarepaidincash?Thegainsofabusiness,whetherconductedbyanindividual,
byafirm,orbyacorporationareordinarilyreinvestedinlargepart.Manyacashdividendhonestlydeclaredasadistributionofprofitsproveslater
tohavebeenpaidoutofcapitalbecauseerrorsinforecastpreventcorrectascertainmentofvalues.Untilabusinessadventurehasbeen
completelyliquidated,itcanneverbedeterminedwithcertaintywhethertherehavebeenprofitsunlessthereturnsatleastexceededthecapital
originallyinvested.Businessmen,dealingwiththeproblempractically,fixnecessarilyperiodsandrulesfordeterminingwhethertherehavebeen
netprofitsthatis,incomeorgains.Theyprotectthemselvesfrombeingseriouslymisledbyadoptingasystemofdepreciationchargesand
reserves.Thentheyactupontheirowndeterminationwhetherprofitshavebeenmade.Congress,inlegislating,haswiselyadoptedtheirpractices
asitsownrulesofaction.
Third.ThegovernmenturgesthatitwouldhavebeenwithinthepowerofCongresstohavetaxedasincomeofthestockholderhisproratashare
ofundistributedprofitsearnedevenifnostockdividendrepresentingithadbeenpaid.Strongreasonsmaybeassignedforsuchaview.See
Collectorv.Hubbard,[32]12Wall.1.Theundividedshareofapartnerintheyear'sundistributedprofitsofhisfirm
Page252U.S.231
istaxableasincomeofthepartneralthoughtheshareinthegainisnotevidencedbyanyactiontakenbythefirm.Whymaynotthestockholder's
interestinthegainsofthecompany?Thelawfindsnodifficultyindisregardingthecorporatefictionwheneverthatisdeemednecessarytoattaina
justresult.LinnTimberCo.v.UnitedStates,236U.S.574[33].SeeMorawetzonCorporations,2ded.,227231CookonCorporations,7thed.,
663,664.Thestockholder'sinterestinthepropertyofthecorporationdiffersnotfundamentally,butinformonly,fromtheinterestofapartner
inthepropertyofthefirm.Thereismuchauthorityforthepropositionthat,underourlaw,apartnershiporjointstockcompanyisjustasdistinct
andpalpableanentityintheideaofthelaw,asdistinguishedfromtheindividualscomposingit,asisacorporations.[Footnote4]Noreason
appears,whyCongress,inlegislatingunderagrantofpowersocomprehensiveasthatauthorizingthelevyofanincometax,shouldbelimitedby
theparticularviewoftherelationofthestockholdertothecorporationanditspropertywhichmay,intheabsenceoflegislation,havebeentaken
bythisCourt.ButwehavenooccasiontodecidethequestionwhetherCongressmighthavetaxedtothestockholderhisundividedshareofthe
corporation'searnings.ForCongresshasinthisactlimitedtheincometaxtothatshareofthestockholderintheearningswhichis,ineffect,
distributedbymeansofthestockdividendpaid.Inotherwords,torenderthestockholdertaxable,theremustbebothearningsmadeanda
dividendpaid.Neitherearningswithoutdividendnoradividendwithoutearningssubjectsthe
Page252U.S.232
stockholdertotaxationundertheRevenueActof1916.
21/29
8/22/2016
Fourth.Theequivalencyofalldividendsrepresentingprofits,whetherpaidofalldividendsinstock,issocompletethatseriousquestionofthe
taxabilityofstockdividendswouldprobablyneverhavebeenmadeifCongresshadundertakentotaxonlythosedividendswhichrepresented
profitsearnedduringtheyearinwhichthedividendwaspaidorintheyearpreceding.ButthisCourt,construingliberallynotonlytheconstitutional
grantofpowerbutalsotherevenueActof1913,heldthatCongressmighttax,andhadtaxed,tothestockholderdividendsreceivedduringthe
year,althoughearnedbythecompanylongbefore,andevenpriortotheadoptionoftheSixteenthAmendment.Lynchv.Hornby,247U.S.
339[34].[Footnote5]Thatrule,ifindiscriminatinglyappliedtoallstockdividendsrepresentingprofitsearned,might,inviewofcorporatepractice,
haveworkedconsiderablehardshipandhaveraisedseriousquestions.Manycorporations,withoutlegallycapitalizinganypartoftheirprofits,had
assigneddefinitelysomepartoralloftheannualbalancesremainingafterpayingtheusualcashdividendstotheusestowhichpermanentcapital
isordinarilyapplied.Someofthecorporationsdoingthistransferredsuchbalancesontheirbooksto"surplus"accountdistinguishingbetween
suchpermanent"surplus"andthe"undividedprofits"account.Othercorporations,withoutthisformality,hadassumedthattheannual
accumulatingbalancescarriedasundistributedprofitsweretobetreatedascapitalpermanentlyinvestedinthebusiness.Andstillothers,without
definiteassumptionofanykind,had
Page252U.S.233
sousedundividedprofitsforcapitalpurposes.Tohavemadetherevenuelawapplyretroactivelysoastoreachsuchaccumulatedprofits,ifand
wheneveritshouldbedeemeddesirabletocapitalizethemlegallybytheissueofadditionalstockdistributedasadividendtostockholders,would
haveworkedgreatinjustice.CongressendeavoredintheRevenueActof1916toguardagainstanyserioushardshipwhichmightotherwisehave
arisenfrommakingtaxablestockdividendsrepresentingaccumulatedprofits.Itdidnotlimitthetaxabilitytostockdividendsrepresentingprofits
earnedwithinthetaxyearorintheyearpreceding,butitdidlimittaxabilitytosuchdividendsrepresentingprofitsearnedsinceMarch1,1913.
Therebystockholdersweregivennoticethattheirsharealsoinundistributedprofitsaccumulatingthereafterwasatsometimetobetaxedas
income.AndCongresssoughtby3todiscouragethepostponementofdistributionfortheillegitimatepurposeofevadingliabilitytosurtaxes.
Fifth.ThedecisionofthisCourtthatearningsmadebeforetheadoptionoftheSixteenthAmendment,butpaidoutincashdividendafterits
adoption,weretaxableasincomeofthestockholderinvolvedaveryliberalconstructionoftheamendment.Toholdnowthatearningsbothmade
andpaidoutaftertheadoptionoftheSixteenthAmendmentcannotbetaxedasincomeofthestockholder,ifpaidintheformofastockdividend,
involvesanexceedinglynarrowconstructionofit.AssaidbyMr.ChiefJusticeMarshallinBrownv.Maryland,[35]12Wheat.419,25U.S.446:
"ToconstruethepowersoastoimpairitsefficacywouldtendtodefeatanobjectintheattainmentofwhichtheAmericanpublictook,andjustly
took,thatstronginterestwhicharosefromafullconvictionofitsnecessity."
NodecisionheretoforerenderedbythisCourtrequiresustoholdthatCongress,inprovidingforthetaxationof
Page252U.S.234
22/29
8/22/2016
stockdividends,exceededthepowerconferreduponitbytheSixteenthAmendment.Thetwocasesmainlyreliedupontoshowthatthiswas
beyondthepowerofCongressareTownev.Eisner,245U.S.418[36],whichinvolvedaquestionnotofconstitutionalpower,butofstatutory
construction,andGibbonsv.Mahon,136U.S.549[37],whichinvolvedaquestionarisingbetweenlifetenantandremainderman.Sofaras
concernsTownev.Eisner,wehaveonlytobearinmindwhatwastheresaid(p.245U.S.425):"Butitisnotnecessarilytruethatincomemeans
thesamethingintheConstitutionandthe[an]act."[Footnote6]Gibbonsv.Mahonisevenlessanauthorityforanarrowconstructionofthepower
totaxincomesconferredbytheSixteenthAmendment.Inthatcase,thecourtwasrequiredtodeterminehow,intheadministrationofanestatein
theDistrictofColumbia,astockdividend,representingprofits,receivedafterthedecedent'sdeath,shouldbedisposedofasbetweenlifetenant
andremainderman.Thequestionwas,inessence,whatshalltheintentionofthetestatorbepresumedtohavebeen?Onthisquestion,therewas
greatdiversityofopinionandpracticeinthecourtsofEnglishspeakingcountries.Threewelldefinedruleswerethencompetingforacceptance.
Twooftheseinvolvesanarbitraryruleofdistribution,thethirdequitableapportionment.SeeCookonCorporations,7thed.,552558.
1.ThesocalledEnglishrule,declaredin1799byBranderv.Brander,4Ves.Jr.800,thatadividendrepresenting
Page252U.S.235
profits,whetherincash,stockorotherproperty,belongstothelifetenantifitwasaregularorordinarydividend,andbelongstothe
remaindermanifitwasanextraordinarydividend.
2.ThesocalledMassachusettsrule,declaredin1868byMinotv.Paine,99Mass.101,thatadividendrepresentingprofits,whetherregular,
ordinary,orextraordinary,ifincashbelongstothelifetenant,andifinstockbelongstotheremainderman.
3.ThesocalledPennsylvaniarule,declaredin1857byEarp'sAppeal,28Pa.368,that,whereastockdividendispaid,thecourtshallinquireinto
thecircumstancesunderwhichthefundhadbeenearnedandaccumulatedoutofwhichthedividend,whetheraregular,anordinary,oran
extraordinaryone,waspaid.Ifitfindsthatthestockdividendwaspaidoutofprofitsearnedsincethedecedent'sdeath,thestockdividendbelongs
tothelifetenantifthecourtfindsthatthestockdividendwaspaidfromcapitalorfromprofitsearnedbeforethedecedent'sdeath,thestock
dividendbelongstotheremainderman.
ThisCourtadoptedinGibbonsv.MahonastheruleofadministrationfortheDistrictofColumbiathesocalledMassachusettsrule,theopinion
beingdeliveredin1890byMr.JusticeGray.Sincethen,thesamequestionhascomeupfordecisioninmanyofthestates.Thesocalled
Massachusettsrule,althoughapprovedbythisCourt,hasfoundfavorinonlyafewstates.ThesocalledPennsylvaniarule,ontheotherhand,
hasbeenadoptedsincebysomanyofthestates(includingNewYorkandCalifornia)thatithascometobeknownasthe"Americanrule."
Whether,inviewofthesefactsandthepracticalresultsoftheoperationofthetworulesasshownbytheexperienceofthe30yearswhichhave
elapsedsincethedecisioninGibbonsv.Mahon,itmightbedesirableforthisCourttoreconsiderthequestiontheredecided,as
23/29
8/22/2016
Page252U.S.236
someothercourtshavedone(see29HarvardLawReview551),wehavenooccasiontoconsiderinthiscase.For,asthisCourttherepointedout
(p.136U.S.560),thequestioninvolvedwasone"betweentheownersofsuccessiveinterestsinparticularshares,"andnot,asinBaileyv.
RailroadCo.,[38]22Wall.604,aquestion
"betweenthecorporationandthegovernment,and[which]dependeduponthetermsofastatutecarefullyframedtopreventcorporationsfrom
evadingpaymentofthetaxupontheirearnings."
Wehave,however,notmerelyargumentwehaveexampleswhichshouldconvinceusthat"thereisnoinherent,necessaryandimmutable
reasonwhystockdividendsshouldalwaysbetreatedascapital."TaxCommissionerv.Putnam,227Mass.522,533.TheSupremeJudicialCourt
ofMassachusettshassteadfastlyadhered,despiteeverrenewedprotest,totherulethateverystockdividendis,asbetweenlifetenantand
remainderman,capital,andnotincome.But,inconstruingtheMassachusettsIncomeTaxAmendment,whichissubstantiallyidenticalwiththe
federalamendment,thatcourtheldthatthelegislaturewastherebyempoweredtolevyanincometaxuponstockdividendsrepresentingprofits.
ThecourtsofEnglandhave,withsomerelaxation,adheredtotheirrulethateveryextraordinarydividendis,asbetweenlifetenantand
remainderman,tobedeemedcapital.But,in1913,theJudicialCommitteeofthePrivyCouncilheldthatastockdividendrepresenting
accumulatedprofitswastaxablelikeanordinarycashdividend,SwanBreweryCo.,Ltd.v.Rex,[1914]A.C.231.Indismissingtheappeal,these
wordsoftheChiefJusticeoftheSupremeCourtofWesternAustraliawerequoted(p.236),whichshowthatthefactsinvolvedwereidenticalwith
thoseinthecaseatbar:
"Hadthecompanydistributedthe101,450amongtheshareholders,andhadtheshareholdersrepaidsuchsumstothecompanyasthepriceof
the81,160newshares,thedutyonthe101,450
Page252U.S.237
wouldclearlyhavebeenpayable.Isnotthisvirtuallytheeffectofwhatwasactuallydone?Ithinkitis."
Sixth.IfstockdividendsrepresentingprofitsareheldexemptfromtaxationundertheSixteenthAmendment,theownersofthemostsuccessful
businessesinAmericawill,asthefactsinthiscaseillustrate,beabletoescapetaxationonalargepartofwhatisactuallytheirincome.Sofaras
theirprofitsarerepresentedbystockreceivedasdividends,theywillpaythesetaxesnotupontheirincome,butonlyupontheincomeoftheir
income.ThatsucharesultwasintendedbythepeopleoftheUnitedStateswhenadoptingtheSixteenthAmendmentisinconceivable.Oursole
dutyistoascertaintheirintentasthereinexpressed.[Footnote7]Interse,comprehensivelanguagebefittingtheConstitution,theyempowered
Congress"tolayandcollecttaxesonincomesfromwhateversourcederived."Theyintendedtoincludetherebyeverythingwhichbyreasonable
understandingcanfairlyberegardedasincome.Thatstockdividendsrepresentingprofitsaresoregardednotonlybytheplainpeople,butby
investorsandfinanciersandbymostofthecourtsofthecountry,isshownbeyondperadventurebytheiractsandbytheirutterances.Itseemsto
24/29
8/22/2016
investorsandfinanciersandbymostofthecourtsofthecountry,isshownbeyondperadventurebytheiractsandbytheirutterances.Itseemsto
meclear,therefore,thatCongresspossessesthepowerwhichitexercisedtomakedividendsrepresentingprofitstaxableasincomewhetherthe
mediuminwhichthedividendispaidbecashorstock,andthatitmaydefine,asithasdone,whatdividendsrepresenting
Page252U.S.238
profitsshallbedeemedincome.ItsurelyisnotclearthattheenactmentexceedsthepowergrantedbytheSixteenthAmendment.And,asthis
Courthassooftensaid,thehighprerogativeofdeclaringanactofCongressinvalidshouldneverbeexercisedexceptinaclearcase.[Footnote8]
"Itisbutadecentrespectduetothewisdom,theintegrity,andthepatriotismofthelegislativebodybywhichanylawispassedtopresumein
favorofitsvalidityuntilitsviolationoftheConstitutionisprovedbeyondallreasonabledoubt."
Ogdenv.Saunders,[39]12Wheat.213,25U.S.269.
MR.JUSTICECLARKEconcursinthisopinion.
[Footnote1]
Moody'sp.1544CommercialandFinancialChronicle,Vol.94,p.831Vol.98,pp.1005,1076.
[Footnote2]
Moody's,p.1548CommercialandFinancialChronicle,Vol.94,p.771Vol.96,p.1428Vol.97,p.1434Vol.98,p.1541.
[Footnote3]
Moody's,p.1547CommercialandFinancialChronicle,Vol.97,pp.1589,1827,1903Vol.98,pp.76,457Vol.103,p.2348.Poor'sManualof
Industrials(1918),p.2240,ingivingthe"comparativeincomeaccount"ofthecompany,describesthe1914dividendas"stockdividendpaid(200
percent)$2,000,000,"anddescribesthe1917dividendas"$3,000,000specialcashdividend."
[Footnote4]
SeeSomeJudicialMyths,byFrancisM.Burdick,22HarvardLawReview,393,394396TheFirmasaLegalPerson,byWilliamHamilton
Cowles,57Cent.L.J.343,348TheSeparateEstatesofNonBankruptPartners,byJ.D.Brannan,20HarvardLawReview,589592.Compare
HarvardLawReview,Vol.7,p.426Vol.14,p.222Vol.17,p.194.
25/29
8/22/2016
HarvardLawReview,Vol.7,p.426Vol.14,p.222Vol.17,p.194.
[Footnote5]
ThehardshipsupposedtohaveresultedfromsuchadecisionhasbeenremovedintheRevenueActof1916asamended,byprovidingin31b
thatsuchcashdividendsshallthereafterbeexemptfromtaxationif,beforetheyaremade,allearningsmadesinceFebruary28,1913,shallhave
beendistributed.ActOct.3,1917,c.63,1211,40Stat.338,ActFeb.24,1919,c.18,201(b),40Stat.1059.
[Footnote6]
CompareRugg,C.J.,inTaxCommissionerv.Putnam,227Mass.522,533:
"Howeverstrongsuchanargumentmightbewhenurgedastotheinterpretationofastatute,itisnotofprevailingforceastothebroad
considerationsinvolvedintheinterpretationofanamendmenttotheConstitutionadoptedundertheconditionsprecedingandattendantuponthe
ratificationofthefortyfourthamendment."
[Footnote7]
CompareRugg,C.J.,TaxCommissionerv.Putnam,227Mass.522,524:
"Itisagrantfromthesovereignpeople,andnottheexerciseofadelegatedpower.Itisastatementofgeneralprinciples,andnotaspecification
ofdetails.Amendmentstosuchacharterofgovernmentoughttobeconstruedinthesamespiritandaccordingtothesamerulesastheoriginal.
ItistobeinterpretedastheConstitutionofastate,andnotasastatuteoranordinarypieceoflegislation.Itswordsmustbegivenaconstruction
adaptedtocarryintoeffectitspurpose."
[Footnote8]
"Itisourduty,whenrequiredintheregularcourseofjudicialproceedings,todeclareanactofCongressvoidifnotwithinthelegislativepowerof
theUnitedStatesbutthisdeclarationshouldneverbemadeexceptinaclearcase.Everypossiblepresumptionisinfavorofthevalidityofa
statute,andthiscontinuesuntilthecontraryisshownbeyondarationaldoubt.Onebranchofthegovernmentcannotencroachonthedomainof
anotherwithoutdanger.Thesafetyofourinstitutionsdependsinnosmalldegreeonastrictobservanceofthissalutaryrule."
TheSinkingFundCases,99U.S.700[40],99U.S.718(1878).SeealsoLegalTenderCases,[41]12Wall.457,79U.S.531(1870)TradeMark
Cases,100U.S.82[42],100U.S.96(1879).SeeAmericanDoctrineofConstitutionalLawbyJamesB.Thayer,7HarvardLawReview129,142.
26/29
8/22/2016
"WiththeexceptionoftheextraordinarydecreerenderedintheDredScottcase,...alloftheactsortheportionsoftheactsofCongress
invalidatedbythecourtsbefore1868relatedtotheorganizationofcourts.DenyingthepowerofCongresstomakenoteslegaltenderseemsto
bethefirstdeparturefromthisrule."
Haines,AmericanDoctrineofJudicialSupremacy,p.288.Thefirstlegaltenderdecisionwasoverruledinparttwoyearslater(1870),LegalTender
Cases,[43]12Wall.457,andagainin1883,LegalTenderCase,110U.S.421[44].
Links
1.https://supreme.justia.com/cases/federal/us/245/418/case.html
6.https://supreme.justia.com/us/136/549/case.html
7.https://supreme.justia.com/us/169/255/case.html
27/29
8/22/2016
28/29
8/22/2016
GetafreeEvernoteaccounttosavethisarticleandviewitlateronanydevice.
Createaccount
29/29

2 Eisner Vs Macomber

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

2 Eisner Vs Macomber

Transféré par

Droits d'auteur :

Formats disponibles

8/22/2016

Vous aimerez peut-être aussi