Eisnerv.

Macomber
252U.S.189(1920)

Syllabus|Case

U.S.SupremeCourt

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,astockdividendmadelawfullyandingoodfaithagainstprofits
accumulatedbythecorporationsinceMarch1,1913.P.252U.S.201.Townev.Eisner,245U.S.
418.

TheRevenueActofSeptember8,1916,c.463,39Stat.756,plainlyevincesthepurposeofCongress
toimposesuchtaxes,andistothatextentinconflictwithArt.I,2,cl.3,andArt.I,9,cl.4,of
theConstitution.Pp.252U.S.199,252U.S.217.
TheseprovisionsoftheConstitutionnecessarilylimittheextension,byconstruction,ofthe
SixteenthAmendment.P.252U.S.205.

Whatisorisnot"income"withinthemeaningoftheAmendmentmustbedeterminedineachcase
accordingtotruthandsubstance,withoutregardtoform.P.252U.S.206.

Incomemaybedefinedasthegainderivedfromcapital,fromlabor,orfrombothcombined,
includingprofitgainedthroughsaleorconversionofcapital.P.252U.S.207.

Meregrowthorincrementofvalueinacapitalinvestmentisnotincomeincomeisessentiallya
gainorprofit,initself,ofexchangeablevalue,proceedingfromcapital,severedfromit,andderived
orreceivedbythetaxpayerforhisseparateuse,benefit,anddisposal.Id.

Astockdividend,evincingmerelyatransferofanaccumulatedsurplustothecapitalaccountofthe
corporation,takesnothingfromthepropertyofthecorporationandaddsnothingtothatofthe
shareholderataxonsuchdividendsisataxancapitalincrease,andnotonincome,and,tobe
validundertheConstitution,suchtaxesmustbeapportionedaccordingtopopulationinthe
severalstates.P.252U.S.208.

Affirmed.

Page252U.S.190

Thecaseisstatedintheopinion.

Page252U.S.199

MR.JUSTICEPITNEYdeliveredtheopinionoftheCourt.

Thiscasepresentsthequestionwhether,byvirtueoftheSixteenthAmendment,Congresshasthe
powertotax,asincomeofthestockholderandwithoutapportionment,astockdividendmade
lawfullyandingoodfaithagainstprofitsaccumulatedbythecorporationsinceMarch1,1913.

ItarisesundertheRevenueActofSeptember8,1916,39Stat.756etseq.,which,inouropinion
(notwithstandingacontentionofthegovernmentthatwillbe

Page252U.S.200

noticed),plainlyevincesthepurposeofCongresstotaxstockdividendsasincome.*

Thefacts,inoutline,areasfollows:

OnJanuary1,1916,theStandardOilCompanyofCalifornia,acorporationofthatstate,outofan
authorizedcapitalstockof$100,000,000,hadsharesofstockoutstanding,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
directorsdecidedtoissueadditionalsharessufficienttoconstituteastockdividendof50percent
oftheoutstandingstock,andtotransferfromsurplusaccounttocapitalstockaccountanamount
equivalenttosuchissue.Appropriateresolutionswereadopted,anamountequivalenttothepar
valueoftheproposednewstockwastransferredaccordingly,andthenewstockdulyissuedagainst
itanddividedamongthestockholders.

Defendantinerror,beingtheownerof2,200sharesoftheoldstock,receivedcertificatesfor1,100
additional

Page252U.S.201

shares,ofwhich18.07percent,or198.77shares,parvalue$19,877,weretreatedasrepresenting
surplusearnedbetweenMarch1,1913,andJanuary1,1916.Shewascalledupontopay,anddid
payunderprotest,ataximposedundertheRevenueActof1916,baseduponasupposedincomeof
$19,877becauseofthenewshares,and,anappealtotheCommissionerofInternalRevenue
havingbeendisallowed,shebroughtactionagainsttheCollectortorecoverthetax.Inher
complaint,sheallegedtheabovefactsandcontendedthat,inimposingsuchataxtheRevenueAct
of1916violatedarticle1,2,cl.3,andArticleI,9,cl.4,oftheConstitutionoftheUnitedStates,
requiringdirecttaxestobeapportionedaccordingtopopulation,andthatthestockdividendwas
notincomewithinthemeaningoftheSixteenthAmendment.Ageneraldemurrertothecomplaint
wasoverruledupontheauthorityofTownev.Eisner,245U.S.418,and,defendanthavingfailed
topleadfurther,finaljudgmentwentagainsthim.Toreviewit,thepresentwritoferroris
prosecuted.

Thecasewasarguedatthelastterm,andrearguedatthepresentterm,bothorallyandby
additionalbriefs.

Weareconstrainedtoholdthatthejudgmentofthedistrictcourtmustbeaffirmed,first,because
thequestionatissueiscontrolledbyTownev.Eisner,suprasecondly,becauseareexaminationof
thequestionwiththeadditionallightthrownuponitbyelaborateargumentshasconfirmedthe
viewthattheunderlyinggroundofthatdecisionissound,thatitdisposesofthequestionhere
presented,andthatotherfundamentalconsiderationsleadtothesameresult.

InTownev.Eisner,thequestionwaswhetherastockdividendmadein1914againstsurplus
earnedpriortoJanuary1,1913,wastaxableagainstthestockholderundertheActofOctober3,
1913,c.16,38Stat.114,166,whichprovided(B,p.167)thatnetincomeshouldinclude
"dividends,"andalso"gainsorprofitsandincomederived
Page252U.S.202

fromanysourcewhatever."Suithavingbeenbroughtbyastockholdertorecoverthetaxassessed
againsthimbyreasonofthedividend,thedistrictcourtsustainedademurrertothecomplaint.
242F.702.Thecourttreatedtheconstructionoftheactasinseparablefromtheinterpretationof
theSixteenthAmendmentand,havingreferredtoPollockv.Farmers'Loan&TrustCo.,158U.S.
601,andquotedtheAmendment,proceededveryproperlytosay(p.704):

"ItismanifestthatthestockdividendinquestioncannotbereachedbytheIncomeTaxActand
couldnot,eventhoughCongressexpresslydeclaredittobetaxableasincome,unlessitisinfact
income."

Itdeclined,however,toaccedetothecontentionthat,inGibbonsv.Mahon,136U.S.549,"stock
dividends"hadreceivedadefinitionsufficientlycleartobecontrolling,treatedthelanguageofthis
Courtinthatcaseasobiterdictuminrespectofthematterthenbeforeit(p.706),andexamined
thequestionasresnova,withtheresultstated.Whenthecasecamehere,afteroverrulinga
motiontodismissmadebythegovernmentuponthegroundthattheonlyquestioninvolvedwas
theconstructionofthestatute,andnotitsconstitutionality,wedealtuponthemeritswiththe
questionofconstructiononly,butdisposedofituponconsiderationoftheessentialnatureofa
stockdividenddisregardingthefactthattheoneinquestionwasbaseduponsurplusearningsthat
accruedbeforetheSixteenthAmendmenttookeffect.Notonlyso,butwerejectedthereasoningof
thedistrictcourt,saying(245U.S.245U.S.426):

"Notwithstandingthethoughtfuldiscussionthatthecasereceivedbelowwecannotdoubtthatthe
dividendwascapitalaswellforthepurposesoftheIncomeTaxLawasfordistributionbetween
tenantforlifeandremainderman.WhatwassaidbythisCourtuponthelatterquestionisequally
truefortheformer."

"Astockdividendreallytakesnothingfromthepropertyofthecorporation,andaddsnothingto
the

Page252U.S.203

interestsoftheshareholders.Itspropertyisnotdiminished,andtheirinterestsarenotincreased..
..Theproportionalinterestofeachshareholderremainsthesame.Theonlychangeisinthe
evidencewhichrepresentsthatinterest,thenewsharesandtheoriginalsharestogether
representingthesameproportionalinterestthattheoriginalsharesrepresentedbeforetheissueof
thenewones."

"Gibbonsv.Mahon,136U.S.549,136U.S.559560.Inshort,thecorporationisnopoorerand
thestockholderisnoricherthantheywerebefore.LoganCountyv.UnitedStates,169U.S.255,
169U.S.261.Iftheplaintiffgainedanysmalladvantagebythechange,itcertainlywasnotan
advantageof$417,450,thesumuponwhichhewastaxed....Whathashappenedisthatthe
plaintiff'soldcertificateshavebeensplitupineffectandhavediminishedinvaluetotheextentof
thevalueofthenew."

Thislanguageaptlyanswerednotonlythereasoningofthedistrictcourt,buttheargumentofthe
SolicitorGeneralinthisCourt,whichdiscussedtheessentialnatureofastockdividend.Andif,for
thereasonsthusexpressed,suchadividendisnottoberegardedas"income"or"dividends"within
themeaningoftheActof1913,weareunabletoseehowitcanbebroughtwithinthemeaningof
"incomes"intheSixteenthAmendment,itbeingveryclearthatCongressintendedinthatactto
exertitspowertotheextentpermittedbytheamendment.InTownev.Eisner,itwasnot
contendedthatanyconstructionofthestatutecouldmakeitnarrowerthantheconstitutional
grantratherthecontrary.

ThefactthatthedividendwaschargedagainstprofitsearnedbeforetheActof1913tookeffect,
evenbeforetheamendmentwasadopted,wasneitherrelieduponnoralludedtoinour
considerationofthemeritsinthatcase.Notonlyso,buthadweconsideredthatastockdividend
constitutedincomeinanytruesense,itwouldhavebeenheldtaxableundertheActof1913
notwithstandingitwas

Page252U.S.204

baseduponprofitsearnedbeforetheamendment.Weruledatthesameterm,inLynchv.Hornby,
247U.S.339,thatacashdividendextraordinaryinamount,andinPeabodyv.Eisner,247U.S.
347,thatadividendpaidinstockofanothercompany,weretaxableasincomealthoughbased
uponearningsthataccruedbeforeadoptionoftheamendment.Intheformercase,concerning
"corporateprofitsthataccumulatedbeforetheacttookeffect,"wedeclared(pp.247U.S.343
344):

"Justaswedeemthelegislativeintentmanifesttotaxthestockholderwithrespecttosuch
accumulationsonlyifandwhen,andtotheextentthat,hisinterestinthemcomestofruitionas
income,thatis,individendsdeclared,sowecanperceivenoconstitutionalobstaclethatstandsin
thewayofcarryingoutthisintentwhendividendsaredeclaredoutofapreexistingsurplus....
Congresswasatlibertyundertheamendmenttotaxasincome,withoutapportionment,everything
thatbecameincome,intheordinarysenseoftheword,aftertheadoptionoftheamendment,
includingdividendsreceivedintheordinarycoursebyastockholderfromacorporation,even
thoughtheywereextraordinaryinamountandmightappearuponanalysistobeamererealization
inpossessionofaninchoateandcontingentinterestthatthestockholderhadinasurplusof
corporateassetspreviouslyexisting."

InPeabodyv.Eisner,247U.S.349,247U.S.350,weobservedthatthedecisionofthedistrict
courtinTownev.Eisnerhadbeenreversed
"onlyuponthegroundthatitrelatedtoastockdividendwhichinfacttooknothingfromthe
propertyofthecorporationandaddednothingtotheinterestoftheshareholder,butmerely
changedtheevidencewhichrepresentedthatinterest,"

andwedistinguishedthePeabodycasefromtheTownecaseuponthegroundthat"thedividendof
Baltimore&Ohioshareswasnotastockdividendbutadistributioninspecieofaportionofthe
assetsoftheUnionPacific."

Therefore,Townev.Eisnercannotberegardedasturning

Page252U.S.205

uponthepointthatthesurplusaccruedtothecompanybeforetheacttookeffectandbefore
adoptionoftheamendment.Andwhatwehavequotedfromtheopinioninthatcasecannotbe
regardedasobiterdictum,ithavingfurnishedtheentirebasisfortheconclusionreached.We
adheretotheviewthenexpressed,andmightrestthepresentcasetherenotbecausethatcasein
termsdecidedtheconstitutionalquestion,foritdidnot,butbecausetheconclusiontherereached
astotheessentialnatureofastockdividendnecessarilypreventsitsbeingregardedasincomein
anytruesense.

Nevertheless,inviewoftheimportanceofthematter,andthefactthatCongressintheRevenue
Actof1916declared(39Stat.757)thata"stockdividendshallbeconsideredincome,tothe
amountofitscashvalue,"wewilldealatlengthwiththeconstitutionalquestion,incidentally
testingthesoundnessofourpreviousconclusion.

TheSixteenthAmendmentmustbeconstruedinconnectionwiththetaxingclausesoftheoriginal
Constitutionandtheeffectattributedtothembeforetheamendmentwasadopted.InPollockv.
Farmers'Loan&TrustCo.,158U.S.601,undertheActofAugust27,1894,c.349,27,28Stat.
509,553,itwasheldthattaxesuponrentsandprofitsofrealestateanduponreturnsfrom
investmentsofpersonalpropertywereineffectdirecttaxesuponthepropertyfromwhichsuch
incomearose,imposedbyreasonofownership,andthatCongresscouldnotimposesuchtaxes
withoutapportioningthemamongthestatesaccordingtopopulation,asrequiredbyArticleI,2,
cl.3,and9,cl.4,oftheoriginalConstitution.

Afterwards,andevidentlyinrecognitionofthelimitationuponthetaxingpowerofCongressthus
determined,theSixteenthAmendmentwasadopted,inwordslucidlyexpressingtheobjecttobe
accomplished:

"TheCongressshallhavepowertolayandcollecttaxesonincomes,fromwhateversourcederived,
withoutapportionmentamong

Page252U.S.206
theseveralstatesandwithoutregardtoanycensusorenumeration."

Asrepeatedlyheld,thisdidnotextendthetaxingpowertonewsubjects,butmerelyremovedthe
necessitywhichotherwisemightexistforanapportionmentamongthestatesoftaxeslaidon
income.Brushaberv.UnionPacificR.Co.,240U.S.1,240U.S.1719Stantonv.BalticMining
Co.,240U.S.103,240U.S.112etseq.Peck&Co.v.Lowe,247U.S.165,247U.S.172173.

Aproperregardforitsgenesis,aswellasitsveryclearlanguage,requiresalsothatthisamendment
shallnotbeextendedbylooseconstruction,soastorepealormodify,exceptasappliedtoincome,
thoseprovisionsoftheConstitutionthatrequireanapportionmentaccordingtopopulationfor
directtaxesuponproperty,realandpersonal.Thislimitationstillhasanappropriateand
importantfunction,andisnottobeoverriddenbyCongressordisregardedbythecourts.

Inorder,therefore,thattheclausescitedfromArticleIoftheConstitutionmayhaveproperforce
andeffect,saveonlyasmodifiedbytheamendment,andthatthelatteralsomayhaveproper
effect,itbecomesessentialtodistinguishbetweenwhatisandwhatisnot"income,"asthetermis
thereused,andtoapplythedistinction,ascasesarise,accordingtotruthandsubstance,without
regardtoform.Congresscannotbyanydefinitionitmayadoptconcludethematter,sinceitcannot
bylegislationaltertheConstitution,fromwhichaloneitderivesitspowertolegislate,andwithin
whoselimitationsalonethatpowercanbelawfullyexercised.

Thefundamentalrelationof"capital"to"income"hasbeenmuchdiscussedbyeconomists,the
formerbeinglikenedtothetreeortheland,thelattertothefruitorthecroptheformerdepicted
asareservoirsuppliedfromsprings,thelatterastheoutletstream,tobemeasuredbyitsflow
duringaperiodoftime.Forthepresentpurpose,werequireonlyacleardefinitionoftheterm
"income,"

Page252U.S.207

asusedincommonspeech,inordertodetermineitsmeaningintheamendment,and,having
formedalsoacorrectjudgmentastothenatureofastockdividend,weshallfinditeasytodecide
thematteratissue.

Afterexaminingdictionariesincommonuse(Bouv.L.D.StandardDict.Webster'sInternat.Dict.
CenturyDict.),wefindlittletoaddtothesuccinctdefinitionadoptedintwocasesarisingunderthe
CorporationTaxActof1909(Stratton'sIndependencev.Howbert,231U.S.399,231U.S.415
Doylev.MitchellBros.Co.,247U.S.179,247U.S.185),"Incomemaybedefinedasthegain
derivedfromcapital,fromlabor,orfrombothcombined,"provideditbeunderstoodtoinclude
profitgainedthroughasaleorconversionofcapitalassets,towhichitwasappliedintheDoyle
case,pp.247U.S.183185.
Briefasitis,itindicatesthecharacteristicanddistinguishingattributeofincomeessentialfora
correctsolutionofthepresentcontroversy.Thegovernment,althoughbasingitsargumentupon
thedefinitionasquoted,placedchiefemphasisupontheword"gain,"whichwasextendedto
includeavarietyofmeaningswhilethesignificanceofthenextthreewordswaseitheroverlooked
ormisconceived."Derivedfromcapital""thegainderivedfromcapital,"etc.Here,wehavethe
essentialmatter:notagainaccruingtocapitalnotagrowthorincrementofvalueinthe
investmentbutagain,aprofit,somethingofexchangeablevalue,proceedingfromtheproperty,
severedfromthecapital,howeverinvestedoremployed,andcomingin,being"derived"thatis,
receivedordrawnbytherecipient(thetaxpayer)forhisseparateuse,benefitanddisposalthat
isincomederivedfromproperty.Nothingelseanswersthedescription.

ThesamefundamentalconceptionisclearlysetforthintheSixteenthAmendment"incomes,
fromwhateversourcederived"theessentialthoughtbeingexpressed

Page252U.S.208

withaconcisenessandlucidityentirelyinharmonywiththeformandstyleoftheConstitution.

Canastockdividend,consideringitsessentialcharacter,bebroughtwithinthedefinition?To
answerthis,regardmustbehadtothenatureofacorporationandthestockholder'srelationtoit.
Werefer,ofcourse,toacorporationsuchastheoneinthecaseatbar,organizedforprofit,and
havingacapitalstockdividedintosharestowhichanominalorparvalueisattributed.

Certainlytheinterestofthestockholderisacapitalinterest,andhiscertificatesofstockarebutthe
evidenceofit.Theystatethenumberofsharestowhichheisentitledandindicatetheirparvalue
andhowthestockmaybetransferred.Theyshowthatheorhisassignors,immediateorremote,
havecontributedcapitaltotheenterprise,thatheisentitledtoacorrespondinginterest
proportionatetothewhole,entitledtohavethepropertyandbusinessofthecompanydevoted
duringthecorporateexistencetoattainmentofthecommonobjects,entitledtovoteat
stockholders'meetings,toreceivedividendsoutofthecorporation'sprofitsifandwhendeclared,
and,intheeventofliquidation,toreceiveaproportionateshareofthenetassets,ifany,remaining
afterpayingcreditors.Shortofliquidation,oruntildividenddeclared,hehasnorighttowithdraw
anypartofeithercapitalorprofitsfromthecommonenterpriseonthecontrary,hisinterest
pertainsnottoanypart,divisibleorindivisible,buttotheentireassets,business,andaffairsofthe
company.Norisittheinterestofanownerintheassetsthemselves,sincethecorporationhasfull
title,legalandequitable,tothewhole.Thestockholderhastherighttohavetheassetsemployedin
theenterprise,withtheincidentalrightsmentionedbut,asstockholder,hehasnorightto
withdraw,onlytherighttopersist,subjecttotherisksoftheenterprise,andlookingonlyto
dividendsforhisreturn.Ifhedesirestodissociatehimself

Page252U.S.209
fromthecompany,hecandosoonlybydisposingofhisstock.

Forbookkeepingpurposes,thecompanyacknowledgesaliabilityinformtothestockholders
equivalenttotheaggregateparvalueoftheirstock,evidencedbya"capitalstockaccount."If
profitshavebeenmadeandnotdivided,theycreateadditionalbookkeepingliabilitiesunderthe
headof"profitandloss,""undividedprofits,""surplusaccount,"orthelike.Noneofthese,
however,givestothestockholdersasabody,muchlesstoanyoneofthem,eitheraclaimagainst
thegoingconcernforanyparticularsumofmoneyorarighttoanyparticularportionoftheassets
oranyshareinthemunlessoruntilthedirectorsconcludethatdividendsshallbemadeandapart
ofthecompany'sassetssegregatedfromthecommonfundforthepurpose.Thedividendnormally
ispayableinmoney,underexceptionalcircumstancesinsomeotherdivisibleproperty,andwhen
sopaid,thenonly(excluding,ofcourse,apossibleadvantageoussaleofhisstockorwindingupof
thecompany)doesthestockholderrealizeaprofitorgainwhichbecomeshisseparateproperty,
andthusderiveincomefromthecapitalthatheorhispredecessorhasinvested.

Inthepresentcase,thecorporationhadsurplusandundividedprofitsinvestedinplant,property,
andbusiness,andrequiredforthepurposesofthecorporation,amountingtoabout$45,000,000,
inadditiontooutstandingcapitalstockof$50,000,000.Inthis,thecaseisnotextraordinary.The
profitsofacorporation,astheyappearuponthebalancesheetattheendoftheyear,neednotbe
intheformofmoneyonhandinexcessofwhatisrequiredtomeetcurrentliabilitiesandfinance
currentoperationsofthecompany.Often,especiallyinagrowingbusiness,onlyapart,sometimes
asmallpart,oftheyear'sprofitsisinpropertycapableofdivision,theremainderhavingbeen
absorbedintheacquisitionofincreasedplant,

Page252U.S.210

equipment,stockintrade,oraccountsreceivable,orindecreaseofoutstandingliabilities.When
onlyapartisavailablefordividends,thebalanceoftheyear'sprofitsiscarriedtothecreditof
undividedprofits,orsurplus,orsomeotheraccounthavinglikesignificance.Ifthereafterthe
companyfindsitselfinfundsbeyondcurrentneeds,itmaydeclaredividendsoutofsuchsurplusor
undividedprofitsotherwiseitmaygoonforyearsconductingasuccessfulbusiness,butrequiring
moreandmoreworkingcapitalbecauseoftheextensionofitsoperations,andthereforeunableto
declaredividendsapproximatingtheamountofitsprofits.Thus,thesurplusmayincreaseuntilit
equalsorevenexceedstheparvalueoftheoutstandingcapitalstock.Thismaybeadjustedupon
thebooksinthemodeadoptedinthecaseatbarbydeclaringa"stockdividend."This,however,
isnomorethanabookadjustment,inessencenotadividend,butrathertheoppositenopartof
theassetsofthecompanyisseparatedfromthecommonfund,nothingdistributedexceptpaper
certificatesthatevidenceanantecedentincreaseinthevalueofthestockholder'scapitalinterest
resultingfromanaccumulationofprofitsbythecompany,butprofitssofarabsorbedinthe
businessastorenderitimpracticabletoseparatethemforwithdrawalanddistribution.Inorderto
maketheadjustment,achargeismadeagainstsurplusaccountwithcorrespondingcreditto
capitalstockaccount,equaltotheproposed"dividend"thenewstockisissuedagainstthisandthe
certificatesdeliveredtotheexistingstockholdersinproportiontotheirpreviousholdings.This,
however,ismerelybookkeepingthatdoesnotaffecttheaggregateassetsofthecorporationorits
outstandingliabilitiesitaffectsonlytheform,nottheessence,ofthe"liability"acknowledgedby
thecorporationtoitsownshareholders,andthisthroughareadjustmentofaccountsononeside
ofthebalancesheetonly,increasing"capitalstock"attheexpenseof

Page252U.S.211

"surplus"itdoesnotalterthepreexistingproportionateinterestofanystockholderorincreasethe
intrinsicvalueofhisholdingoroftheaggregateholdingsoftheotherstockholdersastheystood
before.Thenewcertificatessimplyincreasethenumberoftheshares,withconsequentdilutionof
thevalueofeachshare.

A"stockdividend"showsthatthecompany'saccumulatedprofitshavebeencapitalized,insteadof
distributedtothestockholdersorretainedassurplusavailablefordistributioninmoneyorinkind
shouldopportunityoffer.Farfrombeingarealizationofprofitsofthestockholder,ittendsrather
topostponesuchrealization,inthatthefundrepresentedbythenewstockhasbeentransferred
fromsurplustocapital,andnolongerisavailableforactualdistribution.

Theessentialandcontrollingfactisthatthestockholderhasreceivednothingoutofthecompany's
assetsforhisseparateuseandbenefitonthecontrary,everydollarofhisoriginalinvestment,
togetherwithwhateveraccretionsandaccumulationshaveresultedfromemploymentofhis
moneyandthatoftheotherstockholdersinthebusinessofthecompany,stillremainstheproperty
ofthecompany,andsubjecttobusinessriskswhichmayresultinwipingouttheentireinvestment.
Havingregardtotheverytruthofthematter,tosubstanceandnottoform,hehasreceived
nothingthatanswersthedefinitionofincomewithinthemeaningoftheSixteenthAmendment.

Beingconcernedonlywiththetruecharacterandeffectofsuchadividendwhenlawfullymade,we
layasidethequestionwhether,inaparticularcase,astockdividendmaybeauthorizedbythelocal
lawgoverningthecorporation,orwhetherthecapitalizationofprofitsmaybetheresultofcorrect
judgmentandproperbusinesspolicyonthepartofitsmanagement,andadueregardforthe
interestsofthestockholders.Andweareconsideringthetaxabilityofbonafidestockdividends
only.

Page252U.S.212

Weareclearthatnotonlydoesastockdividendreallytakenothingfromthepropertyofthe
corporationandaddnothingtothatoftheshareholder,butthattheantecedentaccumulationof
profitsevidencedthereby,whileindicatingthattheshareholderisthericherbecauseofanincrease
ofhiscapital,atthesametimeshowshehasnotrealizedorreceivedanyincomeinthetransaction.
Itissaidthatastockholdermaysellthenewsharesacquiredinthestockdividend,andsohemay,
ifhecanfindabuyer.Itisequallytruethat,ifhedoessell,andindoingsorealizesaprofit,such
profit,likeanyother,isincome,and,sofarasitmayhavearisensincetheSixteenthAmendment,
istaxablebyCongresswithoutapportionment.Thesamewouldbetruewerehetosellsomeofhis
originalsharesataprofit.Butifashareholdersellsdividendstock,henecessarilydisposesofa
partofhiscapitalinterest,justasifheshouldsellapartofhisoldstock,eitherbeforeorafterthe
dividend.Whatheretainsnolongerentitleshimtothesameproportionoffuturedividendsas
beforethesale.Hispartinthecontrolofthecompanylikewiseisdiminished.Thus,ifoneholding
$60,000outofatotal$100,000ofthecapitalstockofacorporationshouldreceiveincommon
withotherstockholdersa50percentstockdividend,andshouldsellhispart,hetherebywouldbe
reducedfromamajoritytoaminoritystockholder,havingsixfifteenthsinsteadofsixtenthsofthe
totalstockoutstanding.Acorrespondingandproportionatedecreaseincapitalinterestandin
votingpowerwouldbefallaminorityholdershouldheselldividendstock,itbeinginthenatureof
thingsimpossibleforonetodisposeofanypartofsuchanissuewithoutaproportionate
disturbanceofthedistributionoftheentirecapitalstockandalikediminutionoftheseller's
comparativevotingpowerthat"rightpreservativeofrights"inthecontrolofacorporation.

Page252U.S.213

Yet,withoutselling,theshareholder,unlesspossessedofotherresources,hasnotthewherewithal
topayanincometaxuponthedividendstock.Nothingcouldmoreclearlyshowthattotaxastock
dividendistotaxacapitalincrease,andnotincome,thanthisdemonstrationthat,inthenatureof
things,itrequiresconversionofcapitalinordertopaythetax.

Throughouttheargumentofthegovernment,inavarietyofforms,runsthefundamentalerror
alreadymentionedafailuretoappraisecorrectlytheforceoftheterm"income"asusedinthe
SixteenthAmendment,oratleasttogivepracticaleffecttoit.Thus,thegovernmentcontendsthat
thetax"isleviedonincomederivedfromcorporateearnings,"whenintruththestockholderhas
"derived"nothingexceptpapercertificates,which,sofarastheyhaveanyeffect,denyhimpresent
participationinsuchearnings.Itcontendsthatthetaxmaybelaidwhenearnings"arereceivedby
thestockholder,"whereashehasreceivednonethattheprofitsare"distributedbymeansofa
stockdividend,"althoughastockdividenddistributesnoprofitsthat,undertheActof1916,"the
taxisonthestockholder'sshareincorporateearnings,"whenintruthastockholderhasnosuch
share,andreceivesnoneinastockdividendthat"theprofitsaresegregatedfromhisformer
capital,andhehasaseparatecertificaterepresentinghisinvestedprofitsorgains,"whereasthere
hasbeennosegregationofprofits,norhasheanyseparatecertificaterepresentingapersonalgain,
sincethecertificates,newandold,arealikeinwhattheyrepresentacapitalinterestintheentire
concernsofthecorporation.

Wehavenodoubtofthepowerordutyofacourttolookthroughtheformofthecorporationand
determinethequestionofthestockholder'srightinordertoascertainwhetherhehasreceived
incometaxablebyCongresswithoutapportionment.But,lookingthroughtheform,

Page252U.S.214

wecannotdisregardtheessentialtruthdisclosed,ignorethesubstantialdifferencebetween
corporationandstockholder,treattheentireorganizationasunreal,lookuponstockholdersas
partnerswhentheyarenotsuch,treatthemashavinginequityarighttoapartitionofthe
corporateassetswhentheyhavenone,andindulgethefictionthattheyhavereceivedandrealized
ashareoftheprofitsofthecompanywhichintruththeyhaveneitherreceivednorrealized.We
musttreatthecorporationasasubstantialentityseparatefromthestockholdernotonlybecause
suchisthepracticalfact,butbecauseitisonlybyrecognizingsuchseparatenessthatanydividend
evenonepaidinmoneyorpropertycanberegardedasincomeofthestockholder.Didwe
regardcorporationandstockholdersasaltogetheridentical,therewouldbenoincomeexceptas
thecorporationacquiredit,andwhilethiswouldbetaxableagainstthecorporationasincome
underappropriateprovisionsoflaw,theindividualstockholderscouldnotbeseparatelyand
additionallytaxedwithrespecttotheirseveralsharesevenwhendivided,since,iftherewereentire
identitybetweenthemandthecompany,theycouldnotberegardedasreceivinganythingfromit,
anymorethanifone'smoneyweretoberemovedfromonepockettoanother.

Concedingthatthemereissueofastockdividendmakestherecipientnoricherthanbefore,the
governmentneverthelesscontendsthatthenewcertificatesmeasuretheextenttowhichthegains
accumulatedbythecorporationhavemadehimthericher.Therearetwoinsuperabledifficulties
withthis.Inthefirstplace,itwoulddependuponhowlonghehadheldthestockwhetherthestock
dividendindicatedtheextenttowhichhehadbeenenrichedbytheoperationsofthecompany
unlesshehadhelditthroughoutsuchoperations,themeasurewouldnotholdtrue.Secondly,and
moreimportantforpresentpurposes,enrichmentthroughincreaseinvalue

Page252U.S.215

ofcapitalinvestmentisnotincomeinanypropermeaningoftheterm.

Thecomplaintcontainsavermentsrespectingthemarketpricesofstocksuchasplaintiffheld,
baseduponsalesbeforeandafterthestockdividend,tendingtoshowthatthereceiptofthe
additionalsharesdidnotsubstantiallychangethemarketvalueofherentireholdings.Thistends
toshowthat,inthisinstance,marketquotationsreflectedintrinsicvaluesathingtheydonot
alwaysdo.Butweregardthemarketpricesofthesecuritiesasanunsafecriterioninaninquiry
suchasthepresent,whenthequestionmustbenotwhatwillthethingsellfor,butwhatisitin
truthandinessence.

Itissaidthereisnodifferenceinprinciplebetweenasimplestockdividendandacasewhere
stockholdersusemoneyreceivedascashdividendstopurchaseadditionalstock
contemporaneouslyissuedbythecorporation.Butanactualcashdividend,witharealoptionto
thestockholdereithertokeepthemoneyforhisownortoreinvestitinnewshares,wouldbeasfar
removedaspossiblefromatruestockdividend,suchastheonewehaveunderconsideration,
wherenothingofvalueistakenfromthecompany'sassetsandtransferredtotheindividual
ownershipoftheseveralstockholdersandtherebysubjectedtotheirdisposal.

Thegovernment'srelianceuponthesupposedanalogybetweenadividendofthecorporation'sown
sharesandonemadebydistributingsharesownedbyitinthestockofanothercompanycallsfor
nocommentbeyondthestatementthatthelatterdistributesassetsofthecompanyamongthe
shareholders,whiletheformerdoesnot,andfornocitationofauthorityexceptPeabodyv.Eisner,
247U.S.347,247U.S.349350.

Tworecentdecisions,proceedingfromcourtsofhighjurisdiction,arecitedinsupportofthe
positionofthegovernment.

Page252U.S.216

SwanBreweryCo.,Ltd.v.Rex,[1914]A.C.231,aroseundertheDividendDutiesActofWestern
Australia,whichprovidedthat"dividend"shouldinclude"everydividend,profit,advantage,or
gainintendedtobepaidorcreditedtoordistributedamonganymembersordirectorsofany
company,"except,etc.Therewasastockdividend,thenewsharesbeingallottedamongthe
shareholdersprorata,andthequestionwaswhetherthiswasadistributionofadividendwithin
themeaningoftheact.TheJudicialCommitteeofthePrivyCouncilsustainedthedividendduty
uponthegroundthat,although"inordinarylanguagethenewshareswouldnotbecalleda
dividend,norwouldtheallotmentofthembeadistributionofadividend,"yet,withinthemeaning
oftheact,suchnewshareswerean"advantage"totherecipients.Therebeingnoconstitutional
restrictionupontheactionofthelawmakingbody,thecasepresentedmerelyaquestionof
statutoryconstruction,andmanifestlythedecisionisnotaprecedentfortheguidanceofthisCourt
whenactingunderadutytotestanactofCongressbythelimitationsofawrittenConstitution
havingsuperiorforce.

InTaxCommissionerv.Putnam,(1917)227Mass.522,itwasheldthattheFortyFourth
amendmenttotheConstitutionofMassachusetts,whichconferreduponthelegislaturefullpower
totaxincomes,"mustbeinterpretedasincludingeveryitemwhichbyanyreasonable
understandingcanfairlyberegardedasincome"(pp.526,531),andthatunderit,astockdividend
wastaxableasincome,thecourtsaying(p.535):

"Inessence,thethingwhichhasbeendoneistodistributeasymbolrepresentinganaccumulation
ofprofits,which,insteadofbeingpaidoutincash,isinvestedinthebusiness,thusaugmentingits
durableassets.Inthisaspectofthecase,thesubstanceofthetransactionisnodifferentfromwhat
itwouldbeifacashdividendhadbeendeclaredwiththeprivilegeofsubscriptiontoanequivalent
amountofnewshares."
Page252U.S.217

Wecannotacceptthisreasoning.Evidently,inordertogiveasufficientlybroadsweeptothenew
taxingprovision,itwasdeemednecessarytotakethesymbolforthesubstance,accumulationfor
distribution,capitalaccretionforitsopposite,whileacasewheremoneyispaidintothehandof
thestockholderwithanoptiontobuynewshareswithit,followedbyacceptanceoftheoption,was
regardedasidenticalinsubstancewithacasewherethestockholderreceivesnomoneyandhasno
option.TheMassachusettscourtwasnotunderanobligation,liketheonewhichbindsus,of
applyingaconstitutionalamendmentinthelightofotherconstitutionalprovisionsthatstandin
thewayofextendingitbyconstruction.

Uponthesecondargument,thegovernment,recognizingtheforceofthedecisioninTownev.
Eisner,supra,andvirtuallyabandoningthecontentionthatastockdividendincreasestheinterest
ofthestockholderorotherwiseenricheshim,insistedasanalternativethat,bythetrue
constructionoftheActof1916,thetaxisimposednotuponthestockdividend,butratheruponthe
stockholder'sshareoftheundividedprofitspreviouslyaccumulatedbythecorporation,thetax
beingleviedasamatterofconvenienceatthetimesuchprofitsbecomemanifestthroughthestock
dividend.Ifsoconstrued,wouldtheactbeconstitutional?

ThatCongresshaspowertotaxshareholdersupontheirpropertyinterestsinthestockof
corporationsisbeyondquestion,andthatsuchinterestsmightbevaluedinviewoftheconditionof
thecompany,includingitsaccumulatedandundividedprofits,isequallyclear.Butthatthiswould
betaxationofpropertybecauseofownership,andhencewouldrequireapportionmentunderthe
provisionsoftheConstitution,issettledbeyondperadventurebypreviousdecisionsofthisCourt.

ThegovernmentreliesuponCollectorv.Hubbard,(1870)

Page252U.S.218

12Wall.1,whicharoseunder117oftheActofJune30,1864,c.173,13Stat.223,282,providing
that

"Thegainsandprofitsofallcompanies,whetherincorporatedorpartnership,otherthanthe
companiesspecifiedinthatsection,shallbeincludedinestimatingtheannualgains,profits,or
incomeofanyperson,entitledtothesame,whetherdividedorotherwise."

Thecourtheldanindividualtaxableuponhisproportionoftheearningsofacorporationalthough
notdeclaredasdividendsandalthoughinvestedinassetsnotintheirnaturedivisible.Conceding
thatthestockholderforcertainpurposeshadnotitlepriortodividenddeclared,thecourt
neverthelesssaid(p.79U.S.18):
"Grantallthat,stillitistruethattheownerofashareofstockinacorporationholdsthesharewith
allitsincidents,andthatamongthoseincidentsistherighttoreceiveallfuturedividendsthatis,
hisproportionalshareofallprofitsnotthendivided.Profitsareincidenttothesharetowhichthe
owneratoncebecomesentitledprovidedheremainsamemberofthecorporationuntiladividend
ismade.Regardedasanincidenttotheshares,undividedprofitsarepropertyoftheshareholder,
andassucharethepropersubjectofsale,gift,ordevise.Undividedprofitsinvestedinrealestate,
machinery,orrawmaterialforthepurposeofbeingmanufacturedareinvestmentsinwhichthe
stockholdersareinterested,andwhensuchprofitsareactuallyappropriatedtothepaymentofthe
debtsofthecorporation,theyservetoincreasethemarketvalueoftheshares,whetherheldbythe
originalsubscribersorbyassignees."

InsofarasthisseemstoupholdtherightofCongresstotaxwithoutapportionmentastockholder's
interestinaccumulatedearningspriortodividenddeclared,itmustberegardedasoverruledby
Pollockv.Farmers'Loan&TrustCo.,158U.S.601,158U.S.627628,158U.S.637.Conceding
Collectorv.Hubbardwasinconsistentwiththedoctrineofthatcase,becauseitsustainedadirect
taxuponpropertynotapportioned

Page252U.S.219

amongthestates,thegovernmentneverthelessinsiststhatthesixteenthAmendmentremovedthis
obstacle,sothatnowtheHubbardcaseisauthorityforthepowerofCongresstolevyataxonthe
stockholder'sshareintheaccumulatedprofitsofthecorporationevenbeforedivisionbythe
declarationofadividendofanykind.Manifestlythisargumentmustberejected,sincethe
amendmentappliestoincomeonly,andwhatiscalledthestockholder'sshareintheaccumulated
profitsofthecompanyiscapital,notincome.Aswehavepointedout,astockholderhasno
individualshareinaccumulatedprofits,norinanyparticularpartoftheassetsofthecorporation,
priortodividenddeclared.

Thus,fromeverypointofview,wearebroughtirresistiblytotheconclusionthatneitherunderthe
SixteenthAmendmentnorotherwisehasCongresspowertotaxwithoutapportionmentatrue
stockdividendmadelawfullyandingoodfaith,ortheaccumulatedprofitsbehindit,asincomeof
thestockholder.TheRevenueActof1916,insofarasitimposesataxuponthestockholderbecause
ofsuchdividend,contravenestheprovisionsofArticleI,2,cl.3,andArticleI,9,cl.4,ofthe
Constitution,andtothisextentisinvalidnotwithstandingtheSixteenthAmendment.

Judgmentaffirmed.

"TitleI.IncomeTax"

"PartI.OnIndividuals"
"Sec.2.(a)That,subjectonlytosuchexemptionsanddeductionsasarehereinafterallowed,the
netincomeofataxablepersonshallincludegains,profits,andincomederived,...alsofrom
interest,rent,dividends,securities,orthetransactionofanybusinesscarriedonforgainorprofit,
orgainsorprofitsandincomederivedfromanysourcewhatever:Provided,thattheterm
'dividends'asusedinthistitleshallbeheldtomeananydistributionmadeororderedtobemade
byacorporation,...outofitsearningsorprofitsaccruedsinceMarchfirst,nineteenhundredand
thirteen,andpayabletoitsshareholders,whether,incashorinstockofthecorporation,...which
stockdividendshallbeconsideredincome,totheamountofitscashvalue."

MR.JUSTICEHOLMES,dissenting.

IthinkthatTownev.Eisner,245U.S.418,wasrightinitsreasoningandresult,andthat,on
soundprinciples,thestockdividendwasnotincome.Butitwasclearlyintimatedinthatcasethat
theconstructionofthestatutethenbeforetheCourtmightbedifferentfromthatofthe
Constitution.245U.S.245U.S.425.Ithinkthattheword"incomes"intheSixteenthAmendment
shouldbereadin

Page252U.S.220

"asensemostobvioustothecommonunderstandingatthetimeofitsadoption."Bishopv.State,
149Ind.223,230Statev.Butler,70Fla.102,133.Foritwasforpublicadoptionthatitwas
proposed.McCullochv.Maryland,4Wheat.316,17U.S.407.Theknownpurposeofthis
Amendmentwastogetridofnicequestionsastowhatmightbedirecttaxes,andIcannotdoubt
thatmostpeoplenotlawyerswouldsupposewhentheyvotedforitthattheyputaquestionlikethe
presenttorest.IamofopinionthattheAmendmentjustifiesthetax.SeeTaxCommissionerv.
Putnam,227Mass.522,532,533.

MR.JUSTICEDAYconcursinthisopinion.

MR.JUSTICEBRANDEISdeliveredthefollowingopinion,inwhichMR.JUSTICECLARKE
concurred.

Financiers,withtheaidoflawyers,devisedlongagotwodifferentmethodsbywhichacorporation
can,withoutincreasingitsindebtedness,keepforcorporatepurposesaccumulatedprofits,andyet,
ineffect,distributetheseprofitsamongitsstockholders.Onemethodisasimpleone.Thecapital
stockisincreasedthenewstockispaidupwiththeaccumulatedprofits,andthenewsharesof
paidupstockarethendistributedamongthestockholdersprorataasadividend.Ifthe
stockholderprefersreadymoneytoincreasinghisholdingofthestockinthecompany,hesellsthe
newstockreceivedasadividend.Theothermethodisslightlymorecomplicated..arrangements
aremadeforanincreaseofstocktobeofferedtostockholdersprorataatpar,andatthesame
timeforthepaymentofacashdividendequaltotheamountwhichthestockholderwillberequired
topayto
Page252U.S.221

thecompany,ifheavailshimselfoftherighttosubscribeforhisprorataofthenewstock.Ifthe
stockholdertakesthenewstock,asisexpected,hemayendorsethedividendcheckreceivedtothe
corporation,andthuspayforthenewstock.Inordertoensurethatallthenewstocksoofferedwill
betaken,thepriceatwhichitisofferedisfixedfarbelowwhatitisbelievedwillbeitsmarket
value.Ifthestockholderprefersreadymoneytoanincreaseofhisholdingsofstock,hemaysellhis
righttotakenewstockprorata,whichisevidencedbyanassignableinstrument.Inthateventthe
purchaseroftherightsrepaystothecorporation,asthesubscriptionpriceofthenewstock,an
amountequaltothatwhichithadpaidasacashdividendtothestockholder.

Bothofthesemethodsofretainingaccumulatedprofitswhileineffectdistributingthemasa
dividendhadbeenincommonuseintheUnitedStatesformanyyearspriortotheadoptionofthe
SixteenthAmendment.Theywererecognizedequivalents.Whetheraparticularcorporation
employedoneortheothermethodwasdeterminedsometimesbyrequirementsofthelawunder
whichthecorporationwasorganizedsometimesitwasdeterminedbypreferencesofthe
individualofficialsofthecorporation,andsometimesbystockmarketconditions.Whichever
methodwasemployed,theresultantdistributionofthenewstockwascommonlyreferredtoasa
stockdividend.Howthesetwomethodshavebeenemployedmaybeillustratedbytheactionin
thisrespect(asreportedinMoody'sManual,1918Industrial,andtheCommercialandFinancial
Chronicle)ofsomeoftheStandardOilcompaniessincethedisintegrationpursuanttothedecision
ofthisCourtin1911.StandardOilCo.v.UnitedStates,221U.S.1.

(a)StandardOilCo.(ofIndiana),anIndianacorporation.IthadonDecember31,1911,
$1,000,000capitalstock(allcommon),andalargesurplus.OnMay15,

Page252U.S.222

1912,itincreaseditscapitalstockto$30,000,000,andpaidasimplestockdividendof2,900
percentinstock.[Footnote1]

(b)StandardOilCo.(ofNebraska),aNebraskacorporation.IthadonDecember31,1911,
$600,000capitalstock(allcommon),andasubstantialsurplus.OnApril15,1912,itpaidasimple
stockdividendof331/3percent,increasingtheoutstandingcapitalto$800,000.Duringthe
calendaryear1912,itpaidcashdividendsaggregating20percent,butitearnedconsiderablymore,
andhadatthecloseoftheyearagainasubstantialsurplus.OnJune20,1913,itdeclaredafurther
stockdividendof25percent,thusincreasingthecapitalto$1,000,000.[Footnote2]

(c)TheStandardOilCo.(ofKentucky),aKentuckycorporation.IthadonDecember31,1913,
$1,000,000capitalstock(allcommon)and$3,701,710surplus.Ofthissurplus,$902,457hadbeen
earnedduringthecalendaryear1913,thenetprofitsofthatyearhavingbeen$1,002,457andthe
dividendspaidonly$100,000(10percent).OnDecember22,1913,acashdividendof$200per
sharewasdeclaredpayableonFebruary14,1914,tostockholdersofrecordJanuary31,1914,and
thesestockholderswereofferedtherighttosubscribeforanequalamountofnewstockatparand
toapplythecashdividendinpaymenttherefor.Theoutstandingstockwasthusincreasedto
$3,000,000.Duringthecalendaryears1914,1915,and1916,quarterlydividendswerepaidonthis
stockatanannualrateofbetween15percentand20percent,butthecompany'ssurplusincreased
by$2,347,614,sothat,onDecember31,1916,ithadalargesurplusoverits$3,000,000capital
stock.OnDecember15,1916,thecompanyissuedacirculartothestockholders,saying:

"Thecompany'sbusinessforthisyearhasshowna

Page252U.S.223

verygoodincreaseinvolumeandaproportionateincreaseinprofits,anditisestimatedthat,by
January1,1917,thecompanywillhaveasurplusofover$4,000,000.Theboardfeelsjustifiedin
statingthat,ifthepropositiontoincreasethecapitalstockisactedonfavorably,itwillbeproperin
thenearfuturetodeclareacashdividendof100percentandtoallowthestockholderstheprivilege
prorataaccordingtotheirholdings,topurchasethenewstockatpar,theplanbeingtoallowthe
stockholders,iftheydesire,tousetheircashdividendtopayforthenewstock."

Theincreaseofstockwasvoted.Thecompanythenpaidacashdividendof100percent,payable
May1,1917,againofferingtosuchstockholderstherighttosubscribeforanequalamountofnew
stockatparandtoapplythecashdividendinpaymenttherefor.

Moody'sManual,describingthetransactionwithexactness,saysfirstthatthestockwasincreased
from$3,000,000to$6,000,000,"acashdividendof100percent,payableMay1,1917,being
exchangedforoneshareofnewstock,theequivalentofa100percentstockdividend."Butlaterin
thereportgiving,ascustomaryintheManual,thedividendrecordofthecompany,theManual
says:"Astockdividendof200percentwaspaidFebruary14,1914,andoneof100percentonMay
1,1197."And,inreportingspecificallytheincomeaccountofthecompanyforaseriesofyears
endingDecember31,coveringnetprofits,dividendspaid,andsurplusfortheyear,itgives,asthe
aggregateofdividendsfortheyear1917,$660,000(whichwastheaggregatepaidonthequarterly
cashdividend5percentJanuaryandApril6percentJulyandOctober),andaddsinanote:"In
addition,astockdividendof100percentwaspaidduringtheyear."[Footnote3]TheWallStreet
Journalof

Page252U.S.224

May2,1917,p.2,quotesthe1917"high"priceforStandardOilofKentuckyas"375exstock
dividend."

Itthusappearsthat,amongfinanciersandinvestors,thedistributionofthestock,bywhichever
methodeffected,iscalledastockdividendthatthetwomethodsbywhichaccumulatedprofitsare
legallyretainedforcorporatepurposesandatthesametimedistributedasdividendsare
recognizedbythemtobeequivalents,andthatthefinancialresultstothecorporationandtothe
stockholdersofthetwomethodsaresubstantiallythesame,unlessadifferenceresultsfromthe
applicationofthefederalincometaxlaw.

Mrs.Macomber,acitizenandresidentofNewYork,was,intheyear1916,astockholderinthe
StandardOilCompany(ofCalifornia),acorporationorganizedunderthelawsofCaliforniaand
havingitsprincipalplaceofbusinessinthatstate.Duringthatyear,shereceivedfromthe
companyastockdividendrepresentingprofitsearnedsinceMarch1,1913.Thedividendwaspaid
bydirectissueofthestocktoheraccordingtothesimplemethoddescribedabove,pursuedalsoby
theIndianaandNebraskacompanies.In1917,shewastaxedunderthefederallawonthestock
dividendsoreceivedatitsparvalueof$100ashare,asincomereceivedduringtheyear1916.Such
astockdividendisincome,asdistinguishedfromcapital,bothunderthelawofNewYorkand
underthelawofCalifornia,becauseinbothstateseverydividendrepresentingprofitsisdeemedto
beincome,whetherpaidincashorinstock.IthadbeensoheldinNewYork,wherethequestion
aroseasbetweenlifetenantandremainderman,Lowryv.Farmers'Loan&TrustCo.,172N.Y.
137MatterofOsborne,209N.Y.450,andalso,wherethequestionaroseinmattersoftaxation,
Peoplev.Glynn,

Page252U.S.225

130App.Div.332,198N.Y.605.IthasbeensoheldinCalifornia,wherethequestionappearsto
havearisenonlyincontroversiesbetweenlifetenantandremainderman.EstateofDuffill,58
Cal.Dec.97,180Cal.748.

Itisconcededthat,ifthestockdividendpaidtoMrs.Macomberhadbeenmadebythemore
complicatedmethodpursuedbytheStandardOilCompanyofKentuckythatis,issuingrightsto
takenewstockprorataandpayingtoeachstockholdersimultaneouslyadividendincash
sufficientinamounttoenablehimtopayforthisprorataofnewstocktobepurchasedthe
dividendsopaidtohimwouldhavebeentaxableasincome,whetherheretainedthecashor
whetherhereturnedittothecorporationinpaymentforhisprorataofnewstock.Butitis
contendedthat,becausethesimplemethodwasadoptedofhavingthenewstockissueddirectto
thestockholdersaspaidupstock,thenewstockisnottobedeemedincome,whethersheretained
itorconverteditintocashbysale.Ifsuchadifferentresultcanflowmerelyfromthedifferencein
themethodpursued,itmustbebecauseCongressiswithoutpowertotaxasincomeofthe
stockholdereitherthestockreceivedunderthelattermethodortheproceedsofitssale,for
Congresshas,bytheprovisionsintheRevenueActof1916,expresslydeclareditspurposetomake
stockdividends,bywhichevermethodpaid,taxableasincome.

TheSixteenthAmendment,proclaimedFebruary25,1913,declares:
"TheCongressshallhavepowertolayandcollecttaxesonincomes,fromwhateversourcederived,
withoutapportionmentamongtheseveralstates,andwithoutregardtoanycensusor
enumeration."

TheRevenueActofSeptember8,1916,c.463,2a,39Stat.756,757,provided:

"Thattheterm'dividends'asusedinthistitleshall

Page252U.S.226

beheldtomeananydistributionmadeororderedtobemadebyacorporation,...outofits
earningsorprofitsaccruedsinceMarchfirst,nineteenhundredandthirteen,andpayabletoits
shareholders,whetherincashorinstockofthecorporation,...whichstockdividendshallbe
consideredincome,totheamountofitscashvalue."

Hitherto,powersconferreduponCongressbytheConstitutionhavebeenliberallyconstrued,and
havebeenheldtoextendtoeverymeansappropriatetoattaintheendsought.Indeterminingthe
scopeofthepower,thesubstanceofthetransaction,notitsform,hasbeenregarded.Martinv.
Hunter,1Wheat.304,14U.S.326McCullochv.Maryland,4Wheat.316,17U.S.407,17U.S.
415Brownv.Maryland,12Wheat.419,25U.S.446Craigv.Missouri,4Pet.410,29U.S.433
Jarroltv.Moberly,103U.S.580,103U.S.585587LegalTenderCase,110U.S.421,110U.S.
444LithographCo.v.Sarony,111U.S.53,111U.S.58UnitedStatesv.RealtyCo.,163U.S.427,
163U.S.440442SouthCarolinav.UnitedStates,199U.S.437,199U.S.448449.Isthere
anythinginthephraseologyoftheSixteenthAmendmentorinthenatureofcorporatedividends
whichshouldleadtoadeparturefromtheserulesofconstructionandcompelthisCourttohold
thatCongressispowerlesstopreventaresultsoextraordinaryasthatherecontendedforbythe
stockholder?

First.Theterm"income,"whenappliedtotheinvestmentofthestockholderinacorporation,had,
beforetheadoptionoftheSixteenthAmendment,beencommonlyunderstoodtomeanthereturns
fromtimetotimereceivedbythestockholderfromgainsorearningsofthecorporation.A
dividendreceivedbyastockholderfromacorporationmaybeeitherindistributionofcapital
assetsorindistributionofprofits.Whetheritistheoneortheotherisinnowayaffectedbythe
mediuminwhichitispaid,norbythemethodormeansthroughwhichtheparticularthing
distributedasadividendwasprocured.Ifthe

Page252U.S.227

dividendisdeclaredpayableincash,themoneywithwhichtopayitisordinarilytakenfrom
surpluscashinthetreasury.But(ifthereareprofitslegallyavailablefordistributionandthelaw
underwhichthecompanywasincorporatedsopermits)thecompanymayraisethemoneyby
discountingnegotiablepaper,orbysellingbonds,scriporstockofanothercorporationtheninthe
treasury,orbysellingitsownbonds,scriporstocktheninthetreasury,orbysellingitsown
bonds,scriporstockissuedexpresslyforthatpurpose.Howthemoneyshallberaisediswhollya
matteroffinancialmanagement.Themannerinwhichitisraisedinnowayaffectsthequestion
whetherthedividendreceivedbythestockholderisincomeorcapital,norcanitconceivablyaffect
thequestionwhetheritistaxableasincome.

Likewisewhetheradividenddeclaredpayablefromprofitsshallbepaidincashorinsomeother
mediumisalsowhollyamatteroffinancialmanagement.Ifsomeothermediumisdecidedupon,it
isalsowhollyaquestionoffinancialmanagementwhetherthedistributionshallbe,forinstance,in
bonds,scriporstockofanothercorporationorinissuesofitsown.Andifthedividendispaidinits
ownissues,whyshouldtherebeadifferenceinresultdependentuponwhetherthedistribution
wasmadefromsuchsecuritiestheninthetreasuryorfromotherstobecreatedandissuedbythe
companyexpresslyforthatpurpose?Sofarasthedistributionmaybemadefromitsownissuesof
bonds,orpreferredstockcreatedexpresslyforthepurpose,itclearlywouldmakenodifference,in
thedecisionofthequestionwhetherthedividendwasadistributionofprofits,thatthesecurities
hadtobecreatedexpresslyforthepurposeofdistribution.Ifadividendpaidinsecuritiesofthat
naturerepresentsadistributionofprofits,Congressmay,ofcourse,taxitasincomeofthe
stockholder.Istheresultdifferentwherethesecuritydistributediscommonstock?

Page252U.S.228

Supposethatacorporationhavingpowertobuyandsellitsownstockpurchases,intheinterval
betweenitsregulardividenddates,withmoneysderivedfromcurrentprofits,someofitsown
commonstockasatemporaryinvestment,intendingatthetimeofpurchasetosellitbeforethe
nextdividenddateandtousetheproceedsinpayingdividends,butlater,deemingitinadvisable
eithertosellthisstockortoraisebyborrowingthemoneynecessarytopaytheregulardividendin
cash,declaresadividendpayableinthisstockcananyonedoubtthat,insuchacase,thedividend
incommonstockwouldbeincomeofthestockholderandconstitutionallytaxableassuch?See
Greenv.Bissell,79Conn.547Lelandv.Hayden,102Mass.542.Andwoulditnotlikewisebe
incomeofthestockholdersubjecttotaxationifthepurposeofthecompanyinbuyingthestockso
distributedhadbeenfromthebeginningtotakeitoffthemarketanddistributeitamongthe
stockholdersasadividend,andthecompanyactuallydidso?And,proceedingashortstepfurther,
supposethatacorporationdecidedtocapitalizesomeofitsaccumulatedprofitsbycreating
additionalcommonstockandsellingthesametoraiseworkingcapital,butafterthestockhasbeen
issuedandcertificatesthereforaredeliveredtothebankersforsale,generalfinancialconditions
makeitundesirabletomarketthestock,andthecompanyconcludesthatitiswisertohusband,for
workingcapital,thecashwhichithadintendedtouseinpayingstockholdersadividend,and,
instead,topaythedividendinthecommonstockwhichithadplannedtosellwouldnotthestock
sodistributedbeadistributionofprofits,andhence,whenreceived,beincomeofthestockholder
andtaxableassuch?Ifthisbeconceded,whyshoulditnotbeequallyincomeofthestockholder,
andtaxableassuch,ifthecommonstockcreatedbycapitalizingprofitshadbeenoriginallycreated
fortheexpresspurposeofbeingdistributed

Page252U.S.229

asadividendtothestockholderwhoafterwardsreceivedit?

Second.Ithasbeensaidthatadividendpayableinbondsorpreferredstockcreatedforthe
purposeofdistributingprofitsmaybeincomeandtaxableassuch,butthatthecaseisdifferent
wherethedistributionisincommonstockcreatedforthatpurpose.Variousreasonsareassigned
formakingthisdistinction.Oneisthattheproportionofthestockholder'sownershiptothe
aggregatenumberofthesharesofthecompanyisnotchangedbythedistribution.Butthatis
equallytruewherethedividendispaidinitsbondsorinitspreferredstock.Furthermore,neither
maintenancenorchangeintheproportionateownershipofastockholderinacorporationhasany
bearinguponthequestionhereinvolved.Anotherreasonassignedisthatthevalueoftheoldstock
heldisreducedapproximatelybythevalueofthenewstockreceived,sothatthestockholder,after
receiptofthestockdividend,hasnomorethanhehadbeforeitwaspaid.Thatisequallytrue
whetherthedividendbepaidincashorinotherpropertyforinstance,bonds,scrip,orpreferred
stockofthecompany.Thepaymentfromprofitsofalargecashdividend,andevenasmallone,
customarilylowersthethenmarketvalueofstockbecausetheundividedpropertyrepresentedby
eachsharehasbeencorrespondinglyreduced.Theargumentwhichappearstobemoststrongly
urgedforthestockholdersisthat,whenastockdividendismade,noportionoftheassetsofthe
companyistherebysegregatedforthestockholder.Butdoestheissueofnewbondsorofpreferred
stockcreatedforuseasadividendresultinanysegregationofassetsforthestockholder?Ineach
case,hereceivesapieceofpaperwhichentitleshimtocertainrightsintheundividedproperty.
Clearly,segregationofassetsinaphysicalsenseisnotanessentialofincome.Theyear'sgainsofa
partneristaxableasincomealthoughtherelikewiseno

Page252U.S.230

segregationofhisshareinthegainsfromthatofhispartnersishad.

Theobjectionthattherehasbeennosegregationispresentedalsoinanotherform.Itisargued
that,untilthereisasegregation,thestockholdercannotknowwhetherhehasreallyreceivedgains,
sincethegainsmaybeinvestedinplantormerchandiseorotherproperty,andperhapsbelater
lost.Butisnotthisequallytrueoftheshareofapartnerintheyear'sprofitsofthefirmor,indeed,
oftheprofitsoftheindividualwhoisengagedinbusinessalone?Andisitnottruealsowhen
dividendsarepaidincash?Thegainsofabusiness,whetherconductedbyanindividual,byafirm,
orbyacorporationareordinarilyreinvestedinlargepart.Manyacashdividendhonestlydeclared
asadistributionofprofitsproveslatertohavebeenpaidoutofcapitalbecauseerrorsinforecast
preventcorrectascertainmentofvalues.Untilabusinessadventurehasbeencompletely
liquidated,itcanneverbedeterminedwithcertaintywhethertherehavebeenprofitsunlessthe
returnsatleastexceededthecapitaloriginallyinvested.Businessmen,dealingwiththeproblem
practically,fixnecessarilyperiodsandrulesfordeterminingwhethertherehavebeennetprofits
thatis,incomeorgains.Theyprotectthemselvesfrombeingseriouslymisledbyadoptingasystem
ofdepreciationchargesandreserves.Thentheyactupontheirowndeterminationwhetherprofits
havebeenmade.Congress,inlegislating,haswiselyadoptedtheirpracticesasitsownrulesof
action.

Third.ThegovernmenturgesthatitwouldhavebeenwithinthepowerofCongresstohavetaxed
asincomeofthestockholderhisproratashareofundistributedprofitsearnedevenifnostock
dividendrepresentingithadbeenpaid.Strongreasonsmaybeassignedforsuchaview.See
Collectorv.Hubbard,12Wall.1.Theundividedshareofapartnerintheyear'sundistributed
profitsofhisfirm

Page252U.S.231

istaxableasincomeofthepartneralthoughtheshareinthegainisnotevidencedbyanyaction
takenbythefirm.Whymaynotthestockholder'sinterestinthegainsofthecompany?Thelaw
findsnodifficultyindisregardingthecorporatefictionwheneverthatisdeemednecessarytoattain
ajustresult.LinnTimberCo.v.UnitedStates,236U.S.574.SeeMorawetzonCorporations,2d
ed.,227231CookonCorporations,7thed.,663,664.Thestockholder'sinterestinthe
propertyofthecorporationdiffersnotfundamentally,butinformonly,fromtheinterestofa
partnerinthepropertyofthefirm.Thereismuchauthorityforthepropositionthat,underourlaw,
apartnershiporjointstockcompanyisjustasdistinctandpalpableanentityintheideaofthelaw,
asdistinguishedfromtheindividualscomposingit,asisacorporations.[Footnote4]Noreason
appears,whyCongress,inlegislatingunderagrantofpowersocomprehensiveasthatauthorizing
thelevyofanincometax,shouldbelimitedbytheparticularviewoftherelationofthestockholder
tothecorporationanditspropertywhichmay,intheabsenceoflegislation,havebeentakenby
thisCourt.ButwehavenooccasiontodecidethequestionwhetherCongressmighthavetaxedto
thestockholderhisundividedshareofthecorporation'searnings.ForCongresshasinthisact
limitedtheincometaxtothatshareofthestockholderintheearningswhichis,ineffect,
distributedbymeansofthestockdividendpaid.Inotherwords,torenderthestockholdertaxable,
theremustbebothearningsmadeandadividendpaid.Neitherearningswithoutdividendnora
dividendwithoutearningssubjectsthe

Page252U.S.232

stockholdertotaxationundertheRevenueActof1916.

Fourth.Theequivalencyofalldividendsrepresentingprofits,whetherpaidofalldividendsin
stock,issocompletethatseriousquestionofthetaxabilityofstockdividendswouldprobablynever
havebeenmadeifCongresshadundertakentotaxonlythosedividendswhichrepresentedprofits
earnedduringtheyearinwhichthedividendwaspaidorintheyearpreceding.ButthisCourt,
construingliberallynotonlytheconstitutionalgrantofpowerbutalsotherevenueActof1913,
heldthatCongressmighttax,andhadtaxed,tothestockholderdividendsreceivedduringtheyear,
althoughearnedbythecompanylongbefore,andevenpriortotheadoptionoftheSixteenth
Amendment.Lynchv.Hornby,247U.S.339.[Footnote5]Thatrule,ifindiscriminatinglyapplied
toallstockdividendsrepresentingprofitsearned,might,inviewofcorporatepractice,have
workedconsiderablehardshipandhaveraisedseriousquestions.Manycorporations,without
legallycapitalizinganypartoftheirprofits,hadassigneddefinitelysomepartoralloftheannual
balancesremainingafterpayingtheusualcashdividendstotheusestowhichpermanentcapitalis
ordinarilyapplied.Someofthecorporationsdoingthistransferredsuchbalancesontheirbooksto
"surplus"accountdistinguishingbetweensuchpermanent"surplus"andthe"undividedprofits"
account.Othercorporations,withoutthisformality,hadassumedthattheannualaccumulating
balancescarriedasundistributedprofitsweretobetreatedascapitalpermanentlyinvestedinthe
business.Andstillothers,withoutdefiniteassumptionofanykind,had

Page252U.S.233

sousedundividedprofitsforcapitalpurposes.Tohavemadetherevenuelawapplyretroactivelyso
astoreachsuchaccumulatedprofits,ifandwheneveritshouldbedeemeddesirabletocapitalize
themlegallybytheissueofadditionalstockdistributedasadividendtostockholders,wouldhave
workedgreatinjustice.CongressendeavoredintheRevenueActof1916toguardagainstany
serioushardshipwhichmightotherwisehavearisenfrommakingtaxablestockdividends
representingaccumulatedprofits.Itdidnotlimitthetaxabilitytostockdividendsrepresenting
profitsearnedwithinthetaxyearorintheyearpreceding,butitdidlimittaxabilitytosuch
dividendsrepresentingprofitsearnedsinceMarch1,1913.Therebystockholdersweregivennotice
thattheirsharealsoinundistributedprofitsaccumulatingthereafterwasatsometimetobetaxed
asincome.AndCongresssoughtby3todiscouragethepostponementofdistributionforthe
illegitimatepurposeofevadingliabilitytosurtaxes.

Fifth.ThedecisionofthisCourtthatearningsmadebeforetheadoptionoftheSixteenth
Amendment,butpaidoutincashdividendafteritsadoption,weretaxableasincomeofthe
stockholderinvolvedaveryliberalconstructionoftheamendment.Toholdnowthatearningsboth
madeandpaidoutaftertheadoptionoftheSixteenthAmendmentcannotbetaxedasincomeof
thestockholder,ifpaidintheformofastockdividend,involvesanexceedinglynarrow
constructionofit.AssaidbyMr.ChiefJusticeMarshallinBrownv.Maryland,12Wheat.419,25
U.S.446:

"Toconstruethepowersoastoimpairitsefficacywouldtendtodefeatanobjectintheattainment
ofwhichtheAmericanpublictook,andjustlytook,thatstronginterestwhicharosefromafull
convictionofitsnecessity."
NodecisionheretoforerenderedbythisCourtrequiresustoholdthatCongress,inprovidingfor
thetaxationof

Page252U.S.234

stockdividends,exceededthepowerconferreduponitbytheSixteenthAmendment.Thetwocases
mainlyreliedupontoshowthatthiswasbeyondthepowerofCongressareTownev.Eisner,245
U.S.418,whichinvolvedaquestionnotofconstitutionalpower,butofstatutoryconstruction,and
Gibbonsv.Mahon,136U.S.549,whichinvolvedaquestionarisingbetweenlifetenantand
remainderman.SofarasconcernsTownev.Eisner,wehaveonlytobearinmindwhatwasthere
said(p.245U.S.425):"Butitisnotnecessarilytruethatincomemeansthesamethinginthe
Constitutionandthe[an]act."[Footnote6]Gibbonsv.Mahonisevenlessanauthorityfora
narrowconstructionofthepowertotaxincomesconferredbytheSixteenthAmendment.Inthat
case,thecourtwasrequiredtodeterminehow,intheadministrationofanestateintheDistrictof
Columbia,astockdividend,representingprofits,receivedafterthedecedent'sdeath,shouldbe
disposedofasbetweenlifetenantandremainderman.Thequestionwas,inessence,whatshallthe
intentionofthetestatorbepresumedtohavebeen?Onthisquestion,therewasgreatdiversityof
opinionandpracticeinthecourtsofEnglishspeakingcountries.Threewelldefinedruleswere
thencompetingforacceptance.Twooftheseinvolvesanarbitraryruleofdistribution,thethird
equitableapportionment.SeeCookonCorporations,7thed.,552558.

1.ThesocalledEnglishrule,declaredin1799byBranderv.Brander,4Ves.Jr.800,thata
dividendrepresenting

Page252U.S.235

profits,whetherincash,stockorotherproperty,belongstothelifetenantifitwasaregularor
ordinarydividend,andbelongstotheremaindermanifitwasanextraordinarydividend.

2.ThesocalledMassachusettsrule,declaredin1868byMinotv.Paine,99Mass.101,thata
dividendrepresentingprofits,whetherregular,ordinary,orextraordinary,ifincashbelongstothe
lifetenant,andifinstockbelongstotheremainderman.

3.ThesocalledPennsylvaniarule,declaredin1857byEarp'sAppeal,28Pa.368,that,wherea
stockdividendispaid,thecourtshallinquireintothecircumstancesunderwhichthefundhad
beenearnedandaccumulatedoutofwhichthedividend,whetheraregular,anordinary,oran
extraordinaryone,waspaid.Ifitfindsthatthestockdividendwaspaidoutofprofitsearnedsince
thedecedent'sdeath,thestockdividendbelongstothelifetenantifthecourtfindsthatthestock
dividendwaspaidfromcapitalorfromprofitsearnedbeforethedecedent'sdeath,thestock
dividendbelongstotheremainderman.
ThisCourtadoptedinGibbonsv.MahonastheruleofadministrationfortheDistrictofColumbia
thesocalledMassachusettsrule,theopinionbeingdeliveredin1890byMr.JusticeGray.Since
then,thesamequestionhascomeupfordecisioninmanyofthestates.Thesocalled
Massachusettsrule,althoughapprovedbythisCourt,hasfoundfavorinonlyafewstates.Theso
calledPennsylvaniarule,ontheotherhand,hasbeenadoptedsincebysomanyofthestates
(includingNewYorkandCalifornia)thatithascometobeknownasthe"Americanrule."
Whether,inviewofthesefactsandthepracticalresultsoftheoperationofthetworulesasshown
bytheexperienceofthe30yearswhichhaveelapsedsincethedecisioninGibbonsv.Mahon,it
mightbedesirableforthisCourttoreconsiderthequestiontheredecided,as

Page252U.S.236

someothercourtshavedone(see29HarvardLawReview551),wehavenooccasiontoconsiderin
thiscase.For,asthisCourttherepointedout(p.136U.S.560),thequestioninvolvedwasone
"betweentheownersofsuccessiveinterestsinparticularshares,"andnot,asinBaileyv.Railroad
Co.,22Wall.604,aquestion

"betweenthecorporationandthegovernment,and[which]dependeduponthetermsofastatute
carefullyframedtopreventcorporationsfromevadingpaymentofthetaxupontheirearnings."

Wehave,however,notmerelyargumentwehaveexampleswhichshouldconvinceusthat"there
isnoinherent,necessaryandimmutablereasonwhystockdividendsshouldalwaysbetreatedas
capital."TaxCommissionerv.Putnam,227Mass.522,533.TheSupremeJudicialCourtof
Massachusettshassteadfastlyadhered,despiteeverrenewedprotest,totherulethateverystock
dividendis,asbetweenlifetenantandremainderman,capital,andnotincome.But,inconstruing
theMassachusettsIncomeTaxAmendment,whichissubstantiallyidenticalwiththefederal
amendment,thatcourtheldthatthelegislaturewastherebyempoweredtolevyanincometax
uponstockdividendsrepresentingprofits.ThecourtsofEnglandhave,withsomerelaxation,
adheredtotheirrulethateveryextraordinarydividendis,asbetweenlifetenantand
remainderman,tobedeemedcapital.But,in1913,theJudicialCommitteeofthePrivyCouncil
heldthatastockdividendrepresentingaccumulatedprofitswastaxablelikeanordinarycash
dividend,SwanBreweryCo.,Ltd.v.Rex,[1914]A.C.231.Indismissingtheappeal,thesewordsof
theChiefJusticeoftheSupremeCourtofWesternAustraliawerequoted(p.236),whichshowthat
thefactsinvolvedwereidenticalwiththoseinthecaseatbar:

"Hadthecompanydistributedthe101,450amongtheshareholders,andhadtheshareholders
repaidsuchsumstothecompanyasthepriceofthe81,160newshares,thedutyonthe101,450

Page252U.S.237

wouldclearlyhavebeenpayable.Isnotthisvirtuallytheeffectofwhatwasactuallydone?Ithinkit
is."
Sixth.IfstockdividendsrepresentingprofitsareheldexemptfromtaxationundertheSixteenth
Amendment,theownersofthemostsuccessfulbusinessesinAmericawill,asthefactsinthiscase
illustrate,beabletoescapetaxationonalargepartofwhatisactuallytheirincome.Sofarastheir
profitsarerepresentedbystockreceivedasdividends,theywillpaythesetaxesnotupontheir
income,butonlyupontheincomeoftheirincome.Thatsucharesultwasintendedbythepeopleof
theUnitedStateswhenadoptingtheSixteenthAmendmentisinconceivable.Oursoledutyisto
ascertaintheirintentasthereinexpressed.[Footnote7]Interse,comprehensivelanguagebefitting
theConstitution,theyempoweredCongress"tolayandcollecttaxesonincomesfromwhatever
sourcederived."Theyintendedtoincludetherebyeverythingwhichbyreasonableunderstanding
canfairlyberegardedasincome.Thatstockdividendsrepresentingprofitsaresoregardednot
onlybytheplainpeople,butbyinvestorsandfinanciersandbymostofthecourtsofthecountry,is
shownbeyondperadventurebytheiractsandbytheirutterances.Itseemstomeclear,therefore,
thatCongresspossessesthepowerwhichitexercisedtomakedividendsrepresentingprofits
taxableasincomewhetherthemediuminwhichthedividendispaidbecashorstock,andthatit
maydefine,asithasdone,whatdividendsrepresenting

Page252U.S.238

profitsshallbedeemedincome.Itsurelyisnotclearthattheenactmentexceedsthepowergranted
bytheSixteenthAmendment.And,asthisCourthassooftensaid,thehighprerogativeof
declaringanactofCongressinvalidshouldneverbeexercisedexceptinaclearcase.[Footnote8]

"Itisbutadecentrespectduetothewisdom,theintegrity,andthepatriotismofthelegislative
bodybywhichanylawispassedtopresumeinfavorofitsvalidityuntilitsviolationofthe
Constitutionisprovedbeyondallreasonabledoubt."

Ogdenv.Saunders,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'sManualofIndustrials(1918),p.2240,ingivingthe"comparative
incomeaccount"ofthecompany,describesthe1914dividendas"stockdividendpaid(200
percent)$2,000,000,"anddescribesthe1917dividendas"$3,000,000specialcashdividend."

[Footnote4]

SeeSomeJudicialMyths,byFrancisM.Burdick,22HarvardLawReview,393,394396TheFirm
asaLegalPerson,byWilliamHamiltonCowles,57Cent.L.J.343,348TheSeparateEstatesof
NonBankruptPartners,byJ.D.Brannan,20HarvardLawReview,589592.CompareHarvard
LawReview,Vol.7,p.426Vol.14,p.222Vol.17,p.194.

[Footnote5]

ThehardshipsupposedtohaveresultedfromsuchadecisionhasbeenremovedintheRevenueAct
of1916asamended,byprovidingin31bthatsuchcashdividendsshallthereafterbeexemptfrom
taxationif,beforetheyaremade,allearningsmadesinceFebruary28,1913,shallhavebeen
distributed.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,itis
notofprevailingforceastothebroadconsiderationsinvolvedintheinterpretationofan
amendmenttotheConstitutionadoptedundertheconditionsprecedingandattendantuponthe
ratificationofthefortyfourthamendment."

[Footnote7]

CompareRugg,C.J.,TaxCommissionerv.Putnam,227Mass.522,524:

"Itisagrantfromthesovereignpeople,andnottheexerciseofadelegatedpower.Itisastatement
ofgeneralprinciples,andnotaspecificationofdetails.Amendmentstosuchacharterof
governmentoughttobeconstruedinthesamespiritandaccordingtothesamerulesasthe
original.ItistobeinterpretedastheConstitutionofastate,andnotasastatuteoranordinary
pieceoflegislation.Itswordsmustbegivenaconstructionadaptedtocarryintoeffectitspurpose."

[Footnote8]

"Itisourduty,whenrequiredintheregularcourseofjudicialproceedings,todeclareanactof
CongressvoidifnotwithinthelegislativepoweroftheUnitedStatesbutthisdeclarationshould
neverbemadeexceptinaclearcase.Everypossiblepresumptionisinfavorofthevalidityofa
statute,andthiscontinuesuntilthecontraryisshownbeyondarationaldoubt.Onebranchofthe
governmentcannotencroachonthedomainofanotherwithoutdanger.Thesafetyofour
institutionsdependsinnosmalldegreeonastrictobservanceofthissalutaryrule."

TheSinkingFundCases,99U.S.700,99U.S.718(1878).SeealsoLegalTenderCases,12Wall.
457,79U.S.531(1870)TradeMarkCases,100U.S.82,100U.S.96(1879).SeeAmerican
DoctrineofConstitutionalLawbyJamesB.Thayer,7HarvardLawReview129,142.

"WiththeexceptionoftheextraordinarydecreerenderedintheDredScottcase,...alloftheacts
ortheportionsoftheactsofCongressinvalidatedbythecourtsbefore1868relatedtothe
organizationofcourts.DenyingthepowerofCongresstomakenoteslegaltenderseemstobethe
firstdeparturefromthisrule."

Haines,AmericanDoctrineofJudicialSupremacy,p.288.Thefirstlegaltenderdecisionwas
overruledinparttwoyearslater(1870),LegalTenderCases,12Wall.457,andagainin1883,
LegalTenderCase,110U.S.421.

Disclaimer:OfficialSupremeCourtcaselawisonlyfoundintheprintversionoftheUnitedStatesReports.
Justiacaselawisprovidedforgeneralinformationalpurposesonly,andmaynotreflectcurrentlegal
developments,verdictsorsettlements.Wemakenowarrantiesorguaranteesabouttheaccuracy,completeness,
oradequacyoftheinformationcontainedonthissiteorinformationlinkedtofromthissite.Pleasecheckofficial
sources.