as well for the purposes of the income tax law as for distribution between tenant for life and remainderman. What was said by this court upon the latter question is equally true for the former. "A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interest of the shareholders. Its property is not diminished and their interests are not increased. . . . The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones." Gibbons v. Mahon, 136 U. S. 549, 559, 560. In short, the corporation is no poorer and the stockholder is no richer than they were before. Logan County v. United States, 169 U. S. 255, 261. If the plaintiff gained any small advantage by the change it certainly was not an advantage of $417,450, the sum upon which he was taxed. It is alleged and admitted that he received no more in the way of dividends and that his old and new certificates together are worth only what the old ones were worth before. If the sum had been carried from surplus to capital account without a corresponding issue of stock certificates, which there was nothing in the nature of things to prevent, we do not suppose that any one would contend that the plaintiff had received an accession to his income. Presumably his certificate would have the same value as before. Again, if certificates for $1,000 par were split up in ten certificates, each for $100, we presume that no one would call the new certificates income. What has happened is that the plaintiff's old certificates have been split up in effect and have diminished in value to the extent of the value of the new.

Judgment reversed.

Immediately after the handing down of the decision in the above case (January 7, 1918), the Commissioner of Internal Revenue made the following statement:

RULING. Misapprehension exists as to the effect of the decision of the Supreme Court in the case of Towne v. Eisner, handed down January 7, 1918. In this opinion it was held that under the Act of October 3, 1913, a stock dividend declared by a corporation January 2, 1914, was not properly regarded as income. It does not necessarily follow, however, that no stock dividends are to be held taxable under the provisions of the Acts of September 8, 1916, and October 3, 1917.

The Act of October 3, 1913, which was the only act before the court in the case, contained no provision expressly providing for treating stock dividends as income, and the decision of the court was to the effect that the act was not to be construed as taxing such

dividends. The court did not decide that such dividends cannot be income within the meaning of the sixteenth amendment, but expressly recognized that the word "income" may have a different meaning in the statute from the meaning in the constitution.

The Act of September 8, 1916, contains an express provision taxing stock dividends declared and paid out of earnings accrued since March 1, 1913. In the absence of a decision as to the legal effect of these express provisions contained in the later acts, the Bureau of Internal Revenue naturally will continue to be governed by the express provisions of the later acts in reference to stock dividends.

The Supreme Court could have held that the Towne dividend was not taxable because it was declared from earnings all of which accrued prior to March 1, 1913. It did not so decide, but rather emphasized the broad doctrine that stock dividends are not taxable. The court had before it a case under the 1913 act which did not mention stock dividends.

The 1916 and 1917 laws specifically state that stock dividends are taxable. It could not be expected that the Commissioner of Internal Revenue would read into the court's decision an interpretation of laws which were not specifically at issue. To do so would mean a direct ruling that the clauses taxing stock dividends in the 1916 and 1917 laws were unconstitutional, and it is not part of the duty of the Commissioner of Internal Revenue to pass upon the constitutionality of revenue laws. He can hardly be criticized for awaiting another decision of the Supreme Court.

The decision of the court can fairly be regarded as an enunciation of principles as well as a decision upon facts. In support of this inference the following sentence from the opinion of Mr. Justice Holmes should be noted:

What has happened is that the plaintiff's old certificates have been split up in effect and have diminished in value to the extent of the value of the new.

Stock dividends declared under 1916 law held not taxable. -In the case of Macomber v. Eisner,20 a United States disU. S. District Court, Southern District of New York, January 23,

trict court held that stock dividends declared under the 1916 law were not taxable. The judge said that the government in attempting to tax stock dividends was maintaining that the United States Supreme Court had made an error in the Towne case, and that he would not assume the authority of deciding that the Supreme Court had made such an error. The judge further said that the decision in the Towne case seemed to be perfectly clear, and that if the Supreme Court wanted to change its mind it would have to do so itself.

It can hardly be said, however, that the Towne case is the last word on the subject from the Supreme Court. In the Peabody case21 the Supreme Court in referring to the decision of the lower court in the Towne case said: "The latter case has since been reversed, but only upon the ground that it related to a stock dividend which in fact took nothing from the property of the corporation and added nothing to the interest of the shareholder, but merely changed the evidence which represented that interest."

And again, "It hardly is necessary to say that this case is not ruled by our decision in Towne v. Eisner since the dividend of Baltimore & Ohio shares was not a stock dividend."

This seems to be a clear declaration that the Towne case was decided on its merits as a stock dividend case and without reference to the law of 1913.

Stock dividends declared out of surplus created by a reappraisal of or appreciation in assets.-There may be some justification for reappraising physical assets, but there can be no good excuse for issuing stock for goodwill unless it has been made the subject of sale.

It is to be hoped that only few such instances occur. Any corporation which writes up the value of goodwill, credits the amount to surplus account and out of such alleged surplus

"Peabody v. Eisner, 247 U. S. 330. The opinion of the court was delivered by Mr. Justice Pitney, whereas in the Towne case the opinion of the court was delivered by Mr. Justice Holmes.

declares a dividend may expect to be charged with practicing a fraud on its stockholders and on anyone who afterwards acquires the stock. Goodwill when it appears on the balance sheet of a corporation or partnership is supposed to be carried at cost price or less, and any action which tends to obscure this inference may result in deception, even if there is no intention to deceive.

During 1918 Swift & Co. paid a stock dividend of $25,000,000. The president of the company stated as follows:

This dividend is not being paid out of earnings. It is being issued against surplus resulting from an adjustment of values of the fixed assets of the company to values current January 1, 1914, based upon the appraisement under the American Appraisal Company of Milwaukee.

No dividend of this nature can be paid unless the entire surplus of earnings realized since March 1, 1913, has first been exhausted.22

Refund of taxes paid on stock dividends under 1913 law.

RULING. In order to complete claims for the refunding of income tax collected under the Act of October 3, 1913, on stock dividends; that is, claims based upon the decision of the Supreme Court in the case of Towne v. Eisner, the following evidence is required. An affidavit showing:

(1) The name of the corporation which declared and paid the stock dividend.

(2) The date of declaration of the stock dividend and date of receipt by claimant.

(3) In which year's return of annual net income did the claimant include this stock dividend?

(4) Under what item on the return was the value of the stock dividend included, and what was the valuation placed upon the dividend in the return?

(5) Has the stock thus received and returned as a dividend been sold by the claimant, and if so, what was the date of sale; how much did claimant receive from the sale; and what part of the total amount received from the sale was included by the claimant in its return of annual net income for the year in which the sale occurred?

"Letter from Deputy Commissioner Speer, May 14, 1918.

(6) Did the dividend consist of stock of the corporation distributing the dividend to claimant, or did it consist of stock acquired by the distributor in another corporation? Note: A stock dividend is a distribution by a corporation to its stockholders of capital stock of the distributing corporation. A distribution of capital stock other than that of the distributing corporation is not a stock dividend but a dividend in property.

The receipt on form I should also be filed with the claim. . . . (Letter to collectors, signed by Commissioner Daniel C. Roper, and dated February 26, 1918.)

Can recipient of stock dividend on which tax was paid refuse to accept refund of tax?-Taxpayers, who received stock dividends on which income tax has been assessed and collected and have since sold their stock, may have suffered a loss which they would not have incurred if Congress had not made such a mess of the whole subject of the taxation of stock dividends.

It might be possible for anyone who has sold his stock to maintain this position: that having followed the law and the regulations, and having paid the tax assessed against him, he was justified in assuming that the matter was entirely closed. In other words, the government would be estopped from collecting a greater tax in such cases.

If thereafter he sold the stock received as a dividend and reported the proceeds of sale in accordance with the law and the regulations, having paid the tax assessed upon him, he was again justified in his assumption that the matter was closed.

If he is compelled to accept a refund of the tax paid on account of the dividend and amend his return on account of the sale, he may be assessed for a very large additional tax for which he would not have been liable except for the action of Congress.

In 1917 a corporation with capital stock of $100,000 declared a stock dividend of $400,000, exhausting its entire surplus, all of which was earned after March 1, 1913. Under the provision of the law which, as Senator Simmons said,