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The corporation has paid the normal tax on $10,000. In order to secure the benefit thereof the taxpayer must enter in his 1919 return a dividend 18 of $10,000 and take credit for a loss of $8,000, thus accounting for realized net income of $2,000, which will be subject to the surtax. If the taxpayer were merely to return the $2,000 as a profit the entire credit for the normal tax paid on $10,000 would be lost.

It is clear that the recipient of a stock dividend when being taxed on the proceeds thereof is entitled to the benefit of the normal tax which the corporation has already paid on the earnings since March 1, 1913. The regulations must eventually conform to this principle.

Stock dividends paid before December 31, 1915, not taxable.

The TOWNE CASE.—The final interpretation of every tax question rests with the United States Supreme Court. Its opinion upon the subject of stock dividends is of enough importance to warrant the citation of the case in full. Henry R. Towne, Plaintiff in Error, In error to the District

Court of the United Mark Eisner, Collector of United States for the South

States Revenue for the Third District 1 ern District of New
of the State of New York.

Mr. Justice HOLMES delivered the opinion of the court.19

This is a suit to recover the amount of a tax paid under duress in respect of a stock dividend alleged by the government to be income. A demurrer to the declaration was sustained by the district court and


"It is, of course, not a dividend in a technical sense, but the returns are not flexible enough to permit its entry in any other way. The transaction should be explained on the return.

*245 U. S. 418.

judgment was entered for the defendant. 242 Fed. Rep. 702. The facts alleged are that the corporation voted on December 17, 1913, to transfer $1,500,000 surplus, being profits earned before January 1, 1913, to its capital account, and to issue fifteen thousand shares of stock representing the same to its stockholders of record on December 26; that the distribution took place on January 2, 1914, and that the plaintiff received as his due proportion four thousand and one hundred and seventy-four and a half shares. The defendant compelled the plaintiff to pay an income tax upon his stock as equivalent to $417,450 income in cash. The district court held that the stock was income within the meaning of the income tax act of October 3, 1913, c. 16, section II; A, subdivision 1 and 2; and B. 38 Stat. 114, 166, 167. It also held that the act so constructed was constitutional, whereas the declaration set up that so far as the act purported to confer power to make this levy it was unconstitutional and void.

The government in the first place moved to dismiss the case for want of jurisdiction, on the ground that the only question here is the construction of the statute, not its constitutionality. It argues that if such a stock dividend is not income within the meaning of the constitution, it is not income within the intent of the statute, and hence that the meaning of the sixteenth amendment is not an immediate issue, and is important only as throwing light on the construction of the act. But it is not necessarily true that income means the same thing in the constitution and the act. A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used. Lamar v. United States, 240 U. S. 60, 65. Whatever the meaning of the constitution, the government had applied its force to the plaintiff, on the assertion that the statute authorized it to do so, before the suit was brought, and the court below has sanctioned its course. The plaintiff says that the statute as it is construed and administered is unconstitutional. He is not to be defeated by the reply that the government does not adhere to the construction by virtue of which alone it has taken and keeps the plaintiff's money, if this court should think that the construction would make the act unconstitutional. While it keeps the money it opens the question whether the act construed as it has construed it can be maintained. The motion to dismiss is overruled. Billings v. United States, 232 U. S. 261, 276. B. Altman Company v. United States, 224 U. S. 583, 596, 597.

The case being properly stated here, however, the construction of the act is open, as well as its constitutionality if construed as the government has construed it by its conduct. Billings v. United States, ubi supra. Notwithstanding the thoughtful discussion that the case received below we can not doubt that the dividend was capital 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 dis

U. 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 caseal 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.

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