APPENDIX 3
TowNE v. Eisner, CoLLEcTOR oF UNITED STATES INTERNAL REVENUE FOR
rR THIRD DISTRICT OF THE STATE OF NEW YORK
(245 U. 8. 418)
CRROR TO THE DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN
DISTRICT OF NEW YORK
No. 563. Argued December 12, 1917. Decided January 7, 1918
[n an action to recover back money collected and retained by the Government,
over plaintiff’s protest, as a tax on income under the income tax law of 1913,
plaintiff alleged that that upon which the tax was levied, a stock dividend
based on accumulated profits, was not ‘‘income” within the true intent of
the statute, and that if the statute so intended it was so far unconstitutional,
because in the sixteenth amendment, upon which its validity depended, the
term “income” could not be construed to embrace such dividends. Held, that
there was thus presented, not merely a question whether the statute had been
wrongly understood and applied, but also a question of the scope of the amend-
ment, which afforded jurisdiction to review both questions by direct writ of
error to, the district court.
The value of new shares, issued as a stock dividend and representing merely
surplus profits transferred to the capital account of the corporation, is not
taxable to the shareholders as income within the meaning of the income tax
law of 1913. So held where the profits were earned before January 1, 1913,
and the transfer and dividend were voted December 17, 1913, and the dis-
tribution, ratably to shareholders of record on the 26th of that month, took
place on January 2, 1914.
242 Fed. Rep. 702, reversed. :
ARGUMENT FOR PLAINTIFF IN ERROR
The case is stated in the opinion.
Mr. Charles E. Hughes, with whom Mr. George Welwood Murray, Mr. Charles
P. Howland, and Mr. Louis H. Porter were on the briefs, for plaintiff in error:
The constitutionality of § II of the act of 1913, construed to be appli-
cable to the plaintiff's stock, is drawn in ‘question. Before the sixteenth
amendment there were two kinds of income, subject to different constitutional
rules as to taxation, viz: (1) Gains and profits from “business, privileges, em-
ployments and vocations.” These were subject to excise taxes. (2) Income
from real or personal property, as such. Taxes on real or personal property,
and on the income derived therefrom because of its ownership, were held to be
direct taxes, requiring apportionment among the States according to population.
The tax in controversy is laid directly upon the property in question, as such,
because of its ownership. Investments in stock are unquestionably within the
rule of Pollock ». Farmers’ Loan & Trust Co. (158 U. S. 601, 637). The case at
bar, therefore, concerns a direct tax which must be apportioned unless the stock
in question constitutes income under the sixteenth amendment.
The stock in question is not income within the meaning of the sixteenth
amendment. A “stock dividend” is not income to the stockholder receiving it,
but is a mere readjustment of the evidence of the stockholder’s interest already
owned. The “stock dividend’ takes nothing from the property of the corpora-
tion and adds nothing to the interests of the stockholders. The only change in
substance is that, instead of the property represented thereby being distributed
to stockholders, it is permanently fixed as capital so that it can not be distributed.
(Gibbons ». Mahon, 136 U. S. 549; Bailey v. Railroad Co., 22 Wall. 684; dis-
tinguished; Gray ». Hemenway, 212 Massachusetts, 239; Spooner ». Phillips,
82 Connecticut, 62; Green ». Bissell, 79 Connecticut, 547; Dekoven ». Alsop, 205
Illinois, 309; Kaufman ». Charlottesville Mills Co., 93 Virginia, 673; Williams v.
