24
STOCK DIVIDENDS
The tax in question is an income tax and can not be sustained as anything else.
Mr. George W. Wickersham and Mr. Charles Robinson Smith, by leave of
court, filed a brief as amici curiae:
The principle laid down by this court in two well-considered cases (Gibbons ».
Mahon, 136 U. S. 549, and Towne ». Eisner, 245 U. S. 418), that stock dividends
represent capital and do not constitute income is based on sound economic
reasoning.
Although Collector ». Hubbard (12 Wall. 1), is plainly distinguishable from
the case at bar, it is inconsistent both with other and later rulings of this court
and with sound economics. It tends to block fhe way to a consistent, har-
monious, and logical system of income taxation and it should be expressly over-
ruled. As upholding a tax on property except by apportionment under Article
I, § 2, of the Constitution, it has been overruled by Pollock ». Farmers’ Loan &
Trust Co. (157 U. 8S. 429; 158 U. S. 601). In so far as it assumes an equiva-
lency between the property and the income of the corporation and the shares
of stock in the names of the stockholders for taxation purposes, it has been implicitly
overruled by a long series of authorities in this court. The suggestion that this
court has in other cases cited Collector ». Hubbard or its principle with approval
except upon altogether minor points is erroneous. ’
The stock dividend is in reality not a dividend at all. "It is a mere certified
expression of an undivided surplus and its capitalization. Whatsoever gain
there may be in either case to the stockholder is a capital gain. Capital gains
(being mere increases in valuation) are not income until realized. The gains
that come with stock dividends when stock is sold are realized capital gains—the
same in nature and similarly taxable as those gains that are made with any stock
that is sold at an advance. Inasmuch as undivided corporate earnings can not
be taxed as income against the stockholder—so the stock certificates issued
merely to represent these may not be so taxed until the gain be realized in some
form by sale.
Mr. Justice Pitney delivered the opinion of the court:
This case presents the question whether, by virtue of the sixteenth amend-
ment, Congress has the power to tax, as income of the stockholder and without
apportionment, a stock dividend made lawfully and in good faith against profits
accumulated by the corporation since March 1, 1913.
It arises under the revenue act of September 8, 1916 (c. 463, 39 Stat. 756),
et seq., which, in our opinion (notwithstanding a contention of the Government
that will be noticed), plainly evinces the purpose of Congress to tax stock divi-
dends as income.!
The facts, in outline, are as follows:
On January 1, 1916, the Standard Oil Co. of California, a corporation of that
State, out of an authorized capital stock of $100,000,000, had shares of stock
outstanding, par value $100 each, amounting in round figures to $50,000,000.
In addition, it had surplus and undivided profits invested in plant, property,
and business and required for the purposes of the corporation, amounting to
about $45,000,000, of which about $20,000,000 had been earned prior to March
1, 1913, the balance thereafter. In January, 1916, in.order to readjust the
capitalization, the board of directors decided to issue additional shares sufficient
to constitute a stock dividend of 50 per cent of the outstanding stock, and to
transfer from surplus account to capital stock account an amount equivalent
to such issue. Appropriate resolutions were adopted, an amount equivalent
fo the par value of the proposed new stock was transferred accordingly, and the
new stock duly issued against it and divided among the stockholders.
Defendant in error, being the owner of 2,200 shares of the old stock, received
certificates for 1,100 additional shares, of which 18.07 per cent, or 198.77 shares, par
value $19,877, were treated as representing surplus earned between March 1,
1913, and January 1, 1916. She was called upon to pay, and did pay under
protest, a tax imposed under the revenue act of 1916, based upon a supposed
1TITLE I.—INCOME TAX
PART 1.—ON INDIVIDUALS
Sec. 2. (a) That, subject only to such exemptions and deduction as are hereinafter allowed, the net
income of a taxable person shall include gains, profits, and income derived * * * also from interest,
rent, dividends, securities, or the transaction of any business carried on for gain or profits, or gains or
profits and income derived from any source whatever: Provided, That the term “dividends” as used in
this title shall be held to mean any distribution made or ordered to be made by a corporation, * * *
out of its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its
shareholders, whether in cash or in stock of the corporation, * * * which stock dividend shall be
considered income, to the amount of its cash value.
