STOCK DIVIDENDS 
31 
a precedent for the guidance of this court when acting under a duty to test an 
Soi of Congress by the limitations of a written Constitution having superior 
orce. 
In Tax Commissioner ». Putnam (1917) (227 Massachusetts, 522), it was held 
that the forty-fourth amendment to the Constitution of Massachusetts, which 
conferred upon the legislature full power to tax incomes, “must be interpreted 
as including every item which by any reasonable understanding can fairly be 
regarded as income” (pp. 526, 531); and that under it a stock dividend was taxa- 
ble as income, the court saying (p. 535); ‘‘In essence the thing which has been 
done is to distribute a symbol representing an accumulation of profits, which 
instead of being paid out in cash is invested in the business, thus augmenting 
its durable assets. In this aspect of the case the substance of the transaction 
is no different from what it would be if a cash dividend had been declared with 
the privilege of subscription to an equivalent amount of new shares.” 
We can not accept this reasoning. Evidently, in order to give a sufficiently 
broad sweep to the new taxing provision, it was deemed necessary to take the 
symbol for the substance, accumulation for distribution, capital accretion for 
its opposite; while a case where money is paid into the hand of the stockholder 
with an option to buy new shares with it, followed by acceptance of the option, 
was regarded as identical in substance with a case where the stockholder receives 
no money and hag no option. The Massachusetts court was not under an 
obligation, like the one which binds us, of applying a constitutional amendment 
in the light of other constitutional provisions that stand in the way of extending 
it by construction. 
Upon the second argument, the Government, recognizing the force of the 
decision in Towne v. Eisner, supra, and virtually abandoning the contention 
that a stock dividend increases the interest of the stockholder or otherwise 
enriches him, insisted as an alternative that by the true construction of the act 
of 1916 the tax is imposed not upon the stock dividend but rather upon the stock- 
holder's share of the undivided profits previously accumulated by the corpora- 
tion; the tax being levied as a matter of convenience at the time such profits 
become manifest through the stock dividend. If so construed, would the act 
be constitutional? 
That Congress has power to tax shareholders upon their property interests in 
the stock of corporations is beyond question; and that such interests might be 
valued in view of the condition of the company, including its accumulated and 
undivided profits, is equally clear. But that this would be taxation of property 
because of ownership, and hence would require apportionment under the pro- 
visions of the Constitution, is settled beyond peradventure by previous decisions 
of this court. 
The Government relies upon Collector v. Hubbard (1870), (12 Wall. 1, 17), 
which arose under paragraph 117 of the act of June 30, 1864 (c. 173, 13 Stat. 
223, 282), providing that “the gains and profits of all companies, whether incor- 
porated or partnership, other than the companies specified in this section, shall 
be included in estimating the annual gains, profits, or income of any person 
entitled to the same, whether divided or otherwise.” The court held an individual 
taxable upon his proportion of the earnings of a corporation although not declared 
as dividends and although invested in assets not in their nature divisible. Con- 
ceding that the stockholder for certain purposes had no title prior to dividend 
declared, the court nevertheless said (p. 18): “Grant all that, still it is true that 
the owner of a share of stock in a corporation holds the share with all its incidents, 
and that among those incidents is the right to receive all future dividends; that 
is, his proportional share of all profits not then divided. + Profits are incident to 
the share to which the owner at once becomes entitled provided he remains a 
member of the corporation until a dividend is made. Regarded as an incident 
to the shares, undivided profits are property of the shareholder, and as such are 
the proper subject of sale, gift, or devise. Undivided profits invested in real 
estate, machinery, or raw material for the purpose of being manufactured are 
investments in which the stockholders are interested, and when such profits are 
actually appropriated to the payment of the debts of the corporation they serve 
to increase the market value of the shares, whether held by the original sub- 
seribers or by assignees.” In so far as this seems to uphold the right of Congress 
40 tax without apportionment a stockholder’s interest in accumulated earnings 
prior to dividend declared, it must be regarded as overruled by Pollock ». Farmers’ 
oan & Trust Co. (158 U. 8. 601, 627, 628, 637). Conceding Collector ». Hubbard 
was inconsistent with the doctrine of that case, because it sustained a direct 
tax upon property not apportioned among the States, the Government never-