34. 
STOCK DIVIDENDS 
be equivalents; and that the financial results to the corporation and to the 
stockholders of the two methods are substantially the same—unless a difference 
results from the application of the Federal income tax law. 
Mrs. Macomber, a citizen and resident of New York, was, in the year 1916, a 
stockholder in the Standard Oil Co. (of California), a corporation organized 
under the laws of California and having its principal place of business in that 
State. During that year she received from the company a stock dividend rep- 
resenting profits earned since March 1, 1913. The dividend was paid by direct 
issue of the stoek to her according to the simple method described above, pur- 
sued also by the Indiana and Nebraska companies. In 1917 she was taxed under 
the Federal law on the stock dividend so received at its par value of $100 a share 
as income received during the year 1916. Such a stock dividend is income as 
distinguished from capital both under the law of New York and under the law 
of California; because in both States every dividend representing profits is 
deemed to be income whether paid in cash or in stock. It had been so held in 
New York, where the question arose as between life-tenant and remainderman, 
Lowry ». Farmers’ Loan & Trust Co., 172 N. Y., 137; Matter of Osborne, 209 
N. Y., 450; and also, where the question arose in matters of taxation. People 
». Glynn (130 App. Div. 332; 198 N. Y., 605). It has been so held in California, 
where the question appears to have arisen only in controversies between life 
tenant and remainderman. Estate of Duffill (58 Cal. Dec. 97; 180 Calif., 748). 
It is conceded that if the stock dividend paid to Mrs. Macomber had been 
made by the more complicated method pursued by the Standard Oil Co. of 
Kentucky—that is, issuing rights to take new stock pro rata and paying to each 
stockholder simultaneously a dividend in cash sufficient in amount to enable 
him to pay for this pro rata of new stock to be purchased—the dividend so paid 
to him would have been taxable as income, whether he retained the cash or whether 
he returned it to the corporation in payment for his pro rata of new stock. 
But it is contended that, because the simple method was adopted of having the 
new stock issued direct to the stockholders as paid-up stock, the new stock is 
not to be deemed income, whether she retained it or converted it into cash by 
sale. If such a different result can flow merely from the difference in the method 
pursued, it must be because Congress is without power to tax as income of the 
stockholder either the stock received under the latter method or the proceeds 
of its sale; for Congress has, by the provisions in the revenue act of 1916, expressly 
declared its purpose to make stock dividends, by whichever method paid, taxable 
as income. 
The sixteenth amendment proclaimed February 25, 1913, declares: “The 
Congress shall have power to lay and collect taxes on incomes, from whatever 
source derived, without apportionment among the several States, and without 
regard to any census or enumeration.” 
The revenue act of September 8, 1916, c. 463, 39 Stat. 756, 757, provided: 
“That the term ‘dividends’ as used in this title shall be held to mean any distribu- 
tion made or ordered 10 be made by a corporation, '* * * out of its earnings 
or profits acerued 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.” 
Hitherto powers conferred upon Congress by the Constitution have been liber- 
ally construed, and have been held to extend to every means appropriate to attain 
the end sought. In determining the scope of the power the substance of the 
transaction, not its form, has been regarded. (Martin ». Hunter, 1 Wheat. 304, 
326; McCulloch ». Maryland, 4 Wheat. 316, 407, 415; Brown o. Maryland, 12 
Wheat. 419, 446; Craig v. Missouri, 4 Pet. 410, 433; Jarrolt ». Moberly 103 U. S. 
580, 585, 587; Legal Tender Case, 110 U. 8. 421, 444; Burrow-Giles Lithographic 
Co. ». Sarony, 111 U. S. 53, 58; United States ». Realty Co., 163 U. 8S. 427, 440, 
441, 442; South Carolina ». United States, 199 U. S. 437, 448-9.) Is there 
anything in the phraseology of the sixteenth amendment or in the nature of 
corporate dividends which should lead to a departure from these rules of con- 
struction and compel this court to hold that Congress is powerless to prevent 
a result so extraordinary as that here contended for by the stockholder? 
First. The term “income” when applied to the investment of the stockholder 
in a corporation, had, before the adoption of the sixteenth amendment, been 
commonly understood to mean the returns from time to time received by the 
stockholder from gains or earnings of the corporation. A dividend received by 
a stockholder from a corporation may be either in distribution of capital assets 
or in distribution of profits. Whether it is the one or the other is in no way 
affected by the medium in which it is paid nor by the method or means through