STOCK DIVIDENDS 
arbitrary rule of distribution, the third equitable apportionment. (See Cook on 
Corporations, 7th ed., §§ 552-558.) 
_ 1. The so-called English rule, declared in 1799, by Brander ». Brander (4 Ves. 
Jr. 800), that a dividend representing profits, whether in cash, stock, or other 
property, belongs to the life tenant if it was a regular or ordinary dividend, and 
belongs to the remainderman if it was an extraordinary dividend. 
2. The so-called Massachusetts rule, declared in 1868 by Minot ». Paine 
(99 Mass. 101), that a dividend representing profits, whether regular, ordinary 
or extraordinary, if in cash belongs to the life tenant, and if in stock belongs 
to the remainderman. 
3. The so-called Pennsylvania rule declared in 1857 by Earp’s Appeal (28 
Pa. St. 368), that where a stock dividend is paid, the court shall inquire into the 
circumstances under which the fund had been earned and accumulated out of 
which the dividend, whether a regular, an ordinary, or an extraordinary one, was 
paid. If it finds that the stock dividend was paid out of profits earned since the 
decedent’s death, the stock dividend belongs to the life tenant; if the court finds 
that the stock dividend was paid from capital or from profits earned before the 
decedent’s death, the stock dividend belongs to the remainderman. 
This court adopted in Gibbons ». Mahon, as the rule of administration for the 
District of Columbia the so-called Massachusetts rule, the opinion being de- 
livered in 1890 by Mr. Justice Gray. Since then the same question has come up 
for decision in many of the States. The so-called Massachusetts rule, although 
approved by this court, has found favor in only a few States. The so-called 
Pennsylvania rule, on the other hand, has been adopted since by so many of the 
States (including New York and California), that it has come to be known as the 
‘“ American rule.” Whether, in view of these facts and the practical results of the 
operation of the two rules as shown by the experience of the 30 years which have 
elapsed since the decision in Gibbons ». Mahon, it might be desirable for this court 
to reconsider the question there decided, as some other courts have done (see 
29 Harvard Law 551), we have no occasion to consider in this case. 
For, as this court there pointed out (p. 560), the question involved was one 
“between the owners of successive interests in particular shares,” and not, as 
in Bailey ». Railroad Co. (22 Wall. 604), a question “between the corporation 
and the Government and (which) depended upon the terms of a statute carefully 
framed to prevent corporations from evading payment of the tax upon their 
sarnings.”’ 
We have, however, not merely arguments, we have examples which should 
convince us that ‘‘there is no inherent, necessary, and immutable reason why 
stock dividends should always be treated as capital.” (Tax Commissioner ». 
Putnam, 227 Mass. 522, 533.) The Supreme Judicial Court of Massachusetts 
has steadfastly adhered despite ever-renewed protest, to the rule that 
avery stock dividend is, as between life tenant and remainderman, capital 
and not income. But in construing the Massachusetts income tax amendment, 
which is substantially identical with the Federal amendment, that court held 
that the legislature was thereby empowered to levy an income tax upon stock 
dividends representing profits. The courts of England have, with some relaxa- 
tion, adhered to their rule that every extraordinary dividend is, as between 
life tenant and remainderman, to be deemed capital. But in 1913 the judicial 
committee of the Privy Council held that a stock dividend representing accumu- 
‘ated profits was taxable like an ordinary cash dividend, Swan Brewery Co. 
(Ltd.) ». Rex (1914). (A. C. 231.) In dismissing the appeal these words of 
she chief justice of the Supreme Court of Western Australia were quoted (p. 236), 
which show that the facts involved were identical with those in the case at bar: 
“Had the company distributed the 101,450 pounds among the shareholders 
and had the shareholders repaid such sums to the company as the price of the 
#1,160 new shares, the duty on the 101,450 pounds would clearly have been 
payable. Is not this virtually the effect of what was actually done? I think 
it is. 
Sixth. If stock dividends representing profits are held exempt from taxation 
inder the sixteenth amendment, the owners of the most successful businesses 
in America will, as the facts in this case illustrate, be able to escape taxation 
on a large part of what is actually their income. So far as their profits are repre- 
sented by stock received as dividends they will pay these taxes not upon their 
income but only upon the income of their income. That such a result was in- 
tended by the people of the United States when adopting the sixteenth amend- 
ment is inconceivable. Our sole duty is to ascertain their intent as therein 
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