STOCK DIVIDENDS 
23 
680) ; Evansville Bank ». Britton (105 U. S. 322); Cleveland Trust Co. v. Lander 
(184 U. 8. 111); Home Savings Bank ». Des Moines (205 U. S. 503); Rogers v. 
Hennepin County (240 U. S. 184). 
(2) Bank of Commerce v. Tennessee (161 U. S. 134, 146); Shelby County ov. 
Union & Planters Bank (161 U. S. 149, 153-154); Wright ». Georgia R. R. & 
Banking Co. (216 U. S. 420, 425) ; Farrington ». Tennessee (95 U. S. 679); Sturges 
v. Carter (114 U. S. 511); Tennessee ». Whitworth (117 U. S. 12%: New Orleans 
v. Houston (119 U. S. 265); New Orleans v. Citizens’ Bank 7. U.'S. 371); 
Powers ». Detroit, Grand Haven, &e., Ry. Co. (201 U. S. 543). 
When the question of the nature of the shareholder’s interest in undivided 
profits came before this court in Gibbons v. Mahon (136 U. S. 549), the ques- 
tion was carefully considered and explicitly determined. The court pointed out 
the distinetion between the money earned by the corporation and the share- 
holder’s income, and ruled expressly that the interest of the shareholder in the 
accumulated earnings of the corporation, as a part of his share interest, was 
capital and not income, so long as the earnings were held and invested by the 
Soman as a part of its corporate property. See Towne v. Eisner (245 
U. S. 418). . 
The case of Collector ». Hubbard (12 Wall, 1), arose under a provision that 
gains and profits of certain companies should be included in estimating the 
annual gains, profits, or income of any person entitled to the same, whether 
divided -or otherwise. The object was to insure the payment of the tax upon 
the earnings of the corporation. (See Gibbons ». Mahon, 136 U. S. 549, 560.) 
It was a crude method of reaching the corporate earnings and was the only tax 
imposed with respect to those earnings. A shareholder was to be taxed upon 
the increment supposed to have been added to the value of his share by his 
proportionate interest in the undivided profits. This, as a matter of statutory 
construction, is clear enough. But it by no means follows that this increment 
was income to the shareholder, when it becomes necessary to distinguish between 
a tax on income and a direct tax on the capital invested. 
The Hubbard case was dealing with the mere fact of the increment and did 
not, deal with its nature, as the court in the Gibbons case was called upon to 
deal. The reason why the court in the Hubbard case was not called upon to 
define the nature of the increment, beyond the fact that it was property, is 
apparent from the absence of any controversy over a constitutional question, 
and from the opinion entertained at the time with respect to what was a direct 
and what was an indirect tax under the Federal Constitution; accepting the 
view then entertained of direct and indirect taxes, the decision was unassailable. 
It was not necessary for Mr. Justice Clifford, in the absence of the debate 
which about 25 years later took place in Pollock ». Farmers’ Loan & Trust Co. 
(157 U. S. 429; 158 U. 8. 601), to go further. When, however, the court had 
occasion to deal with the precise question, in Gibbons ». Mahon, it stated its 
conclusion emphatically, and without the slightest reservation, that whatever 
increment there was, through undivided profits held and invested by the cor- 
poration, to the share of the stockholder, was capital and not income. * But the 
increment in the Hubbard case was nothing but an accretion to capital. It was 
not a separated, realized gain. It was not income. Hence, under the doctrine 
of the Pollock case and the doctrine now applicable to all cases where a capital 
interest is taxed, the tax could not validly be laid except as an apportioned 
direct tax. (Bailey ». Railroad Co., 22 Wall. 604, and recent cases cited by the 
Government, distinguished.) 
Income is the gain, come to fruition, from capital, from labor, or from both 
combined. This is sound doctrine both in law and in economics. Income of a 
corporation is not income of a shareholder until distributed. A “stock dividend” 
is not income. It does not constitute a distribution of anything; it is a mere 
readjustment of capital. (Stratton’s Independence ». Howbert 231 U. S. 399, 
415; Doyle ». Mitchell Bros. Co., 247 U. S. 179, 185; Lynch v. Hornby, 247 U. S. 
339, 343; Lynch v. Turrish, 247 U. 8S. 221, 231; Commissioners of Inland Revenue 
». Blott (reported in the London Times of July 25, 1919); Seligman, Income Tax, 
p. 19; “The economic nature of the stock dividend,” by Fairchild, Bulletin of 
National Tax Association, Vol. III, No. 7, April, 1918, p. 163; Seligman, ‘“Are 
stock dividends income,” American Economic Review, Vol. IX, No. 3, p. 517; 
Peabody v. Eisner, 247 U. 8. 347; Towne v. Eisner, 245 U. 8S. 418, 426; Union 
Trust Co. v. Coleman. 126 N. Y. 433. 438.)