26 
STOCK DIVIDENDS 
of “incomes” in the sixteenth amendment; it being very clear that Congress 
intended in that act to exert its power to the extent permitted by the amend- 
ment. In Towne v. Eisner it was not contended that any construction of 
the statute could make it narrower than the constitutional grant; rather the 
contrary. 
The fact that the dividend was charged against profits earned before the 
act of 1913 took effect, even before the amendment was adopted, was neither 
relied upon nor alluded to in our consideration of the merits in that case. Not 
only so, but had we considered that a stock dividend constituted income in any 
true sense, it would have been held taxable under the act of 1918, notwithstanding 
it was based upon profits earned before the amendment. We ruled at the same 
term, in Lynch ». Hornby (247 U. S. 339), that a cash dividend extraordinary in 
amount, and in Peabody ». Eisner (247 U. S. 347), that a dividend paid in stock 
of another company, were taxable as income, although based upon earnings 
that accrued before adoption of the amendment. In the former cage, con- 
cerning “corporate profits that accumulated before the act took effect,” we 
declared (pp. 343-344): “Just as we deem the legislative intent manifest to 
tax the stockholder with respect to such accumulations only if and when, and 
to the extent that his interest in them comes to fruition as income; that is, in 
dividends declared, so we can perceive no constitutional obstacle that stands 
in the way of carrying out this intent when dividends are declared out of a pre- 
existing surplus. * * * Congress was at liberty under the amendment to 
tax as income without apportionment everything that became income, in the 
ordinary sense of the word, after the adoption of the amendment, including 
dividends received in the ordinary course by a stockholder from a corporation, 
even though they were extraordinary in amount and might appear upon analysis 
to be a mere realization in possession of an inchoate and contingent interest that 
the stockholder had in a surplus of corporate assets previously existing.” In 
Peabody ». Eisner (pp. 349-350), we observed that the decision of the district 
court in Towne v. Eisner had been reversed “only upon the ground that it related 
to a stock dividend, which in fact took nothing from the property of the cor- 
poration and added nothing to the interest of the shareholder, but merely changed 
the evidence which represented that interest”; and we distinguished the Peabody 
case from the Towne case upon the ground that “the dividend of Baltimore & 
Ohio shares was not a stock dividend but a distribution in specie of a portion of 
the assets of the Union Pacific.” 
Therefore, Towne ». Eisner can not be regarded as turning upon the point 
that the surplus accrued to the company before the act took effect and before 
adoption of the amendment. And what we have quoted from the opinion in 
that case can not be regarded as obiter dictum, it having furnished the entire 
basis for the conclusion reached. We adhere to the view then expressed, and 
might rest the present case there; not because that case in terms decided the 
constitutional question, for it did not; but because the conclusion there reached 
as to the essential nature of a stock dividend necessarily prevents its being 
regarded as income in any true sense. 
Nevertheless, in view of the importance of the matter, and the fact that Con- 
gress in the revenue act of 1916 declared (39 Stat. 757) that a “stock dividend 
shall be considered income, to the amount of its cash value,” we will deal at 
length with the constitutional question, incidentally testing the soundness of 
our previous conclusion. 
The sixteenth amendment must be construed in connection with the taxing 
clauses of the original Constitution and the effect attributed to them before 
the amendment was adopted. In Pollock ». Farmers’ Loan & Trust Co. (158 
U. 8. 601), under the act of August 27, 1894 (c. 349, § 27, 28 Stat. 509, 553), 
it was held that taxes upon rents and profits of real estate and upon returns 
from investments of personal property were in effect direct taxes upon the prop- 
erty from which such income arose, imposed by reason of ownership; and that 
Congress could not impose such taxes without apportioning them among the 
States ‘according to population, as required by Article I, § 2, clause 3, and 
§ 9, clause 4, of the original Constitution. 
Afterwards, and evidently in recognition of the limitation upon the taxing 
power of Congress thus determined, the sixteenth amendment was adopted, in 
words lucidly expressing the object to be accomplished: “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.” As repeatedly held, this did not extend the taxing 
power to new subjects, but merely removed the necessity which otherwise might