cs 
STOCK DIVIDENDS 29 
such realization, in that the fund represented by the new stock has been trans- 
ferred from surplus to capital and no longer is available for actual distribution. 
The essential and controlling fact is that the stockholder has received nothing 
out of the company’s assets for his separate use and benefit; on the contrary, 
every dollar of his original investment, together with whatever accretions and 
accumulations have resulted from employment of his money and that of the 
other stockholders in the business of the company, still remains the property of 
the company and subject to business risks which may result in wiping out the 
entire investment. Having regard to the very truth of the matter to substance 
and not to form, he has received nothing that answers the definition of income 
within the meaning of the sixteenth amendment. 
Being concerned only with the true character and effect of such a dividend 
when lawfully made, we lay aside the question whether in a particular case a 
stock dividend may be authorized by the local law governing the corporation, or 
whether the capitalization of profits may be the result of correct judgment and 
proper business policy on the part of its management and a due regard for the 
interests of the stockholders. And we are considering the taxability of bona 
fide stock dividends only. 
We are clear that not only does a stock dividend really take nothing from the 
property of the corporation and add nothing to that of the shareholder, but that 
the antecedent accumulation of profits evidenced thereby, while indicating that 
the shareholder is the richer because of an increase of his capital, at the same 
time shows he has not realized or received any income in the transaction. 
It is said that a stockholder may sell the new shares acquired in the stock 
dividend; and so he may, if he can find a buyer. It is equally true that if he 
does sell, and in doing so realizes a profit, such profit, like any other, is income, 
and so far as it may have arisen since the sixteenth amendment is taxable by 
Congress without apportionment. The same would be true were he to sell some 
of his original shares at a profit. But if a shareholder sells dividend stock he 
necessarily disposes of a part of his capital interest, just as if he should sell a part 
of his old stock, either before or after the dividend. What he retains no longer 
entitles him to the same proportion of future dividends as before the sale. His 
part in the control of the company likewise is diminished. Thus, if one holding 
$60,000 out of a total $100,000 of the capital stock of a corporation should receive 
in common with other stockholders a 50 per cent stock dividend, and should sell 
his part, he thereby would be reduced from a majority to a minority stockholder, 
having six-fifteenths instead of six-tenths of the total stock outstanding. A 
corresponding and proportionate decrease in capital interest and in voting power 
would befall a minority holder should he sell dividend stock; it being in the 
nature of things impossible for one to dispose of any part of such an issue without 
a proportionate disturbance of the distribution of the entire capital stock, and a 
like diminution of the seller’s comparative voting power—that “right preserva- 
tive of rights” in the control of a corporation. Yet, without selling, the share- 
holder, unless possessed of other resources, has not the wherewithal to pay an 
income tax upon the dividend stock. Nothing could more clearly show that to 
tax a stock dividend is to tax a capital increase, and not income, than this demon- 
stration that in the nature of things it requires conversion of capital in order to 
pay the tax. 
Throughout the argument of the Government, in a variety of forms runs the 
fundamental error already mentioned—a failure to appraise correctly the force 
of the term “income” as used in the sixteenth amendment, or at least to give 
practical effect to it. Thus, the Government contends that the tax “is levied on 
income derived from corporate earnings,” when in truth the stockholder has 
“derived” nothing except paper certificates which, so far as they have any effect, 
deny him present participation in such earnings. It contends that the tax may 
be laid when earnings “are received by the stockholder,” whereas he has received 
none; that the profits are “distributed by means of a stock dividend,” although 
a stock dividend distributes no profits; that under the act of 1916 “the tax is on 
the stockholder’s share in corporate earnings,” when in truth a stockholder has 
no such share, and receives none in a stock dividend; that “the profits are segre- 
gated from his former capital, and he has a separate certificate representing his 
invested profits or gains,” whereas there has been no segregation of profits, nor 
has he any separate certificate representing a personal gain, since the certificates, 
new and old, are alike in what they represent—a capital interest in the entire 
concerns of the corporation. 
We have no doubt of the power or duty of a court to look through the form of 
the corporation and determine the quesfion of the stockholder’s right in order