STOCK DIVIDENDS
37
tax only those dividends which represented profits earned during the year in
which the dividend was paid or in the year preceding. But this court, eon-
struing liberally not only the constitutional grant of power but also the revenue
act of 1913, held that Congress might tax, and had taxed, to the stockholder
dividends received during the year, although earned by the company long before;
and even prior to the adoption of the sixteenth amendment. (Lynch ». Hornby,
247 U. 8. 339.5 That rule, if indiscriminatingly applied to all stock dividends
representing, profits earned, might, in view of corporate practice, have worked
sonsiderable hardship and have raised serious questions. Many corporations,
without legally capitalizing any part of their profits, had assigned definitely some
part or all of the annual balances remaining after paying the usual eash divi-
dends, to the uses to which permanent eapital is ordinarily applied. Some of
the corporations doing this, transferred such balances on their books to ‘surplus’
aceount—distinguishing between sueh permanent “surplus” and the “undivided
profits” account. Other corporations, without this formality, had assumed
that the annual accumulating balances carried as undistributed profits were to be
treated as capital permanently invested in the business. And still others, with-
out definite assumption of any kind, had so used undivided profits for capital
purposes. To have made the revenue law apply retroactively so as to: reach
such aceumulated profits, if and whenever it should be deemed desirable to
capitalize them legally by the issue of additional stoek distributed as a dividend
to stockholders, would have worked great injustice. Congress endeavored in
the revenue act of 1916 to guard against any serious hardship which might
otherwise have arisen from making taxable. stock dividends representing ae-
cumulated profits. It did not limit the taxability to stock dividends represent-
ing profits earned within the tax year or in the year preceding; but it did limit
baxability to such dividends representing profits earned sinee March 1, 1913.
Thereby stockholders were given notice that their share also in undistributed
profits accumulating thereafter was at some time to be taxed as income. And
Congress sought by paragraph 3 to discourage the postponement of distribution
for the illegitimate purpose of evading liability to surtaxes.
Fifth. The decision of this court, that earnings made before the adoption: of
the sixteenth amendment but paid out in cash dividend after its adoption were
taxable as income of the stockholder, involved a very liberal construction of
the amendment. To hold now that earnings both made and paid out after the
adoption of the sixteenth amendment can not be taxed as income of the stock-
holder, if paid in the form of a stoek dividend, involves an exceeding narrow
construction of it. As said by Mx. Chief Justice Marshall in Brown ». Maryland
(12 Wheat, 419, 446): “To construe the power so as to impair its efficacy, would
tend to defeat an object, in the attainment of which the American public took,
and justly took, that strong interest which arose from a full conviction of its
necessity.”
No decision heretofore rendered by this eourt requires us to hold that Congress,
in providing for the taxation of stock dividends, exceeded the power conferred
upon it by the sixteenth amendment. The two cases mainly relied upon to
show that this was beyond the power of Congress are Towne ». Eisner (245 U. S.
418), which involved a question not of constitutional power but of statutory
construetion, and Gibbons ». Mahon (136 U. 8. 549), which involved a. question
arising between life tenant and remainderman. So far as coneerns Towne v.
Eisner, we have only to bear in mind what was there said (p. 425): “But it is not
neeessarily true that income means the same thing in the Constitution and the
(am) act.” 7 Gibbons v. Mahon is even less an authority for a narrow construc-
tion of the power to tax incomes conferred by the sixteenth amendment. In
that case the court was required to determine how, in the'administration of an
estate in the District of Columbia, a stock dividend, representing profits, received
after the decedent’s death, should be disposed of as between: life tenant and
remainderman. The question wag in essence: What shall the intention of the
testator be presumed to have been? On this question there was great diversity
of opinion and practice in the courts of English-speaking countries. Three
well-defined rules were then competing for acceptance: two of these involve an
PO WE WP
¢ The hardship supposed to have resulted from such a decision has been removed in the revenue act of
1916, as amended, by providing in § 31 (b) that such cash dividends shall thereafter be exempt from
taxation, if before they are made, all earnings made since February 28, 1913, shall have been distributed.
(Act of Oct. 3, 1917, c. 63, § 1211, 40 Stat. 338; act of Feb. 24, 1919, c. 18, § 201 (b), 40 Stat. 1059.)
? Compare Rugg, C. Ji, in Tax Commissioner ». Putnam (227 Mass. 522, 533): ‘However strong such
an argument might be when urged as to the interpretation of a statute, it is not of prevailing force as to the
broad considerations involved in the interpretation of an amendment to the Constitution adopted under
the conditions preceding and attendant upon the ratification of the fortv-fourth amendment.’’
