14

STOOK DIVIDENDS

or property of a person at a given instant of time; “income” represents the
advantage, service, or use actually rendered by capital to its owner during a
period of time. Under the act, income need not be money, but may be any advantage
 or service capable of easy, accurate, monetary appraisement. State
courts have held that the term “income” includes the passing of shares of stock.
(Union &e. Trust Co. v. Taintor, 85 Conn, 452; Gray ». Hemenway, 212 Mass.
239; Leland v. Hayden, 102 Mass. 542, 551.)
There is a strong presumption that the distribution of this stock dividend was
an advantage to the stockholders from the fact that they desired it and passed
the resolutions directing it. These advantages were: (1) A transfer of the surplus
 and undivided profits from the plenary control of the corporation to a
control largely in the stockholder. (2) An assurance that a declaration of
dividends would in the future specifically take account of this surplus and be
declared upon it. (3) A muniment of title which enables the stockholder to
deal easily with his interest in the surplus by a mere spiel of his new
stock. The latter is a real advantage and of great value. (In re Evans (1913),
1 Ch. Div. 23, 30, 31.) These advantages constitute “income” to the stockholder
 because they flow to him from his property rights (i. e., “capital’”) in the
corporation, and are capable of easy, accurate, monetary appraisement. They
acerued to him because of his ownership of a portion of the original capital stock;
that they were capable of easy, monetary appraisement is demonstrated by the
fact that there was a regular market quotation upon them.
True, the surplus always belonged to the stockholder, but not in the strict
sense and to the full extent of control obtaining in the case of original capital.
The transfer gave him new rights. It can not be said that the corporation lost
nothing or that the stockholder gained nothing. The former lost its plenary
control over the surplus; instead of being indebted to “surplus,” with a consequent
 free use of such funds, it Became indebted to “ capital,” with a limited
use of the funds. The latter gained a direct: right against the corporation instead
of an indirect interest in the “surplus.” Counsel contend that the surplus was
put in a position where it could not be distributed as dividends or income. But
it gained this position by distribution ; by conversion into capital. It passed to
the stockholder as income en bloc, and of course could not produce income
again in that form until another complete change took place. 3
The rule as between life tenant and remainderman, involved in Gibbons ».
Mahon (136 U. S. 549), depends on equitable considerations, but a statute
levying a tax must be rigorously applied according to its correct construction,
no matter what hardships may be caused thereby. In Bailey v. Railroad Co.
(22 Wall. 604, 106 U. S. 109), it was undoubtedly held in the first error proceedings
 that a stock dividend was, and could lawfully be, taxed under the income
 act tax of 1864. Gibbons ». Mahon seems to recognize this (p. 560).
Reviewing the decisions of this court in the first Bailey case, in Gibbons .
Mahon, and in Logan County ». United States (169' U. 8. 255), comparing them,
and considering carefully the due weight to be given to each as an authority in
the case at bar, it is submitted that the question whether a stock dividend is
“income’’ within the meaning of an act taxing “net income arising or accruing
from all sources’ is not foreclosed by authority.
Mr. Gordon M. Buck, by leave of court, filed a brief as amicus curiae,
Mr. Justice Holmes delivered the opinion of the court.
This is a suit to recover the amount of a tax paid under duress in respect of
a stock dividend alleged by the Government to he income. A demurrer to the
declaration was sustained by the district court and judgment was entered for
the defendant. (242 Fed. Rep. 702.) The facts alleged are that the corporation
 voted on December 17, 1913, to transfer $1,500,000 surplus, being profits
earned before January 1, 1913, to its capital account, and to issue 15,000 shares of
stock representing the same to its stockholders of record on December 26; that
the distribution took place on January 2, 1914, and that the ‘plaintiff received
as his due proportion 4,17414 shares. ~The defendant compelled the plaintiff’ to
pay an income tax upon this stock as equivalent to $417,450 income in cash.
The district court held that the stock was income within the meaning of the
income tax of October 3, 1913 (ec. 16, sec. II; A, subdivisions 1 and 2; and B :
38 Stat. 114, 166, 167). It also held that the act so construed was constitu
tional, whereas the declaration set up that so far as the act purported to confer
power to make this levy it was unconstitutional and void.
The Government in the first place moves to dismiss the case for want of jurisdiction
 on the ground that the only question here is the construction of the