(S.Ct.1920)
On January 1, 1916, the Standard Oil Company of California, a corporation organized under the laws of that state, had shares of stock outstanding with a par value of $100 each amounting in round figures to $50,000,000 out of an authorized capital of $100,000,000.1 In addition, the company had surplus and undivided profits invested in plant, property, and business amounting to about $45,000,000, of which about $20,000,000 had been earned prior to March 1, 1913, and the balance thereafter.2
In January 1916 the board of directors decided to issue additional shares sufficient to constitute a stock dividend of 50 percent of the outstanding stock and to transfer from surplus account to capital stock account an amount equivalent to such issue.3 Appropriate resolutions were adopted. An amount equivalent to the par value of the proposed new stock was transferred accordingly. The new stock was duly issued against it and divided among the stockholders.4
Mrs. Macomber, the owner of 2,200 shares of the old stock, received certificates for 1,100 additional shares. Of these, 18.07 percent, or 198.77 shares with a par value of $19,877, were treated as representing surplus earned between March 1, 1913, and January 1, 1916.5 She was called upon to pay, and did pay under protest, a tax imposed under the Revenue Act of September 8, 1916, based upon a supposed income of $19,877 because of the new shares.6
After an appeal to the Commissioner of Internal Revenue was disallowed, she brought action against the Collector to recover the tax.7 In her complaint she alleged the above facts.8 A general demurrer to the complaint was overruled upon the authority of Towne v. Eisner, 245 U.S. 418.9 The Collector having failed to plead further, final judgment went against him.10 To review it, the present writ of error was prosecuted, with arguments heard in April 1919 and rearguments in October 1919.11
Whether, by virtue of the Sixteenth Amendment, Congress has the power to tax, as income of the stockholder and without apportionment, a stock dividend made lawfully and in good faith against profits accumulated by the corporation since March 1, 1913?12
The Sixteenth Amendment empowers Congress to lay and collect taxes on incomes from whatever source derived without apportionment among the States.13 Yet this authority reaches only gains derived from capital or labor that are severed from the capital investment.14 Such gains must be received or drawn by the taxpayer for separate use and benefit.15 A stock dividend constitutes no such income.16 It merely capitalizes accumulated surplus through a bookkeeping adjustment.17 That adjustment leaves corporate assets undiminished.18 The stockholder's proportional interest remains unaltered.19 No portion of profits becomes available for the stockholder's separate withdrawal or disposal.20
No. The rule demands a realized gain proceeding from property, separated from capital, and coming into the recipient's hands for independent use.21 Under the established facts, the Standard Oil Company of California transferred an amount equivalent to the par value of a fifty-percent stock dividend from its surplus account to capital stock account and issued the new shares pro rata.22 Mrs. Macomber, owner of 2,200 shares, received 1,100 additional shares of which 198.77 shares with a par value of $19,877 represented post-March 1, 1913 earnings.23
That issuance effected no segregation of assets, no distribution to her separate ownership, and no increase in her proportionate stake in the corporation.24 The new certificates merely evidenced the same undivided interest previously represented by her original shares.25 Because the transaction supplied none of the elements required for taxable income, the Revenue Act of 1916 could not constitutionally impose an unapportioned tax upon the $19,877 as income of the stockholder.26
Congress lacks power under the Sixteenth Amendment to tax a true stock dividend as income of the stockholder without apportionment, and the Revenue Act of 1916 is invalid to the extent it attempts to do so.27
Related opinions on this issue
Joined by Justice Day
Justice Holmes dissented on the ground that the word incomes in the Sixteenth Amendment should be read in a sense most obvious to the common understanding at the time of its adoption.28 The known purpose of this Amendment was to get rid of nice questions as to what might be direct taxes.29 Most people not lawyers would suppose when they voted for it that they put a question like the present to rest.30
He therefore concluded that the Amendment justifies the tax.31
Joined by Justice Clarke
Justice Brandeis dissented on the ground that financiers and investors have long treated the simple issuance of stock dividends and the more complicated method of declaring cash dividends coupled with subscription rights as recognized equivalents.32 These methods achieve the same economic result of retaining accumulated profits for corporate use while distributing them in effect to stockholders.33 Every dividend representing profits is income under the laws of New York and California regardless of the medium of payment.34
Congress therefore possesses power under the Sixteenth Amendment to tax stock dividends representing post-1913 earnings as income of the stockholder.35