The opinion
GreeN,
dissenting: The revenue acts provide that after the earnings and profits accumulated by a corporation subsequent to February 28, 1913, have been distributed, the earnings and profits accumulated *772 prior to March 1, 1913, are, upon distribution to its stockholders, tax exempt. In the case here under consideration the stockholder was a corporation and the question is whether the tax-exempt dividends received by it are tax exempt in the hands of its stockholders when distributed.
In the Appeal of Caroline S. McLean, 4 B. T. A. 487, following the rule laid down in Lynch v. Hornby, 247 U. S. 389 , we said:
A dividend is none tiie less income to the stockholder though a distribution of earnings accumulated by the corporation prior to March 1, 1913, and is taxable in the absence of express statutory exemption.
In that case we also said:
The provisions in the 1916 and subsequent acts exempting such dividends do not have the effect of changing their fundamental nature and converting into capital that which was income.
Prior to the adoption of the majority opinion herein I had thought this question settled. In that opinion, however, it is said:
The distributions made by the subsidiary to the parent in 1918 from sources other than earnings accrued subsequent to February 28, 1913, are regarded for tax purposes as in the nature of a return to the parent of a part of the amount invested or of the March 1, 1913, value of its investment and not as a part of the earnings or profits of the parent; at least until there is a gain to the parent by reason of a return to it of amounts in excess of the cost or March 1, 1913, value of the stock.
The rule thus announced is predicated upon the theory that that which was received by the stockholder of the subsidiary corporation was not income, and to me it seems that such a rule is contra to that announced in Lynch v. Hornby, supra, and the Appeal of McLean, supra.
In the prevailing opinion it is said:
The earnings of the subsidiaries should be considered only to the extent to which they have been distributed as dividends to the parent.
This I believe to be a correct statement of the law. The parent corporation here had no interest in the earnings of its subsidiary until distributed, for as was said in Rhode Island Hospital Trust Co. v. Doughton, 270 U. S. 69 , “ The owner of shares of stock in a company is not the owner of the corporation’s property.” If the Hornby and McLean cases, supra, are right, it follows that all that the subsidiary distributed as dividends to the parent was income (in part tax exempt) to the parent in the year in which the dividend was paid.
If the dividends of the subsidiary are income to the parent corporation, the case falls squarely within section 201(b) of the Revenue Act of 1918, which reads as follows:
(b) Any distribution shall be deemed to have been made from earnings or profits unless all earnings and profits have first been distributed. Any distri- *773 button made in the year 1918 or any year thereafter shall be deemed to have been made from earnings or profits accumulated since February 28, 1913, or, in the case of a personal service corporation, from the most recently accumulated earnings or profits; but any earnings or profits accumulated prior to March 1, 1913, may be distributed in stock dividends or otherwise, exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been distributed.
Such income to the parent corporation may not be said to have been “ accumulated before March 1, 1913,” and may not therefore be distributed by it tax exempt for it is only earnings and profits accumulated prior to that date which may be so distributed.
Ordinarily those attempting to support the rule announced in the majority opinion urge that once income is impressed with the exemption, it retains its exempt status thereafter. Such an argument leads to the conclusion that if the subsidiary distributes a depletion or depreciation reserve, or income from tax-exempt bonds, such distribution may be, by the parent, distributed tax exempt. The same rule should apply in all cases and it should be held that exempt income is not ear mwrTced and that it is not so impressed with the exempt status that its recipient may distribute it tax free.
Under the regulations and the later revenue acts, the basis to be used in the computation of gain or loss on sale or other disposition of the stock is reduced by the amount of the tax-exempt distribution. If the majority rule is put into effect, a peculiar advantage results to the stockholder of the parent corporation in that he receives the pre-March 1, 1913, earning of the subsidiary tax exempt and at the same time his corporation has the same advantage, offset it is true, by the reduction in basis. Surely such a result was not within the contemplation of Congress, and that is the test, for the exemption is not inherent but is a matter solely within the power of Congress. See Lynch v. Hornby, supra.
In my opinion the dividends distributed to petitioner herein by the parent corporation are not tax exempt and are in no wise affected by the fact that the funds from which they were paid were received by the parent corporation tax exempt.
Smith, Love, and MoRRis agree with this dissent.