Helvering v. Griffiths

Mr. Justice Douglas,

dissenting:

Eisner v. Macomber dies a slow death. It now has a new reprieve granted under circumstances which compel my dissent.

I.

In 1936, Congress provided that stock dividends were taxable as income when they constituted “income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution.” 1 § 115 (f) (1). That statutory *405 provision is now rewritten so as to permit stock dividends to be taxable when they constitute “income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution as construed by Eisner v. Macomber.” That extraordinary result is reached in the face of the plain language of the Act and in face of clear statements of its purpose made in Committee Reports. The report of the House Ways and Means Committee (H. Rep. No. 2475, 74th Cong., 2d Sess., p. 10) stated that stock dividends were to be taxable when they constituted “income to the shareholder within the meaning of the sixteenth amendment to the Constitution.” The report of the Senate Finance Committee (S. Rep. No. 2156, 74th Cong., 2d Sess., p. 18) contained the unequivocal statement that “stock dividends are made taxable to the full extent permitted by the Constitution.” That purpose is now thwarted. Reliance is placed on certain statements made by Mr. Vinson who managed the bill on the floor of the House. Yet the most that can be said is that his statements in explanation of the bill were ambiguous. He stated, to be sure, that the new provision was not to be *406 regarded as “an attack upon the Eisner against Macomber decision.” 80 Cong. Rec., Pt. 6, p. 6215. But in answer to an inquiry from Mr. Treadway whether the new provision “describes new stock dividends that can be taxed or what portion of stock dividends under the sixteenth amendment can in the future be taxed,” he made the following statement: “Well, we take the broad position that stock dividends that are taxable income within the sixteenth amendment are subject to taxation, and if they are not such stock dividends and not any taxable income under the sixteenth amendment, they are not subject to taxes." Id., p. 6310. I fail to see in that declaration even any intimation that Eisner v. Macomber rather than the Constitution marked the reach of the new legislation. Furthermore, a reading of the whole discussion on the floor of the House indicates to me that his denial that the legislation made an “attack” on Eisner v. Macomber fell far short of suggesting that the House intended to joreclose this Court from reexamining Eisner v. Macomber. If Congress had that purpose, the Act hardly would have been phrased in terms which embrace the full scope of the Sixteenth Amendment. To me, the disavowal of an intent to “attack” Eisner v. Macomber meant no more than a disclaimer of any purpose to propose unconstitutional legislation. Eisner v. Macomber is a decision of this Court. Under the traditional conceptions of the place of judicial review in our constitutional system, this Court and only this Court can change the rule of that case in absence of an amendment to the Constitution. Congress here was merely respecting that traditional view. It wanted to go as far as it could. But it could have no idea how far that would be until this Court spoke. No one could predict v/hether this Court would overrule, modify, or sustain Eisner v. Macomber when the 1936 legislation came before *407 it. Indeed, when the 1936 bill passed the House, 2 Koshland v. Helvering, 298 U. S. 441 , which narrowed the application of Eisner v. Macomber, had not been decided by this Court. And Helvering v. Gowran, 302 U. S. 238 , which somewhat extended the rule of the Koshland case was not decided until after the 1936 Act was passed. But numerous decisions by lower courts had made inroads on the Eisner v. Macomber doctrine. The rule of that case was in flux; a process of erosion had set in; and none knew where that erosion would cease. Accordingly, Congress drafted § 115 (f) of the 1936 Act in the most flexible of terms. It used sweeping language incorporating the full coverage of the Sixteenth Amendment so that those stock dividends would be taxed which this Court would permit to be taxed. There are probably other ways in which the same idea could have been phrased. But the one chosen is clear enough.

The only Treasury Regulations applicable to the taxable year in question — 1939—are Regulations 103. These were originally promulgated on January 29, 1940. Sec. 19.115-7 provided: “A distribution made by a corporation to its shareholders in its stock or in rights to acquire its stock shall be treated as a dividend to the full extent that it constitutes income to the shareholders within the meaning of the sixteenth amendment to the Constitution.” That sentence was followed by the statement, “The Supreme Court has pointed out some of the characteristics distinguishing a stock dividend which constitutes income from one which does not constitute income within the meaning of the Constitution.” Then followed a summary of our decisions, ending with three examples based on the Koshland case, Eisner v. Macomber, and the Gow *408 ran case. On November 15, 1940, this regulation was amended by striking out everything following the first sentence. This regulation, however, even in its original form did not and could not foreclose inquiry into the validity of the decision in Eisner v. Macomber. It did no more than state the constitutional principles on which the decided cases rested. It certainly did not indicate that the Treasury construed the statute more narrowly than the Constitution itself. However that may be, this Court on more than one occasion has refused to follow a Treasury regulation which it felt to be “in the teeth” of the statute. Helvering v. Sabine Transportation Co., ante, p. 306; Helvering v. Credit Alliance Corp., 316 U. S. 107 . If this regulation be construed to narrow the Act so as to tax only stock dividends permitted by Eisner v. Macomber, I would have less reluctance in striking it down than I have had in other instances.

But there is said to be lack of wisdom in this interpretation of the Act. It is argued that it would be disruptive of tax administration. It is urged that a decision which now overruled Eisner v. Macomber would be unfair because it would be retroactive. Those matters are none of our business. Every revenue act which Congress has passed has a retroactive effect. It is something on which taxpayers of necessity take their chances. Milliken v. United States, 283 U. S. 15, 23 . And many of the uncertainties in revenue acts necessarily are not resolved until this Court passes on them years later. Here there is no possible basis for complaint. These stock dividends were declared in 1939, three years after the Act making them taxable was passed. Of course, the taxpayer no more than Congress could predict what interpretation this Court would give the new statute. Sec. 115 (f) (1), however, made the risks apparent. The fact that some guessed wrong is wholly irrelevant to this litigation. Inequities may result from a holding in 1943 that Eisner v. *409 Macomber has not been the law since 1936. But the relief against them lies with Congress. Our task ends if we erase Eisner v. Macomber and give Congress a clean slate on which to write. Then and only then can Congress design a tax system treating stock dividends consistently. So long as Congress has to guess whether or not this Court will overrule Eisner v. Macomber, any interim treatment which it gives stock dividends may have to be readjusted after this Court speaks, so as to remove inequities which may have resulted.

II.

I think Eisner v. Macomber should be overruled. The Sixteenth Amendment gives Congress the power “to lay and collect taxes on incomes, from whatever source derived.” As Mr. Justice Brandéis stated in his dissent in Eisner v. Macomber, 252 U. S., p. 237, that Amendment was designed to include “everything which by reasonable understanding can fairly be regarded as income.” Stock dividends representing profits certainly are income in the popular sense. “From a practical common-sense point of view there is something strange in the idea that a man may indefinitely grow richer without ever being subject to an income tax.” . Powell, Income From Corporate Dividends, 35 Harv. L. Rev. 363 , 376. The wealth of stockholders normally increases as a result of the earnings of the corporation in which they hold shares. I see no reason why Congress could not treat that increase in wealth as “income” to them. 3 See Collector v. Hubbard, *410 12 Wall. 1, 18 ; Helvering v. National Grocery Co., 304 U. S. 282, 288 ; Powell, The Stock-Dividend Decision and The Corporate Nonentity, 5 Nat. Tax Assoc. Bull. 201. The notion that there can be no “income” to the shareholders in such a case within the meaning of the Sixteenth Amendment unless the gain is “severed from” capital and made available to the recipient for his “separate use, benefit and disposal” (Eisner v. Macomber, 252 U. S., pp. 207, 211) will not stand analysis. In cases like Koshland v. Helvering and Helvering v. Gowran where stock dividends were held to be taxable as income, both the original investment and the accumulations were retained by the company. Yet those cases hold that stockholders may receive “income” from the operations of their corporation though the corporation makes no distribution of assets to them. And see United States v. Phellis, 257 U. S. 156 ; Rockefeller v. United States, 257 U. S. 176 ; Cullinan v. Walker, 262 U. S. 134 ; Marr v. United States, 268 U. S. 536 . Other cases make plain that there may be “income” though neither money nor property has been received by the taxpayer. Benefits accruing as the result of the discharge *411 of the taxpayer’s indebtedness or obligations constitute familiar examples. Old Colony Trust Co. v. Commissioner, 279 U. S. 716 ; Douglas v. Willcuts, 296 U. S. 1 ; United States v. Hendler, 303 U. S. 564 . And increases in the value of property as a result of improvements made by the lessee are taxable income to the lessor even though the taxpayer could not “sever the improvement begetting the gain from his original capital.” Helvering v. Bruun, 309 U. S. 461, 469 . The declaration of a stock dividend normally will not increase the wealth of the stockholders. Its accrual will usually antedate that event. See Haig et ah, The Federal Income Tax (1921) p. 8. For it is the accumulation of corporate earnings over a period of time which marks any real accrual of wealth to the stockholders. The narrow question here is whether Congress has the power to make the receipt of a stock dividend based on earnings an occasion for recognizing that accrual of wealth for income tax purposes. Congress has done so through the formula of computing the “income” to the stockholders at the “fair market value” of the stock dividends received. § 115 (j). Whether that is the most appropriate procedure which could be selected for the purpose may be arguable. But I can see no constitutional reason for saying that Congress cannot make that choice if it so desires. That is one way — though perhaps at times a crude one — of measuring for income tax purposes the wealth which normally accrues to stockholders as a result of the earning of their corporation.

Mr. Justice Black and Mr. Justice Murphy join in this dissent.

Sec. 115 (a) defines “dividend” as follows: “The term ‘dividend’ when used in this title . . . means any distribution made by a cor *405 poration to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.”

Sec. 115 (f) (1) is entitled “General Rule” and reads as follows: “A distribution made by a corporation to its shareholders in its stock or in rights to acquire its stock shall not be treated as a dividend to the extent that it does not constitute income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution.”

Sec. 115 (j) sets forth the formula for valuation of dividends other than cash dividends: “If the whole or any part of a dividend is paid to a shareholder in any medium other than money the property received other than money shall be included in gross income at its fair market value at the time as of which it becomes income to the shareholder.”

April 29, 1936. See 80 Cong. Rec., p. 6367. The Koshland case was decided by this Court on May 18, 1936.

Cf. the income tax of partners. Sec. 182 of the Internal Revenue Code provides: “In computing the net income of each partner, he shall include, whether or not distribution is made to him . . . (c) His distributive share of the ordinary net income or the ordinary net loss of the partnership, computed as provided in section 183 (b).” A partner is chargeable with his allocable share of the partnership earnings even where they could not be distributed to him by reason of *410 local law. Heiner v. Mellon, 304 U. S. 271 , 281: “The tax is thus imposed upon the partner’s proportionate share of the net income of the partnership, and the fact that it may not be currently distributable, whether by agreement of the parties or by operation of law, is not material.” As stated by Mr. Justice Brandéis in his dissent in Eisner v. Macomber, 252 U. S., p. 231: “The stockholder’s interest in the property of the corporation differs, not fundamentally but in form only, from the interest of a partner in the property of the firm. There is much authority for the proposition that, under our law, a partnership or joint stock company is just as distinct and palpable an entity in the idea of the law, as distinguished from the individuals composing it, as is a corporation. No reason appears why Congress, in legislating under a grant of power so comprehensive as that authorizing the levy of an income tax, should be limited by the particular view of the relation of the stockholder to the corporation and its property which may, in the absence of legislation, have been taken by this court.”