Petition for Writ of Certiorari — Helvering v. Griffiths

Supreme Court brief1943

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CRABLES ELmoat epamey |

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‘Que T. ‘Hetvermc, CoMMISSIONER OF INTERNAL

REVENUE, PETITIONER |

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PETITION FOR A WRIT OF CERTIORARI TO THE UNITED 7

- STATES crncuis ¢ COURT OF APPEALS FOR THE SECOND riaeg

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Constitutional provisions, statute, and aaa involved... '

Specification of errors to be = ONL ITE RTI

Reason for granting the writ.-----.------ <bhmacananel eeeeneaee +

_ CITATIONS

Cases: .

Bienes. Macomber, 252 .U. aed iene » umanienia

Helvering v. Sprouse, October. Term, 1942, No. Cincacece

= ~Strassburger v. Helvering, October Term, 1942, No.

Constitution and Statute:

Constitution of the United States:

Article 1, Section 8, Clause 1-_...-.-.--- ooee4 . ae

Sixteenth: mem aegis erence

Miscellaneous: -

Treasury Regulations 101:

Art. 115-7 [as amended beT. D. 5110, 1942-4 Int. Rev.

AE, a ccc cchpaescws0cdischasessencncseteanee

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_ atte Sqreme nro ied Snes

_— — “OcroBER TERM, “1942

No. — |

- Guy T. Hucreuno, COMMISSIONER OF INTERNAL

° - REVENUE, PETITIONER >. ae

| v. EARS lee or x

Bac eee _- See R Gri

. |. PETITION FoR A WRIT OF CERTIORARI 10 THE UNITED —

‘STATES CIRCUIT COURT OF APPEALS FOR THE SECOND. ..

"The Solicitor General, on behalf of Guy vA Hel-

vering, Commissioner of Internal Revenue, prays

that a writ of certiorari issue to review the judg-

ment of the Circuit Court of Appeals for the Sec-

ond Circuit entered in the above case on July 20,

1942, affirming the. decision of the United States

Board of Tax Aupes .

3 710m BELOW

’ ‘The memoranduin opinion of the Board of Tax

_ Appeals (R:'11)' is unreported: The per curiam.

opinion ofthe Circuit Court of ' Appeals for the Sec-

ond Circuit (R. 20), is reported at 129 F. (2d) 321.

(1) . & - . &

™ e all

: aa er

: JURISDICTION’ - > ° -

The judgment of the Circuit Court of Appeals)

was entered on July 20, 1942 °(R. 20). The juris- —~

diction of this Court is invoked under Section 240

‘(a) of the Judicial Code, as amended by the Act of

Februar} 13, moo. Pe

QuEsTioN FE PRESENTED’ —

Whether a ‘dividend i in common stock upon com-

mon stock supported by. corporate earnings and |

Ad where there is no other class of¢stock out- ©

ding, i is constitutionally Pr to tax without”

| CoNeTTTUTIONAL PROVISIONS, STATUTE, aun |

REGULATIONS INVOLVED |

The provisions ef the Constitution, the statute —..

and the regulations involved are set forth in the |

Appendix, t infra, oo

. . STATEMENT ae

The taxpayer ¥ was the owner and holder of ‘1a.

shares of capital stock of Standard Oil Gompany ” -

(New Jersey). (R. 6.) Standard had a total au-.

thorized capitalization of 30,000,000 sharés of stock

of a par value of $25 each. On.January 1, 1939,. .

there were outstanding approximately 26,500,000

shares, which had an aggregate par value of $662,-

500,000 (R. 4).

_ In addition, on January 1, 1939, ‘the corporation

had a capital surplus on its books of approximately

$66, p00, 000 and earned ee and undivided prof-

its of approximately $130,000,000.’ The amounts

re nted by the outstanding capital ‘stocky capi- :

tal surplus, earned surplus ahd undivided profits

were invested i in assets or otherwise used by the e cor-

poration for purposes of its business ee 4). ;

All of the share f the capital stock of the cor-”

poration which ‘outstanding’ during the year

1939 were of the same class and character: ‘The.

rights atid interests of the holder of each share were

‘identical with those of the holder of every other

share (R. 4). ~

On May 1, 1939, th board of directors of Stand- |

ard adopted resohitions directing that on. June

15, 1939, there bé distributed to the stockholders of 5

record at the ose of business on May 16, 1939, ad-

' ditional shares of the capital stock of the corpora-—

tion an the basis of two shares of stock for each

200 shaves held on: the record date. The earned —

surplus account would be charged with $27.50 for

“ each additional share of capital stock issued. The

capital stock account would be tredited with the

par value.of such share, namely, $25, and the capi-

tal surplus account would be credited with $2.50. -

The transfers were made in accordance with these

directions and the new shares were divided among.

the stockholders.in the proportions described. The —

o total amount transferred from the earned surplus

account to the capital stock account and the capital

i surplus account was less than the amount of the

earnings and profits accumulated by the corpora-

: tion subsequent to February 28,1913 (R. 4-5).

, | t a : ce

4 |

On Prember't 1, 1939, Standard’s board of direc-

ters adopted further resolutions directing that on

December 15, 1939, there be. distributed to the .

stockholders of record. at the close of business on

_- November 15, 1939, additiénal shares of capital

stock of the corporation én the basis of three shares,

for each 200 shares. held ‘on the record date. The

earned surplus account. would be charged with

issued. ‘The capital stock account would be cred-

ited with the par value of such share, namely, $25,

and the capita@surplus account would be credited.

with $2.50. ‘The transfers were made in accordance

with these directions, and. the new shares were di-

vided among” the stockholders in the. proportions

7 described. The total amount transferred ‘from the |

earnal surplus account to the capital stock account —

__and the capital surplus account was.less than the —

amount of the earnings and profits accumulated by

(R. 5).

The shares of stock “thus distributed ‘as stock

dividends on June 15, 1939, and December 15, 1939,

respectively, were of precisely the same class and _

cha‘acter as the shares of the capital stock in re-

spect of which the distributions were made. In

. ‘each instance the proportionate -interest of éach

shareholder in the corporation ithmediately after.

the issuance and-distribution of the new shares was

the same as his former interest. In neither in-

| . $27.50 for each additional share of the capital stock

. , the Corporation subsequent to February 28, 1913 BS

Bea oes

stance did any shareholder have a right toan elec- -

tion or option to receive cash or other property. in

lieu of his proportion of additional shares of capi-

tal stock issued and distributed (R. 5-6). |

The taxpayer, on June 15, 1939, received as her

. _ proportion of the stock dividend distributed on that

"date 1.01 shares of the capital stock of the corpora- __

‘tion. The fair market value of each share: of :

stock of the corporation on June. 15, 1939, imme- ~—

diately after receipt of the additional shares by the

taxpayer, was $42.50. The fair market value of

the 1.01 additional shares was $42.93 (RB. 6). 7s

- On December 15, 1939, the taxpayer received in. .

respect of the 102. 01 shares of stock of the corpora-_

~ tion which she now held, 1.53 additional shares of

the stock of the corporation as her proportion of

stock diyidend distributed on th: date.’ The fair .

market value of each share of the ‘stock of the cor- |

poration on December 15, 1939, immediately after -

_. the receipt of the additional shares by the taxpayer, — -

_-was $43.1875. The fair market value, of the 1.53

additional shares was $66.08 (R. 6).

The Commissioner. assessed the deficiency based

on the failure of the taxpayer to include in her in-

— come the fair market value of the two and one-half...

shares of common stock of Standard received by

her as a dividend (R. 8-9). This determination

‘was reversed by the Board of Tax Appeals (R. 12).

. The Circuit Court of Appeals affirmed on the au-

thority of Kisner v. Macomber, 252 U.S. 189.

)

ey is : a Ee

6°

SPFCIFICATION OF ERRORS TO BE URGED

The Cirenit Court of Appeals erred:

$1. In holding that the. stock dividends could not

constitutionally be ‘subjected to tax.

2. In failing to hold that the additional common

stock whfch the- taxpayer received as dividends

updn her common. stock was taxable to her.

3. In affirming the. decision. of the Board of at

a oa

REASON FOR GRANTING THE WRIT

This is a test case designed to challenge directly

the authority-of Eisner vy. Macomber, 252 U. S. 189.

The public importance of a re-examination of that -

decision has been set forth in the Government's

petitions for certiorari and rehearing thereon in

" Helvering v. Sprouse, October Term, 1942, No. 22. °

The Government proposes to urge that Eisner v.

Macomber be overruled both in-the Sprouse case

and in. Strassburger v. Helvering, October Term, .

1942, No. 66. Because of ‘the importance of the -

question and because the issue is now before the

Court in the Sprouse’ and Strassburger cases, re-

view of the instant cause is also appropriate.

Respectfully submitted.

Le Sy CHARLES Fany,

aie ae ' Solicitor General. _

OcTORER 1942. ° - . eis)

_ APPEN NDIX

3 Constitution of thé United States:

Article I, Section 2, Clause 3 ey

tatives and “direct Taxes shall-be apportioned °

among the several Statés which may be in-

eluded within this Union, according to their. - %

respective Numbers, which, shall be .deter-

mined by additig to the whole Number of free

Persons, including those bound toAService

for a. Term of ears, and excluding In- -

dians not’ taxed, three fifths of all Sher

Persons * * ‘

“Article I, eition 8, Clause 1 —The' Con-.

_ gress shall -have Power To lay and collect

Taxes, Duties, Imposts and Excises, to pay

the Debts and provide for the common De-

_ fence and general Welfare of the United

States; but all Duties, Imposts and Excises

_ Shall be uniform ‘throughout the United

: States; pa ;

_ * . *. * :

Article I, Section 9, Clauses, 4 and 5—No- .

Capitation, or. other direct, Tax shall be laid,

unless in Proportion to the Census or Enu- Tf

meration herein before directed to be taken.!

No Tax or Duty shall be laid oh Articles

. rasan f rom any ame.

. * “a

‘Siatoenth ‘liek » Congress . .

shall have power to lay ang collect taxes on

incomes, from whatever irée derived,

without apportionment imehe the several

‘States, and without regard to any census or |

enumeration. I: 9

ae |

Bo Pence Ss -

Rév enye Act of 1938, ¢. 289, 52 Stat. 447:

Src. 22. Gross INCOME.

( a) «General Definition. —*Gross income”’

includes gains, profits, and income derived

ee Re dividends bal i eae

* * . ° *. -* :

‘Site. 115. Seiemteiin BY CORPORATIONS.

(a) Definition of Dividend—tThe- term -

‘dividend’? when used in this title * *

nieans any distributfon made by ‘a corpora-

tion to its shareholders, whethas 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. -

(b) Source. of Distributions.—For the ©

purposes of this Act every distribution is .

made out of earnings or profits to the extent

thereof, and from-the most recently accumu-

> lated e rnings or promis, me es

+ *

Stock Dividend “4

- (1) General: Rule— A’ distribution made.

by a corporation tags _ Shareholders: in its

stock or in rights to acquire its stock shall

- not be treated ag a dividend to the extent

- that it does not constitute income to the

sharcholder. within the meaning of the Six-

teenth Amendment to the Constitution.

(2) Election of Sharehglders as to Me-

dium of Payment.— lever -a distribu-

tion by a corporation is, at the election of

any of the shareholders (whether exercised

before or after the declaration thereof),

— either (A) in its stock or in rights :

“ :

. to acquire its stock, of a des which if dis-

wou

o.-

-9

‘tributed without election would be exempt —

’ from tax under paragraph (1), or (B) in

[Rosen or any other property (including its

- stock-or in rights to acquire itstock, of a

not be exempt from tax.under para-

class vould if distribu without election

(1)), then the distribution shall con-

Stitate a taxable dividend in the hands of all

shareholders, regardless of the mediuin in

which paid,

+ .* e * "y °

oe ). Veluaiiie of Dividend.—If the whole’

or any part of a dividend is paid to a share-

_ holder in any medium other thag 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 in-

~ @ome to the shareholder.

Tréasury Regulations 101,. promulgated under ~

the Revenue’ Act of 1938, |

Re a Arr. 115-7 [as ainended by 7. D. 5110,

_° 1942-4 Int. Rev. Bull. 7]... Stock dividends.

—<A distribution made by a corporation to

its shareholders in its stock or in rights to

- acquire its stock shall be treated as a divi-

dend to the full extent that it constitutes in-

come to the shareholders within the meaning ~

ti the sixteenth amendment to the samaceae

on. 5

The provisions of Article 115-7 deleted by T. D.

5110, 1942-4 Int. Rev. Bull. 7, were as follows:

The Supreme Court has pointed out’ some

/ of the characteristics distinguishing | & stock

dividend which constitutes income from one

which does not oe income within the

10 ;

‘meaning of the Constitution.’ The distinc-

tion between a stock dividend which does

not, and one which does, constitute income to

the shareholder within the meaning of the:

sixteenth. amendment to the Constitution is

the distinction between a stock dividend

which works no change in the corporate en-

tity, the same interest in the same LA-

‘ tion being represented after the distribution \

by more shares of precisely the same charac- —

ter, and a stock dividend where there either

has been a change of corporate identity ora

change in the nature of the shares issued as -

dividends whereby“the proportional interest

of the shareholder after the distribution is -

essentially different from his former inter- .

est. A stock dividend constitutes income if

it gives the shareholder an interest different .

from that which his former stuck holdings

represented.. A stock dividend does not con-

stitute income if the new shares confer no

_ different rights or interests than did the

old—the new certificates plus the old. repre-

senting the same proportionate interest in.

= net assets of the corporation as did the

old: : rea

‘ * * ct . * “ee |

[The three remaining paragraphs contain exam-

ples illustrating the foregoing rules. ] AE Deve

1 See Eisner v. Macomber (252 U. 8. 189, T. D. 3010, €. B.

3, 25 (1920)); and Koshland v. Helvering (298 U. S. 441, —

Ct. D. 1124,'C. B. XV-1, 219 (1936)). Compare United

- States v. Phellis (257 U. S. 156, T. D. 3270, C. B. 5, 37

- (1921\); Rockefeller v. United States (257 U.S. 176, 7:

3271, C. B. 5, 3441921) ) ; Cullinan v. Walker (262 U.S. 154,

T.. D. 3508, C. B. T1-2, 55 (1923)); Weiss v. Stearn (265 |

U. S. 242, T. D. 3609, C. B. ITI-2, 51 (1924)); and Marr v.

United States (268 U. S. 536, T. D. 3755, C. B. TV-2, 116

(1925)). - ;

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| “No, 467

Ste Supreme ourtof the Waited Sites

Ocroser TERM, 1942 oe

Guy T. HeLvertnc, CosMIssionER OF ENTERNAL

_ REVENUE, PETITIONER

Syiviz R. GrirFitHs

ON WRIT OP CERTIORARI TO THE UNITED STATES CIRCUIT

COURT OF APPEALS FOR THE SECOND CIRCUIT i

BRIEF FOR THE, PETITIONER

-. : he 5 nN ra

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1. As

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* 4

s 7

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INDEX

: ars Page

Opinions below - - - cekweean eaten aes kes 1

Jurisdiction . _, pes Ege, ee eon om i

Fa presented : _ - : : <- 2

onstitutional provisions, statute, and regulations involved _ 2

Statement. _- - —hecnenennbas bsaweke 2

Specification of errors to » be ae EE eee a apa orgae 6

‘Argument:

Introductory -- .,. ---- :; ae ca apne wena ; 6

1. The statutory provisions __--. - eee VP FRR ES s

Il. The Treasury regulations - ‘ “a

111 The importance of overruling F isner v. Macomber. -

Conchision -_ _. : ed ee hotekawhs <a

Appendix A__- _- Rae Kel cay pier ae

Appendix B pee : Sac . TEN

Appendix C___...- re stg baer J be

CITATIONS

Cases : —— :

Collector vg yt ba Wen. 286....:: ; 17, 55

Collector v “Hubbard, 12 Wall. 4 ean , é

Commissioner y. Income- Taz, Bengal v. Mercantile Bank of

India, Lid , [1936] A. C. 478 46

Commissioners of Inland Revenue v. "Blot, {1920} 1K.B. 114,

11920] 2 K. B. 657, [1921], 2 A.C. 171. = 46

‘ Commissioners of. Inland Revenue v: Fisher's Executors,

* 19926] A. C. 395... ba 46

Cullinan v. Walker, 262 U.S. 1347. -:. 9

Dreyfuss v. Mann@@g, 44 F. _— 383 —— 8

Fisner v. Macomber, 252 U.S. 189 6, 9, 10, 13,24, 26, 28

Groves v. N. ¥. ex rel O Kesde 306 U.S. 466 MS --F

Helvering v. Gerhardt, 304 U. S. 405... - bea late 17, 26,55

Helvering v. Gowran, 302 U. 8, 238 ; 10, 12, 24, 26

Helvering v. Hallock, 309 U. ¥* 106 ap 26, 54, 55

Helvering v. Reynolds, 313 U. 8. 428. - a aie 54

Helvering v. Reynolds Tobacco rt 306 U.S. 110-., 54

Helvering ¥. Sprouse, No, 22, this Term..-.. a 6, 8, 35

Helvering v \ St. Louis Union Trust va = U. 8. 39... .. -, 54,55

Helvering v.\Wilshire Oil Co., 308 'U. “ 5A

Hopkins Savings Assn. v. Cleary, 296 ne 8. 315 , bos 16

2. eg)

497038-—42 }

‘ Calatatian and Statutes: cranes. Be a z

"> Parker v~ Motor Boat,Sales, 314 U. 8. 2440.00...

“Quirin, Ex ‘parte, opinion dated Setober | | aaa

Southern Pacific Co. v. Jensen, 244 U.S. 205. . ea ss

' Strassburger v. Helvering, No: 66, this Term __ __- 6, 8, 10, 35, 4

Swan Brewery Co. y. The King, (1914] A. C. 331.

. Revenue Act of 1918. 40 Stat. 1057, Sec. 220." :. 8

“Casee ‘Continued. on rs, eta) —

. James v: | Federal Commisrioner of Tazation, 34 Commw., .

L. R. 404__ - _... 45, 46

King v. Johnson Matthey & Co. | {1938} Fx. re . R. ” 44

Koshland v. Helvering, 298 U. Ss. 441.

Liddeli v. Commissioner for Inland “Revenue (1939), :

Afr. L. R. (Cape of Good Hope Provincial. Division) . 181, - 44

Manhattan Co. v. Commissioner, 297. U. 8. 129-2... - 48_

Marr vy. U Suited ee Gs ca ea ckunaecneons 1) S10

Morrissey v. Commissioner, 296.U.S. 344. AS eee 48

Motes v. United States, 178 U.S. 458. 002. eats fone

Murphy Oil Co. v. Burnet, 287 U. 8. 299. ae ; . * &

National Labor Riulations Board v. Painblatt, 306 U. 8. 601_ 15, 21

Nicholas v. Commissioner of Taxes of the State of Victoria,

{1940} A..C. 744, sustaining 59 Commw. L. R. 230... 45, 46

—

Rockefeller vy. United States, 257.U. 8. 176__ Gunuienen

Schechter Corp, v. United Stated, 295. U. 8. 495. :

Sprouse v. Commissioner, 122 F. (2d) 973. ses waueherens

Strassburger v. Commissioner, 124 F. (2d) 315.

United States v. Amer. Trucking Asa’ns, 310 U.S le

United: States v. Pheilis, 257 U. 8. 156... :

United States vy. Wrightwood Dairy Co., 315 U. S. 110_- a

Weiss v. Stearn, 265 U. 8. 243... - pibeken

Constitution of the United States!

8 OS SIE eR es ee ie

det 8, Oe. 0 8, 8:..-.-.-.. Oh: .-.-.--2- 22,

Sixteenth Amendment. ...__. 2 eres: aT agshion

Revenue Act of 1913 38 Stat. 114, ak cas. Sec. II, A,

Revenue Act of 1916, 39 Stat. 756, Sec..3......-..._-- |

Revenue Act of 1921; 42 Stat. 227:

. 10, ——

Re deo

BS BRR SRSss

~--0

: m1

~~ Constitution-and Statutes—Continued.

"Public Salary Tax Act of 1939, 53 Stat. 574.

U. 8. C.Aiftle ts:

Revenue Act of 1924, 43. Stat. 253:

Sec. 220_. ETS Sa aor.

Revenue Act of 1926, 44 ‘Stat. 9:

1108. Geo , ee

Revenue Act of 1928, 45, Stat. 791:

Sec. 104____. :

608... _. Pa :

Revenue Act of 1932, 47 Stat. 169,-Sec. 104

Revenue Act of 1934, 48 Stat. 680:

eee ie

506

Revenue Act of 1936, 49 Stat. 1648, Sec. 102. :

Reventte Act of 1838, 52 Stat. 447, See. 102

Internal Revenue Code (53 Stat.:!)

ee. 1.....<.

ie Aen eee

eee

‘Foreign statute:

"A ian Income Tax Assesament Act, 1936- 1940, No. 17,

* 80 Cong. Rec., part 6, pp. g214-15, 6309-10, 6367.

80 Cong. Rec., part 8, p. 8813... ----. SE AEP

45 Harv. L. Rev. 1072-1077 (1932)_.......-.---

Hearings, House Ways and Means Committee, ‘1936 Reve-

nue Bill, pp: 96, 98, 193, 321, 322, 340, 341, 745

- Hearings, Senate Finance Committee, 1936 Revenue Bill,

_ 10, 13,

$ ; : ee : - ; aa

afi | tet PRR ee ere einen

; Miscellaneous ‘ontinued.— . : : % Page

House Document No. 418, 74th Cong., 2d Sess. 30

H. R. 12395, 74th Cong., 3d Sers_, ae

H. Rep. No. 26, 76th Cong., Ist Sess., mG Pe a Js

H- Rep. No. 356, 67th Cong, Ist Sess, pp.8 12-13, 15. 10, 29, 30, 49

HH. Rep. No. 704, 73rd_Cong., 2d Sess., p. 38_. ’ 8

H: Rep. No. 1882, 70th Cong., Ist Sess., p. 22 ae . Ba

H. Rep, No. 2475, 74th Cong., 2d Sess., p. 10_ es ce

Proceedings, National Tax Association, 1939 . 33

_S. Rep. "No. 112, 76th Cong., Ist Sess., pp. 10-11 - 19

S. Rep. No, 278, 67th Cong., Ist Sess., pp. 9, ‘16, 32: 10, 30, 49

S. Rep. No. 558, 73rd Cong., 2d Sess p. 48. a

8S. Rep. No: 960, 70th Cong., Ist. Sess., p. 40. . - jt

S. Rep. No. 2146, 74th 'Cong., 2d Sess. gt os A Rea 12

T. D. 5008, 1940-2 Cudi. Bull! 286... _ see .. 83

Treasury Regulations 103. eS ; _ 23,40

Treasury Regulations 103“ Art. 19.115-7 [as amerided by

— 'T. D. 5020, 1940-2 Cum. Bull. 118, issued’ apie 15,

1m Ap Ae NY

5.U. of Pa. L. Rev. 83; 86; n. 7. Be et ee ate tea 34.

: 3

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gr he Supe Court of the inted States

Oc TOBER Teri, ‘1942

—e—o

No. 467 © ei

” ” a : f. |

Gvy T. Hetvertne, ComMisgonxerR OF INTERNAL © |

REVENUE, PETITIONER !

a . ; v.

’

Syivie R. Grirrirus

ON WRIT OF CERTIORARI TO THE UNITED STATES CIRCUIT |

as COURT OF APPEARS: FOR. THESSECON D CIRCUIT ° 4

BRIEF FOR THE PETITIONER ; gg

aie Cas OPINIONS BELOW

The memorandum opinion ofthe. Board of Tax . |

Appeals (R. 8), is unreported, 5 The per curiam”

opinion of the ¢ ‘irquit Court of Appe als for the

Mecind C ‘ireuit (R, si is * at a 29 F. (2d) ~

99].

Dus

JURISDICTION

The judgment of the Cireuit Court of Aiipesle

was entered on July 20, 1942°(R244). The _peti-

tion for a Writ of certiorarl was filed on October

20, 1942, and was granted on Nove mber 23; 1942.

The jurisdiction of this Court rests + male Section

, . ay eee

SS 4 .

}

2 ’.

240 (a) of. the Judicial Code, as amended by. the

Act of February 13, 192%. - ia eee

a QUESTION paaneNTE

Whether a dividend in comnion stock upon com-

nion stock ‘supported-by eorporate earnings—and —

profits, where there is no other class of stock out-

standing, is constitutionally subject to tax as in-

‘ eome without, apportionment, under Sections 22

and 115 of the: Internal Revenue Code.

CONSTITUTIONAL PROVISIONS, STATUTE, AND —

_ REGULATIONS INVOLVED

The provisions of the C ‘onstitution, he statute,

and the regulations involved are set forth in

Appendix A, tnfre, pp. 3443. rane

STATEMENT

This case involves the taxabitity ~of two chock:

dividends declared and paid during the vear 1939.

_ The taxpayer was the owner and holder of 101

shares of eapital stock of Standard Oil Company :

(New Jersey) (R. 4). Standard had a total au-

thorized. capitalization of 30,000,000 shares ‘of

stock of a:par value-of $25 each. On January .1,

1929, there were outstanding approximately 26,/

500,000 shares, w hich had an axgregate per valué

of $662;500,000,. CR. 3.)

In addition, on January 1, 1939, the corporation

had. a eapital surplus on its books of approxi--

mately. $66,500,000 and earned surplus and undi-

vided profits of approxiniately $130,000,000. The

- amounts represented by the outstanding capital |

3 / |

stock, capital surplus, earned surplus and undi- |

vided profits were invested in assets or otherwise —

uséd. by. the corporation for purposes “ its busi-

ness. (R. 3.)

- All of the shares of the eapital stock of the cor-

poration which were outstanding, during the year _

1939 were of the same class and character. The-

rights and’ interests of the holder of each share

were: identical with those of the holder of every

other share. (R.3.)_ - eo

On May 1, 1939, th® board of directors of Stand-

ard adopted. resolutions directing that on June 15, .

1939,. there be’ distributed to the stockholders of

record at the close of business on May 16, 1939, ©

additional shares of the capital stock of the corpo- —

ration on a basis of two shares of stock for each A

200 shares held on the record date. The earned

surplus account would be charged with $27.50 for

each . additional share of capital stock issued. .” .

The,eapital stock account would be credited with

the has value of such share, namely, $25, and the

“capital. surplus account would be credited with

$2.50. The transfers were made in accordance

with these directions and. the new shares were di--

_ vided among the stockholders in ‘the proportions

described. The total amount transferred from the

earned surplus account to the capital stock account

- and the capital’ ‘surplus account was less than the

amount of the earnings and profits accumulated by

_ the corporation subsequent to February: 28, 1913.

(R. *) ;

Ae. 4 : .

On Nove amber 1, 1939, Standard’s board of direc-

tors adopted further resolutions directing that on

~ December 15, 1939, there be distributed to the

stockholders of reeord at the élose of business on

November 15, 1939, additional shares of capital”

stock of the corporation on‘the basis of three

shares for each’ 200 shares held on the record date.

— earned surplus account would be charged with

27.50 for each additional share of the capital stock

oud The capital stock ‘account would be ered-

ited with the par value of such share, namely, #25,

and the capital surplus account would be credited

with #2.50. The transfers were made in ‘accord:

ance with these directions, and. the new. shares

were divided among the stockhvlders in the pro-

portions described. The total amount transferred

from the earned surplus uecount to the capital

stock account and the capital surplus account was |

less than the amount of the earnings and profits

accumulated by thie « corporation subsequent to Feb-

ruary 28, 1983. (R. tk.)

The shares of. stock thus distributed as stock

dividends on June 15, 1939, and. December ‘15,

— 1959, respectively, were of precisely the same

elass and character as the shares of the capital

stock in respect of which the distributions. were

made... In each instance the proportionate inter-

est of ‘each shareholder in, the. « corporation im-

mediately after the issuance and. distribution of

the new shares was the same as his former inter-

- *

5 ¢

/ , ; ~> :

est. In neither instanee did any shareholder

‘have a right to an election or option to receive

cash or other property in lieu of his proportion

‘of additional shftes of capital stock issued and /

distributed. (R. 4.) 000 7 | . |

The taxpayer, on J une 15, 1939, received as

her proportion of the stock dividend distributed

"on tliat date 1.01 shares of the eapital stock of »

the corporation. The fair. market value of each

share- of stock of the corporation on June 1,_

1939, immediately after receipt of the. . li

shares by the taxpayer, was $42.50. &

- market value ef the 1.01 additional shi

$42.93. (R. 4.) ae |

On. December 15, 1939, the taxpayer \received

in- respect of the 102.01 shares of stock ‘of te cor-

poration which: she now held, 1.53 +additional-

res Was

shares of the stock of the corporation as her pro- —

portion of stock dividend distributed on that

‘date. .The fair market value of each share of the

stock of the corpération on Deeember .15, 1939,

_ immediately after the receipt of the additional

shares by the taxpayer, was $43.1875. The fair

market value of the 1.53 ‘additional shares was

$66.08) (R.5.) | |

~The Commissioner proposed to assess a de-

ficiency for 1939 based on the failure of the tax- .

_ payer to include in her income the fair market

value of the shares of common stock ofs Standard

_ received by her as dividends (R. 6-7). His deter-. —

mination was reversed by the Board of Tax Ap-

peals (R. 9). The Circuit Court of Appeals af-.

coon on the authority of Eisner v. Macomber, .

252 U.S. 189. (R. 14)

| SPECIFICATION OF ERRORS TO BE URGED

ig Circuit Court of Appeals -erred:

in holding that the stock dividends could

on constitutionally ‘be subjec ‘ted to tax.

. In faifing to hold*that the additional com-.

okt stoek which the taxpayer reecived as. divi-

dends upon ‘her common stock was constitution- .

ally taxable to her under Sections 22 and 115 of

‘the Internal Revenue Code. :

3. In affirming the decision of the: Board of °

= Appeals.

ARGUMENT

Introductory— This case involves. stock divi-

dends ef pure common up m common, supported by

corporate earnings,’ where there was no other

class of stock ottstanding. . The ‘taxability of

these dividends, therefore, will squarely ep

the overruling of Eisner v. Macomber, 252 U.S.

189. The per curiam opinion of the court below

was based solely upon that decision (R. 14).

“In Strassburger v. Helvering and Helvering Vv.

Sprouse; Nos. 66 and 22, this Term, we undertook

to show at length’'why Eisner v. Macomber was

incorrectly decided, and we respectfully refer the

Court to our brief in the Strassburger ease for a

‘

full exposition of our arent on this issue.’

However, the further issue has been raiked here, |

as it-was in thse cases, that the statutory provi-

sions should be narrowly interpreted sotas not to

reach these dividends. Accordingly, we shall first

dise “USS - somewhat. more fully the scope of the

statutory: provisions;. we shall secondly, deal with

the related question involving the’ Treasury regu-

lations; and thirdly, we shall consider in greater

detail the: public interest which requires the re-

examination of Eisner v. Macomber, —

It may be observed atthe outset that m none

6f the cases, whether decided for or against the | °

Government, was there any suggestion that. the

‘statute failed to tax the stock dividend if it could

he regarded as income within the meaning of the

Sixteenth Amendment. The Ninth ( ireuit in the

Sprouse case. rested > its. decision squarely upon

Lisner V. Macomber, and indeed stated that ‘It

_ is¢onceded that under the taxing act the value of

the non-voting common stock, distributed to. peti-

- * In addition, we have set forth herein in Appendix B,

‘infra, pp. 4t-Aiya br ief cise ussion of the cases dec ided in the

other E nglish- speaking « ‘ountries, The statement was made,

erroneously we think, in one of the amicus briefs in the

Stréksburger case that “The doctrine that.a stock dividend

is not income has been adopted throughout the E nglish speak -

ing world.” See brief of John E: Hughes, p. 10.

Although not bearing directly upon the meaning of the:

_ sixteenth amendment, to our Constitution, those vases in

general support the view that the word “incomes” in the -

Sixteenth Amendment is broad enough to include stock -

. dividends. |

tioner as,a- dividend, was taxable if it was

‘ineome’ of the kind which the comps Amend-

ment authorizes ge “ge to tax.’ geod record -

in Sprouse case, p.. 52, 122 F. (2d) 973, 975.)

Similarly, in the fate case, lag Swan,

speaking for himself and Judge A. N. Hand,

stated that “It is implicit. in-this. provision: [ See-

tion 115 (f) of the 1936 Act] that Congress in-

tended to ‘tay Stuck *itividends to the full extent

of its constitutional es and so the Regula-

tions expressly dee lared.”” (See recordin Strass-

burger case, p. 33, 124 F, (2d) 315, 316.) And:

{

Judve’ Chase, who disagi me as to the ultimate |

- result, dissented on the ground that Eisner v..°

Macomber forbade the tax rather than. upon a

ground of statutory’ construction.’ Finally, the

court below in the instant case rested its décision-

solely vpon Eisner ve: Macomber (R. 14).

THE STATUTORY PROVISIONS * 7

. The stock dividends herein were payarle to

‘the stockholders of rec6rd at the close of busiress

on May 16 and November ‘15, 1939, and were dis-

> Similarly, in Dreyfuss vo Manning, 44 FE. Supp. 383

~(NSI.), a case’ substantially identical with the Strasshurger

ease, the court. followed Judge Chase's dissenting opinion

and relied solely upon Lisner v. Macomber. There was not

even the remotest suggestien that the statute was too nar-

rowly drawn to reach the dividend if it were income within

the meaning of the Constitution,

° >

i a

a se hee

tributed on June 15 and December 15, 1939, respec-

tively. - The operative statutory provisions, there-

fore, are found in the Internal Revenue Code

(53 Stat. 1), for the income tax chapter of the

Code was specifically designated (Section 1) to

govern the taxable years beginning after Deceniber

31, 1938. Section 115 (f) (1) of the Code, hew-

ever, is identical with Section 115. (f) (1) of. the

Revenue Act of 1936, involved in the Strassburger

and Sprouse cases. Moreover, - since the pro-

visions of Section 115 (f) first’ appeared in the

1936 Act, their meaning can best be determined by

examining’ them in the setting of the legislative

history of that Act. | | te or :

~The revenue bill which ‘became fhe 1936 Act

(IE: R. 12395, 74th Cong., 2d Sess.) was introduced

‘and reported to the House of Representatives on

April 21, 1936. Prior to that time the scope of

Eisner v, Macomber had been progressively limited

in a series of decisions. See United States v.

Phellis, 257 U.S. 156 (J ustices McReynolds and

‘Van Devanter dinseniting upon the basis of Hisier

v. Macomber) ; Rockefeller ¥. United States, .257-

U. S. 176 (same) ; Cullinan v. Watker, 262 U. S.°

134; Marr v. United States, 268 U. 8.536 (Justices

Van Devanter, McReynolds, Sutherland, and

Butler dissenting). * And the Court's departure

7 An apparently temporary trend in the other direc ‘tion ap-

peared in Weise v. Stearn, 265 U. S. 242 (Justices Holmes

and Brandeis dissenting), but that trend was soon to. be

reversed in the Marr Case, supra. -

10 as

from the theory of Eisner v. Macomber had been

evidenced in a variety of other cases. See (1932)

45 Harv. L. Rev. 1072-1077. See also our brief in

the. Strassburger r case, pp. 34-39. : |

‘Prior to the 1936 Act, there had been a statu-

tory provision relieving all stock. dividends of

_ tax—an exemption which Congress thought had

-been ‘required by the decision of the Supreme 7

‘Court. in Eisner v. Mocomber” (H. Rep. No. 350,

, 67th Cong., Ist Sess., p. 8% 8. Rep. No. 275, 67th,

Congt, Ist Sess., p. 9). The progressive limitation

of Eisner vo Macomber, however, made it clear

that so broad an exemption was: not necessary.

The exemption was accordingly completely elimi-

nated in the 1936 Act. But it was apparent that .

the process ~ limitation had not yet ceased, and |

neither the Treasury nor Congress would -know

where it would. stop. Indeed, Koshland v. Hel- 7

vering, 298 U. S. 441, which tnade further drastic

inroads upon the Macomber decision, had not yet

been decided: when the 1936 bill was either: in-

troduced or passed by the House.“ And Helveri ng

v. Gowran, 302 U. 8. 238, which extended the.

Koshland case still further * was not to be decided

*Tne Aoshland case was decided on May 18, 1936. oa

1936 bill had already been passed by the House on wae

1936, 80 Cong. Ree., part 6, p. 6367.

* The Koshland case involved a dividend of common stock

--which was paid to the holders of the preferred and which

thereby gave the recipients voting rights not theretofore

possessed by them, whereas the Gowran case involved. a’

dividend of pane nonvoting stock which was paid to

the common.

- until nearly: a year ae one half after the 1936

Act became law.

Accordingly, Section 15-(f ) of the 1936 bill, as

introduced and reported to the House, was wisely

drafted to be sufficiently flexible to ‘meet all fur-

ther limitations upon Eisner v. Macomber, It

was framed in tlie broadest possible terms, and

-referred to the Sixteenth Amendment itself as

marking the limit of its reach. .It provided (H.

R.- 12395, 74th Cong., 2d Sess.) : hero

(ff) Srock DIVIDENDS.—

(1) GENERAL RULE.—A distribution ‘made

hy a corporation to ‘its shareholders in

- stock of the corporation or in‘rights to

acquire stock of the corporation shall be

treated as a taxable dividend to the extent

that such distribution constitutes income

to the shareholder within the meaning of

the Sixteenth Amendment to the Constitu-

_tion and represents a distribution! of earn-

ings or profits ac cumulated after February

-°28, 1913. .

The report of the House Ways — Means Com-

_ mittee left its meaning no less clear. Concisely °

and uriambiguously, the Committee explained these

provisions as follows (H. Rep. No. 2475, ‘T4th |

Cong., 2d Sess., p. 10): |

It is provided in. section 115 (f) that stock. ~

dividends shall,be subject to tax to.the ex-.

tent that such dividends constitute income

to the shareholder within the meaning of °°

the sixteenth amendment to the Constitu-

tion. i .

This. explanation contained no qualification, and

did not indicate that the statute was to be read as

referring.to the Sixteenth Amendment:as then in-

terpreted, or as it would be interpreted a few |

weeks. later’ in. the Koshland decision, or as it|

would be interpreted: some nineteen monthg later,

in the Gowran case. It was. intended to give this

Court a free hand to consider the taxability of any

stock dividend as income, unembarrassed by any —

statutory restriction. ota ay

The —_ of the Senate Finance Committe¢ is-

equally clear. Although the provisions of Section

115. (Cf) were restated in the form of a lee

negative, in an effort to conform to certain changes

that were made in Section 115 (a), the eri ieal

language was retained (“income - to: the share-

holder within the meaning of the Sixteenth .

Amendment to the Constitution’), and thie (‘om-

_ plainly stated (S. Rep. No. 2156, rath

“* Cong., 2d Sess:, pp. 18-19) : |

This subsection of the House bill, under °* @

which stock dividends are made ‘taxable to

the full extent permitted by the Constitu-

tion, is retained by your committee, except

for changes made necessary by virtug¢. of. '

the reportéd amendment of section 115 (a)

and in the interest of greater clarity.

. The argumert that. the words c, Income ‘to the.

sik a within the meaning of the Sixteenth |

Amendment * should not be interpreted to mean ‘

ogee , Tiga *

. aes

what they say ; appears to be constructed primarily

upon statements made by Mr. Vinson’ on the

floor of the House. 80 Cong. Bet . 6, il

6214-6215 ), 6309-6310. Jr EEN

We think that Mr. Vinson’s statements; ‘when

read in coutext and in the light of their historical

setting, do not. require any such disregard. of. the

plain language of the statute or of the-clear and

carefully prepared explanations of thie committees .

themselves. Mr. Vinson’s opetiing statement éx-

plained why the prior exemption of all stock divi-

dends was being eliminated from the statute.» He

pointed out (p. 6214) that there were “mifumerabve

types’’ of stock dividends that were constitution-_

ally taxable under Eisner v. Macomber. However,

‘it must be remembered that most of such dividends

were then considered taxable, not because Eisner v.

Macomber recognized them as such, but because

of subsequent limitafions upon Eisner vy. Macom-

decided by this Court. “To, be sure, Mr. Vinson

declared that the new provisions were not: ‘to be”

regarded (p. 6215) as “an attack ypon the Eisner

ks It was erroneously stated at the oral argiiments of the

Sprouse and Strassburger cases that Mr. Vingon was chair-

’

man of the House Ways and Means Committee. Mr. Dough- |,

ton was the chairman. However, Mr. Vinson'was a meinber

of the committee and took an active part_in the consideration

of the bill. : rus ae y Ay Aes.

497438—42 “2 a

weakened the Macomber decision had not yet been |

a’

147

against Macomber decision.”’ But obviously, all

that he meant was that Congress was not requir-

ing the taxation of all stock dividends in defiance

of Eisner v. Macomber; rather, it was taxing.stock

dividends to-the full extent: that they constituted

income within the meaning of ‘the Sixteenth

Amendment, whatever'that extent may be. There

was ny suggestion that Congress ‘intended to

foreclose this Court from reexamining Eisner v.

Macomber. If: Congress had so intended, the

statute certainly. would not ‘have - -been framed ©

in the specifie terms of the Sixteenth Amendment

‘itself. The provisions were designedl.drawn in *

“ sweeping language with sufficient elasticity to

permit the Court to reexamine Eisner v, Macom-

ber, without at the same time placing Congress in’

the embarrassing position of making a frental. at-

~ tack upon the decision. Moreover, the 1936 reve-

nue bill as a whole was the object of vigorous :

attack by the opposition, and at that time this -

me ourt had only - recently declared several im-

portant Federal statutes unconstitutional; it is’

therefore easy to see why Mr. Vinsoti took the

pains to explain that he was not sponsoring any

_ unconstitutional legislation. This is confirmed by:

Mr. Vins6n’s subsequent colloquy (pp: 6309-6310).

with Mr. Treadway, the leader of the opposition,

where Mr. Vinson in'substance repeated: what he

had said in his opening statement, and where the

_ ?

“ed

: 15

following additional ‘illunffnating exchange oc-

-eurréd <p. 6310) :°

Mr. Treapway. The laiiguage now sub- . .

stituted for*the stricken language describes —

new stock ‘dividends that can: be taxed or -

what portion of stock dividends under the

sixteenth amendment ean in the future be

taxed. is that the right we: of the

- “Intention? — .

_ Mr, VINSon of: Kentucky. 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.

[dtalies supplied. ]

-We, of course, do not suggest ‘that the. Court .

should not seek sn aid in the interpretation

- . ' Similar debates had oce curred with réspect to the National

. Labor Relations Act, in which the opponents, had argued’ -

that the Act would be unconstitutional under recent ¢om-

merce clause decisions. The sponsors of the Act, howev er,

disavowed any intention to enact unconstitutional. legisla-

tion; they contended that the Act was designed to go to the

limit of the commerce power whatever that limit may be.

And this Court has since Tuied in National Labor. Relations

Board x. Fainblatt, 306 U. S. 601, 607, that the Act repre-

_ permissible under the Constitution. Compare United States:

oY. Wrightwood Dairy Co., 315 U. S. 110, 121-126. which is

even stronger, for the Court ignored contrary statements

made by some ‘members of the Senate.

sents an exercise of the commérce power to the full extent |

eae

‘of the statute here involved (cf. United States v:

Amer, Tracking Ass’ns, 310 U.S. 334, 543-044).

But we vigorously urge that where the statute 4s

framed in clear terms, and where the reports. of -

the committees of both Houses are equally clear,”

the Court shold: not refuse to give effyct to. that

lag mige merely because there is a statement in

the débates whieh is/at mosi ambiguous and which

js’ as consistent with the plain meaning | of thie

statute as it is*With an opposing vie W.

ae ar rps

. In view of ma clear Latina of the: Statute: “and the un-

aribigyous intention of Congress, as expressed in the com-

nrittee reports, there is no ‘room for the application of the

r ule that statutes should be construed so-as to avoid con-

stitutional issues, Compare the remarks of Mr. Justice

( ‘ardozo in Hopkins Sav begs faxnv. Clears, 296 U. S.. 315,

De a mead ys ‘ :

Courts have ‘striven ‘mightily: at times to canalize

* constraction along ph ogee sifety. Moore lee Cream:

Co, V. Rox, 289-U. 8S, 373, 379." Whena.statute is rea-

sonably susceptible oe two interpretations, they have

preferred the meaning. that preserves. to the meanin

that pep ‘United States v. Delaware & Hudson Co.,

213 US. 366, 407: . Ak nights Te mplars’ Inde munity Co. v.

Publie tilities: Comm'n, 2 1 U. S. 493, 510; Savage

“¢ Jone 8, 225 US. 501, 583, “But gle of a diffi--*.

ae ulty” will not be pressed to the point of disingenuous

evasion.” Moore lee Cream Coon R dae supra. “Here

_ the intention of thee Congress is revealed too distinctly

td perniit: Us to ignore it because of mere misgiv ings as

Jasin: Inv U. S. 197, 205; ef. Hilinota Central BR. Co, v.

to power.) bid, The problem must: bé faced and :

answ ered,, i, = ‘ 9

~ | a

3. There is no more reason to read Eisner v.

Macomber as a gloss upon the broad language of

Seetion 115 (f) than there was to read ¢ ‘ollector

y. Day, 11 Wall. 113, as a limitation upon the gen-

eral language ‘in Section 22 (a) of the revenue»

aets which defined gross income as ineluditig , in-

come derived from salaries, wages, or compensa: .

tion for personal service.’” And there Was never

any serious dispute tliat Seetion 22 (a) was not

sufficiently’ sweeping to encompass any restric-—

' tions upon the decision of Collector vy. Day (ef.

“Helvering v. Gerhardt; 304 U.S. 405), or indeed,

the overruling of ¢ ‘ollector V 7 Day. Thus, after

the Gerhardt decision, when the. overruling f

Collector Vv. Day appe ared imminent in Graves

v.N.:Y. ex re O'Keefe, 306 U.S. 466, which was

ied

then pe nding, Congress found it nec essary to-en- ee

- act. legislation (Publie Salary’ Tax Act of 1939,

“O3 Stat. 574) which would relieve state employees

from the hardship involved in the ret roactive ap-

plication’ of the new decision.’ a

Moreover, although the Public Salary Tax Avt

also amended Section : 22 (a) prospectively by in- ©

serting. after the words. “compensation | for per-

sonal service’? the . following: | (‘‘ineluding

personal service ‘as an officer or employee of, a

State: a eee it did ‘so only out of an abun-

*The Treasury expects to propose similar legislation here

‘if Kisner vy. v. Macojnber is overruled. See mfra, p. 5d. .

dance of caution. Thus, the report of the House

— and Means Committee plainly stated (H.

. No. 26,° 76th Cong., Ist Sess., pp. 34);

Section 1: Section 1 of the bill amends .

section 22 (a) of the-Revenue Act of 1938 |

(which defines gross income) by prov iding

expressly that there shall be included in

gross income, salaries, wages, or compensa- -

tion. for ‘personal service as an ‘officer or-

employee of a State, or any political sub-

division thereof, or any ageney or instru-

mentality of any one or more of. the fore-

going.’ Under this amendment the wages,

‘salaries, and compensation of all officers | >

and employees of the respective tne mer saa

of their political subdtistons and agencies ;

and amstrumentalities, without exception,

are included in gross income. The com-

— ag ia cx that the language of sec-

tion 22) (a) as -it previously | existed was

oad nough to include in gross income the

compensation of such officers and em-

evey, believing the compensation of some of

these officers and employees to be constitu-

tionally exempt has, until: recently, by ad-

ministrative action treated their compensa-

tion \as nontaxable. This: administrative

action, followed by repei ited reenactment of

the statutory -provisions without change,

might lead to the contention: that Congréss

by such \reenactment had exempted such

State and local officers and. employees.

This contention would only serve to eon-

fuse the. issue of the constitutionality of

the future taxation of all State and local,

officers and employees. To eliminate the

possibility of such confusion, therefore,

your commitiee recommends amendment of,

the Revenue Act of 1938 to insert ‘the pro-

posed language so that, there can be no_

- . doubt ‘whatever of the intention of Con-

gress that all State and. local officers and

employees, without exception, shall be sub-

ject to Federal income tax for taxable years .* _

beginning aftér December 31, 1938. It is ~

not to be inferred from this amendme

however, that those groups of St “and

“ers and employees from whom

Federal income taxes have previously: been

‘collected ‘were not subject to tax under the

language of section 22 (a) in earlier reve-

nue acts or in the Revenue Act of 1938 as

it existed prior to the amendment proposed -

nll

- inthe bill. [Italies supplied.] . . .

See also S. Rep. No. 112, 76th Cong., Ist Sess

st 10-11:

4. The contention was made ‘in one of the ami-

cus briefg, in the Strassbu ‘ger ease that legisla- °

‘tion whi socks the limits of constitutional power

is vague and undesirable and that therefore this —

Court should give it a narrower interpretation. |

However, statutory provisions of. this type are

not at all unfamiliar and the Court has given full

effect. to such législation in situations that are

‘far more d ramatic and sweeping than the present

In United States \ v. Wrightwood Dairy Co., 315

U. S. 110, the Court held ‘that in the agricultural

legislation there involved Congress had intended

to exercise its power to the full extent permissible

under the Constitution. It will be reealled that

the agricultural legislation was pending in Con-

gress when Schéchter Corp. v. United States, 295—

U. S. 495, was decided; and that there was sub-

stituted in place of the broad Janguage of the-

pending bill lagzuage regarded as more restrictive

in the light of the Schecht r- opinion, whigh re-

flected a more limited view of the commerce

clause. Nevertlieless, this Court held in the

Wrightwood case that the statute was intended to

go the whole way and. was not to be limited by

the coneepis-of. commerce set forth in the Se hech-

_ ter opinion | whence the statutory language was

deriv ed.”

*To be sharply distinguished from the pres¢nt case as 2

w on as the W rightwood case is Parker vy. Motor Boat Sales,

3M USS. 244. In a doubtful and probably erroneous jack

sion, Southern Pacific Co. v. Jensen, 244 U.S. 205, it had .

been held that a state was without constibutional authority:

to enact certamn workmen's compensation legislation with

“respect to a stevedore engaged in work of a maritime nature

upon navigable waters within the state. The’ basis of the |

deci ‘ision was that the ¢ ‘onstitution, had committed exclusive

jurisdiction over such matters to the national grea ge

Although Congress was not anXious to enter the field,

nevertheless thereafter enacted like legislation for the <i

of the employees and their families, but. provided that the

Act was to be applicable only if reeov ery through workmen's

compensation proceedings “nay not validly be provided by

“State law.” The widow and children of a deceased employee

ee ee 21:

—_

Similarly, the National Labor Relations Act

became law at a time when the commerce clause

had received a narrow interpretation. Yet the

Court recognized that it was framed in sufficiently

broad terms.-to constittite an exercise of the com- |

“merce power. to the full exteut of the Constitu- ;

tion. eae Labor Re lations Board v. Fain-

blatt, 306 U.S. 601, 607. .

Indeed, ty present case is stronger, for. here

the statute makes specific reference to the Con-

stitution itself. :

Even more sweeping are the provisions of the

so-called civil rights statute which pe nalizes a con-

. splracy to injure, oppress, or intinidate any citi-

zn “in the free exereise or” enjoy ment of any

right or privilege secured: to him by the Constitu-

tion or laws of the United States’. U.S.C. Title

sought compensation vnder the federal Act in the Motor

oat Sales case: it was,argued in opposition to their claim

that the statute did not apply because fie Jensen case haa

been erroneously decided ana compensation could “validly

be provided by State law.” “To have accepted that, conten-

tion, however, would have meant that the very object which

Congress sought to-attain—namely, the protection pf the

- employees and their. ‘faniilies—would have been defeated

in that case. The Court accordingly gave effect to the dom-

inwit purpose of Congress by construing the word “validly”

as Meaning within constitutional limits-as then recognized .

by existing decision. — ~ ive

No such considerations are present here. No congressional.

purpose would be furthered by any such interpretation of

this statute, which seeks ‘to expand the taxing power over

stock dividends to the full extent permitted by the Sixteenth

Amenduent. ye “8 .

O-

18, See. 51. See Motes v. United States, 178 U.S.

458, 462. Again, there are a. large number of

federal crimes which are so defined as to include -

. only acts ¢ommitted ‘‘upon the high seas, or on

any other waters within the admiralty. and mari-

- time jurisdiction of the United’ States.” See

- UL S. C., Title 48, Sees. 451, 482, 483, 484, 487,

489, 490, 491, 492, 497. These statutes mole

applicable two consliiedbial provisions : Article

See. 8, cl. 10, dealing with crimes on the “high

seas,”’ and Article ILI, See. 2, extending federal

judicial power to all cases of “admiralty ‘and mari:

time. Jurisdiction.”’ .

F inally, as recently as this year, the Court stale |

in. the saboteur cases (Ex parte Quirin, opinion.

| aes October 29, 1942, pp. 8-9):

By the Articles of War, and eicubialae

Article 15, Congress has: explicitly provided,

so tar as it may constitutionally do so, that

military tribunals shall have jurisdiction to

try offenders or offenses against the law of

war inappropriate cases. * * *

Thus, that legislation, with its, severe penalties,

called. into play the entire sweep of constitutional

beth as Well as that. nebulous field, the ‘‘law of

war.’ 4

| II

THE TREASURY REGULATIONS |”

1.. This case involves the taxable year 1939, the

‘returns for which were due on Mareh 15, 1940.

_ The only Treasury regulations applicable to the |

year 1939 are Regulations 103, which were pro-:

mulgated on January 29, 1940. Thé provisions

relating to stock dividends are contained in See-

tion 19.115-7, the first sentence of which reads as

follows: ;

‘Sec. 19.115-7. Stock -dividends.—A die-

tribution made by a corporation to its share--

holders 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

sittcenth amendment to the Constitu-

“tion. -* * * [Italies supplied. ]

i originally issued, this sentence was followed by

a discussion (taken largely f rom the opinion in the

Koshland ease) as to what this Courf had ruled in

the past with respect to the scope of the Sixteenth |

Amendment; and that discussion was in turn fol-

lowed by three examples which represented the _

holdings of this Court in three decisions, namely, -

(1)° the Koshland case, (2) Eisner v. Macomber, -

and (3) Helvering v. Gowran, 302 U.S. 238..

On November 15, 1940, less than ten months

after Regulations 103 had been promulgated, the |

Commissioner of Internal Revenue and the Secre-

_ tary of the Treasury, by T. D. 5020, 1940-2 Cum.

Bull. 118, amended Section 19.115-7, striking out

all of the matter appearing after the first.sentence,

quoted above. To the extent that this amendment

had any significance, it applied to the year ” s

a ae!

, aay 24

(the first year governed by Regulations 103) as

well as to subsequent years, for Section 3791 (b) |

of the Code specifically provides:

Sec. 3791. RubEs aNnp REGULATIONS

‘* * * * . * .

(b) Rerroacrivity OF REGULATIONS OR

RULINGS.—The Secretary, or the Commis-

sioner with the approval of the Secretary,

may prescribe the extent, tf. any,eto which

‘any ruling, regulation, or Treasury Deci-

sion, relating, to the. internal ‘revenue hws,

shall be applied without retroactive: effect.

[ Italics supplie ‘d.] |

Thus, these provisions “make it clear beyond

question that the new regulations are to have ‘uni-

- versal application,both prospective and ret rospec-

. tive,” unless ‘the Secretary of the Treasury or the

Commissioner has prescribed that they may oper-

ate without retroactive effect. But. neither the

Secretary nor: the Commissioner has so prescribed’

with respect to this amendment, ‘and we do not

understand ri sspondent to. contend the! contrary.

" Normally, even if an stmendment in any partic ular regu- :

lations were per mitted to be fully retroactive, at could affect

liability for only a very. few tax vears. For there is gen-

erally a separate set’ ef regulations with respect toe each

revenue act, and since each revenue act govern. liability for

at most only several years, the amendment of any Treasury

regulations would not reach -back of the revenue act under

which they were issued. .Moreover, the three-year statute -

‘of limitations’ (see Section 275 of the Code) would-in any

event operate as an outside limit for the reopening of lia-

bility with respect to past years.

The history of the foregoing provisions of Sec-

tion 3791 (b) is illuminating. and is set forth in

detail in Appendix C, infra, pp. 48-55...

2. ‘Although . we’ think that the ‘regulations

should be: considered only as amended, we submit

that even. in- their original form they do not, fore-

‘selose the reexamination of. Eisner v. Macomber.

The original regulations were of a unique char-: ’

acter, unlike any which this Court has: had o¢ca-

sion to “consider. They consisted essentially of

three parts. Only the first part, the first sentence,

purported to be.an interpretation of the’ statute,

and it deélared that a stock dividend ‘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 Con-»

'_ Stitution.””. The second part consisted of a dis-

“cussion, not, of the statute, but of constitutional

principles, and was prefaced by a sentence read-

ing **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 Con-

stitution.”” At that point there was a footnote,

_ citing a number of decisions, and the sentence was

then followed by a dtseussion that was taken

largely from the Koshland opinion. Nowhere in

this diseussion was there any ‘indication that the

Tre: asury was doing-anything more than attempt- .

ing to restate ‘the constitutional principles ex-

pounded in the decided cases; and nowhere did it

26 eon (

indicate that the Treasury covstrucd the statute |

more narrowly than the Constitution itself. The ae

third and final part of these: regulations consisted’

simply of three examples which in substance _

: mbrely stated’ the holdings of the Koshland, Ma-e

comber and Gowran cases, respectively, vithout

~ specifically identifying them.

Accordingly, even if the second and third parts

_ of these regulations, which had been eliminated,

are taken into account, they représented: simply -

an effort: by the .Tre ‘asury to set\ forth the prin-

ciples of decided _ cases—pr nines of constitu-

tional law, and not an interpretation of the statute,

This case is therefore much-stronger than the

analogous situation in Helvering v. Hallock, 309

U. $. 106, 121, n. 8, where the Court Keld that the

Treasury ‘was not bound by regulations which it

had promulgated under the compulsiéns of certain

- earlier decisions and which did not in fact repre- |

sent its interpretation of the statute. The situ-

_ ation here is stronger, because the regulations

herein, apart from the first sentence, did not even

purport to bean interpretation ‘of: Onenaioel

‘intent. Finally, to the extent that these regulations -

might otherwise apply to prevent the -imposition

of the tax they are invalid. Cf. Helvering v. Ger-

hardit, 304 U.S. 405, 422-423. — |

THE IMPORTANCE OF OVERRULING

oe EISNER U. MACOMBER

In our bfief in the Strassburger case: we under-

took to dentonstrate at length that Eisner v. Ma-

comber was erroneously decided; and in Points I

and If of: this brief we have endeavored, tor show

that-the question is squarely presented here, that:

the statute was carefully framed so as to impose

the tax if the dividend. constituted income within

the meaning of the ‘Sixteenth Amendment, and

that the regulations. dv not stand in the way.

We think that there can be no serious question as °

to whether the issue is squarely raised. More-

over, there are considerations of great public im-

portance which require that Eisner v. Macomber

be reexamined, |

_Thé importance of overruling Eisner v. Ma-

comber is not merely that the Government may be

able to tax. stock dividends, although many inillions -

of dollars in taxes may be involved-each year with

respect tu stock dividends. Of far greater im-

portance is the removal! of the restriction that it

imposes ‘upon the taxation of corporate earnings

in the hands of ‘the shareholders at the appropri-

ate surtax levels. oe : .

In the Civil War income tax law, corporate

earnings-were taxed directly to the stockholders,

whether or not the earnings were in fact dis-

‘tributed to them, just as though they were mém-

oOo

rt)

bers of a partnership. ° ¢ '‘ollector v. Hubbard, 12

Wall. 1. And to a limited extent after the adyp-

tion of: the Sixteenth Amendment, Congress / at-

tempted to tax stoc -kholders «directly: with regpect

to corporate earnings wlhiere the corporation was

used for the purpose’ of avoiding’ surtax." ‘But

it was thought that such provisions could not sur-

vive Eisner v. Macomber, for in ruling that stock

dividetids based upon cerporate earnings could «

“not be taxed the majority opinion stated the essense

of its holding as follows (252 U.S. at 211):

The essential and controlling fact is that

the stockholder has received nothing out

“e of the, company’s assets for his separate

use and» benefit; on: the’ contrary, - every

dollar of his origina investment,’ together

with whatever ace retions and ace uinula- |

tions have, resulted from employment of

his money and that of the other stockhold-

ers in the business of the company, still

remains the property of the-company, and

subject to business risks Which may. result

in Wipihg out the entire investment. *.* *

This did not appear to be mere obiter dicta,

particularly sinee the Court further. stated (252

U.S. at 217-219) that ¢ ‘ollector v. Hubbard must

be regarded“as overruled. The very heart of de-—

cision, seemed to be: that. there could be no **in-

*Sce Scetion 220 of the Revenue Act of 1918, 40 Stat.

1037; Section 3'of the Revente Act of 1916, 39 Stat. 756: ‘

Section I], A, subdivision 2. of the Revenue Act of 1913, 38

Stat. d14, 166-181.

29 ate

come” constitutionally to the stockholders with

respect to the earnings of their cor poration’ until

those earnings were distributed. Accordingly, ‘as

‘a -result of Eisaer vy. Macomber, . Congress

promptly repealed the tax upon’ the. stockhold-

ers," and the reason for the change was noted by

the committees of both Houses. See H. Rep. No.

250, 67th Cong., 1st Sess., pp. 12-13: |

SURTAX EVASION BY CORPORATE ‘ORGANIZATION

Section 226: Section 220 of the existing

Jaw provides that if any corporation is

formed or availed. of for the purpose of

Avading “the surtax upon its stoekholders

‘through the medium of permitting its gains

and profits to accumulate instéad of being.

divided, the stockholders. shall be taxed in

the same-manner as partners. By reason

of the’ recent decision of the Supreme

Court in the stock dividend case (Kisner .

' Vv. Macomber, 252 U. S., 189), considerable

* In place of these provisions there were substituted less.

satisfactery provisions which imposed ‘an artificial flat rate

penalty,tax upon the corporation itself where it had been

formed.or availed of for the puropse of preventing the im-

position of the surtax upon its stockholders. See Section

220 of the Reveifue Act of 1921, 42 Stat. 227; Section 220 of

the Revenue Act of 1924, 43. Stat. 253; Section 220 of the

Revenue Act of 1926, 44 Stgt. 9; Section 104 of the Revenue

Act of 1928, 45 Stat. 791; Section 104 of the Reverue Act of

i932, 47 Stat. 169; Section 162 of the Revenue Act of 1984.48 | .

Stat. G80; Section 102 of the Revenue Act of 1936, 49 ‘Stat.

1648; Section 102 of the Revenue Act of 1938, 52 Stat. 447:

Section 102 of the Internal Revenue Code, 53 Sfat. 1.

497638—42—____3

y 1; . ° Pa. a : “

sity" . * nN cme : . : e

; doube: exists “ais ta the. constitutionality of

| Ss the’ existing law." ° e\ .

- See also S. Rep. No. 275, 67th Cong.,\st, Sess,

o corporations availed of for the purpose of pre

. . venting the imposition of surtaxes, Was the great

SONNE a “ mass of. business corporations generally which in

ee eae “\their: normal operations distributed only .a: portion,

eee ‘3 “of. their earhings as ‘dividends, with the result. that >

ae > Sever” the situation led the President to send ¢

af tga oy Special message. to’ Congreas in: 1936 | (See. Hotes

] vaihoe 7 .» Doe.’ No, 418, 74th Cong... 2d Ses. nn in. which he

me -deelared App. 24 3): Aa ep

bbe AY ; tions controlled by taxpayers. with large in-

—' “of undistributed corporate income. from

~. ‘surtaxes. ‘Since stockholders. are the bene-

_ the. retaining earnings, would escape ‘surtax in.

the hands of the. stockholders. rowing concern’

“i The sneniaiiihation of surplus ‘in’ Neorpora-

7 a BN Of even greater significance, however, than the -

-* comes is encouraged by the present freedom .

- 4! >. ficial owners of both distributed and .un- ;

a 9 *- "distributed corporate imeome, the aim, as a-

‘matter of. fundamental equity, ‘should be to

a | seek equality of tax burden on. all corporate -

income’ ‘whether - distributed or, withheld’

Be aa oC from the beneficial . owners, As ‘the. law

ee. 8 now ‘stands: our: corporate taxes. dip too

Os ee ee dee ‘ply. into the shares of corporate earn,

| : ings going to stockholders -who need the

._ disbursement of dividends, while the shares

of stockholders who ean afford to leave

earnings . caer wee escape current sur-

-----— “taxes altogether. © , .

This method -of evading. existing sur-

taxes constitutes a problem as old as the

income tax law itself. Repeated attempts.

by the Congress to prevent this form of

evasion has-not been successful. The evil

has’ been a growing one. It has now

reached: disturbing proportions from the -

standpoint of the inequality it- represents

and of its serious effet “on the Federal

revenue. “Thus the Treasury estimates

that, during the calendar year 1936, over |

41% billion ‘dollars of. corporate income

will be withheld from - stockholders. If

__. this undistributed income were distributed,

it would be added -to the income. of. stock-:

holders and there taxed as is other, per-

sonal income.. But,.as matters now stand;

it will be withheld from stockholders by

those in control of these corporations. In

', one year alone, the Government will be de-—

“ prived of revenues ‘amounting to over

$1,300, 000,000.

In order to’ meet in part that staggering loss

‘of revenue ‘the President recommended the repeal

’ of existing’ corporate taxes and ‘the imposition of

an undistributed profits tax. The undistributed

. profits tax could not fully meet the deficiencies of |

_existing law, but it would suceeed to the-limited

extent that it would induce distributions of cor-

porate earnings | which would then be taxed at the

appropriate surtax, levels, leaving the remaining

earnings to be reac lied by the undistributed profits

. tax itself.“ - | e

It is not unreasonable to suppose that it was

thought that Eisner vy. Macomber prevented, the

adoption of a much more complete and lé% cir-

cuitous solution, namely *the imposition. of -a

tax directly upon the stockholders with respect

to thei ir pro . rata share of corporate earnings,

whether or not distributed to them.” But in

any event the hearings and debates upon the 1936

revenue bill show that such fears of uneonstitu-- : 2

tionality, engendered by Etsner Nv. Macomber, fore-

closed that alternative as a possible solution.

“The new system proposed by the President apparently

would not close the gap completely, for his estimate that the

new taxes would produce $620,000,000 additional revenue

(p. 3) should be contrasted with his statement that the Gov-

ernment would lose over $1,300,000 000 i in one year under the

old system. — )

oA direct tax upon stockholders has been successfully.

employed to a considerable extent in various foreign coun-

tries, notably Australia. See Proceedings, National Tax |

Association, 1939, p..548.. Moreover, the Final Report of

the Committee of the National Tax Association on Federal

Taxation of Corporations recommended :that the partner-

ship, method be applied to the taxation of cerporate earn-

ings to the limit of its legal and administrative possibilities ;

and it was stated that “the number of. corporations to which _

the partnership method can be _ applied without involving

formidable administrative difficulties is far greater than |

is generally realized”. Jd., pp. 555, 579-580.

But the Committee was careful go note the siaatitutions!

doubts which would be raised by such a method of taxing

corporate earnings, and indeed recommended that the Con-.

stitution be amended, if that should be. necessary. Id...

— pp. 548, 579.

7 | 33

| 1 hus, in the Senate debates upon the undistribu-

ted profits tax, the following occurred, (80 Cong. |

Ree., part 8, p. 8813) :"

Mr. Apams. Mr. President, is it possible

froma legal and administrative standpoint

to assimilate the tax procedure applicable

to corporations as is done in the vase of a

partnership? .

Is it legally possible to say ‘to each cor-

* poration, ‘‘Make a report of the propor- -

tionate earnings of each stockholders’’, as -

“we would to a partnership, and then let

_the stockholder make his return ? |

Mr. Biackx. Unfortunately that was done

about 60 years ago, and while it is my

recollection that the Supreme Court itself

sustained the act [presumably: referring to

Collector v. Hubbard, 12 Wali. 1], it later,

..by another divided opinion ‘[presumably

referring to Eisner v: Macomber], changed

its mind and struck down the act.as being

in contravention of the Constitution. So

* that it is impossible to tax -the undistribu-

ted profits which remain in the corporate

treasury as-a part of the individual in- |

comes of the stockholders. eoN

° >

Similarly, in the Hearings of the House Ways and

Means Committee on the 1936 revenue bill, Rep-

Satiiciadanabaiiaiay

“In the Hearings on the 1936 revenue bill the. Senate

Finance Committee .was told by-a tax expert that.“our con-

stitition si ays that we cannot tax individuals upen the undis-

tributed profits of their corporations.” P2255. Cf. p. 696

See also Proceedings, National Tax Association, 1939, pp.

548,” 555.

resentative David x Lewis of Maryland stated

~(p. BBS) :° 5 ! = ’

Mr. Lewis. I'do not know that it is fully

understood by the public that this round-

about device of compelling the distribution

of the real income of the corperation to its

shareholders, so that-the shareholders may

be called upon to pay taxes upon their in-

come, is due to a decision of a divided

court. Some years ago the Supreme Court

+ in a sharp. decision’ determined that we

could not do in the United States with

regard to earned dividends that were not:

distributed what they do in other coun-

tries, especially in England, require the

shareholder to pay his tax oh his income

just the same whether his company had

refused to distribute it or not.

Now, if that decision " of the Court should: -

be reversed, what we are doing here, or at-

te mpting to do in order to reach the tax-.

payer here, the method -of our attempt,

would not be necessary. Not ours the fault

of all this clumsiness and- indirection of.

approach to a necessary publie object.

See also pp. 96, 98; 321, 322; 340, 341, 745.

Whether it was rightly or wrongly*thought that

Eisner: vy. Macomber prevented such a ‘system of |

taxation, the fact is that’ the very existence of

*In-a letter subsequently Written to the editors of the

University of Petinsylvania Law Review, Representative

Lewis confirmed the fact that -he was referring to Fisner v.

Macomber. Sve 88 -U, &* Pa. L. Rév. 83, S6, n. 17.

Eisner v. Macomber. rules out such a. tax as a

practical matter, for it is obvious that, unlike

other types of legislation, no system of taxation

| may be deliberately adopted as a major part of

our fiscal scheme so long as there exists doubt as

togultimate fate in the courts.

Moreover, even if Congress should again prefer

to tackle the problem in whole or in part through

“the undistributed- profits tax, Hisner v. Macomber

stands in the way ofa suitable statute. The 1936.

undistributed-profits tax, as enacted, was the

source of widespread dissatisfaction and irrita-

tion.- There were countless complaints that cor-

porations were being forced into making distribu-

tions of assets that were unsound from a business

point of view, in order to avoid the rigors of the

undistributed- -profits tax. However, if Kisner v.

Macomber did not block the way, stock dividends.

could be declared against the earning» in such

manher that there, would be no disturbance of the

corporate structure.” Accordingly, a-far more

_ Workable and satisfactory undistributed-profits

tax could. be achieved if Kisner v: Macomber were

saniadicidiniacaas

* Of course, stock dividends of the Kosh/and type would

hot invelve any distribution of corporate assets, but the scope

of the Moshland case itwlf was too uncertain (for eX: unple.

its applicability is now being vigorously contested in the

SN pheiiise and Strasaburae reads) tand in any event such ‘divi-

dends might involve an unsound dislocation of the corporate

amework. See Proceedings. National Tax Association,

1929, PP. 549, 550, 555-558... 7 =

overruled. . And part icularly at this time, when

the maximum revenues are needed by: the Govern-

ment and when. it becomes of even greater impor-

tance that additional taxes be imposed as equitably

as possible, neither the Treasury nor Congress

should be straight-jacketed in the formulation of

new legislation by an erroneous ‘constitutional de- .

cision of sweeping dimensions. -

CONCLUSION

The judgment below should be reversed.

Respectfully’ tehanitted,

CHARLES Faty,

Solicitor pO

. SamMvet O. Criark, Jr; |

] Assistant, Attorney General.

Sewatt Key, — Aye

ARNOLD Ray, .

BERNARD CHERTCOFF,

Special Assistants to the Attorney General.

* Dece BER: 1942.

“APPENDIX. A

Constitution of the United States:

. Article I, Section .2, Clause 3.—Repre-

sentatives and direct Taxes shall be appor-

_ tioned among the several States which may

_ be included within this Union, according

to their respective Nuinbers, which shall —_

be deterniined by adding to the whole Num-

ber of free Persons, including those bound

to Service for a Term of Years, and ex-

cluding Indians not: taxed, three fifths of

all other Persons * *

Article I, Section 8, C am 1.—The Con-

gress shall have Power To. lay and collect

_ Taxes, Duties, Imposts and Excises, to pay

the Debts and provide for the common De-

fence and general Welfare of the United -

States; but all Duties, Imposts and Excises

shall: be: uniform bersisheamien the United

' States; -

a + * * *

Article I, Sectton 9, Clauses 4. and 5,—

No Capitation, or other direct, Tax shall be

laid, unless in Proportion to the Census or

Enumeration herein before directed -to .be

taken.

No Tax or Duty shall be laid on Articles

exported ffom any State.

* a *. a, oe

Sirtecnth Amendment.—The Congress -

shall have power to lay and collect taxes on

incomes, from whatever source: derived,

‘without apportionment among the several -

States, and without regard to any. census or

-entimeration.

37)° 2 f

Me Dl aaa ke | h

38 2 ail

Internal. Revenne Code (53 _ 1): ;

Sec. 1. Applic ATION OFC “HAPTER. |

The provisions of this chapter shall ap-

ply only to taxable years beginning after

December 31, 1938.. «Income, war-profits,

and excess-profits taxes for taxable years

beginning prior to January 1, 1939, shall.

not be- affected by the provisions. cf this

_ chapter, but shall remain subject’ to the

apple ‘able provisions of the Revenue Act.

of 1938 and prior revenue acts, except as

such provisions are modified by legislation

erracted subsequent to the Revenue Act of

1938.

Sec. 22. Gross INCOME,

(a) GENERAL DEFITION.— ‘Gross in-

come” includes gainsg profits, and income

derived from * * * dividends * *- *.

* * i 3 *. >

Sec. 115. DIstkRIBUTIONS BY CORPORATIONS. |

(a) DeFENITION OF DIVIDEND.—The term

“dividend” when used. in this chapter (ex-

cept in section 203 (a) (3) and section 207.

means any ‘distribution made bya corpeora-

tion to its shareholders, whether in nioney

or in other’ property, (1) out of its warti-

ings or profits accumulated after Febru- |

ary, 28 1913. ‘or (2) out of the earnings

“or profits of the taxable year (computed

as of the close of the taxable vear without

diminution by reason of-any distributions

made during the taxable vear); without: re-

gerd to the amount of the earnings and

— at the time the. distribution Was ,

made, -

(b) Source /oOr pisrrmuTtions.—For the

purposes of this chapter every distribution

is made eut of earnings or profits to the

extent thereof, and front the most recently

accumulated, earnings or profits. Any ~

earnings or profits accumulated, or increase

in value of property accrued, before March «:

1, 1913, may be distributed exempt: from

tax, after the earnings and profits accumu-

lated after-Fébruary: 28, 1913, have been

‘distributed, but any such tax-free distri-

bution shall be applied against and reduce

the adjusted basis of the stock provided in

section 113. . . :

oe: * * _ Me *

(f) SrockK-pIVIDENDS.—

-(1) GeneRab RULE.—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 doves not constitute income to the

shareholder within the meaning of the Srx-

teenth Amendment to. the Constitution. |

' (2) ELecTION -OF SHAREHOLDERS AS TO

MEDIUM OF PAYMENT.—Whenever a distri-

bution by a corporation js, at the election

of any of the shzreholders (whether exer-

cised before or. after the declaration

thereof), payable, either (A) in its stoek

or in rights to acquire its stock, of a class

which if distributed without election would:

be exempt from tax under, paragraph (1),

or. (B) in money. er any. other property.

(including its stock or in. rights to aequire

_ its stock, of a elass which if distributed

without election would not be exempt from

_ tax under paragraph (1)), then the distri-:

bution shall constitute a taxable dividend

in the h: nds of all share holde TS, regardless

of the medium i in whic h paid.

/ .

i x - . - a *

(j) VAL UATION OF DIVIDEND.--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. shi be included in gross income at

its fair market value at the time as of:

which it becomes: income to.the shareholder,

> * * hed *

Treasury Regulations 103, promulg: rated “Janu-

“ary 29, 1940, under the Internal Revenue Code:

Sec. 19.115-7 [as ametided by T. D. 5020,

1940-2 Cum. -Bull. 118, issued . November

15, 1940). Stock dividends.—A_ distribu-

“tion made “by a corporation to its share-

holders’in its stéck 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 Constitu-

tien. . .

‘The amendme nt made, ‘by T. D. 5020 oie

simply of the acetion of the following: material

which had previously followed the sentence quoted.

abov eC:

;

The Supreme Court has pointed out some of

the characteristics distinguishing‘ a stock

dividend which constitutes income front one

whieh does not constitute Mmeeme within

the meaning of the Constitution.” The dis-

“See Kisaer vi Macomber (252 1. S.. isa. FP. D.

Bo10, C.. Bo 3. 25 (19203): Noshland -v. Helvering

(29S US. 4 Cte D. 1124. CB. NV =1.219 (1936) ) ;

idelve ring Vv. Goowrran (302 U. S. 258, c. B. 1838-1;

oe 4dee and Helvering v. Pfeiffer (02 U.S... 247,

f |

| eae

2 tinction - het ween a. stock dividend. which

. does not, and-orie which Goes, constitute in-

come to the shareholder within the. mean-

ing of the sixteenth amendment to the Con--

stitution is the distinction between a stock

dividend which* works ‘ no- change in the

corporate ‘entity, the same interest-:in the

_ same corporation being represented after

ag the distribution by more shares of precisely

the same character, and a stock dividend

where there-either has. Leen a change of

corporate identity or.a eliange inthe nature

of the shares issued as dividerids whereby °

the proportional interest ef the sharelolder..

after the distribution is essentially different

from his former interest. A stock dividend

constitutes income if it gives the. share-

holder an interest different from that which -

his. former stock holdings represented. <A

_ stock dividend does not constitute income if

the new shares confer no different rights or.

interests than did the old—the new certifi- ’

, cates plus the old representing the Same

~ proportionate interest in the net assets of

the corporation as did the old.

a9 . Example (1): The X Corporation had an_

- .-, authorized capital stoek of $300,000 of com-

~~ F ion stock, _par value $10 a share, and .

"$100,000 of T-percent cumulative preferred

| stock, par value $100 a share, which is pre-

. ferred as to dividends, has no voting rights,

and may be redeemed at any time at $105

: (C. B. 1938-1, 304). * Compare United States® v. |

en” Phellis (237 U. S., 156, T. D. 3270, C. B.°5, 37

- (1921) ) 5 Rocks feller v. United States (257 U.S.

16, T: D..3271. C. B. 5. 34 (1921)): Cullinan v.

Walker (262 U.S... -134, T. D. 3508, C, B. IL-2, 55

(1923)) OWeiss v Stearn (265 UL S.. 242, T. D. 3609,

C. B. UIT-2. 51 (1924)) sand Marr v. United State s

1268 U.S.2 3386, T. D. 3755, C. B. TIW-2, 116 (1925) ).

« * . 5

ta “4

. .pravide: that: the: ual, dividend on the’ -

— Preferred, sfock @iay paid in eash ‘or, at

‘the option of the rporati in One'share.

of tommon stock \for eych WF

ferred. On-July 4, 1939. the X. Corpora- ~

an ae ene 0,000 of common .

' stock and 000 ¢ preferred stock, earn-

ings Feb profits gf $60,000; accumulated.’

1913, and eatnings and

sitice February .28,

es , e aLlé ‘year amounting. to .

o > as

On Fuly 1,-.1939, it: distributed

shares: of: its common ‘stock = ae, ‘

hook x value ‘(and fai J

“of fi, to the | holders 'b

stock in payment. of. the ¥ vic

‘on such ‘stock, ° The ‘stock so “ai ribut

~ constitutes a taxable: stock dividend to the

_ holders ofthe preferred stock. -. 3

hele e (2): On July 1, "1939, ‘the Y.

ior had an’ authorized capital stock.

| conaheting’ of 1,000. shares:of eorhmon stock, .

par value ($100 a share, of which 500 shares

~ were outstanding. “It had - earnings - @nd_

_ Prodits of $40,000 ‘accumulated’ since Febru-

-ary 28, 1913, and $5,000, of earnings end

profits: of - the taxable: year, On July: i,

- 939, the Y Corporation issned and divided .

among its shareholders 250 additional shares

& common stock of a total par -value of

te! and. transferred an equivalent |

amount from” su lus aceount to capita!

‘‘stock account. ‘The: stock so distributed.

does not constitute a taxable stock dividend

to the shareholders. . |

Example 13): The Z Corporation had an

authorized capital stock of 30,000 shares of.

common, without par value, and 10,000.

shares of 7 percent ciimulative ‘preferred

stock, par $100, which inp... rred as to

+ |

per share. - The: articles” of incorporation

share of prey —

~4¢

. , 43 :

dividends, has voting rights, and maybe .

redeemed on the Ist of January or, July of

* any year by the, payment of $105 per Sigg

and ‘accrued: ‘dividends. On July 1, Re

the company’s issued and outstanding ‘stoc

‘amounted to 20,000 shares of ‘common and

6,000 shares of preferred, and at had $250,-

oro: —s and. oA greet accumulated since _ |

| rafts a and’ $90,000° earnings. 7

ts Saad Gea tauaple Suen On July 1,- -

foo id a dividend on its’ common .

stock in preferred stock at.the rate of 1/10

share of p ferred en each share of com-.—

mon outstat The, preferred stock so

distributed « constitutes a taxable stock divi-

_ APPENDIX 55

THE TAXABILITY OF STOCK DIVIDENDS IN- OTHER %

a COUNTRIES :

The decisions in other English-speaking juris: :

dictions are not directly illuminating upon. the

construction to be accorded the Sixteenth Amend-

-- ment to our Constitution, “However, the light _

which they. do throw. upon the question supports

‘our. contention that’ the word “incomes” in’ the.

Sixteenth Amendmént- “is broad enough to include .. -

stock dividends. - sae

os. @anada-—In Canada the statute expretaly 1 in- ~

j - eludes stock dividends within the’ tax upon the

j receipt of dividends, and’ these provisions “have

been’ applied to common-on-common stock divi-

dends by the Exchequer Court of Canada. The*

South ‘A frica, —In South Africa the stXtute in-

cludes ‘as income subject to super tax “an amount -

_» equal to the nominal value-of.any bonus shares, —

‘. *. debentures or other securities awarded to the tax-

payer by way of capitalizing the profits of a com-

ae > > <a provision’ was . applied to

' inelude stock dividends in Liddell v. Commissioner

_ for Inland Revenue (1939), So. Afr. L. R¢ (Cape

_. of Good Hope*Provincial Division) 16%. po,

_ “ Australia.—Stock. dividends are also treated as

income in Australia. Swan Brewery Co. v. The. ~

i ;

-King, [1914] A. CO. 231, involved a statute of West-

_ ern Australia which levied a tax upon every com- |

pany declaring a dividend, the term. ‘‘dividend”’

-: being defined as including “‘every profit, advan-

tage, oF gain intended to'be paid or credited to

or distributed among”’ the members of the com-

“pany. The Supreme Court of Western Australia

_ - held that a common-on-common stock dividend.

was subject to the tax and its judgment was .

affirmed by the Privy. Council. : .

_ James v. Federal Commissioner of Fascticn,

34 Commw. L. R. 404 (High Court of Australia

7 1924) involved a statute which provided that “The .

income of My person shall include * * * digf-

dends, interest, profits, or bonus credited or paid |

. to.any depositor, member, or shareholder.”” ‘The.

taxpayer. was a shareholder of a corporation

which distributed partly paid-up common’ shares __-

as a dividend upon its outstanding stock, which

_ consisted solely of common shares. It was held

that the partly paid-up shares constituted income

pro tanto within he meaning of the statute.

) A similar. résvit was reached in Nicholas v.

‘ Commissioner of Taxes of the State of Victoria,

tained a judgment of the High Court of Australia

(59 Commw. L. R. 230) ‘that a

mon stock: dividend was taxable as income under.

a statute of Victoria similar to that considered i in

the James case. .'

The Australian esoeeise Tax Assessment ‘Act,

. 1936-1940, No. 17 of 1940, now defines a dividend

_to inelude (see. 6) ‘‘the paid-up value .of shares

distributed by a company to its shareholders to

s97638—42-. —4

| 46

°° .

the extent to which the paid- “up valué represents

a capitalization of profits..”” .

England and India.—The question was consid-

' ered under the English Act in Commissioners of

Inland Revenue v.. Biott, [1921] 2A. C. 171, in

’ which a bare majority of the House of Lords held

a stock dividend to be not taxable. The decision

_ has beep regarded as turning, however,-upon the

- point that 4 stock dividend was not a payment by -

the corporatjpn within the meaning of the stati-

tory phrase, “‘rents, interests, annuities or other .

annual payments * * * ’’' See the opinions of ,

Isaacs, J., in James v. Federal Commissioner of

- | Taxation, supra, pp. 413-416, and of Lord Thank-

_ erton in Nicholas v. Commissioner of Taxes of

' the State of Victoria, supra, pp. 755-758. Thus, a

even dividends of preferred stock (see the Biott

case, supra) and of debentures (Commissioners

of Inland Revenue v. Fisher’s Executors, [1926]

A. C. 395 House of Lords)) do not fall within

the meaning of that statutory pro The —

same results have been reached under Indian

; Act which is similar to the English upon this _

point. Commissioner of Income-Taz, Bengal v.

Mercantile Bank of — Ltd., [1936] A. C. 478

ie (House of Lords).

The significant consideration with respect. to

all of the foregoing cases is that stock dividends

were treated as taxable income where the statute .

was properly framed. For, as the James and

N icholas cases plainly indicate, the Blott case and

* The statutory provisions are set out in the.opinions in the. .

Court of Appeal, [1920] 2 K. B. 657, 668, and of Rowiatt, J.,

11920] ft K. By 114, 115, 132. * toe

its progeny do not stand in the way of including

stock dividends within taxable income if the sta-

tute is properly drawn, And equally significant

for present purposes is the fact that the legisla- —

tures of most of the English-speaking jurisdictions,

when it is sought to tax ‘‘income,”’ stock dividends.

are thought of as naturally falling into that cate-

gory along :with other kinds of income. We sub-

mit that this shows that the ordinary meaning of

the word’ “‘income”’ is broad enough to include

stock dividends. And, as we pointed out in our

brief in the Strassbuxger case. (p. 22-23), the

Sixteenth Amendment, like every other constitu-

tional provision, should be broadly interpreted so

as to give Congress whatever power can reason-

ably be read into its terms. .To deny to Con-

gress, as did Eisner v. Macomber, the power to .

treat stock dividends as income—a power found

necessary of exercise by the majority of the other

English-speaking jurisdictions i in the development

of.a sound system of progressive income taxa-

tion~-is to constfue the Sixteenth Amendment in

direct violation of its purpose. — : :

-. APPENDIX

RETROACTIVE REGULATION B -

‘The plenary power to. prescribe the peters to.

which any ruling, regulation, or Treasury Decision

niay operate with’ or without retroactive effect is -

plainly recognized by. Section 3° 3791 (b) of ,

———-fnternal Revenue Code. (53 Stat. 1) which pro- .

vides: :

- Sec. 3791, Ruxes AND REGULATIONS. - .

* *. ee. @ *~« *

(b) RETROACTIVITY. OF REGULATIONS -OR

RULINGS.—The Secretary, or the Commis-

sioner with the approval of the Secretary,

may prescribe the extent, if any, to-which

_-any ruling, regulation; or Treasury Deci- |

- sion, relating to the internal revenue laws, |

shall be. applied without retroactive effect.

of a more limited character, and appeared in‘the -

Revenue Act of 1921, 42 Stat.. 227. Section. 1314

of that Act provided: _ |

* RETROACTIVE REGULATIONS

‘aah Sec. 1314. That in case°a regulation ‘or

| Treasury. decision relating to the internal- .

, _ ‘revenue laws made by the. Commissioner or

' _. thé Secretary, or by the Commissioner with

"1 For decisions involving retroactive —s of.regula-

tions, see Morrissey v. Commissioner, 296 U. S. 344, 355; |

Murphy Oil Co. v. Burnet, 287 U.S. 299; Manhatten Cov.

Coneneatoaan, 297 U.S. 129.

(48)

e P \ .

Racer esac setts cr ees exscotesiseninlosesx ence ister 8

. . . . , .

. the approval of the Secretary, 4 is reversed

_:by a subsequent regulation or Treasury -

Decision, and such reversal is not immedi-

ately occasioned or. required by a decision of

a court of competent jurisdiction, such sub-

sequent regulation or Treasury | decision

may, in the discretion of the Commissioner,

with the approval of the Secretary, be

applied without retroactive effect. aire

if senna

In commenting upon ‘those provisions “(referred

to as Sec. 1002-in the House bill), the House Ways

o and Means. Committee stated (H. Rep. No. 350,

_ 67th Cong., Ist Sess., p. 15):

- Section 1002 _= permit the reasnry.:

y without retroactive

Department to apply

effect a new regulation or Treasury deci-

_ sien reversing a prior regulati

~~~ ury decision, unless such reversal is occa-

‘sioned or required by a decision of 4 court

of competent jurisdiction. <a

~. And the“Senate Finance Committee similarly re-

\. ‘marked (S. ‘Rep. No. Se Cone, 1st Sess.,

| p. 32):

regulation or Treasury decision which re-

verses'a prior regulation or Treasury -de-

— “(if it is not immediately occasioned

y a decision of a court of, competent ~

jrisaetion) that the new. lation or

reasury decision may be. — without

retroactive effect.

Thus, it was clear that under the "4921 ‘Act,

any change’ in the regulations was to operate.

Section 1314 of the proposed bill wathor-

| izes the commissioner, with the approval _

5 ae of the Secretary, to provide in making, a—

retrospectively as well as prospectively, unless

the Treasury determined to permit the change

to operate prospectively only. But where the

change in regulations was occasioned by judicial’.

decision the Treasury was to have no discretion;

such change was to affect all tax years, both

before-and-after the change.

‘The next revenue act, the Revenue Act of 1924, _

43 Stat. .253,. made no change im these provi-

sious which were embodied in Section 1008 (a)

of that Act. Thereafter, the same provisions — .

were carried over as Section 1108 (a) of the

- Revenue Act of 1926, without any alteration. .

However, Section. 605 of the Revenue Act of 1928,

45 Stat. 791, amended Section 1108 (a) of the

1926 Act as follows: .

. Sec. 605. CERN REGULATIONS. 3

. " Section 1108 (a) of the Revenue Act of

1926 is amended to read as fo!lows:

— “Sec. 1108..(a) In case a regulation or

. Treasury decision relating to ~ internal-

revenue laws is amended by a — uent

regulation or Treasury: deciaion,

the mene | a by the Commissioner wi

the appro the Secretary, such, subse-

quent regulation or,Treasury decision may, .

. With the appreval of the Secretary, be ap-

plied without retroactive effect.”

‘The purpose. of the anientment was to increase -

further the discretion given to the Treasury. It

was intended to permit the Treasury to determine

_Whether a-change in regulations should operate

prospectivély only, even where the change was in-

duced by judicial decision. This was madéabun-

dantly clear by.the Senate .Finance Committee

which stated. (8. Rep. No. 260, 70th 1 Cone ist ~

Sess., p. 40): ’

Section 1108 (a) of the.revenue act of +

1926 amg on that where a Fo or

- Treasury decision is reve ya su

quent regulation or Treasury eae the \

‘ subsequent decision may be applied without

retroactive effect if the reversal is not im-

- mediately cecasioned or required by a court

‘ deeision.. The policy of this provision is

that the Bureau of Internal Revenue is now

‘ éomparatively free from the congestion of

eases from the war years, it is believed that

this policy may now be extended to cases -

where the new tion or Treasury deci-

sion is occasioned or required by a court ,

decision. ‘Fasdumnteliy there is no differ-

ence in the two cases: which can justify the .

restrictions in section 1108 (a) of the 1926 .

act. Accordingly, these restrictions have

* In accepting the Senate amendment, the Conference Com-

_ mittee declared i. Rep. No. 1882, 70th Cong., lst Sess., p.

22) :

ee Section (1108 (a) of the revenue act. f 1926 per- yA

mits the commissioner to apply a new regulation or Treasury

decision without retroactive effect when the new regulation

or Treasury decision is not i patentee by a court

decision.

» “This desirable policy has ‘been extended’ by the TES

. amendment so as to include all, regulations and Treasury

_ decisions whether or not occasioned by ja court decision. . It

is hoped that-this provision will prev ent the constant reopen-

ing of cages on account of changes i in regulations rd Treasury

decisions, and it is believed that sound ailministration prop-

erly places upon the Government the responsibility: and bury -

den of interpreting the law and of prescribing regulations ~

upon which the taxpayers may rely; and the House recedes.” ~

+ Be

° >

been rerhoved in section 605. of the

ee .

The final change wrought in these provisio

appeared in Section 506 of the Revenue Act of

1934, 48 Stat. 680, which amended. Section 1108

(a) of the 1926 Act to read: :

(x) ‘The Secretary, or the Commissioner

with the, approval of the Secretary, may

_°_» preseribe the extent, it any, to which any

/ Yvuling, regulation, or Treasury Decision, re-

i lating to the internal revenue laws, shall be _

. applied without retroactive effect. [Italies

supplied. ]

- The discretion vested in the Treasury . was: now -.

complete. The Treasury could determine not only —__

whether changes ‘in regulations were to be retro- -

spective in all cases, but it was given the further

_.power of declaring the exact exient of’ retroactiv-

\ ity. Thus, under the new provisions, the Treas-

ury might. provide for a change in regulations

that-would operate retroactively for any. desig- —

nated period. The committee reports leave ‘no «

-~ doubt whatever that-this was the purpose of thes®

- provisions. The House: Ways and Means Com- rs

_ miftee unambiguously explained the amended pro-

visions as follows (CH. Rep. No. 704, 73d Cong.,

2d Sess., p. 38):

This section amends section 1108 (a). of

. ie Revenue Act of .1926, as amended; so

as to permit the Secretary, or the Com-

missioner with the approval of the: Secre-'

“tary, to ‘prescribe the’ extent, if any, to

which<any regujation, Treasury Decision,

or ruling relating to internal revenue taxes.

shall be — haere retroactive effect.

S .

~The amendment extends the ‘ri al asisind

hy existing ‘law to the Treasury to at

to give regulations and Treasury i

amending prior regulations or Treasury

cisions prospective effect only, by ving

_ the Secretary, or the Commissioner with the

approval of the Secretary, to prescribe the

exact extent -to which any’ regulation or

- Treasury Decision, whether or not it amends

a pfior regulation or Treasury Decision, |

will be applied without retroactive effect.

“The amendment furthermore permits’ in-

: eee rulings as well as regulations

r Treasury Decisions to be applied with-

out retroactive effect: Regulations, Treas- -

ury Decisions, and rulings which are merely

interpretative of the statute, will normally

have a universal application, but in some

, cases the application of. reguéations, Treas-

- ury Decisions, and rulings to past transac-

\ | tions which have been closed by taxpayers |

in reliance upon existing practice, will work

* such inequitable results that: it is believed

desirable to lodge in the Tréasury Depart-

‘ment the power to avoid these results by

applying certain regulations, Treasury De-

cisions, and rulings with prospective effect

only. | ‘[Italies supplied. ]

A similar statement was made by the Senate

Finance Committee. 8S. Rep.. No. 558, 73d Cong. oe

2nd Sess., p. 48.

These provisions, as thus amended by the 1934

' Act were incorporated into the Internal Revenue

- Code as Section 3791 (b) which is involved herein.

"The history of these provisions: plainly .shows, we -

submit, that Congress intended the iNreaaiiry to

~ have full and complete discretion to determine to:

what extenf changes in regulations are to operate

. er a ‘8

retroactively, Nowhere in the legislative history

is there the slightest suggestion that the Treas-

ury’s diseretion was to be limited, in the language

of Helvering V. Reynolds Fobacco Co.; 306. U. 8.

110, 116, merely ‘to correct misinterpretations, in-

accuracies, or omissions”’. The broad sweep of . .

athe statutory provisions themselves and the, clear

+, and ‘persistent. statements appearing in the com- ..

mitteAPeports afford no support for the limitation -

imposed upon those previsions by the Reynolds

Tobaeco decision, where the foregoing legislative

. history ‘was neither. fully presented to the Court

nor apparently considered by it. Moreover, the

_.1934, or last amendment to these provisions was

“not even applicable .in that. case, because the.

amendatory regulations were issued (May. 2, 1934)

prior to the enactment of the Revenue Act of»

1934, which became law on May 10, 1934. Finally

much of the theory. underlying the Reynolds To-

bacco case has since been rejected by the Court.

See Helvering v. Wilshire Oil Co., 308 U. S. 90;

Helvering Vv. Reynolds, 313 U.S. 428.

Accordingly, we submit that under Section —

3791 (b) of the Code, the Treasury had statutory —

authority: to promulgate an amendment to the

regulations that would be applicable here. - It |

should not be assumed that the Treasury will |

abuse that discretion. Indeed, a recent instance

* of the Treasury’ s sense of fairness in applying

these provisions may be seen in its aetion follow-

ing this Court’s decision in, Helvering v. Hallock,’

- 309 U.S. 106. The Hallock decision had over-

~ ruled Helvering v. St. Louts Union Trust Co.,

296 Uy S. 39, and thus mavelitiated the Treasury

55 " e

reguiations that had previously been adopted: to .

reflect. the result in the St. Louis Union Trust Co.

- ease. But,the Treasury recognized that transfers | _

of property may have been. made. between the |

date of the St. Louis Union Trust Co. decision

(1935) and the Hallock decision (1940) in reliance -

- upon those regulations. Accordingly, in promul-

gating amended regulations to reflect the result of

the Hallock decision the Treasury has.specifically

provided that all transfers made during the pe- —

riod between the St. Louis Union Trust Co. and

- Hallock decisions are to be governed ‘by the rule

of the. existing rather than the new regulations.”

T. D. 5008, 1940-2 Cum. Bull. 286.

In the instant-case, the amendment to.the regu-

lations was permitted to have retroactive as well

_ a8 prospective operation, merely to remove any

_ -possible obstacle that might otherwise prevent the

Court for an unduly long time from adjudicating

the validity of the tax upon a pure'stock dividend

imposed by the statute. (Cf. Helvering v. Ger-

hardt,-304 U. S. 405, 422-423.) We are informed

by the: Treasury that it has no intention of harass-

_ ing taxpayers with respect to liability for past”

- years, and that if Eisner v. Macomber is over-

ruled, it intends immediately to recommend to

Corigress legislation which.would relieve taxpay-

‘ers of any’ unfair retroactive burden that might

result from such overruling, just as it did in the .

Public Salary Tax Act of 1939 (53 Stat. 574)

which protected both state and fedetal employ ees

from the-hardship involved in the retroactive ap-

plication of the overruling of Collector v. Day,

HM Wall. 113. : |

U.S SQYCRMMCNT PRINTING OFFICE. 1942

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.