# Petition for Writ of Certiorari — Helvering v. Griffiths > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386403_0133%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1943 - **Citation:** 318 U.S. 371 ## Text ve a. e » ° é. Vitke . “upreme ie make | ee 0.4 riLeax i omen Aer PILE CORY «- | ‘ocr 20 i CRABLES ELmoat epamey | —. 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). $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 : “ : a . 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. — INDEX ¢ : ars Page Opinions below - - - cekweean eaten aes kes 1 Jurisdiction . _, pes Ege, ee eon om i Fa presented : _ - : : 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 3 NS — 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..... 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 oe 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 of : 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 | a 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. *) ; VJ 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 ¢ ee / , ; ~> : 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-. — 6 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. | Ls > .. 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). I 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. se - 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 . 1D 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- © ber. Moreover, the Koshland ease, which further 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 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- © ployves. The Treasury Department, how- 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- 19 a . 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 - Aw af 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 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 Pa 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 od 31 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 - ¢ @ 32 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. 34 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. . . 35 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 = > 36 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. (c) (1).- relating to mmsurance companies ) 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, - 39 (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 40 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. 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- de lend to” © thé holders of common stock, | _ 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* King Vv. Johnson gece & Co., [1938] Ex. ©. R. oe 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 > > 52 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 @ 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 7 . er a ‘8 4 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386403_0133%3A2. Public record. Not legal advice.