Dividends of earnings by subsidiaries to a company holding all
their stock and controlling them in conducting a single enterprise,
the result of the transfer being merely that the main company
became the holder of debt in the business, previously due from one
subsidiary to another, held
not taxable as income under
the Income Tax Act of October 3, 1913, where the earnings were
accumulated before the taxing year and had practically become
capital. Southern Pacific Co. v. Lowe, 247 U.
245 F. 1 reversed.
The case is stated in the opinion.
MR. JUSTICE HOLMES delivered the opinion of the Court.
This is a suit to recover a tax levied upon certain dividends as
income, under the Act of October 3, 1913, c. 16, § II, 38 Stat.
114, 166. The district court gave judgment for the plaintiff, 242
F. 709, but this judgment was reversed by the circuit court of
appeals. 245 F. 1, 158 C.C.A. 1.
The facts may be abridged from the findings below as follows:
the petitioner was a holding company owning
Page 248 U. S. 72
all the stock in the other corporations concerned except the
qualifying shares held by directors. These companies, with others,
constituted a single enterprise, carried on by the petitioner, of
producing, buying, transporting, refining, and selling oil. The
subsidiary companies had retained their earnings, although making
some loans inter se,
and all their funds were invested in
properties or actually required to carry on the business, so that
the debtor companies had no money available to pay their debts. In
January, 1913, the petitioner decided to take over the previously
accumulated earnings and surplus, and did so in that year by votes
of the companies that it controlled. But, disregarding the forms
gone through, the result was merely that the petitioner became the
holder of the debts previously due from one of its companies to
another. It was no richer than before, but its property now was
represented by stock in and debts due from its subsidiaries,
whereas formerly it was represented by the stock alone, the change
being effected by entries upon the respective companies' books. The
earnings thus transferred had been accumulated and had been used as
capital before the taxing year. Lynch v. Turrish,
247 U. S. 221
247 U. S.
We are of opinion that the decision of the district court was
right. It is true that the petitioner and its subsidiaries were
distinct beings in contemplation of law, but the facts that they
were related as parts of one enterprise, all owned by the
petitioner, that the debts were all enterprise debts due to
members, and that the dividends represented earnings that had been
made in former years and that practically had been converted into
capital, unite to convince us that the transaction should be
regarded as bookkeeping, rather than as "dividends declared and
paid in the ordinary course by a corporation." Lynch v.
Hornby, 247 U. S. 339
247 U. S. 346
The petitioner did not itself do the business of its subsidiaries
Page 248 U. S. 73
possession of their property, as in Southern Pacific Co. v.
Lowe, 247 U. S. 330
the principle of that case must be taken to cover this. By § II, G,
(c), 38 Stat. 174, and S, id.,
202, the tax from January 1
to February 28, 1913, is levied as a special excise tax, but, in
view of our decision that the dividends here concerned were not
income, it is unnecessary to discuss the further question that has
been raised under the latter clause as to the effect of the fact
that excise taxes upon the subsidiary corporations had been