Edwards v. Douglas,
269 U.S. 204 (1925)

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U.S. Supreme Court

Edwards v. Douglas, 269 U.S. 204 (1925)

Edwards v. Douglas

No. 129

Argued April 17, 1925

Decided November 23, 1925

269 U.S. 204


Section 31(b), added by the Revenue Act of 1917 to the Revenue Act of 1916, provides:

"Any distribution made to the shareholders . . . of a corporation . . . in the year nineteen hundred and seventeen or subsequent tax years shall be deemed to have been made from the most recently accumulated undivided profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received, and shall be taxed to the distributee at the rates prescribed by law for the years in which such profits or surplus were accumulated by the corporation, . . . but nothing herein shall be construed as taxing any earnings or profits accrued prior to March first, nineteen hundred and thirteen. . . ."

Construing this,


1. Where the net profits of a corporation, during the fiscal year in which dividends are paid are sufficient to cover such dividends, the term "most recently accumulated undivided profits" applies to such current earnings, and the dividends must be deemed to have made from them, and are subject to the income tax rates of that year, although, when the distribution was made, there were other funds, adequate to meet it, carried in the surplus account of the corporation, as made up to the end of the preceding fiscal year. Pp. 269 U. S. 207, 269 U. S. 215, 269 U. S. 217.

2. The term "surplus," as employed in corporate finance and accounting, designates an account on the books representing the net assets of the corporation in excess of all liabilities, including its capital stock. P. 269 U. S. 214.

3. As used in § 31(b), supra, "surplus" means that part of the surplus which was derived from profits which, at the close of earlier annual accounting periods, were carried into the surplus account as undistributed profits. Id.

Page 269 U. S. 205

4. "Undivided profit" has not acquired a fixed meaning in corporate finance and accounting; in § 31(b), supra, there is reason to conclude it refers to profits which have neither been distributed as dividends nor carried to surplus account upon the closing of the books -- that is, to current undistributed earnings. P. 269 U. S. 214.

5. The general aim of Congress, when enacting the above legislation, was to make the dividend, in whatever year paid, bear the tax rate of the year in which the profits of which it was a distribution had been earned, and for this purpose to treat as a unit the profits of the whole tax year, coupled with which was the special aim of making the war profits pay the high war taxes, to which end it was essential that the law, in determining the applicable tax rate, should neither accept any declaration of the corporation as to what year's profits were being distributed nor adopt the earliest year (since March 1, 1913) of which there were accumulated profits available for distribution. P. 269 U. S. 216.

298 F. 229 reversed.

Certiorari to a judgment of the circuit court of appeals which reversed a judgment of the district court adverse to the plaintiffs, Douglas et al., in their action to recover from the defendant Edwards the amount of an income tax assessment which they paid to him, as Collector, under protest. See 287 F. 919.

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