1. Sum paid as dividends by a transferee corporation to the
stockholders of a transferor corporation, and amounts paid by the
transferee corporation as income taxes on the sums so distributed
as dividends held,
under the Revenue Act of 1928, taxable
income of the transferor corporation, although the transfer was of
all the transferor's property, by a "lease" in perpetuity without a
defeasance clause, and although the dividends were paid, pursuant
to the "lease," by the transferee directly to the stockholders of
the transferor. Pp. 315 U. S. 46
315 U. S.
2. Article 70 of Treasury Regulations 74, promulgated under the
Revenue Act of 1928, authorizing such construction of the Act,
valid. P. 315 U. S.
118 F.2d 174, reversed.
Certiorari, 314 U.S. 591, to review the reversal of a judgment
disallowing a claim for refund of income taxes.
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
By an indenture denominated a "lease," respondent, in 1864
granted, demised, and leased to Chicago & Alton Railroad Co.
all of its railroad property, real and personal.
Page 315 U. S. 45
The "lease" was in perpetuity upon specified terms and
conditions. The Chicago & Alton Railroad Co. covenanted and
agreed, inter alia,
to guarantee and pay quarterly to the
holders of the fifteen thousand shares of capital stock of
respondent an annual dividend of seven percent on the par value of
the shares; to deposit with a designated depository specified
monthly sums to be placed to the credit of the stockholders and to
be held as a fund for the purpose of paying the dividends; to pay
the dividends without any deduction for any federal tax whatsoever;
to pay all taxes which may be due to the United States "on account
of said dividend so paid from time to time;" and to pledge to
respondent thirty-seven parts out of two hundred and fifty-seven
parts of the gross receipts of the line between the cities of Alton
and Chicago for the purpose of securing the performance of its
various covenants. The "lease" contained no defeasance clause.
The annual dividend is.$7.00 per share, and totals $105,000.00.
This amount has been paid directly to respondent's stockholders
every year since 1864 -- by Chicago & Alton Railroad Co. until
acquisition of the property in 1931 by the Alton Railroad Co. and,
since then, by the latter company. The dispute here is over federal
income taxes for the years 1931, 1932, 1933, and 1934. Respondent,
a corporation organized and existing under the laws of Illinois,
filed its income tax return for each of those years reporting the
$105,000.00 of dividends paid its shareholders as its income. The
resulting tax was paid each year by the Alton Railroad Co. In
addition, the latter paid each year for respondent an additional
tax on the amount of the income tax on $105,000.00 on the theory
that the latter constituted additional taxable income to
respondent. Respondent filed claims for refund for the additional
tax paid in 1931 and for all the income taxes paid on its behalf
for the other years in question
Page 315 U. S. 46
on the theory that the income on which those taxes were paid was
not realized by it. On rejection of those claims by the
Commissioner, respondent instituted suit in the District Court.
That court rendered judgment for the petitioner. The Circuit Court
of Appeals reversed, one judge dissenting. 118 F.2d 174. We granted
the petition for certiorari, 314 U.S. 591, because of the conflict
between that decision and the governing principles of Gold
& Stock Telegraph Co. v. Commissioner,
83 F.2d 465,
United States v. Northwestern Telegraph Co.,
83 F.2d 468,
and Pacific & Atlantic Telegraph Co. v. Commissioner,
83 F.2d 469, decided by the Circuit Court of Appeals for the Second
Respondent urges, and the court below held, that this so-called
lease in perpetuity without a defeasance clause divested respondent
of all right, title, and interest in the property, and vested a
full and indefeasible title in the grantee. See Huck v. Chicago
& Alton R. Co.,
86 Ill. 352, 354, 355; Chicago, B.
& Q. R. Co. v. Boyd,
118 Ill. 73, 7 N.E. 487. Respondent
also argues that the indenture of 1864 vested all rights to payment
of dividends in its stockholders, and divested it of any right to,
or control over, such payments. Respondent therefore contends that
a corporation which does not own or control property and has no
right to, or control over, any income from the property cannot be
in receipt of income, constructively or otherwise.
Such considerations do not dispose of this controversy. In
Lucas v. Earl, 281 U. S. 111
this Court held that a husband's salary was taxable to him though,
by contract with his wife, half of it vested in her when paid. Mr.
Justice Holmes said (pp. 281 U. S.
"There is no doubt that the statute could tax salaries to those
who earned them and provide that the tax could not be escaped by
anticipatory arrangements and contracts, however skillfully
Page 315 U. S. 47
devised, to prevent the salary when paid from vesting even for a
second in the man who earned it. That seems to us the import of the
statute before us, and we think that no distinction can be taken
according to the motives leading to the arrangement by which the
fruits are attributed to a different tree from that on which they
Precisely that approach was taken in Art. 70 of Treasury
Regulations 74, promulgated under the Revenue Act of 1928. It
provides in part:
"Where a corporation has leased its property in consideration
that the lessee shall pay in lieu of other rental an amount
equivalent to a certain rate of dividend on the lessor's capital
stock or the interest on the lessor's outstanding indebtedness,
together with taxes, insurance, or other fixed charges, such
payments shall be considered rental payments, and shall be returned
by the lessor corporation as income, notwithstanding the fact that
the dividends and interest are paid by the lessee directly to the
shareholders and bondholders of the lessor. The fact that a
corporation has conveyed or let its property and has parted with
its management and control, or has ceased to engage in the business
for which it was originally organized, will not relieve it from
liability to the tax."
That longstanding regulation [Footnote 1
] is plainly applicable here. It covers various
kinds of conveyances and leases, including those where the grantor
or lessor has parted with all rights of management and control over
the property. If valid, it governs this case whatever may be the
legal incidents of the 1864 indenture under Illinois law. Its
validity seems clear. It is a permissible definition of
Page 315 U. S. 48
one item of gross income [Footnote 2
] under § 22(a) of the Revenue Act of 1928, 45
Stat. 791, 797. Payments made directly to shareholders by the
lessee or transferee of corporate property are properly recognized
as income to the corporation by reason of the relationship of a
corporation to its shareholders. The fact that there is an
anticipatory arrangement whereby the taxpayer is not even a conduit
of the payments is no more significant in this type of case than it
was in Lucas v. Earl, supra.
The relationship between respondent and its shareholders is an
abiding one. They obtain the dividend payments because of their
status as shareholders. All questions of the rights of creditors
aside, there can be no doubt that a corporation may normally
distribute its assets among its stockholders. When it undertakes to
do so, its act is nonetheless a corporate act though its
shareholders receive new contractual rights enforceable by them
alone against the transferee. That is to say, their rights to
receive the proceeds on the disposal of corporate assets are
strictly derivative in origin. The fact that the consideration is
made distributable to them directly over a long period of time,
rather than in one lump payment, does not alter the character of
those rights. In each case, their claims to the proceeds flow from
the corporation, and are measured by the stake which they have in
it. For the rental or purchase payments for the property conveyed
by respondent could not lawfully be paid to another without its
authority, and it could not lawfully dispose of them to others
without the consent of its shareholders. Cf.
Raybestos-Manhattan, Inc. v. United States, 296 U. S.
. The fact that the corporation
Page 315 U. S. 49
may remain in existence only to maintain a stock transfer book
is immaterial. The umbilical cord between it and its shareholders
has not been cut. The distribution made is in performance of the
obligation owed by the corporation to them. For these reasons, the
regulation in question merely conforms to accepted legal theory.
The conclusion that the dividend payments made to respondent's
stockholders were income realized by it likewise marks no
innovation in income tax law. That is indicated not only by
Lucas v. Earl, supra,
but also by those cases which hold
"Income is not any the less taxable income of the taxpayer
because, by his command, it is paid directly to another in
performance of the taxpayer's obligation to that other."
Raybestos-Manhattan, Inc. v. United States, supra,
296 U. S. 64
cases cited. The reach of the income tax law is not to be delimited
by technical refinements or mere formalism. Helvering v.
Clifford, 309 U. S. 331
Since the dividend payments made to respondent's stockholders
were income realized by it, the federal income tax on those sums
which was paid by the Alton Railroad Co. was likewise income
taxable to respondent. Old Colony Trust Co. v.
Commissioner, 279 U. S. 716
United States v. Boston & Maine R. Co., 279 U.
The judgment of the Circuit Court of Appeals is reversed, and
that of the District Court affirmed.
MR. JUSTICE ROBERTS did not participate in the consideration or
decision of this case.
This regulation dates from Art. 80, Treasury Regulations 33
(1914 ed.). And see
Art. 102, Treasury Regulations 33
(1918 ed.). Provisions similar to those quoted in the text are
contained in Art. 70, Treasury Regulations 77, promulgated under
the Revenue Act of 1932 and in Art. 22(a)-20 of Treasury
Regulations 86, promulgated under the Revenue Act of 1934.
Like definitions of gross income are contained in § 22(a) of the
Revenue Act of 1932, 47 Stat. 169, 178, and in § 22(a) of the
Revenue Act of 1934, 48 Stat. 680, 686.