1. Whether at the date of the death of a taxpayer a dividend has
"accrued," within the meaning of § 42 of the Revenue Act of 1938,
so as to be includible in computing income of the taxpayer, is a
question of federal law. P.
324 U. S.
395.
2. A dividend which was declared prior to the date of the death
of a taxpayer (assumed to be on the cash receipts basis), but
which, by the terms of the declaration, was payable to stockholders
of record on a date subsequent to his death, was not at the date of
the death
Page 324 U. S. 394
of the taxpayer "accrued," within the meaning of § 42 of the
Revenue Act of 1938, and was not includible in computing net income
of the taxpayer. P.
324 U. S. 398.
144 F.2d 756, reversed.
Certiorari, 323 U.S. 702, to review the reversal of two orders
of the Board of Tax Appeals (45 B.T.A. 517) involving the income
tax liability of a taxpayer and of his estate.
MR. JUSTICE REED delivered the opinion of the Court.
This case brings here for review a judgment which applies
Section 42, Revenue Act of 1938, [
Footnote 1] so as to "accrue" corporate dividends on the
date of their declaration, rather than the later record or payment
dates. The result is that the dividends are taxable as income to a
decedent taxpayer instead of to his estate.
Certiorari was granted [
Footnote
2] because of a conflict in conclusion
Page 324 U. S. 395
between
Tar Products Corp. v. Commissioner, 130 F.2d
866, and this case as to the date of accrual of corporate
dividends. The resolution of this conflict is complicated by
further conflicts between the decision below and those in other
circuits as to whether the governing rule is to be drawn from
federal or state law.
Helvering v. McGlue's Estate, 119
F.2d 167, 171;
Commissioner v. Cohen, 121 F.2d 348,
349.
The decedent, Henry W. Putnam, died on March 30, 1938. Prior to
his death, several corporations in which he owned stock declared
dividends which, by the resolutions, were payable and were paid to
stockholders of record on dates which were subsequent to his death.
Each of these dividends, aggregating in all $24,051.75, was held by
the Commissioner to constitute income to the decedent under the
provisions of Section 42. The Board of Tax Appeals decided that the
time of accrual depends upon the varying state decisions as to when
a corporate debt arises upon a declaration of dividend with a
provision for its payment to stockholders of record on some future
date. 45 B.T.A. 517. This resulted in an agreement in part with the
Commissioner's determination.
The Circuit Court of Appeals was of the view that federal law
controlled the disposition of the controversy, and that the
dividend accrued on its declaration.
Commissioner v. Guaranty
Trust Co., 144 F.2d 756.
We think the federal law controls. A federal revenue act
applicable throughout the nation fixes liability on the decedent
taxpayer under Section 42 if the dividend is "accrued." The meaning
of that word in this section should be uniform unless Congress has
shown an intention to permit its meaning to be varied by state law.
Burnet v. Harmel, 287 U. S. 103,
287 U. S. 110;
Palmer v. Bender, 287 U. S. 551,
287 U. S. 555;
United States v. Pelzer, 312 U. S. 399,
312 U. S.
402-403. Section 42 lays down the test of accrual for
the taxation of a decedent's income and the definition of the
meaning and extent
Page 324 U. S. 396
of that test is a federal responsibility. The present problem is
closely akin to that resolved in
Lyeth v. Hoey,
305 U. S. 188,
305 U. S. 193.
In that case, an heir received a sum in settlement of litigation
over a will. Its taxability as income under the federal statute
depended upon the meaning of the statutory exemption "acquired by
inheritance." The law of the testator's domicile held sums paid as
will compromises were not inheritances. Acting on the principle
that, in the interest of uniformity, exemptions under federal
statutes should be determined by federal courts, we reached a
contrary federal rule. The same principle leads to our conclusion
in this case. [
Footnote 3]
We recently examined the Congressional purpose in the enactment
of Section 42.
Helvering v. Enright's Estate, 312 U.
S. 636. That purpose was to cover into income the
"accruals" theretofore unreported as income of a decedent
Page 324 U. S. 397
taxpayer who reported on a cash basis. By "accrual," the income
so accrued became subject to income tax as decedent's income. These
"accruals" had theretofore escaped taxation as the income of
decedent because no cash was received during decedent's life.
Moreover, such payments were held not to be the income of
decedent's estate on the theory that the "accrual" was a part of
the corpus of the estate at death, and therefore the estate's
subsequent receipt of the "accruals" as cash was not income to the
estate.
Helvering v. Enright's Estate, supra, p.
312 U. S. 639.
In the instant case, there is no avoidance of income taxes such as
Section 42 was designed to prevent. If the dividend does not
"accrue" to decedent on the date of declaration so as to be taxable
as income to him, it will appear as an item of income in the income
tax return of the estate or of the stockholder who owns the stock
on the record date. [
Footnote
4] Tax-wise,
Page 324 U. S. 398
it may be important upon whom the tax falls, as the sum assessed
may vary according to the tax bracket of the taxpayer. This result,
however, is apart from the purpose of Congress in enacting Section
42, and is not significant in the interpretation of the section.
[
Footnote 5]
We assume that decedent was a taxpayer on the cash receipts
basis.
Compare 144 F.2d 756, 757. [
Footnote 6] Our inquiry leads us only to a decision as
to whether a dividend accrues as income on its declaration with a
subsequent record date, not to whether it accrues on its record
date or its payment date. A declaration of a dividend to
stockholders of record on the date of the resolution, but payable
in the future, is not involved. This Court has suggested
Page 324 U. S. 399
that a tax be deemed to accrue as a charge against a taxpayer
when events "occur which fix the amount of the tax and determine
the liability of the taxpayer to pay it."
United States v.
Anderson, 269 U. S. 422,
269 U. S. 441.
It is said also that accrual imports "that it is the right to
receive, and not the actual receipt, that determines the inclusion
of the amount in gross income."
Spring City Foundry Co. v.
Commissioner, 292 U. S. 182,
292 U. S. 184.
The declaration of the dividends here in question fixes their
amount, but does not determine the distributee. He cannot be known
with certainty until the record date. Nor does the stockholder have
the right to receive payment upon the declaration. The words of the
corporate resolution which arranges for the payment from the stock
record of a certain day determines the earliest time for possible
receipt.
Under the income tax acts, no stockholder has a separate and
divisible taxable interest in the assets of a corporation, even
though those assets have been increased by earnings. Earnings,
before declaration of dividends, while increasing the value of his
stock, have never been treated as an event to mark taxable income
to the stockholder. Mere declaration of a dividend does not alter
the stockholder's interest in the corporate assets. If no other
factors were involved in value except earnings and dividends, the
value of the stock would advance
pari passu with earnings,
and the declaration of a dividend with a subsequent record date for
payment would not affect the stock's value.
United States v.
Phellis, 257 U. S. 156,
257 U. S. 171.
See Schabacker, Stock Market, 353. The stockholder can
acquire no interest in a dividend amounting to an accrual under
Section 42 before the amount of the dividend and the distributee is
determined.
In applying to the present dividends our description of accruals
under Section 42 as "assets of decedents, earned during their life
and unreported as income, which, on a cash return,
Page 324 U. S. 400
would appear in the estate returns," [
Footnote 7] the Court of Appeals may have treated the
words "earned during" the decedent's life as though they included,
prior to a declaration of dividends, the proportionate part of
corporate earnings attributable to decedent's stock. If so, it is a
more extended meaning than was intended, since stock does not earn
an identifiable separate taxable share of corporate profits for its
owner before the corporation makes those profits available to the
stockholder. It is not the earnings of a corporation, but the
separation of those earnings by a completed dividend, which assigns
a part of those earnings to a stockholder. The price a stockholder
would receive on a stock sale after declaration and before the
record date would reflect corporate earnings, but would not reflect
the declaration or nondeclaration of a dividend. As the same value
would be in the stock with or without the declaration, the price
would be the same. Only an ex-dividend sale would affect price.
For the earnings of a corporation to pass into the earnings of
its stockholder so as to be subject to accrual to the stockholder
under Section 42, something more than a declaration of dividends
with a subsequent record date to identify the distributee is
required. Such a declaration leaves the identity of the recipient
at large. Such uncertainty destroys any conception of accrued as
involving a right to receive or an obligation to pay -- elements
which we think are essential for accruals under our decisions.
[
Footnote 8]
Reversed.
[
Footnote 1]
52 Stat. 447, 473, Sec. 42:
"The amount of all items of gross income shall be included in
the gross income for the taxable year in which received by the
taxpayer, unless, under methods of accounting permitted under
section 41, any such amounts are to be properly accounted for as of
a different period. In the case of the death of a taxpayer, there
shall be included in computing net income for the taxable period in
which falls the date of his death, amounts accrued up to the date
of his death if not otherwise properly includible in respect of
such period or a prior period."
[
Footnote 2]
323 U.S. 702. Judicial Code, Section 240(a), as amended.
[
Footnote 3]
The Government calls attention to the conflict in state
decisions as to the event which vests title according to state law
to a corporate dividend. Some specify the declaration and some
compliance with the requirement of being a stockholder of record on
a subsequent date.
Declaration date:
Ford v. Snook, 205 App.Div.194, 196,
199 N.Y.S. 630,
aff'd, 240 N.Y. 624, 148 N.E. 732;
Beattie v. Gedney, 99 N.J.Eq. 207, 132 A. 652;
Western
Securities Co. v. Silver King Consol. Mining Co., 57 Utah 88,
113, 192 P. 664; 27 Georgetown L.J. 74; 38 Harv.L.Rev. 245.
Record date:
Smith v. Taecker, 133 Cal. App. 351, 24
P.2d 182;
Richter & Co. v. Light, 97 Conn. 364, 116 A.
600;
Ford v. Ford Manufacturing Co., 222 Ill.App. 76, 84;
Nutter v. Andrews, 246 Mass. 224, 142 N.E. 67.
Accrual under Section 42, however, is not dependent upon these
varying concepts of when dividends vest. Despite possible
difference between state and federal income taxation of dividend
items, the presumed Congressional purpose to have the national
revenue acts uniformly administered leads to a federal
interpretation of accruals under Section 42.
Such inconsistency would not occur if the federal accrual date
under Section 42 is held eventually to be the same for taxpayers on
the accrued and cash basis.
Cf. Avery v. Commissioner,
292 U. S. 210;
Tar Products Corp. v. Commissioner, 130 F.2d 866.
[
Footnote 4]
Respondent argues for the judgment below on the ground that the
dividends could not properly be treated as income of the estate
when received, since the receipt of the dividends in cash by the
estate was merely a conversion into money of one of the assets of
the estate, citing
Vanderbilt v. Commissioner, 11 B.T.A.
291;
Nichols v. United States, 64 Ct.Cls. 241; 80
Treas.Reg., Art. 13. The truth or error of this position depends
upon whether those dividends are income, by virtue of the accrual
provision of Section 42, to the decedent. If they are income to the
decedent, they cannot be income also to the estate. If they are not
income to the decedent, they are income to the estate. The
Vanderbilt and
Nichols cases were apparently
decided on the theory that the items in controversy constituted
income to the decedent and assets of the estate for estate tax
purposes, and therefore could not later be income to the estate.
The regulation does not purport to direct the return as corpus of
the estate of dividends declared but with a record date subsequent
to the stockholder's death. Neither do the present regulations. 105
Treas.Reg., Sec. 81.13;
cf. United States v. Phellis,
257 U. S. 156,
257 U. S.
171.
Congress has modified Section 42 by an amendment which is
inapplicable to this case. Revenue Act of 1942, Sec. 134(a), 56
Stat. 798, 830; H.Rep. No. 2333, 77th Cong., 2d Sess., Sec. 125, p.
83; S.Rep. 1631, 77th Cong., 2d Sess., Sec. 135, p. 100.
[
Footnote 5]
A reference to dividends appears in the legislative history, but
casts no light on the problem of the event which accrues a
corporate dividend.
See H.R. 7835, 73rd Cong., 2d Sess.,
printed with Senate amendments, March 28 (Calendar day, April 13),
1934; I.R.B. (C.B.1939-1 (Part 2)), p. 629, Amendment 27; Section
43, Revenue Act, 1934, 48 Stat. 694; Section 43, Revenue Act of
1938, 52 Stat. 473.
[
Footnote 6]
Therefore, the construction of accrued according to the
taxpayer's method of accounting, which is directed in Sec. 48(c),
52 Stat. 476, is not of use.
Helvering v. Enright's
Estate, 312 U. S. 636,
312 U. S. 644;
Avery v. Commissioner, 292 U. S. 210,
holds that dividends of a living taxpayer on the cash basis would
not become his income on mere declaration, but only when "received"
-- that is, unqualifiedly made subject to the stockholder's demand
as by check. "Received" in the section there under consideration
was the word designating taxability as income of sums actually or
constructively collected, including dividends, as it is in the
section of the statute here involved. This rule has been
continuously applied.
See Mason v. Routzahn, 275 U.
S. 175,
275 U. S. 178;
65 Treas.Reg., Art. 1541; 101 Treas.Reg., Art. 42-3; 111
Treas.Reg., Sec. 29.42-3; 53 Harv.L.Rev. 853; 2 Mertens, Federal
Income Taxation, 17.
See Tar Products Corp. v. Commissioner, 130 F.2d 866,
for an instance of the application of this rule to a taxpayer on
the accrual basis.
Compare 94 Treas.Reg., Art. 115-1 and
22(a)(1) for appraisal of position of those regulations as to date
when dividends are received by a taxpayer.
American Light &
Traction Co. v. Commissioner, 3 T.C. 1048.
[
Footnote 7]
312 U.S. at
312 U. S.
644-645; 144 F.2d at 758.
[
Footnote 8]
This accords with the original holding of the Board of Tax
Appeals on this question in
Estate of McGlue v.
Commissioner, 41 B.T.A. 1186, 1193. After that case was
reversed on the law of New York,
Helvering v. McGlue's
Estate, 119 F.2d 167, the Board followed the Circuit Court
decision.
Estate of Ledyard v. Commissioner, 44 B.T.A.
1056, 1065. Recently the Tax Court has held that a taxpayer on the
accrual basis should account for a dividend when received.
American Light & Traction Co. v. Commissioner, 3 T.C.
1048.