In an action to recover back money collected and retained by the
government, over plaintiff's protest, as a tax on income under the
Income Tax Law of 1913, plaintiff alleged that that upon which the
tax was levied, a stock dividend based on accumulated profits, was
not "income" within the true intent of the statute, and that, if
the statute so intended, it was so far unconstitutional because, in
the Sixteenth Amendment, upon which its validity depended, the term
"income" could not be construed to embrace such dividends.
Held that there was thus presented not merely a question
whether the statute had been wrongly understood and applied, but
also a question of the scope of the Amendment, which afforded
jurisdiction to review both questions by direct writ of error to
the district court.
The value of new shares, issued as a stock dividend and
representing merely surplus profits transferred to the capital
account of the corporation, is not taxable to the share holders as
income within the meaning of the Income Tax Law of 1913. So
held where the profits were earned before January 1, 1913,
and the transfer and dividend were voted December 17, 1913, and the
distribution, ratably to shareholders of record on the 26th of that
month, took place on January 2, 1914.
242 F. 702 reversed.
Page 245 U. S. 419
The case is stated in the opinion.
Page 245 U. S. 424
MR. JUSTICE HOLMES delivered the opinion of the court.
This is a suit to recover the amount of a tax paid under duress
in respect of a stock dividend alleged by the government to be
income. A demurrer to the declaration was sustained by the district
court, and judgment was entered for the defendant. 242 F. 702. The
facts alleged are that the corporation voted on December 17, 1913,
to transfer $1,500,000 surplus, being profits earned before January
1, 1913, to its capital account and to issue fifteen thousand
shares of stock representing the same to its stockholders of record
on December 26; that the distribution took place on January 2,
1914, and that the plaintiff received as his due proportion four
thousand one hundred and seventy-four and a half shares. The
defendant compelled the plaintiff to pay an income tax upon this
stock as equivalent to $417,450 income in cash. The district court
held that the stock was income
Page 245 U. S. 425
within the meaning of the Income Tax of October 3, 1913, c. 16,
Section IIA, subdivisions 1 and 2, and B. 38 Stat. 114, 116, 167.
It also held that the Act, so construed, was constitutional,
whereas the declaration set up that, so far as the Act purported to
confer power to make this levy, it was unconstitutional and
void.
The government in the first place moves to dismiss the case for
want of jurisdiction on the ground that the only question here is
the construction of the statute, not its constitutionality. It
argues that, if such a stock dividend is not income within the
meaning of the Constitution, it is not income within the intent of
the statute, and hence that the meaning of the Sixteenth Amendment
is not an immediate issue, and is important only as throwing light
on the construction of the Act. But it is not necessarily true that
income means the same thing in the Constitution and the Act. A word
is not a crystal, transparent and unchanged, it is the skin of a
living thought, and may vary greatly in color and content according
to the circumstances and the time in which it is used.
Lamar v.
United States, 240 U. S. 60,
240 U. S. 65.
Whatever the meaning of the Constitution, the government had
applied its force to the plaintiff, on the assertion that the
statute authorized it to do so, before the suit was brought, and
the court below has sanctioned its course. The plaintiff says that
the statute as it is construed and administered is
unconstitutional. He is not to be defeated by the reply that the
government does not adhere to the construction by virtue of which
alone it has taken and keeps the plaintiff's money, if this court
should think that the construction would make the Act
unconstitutional. While it keeps the money, it opens the question
whether the Act. construed as it has construed it. can be
maintained. The motion to dismiss is overruled.
Billings v.
United States, 232 U. S. 261,
232 U. S. 276;
B. Altman & Co. v. United States, 224 U.
S. 583,
224 U. S.
596-597.
Page 245 U. S. 426
The case being properly here, however, the construction of the
act is open, as well as its constitutionality if construed as the
government has construed it by its conduct.
Billings v. United
States, ubi supra. Notwithstanding the thoughtful discussion
that the case received below, we cannot doubt that the dividend was
capital as well for the purposes of the Income Tax Law as for
distribution between tenant for life and remainderman. What was
said by this Court upon the latter question is equally true for the
former.
"A stock dividend really takes nothing from the property of the
corporation, and adds nothing to the interests of the shareholders.
Its property is not diminished, and their interests are not
increased. . . . The proportional interests of each shareholder
remains the same. The only change is in the evidence which
represents that interest, the new shares and the original shares
together representing the same proportional interest that the
original shares represented before the issue of new ones."
Gibbons v. Mahon, 136 U. S. 549,
136 U. S.
559-560. In short, the corporation is no poorer and the
stockholder is no richer than they were before.
Logan County v.
United States, 169 U. S. 255,
169 U. S. 261.
If the plaintiff gained any small advantage by the change, it
certainly was not an advantage of $417,450, the sum upon which he
was taxed. It is alleged and admitted that he receives no more in
the way of dividends, and that his old and new certificates
together are worth only what the old ones were worth before. If the
sum had been carried from surplus to capital account without a
corresponding issue of stock certificates, which there was nothing
in the nature of things to prevent, we do not suppose that anyone
would contend that the plaintiff had received an accession to his
income. Presumably his certificate would have the same value as
before. Again, if certificates for $1,000 par were split up into
ten certificates each, for $100, we presume that no
Page 245 U. S. 427
one would call the new certificates income. What has happened is
that the plaintiff's old certificates have been split up in effect
and have diminished in value to the extent of the value of the
new.
Judgment reversed.
MR. JUSTICE McKENNA concurs in the result.