as Congress has to guess whether or not this Court will overrule Eisner. v. Macomber, any interim treatment which it gives stock dividends. may have to be readjusted after this Court speaks, so as to remove inequities which may have resulted. II I think Eisner v. Macomber should be overruled. The Sixteenth Amendment gives Congress the power "to lay and collect taxes on incomes, from whatever source derived." As Mr. Justice Brandeis stated in his dissent in Eisner v. Macomber, 252 U. S., p. 237, that Amendment was designed to include "everything which by reasonable understanding can fairly be regarded as income." Stock dividends representing profits certainly are income in the popular sense. "From a practical common-sense point of view there is something strange in the idea that a man may indefinitely grow richer without ever being subject to an income tax." Powell, Income From Corporate Dividends, 35 Harv. L. Rev. 363, 376. The wealth of stockholders normally increases as a result of the earnings of the corporation in which they hold shares. I see no reason why Congress could not treat that increase in wealth as "income" to them. See Collector v. Hubbard, [410] 12 Wall. 1, 18; Helvering v. National Grocery Co., 304 U. S. 282, 288; Powell, The Stock-Dividend Decision and The Corporate Nonentity, 5 Nat. Tax Assoc. Bull. 201. The notion that there can be no "income" to the shareholders in such a case within the meaning of the Sixteenth Amendment unless the gain is "severed from" capital and made available to the recipient for his "separate use, benefit and disposal" (Eisner v. Macomber, 252 U. S., pp. 207, 211) will not stand analysis. In cases like Koshland v. Helvering and Helvering v. Gowran where stock dividends were held to be taxable as income, both the original investment and the accumulations were retained by the company. Yet those cases hold that stockholders may receive "income" from the operations of their corporation though the corporation makes no distribution of assets to them. And see United States v. Phellis, 257 U. S. 156; Rockefeller v. United States, 257 U. S. 176; Cullinan v. Walker, 262 U. S. 134; Marr v. United States, 268 U. S. 536. Other cases make plain that there may be "income" though neither money nor property has been received by the taxpayer. Benefits accruing as the result of the discharge [411] of the taxpayer's indebtedness or obligations constitute familiar examples. Old Colony Trust Co. v. Commissioner, 279 U. S. 716; Douglas v. Willouts, 296 U. S. 1; United States v. Hendler, 303 U. S. 564. And increase in the ... Cf. the income tax of partners. Sec. 182 of the Internal Revenue Code provides: "In computing the net income of each partner, he shall include, whether or not distribution is made to him (c) His distributive share of the ordinary net income or the ordinary net loss of the partnership, computed as provided in section 183 (b)." A partner is chargeable with his allocable share of the partnership earnings even where they could not be distributed to him by reason of local law. Heiner y. Mellon, 304 U. S. 271, 281: "The tax is thus imposed upon the partner's proportionate share of the net income of the partnership, and the fact that it may not be currently distributable, whether by agreement of the parties or by operation of law, is not material." As stated by Mr. Justice Brandeis: in his dissent in Eisner v. Macomber, 252 U. S., p. 231: "The stockholder's interest in the property of the corporation differs, not fundamentally but in form only, from the interest of a partner in the property of the firm. There is much authority for the proposition that, under our law, a partnership or joint stock company is just as distinct and palpable an entity in the idea of the law, as distinguished from the individuals composing it, as is a corporation. No reason appears why Congress, in legislating under a grant of power so. comprehensive as that authorizing the levy of an income tax, should be limited by the particular view of the relation of the stockholder to the corporation and its property which may, in the absence of legislation, have been taken by this court." value of property as a result of improvements made by the lessee are taxable income to the lessor even though the taxpayer could not "sever the improvement begetting the gain from his original capital." Helvering v. Bruun, 309 U. S. 461, 469. The declaration of a stock dividend normally will not increase the wealth of the stockholders. Its accrual will usually antedate that event. See Haig et al., The Federal Income Tax (1921) p. 8. For it is the accumulation of corporate earnings over a period of time which marks any real accrual of wealth to the stockholders. The narrow question here is whether Congress has the power to make the receipt of a stock dividend based on earnings an occasion for recognizing that accrual of wealth for income tax purposes. Congress has done so through the formula of computing the "income" to the stockholders at the "fair market value" of the stock dividends received. § 115 (j). Whether that is the most appropriate procedure which could be selected for the purpose may be arguable. But I can see no constitutional reason for saying that Congress cannot make that choice if it so desires. That is one waythough perhaps at times a crude one-of measuring for income tax purposes the wealth which normally accrues to stockholders as a result of the earning of their corporation. MR. JUSTICE BLACK and MR. JUSTICE MURPHY join in this dissent. 3. HELVERING, COMMISSIONER OF INTERNAL REVENUE, v. SPROUSE* (318 U. S. 604. No. 22-Decided April 5, 1943) 1. Where a corporation having but two classes of stock, voting common and nonvoting common, distributes to all the shareholders of both classes, in proportion to their respective holdings, a dividend of non-voting common, the fair market value of which is its par value, and which is backed by earnings and profits available for distribution in excess of its total value, neither the voting rights of the voting common nor its right to share in dividends or in liquidation being altered by the distribution, so that the relations previously existing between all the shareholders, or between the particular shareholder and the corporation, are in no wise disturbed by the distribution, the dividend is not subject to income tax. Const., Amendment XVI; Revenue Act of 1936, § 115 (f) (1). P. 606. 2. Where the sole owner of the common stock of a corporation which had common stock only, received a dividend of non-voting preferred stock authorized by a charter amendment and the value of which [605] was exceeded by earnings of the corporation available for dividends without changing the shareholder's interest in the corporation or in its net value, the dividend is not taxable income. Const., Amendment XVI; Revenue Act of 1936, § 115 (f) (1). P. 606. No. 22, 122 F. 2d 973, affirmed. No. 66, 124 F. 2d 315, reversed. REVIEW by certiorari, 316 U. S. 656, of two judgments, the one reversing a ruling which sustained a deficiency assessment of income, 42 B. T. A. 484, and the other affirming the like ruling in another case. Mr. JUSTICE ROBERTS delivered the opinion of the Court. Certiorari was granted because the decisions below in the two cases conflict. They arise under § 115 (f) (1) of the Revenue Act of 1936:1 "A distribution made by a corporation to its shareholders in its stock or in rights to acquire its stock shall not be treated as a dividend *Together with No. 66, Strassburger v. Commissioner of Internal Revenue. 1 c. 690, 49 Stat. 1648, 1688. to the extent that it does not constitute income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution." [606] No. 22 The respondent owned voting common stock in an Oregon corporation which paid a ten per cent stock dividend in shares of non-voting common stock. The company had outstanding but two classes of stock: voting common, of a par value of $397,471.25; and non-voting common, of a par value of $819,333.06. The dividend was of nonvoting common of a par of $121,680.43 and was distributed to holders of the voting and non-voting common. The fair market value of the stock distributed as a dividend was its par value, and the earnings or profits available for distribution were in excess of its total value. Neither the voting rights of the voting common, nor its right to share in dividends and in liquidation, was altered by the distribution. The respondent, who owned no non-voting common, received 200 shares of that class of stock. In his return for 1936, he did not report the dividend as income. The Commissioner determined a deficiency by including the value of the dividend as income, and the Board of Tax Appeals sustained him. The Circuit Court of Appeals reversed, holding that the dividend was not constitutionally the subject of income tax if it was distributed to holders of both classes of outstanding stock in proportion to their respective holdings. It accordingly remanded the case to the Board to find the facts and to apply the rule announced.3 No. 66 Petitioner owned 200 shares of common,-the entire stock of a corporation. By charter amendment the creation of an issue of 500 shares of 7% Cumulative Non-Voting [607] Preferred Stock, of $100 par value, was authorized. The directors voted a distribution to stockholders of $5,000 par of the preferred stock; and the petitioner, as sole stockholder, received fifty shares as a stock dividend. The earnings available for dividends were in excess of the value of this stock. Petitioner still holds the preferred stock and no dividends have been paid upon it. The petitioner failed to return the stock dividend as income, the respondent determined a deficiency, and the Board of Tax Appeals affirmed his action. The Circuit of Appeals affirmed the Board's decision.* We think the judgment in No. 22 was right and that in No. 66 erroneous. The cases are ruled by Helvering v. Griffiths, ante, p. 371.* While the petitioner in No. 66 received a dividend in preferred stock, the distribution brought about no change whatever in his interest in the corporation. Both before and after the event he owned exactly the same interest in the net value of the corporation as before. At both times he owned it all and retained all the incidents of ownership he had enjoyed before. In No. 22, the respondent insists that the distribution of the dividend in nowise disturbed the relationship previously existing amongst all the stockholders, or that previously existing between the respond 242 B. T. A. 484. 122 F. 2d 973. 4124 F. 2d 315. *Page 170 herein. ent and the corporation. The court below has held that, if this is true, the dividend did not constitute income. We think Koshland v. Helvering, 298 U. S. 441, distinguishable. That was a case where there were both preferred and common stockholders, and where a dividend in common was paid on the preferred. We held, in the circumstances there disclosed, that the dividend was income, but we did not hold that any change whatsoever in the character of the shares issued as dividends resulted in [608] the receipt of income. On the contrary, the decision was that, to render the dividend taxable as income, there must be a change brought about by the issue of shares as a dividend whereby the proportional interest of the stockholder after the distribution was essentially different from his former interest. No. 22 affirmed. MR. JUSTICE RUTLEDGE took no part in the consideration or decision of these cases. MR. JUSTICE REED, MR. JUSTICE FRANKFURTER, and MR. JUSTICE JACKSON dissent from each judgment. They are of opinion that Koshland v. Helvering, 298 U. S. 441, requires contrary conclusions. 4. MOLINE PROPERTIES, INC. v. COMMISSIONER OF INTERNAL REVENUE (319 U. S. 436. No. 660 Decided June 1, 1943) 1. Upon the facts of this case, held that, for the purpose of the federal income tax, gains from sales (in 1935 and 1936) by a corporation of its property, although the corporation was owned wholly by an individual stockholder, could not be treated as income taxable to the individual rather than to the corporation. P. 440. 2. The corporation in this case was not a mere agent of the stockholder. P. 440. 131 F.2d 388, affirmed. CERTIORARI, 318 U. S. 751, to review the reversal of a decision of the Board of Tax Appeals, 45 B. T. A. 647, that there were no deficiencies in the corporate taxpayer's income and excess-profits taxes. MR. JUSTICE REED delivered the opinion of the Court. Petitioner seeks to have the gain on sales of its real property treated as the gain of its sole stockholder and its corporate existence ignored as merely fictitious. Certiorari was granted because of the volume of similar litigation in the lower courts and because of alleged conflict [437] of the decision below with other circuit court decisions.1 Petitioner was organized by Uly O. Thompson in 1928 to be used as a security device in connection with certain Florida realty owned by him. The mortgagee of the property suggested the arrangement, under which Mr. Thompson conveyed the property to petitioner, which assumed the outstanding mortgages on the property, receiving in 1 112 West 59th Street Corp. v. Helvering, 62 App. D. C. 350, 68 F. 2d 397: United States v. Brager Building & Land Corp., 124 F. 2d 349; North Jersey Title Ins. Co. v. Commis sioner, 84 F. 2d 898; Inland Development Co. v. Commissioner, 120 F. 2d 986; see Carling Holding Co. v. Commissioner, 41 B. T. A. 493; Mayer v. Commissioner, 36 B. T. A. 117; Abrams Sons' Realty Corp. v. Commissioner, 40 B. T. A. 653; Thrift Realty Co. v. Commissioner, 29 B. T. A. 545: Moro Realty Holding Corp. v. Commissioner, 25 B. T. A. 1135, affirmed 65 F. 2d 1013; Forshay v. Commissioner, 20 B. T. A. 537. return all but the qualifying shares of stock, which he in turn transferred to a voting trustee appointed by the creditor. The stock was to be held as security for an additional loan to Mr. Thompson to be used to pay back taxes on the property. Thompson owned other real property, title to which he held individually. In 1933 the loan which occasioned the creation of petitioner was repaid and the mortgages were refinanced with a different mortgagee; control of petitioner reverted to Mr. Thompson. The new mortgage debt was paid in 1936 by means of a sale of a portion of the property held by petitioner. The remaining holdings of the petitioner were sold in three parcels, one each in 1934, 1935 and 1936, the proceeds being received by Mr. Thompson and deposited in his bank account. Until 1933 the business done by the corporation consisted of the assumption of a certain obligation of Thompson to the original creditor, the defense of certain condemnation proceedings and the institution of a suit to remove restrictions imposed on the property by a prior deed. [438] The expenses of this suit were paid by Thompson. In 1934 a portion of the property was leased for use as a parking lot for a rental of $1,000. Petitioner has transacted no business since the sale of its last holdings in 1936 but has not been dissolved. It kept no books and maintained no bank account during its existence and owned no other assets than as described. The sales made in 1934 and 1935 were reported in petitioner's income tax returns, a small loss being reported for the earlier year and a gain of over $5,000 being reported for 1935. Subsequently, on advice of his auditor, Thompson filed a claim for refund on petitioner's behalf for 1935 and sought to report the 1935 gain as his individual return. He reported the gain on the 1936 sale. The question is whether the gain realized on the 1935 and 1936 sales shall be treated as income taxable to petitioner, as the Government urges, or as Thompson's income. The Board of Tax Appeals held for petitioner on the ground that because of its limited purpose, the corporation "was a mere figmentary agent which should be disregarded in the assessment of taxes." Moline Properties v. Commissioner, 45 B. T. A. 647. The Circuit Court of Appeals reversed on the ground that the corporate entity, chosen by Thompson for reasons sufficient to him, must now be recognized in the taxation of the income of the corporation. Commissioner v. Moline Properties, 131 F. 2d 388. The doctrine of corporate entity fills a useful purpose in business life. Whether the purpose be to gain an advantage under the law of the state of incorporation2 or to avoid or to comply with the demands of creditors or to [439] serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity. New Colonial Co. v. Helvering, 292 U. S. 435, 442; Deputy v. du Pont, 308 U. S. 488, 494. In Burnet v. Commonwealth Improvement Co., 287 U. S. 415, this Court appraised the relation between a corporation and its sole stockholder and held taxable to the corporation a profit on a sale 5 3 2 Texas-Empire Pipe Line Co. v. Commissioner, 127 F. 2d 220. Cf. Edwards v. Chile Copper Co., 270 U. S. 452, 453-4, 456. Sheldon Bldg. Corp. v. Commissioner, 118 F. 2d 835. Palcar Real Estate Co. v. Commissioner, 131 F. 2d 210. Watson v. Commissioner, 124 F. 2d 437; Salmon v. Commissioner, 126 F. 2d 203. 68843-45-14 |