RULE UNDER 1916 LAW. The 1916 Law expressly provided that stock dividends should be taxable. It defined a stock dividend as a distribution by a corporation out of its earnings or profits accrued since March 1, 1913, and payable to its shareholders in stock of the corporation. It was provided that such stock dividends should be considered income to the amount of the earnings or profits so distributed.70 Notwithstanding the broad language in the opinion quoted at length in the following paragraph, the Treasury Department declared that since only the language of the 1913 Law and not the language of the 1916 Law was before the Court in that case, it did not necessarily follow that stock dividends were not taxable under the provisions of the 1916 Law and the 1917 Law, and that it would continue to be governed by the express provision in the 1916 Law taxing stock dividends, and would assess the tax on such dividends unless and until the Supreme Court held otherwise.71 This also expresses the position of the Treasury Department under the present law.

RULE UNDER 1913 LAW. The 1913 Law was silent as to stock dividends, and it was at first held by the Treasury Department that such dividends were not subject to tax, on the theory that the additional shares of stock issued to the stockholder represented no more than the same interest in the identical property represented by his stock before the dividend. The Treasury Department subsequently changed its attitude and held stock dividends to be the equivalent of cash and to constitute taxable income under the same conditions as cash dividends.72 As to the 1913 Law, this

70 Revenue Act of 1916, § 31, added by Revenue Act of 1917. The 1916 Law prior to the amendment contained substantially the same definition of stock dividends.

71 Letter to Collectors dated January 10, 1918; I. T. S. 1918, ¶ 2279. In the opinion of the Treasury Department the Court did not decide that such dividends cannot be income within the meaning of the Sixteenth Amendment, but expressly recognized that the word "income" may have a different meaning in the Statute from the meaning in the Constitution.

72 T. D. 2274, dated December 22, 1915.

ruling of the Treasury Department has been reversed by decision of the United States Supreme Court in a case holding that stock dividends were not taxable. In that case 73 the Court said in part: "Notwithstanding the thoughtful discussion that the case received below we can not doubt that the dividend was capital as well for the purpose of the Income Tax Law as for the 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 interest of the shareholders. Its property is not diminished and their interests are not increased. The pro

*

portional interest 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 the new ones.' Gibbons v. Mahon, 136 U. S. 549, 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, 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 received 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 any one 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 in ten certificates, each for $100, we presume that no one would call the new certificates income. What has happened is that the plain

73 Towne v. Eisner, 245 U. S. 418.

tiff's old certificates have been split up in effect and have diminished in value to the extent of the value of the new." After this decision was rendered the Treasury Depart ment announced that it would refund all taxes based on income from stock dividends reported by taxpayers under the 1913 Law, that is, for the years 1913, 1914 and 1915. In claiming such refunds the taxpayer was required to show by affidavit: (1) The name of the corporation which declared and paid the stock dividend; (2) The date of declaration of the stock dividend and date of receipt by claimant; (3) In which year's return of annual net income the claimant included the stock dividend; (4) Under what item on the return the value of the stock dividend was included, and what valuation was placed upon the dividend in the return; (5) Whether or not the stock thus received and returned as a dividend had been sold by the claimant, and if so, (a) the date of sale, (b) the amount claimant received therefrom, and (c) what part of the total amount received from the sale was included by the claimant in his return of annual net income for the year in which the sale occurred; and (6) Whether or not the dividend consisted of stock of the corporation distributing the dividend to claimant, or of stock acquired by the distributor in another corporation.74

CONSTITUTIONALITY OF TAXING STOCK DIVIDENDS WITH OUT APPORTIONMENT. The Sixteenth Amendment to the Federal Constitution authorized Congress "to lay and colleet taxes on incomes from whatever source derived, without apportionment." The whole purpose of this amendment has been held to be to relieve income taxes, when imposed, from the requirement of apportionment; it in no way enlarged the power of Congress to levy income taxes.75 It has been contended by the Treasury Department that the Supreme Court did not decide that stock dividends cannot be income within the meaning of the above constitutional

74 Mimeograph Letter to Collectors, No. 1795; I. T. S. 1918, ¶ 3107. 75 Brushaber v. Union Pacific R. R. Co., 240 U. S. 1.

amendment in the Towne case 76 referred to above, wherein it was held that stock dividends were not taxable under the 1913 Law, but expressly recognized that the word income may have different meanings, as used in the Statute and the Constitution.77 On the other hand, it has been argued that the Supreme Court was not construing the 1913 Law in the Towne case, but was considering the broad question whether or not a stock dividend is fundamentally and essentially income within the meaning of that term as used in the Sixteenth Amendment; in other words, whether or not Congress has power under the Constitution to tax stock dividends without apportionment. In support of this argument it is urged that the Supreme Court was obliged to place its decision in the case of Towne v. Eisner upon constitutional grounds because of the Government's contention that under the sweeping language of the 1913 Law, stock dividends must have been considered taxable if they were income, and that a decision that they were not taxable was equivalent to a decision that they were not income. It is also to be noted in this connection that the dividends involved in the Towne case were from profits earned before January 1, 1913. The Supreme Court by a later decision 78 has removed the possibility that its decision in the Towne case was based upon this ground. The view that the decision denied the constitutional right of Congress to levy an income tax upon stock dividends has been adopted in a recent case in a lower federal court, decided under the 1916 Law, which expressly taxed stock dividends. The court in this case decided that the provision of the 1916 Law by

76 Towne v. Eisner, 245 U. S. 418.

77 Letter from Treasury Department to Collectors dated January 10, 1918, I. T. S., 1918, ¶ 2279.

78 Lynch v. Hornby, 247 U. S. 339. In this case the Court held under the 1913 Law that dividends declared and paid in the ordinary course by a corporation to its stockholders after March 1, 1913, whether from current earnings or a surplus accumulated prior to that date, were taxable as income to the stockholders. See also Peabody v. Eisner, 247 U. S. 347; Gulf Oil Corporation v. Lewellyn, 248 U. S. 71; Southern Pacific Co. v. Lowe, 247 U. S. 330.

which stock dividends are in terms stated to be income, and to be taxable as such to the same extent as are cash dividends, was unconstitutional because to impose an income tax upon stock dividends is to tax capital or principal, contrary to the requirement that direct taxes be laid by apportionment among the several states according to population.79 Taxpayers against whom a tax is assessed under the 1916 Law and the Revenue Act of 1918 on stock dividends should exercise care in paying the tax under protest and duress in order to protect their rights to recovery.80 Where stock dividends are reported in the return of income, care should be taken that they are segregated from cash dividends and that it be clearly shown either on the return or on a rider attached to the return that the dividend was paid in stock and that the amount is reported not as an admission of liability for tax thereon, but out of courtesy to the Commissioner and in order to avoid the imposition of penalties for an alleged false or fraudulent return.

MONEY VALUE OF STOCK DIVIDENDS. The Revenue Act of 1918 provides 81 that dividends paid in stock of the corporation shall be considered income "to the amount of the earnings or profits distributed." The 1916 Law as amended by the 1917 Law, contained a substantially similar provision.82 Prior to this amendment, the 1916 Law provided that a stock dividend should be taxable "to the amount of its cash value." Both phrases were construed to have the same meaning. Under the law and the regulations stock

79 Macomber v. Eisner, (U. S. Dist. Ct., So. Dist. of N. Y.) decided January 23, 1919, I. T. S. 1918, ¶3718. Judge Mayer overruled the demurrer of the Government to the complaint in this case upon the authority of Towne v. Eisner, 245 U. S. 418, and Peabody v. Eisner, 247 U. S. 347. It is understood that the Government will immediately appeal from this decision to the United States Supreme Court.

80 See Chapter 35 on Assessment and Payment of the Tax for the rules respecting payment under protest and duress.

81 Revenue Act of 1918, § 201 (c).

82 Revenue Act of 1916, § 31, as amended by the Revenue Act of