#### THE UNITED STATES v. CHARLES W. PHELLIS.

[56 C. Cls. 157; 257 U. S. 156.]

Judgment was rendered against the United States in the court below. On appeal the judgment was *reversed,*and the Supreme Court decided: •

Substance and not form should control in the application of the sixteenth amendment and the income tax laws enacted under it.

The income tax law of October 3,1913, in declaring that the tax shall be laid on gains, profits, and income derived from dividends, means, not that everything in the form of a dividend must be treated as income, but that income derived in the way of dividends shall be taxed.

Income defined as in *Eisner*v. *Macomber,*252 U. S. 189.

With the concurrence of 90 per cent of the stockholders of a corporation, a plan of reorganization was effected, pursuant to which a new corporation with an'authorized capital stock nearly four times as great in par value as the aggregate stock and bonded indebtedness of the old was formed under the laws of a different State, all the assets of the old were transferred to the new, as a going concern, including the good will and a large surplus, and, in consideration, the old corporation retained money enough to redeem part of its bonds and received (1) the new company’s debenture stock of par value sufficient to redeem the remainder, retire its own preferred stock and leave in its treasury an amount equal in par value to its own outstanding common stock, and (2) the new company’s common stock of par value double the amount of the old company’s outstanding common stock, which the latter immediately distributed to its common stockholders as a dividend, paying them two shares of the new for each of the old. Upon completion of the transaction, October 1, 1915, the personnel of the stockholders and officers of the two corporations was identical, the stockholders having proportionate holdings in each; but less than one-half of the new company’s authorized stock had been issued. Thereafter, the old corporation continued as a going concern, but, except for the redemption of its bonds and retirement of its preferred stock, and the holding of the debenture stock equal to its common, and collection and disposition of the dividends thereon, did no business. *Held: (a)*The shares of the new *594company’s common stock which passed to the old company and through it to its stockholders as a dividend, representing its surplus, were income of the shareholders, taxable under the act of October 3, *1913. (2>)*And this, although the market value of the stockholder’s old shares before the dividend was the same as that of his old and new shares after it. (c) The new company must be regarded, not as substantially identical with the old, but as a separate entity, and its stockholders as having property rights and interests materially different from those incident to ownership of stock in the old company. *(<L)*The new common stock in the treasury of the old company being treasury assets representing accumulated profits and capable of distribution, its distribution transferred to the several stockholders new individual property, which they were severally entitled to enjoy or sell — their individual income.

Mr. Justice PitNey

delivered the opinion of the Supreme Court November 21,1921.