#### ANNA LOUISE NOLDE v. THE UNITED STATES1

[No. F-91.

Decided November 7, 1927]

*On the Proofs*

*Income tax; stoclc and, cash dividends;*“ *most recently accumulated ”*profits.—

(1) The declaration by directors of a corporation that dividends are to be paid from the earnings of a designated year does not affect the application of a taxing statute providing from what year the earnings shall be deemed to have been distributed.

(2) Where on February 21, 1919, a stock dividend of 900 per cent is declared which is sufficient to exhaust the undistributed earnings accumulated prior to March 1, 1913, and on February 28, 1919, a cash dividend of 20 per cent is declared on the capital stock so increased, the cash dividend is, under sections 31 of the revenue act of 1917 and 201 of the revenue a.ct of 1918, to be treated as paid from earnings accumulated after February 28, 1913, notwithstanding a declaration by the directors that it is payable out of undistributed earnings prior to March 1, 1913.

*205*The Reporter’s*statement of the case:

*Mr. H. F. Kantner*for the plaintiff.

*Mr. Alexander H.*McCormick, with whom was *Mr. Assistant Attorney General Herman Jy*Galloway, for the defendant.

The court made special findings of fact, as follows:

I. Anna Louise Nolde, plaintiff, is now, and at all times hereinafter mentioned was, a citizen of the United States and a resident of Reading, Berks County, Pa.

II. Under the provisions of the revenue act of 1918 the plaintiff prepared her income-tax return for the calendar year 1919, wherein she detailed her gross and net income for said year as follows:

Total income from all sources subject to taxation_$16,189.02

Dividends_ 1,649.00

Gross income- 17, 838.02

General deductions:

Taxes paid- $951. 63

Contributions_ 1,240.00

- 2,191. 63

Net income_ 15, 646.39

III. In addition to the amounts set forth in said return, plaintiff received during the year 1919 from Nolde & Horst Company, a corporation, a cash dividend of $110,000, which was not included by the plaintiff in her return. Upon the basis of said return plaintiff’s total tax liability for the year 1919 was determined by her to be $641.47, and she paid said amount to the proper collector of internal revenue.

IV. The Nolde & Horst Company on March 1, 1913, had on hand undistributed profits amounting to $1,100,000. All earnings of the corporation for the years 1913, 1914, and 1915 were currently distributed. For the subsequent years the undistributed earnings or profits accumulated were:

Undistributed earnings or profits of year 1916- $109,000. 00

Undistributed earnings or profits of year 1917- 643,489. 97

Undistributed earnings or profits of year 1918- 659, 355. 30

Undistributed earnings or profits for months of January and February, 1919- 250,000. 00

Accumulated undistributed earnings or profits on Mar. 3, 1919, earned after Mar. 1, 1913_ 1, 652, 845.27

*206Y. On February 21, 1919, the board of directors of Nolde & Horst Company declared a stock dividend of 900 per cent, to be distributed pro rata among the stockholders. The total par value of the shares so distributed amounted to $2,260,000. The plaintiff received 4,950 shares, of the par value of $100 each, as her pro rata share of said distribution.

VI. On February 28,1919, the board of directors of Nolde & Horst Company declared a dividend of 20 per cent on the outstanding capital stock as so increased, or $500,000 payable in cash on March 6, 1919, to the stockholders of record on that date. The cash dividend of 20 per cent was paid on March 6, 1919, and the plaintiff received as a dividend upon her holdings of stock of the said corporation the sum of $110,000. The resolution of the board of directors declaring the cash dividend stated that it was payable out of surplus representing undistributed profits of the years prior to Mai'ch 1, 1913.

VII. On January 22, 1923, the Commissioner of Internal Bevenue notified the plaintiff that an assessment of additional income tax for the calendar year 1919, amounting to $37,339.53, would be made against her, which additional tax was based upon the receipt by plaintiff of the cash dividend declared and paid by the Nolde & Horst Company on March 6, 1919.

VIII. In determining the assessment of additional income tax for the year 1919 the Commissioner of Internal Bevenue held that the 900 per cent stock dividend was not a distribution of undivided earnings and profits, and that there remained undistributed a sufficient amount of earnings and profits accumulated subsequent to February 28, 1913, to pay in full the cash dividend distributed March 6, 1919. On appeal by the plaintiff to the Committee on Appeals and Beview the action of the Commissioner of Internal Bev.enue in assessing the additional tax was sustained.

IX. On December 24, 1923, plaintiff, under duress and protest, paid said additional income tax, amounting to $37,-339.53, to the proper collector of internal revenue, and thereafter duly filed a claim for the refund thereof, which was *207denied by the Commissioner of Internal Revenue on July 25, 1924.

The court decided that plaintiff was not entitled to recover.

1

 Certiorari denied.

GRAiiam, *Judge,*

delivered the opinion of the court:

Plaintiff’s return of her income for the year 1919 showed a net income of $15,646.39, and a tax was paid on the basis of this return amounting to $641.47.

On and prior to February 21, 1919, the plaintiff was a holder of stock in the Nolde & Horst Company. On that date the board of directors of said company declared a stock dividend of 900% to be distributed pro rata among the "stockholders, the total value of the shares so distributed being $2,250,000. The plaintiff received 4,950 shares, of the par value of $100 each, as her pro rata share of this distribution.

On February 28, 1919, seven days after the declaration of the stock dividend, the board of directors of said company declared a dividend of 20% on the outstanding capital stock as increased, amounting to $500,000, payable in cash on March 6, 1919, to the stockholders of record on that date. This cash dividend was- paid on March 6, 1919, and the plaintiff received as a dividend upon her holdings of stock of said corporation the sum of $110,000. The resolution of the board declaring this dividend stated that it was payable out of the surplus representing undistributed profits of the years prior to March 1, 1913.

On March 1, 1913, said company had on hand undistributed earnings or profits amounting to $1,100,000. Its earnings for the years 1913, 1914, and 1915 were currently distributed. For the subslequent years the undistributed earnings were as follows:

> Undistributed earnings or profits of 1916_ $100,000.00

> Undistributed earnings or profits of 1917- 648,489.97

> Undistributed earnings or profits of 1918- 659, 355. 30

> Undistributed earnings or profits of January and February, 1919_ 250,000.00

> Accumulated undistributed earnings or profits on March 3, 1919, earned after March 1, 1913_ 1, 652, 845.27

*208The Commissioner of Internal Revenue on January 22, 1923, notified the plaintiff of an additional assessment of income tax for 1919, amounting to $31,339.53, based upon the receipt by plaintiff of the cash dividend declared and paid by the Nolde & Horst Company on March 6, 1919. The plaintiff appealed to the Comm,ittee on Appeals and Review, which sustained the action of the commissioner, and thereupon plaintiff filed a claim for refund, and this being denied suit was brought in this court March 2, 1926.

I In making the additional assessment the commisS|ioner held that the 900% stock dividend was not a distribution of undivided earnings or profits and that there remained undis¡'tributed a sufficient amount of earnings or profits accumulated subsequent to February 28,- 1913, to pay in full the cash dividend distributed March 6, 1919.

The sole question presented, therefore, is whether the commissioner, under the facts of this case, acted legally in assessing a tax upon the basis of the cash dividend received. The applicable statutes are sec. 31,1 (a) and (b) of the revenue act of 1917, 40 Stat. 300, 338, and sec. 201,2 (a) to (e), inc., of the revenue act of 1918, 40 Stat. 1057, 1059.

*209Prior to the decision on March 8, 1920, in the case of *Eisner*v. Macomber, 252 U. S. 189, the commissioner had held that stock dividends were taxable as income.

As stated, the company had on hand on March 1, 1913, earnings or profits accumulated prior to February 28, 1913, amounting to $1,100,000, and earnings or profits on hand March 3, 1919, accumulated after March 1, 1913, amounted to $1,652,845.27, making a total of $2,752,845.27 of accumulated and undistributed earnings or profits prior to the declaration of the dividends. As the dividends taken together amounted to $2,750,000, it will be seen that there were enough earnings and profits in the treasury of the company to cover both dividends.

*210The court in the *Eisner case*held that a *stock*dividend is not income; that a stock dividend is merely a change in the form of the holding of the stockholder, evidenced by certain certificates, due to the action of the corporation in taking a portion of its earnings and profits, in which the stockholder, of course, had an interest, and converting it into capital, and that it was not such a distribution of profits within the meaning of the statute as to constitute it taxable income. The case also distinguished between the corporation as a separate entity and the stockholder, and held that the stockholder in receiving the stock dividend took nothing out of the company’s assets for his own-use and benefit, while his investment with any additions remained the property of the corporation subject to business risks, the payment of its debts, etc. It made no change in the ownership of the assets of the corporation. The declaration of the cash dividend segregated certain of the company’s profits as property of the stockholder. It was paid to the stockholder and was therefore income to him, and under the act of 1918 cash dividends from profits accumulated after February 28, 1918, were taxable as income.

As recited above, the directors first declared the stock dividend to be paid out of the earnings and profits accumulated since February 28, 1913, and a week later declared the cash dividend payable out of earnings and profits accumulated prior to February 28, 1913. It was decided in the case of *Edwards*v. Douglas, 269 U. S. 204, that the directors could not control by their action what year’s earnings the dividends were to be paid from; that the statute regulated this, and provided that the tax should be paid from the “ available profits or earnings of the most recent year or years,” and that this intention was to be gathered from the phrase “ most recently accumulated ” in connection with the words “ undivided profits or surplus.”

It will be seen from the facts stated that there were ample undistributed earnings and profits at the time the cash dividend was declared, from the years following February 28, 1913, out of which the cash dividend could have been paid. The dividend amounted to $500,000, and the earnings and profits accumulated from the date mentioned *211to the time of the declaration of the dividend amounted to $1,652,845.27.

The petition should be dismissed and it is so ordered.

Moss, *Judge;*Booth, *Judge;*and Campbell, *Ghief*Justice, concur.

Hat, *Judge,*absent.

1

 Sec. 31. (a) That the term “ dividends ” as used in this title shall be held to mean any distribution made or ordered to be made by a corporation, joint-stock company, association, or insurance company out of its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in stock of the corporation, joint-stock company, association, or insurance company, which stock dividend shall he considered income, to the amount of the earnings or profits so distributed.

(b) Any distribution made to the shareholders or members of a corporation, joint-stock company, or association, or insurance company in the year nineteen hundred and seventeen, or subsequent tax years, shall be deemed to have been made from the most recently accumulated undivided profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received, and shall be taxed to the distributee at the rates prescribed by law for the years in which such profits or surplus were accumulated by the corporation, joint-stock company, association, or insurance company, but nothing' herein shall be construed as taxing any earnings or profits accrued prior to March first, nineteen hundred and thirteen, but such earnings or profits may he distributed in stock dividends or otherwise, exempt from the tax, after the distribution of earnings and profits accrued since March first, nineteen hundred and thirteen, has been made. This subdivision shall not apply to any distribution made prior to August sixth, nineteen hundred and seventeen, out of earnings or profits accrued prior to March first, nineteen hundred and thirteen.

* *it * * *

2

 Sec. 201. (a) That the term “ dividend ” when used in this title (except in paragraph (10) of subdivision (a) of section 234) means (1) any distribution made by a corporation, other than a personal-service corporation, to its *209shareholders or members, whether in cash or in other property or in stock of the corporation, out of its earnings or profits accumulated since February 28, 1913, or (2) any such distribution made by a personal-service corporation out of its earnings or profits accumulated since February 28, 1913, and prior to January 1, 1918.

(b) Any distribution shall be deemed to have been made from earnings or profits unless all earnings and profits have first been distributed. Any distribution made in the year 1918 or any year thereafter shall be deemed to have been made from earnings or profits accumulated since February 28, 1913, or in the case of a personal-service corporation, from the most recently accumulated earnings or profits ; but any earnings or profits accumulated prior to March 1, 1913, may be distributed in stock dividends or otherwise, exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been distributed.

(c) A dividend paid in stock of the corporation shall be considered income to the amount of the earnings or profits distributed. Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profits realized thereby shall be taxed to the distributee as other gains or profits.

(d) If any stock dividend (1) is received by a taxpayer between January 1 and November 1, 1918, both dates inclusive, or (2) is during such period bona fide authorized or declared, and entered on the hooks of the corporation, and is received by a taxpayer after November 1, 1918, and before the expiration of thirty days after the passage of this act, then such dividend shall, in the manner provided in section 206, be taxed to the recipient at the rates prescribed by law for the years in which the corporation accumulated the earnings or profits from which such dividend was paid, but the dividend shall be deemed to have been paid from the most recently accumulated earnings or profits.

(e) Any distribution made during the first sixty days of any taxable year shall be deemed to have been made from earnings or profits accumulated during preceding taxable years; but any distribution made during the remainder of the taxable year shall be deemed to have been made from earnings and profits accumulated between the close of the preceding taxable year and the date of distribution to the extent of such earnings or profits; and if the books of the corporation do not show the amount of such earnings or profits, the earnings or profits for the accounting period within which the distribution was made shall be deemed to have been accumulated ratably during such period.