The sun., 1918-01-08
STOCK DIVIDEND
HELD AS EXEMPT
OF INCOME TAX
Decision Rendered by Su.
preme Court on Appeal
From District Court.
CASE ARGUED BY HUGHES
Based on Stock Exchanged in
Course Of Capital Re-
adjustment.
CASE ARGUED BY HUGHES
Special Despo,rh 70 TIM sry

"
"AsHiNGroN. Jan. "A decision Of
rar reaching Importance to corporation
stockholders and to the Government In
income tax collections was handed down
oy the Supreme Court Of the United
states to-day In the suit Of Henry
Towne against Mark Eisner. Collector
or internal Revenue for the Third dis
trict Of New York. The decision held
in effect that stock dividends are not
taxable income under the income tax
law when they are a part OF capital
adjustment or reorganization.
The decision Of the supreme Court.
reversing the District Court OF New
YORK. In which suit was brought. was
unanimous. The case for Towne vas
argued by Charles F.. Hughes. former
Associate Justice OF the supreme Court.
In 4 stock adjustment Towne turned
IN old shares and new ones were issued
to him. He was assessed for taxes on
them under a Treasury decision that in.
come from dividends paid IN stock were
taxable under the income tax Law. He
sued for recovery Of tho tax In tho Dis
trict Court Of New York and lost and
took the case to the Supreme Court on
appeal.
Just what effect the decision will have
problematical Treasury officers have
not had opportunity to study the deci-
sion.
Not q straight Dividend.
In the case involved the stock issued
to Towne was not straight dividend
payment, but involved exchange Of old
shares for new shares when the new
shares had less value than the old
ones.
Towne was forced to pay income taxes
on his stock income. which was held to
be equivalent to S4l7.450. The District
Court Of New York passed on the case.
holding that the stock was income within
the meaning OF the law. and II held also
that the law was constitutional.
When the case was In the District
Court the Government moved to dismiss 5
for want Of Jurisdiction on the ground
that the only question was the construc-
tion Of the law, not its constitutionality.
1t was argued that II such a stock divi-
dend is not income within the meaning
OF the Constitution 1t is not income
within the intent Of the law. The Su-
preme Court held to-day that II 10 not
necessarily true that income means the
same hing in the Consultation AAl the
law, The decision In part. A. fead BY
Justice Holmes. follows:
"A word is not a crystal. transparcn;
and unchanged. II Is the succession y!
living thought and may vary greatly
in color and content according to the
circumstances and the time In whic,, II
is used. Whatever the meaning OF the
Constitution, the Government has ap-
piled it's force to the plaintiff on the as
seytion that the statute authorised II 70
do so before the suit was brought. and
the court below has sanctioned its
, course.
Motion Ovcrruled.
THE plaintiff says that the statute
as II Is construed and administered Is
! unconstitutional He Is not to be de.
feated By the reply that the Government,
does not adhere TO the conviction by vir.
tue OF which alone 1t has taken and
keeps the plaintiffs money. II this
court should think that, the construction
woald make the act unconstitutional
While it keeps the money 1t opens the
question whether the act construed as II
las construed II can be maintained. The
motion to dismiss Is overruled.
| Tho case being properly here. how.
ever, the conviction OF the act is open as
, well as Ats constitutionality II construed
as the Government has construed 1t by
Its conduct, Notwithstanding the
thoughtful discussion that the case re.
cc!ved below. we cannot doubt that the
dividend was capital. as we'll for pur.
poses OF the income tax law as 70,
distribution between tenant for life and
rema!nderman. What was said by thi.
court upon the latter question Is equal,
true for the former. A stock dividend
really takes nothing from the property Of
the corporation and adds nothing to thu
interest OF the shareholders. Its propert,
1 = mt tytu ,aA I'D hall trSx
! not Increased. -
Stockholders No Richer.
THE proportional interest Of eacf
shareholder seems the same. The onl,
change 10 in the evidence which repre-
sents that interest, the new shares ant
tho original shares together Representing
the sane proportional interest that thu
original shares represented before the
issue of the new ones.
I'm short the corporation Is no poorer
and the stockholder Is no richer thar
they were before. II the plaintiff gained
any small advantage by the change 4
certainly was not an advantage Of SIl7
$50, the sum upon which he was taxed
1t Is alleged and admitted that he "a
ceived no more in the way OF dividend,
fand that his old and new certificates to
gether are worth only what the old one,
were worth before. II the sum hat
been carried from surplus to capita
account without corresponding issu,
OF stock certificates. which there wa.
nothing In the nature OF things to pre-
vent. We do not suppose that any on,
would contend that the plaintiff had re
ceived an accession to his income. Pre-
sumably his certificate would have tn,
same value as before. Again, II certif
Gates for $1,000 par were split up II
ten certificates each for 800 We pre-
sumo that no ono would call the new
certificates income. What has happened
Is that the PLAINTIFFS old certificates
have been split UP In effect and hav,
diminished In value to the extent Of tn
value Of the nsw."
! DECISION IMPORTANT.