Evening journal., 1918-01-08
DIVIDENDS EXEMPT
Of income TAX
Decision Rendered by Su-
preme Court on Appeal
From District Court
CARE ARGUED BY
JUSTICE HUGHES

WASHINGTON, Jan. S.--A decision Of
far reaching Importance to corporation
stockholders and 10 the Government in
income tax collections was handed
down by the Supreme Court Of The
United States yesterday in the suit
Of Henry Towne against Mark Eisner,
collector Of internal revenue Tor the
Third district of New York. The deci-
sion held in, effect that stock dividends
are not taxable income under the in
come tax law when they are 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 rowne was
argued by Charles Z. Hughes, former
Associate Justice OF the supreme Court.
In a stock adjustment Townc turned
in old shares and new ones were Is
sued TO him. He was assessed for taxes
on them under a treasury decision that
income from dividends paid in stock
were taxable under the income tax law
He sued for recovery of the tax in the
District Court Of New York and lost
and took the case TO the Supreme Court
on appeal.
Just Whit effect the decision will
have on receipts under the income tax
law is problematical. Treasury OIL
GERS have not had opportunity 10 study
the decision.
In the case involved the stock issued
10 Towne was not a straight dividend
payment. but involved exchange Of old
shares for new shares when the new
shares had a less value than tho old
ones.
Towne was forced to pay income
taxes on his stock income, which was
held TO be equivalent to Sii7i50. The
District Court of New York passed on
the case, holding that the stock was
income within the meaning Of the law
and it held also that The law was con-
stitutional.
When the case was in the District
Court the Government moved TO dis
miss for want Of jurisdiction on the
ground that the only question was the
construction of the law, not It's c0nsti-
tutionality. II was argued that If such
stock dividend is not income within
the meaning OF the Constitution IL Is
not income within the intent Of the
law. The Supreme Court held that 1t
is not necessarily true that income
means the same thing in the Con-
stitution and the law. The decision in
part, as read by Justice Holmes, fol-
lows;
a word is not a crystal, transparent !
and unchanged. 10 IS the succession Of
a living thought and may vary greatly
in color and content according to the
and the time in which i'll
is used Whatever the meaning of the
the Government has ap-
piled its force 10 the plaintiff on the as
sertion that the statute authorized it to
do So before The suit was brought, and
the court below has sanctioned its /
course.
The plaintiff says that the statute /
as IL is construed and administered is /
unconstitutional He is not to be de- I
feated by the reply that the Govern /
ment does not adhere 10 the conviction /
by virtue of which alone it has taken
and keeps the plaintiffs money. If this .
court should think that the construc-
tion would make the act unconstitu-
tional. While it keeps the money IL
opens the question whether the act
construed as IL has construed 10 can be
The motion 10 dismiss is
overruled.
The case being properly here, how
ever, the conviction Of the act, is open
as we'll as its consttutonalitv if con-
strued as the Government has con-
strued It by its conduct Notwithstand-
ing the thoughtful discussion that the
,ase received below we cannot doubt
hat the dividend was capital, as we'll
rs that the purposes Of the income tax
IS for the distribution between tenant
'or life and remainder man. What was
said by this court upon the latter quss-
ion is equally true for the former. A
stock dividend really takes nothing
rom the property Of the corporation
md adds nothing to the interest Of
he shareholders. It's property is not
diminished and their interests are not I
increased
'The PROPORTIONAL interest Of each
seems the same. The only