Rock Island Argus. (Rock Island, Ill.) 1893-1920, 1920-03-08
COURT HOLDS
LAW OF 1916
M|SAPPLIED
stock Dividends, Levied
Upon for Years, Are
Really Exempt.

washington, March Stock
diyidends may not be taxed as in
eome. the supreme court held today
n declaring unconstitutional the
,,oyisions of the 1916 income tax
at taxing as income such dividends
declared by corporations out OF
earnings and profits accruing after
March /, 1918.
The court divided five to four,
Justice Pitney rendering the ma
iority opinion, Justices Holmes and
Day Joining in one dissenting opin-
ion. and Justices Clarke and
Brandeis in another.
Must Refund Millions.
Under the courts ruling, the
federal government must refund
millions of dollars in taxes collect
ed on stock dividends since the 1916
law became effective. Internal
revenue bureau officials said today
the exact total of the refunds could
not be estimated at this time and
that il would not be known until
all claims had been filed and COM
puted.
Most Important Ruling.
The court upheld federal court
decrees denying the authority OF
congress to tax stock dividends and
awarding to Myrtle H. Macomber
Sl,3e7 which she had paid under
protest on 100 shares Of new
stock received in January, 1915, as
stock dividend from the Standard
OIL company of California. The
case was one of a series in which
Up. Morgan. Herbert l.. Pratt and
others had questioned the validity
Of the act.
Court officials said the case was
one OF the most important at this
term and that determination of the
question involved affects thousands
Of investors.
e Held Not . Dividend.
Justice Pitney, in his majority
opinion, said stock dividend us
in essence not q dividend but rather
the opposite"
no part of the assets Of the
company is separated from the
common fund" he said. nothing
distributed except paper certificates
that evidence an antecedent in
crease in the value of the stock
holders capital interest resulting
from an accumulation of profits by
the company, but profits so far a5-
sorbed in the business as TO render
i lmpracticable to separate them
for withdrawal and distribution.
Far from being a realization of
profits Of the stockholder, it tends
rather to postpone such realiza-
ton, in that the fund represented
by the new stock has been trans
ferred from surplus to capital, and
no longer is available for actual
distribution.
The essential and controlling
iact is that the stockholder has
received nothing out of the COM
Mny's assets for his separate use
and benefit; on the contrary, every
dollar of his original Investment to-
sether with whatever accretions
and accumulations have resulted
from employment of his money and
tnat OF the other stockholders in the
business of the company still re-
mans the property of the company,
and subject to business risks which
may result in wiping out the entire
investment. Having regard to the
very truth of the matter. to sub
sance and not to form, he has re-
celved nothing that answers the
uenntion of income in he meaning
VI he 18th amedment.
Takes Nothing; Gives nothing.
! We are clear that not only does
Sock dividend really take moth
Jug from property. of the corpora
uon ana add nothing to that of the
suareholder, but that the antecedent
..sseumulatlon of profits evidenced
'aereoy. while indicating that the
saarenolder is the richer because OF
aa increase Of his capital, at the
ssine time shows he has not realiz-
W OF received any income in the
transaction.
Taxable II Sold.
~ is said that a stockholder
aAs sell the new shares acquired
M, ~ sae stock dividend; and so he
s' II he can find buyer. 1t is
NV ssAiiy true that II he does sell
,ro a IN doing so realizes a profit
co osu profit, like any other. is in
s,;u, ,a,e, and so far as it may have
t,,'a I since the 18th amendment, IL
,ia."e oy congress without appor.
ss.ant s.nt The same would be true
MI. ~ ne to sell some Of his original
h.,ss hes At a profit. But il a share.
es.ser sells dividend stock he nee.
e,n;..s oisposes of a part Of his
al s' interest, Just as il he should
h.sa.. part Of his old stock, ethel
or after the dividend. Wha,
Ia Ms!Ans no longer entities hin
aSS same proportion of future
vhhsuos - before the sale. Yet
les. selling, the shareholder, un
has uossessed Of other resources
ipcom~ ~ the wherewithal to pay al
NosAS ux on the dividend stock
tha, =. could more clearly show
nr " tax . stock dividend is Il
coms capital increase and not in
n. 'aan this demonstration tha
eoe,".n nature Of things it requires
hrsAss s'cn On OF capital in order 4