Evening star., 1920-03-08
Judges Divide 5 to
4 on Act of
1916.
GOVERNMENT TO
REFUND MILLIONS
Federal Court Upheld
in Myrtle II. Ma
cornber Case.

| stock dividends may not be taxed as
| income, the Supreme Court of the
United States held today in declaring
unconstitutional the provisions of the
1915 income tax act taxing as income
such dividends declared by corpora
tions out of earnings and profits ac.
cruing after March 1. 1913.
The court divided five to four. JUS
| tice Pitney rendering the majority
| opinion; Justices Holmes and Day
Justices Clark and Brandeis in an
| other.
| Under the courts ruling the federal
| government must refund millions of
dollars in taxes collected on stock
| dividends since the 1916 law became
officials said today the exact total of
| refunds could not be estimated at this
| time and that it would not be known
! until all claims had been filed and
computed.
Court DEGREES Upheld.
! The court upheld federal court de-
| crees denying the authority of Con-
gress to tax stock dividends and
awarding to Myrtle H. Macomber
$1.367 which she had paid under pro-
| test on 1.100 shares of new stock re-
| ceived in January, 1916, as a stock
| dividend from the Standard Oil Com
pany of California. The case was
one Of series in which j; P. Nor:
gan, 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 Ques.
| ton affects thousands of investors.
In the majority opinion Justice Pit
| ney said a stock dividend lis no more
than a book adjustment, in essence
not q dividend, but rather the oppo.
site.
"No part of the assets Of the COM
pany is separated from the common
fund.-" he said, nothing distributed
| except paper certificates that evil
dence an antecedent increase in the
value Of the Stockholders capital in.
terest resulting from an accumula.
| tion Of profits by the company, bu,
profits so far absorbed in the busines:
aa to render 1t impracticahle to sep
arate them for withdrawal and dis
Far from being = realisation Of
profits Of the stockholder. 1t tends
rather to postpone such realisation. in
| that the fund represented by the new
stock has been transferrd from sur
plus to capital. and no longer is avail
able for actual distribution.
Essential Fact Stated.
'aThe essential and controlling fact is
that the stockholder has received MOTH
ing out Of the company's assets for his
i separate use and benefit; on the con-
trary, every dollar of his original in
| vestment, together with whatever ac-
/ cretions and accumulations have re-
suited from employment of his money
and that of the other stockholders in
| the business of the company. still re-
mains 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 substance and not tc
answers the definition of income in
the meaning of the sixteenth amend
ment.
I'VE are clear that not only does a
stock dividend really take nothing
from the property of the corporation
and add nothing to that of the share
holder, but that the antecedent accu-
mutation of profits evidenced thereby
while indicating that the shareholder
is the richer because of an increase of
his capital, at the same time shows he
has not realized or received any in
come in the transaction.
stoekholder's PROFIT.
1T is said that a stockholder may
sell the new shares acquired in the
"
can find a buyer. 1t is equally true
that If he does sell and in doing so
realizes a profit, such profit, like any
other. Is income, and so far as it
may have arisen since the sixteenth
amendment is taxable by Congress
would be true were he to sell some
Of his original shares at a profit. But
if a shareholder sells dividend stock
he necessarily disposes Of part of
his capital interest, just as If he
should sell a part of his old stock.
either before or after the dividend.
What he retains no longer entities
him to the same proportion OF future
dividends as before the sale. Yet.
without selling, the shareholder, un-
not the wherewithal to pay an income
tax upon the dividend stock. Moth
ing could more clearly show that to
tax a stock dividend is to tax a cap
itial increase and not income, than
this demonstration that in the nature
of things 1t requires conversion of
capital in order to pay the tax"
Government Contention Untenable.
The governments argument that
stock dividends should be taxable be-
cause in a previous case the court
had held that taxes should be imposed
on distribution by corporation of
stock in another corporation owned
Dy II was ucCIdTcu uulcHdDie Oy
Justice Pitney. .In the case of stock
of another corporation. he said, the
assets of the distributing corporation
are distributed and. therefore. are in
come to the stockholders, while no
assets are distributed when q CORPORA
ton makes a dividend of its own
stock.
To the governments contention
that stock dividends are income from
corporate earnings. Justice Pitney
said such dividends are nothing" but
paper certificates which. so far as
they have any effect, deny him the
present participation in such earn
ings."
Stockholders are not partners. Jus
tice Pitney declared.
Cited NJ property Tax"
In the opinion Justice Pitney said
that Congress has unquestioned pow
er to tax shareholders interest in
corporations, but such taxation. he
said would be property tax and
would have to be apportioned among
the states as required by the Consti-
tuition, without regard to the income
tax amendment.
Justice Pitney denied the govern
ment's contention that the income tax
amendment removed obstacles to tax
alton of accumulated corporate prof
"Manifestly this argument must be
rejected" he said. .since the amend
ment applies to income only, and what
In called the stockholders share In the