Source: https://supreme.justia.com/cases/federal/us/302/238/
Timestamp: 2019-04-24 15:53:46+00:00

Document:
1. Dividends of preferred stock to common stockholders whereby they acquire an interest in the corporation essentially different from that represented by their common stock are income within the meaning of the Sixteenth Amendment. P. 302 U. S. 241.
2. Although Congress has power to tax such dividends, they are exempted by § 115(f) of the Revenue Act of 1928, which declares that "A stock dividend shall not be subject to tax." P. 302 U. S. 241.
3. A common stockholder received a dividend of preferred stock worth $100 per share and several months later disposed of it to the corporation for cash at that valuation.
(1) That the whole of the proceeds of the sale were taxable as income. P. 302 U. S. 243.
The computation is under §§ 111 and 113, Revenue Act of 1928, which provide that the gain from conversion of property into money shall be computed at the excess of the amount realized over the "cost" of the property, which in this case was zero.
(2) The stock dividend was not to be likened to gifts and legacies, as to which there are special provisions of the Act excluding them from gross income and prescribing the basis for computing gain from later disposition of the property -- §§ 113(a)(2); 22(b)(3). P. 302 U. S. 243.
(3) Section 115(f) cannot, in view of its history, be taken as a declaration of Congressional intent that the value of all stock dividends shall be immune from tax not only when received, but also when converted into money or other property. P. 302 U. S. 244.
(4) The rates applicable were those prescribed for ordinary income, not the rate for "capital gains" from "property held by the taxpayer for more than two years." § 101(c)(8). Id.
made "out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits."
4. The Circuit Court of Appeals may affirm a decision of the Board of Tax Appeals upon a theory not presented to or considered by the Board, but acceptance of the new theory may involve granting the taxpayer an opportunity to establish additional facts. P. 302 U. S. 245.
Certiorari, 301 U.S. 676, to review a judgment which reversed a decision of the Board of Tax Appeals, 32 B.T.A. 820, sustaining an income tax assessment.
The questions for decision concern the taxation as income of a dividend in preferred stock and the proceeds received on its sale.
at $100 a share, $53,371.50. In his income tax return for the year, Gowran did not treat this sum as taxable income, but included $27,262.72 as capital net gain on the shares received and sold, computing the gain under articles 58 and 600 of Regulations 74, then in force. The Commissioner rejected that treatment of the matter; determined that the $53,371.50 received was income taxable under the Revenue Act of 1928, § 115(g), 45 Stat. 791, 822, as a stock dividend redeemed, and assessed a deficiency of $5,831.67.
The taxpayer sought a redetermination by the Board of Tax Appeals. A division of the Board concluded, upon testimony and stipulated facts, that there had been no cancellation or redemption of the preferred stock so as to make it a taxable dividend under § 115(g); that the transaction by which the company acquired it constituted a sale. The Commissioner secured a reconsideration of the case. He then contended that, under the rule declared in Commissioner v. Tillotson Mfg. Co., 76 F.2d 189, the stock dividend was taxable because it had resulted in a change of Gowran's proportionate interest in the company. That contention was sustained by the Board and, on that ground, it affirmed the Commissioner's determination of a deficiency. 32 B.T.A. 820.
v. Helvering, 298 U. S. 441; but it held that the dividend could not be taxed as income, since, by § 115(f), Congress had provided: "A stock dividend shall not be subject to tax." And it held further that no part of the proceeds could be taxed as income, since there was no profit on the sale, it being agreed that the fair market value of the stock, both at the date of receipt and at the date of the sale, was $100 a share. Gowran v. Comm'r, 87 F.2d 125.
Because of the importance of the questions presented in the administration of the revenue laws, certiorari was granted.
First. The government contends that § 115(f) should be read as prohibiting taxation only of those stock dividends which the Constitution does not permit to be taxed, and that since, by the dividend, Gowran acquired an interest in the corporation essentially different from that theretofore represented by his common stock, the dividend was taxable. In support of that construction of § 115(f), it is urged that Congress has in income tax legislation manifested generally its intention to use, to the full extent, its constitutional power, Helvering v. Stockholms Enskilda Bank, 293 U. S. 84, 293 U. S. 89; Douglas v. Willcuts, 296 U. S. 1, 296 U. S. 9; that this Court holds grants of immunity from taxation should always be strictly construed, Pacific Co. v. Johnson, 285 U. S. 480, 285 U. S. 491, and that the only reason for exempting stock dividends was to comply with the Constitution.
embodied in the statute. Congress declared that the preferred stock should not be taxed as a dividend.
"One who receives a tax-free gift and later sells it, in the absence of statute providing otherwise, is taxed upon the profit arising from the difference in its value at the time he receives it and the sale price. Similarly, one who receives a tax-free bequest, when selling it, is taxed upon the profit arising from any excess of the sale price over its fair market value at the time of receipt."
Compare Taft v. Bowers, 278 U. S. 470.
"If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift."
§ 115(f) cannot, in view of its history, be taken as a declaration of congressional intent that the value of all stock dividends shall be immune from tax not only when received, but also when converted into money or other property. Gain on them is therefore to be computed as provided in §§ 111 and 113, by the "excess of the amount realized" over "the cost of such property" to the taxpayer. As the cost of the preferred stock to Gowran was zero, the whole of the proceeds is taxable.
"The Board approved the Commissioner's assessment, but did so upon a legal theory different from his. We are of the opinion that the Board acted within its powers. . . . It is immaterial whether the Commissioner proceeded upon the wrong theory. The burden is upon the petitioner to show that the assessment is wrong upon any proper theory; otherwise, he must fail."
supra, or in Helvering v. Salvage, 297 U. S. 106, is opposed to such procedure.
If the Court of Appeals had accepted the theory, it would have been open to the taxpayer to urge, in view of the new issue presented, that he should have the opportunity to establish before the Board additional facts which would affect the result. [Footnote 6] As we accept the new theory, leave is granted Gowran to apply to the lower court for that purpose.
"Stock dividends. -- The issuance of its own stock by a corporation as a dividend to its shareholders does not result in taxable income to such shareholders, but gain may be derived or loss sustained by the shareholders from the sale of such stock. The amount of gain derived or loss sustained from the sale of such stock, or from the sale of the stock in respect of which it is issued, shall be determined as provided in Articles 561 and 600."
"(1). General Rule. -- A distribution made by a corporation to its shareholders in its stock or in rights to acquire its stock shall not be treated as a dividend to the extent that it does not constitute income to the shareholders within the meaning of the Sixteenth Amendment to the Constitution."
49 Stat. 1648, 1688. See also § 115(h).
"if the taxpayer has held for more than two years stock upon which a stock dividend has been declared, both the original and dividend shares are considered to be capital assets."
But this was based upon the erroneous premise that stock dividends could not be income, and was part of an administrative scheme to apportion some of the cost of the original shares to the stock received by way of dividend. This arrangement we declared in Koshland v. Helvering, 298 U. S. 441, to be without statutory authority, and the same must be said of the regulation involved here.
See Burnet v. Harmel, 287 U. S. 103, 287 U. S. 105-106; Helvering v. New York Trust Co., 292 U. S. 455, 292 U. S. 463; McFeely v. Commissioner, 296 U. S. 102, 296 U. S. 106-107.
See also Hurwitz v. Commissioner, 45 F.2d 780; Superheater Co. v. Commissioner, 38 F.2d 69; Commissioner v. Linderman, 84 F.2d 727; Dickey v. Burnet, 56 F.2d 917; Lewis-Hall Iron Works v. Blair, 57 App.D.C. 364, 23 F.2d 972; cf. Dobbins v. Commissioner, 31 F.2d 935; Seufert Bros. Co. v. Lucas, 44 F.2d 528 (C.C.A.9); Hughes v. Commissioner, 38 F.2d 755.
Compare Darcy v. Commissioner, 66 F.2d 581; Helvering v. Gregory, 69 F.2d 809, aff'd, 293 U. S. 293 U.S. 465; Alexander Sprunt & Son, Inc. v. Commissioner, 64 F.2d 424; Helvering v. Bowen, 85 F.2d 926; Atlanta Casket Co. v. Rose, 22 F.2d 800; J. & O. Altschul Tobacco Co. v. Commissioner, 42 F.2d 609; Crowell v. Commissioner, 62 F.2d 51; Schweitzer v. Commissioner, 75 F.2d 702, reversed on other grounds, Helvering v. Schweitzer, 296 U. S. 551; Christopher v. Burnet, 60 App.D.C. 365, 55 F.2d 527; Beaumont v. Helvering, 63 App.D.C. 387, 73 F.2d 110.
Compare Woodward v. Boston Lasting Machine Co., 60 F. 283, 63 F. 609.

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