Source: https://supreme.justia.com/cases/federal/us/298/441/
Timestamp: 2019-04-21 10:57:25+00:00

Document:
1. Common voting shares of a corporation received by the holder of cumulative preferred shares as a dividend held income, and not to be treated as returns of capital. P. 298 U. S. 443.
Therefore, upon a subsequent sale or other disposition of the preferred shares, no part of their original cost is to be apportioned to such common shares for the purpose of determining the gain or loss from such disposition.
2. An administrative construction, the effect of which is to convert an income tax imposed by a statute into a capital levy, cannot be adopted. P. 298 U. S. 445.
3. Where the provisions of an Act are unambiguous and its directions specific, there is no power to amend it by regulations. P. 298 U. S. 446.
Review by certiorari, 297 U.S. 702, of a judgment reversing a decision of the Board of Tax Appeals, 33 B.T.A. 634, and approving the action of the Commissioner of Internal Revenue in increasing an income tax assessment.
The question is whether, under the Revenue Acts of 1926 and 1928, a taxpayer who purchases cumulative nonvoting preferred shares of a corporation upon which a dividend is subsequently paid in common voting shares must, upon a sale or other disposition of the preferred shares, apportion their cost between preferred and common for the purpose of determining gain or loss.
The petitioner, in 1924 and 1926, purchased preferred stock of Columbia Steel Corporation. The company's articles of incorporation provided that holders of preferred stock should receive annual dividends of $7 a share in cash or, at the company's option, one share of common stock for each share of preferred. Dividends on the preferred were to be paid in full before any could be paid on the common; the common had voting rights, the preferred none. The preferred was redeemable at $105 per share, plus accrued dividends, and, upon dissolution or liquidation, was entitled to preferential payment of $100 per share, plus accrued dividends, and no more. The common alone was entitled in such event to the assets of the corporation remaining after payment of the preferred.
share. In computing the profit realized by the petitioner, the Commissioner allocated to the common stock so received, in each instance, a proportionate amount of the cost of the preferred stock. He thereby decreased the resulting cost basis per share and increased the gain. The Board of Tax Appeals reversed, holding that the dividends were taxable income, were not stock dividends within the meaning of the Revenue Acts, [Footnote 3] and their receipt did not reduce the cost basis of the preferred stock. The Circuit Court of Appeals reversed the Board, and approved the Commissioner's action.
The petitioner contends, first, that the dividends she received were not stock dividends exempted from taxation by the Revenue Acts; and, secondly, if exempted, they were nonetheless income, and cannot be treated as returns of capital in computing capital gain or loss. The respondent answers that the distributions were stock dividends because made in the capital stock of the corporation and come within the plain meaning of the provisions exempting stock dividends from income tax; accordingly, the Treasury regulations have consistently and continuously treated them as returns of capital, and required the original cost to be apportioned between the shares originally acquired and those distributed as dividends to obtain the cost basis for the calculation of gain or loss. We hold that the dividends were income, and may not be treated as returns of capital.
The Revenue Act of 1913 imposed an income tax on dividends. [Footnote 4] In Towne v. Eisner, 245 U. S. 418, it was held that, where a corporation declared a dividend on its common stock, in the form of common stock, the dividend was not income within the intendment of the act.
"modifies the definition of dividends in existing law by exempting stock dividends from the income tax, as required by the decision of the Supreme Court in Eisner v. Macomber, 252 U. S. 189. [Footnote 7] "
Although Eisner v. Macomber affected only the taxation of dividends declared in the same stock as that presently held by the taxpayer, the Treasury gave the decision a broader interpretation which Congress followed in the Act of 1921. Soon after the passage of that Act, this Court pointed out the distinction between a stock dividend which worked no change in the corporate entity, the same interest in the same corporation being represented after the distribution by more shares of precisely the same character, and such a dividend where there had either been changes of corporate identity or a change in the nature of the shares issued as dividends whereby the proportional interest of the stockholder after the distribution was essentially different from his former interest. [Footnote 8] Nevertheless, the successive statutes and Treasury regulations respecting taxation of stock dividends remained unaltered. [Footnote 9] We give great weight to an administrative interpretation long and consistently followed, particularly when the Congress, presumably with that construction in mind, has reenacted the statute without change. [Footnote 10] The question here, however, is not merely of our adopting the administrative construction, but whether it should be adopted if, in effect, it converts an income tax into a capital levy.
of the corporation as did the old, does not constitute the receipt of income by the stockholder. On the other hand, where a stock dividend gives the stockholder an interest different from that which his former stockholding represented, he receives income. The latter type of dividend is taxable as income under the Sixteenth Amendment. Whether Congress has taxed it as of the time of its receipt is immaterial for present purposes.
"The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in § 113, [Footnote 11]"
"The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property [with exceptions having no relevancy here]. [Footnote 12]"
governs where the statute merely expresses a general rule and invests the Secretary of the Treasury with authority to promulgate regulations appropriate to its enforcement. But where, as in this case, the provisions of the act are unambiguous and its directions specific, there is no power to amend it by regulation. [Footnote 14] Congress having clearly and specifically declared that, in taxing income arising from capital gain, the cost of the asset disposed of shall be the measure of the income, the Secretary of the Treasury is without power by regulatory amendment to add a provision that income derived from the capital asset shall be used to reduce cost.
Commissioner v. Koshland, 81 F.2d 641.
Commissioner v. Tillotson Mfg. Co., 76 F.2d 189.
Revenue Act of 1928, § 115(f), c. 852, 45 Stat. 791, 822; Revenue Act of 1926, § 201(f), c. 27, 44 Stat. 9, 11: "A stock dividend shall not be subject to tax."
38 Stat. 114, 166, 167.
39 Stat. 756, 757, § 2. Compare Revenue Act of 1918, § 201, 40 Stat. 1057, 1059.
42 Stat. 227, 228. The same provision was repeated in all subsequent Revenue Acts; Revenue Acts of 1924 and 1926, § 201(f); Revenue Acts of 1928 and 1932, § 115(f), 26 U.S.C. § 115(f) and note; Revenue Act 1934, § 115(f).
H.R. 350, 67th Cong., 1st Sess., p. 8. Senate Report No. 275, 67th Cong., 1st Sess., p. 9.
United States v. Phellis, 257 U. S. 156; Rockefeller v. United States, 257 U. S. 176; Cullinan v. Walker, 262 U. S. 134; Marr v. United States, 268 U. S. 536.
See Regulations 65 and 69, Articles 1547, 1548; Regulations 74 and 77, Articles 627, 628; Regulations 86, Articles 115-7, 115-8.
Poe v. Seaborn, 282 U. S. 101, 282 U. S. 116; McCaughn v. Hershey Chocolate Co., 283 U. S. 488, 283 U. S. 492; McFeely v. Commissioner, 296 U. S. 102, 296 U. S. 108.
Regulations 74, Articles 58, 628, and 600.
Manhattan General Equipment Co. v. Commissioner, 297 U. S. 129, and cases cited.
MR. JUSTICE STONE and MR. JUSTICE CARDOZO are of the opinion that the judgment should be affirmed.
of Miles v. Safe Deposit & Trust Co., 259 U. S. 247, 259 U. S. 253, the cost of all the shares is properly distributed between the investment and its accretions, between the old shares and the new. The Regulations so provide. Regulations 45, 1916 Act, Article 1547; Regulations 65, 1924 Act, Articles 1547 and 1548; Regulations 69, 1926 Act, Articles 1547 and 1548; Regulations 74, 1928, Act, Articles 627 and 628; Regulations 77, 1932 Act, Articles 627 and 628; Regulations 86, 1934 Act, Articles 115-7 and 115-8.

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