Source: https://caselaw.findlaw.com/us-supreme-court/247/339.html
Timestamp: 2019-04-20 13:49:30+00:00

Document:
[247 U.S. 339, 340] Mr. Solicitor General Davis, for petitioner.
Messrs. A. W. Clapp and Newell Clapp, both of St. Paul, Minn., and H. Oldenburg, of Carlton, Minn., for respondent.
Hornby, the respondent, recovered a judgment in the United States District Court against Lynch, as Collector of Internal Revenue, for the return of $171, assessed as an additional income tax under the Act of October 3, 1913 (chapter 16, 38 Stat. 114, 166), and paid under protest. The Circuit Court of Appeals affirmed the judgment (236 Fed. 661, 149 C. C. A. 657), and the case comes here on certiorari. It was submitted at the same time with Lynch, Collector, v. Turrish, 247 U.S. 221 , 38 Sup. Ct. 537, 62 L. Ed. --, Southern Pacific Co. v. Lowe, Collector, 247 U.S. 330 , 38 Sup. Ct. 540, 62 L. Ed. --, and Peabody v. Eisner, Collector, 247 U.S. 347 , 38 Sup. Ct. 546, 62 L. Ed. --, arising under the same act, and this day decided.
The facts, in brief, are as follows: Hornby, from 1906 to 1915, was the owner of 434 (out of 10,000) shares of the capital stock of the Cloquet Lumber Company, an Iowa corporation, which for more than a quarter of a century had been engaged in purchasing timber lands, manufacturing the timber into lumber, and selling it. Its shares had a par value of $100 each, making the entire capital stock $1,000,000. On and prior to March 1, 1913, by the increase of the value of its timber lands and through its business operations, the total property of the company had come to be worth $4,000,000, and Hornby's stock, the par value of which was $43,400, had become [247 U.S. 339, 341] worth at least $150,000. In the year 1914 the company was engaged in cutting its standing timber, manufacturing it into lumber, selling the lumber, and distributing the proceeds among its stockholders. In that year it thus distributed dividends aggregating $650,000, of which $240,000, or 24 per cent. of the par value of the capital stock, was derived from current earnings, and $410,000 from conversion into money of property that it owned or in which it had an interest on March 1, 1913. Hornby's share of the latter amount was $17,794, and, this not having been included in his income tax return, the Commissioner of Internal Revenue levied an additional tax of $171 on account of it, and this forms the subject of the present suit.
The case was tried in the District Court and argued in the Circuit Court of Appeals together with Lynch, Collector, v. Turrish, 236 Fed. 653, 149 C. C. A. 649, and was treated as presenting substantially the same question upon the merits. In our opinion it is distinguishable from the Turrish Case, where the distribution in question was a single and final dividend received by Turrish from the Payette Company in liquidation of the entire assets and business of the company and a return to him of the value of his stock upon the surrender of his entire interest in the company, at a price that represented its intrinsic value at and before March 1, 1913, when the Income Tax Act took effect.
It is evident that Congress intended to draw and did draw a distinction between a stockholder's undivided share or interest in the gains and profits of a corporation, prior to the declaration of a dividend, and his participation in the dividends declared and paid; treating the latter, in ordinary circumstances, as a part of his income for the purposes of the surtax, and not regarding the former as taxable income unless fraudulently accumulated for the purpose of evading the tax.
This treatment of undivided profits applies only to profits permitted to accumulate after the taking effect of the act, since only with respect to these is a fraudulent purpose of evading the tax predicable. Corporate profits that accumulated before the act took effect stand on a different footing. As to these, however, just as we deem the legislative intent manifest to tax the stockholder with respect to such accumulations only if and when, and to the extent that, his interest in them comes to fruition as income, that is, in dividends declared, so we can perceive no constitutional obstacle that stands in the way of carrying out this intent when dividends are declared out of a pre-existing surplus. The act took effect on March 1, 1913, a few days after the requisite number of states had given approval to the Sixteenth Amendment, under which for the first time Congress was empowered to tax income from property without apportioning the tax among the states according to population. Southern Pacific Co. v. Lowe, supra. That the retroactivity of the act from the date of its passage (October 3, 1913) to a d te not prior to the adoption of the amendment was permissible is settled by Brushaber v. Union Pacific R. R., 240 U.S. 1, 20 , 36 S. Sup. Ct. 236, Ann. Cas. 1917B, 713, L. R. A. 1917D, 414. And we deem it equally clear that Con- [247 U.S. 339, 344] gress was at liberty under the amendment to tax as income, without apportionment, everything that became income, in the ordinary sense of the word, after the adoption of the amendment, including dividends received in the ordinary course by a stockholder from a corporation, even though they were extraordinary in amount and might appear upon analysis to be a mere realization in possession of an inchoate and contingent interest that the stockholder had in a surplus of corporate assets previously existing. Dividends are the appropriate fruit of stock ownership, are commonly reckoned as income, and are expended as such by the stockholder without regard to whether they are declared from the most recent earnings, or from a surplus accumulated from the earnings of the past, or are based upon the increased value of the property of the corporation. The stockholder is, in the ordinary case, a different entity from the corporation, and Congress was at liberty to treat the dividends as coming to him ab extra, and as constituting a part of his income when they came to hand.
Hence we construe the provision of the act that 'the net income of a taxable person shall include gains, profits, and income derived from ... interest, rent, dividends, ... or gains or profits and income derived from any source whatever' as including (for the purposes of the additional tax) all dividends declared and paid in the ordinary course of business by a corporation to its stockholders after the taking effect of the act ( March 1, 1913), whether from current earnings, or from the accumulated surplus made up of past earnings or increase in value of corporate assets, notwithstanding it accrued to the corporation in whole or in part prior to March 1, 1913. In short, the word 'dividends' was employed in the act as descriptive of one kind of gain to the individual stockholder; dividends being treated as the tangible and recurrent returns upon his stock, analogous to the in- [247 U.S. 339, 345] terest and rent received upon other forms of invested capital.
We repeat that under the 1913 act dividends declared and paid in the ordinary course by a corporation to its stockholders after March 1, 1913, whether from current earnings or from a surplus accumulated prior to that date, were taxable as income to the stockholder.
We do not overlook the fact that every dividend distribution diminishes by just so much the assets of the corporation, and in a theoretical sense reduces the intrinsic value of the stock. But, at the same time, it demonstrates the capacity of the corporation to pay dividends, holds out a promise of further dividends in the future, and quite probably increases the market value of the shares. In our opinion, ongress laid hold of dividends paid in the ordinary course as de facto income of the stockholder, without regard to the ultimate effect upon the corporation resulting from their payment.
Of course we are dealing here with the ordinary stockholder receiving dividends declared in the ordinary way of business. Lynch, Collector, v. Turrish and Southern Pacific Co. v. Lowe, Collector, this day decided, rest upon their special facts and are plainly distinguishable.

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