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HELVERING V. GRIFFITHS, 318 U. S. 371 (1943) - US SUPREME COURT DECISIONS ON-LINE
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The question in this case is whether the Acts of Congress and the administrative regulations thereunder afford a basis on which we may reconsider the decision in chanroblesvirtualawlibrary
Was Congress thereby saying that such a dividend as we have here is not being taxed, in view of the Eisner v. Macomber decision, or was it saying that, regardless of that decision, it is being taxed? Events which must be considered to determine which Congress intended begin with the enactment of the Revenue Act of 1913, which taxed corporate "dividends" in general, but said nothing of stock dividends in particular. [Footnote 2] The Treasury attempted to tax them, and this Court held that a dividend of common stock paid on stock of the same kind was not income within the meaning of the Act, intimating, however, that, as used in the Sixteenth Amendment, "income" might have a wider scope. Towne v. Eisner, 245 U. S. 418. Congress had meanwhile provided that a "stock dividend shall be considered income, to the amount of its cash value." [Footnote 3] Under that Act, the Commissioner asserted that a dividend in common stock paid on common stock constituted income when received. This Court held it was not income within the meaning of the Sixteenth Amendment, chiefly for the reason that income had not been severed from capital or realized by such a distribution. Eisner v. Macomber, 252 U. S. 189. This decision was by a divided Court, Justices Holmes and Brandeis each writing a dissenting opinion, in which, respectively, Justices Day and Clarke joined. It was promptly and sharply criticized. [Footnote 4] chanroblesvirtualawlibrary
There the matter stood for nearly fifteen years, although, in the meantime, this Court pointed out in reorganization cases that a distinction existed between the type of stock dividend before it in Eisner v. Macomber and one which gave the stockholder a different stock, or different proportionate interests, than before. United States v. Phellis, 257 U. S. 156; Rockefeller v. United States, 257 U. S. 176; Cullinan v. Walker, 262 U. S. 134; Weiss v. Stearn, 265 U. S. 242; Marr v. United States, 268 U. S. 536. chanroblesvirtualawlibrary
Inaction did not mean, however, that persons who received stock dividends were escaping all support of the revenues. Taxation was only postponed, as it taxation of many securities taken in corporate reorganizations, until sale or other realization has occurred. Their proceeds, when realized, have always been taxable as income. The Treasury had come to compute the postponed tax under Regulations which, as to some classes of stock, apportioned the cost basis between the old stock and the dividend stock in accordance with their respective fair market values at the time the stock dividend was issued. [Footnote 7] March 30, 1936, this Court granted certiorari in Koshland v. Helvering, 298 U. S. 441, in which the taxpayer challenged the validity of the apportionment Regulations. 297 U.S. 702. She had owned certain preferred stock, and had received a dividend of common shares thereon. The preferred was thereafter redeemed, and the Commissioner applied the allocation rule, which reduced the cost basis of this old stock. This, of course, increased her gain on the redemption of the old stock and added to her tax. She argued that her dividend, notwithstanding Eisner v. Macomber, to which she gave a narrow reading, was constitutionally taxable as income at the time received. The Court held unanimously and squarely that the dividend in question did constitute income within the Sixteenth Amendment, and in effect limited Eisner v. Macomber to the kind of dividend there dealt with. But it did not overrule that decision or question its authority as to dividends such as we have in this case. With two Justices dissenting, it struck down the apportionment regulations as being beyond statutory authorization. chanroblesvirtualawlibrary
On March 3, 1936, the President had suggested the enactment of a tax upon the undistributed income of corporations. [Footnote 8] On March 26, 1936, and while the taxpayer's petition for certiorari in the Koshland case was pending, a Subcommittee of the House Ways and Means Committee recommended that such a tax be enacted in lieu of the existing capital stock, excess profits, and income taxes on corporations. [Footnote 9] It was thought by some authorities that imposition directly upon shareholders of a tax based on their pro rata shares of corporate earnings would be more satisfactory than the undistributed profits tax. [Footnote 10] Serious consideration of this method, which had been employed in chanroblesvirtualawlibrary
earlier times, [Footnote 11] was foreclosed by the belief that Eisner v. Macomber made it "impossible" to put into effect. [Footnote 12] chanroblesvirtualawlibrary
At the hearings of the Congressional Committees, the proposed tax was attacked as being a measure which would have the effect of forcing the distribution by corporations of assets needed in their business. Its supporters anticipated the decision of this Court in the Koshland case, and countered with statements that dividends taxable as income to the shareholders -- which would have the effect of avoiding the undistributed profits tax on the corporation [Footnote 13] -- could be declared and the undistributed profits tax avoided without the necessity of distributing assets. [Footnote 14] No testimony was given, however, that dividends chanroblesvirtualawlibrary
such as we have in this case were legally taxable or intended to be taxed. [Footnote 15] chanroblesvirtualawlibrary
He submitted a legal memorandum furnished by Arthur Kent, chanroblesvirtualawlibrary
Congressman Vinson called particular and favorable attention to an article approving the decision in Eisner v. Macomber, published in the same month by Professor Magill, who had served as Special Assistant to the Secretary of the Treasury in tax matters and has also served as Undersecretary of the Treasury. [Footnote 20] Congressman Vinson reiterated his views on the following day in response to questions by Congressman Treadway, leader of the opposition to the Bill. [Footnote 21] chanroblesvirtualawlibrary
The opinion of this Court in the Koshland case was announced on May 18, 1936, six days after the Senate Finance chanroblesvirtualawlibrary
Senator Black answered chanroblesvirtualawlibrary
The meaning of § 115(f)(1) was critical in the administration both of the undistributed profits tax upon corporations and of the income tax upon shareholders. This was not its only importance, however. Like the earlier Revenue Acts, the Revenue Act of 1936 contained provisions intended to cope with the problem of evasion of income taxes by shareholders through failure to distribute corporate income. [Footnote 30] These provisions had been drafted to avoid the limitations set upon Congressional power by chanroblesvirtualawlibrary
Other agencies of the Government accepted this same view of the meaning of the statute, authorizing the issuance by corporations subject to their supervision of securities other than common stock at variance with their usual policy and in order to permit the corporations to chanroblesvirtualawlibrary
Against this background, it was proposed to incorporate an undistributed profits tax in the pending Revenue Act for 1938. As proposed and enacted, § 115(f)(1) was the same as in the 1936 Act. [Footnote 36] Like earlier Acts, the Revenue Act of 1938, as proposed and enacted, contained provisions chanroblesvirtualawlibrary
intended to conform with the authority of Eisner v. Macomber, [Footnote 37] and it was attacked as embodying the principle chanroblesvirtualawlibrary
of forcing the distribution of needed corporate assets. The rate of the undistributed profits tax was, however, chanroblesvirtualawlibrary
very materially lower than in the 1936 Act. [Footnote 38] This would have had the effect of diminishing the amount which would be collected from the corporation as undistributed profits tax despite the declaration of a nontaxable stock dividend. Despite these factors, again there was not the slightest suggestion of the view that § 115(f)(1) had made or had intended to make all stock dividends taxable; on the contrary, there was continued recognition of the chanroblesvirtualawlibrary
The Treasury adhered to its earlier views of the meaning of § 115(f)(1) by repromulgating its former Regulation under the Revenue Act of 1938 and under the Internal Revenue Code, [Footnote 41] and it stood unamended at the time of the receipt of the stock dividends here in question. Congress, in 1939, enacted basis provisions incorporating the language of § 115(f)(1). [Footnote 42] It was not until November 15, 1940, and after the receipt of the dividends here involved, that the Treasury amended the Regulation, and then only by striking out all after the first sentence. [Footnote 43] This action followed the decision of this Court in Helvering v. Brunn, 309 U. S. 461, on March 25, 1940, which rejected the concept that taxable gain could arise only when the taxpayer was able to sever increment from his original capital. It preceded by ten days the decision in Helvering v. Horst, 311 U. S. 112, which held that there was no exemption from taxation where economic gain is enjoyed "by some event other than the taxpayer's personal receipt of money or property." Id. at 311 U. S. 116. Each of these decisions chanroblesvirtualawlibrary
(Italics supplied.) If the statute is to be literally read, use of "does" instead of some word of futurity indicates that the time of enactment or, at the latest, the time of receipt of the dividend is the critical one for determining taxability. Under either view, these dividends would not be taxable. The parties are agreed that, for the purposes of this decision, the meaning of the Constitution must be found in the decisions of this Court, chanroblesvirtualawlibrary
The statute was reenacted in its original form after having been in force for two years, and after a long controversy centering around the meaning of the statute which assumed throughout the correctness of the administrative construction. This Court has denied retroactive effects to amendments to valid Treasury Regulations which have survived reenactment of the statute, even in the absence of any affirmative indication that the subject matter of the statute and Regulation was called to the attention of Congress. [Footnote 46] The effect of reenactment in the absence of chanroblesvirtualawlibrary
such affirmative indications of agreement has been stated in various and not entirely consistent terms. [Footnote 47] This is a question we do not now need to examine, for there are in this case many indications that Congress was in complete chanroblesvirtualawlibrary
Nor do we concur in the Government's argument that the legislative history of § 3791(b) of the Internal Revenue Code requires reconsideration of our decision as to the effect of a corresponding provision of the Revenue Act of 1928 in Helvering v. R. J. Reynolds Tobacco Co., 306 U. S. 110, 306 U. S. 116. [Footnote 49] We think that, in the circumstances of this chanroblesvirtualawlibrary
case, the administrative construction in effect at the time of the receipt of the stock dividends here in issue must be given controlling effect. chanroblesvirtualawlibrary
The Government's assertion that Congress intended to hold the meaning of § 115(f)(1) in suspense until the termination of years of litigation is in conflict with our recent decision in Parker v. Motor Boat Sales Co., 314 U. S. 244. There, we were called upon to construe § 3(a) of the Longshoremen's and Harbor Workers' Act, 44 Stat. 1424, which made compensation payable only if "recovery for the disability or death through workmen's compensation proceedings may not validly be provided by State law." Its statement in such terms was due to this Court's decision in Southern Pacific Co. v. Jensen, 244 U. S. 205, a much criticized and somewhat impaired, but not overruled, chanroblesvirtualawlibrary
The Government urges that we read into the Congressional Act an intent to tax these dividends because of considerations that we do not think are entitled to any weight. It argues that the form of § 115(f)(1) is attributable to "embarrassment" which would have been incident to a "frontal attack" on Eisner v. Macomber. There is ample ground to know that the prospect of conflict in opinion with this Court on constitutional questions was not sufficient so to mute the 74th and 75th Congresses. [Footnote 51] This was as it should be. There is no reason to doubt that this Court may fall into error, as may other branches of the Government. Nothing in the history or attitude of this Court should give rise to legislative embarrassment if, in the performance of its duty, a chanroblesvirtualawlibrary
And, if we were to assume Congressional "embarrassment" and take it into consideration, we would also be required to weigh the many other political factors which may have motivated the choice employed in the language of § 115(f)(1). Those in favor of the Bill may have believed that the adoption of existing decisions was the chanroblesvirtualawlibrary
We are asked to make a retroactive holding that, for some seven years past, a multitude of transactions have been taxable although there was no source of law from which the most cautious taxpayer could have learned of the liability. If he consulted the decisions of this Court, he learned that no such tax could be imposed; if he read the Delphic language of the Act in connection with existing decisions, it, too, assured him there was no intent to tax; if he followed the Congressional proceedings and debates, his understanding of nontaxability would be confirmed; if he asked the tax collector himself, he was bound by the Regulations of the Treasury to advise that no such liability existed. It would be a pity if taxpayers could not rely on this concurrent assurance from all three branches of the Government. But we are asked to brush all this aside and simply to decree that these transactions are taxable anyway. chanroblesvirtualawlibrary
§ 117. Compare 79 U. S. 17, with Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601, and Eisner v. Macomber, 252 U. S. 189, 252 U. S. 218, 252 U. S. 230-232. See [email protected] 13 Stat. 480; 14 Stat. 5, 478; 16 Stat. 258.
80 Cong.Rec. 8811. See also statement by Oliphant, General Counsel of the Treasury, Hearings on the Revenue Act, 1936, House Ways and Means Committee, 74th Cong., 2d Sess., pp. 658, 659; footnotes 10 and < a>| 10 and < a>S. 371fn12|>12, supra; cf. Report of Subcommittee of the House Committee on Ways and Means, Tax Revision, 1938, January 14, 1938, 75th Cong., 3d Sess., pp. 20 et seq.; H.R.Rep. No. 1860, 75th Cong., 3d Sess., p. 53; 65 Cong.Rec. 8014 et seq.; Martin, Taxation of Undistributed Corporate Profits, (1936) 35 Michigan Law Review 44, 50, 62.
See also 25 U. S. 210; United States v. Moore, 95 U. S. 760, 95 U. S. 763; Fawcus Machine Co. v. United States, 282 U. S. 375, 282 U. S. 378; Norwegian Nitrogen Co. v. United States,@ 288 U. S. 294, 288 U. S. 315.
In 1936, Congress provided that stock dividends were taxable as income when they constituted "income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution." [Footnote 2/1] § 115(f)(1). That statutory chanroblesvirtualawlibrary
provision is now rewritten so as to permit stock dividends to be taxable when they constitute "income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution as construed by Eisner v. Macomber." That extraordinary result is reached in the face of the plain language of the Act, and in face of clear statements of its purpose made in Committee Reports. The report of the House Ways and Means Committee (H.Rep. No.2475, 74th Cong., 2d Sess., p. 10) stated that stock dividends were to be taxable when they constituted "income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution." The report of the Senate Finance Committee (S.Rep. No. 2156, 74th Cong., 2d Sess., p. 18) contained the unequivocal statement that "stock dividends are made taxable to the full extent permitted by the Constitution." That purpose is now thwarted. Reliance is placed on certain statements made by Mr. Vinson, who managed the bill on the floor of the House. Yet the most that can be said is that his statements in explanation of the bill were ambiguous. He stated, to be sure, that the new provision was not to be chanroblesvirtualawlibrary
Id., p. 6310. I fail to see in that declaration even any intimation that Eisner v. Macomber, rather than the Constitution, marked the reach of the new legislation. Furthermore, a reading of the whole discussion on the floor of the House indicates to me that his denial that the legislation made an "attack" on Eisner v. Macomber fell far short of suggesting that the House intended to foreclose this Court from reexamining Eisner v. Macomber. If Congress had that purpose, the Act hardly would have been phrased in terms which embrace the full scope of the Sixteenth Amendment. To me, the disavowal of an intent to "attack" Eisner v. Macomber meant no more than a disclaimer of any purpose to propose unconstitutional legislation. Eisner v. Macomber is a decision of this Court. Under the traditional conceptions of the place of judicial review in our constitutional system, this Court, and only this Court, can change the rule of that case in absence of an amendment to the Constitution. Congress here was merely respecting that traditional view. It wanted to go as far as it could. But it could have no idea how far that would be until this Court spoke. No one could predict whether this Court would overrule, modify, or sustain Eisner v. Macomber when the 1936 legislation came before chanroblesvirtualawlibrary
Then followed a summary of our decisions, ending with three examples based on the Koshland case, Eisner v. Macomber, and the Gowran chanroblesvirtualawlibrary
But there is said to be lack of wisdom in this interpretation of the Act. It is argued that it would be disruptive of tax administration. It is urged that a decision which now overruled Eisner v. Macomber would be unfair, because it would be retroactive. Those matters are none of our business. Every revenue act which Congress has passed has a retroactive effect. It is something on which taxpayers, of necessity, take their chances. Milliken v. United States, 283 U. S. 15, 283 U. S. 23. And many of the uncertainties in revenue acts necessarily are not resolved until this Court passes on them years later. Here, there is no possible basis for complaint. These stock dividends were declared in 1939, three years after the Act making them taxable was passed. Of course, the taxpayer, no more than Congress, could predict what interpretation this Court would give the new statute. Sec 115(f)(1), however, made the risks apparent. The fact that some guessed wrong is wholly irrelevant to this litigation. Inequities may result from a holding in 1943 that Eisner v. chanroblesvirtualawlibrary
Powell, Income From Corporate Dividends, 35 Harv.L.Rev. 363, 376. The wealth of stockholders normally increases as a result of the earnings of the corporation in which they hold shares. I see no reason why Congress could not treat that increase in wealth as "income" to them. [Footnote 2/3] See 79 U. S. 18; Helvering v. National Grocery Co., 304 U. S. 282, 304 U. S. 288; Powell, The Stock Dividend Decision and The Corporate Nonentity, 5 Nat.Tax Assoc.Bull. 201. The notion that there can be no "income" to the stockholders in such a case within the meaning of the Sixteenth Amendment unless the gain is "severed from" capital and made available to the recipient for his "separate use, benefit and disposal" (Eisner v. Macomber, 252 U.S., pp. 252 U. S. 207, 252 U. S. 211) will not stand analysis. In cases like Koshland v. Helvering and Helvering v. Gowran, where stock dividends were held to be taxable as income, both the original investment and the accumulations were retained by the company. Yet those cases hold that stockholders may receive "income" from the operations of their corporation though the corporation makes no distribution of assets to them. And see 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. Other cases make plain that there may be "income" though neither money nor property has been received by the taxpayer. Benefits accruing as the result of the discharge chanroblesvirtualawlibrary
of the taxpayer's indebtedness or obligations constitute familiar examples. Old Colony Trust Co. v. Commissioner, 279 U. S. 716; Douglas v. Willcuts, 296 U. S. 1; United States v. Hendler, 303 U. S. 564. And increase in the value of property as a result of improvements made by the lessee are taxable income to the lesser even though the taxpayer could not "sever the improvement begetting the gain from his original capital." Helvering v. Bruun, 309 U. S. 461, 309 U. S. 469. The declaration of a stock dividend normally will not increase the wealth of the stockholders. Its accrual will usually antedate that event. See Haig et al.,@ The Federal Income Tax (1921) p. 8. For it is the accumulation of corporate earnings over a period of time which marks any real accrual of wealth to the stockholders. The narrow question here is whether Congress has the power to make the receipt of a stock dividend based on earnings an occasion for recognizing that accrual of wealth for income tax purposes. Congress has done so through the formula of computing the "income" to the stockholders at the "fair market value" of the stock dividends received. Sec. 115(j). Whether that is the most appropriate procedure which could be selected for the purpose may be arguable. But I can see no constitutional reason for saying that Congress cannot make that choice if it so desires. That is one way -- though perhaps, at times, a crude one -- of measuring for income tax purposes the wealth which normally accrues to stockholders as a result of the earning of their corporation.