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Matched Legal Cases: ['§ 115', '§ 115', '§ 115', '§ 115', '§ 115', '§ 3791', '§ 3791', '§ 115', '§ 3', '§ 115', '§ 115', '§ 115']

HELVERING V. GRIFFITHS, 318 U. S. 371 - Volume 318 - 1943 - Full Text - US Supreme Court Center - USSC Cases - Nolo
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HELVERING V. GRIFFITHS, 318 U. S. 371 (1943)
Eisner v. Macomber, 252 U. S. 189, and pass on the Government's request that it be overruled.
"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 shareholder within the meaning of the Sixteenth Amendment to the Constitution. [Footnote 1] "
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]
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.
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.
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
earlier times, [Footnote 11] was foreclosed by the belief that Eisner v. Macomber made it "impossible" to put into effect. [Footnote 12]
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
such as we have in this case were legally taxable or intended to be taxed. [Footnote 15]
Acting Chief Counsel of the Bureau of Internal Revenue, setting forth cases dealing with the taxability of stock dividends, sixteen of which, including Eisner v. Macomber, had held stock dividends nontaxable, and twelve of which had held that the dividends were not true stock dividends, and thus were taxable. This memorandum was in support of Kent's statement in response to Congressman Vinson's questioning at the hearings before the House Ways and Means Committee, to the effect that
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]
The opinion of this Court in the Koshland case was announced on May 18, 1936, six days after the Senate Finance
tax on stock dividends which are taxable income for the individual recipient because the stock 'gives the stockholder an interest different from that which his former stockholdings represented. [Footnote 23]"
that they could, but that they would then be subject to the undistributed profits tax. [Footnote 25]
"under all these measures -- under the House bill, under the Senate committee bill, and under this amendment -- any corporation desiring to retain 100 percent of its statutory net income free from increased tax may do so by paying out to its stockholders a dividend which is taxable under the sixteenth amendment. [Footnote 28] "
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
Eisner v. Macomber. It was generally believed that they had failed, and would fail, fully to accomplish their purpose, and that fully effective provisions would entail a challenge of the authority of Eisner v. Macomber. [Footnote 31]
do what the Treasury assured them was necessary to avoid the payment of undistributed profits taxes. [Footnote 34]
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
intended to conform with the authority of Eisner v. Macomber, [Footnote 37] and it was attacked as embodying the principle
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
authority of Eisner v. Macomber. [Footnote 39] Section 115(f)(1) was reenacted while the Treasury Regulation and rulings on its meaning stood unamended and in their original form. [Footnote 40]
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
undermined further the original theoretical bases of the decision in Eisner v. Macomber.
and, when these dividends were received, Eisner v. Macomber fixed the meaning contrary to the Government's position.
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
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
agreement with the Treasury on the question of the taxability of the stock dividends here involved. We would think it unquestionable that, in this case, the Treasury could not retroactively amend the Regulation to the prejudice of the respondent except for the Government's assertion that it should be disregarded upon the authority of Helvering v. Hallock, 309 U. S. 106, 309 U. S. 121, note 8, and that, in any event, under § 3791(b) of the Internal Revenue Code, the Secretary or Commissioner must be held to have authority in any case to make a retroactive amendment of a Regulation.
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
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,
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
legislative body feels impelled to enact laws which may require the Court to reexamine its previous judgments or doctrine. [Footnote 52] The Court differs, however, from other branches of the Government in its ability to extricate itself from error. It can reconsider a matter only when it is again properly brought before it in a case or controversy, and, if the case requires, as a tax case does, [Footnote 53] a statutory basis for a case, the new case must have sufficient statutory support.
most that was politically possible; those who opposed it may have thought it desirable as matter of tax policy to defer taxation of the stock dividend until realization. [Footnote 54] Needless to say, speculation upon such factors has no place in the construction of Acts of Congress.
"We are informed by the Treasury that it has no intention of harassing taxpayers with respect to liability for past years, and that, if Eisner v. Macomber is overruled it intends immediately to recommend to Congress legislation which would relieve taxpayers of any unfair retroactive burden that might result from such overruling. . . . "
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
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
regarded "as an attack upon the Eisner against Macomber decision." 80 Cong.Rec. Pt. 6, p. 6215. But, in answer to an inquiry from Mr. Treadway whether the new provision "describes new stock dividends that can be taxed or what portion of stock dividends under the Sixteenth Amendment can in the future be taxed," he made the following statement:
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
it. Indeed, when the 1936 bill passed the House, [Footnote 2/2] Koshland v. Helvering, 298 U. S. 441, which narrowed the application of Eisner v. Macomber, had not been decided by this Court. And Helvering v. Gowran, 302 U. S. 238, which somewhat extended the rule of the Koshland case, was not decided until after the 1936 Act was passed. But numerous decisions by lower courts had made inroads on the Eisner v. Macomber doctrine. The rule of that case was in flux; a process of erosion had set in, and none knew where that erosion would cease. Accordingly, Congress drafted § 115(f) of the 1936 Act in the most flexible of terms. It used sweeping language incorporating the full coverage of the Sixteenth Amendment, so that those stock dividends would be taxed which this Court would permit to be taxed. There are probably other ways in which the same idea could have been phrased. But the one chosen is clear enough.
Then followed a summary of our decisions, ending with three examples based on the Koshland case, Eisner v. Macomber, and the Gowran
case. On November 15, 1940, this regulation was amended by striking out everything following the first sentence. This regulation, however, even in its original form, did not and could not foreclose inquiry into the validity of the decision in Eisner v. Macomber. It did no more than state the constitutional principles on which the decided cases rested. It certainly did not indicate that the Treasury construed the statute more narrowly than the Constitution itself. However that may be, this Court, on more than one occasion, has refused to follow a Treasury regulation which it felt to be "in the teeth" of the statute. Helvering v. Sabine Transportation Co., ante, p. 318 U. S. 306; Helvering v. Credit Alliance Corp., 316 U. S. 107. If this regulation be construed to narrow the Act so as to tax only stock dividends permitted by Eisner v. Macomber, I would have less reluctance in striking it down than I have had in other instances.
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.
Macomber has not been the law since 1936. But the relief against them lies with Congress. Our task ends if we erase Eisner v. Macomber and give Congress a clean slate on which to write. Then and only then can Congress design a tax system treating stock dividends consistently. So long as Congress has to guess whether or not this Court will overrule Eisner v. Macomber, any interim treatment which it gives stock dividends may have to be readjusted after this Court speaks so as to remove inequities which may have resulted.
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 Collector v. Hubbard,
12 Wall. 1, 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
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.
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