Court Opinion

ID: 9653192
Source: CourtListenerOpinion
Date Created: 2023-08-23 17:40:50.14495+00
Date Added: 2024-06-11T18:12:56.950865
License: Public Domain

MANTON, Circuit Judge
(dissenting).
In 1914, appellant purchased 30' shares of stock for $1,875 and in 1916 received a stock dividend of 60 shares out of the profits accrued since March 1, 1913. Under the 1916 Revenue Act, § 2 (a), 39 Stat. 756, appellant paid a tax on the 60 shares, valued at $6,000, being the amount transferred from surplus to capital account, when these dividend shares were issued to him. In 1918, the appellant sold the 90 shares for $5,625 and claimed a loss for that year of $2,250, the difference between the sum of the original price of $1,875 plus the stock dividend value of $6,000 and the sale price of $5,625. The tax for 1918 as thus returned was paid in 1919.
The 1916 act imposed a tax on stock dividends “which stock dividend shall be considered ineome, to the amount of its cash value.” The Revenue Act of 1918 applied for the year appellant sold his stock, and section 213 (a) and section 201 (a) (c) thereof carried the same provisions as section 2 (a) of the Revenue Act of 1916, except that stock dividends were required to be considered as income “to the amount of the earnings or profits distributed.”
On March 8, 1920, Eisner v. Macomber, 252 U. S. 189, 44 S. Ct. 546, 68 L. Ed. 970, decided that an income tax on a stock dividend under the 1916 act was unconstitutional. In the fall of 1920, Treasury Decision 3059 was issued revoking articles 1545, 1546, and 1642 and amending article 1547, Regulations 45, to read that a stock dividend was not taxable, but, on the sale of the stock, the cost basis was to he determined by the apportionment of the cost of the original stock. Article 1546 as originally promulgated provided that, as stock dividends were taxable under the 1916 act, for the purpose of ascertaining the gain or loss derived from the sale of stock of a corporation received as a dividend or for the sale of the stock in respect to which such a dividend was paid, the cost of such stock is to he determined in accordance with the following rule:
“(3) In the ease of stock received as a dividend in 1916 or subsequent years out of earnings or profits accumulated since February 28,1913, the cost of each share is the valuation at which it was returnable as ineome, as shown by the transfer of surplus to capital account on the books of the corporation, usually its par value.”
Thus, before the decision in Eisner v. Ma-comber, the Regulations construing the acts of 1916 and 1918, levying a tax on stock dividends as income received, -the Commissioner found the cost of the stock at the valuation at which it was transferred from surplus to- capital on the books of tbe corporation and taxed the difference between the selling price and this valuation as the profits of the sale and as ineome. It was the valuation at which the dividend was returned as income.
After the decision of Eisner v. Macomber, .the Treasury construed the act of 1918, which was in effect when this taxpayer sold his stock, as not taxing stock dividends, but as taxing the entire proceeds thereof as profits derived from a sale. The Treasury necessarily thus maintained that the act of 1918 had one meaning before the decision of Eisner v. Macomber and a different meaning after that decision. But the act remained unamended until the Revenue Act of November 23, 1921 (42 Stat. 227), wherein Congress for the first time declared stock dividends not taxable.
In 1923 appellant’s 1918 tax was re-examined and tbe taxahle ineome calculated under the amendment of Regulations 45, using the apportionment basis and increasing his taxable income $3,750. Appellant paid the deficiency tax and sues to recover. Appel*843lant’s time to file a claim for a refund of the 1916 tax expired in 1922.
If what the appellee has contended for here prevails, it results in the eyil of double taxation to the appellant. We can attribute to Congress no such intention unless the statute expressly so provides. By the Regulations of the Treasury a sale of the stock dividend was taxable under the 1916 and 1938 acts only in so fax as the proceeds exceeded the valuation at which the stock dividend had been returned as taxable income. Because of the decision in Eisner v. Macomber, it is held below that the entire proceeds of a stock dividend falls into ta.x under that provision of the statute whieh levied a tax on profits of sales; that this justifies a reversal of the previous construction of the act.
Eisner v. Macomber stated that section 2 (a) of the 3.916 act plainly evinced the purpose to tax stock dividends. Section 2 (a) provided that “stock dividend shall bo considered income, to the amount of its cash value.” The Revenue Act of 1917, title 12 (40 Stat. 329), amended the act of 1916. Section 1200 amended section 2 (a) by eliminating the proviso, and seeiion 1231 (40 Stat. 337) added a new section to the 1916 act, section 31 (a), providing that stock dividends “shall be considered income, to the amount of the earnings or profits so distributed.” Indeed the Revenue Act of 1918 makes more specific provision for taxation of dividends. Section 213 (a) states that gross income includes gains derived from dividends. Section 201 (e) provides that a stock dividend shall bo considered income “to the amount of the earnings or profits distributed.” Section 202 (a) (2) provides that the cost shall be the basis for determining gain or loss on the sale of property acquired on and after March 1, 1913. The Revenue Act of 1921, § 201 (d), provides that a stock dividend shall not be subject to tax, and section 202 (a) provides that cost shall bo the basis for property acquired after February 28, 1913. Thus the plain purpose of the acts of 1916 and 1918 to tax stock dividends, when distributed, is recognized in the practice actually followed under the Treasury Regulations applicable to the acts of 1916 and 1918. Since stock dividends distributed under the 1913 act were not taxable, and those under the acts of 1916 and 1918 were considered taxable, in order to avoid double taxation, Treasury Decision 2734, approved June 7, 1918, provided that, on sale of stock dividends received under the later acts, the “cost of each share is the valuation at which it was returnable as income, as shown by the transfer of surplus to capital account on the books of the corporation, usually its par value.”
Appellant contends that section 201 (e) of the 1918 act, although unconstitutional, must be read with section 202 (a) to determine the meaning of the latter. And he argues that since Congress intended to tax stock dividends under section 201, it did not intend to tax the same dividend again under section 202 and that the defeat of the intent of section 201 cannot he the occasion for enlarging the scope of section 202. Appellant claims that section 202 intends to tax on sa.le only the difference between the sale price and the cost, whieh is the value at whieh the stock dividend was returnable for taxation under section 201. The appellee contends that Congress intended to tax all income, and, failing to reach stock dividends under section 203, taxed them on sale under section 202. In making his contention, the appellant does not necessarily contend that a stock dividend has a real cost independent of the old stock, but that section 202 intended to tax only the difference between the sale value and the par value of the stock dividend and that intent and purpose cannot he expanded because section 201 is unconstitutional. The appellee’s contention is that, since seeiion 201 is bad, we should consider section 202 alone and the amended regulations apportioning the cost of the old stock to stock dividends. This necessarily denied to stock dividends an independent cost.
It is improper to rejeet the unconstitutional section 291 as an aid in interpreting section 202. Section 201 should be read together with section 202 to determine the intent and purposes of section 202. Section 202 states that the basis on sale of property should be cost. In view of section 201, and the rule of interpretation against double taxation, section 202 does not tax stock dividends, not only because they have a cost, but also because they are taxable under section 201.
Whether or not the stock dividend shall bo given a cost independent of the original stock is a matter of tax administration whieh, within the statutory limits, is concerned primarily with taxing all income. Where stock dividends were taxed, when distributed under the 1916 and 1918 acts, the regulations properly attributed an independent cost to them for the purpose of taxing a gain on sale of the stock dividends. As stated when Eisner v. Macomber caused a ebange in the administrative practice, the regulations apportioned *844the cost of the original stock to the stock dividend. Why the government did not eliminate this tax when it re-examined the appellant’s return and when it taxed the stock dividend on sale, Beckers v. United States (Ct. Cl.) 42 F.(2d) 300, or allow the stock dividend cost equal to the value on which a tax was paid as under the old regulations, is unexplained. It reopened the tax after the time for refund had lapsed, and now urges an interpretation of section 2:02 which will permit it to tax the stock dividend on sale as if it had not been taxed under the unconstitutional section 201. The result is unfair and very wrong; no interpretation should be adopted which will permit this result unless the statute compels it.
Where a tax has been paid under section 201, the stock dividend obtains a cost for the purposes of tax administration under section 202 to be calculated either as article 1546 originally provided or as it is provided after its first amendment of April 17,1919. Surely it was not the intention of the 1916 and 1918 acts to tax stock dividends and later to tax the entire proceeds of the sale thereof, resulting in the evil of double taxation. The legislative intent of the Revenue Act of 1918 was to tax dividends as such and not to tax the entire proceeds thereof as gains and profits derived from sales. To permit the latter requires an addition to the language of the statute which Congress alone is qualified to make. The decision in Eisner v. Macomber did not render taxable that which before was not taxable. If it was not the intention of Congress to tax all the proceeds as profits derived from sale, the intent not to tax the proceeds did not become a contrary intent merely because the tax on stock dividends as income was invalidated by the courts. It is the intent of the statute that is controlling, not an intent disclosed by the 1921 act.
When Congress enacted the Revenue Act of 1918, it had before it the act of 1916, which had been construed and applied by the Treasury as not taxing the proceeds of a stock dividend except in the amount by which such pro-' ceeds exceeded the valuation at which the dividend had been returned as income. T. D. 2734. If this construction was not in accord with the legislative intent of Congress, it could easily have been rectified by amendment, but, instead of doing 'so, the act of 1918 re-enacted the act of 1916 in substantially the same language, which we may deem to be an approval and adoption of the construction of the Treasury. Brewster v. Gage, 280 U. S. 327, 337, 50 S. Ct. 115, 74 L. Ed. 457; Edwards v. Wabash Ry., 264 F. 610 (C. C. A. 2).
Section 1402 of the Revenue Act of 1918 (40 Stat. 1150) provided that, if any clause or part of the act should be declared invalid by a court of competent jurisdiction, such judgment would not affect or impair or invalidate the remainder of the act, “but shall be confined in its, operation to the clause, sentence, paragraph, or part thereof directly involved in the controversy in which such judgment has been rendered.” Thus, if the part of the act which prescribes a tax on dividends is invalid, that declaration of invalidity attaches only to that portion of the act “directly involved in the controversy” in which judgment was rendered in Eisner v. Macomber. Plainly the intention of Congress was to tax stock dividends as such and not impose taxation under another provision of the act on the proceeds of the same stock dividends as profits derived from' sales.
When the Treasury imposed this tax on the sale of stock dividends before the 1921 act by promulgating amended Regulations 45-, it was not authorized to do so by virtue of section 1309 of the Revenue Act of 1918 (26 USCA § 1245 and note). Merely because the stock tax was ineffectual, it had no right to substitute for the tax a levy on the proceeds of the stock dividend without giving a cost provided for by section 202. Eisner v. Macomber rendered the stock dividend tax incapable of enforcement, but it did not impair the fact that Congress intended to tax the stock dividends. It did not justify a construction that, if invalid, it did intend to tax the same dividends in another way, as profits from sales.
Moreover, economically the stock dividend has a cost independent of the original stock which should be recognized under section 202. The cost of the original stock is the price paid for it, and the cost of an additional issue is the price paid for it. Equally there is a price paid by the stockholder for a stock dividend, and that price should be adopted as the cost of the stock dividend. That price and that cost is the surplus transferred from surplus to capital account when the stock dividend is issued. In point of fact, in the case of a stock dividend, the stockholder permits his corporation to transfer from surplus to capital account the value of the stock dividends issued. Indisputably, if he had received the surplus in a cash dividend and bought additional stock, the cash reinvestment would be the basis of the additional stock. The stock dividend produces the same result by avoiding a sale and purchase of stock. We should *845in fairness attribute the same effect to the same result. It is but the Treasury regulations that forbid doing so. The same transfer from surplus to capital account is a reinvestment of capital to the same extent that the cash dividend used to buy stock is a reinvestment of capital and the surplus transferred presumably the par value of the stock dividend is the proper basis of cost of ihe stock dividend. A refusal to accept this basis and the tax computed on a lower basis would tax the capital investment.
In objection, it may be said that payment of cash dividend is not similar to a transfer of surplus to capital account for an issue of stock dividends because the stockholders’ right to a cash dividend received is unlike the stockholders’ right to surplus held by the corporation. Admitting that the corporation is the legal owner of the surplus and that the directors have a very wide control over the distribution of surplus in dividends, it may be pointed out that the stockholders control the election of directors, and have some equitable claim to surplus and indirectly control the distribution of surplus. Indeed, in a corporation closely held, the control of distribution of surplus is more than indirect. Nor is it a fatal objection that cash dividends reinvested are unlike stock dividends because in the former the stockholder pays a tax on receipt and for that reason is permitted a basis of the cost of the stock for future sale. As stated above, under the 1916 and 1918 acts, this was not regarded as an objection because the taxpayer under the regulations on sale of a stock dividend was allowed a basis of the cost of the stock dividend, to wit, the amount transferred from surplus to capital. The fact that a stock dividend is exempt from taxation does not make a stock dividend the less a capital asset.
In Miles v. Safe Deposit & Trust Co., 259 U. S. 247, 42 S. Ct. 483, 485, 66 L. Ed. 923, in speaking of stock rights, which are closely analogous to stock dividends, the court said: “To treat the stockholder’s right to the now shares as something new and independent of the old, and as if it' actually cost nothing, leaving the entire proceeds of sale as gain, would ignore the essence of the matter, and the suggestion cannot be accepted.”
Much that is said in Eisner v. Macomber as to nothing having been paid for the stock dividend by the stockholder was used argumentatively to demonstrate that a stock dividend was capital and not income. But where, as here, the appellant has held the dividend stock together with Ms original stock for years, the dividend stock had a value capable of estimate, and that sum should enter into its cost basis. Congress did not intend to tax the proceeds of the sale as such, but rather the profit after allowing a valuation for the stock dividend.
The judgment should be reversed.