Court Opinion

ID: 4475932
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:11:45.705684+00
Date Added: 2024-06-11T15:04:23.042770
License: Public Domain

Arundell, /., dissenting: In holding that the dividend received by the petitioners was not “a true stock dividend made in good faith,” I think that the majority fails to give due consideration to one important factor. That is, that the character of what a stockholder receives from his corporation for tax, as well as other purposes, is definitively settled by the action of the directors of the corporation in making the declaration on which the distribution is based. If, on the declaration of a dividend, the directors provide for the medium of distribution, the stockholders must take it in the form so provided. A corporate distribution must “be taken as it emanates from the board.” State v. B. & O. R. R., 6 Gill, (Md.) 363; Staats v. Biograph Co., 236 F. 454; General Utilities & Operating Co., 29 B. T. A. 934, affd. 296 U. S. 200. If the directors declare, and the corporation pays, a stock dividend, that is all that the stockholder can receive. What constitutes a stock dividend has not been open to serious question, at least since the decision in Gibbons v. Mahon, 136 U. S. 549, .was banded down in 1890. That decision laid down the proposition that in the receipt of a stock dividend “the proportional interest of each shareholder remains the same. The only change is in the evidence that represents that interest * * 136 U. S. at 559, 560. The principle so declared in Gibbons v. Mahon was the basis of the decision in Towne v. Eisner, 245 U. S. 418, and has been the touchstone of decision in cases involving the taxability of stock dividends ever since. See the summary of cases in the footnote in the majority opinion. Whether or not a dividend in stock changes the proportional interest of shareholders needs no lengthy discussion in these cases. We know from the decisions that a dividend of common on common does not, Eisner v. Macomber, 252 U. S. 189; neither does a dividend of preferred on common where only common is outstanding, Strassburger v. Commissioner, 318 U. S. 604, while a dividend of common on preferred does work a change and results in the realization of constitutionally taxable income, Koshland v. Helvering, 298 U. S. 441, even though not taxed by the Eevenue Act then in force. In the Koshland case, the Court pointed out that “The company had a surplus sufficient to pay the preferred dividends in cash, but elected to pay them in common stock” (emphasis added). This is in line with the thought expressed in Gibbons v. Mahon, supra, that whether a “distribution is an apportionment of additional stock representing capital, or a division of profits and income, depends upon the substance and intent of the action of the corporation, as manifested by its vote or resolution * * None of the stock dividend cases turn upon the question of the intent of the stockholder, at the time of the receipt, as to the disposition that he will make of his dividend. He may have no intention or plan at all; he may intend to keep it, to give it away, or to sell it. But I do not see how these considerations can change the character of the distribution as manifested by the “substance and intent of the action of the corporation” in making the distribution. Gibbons v. Mahon, supra. Indeed, in the average case, the corporate directors and officers cannot be expected to know what disposition the stockholders will make of their dividend stock. One of the stockholders in this company did not dispose of its dividend stock. My view that the character of a distribution depends upon the intent and action of the corporation is supported by the wording of the Code. Section 115(f)(1) speaks of “A distribution made by a corporation to its shareholders * * *.” It says nothing about what the stockholders do with the distributions. That is taken care of by other sections, such as the gain or loss provisions and the gift tax sections. I also think that in these cases we do not properly come to the question of good faith. That may be a proper consideration in cases where Congress has provided for the postponement of a tax under facts which, without statutory provision, would result in the imposition of a tax concurrently with the happening of the event. Under the early taxing statutes, reorganization exchanges gave rise to recognizable gains that were currently taxed. Marr v. United States, 263 U. S. 536. By the enactment of provisions presently contained in Code section 112(b), the tax may be postponed. Under such provisions, it is proper to inquire as to whether there is a good faith compliance with the statutory intent rather than a mere surface compliance. Gregory v. Helvering, 293 U. S. 465. Here we start with the basic proposition that under the decisions of the Supreme Court stock dividends are not income. The Congress has manifested an intent not to treat them otherwise. Griffiths v. Commissioner, 308 U. S. 355. Therefore, we have only the clear-cut question of whether the distributions here under consideration were, or were not, stock dividends. If they were, whatever plan there may be for their disposition cannot convert them into income any more than Congress could make them income as it attempted to do in the Revenue Act of 1916 and which gave rise to Eisner v. Macomher.