//.TV 6 try 
 
United States District Court 
 
 Southern District of New York 
 
 MYRTLE H. MACOMBER, 
 
 Plaintiff, 
 against 
 
 MARK EISNER, as Collector of United States 
 Internal Revenue for the Third District of 
 the State of New York, 
 
 Defendant. 
 
 BRIEF FOR THE PLAINTIFF. 
 
 Statement of the Case. 
 
 The case is heard on complaint and demurrer. 
 The action is brought to recover a tax collected under 
 the Income Tax Law of 191 6 on the ground that it 
 was illegally assessed. The facts are fully set out in 
 the complaint ; briefly they are as follows : 
 
 On January 1st, 191 6, the Standard Oil Company 
 of California had capital stock issued and outstanding 
 to the amount of $49,686,656. On that date the Com- 
 pany had surplus and undivided profits, which were in- 
 vested in its plant, property and business required for 
 
• v : 
 
 the purposes of the Company, amounting to $44,852,- 
 263.02. Of this sum $20,353,068.34 had been earned 
 prior to March 1st, 19 13, and the balance, $24,499,- 
 194.68, subsequent to that date (fols. 3, 4, 5). On 
 January 16th, 191 6, the Directors declared a 'stock divi- 
 dend' of $24,843,327.74, to be issued to the shareholders 
 on a ratio of half a new share to one old share. Pur- 
 suant to this resolution all of the surplus earned before 
 March 1st, 19 13, was transferred from surplus account 
 to capital stock account and sufficient of the remaining 
 surplus to equal the balance of the par value of the new 
 shares (fol. 7). As a result 18.0743 per cent, of the 
 par value of the new shares represented earnings sub- 
 sequent to March 1st, 19 13 (fol. 12). 
 
 The plaintiff, owning 2,200 shares previous to 
 January 1st, 19 16, received 1,100 of these new shares 
 (fol. 8). The defendant, acting under the authority 
 of the Treasury Department and the Act of Congress 
 of September 8th, 19 16, levied a tax on the plaintiff 
 as having received income of $19,877, being 18.07 per 
 cent, of $110,000, the par value of the new shares 
 (fols. 15, 16, 17, 18). The tax was paid under pro- 
 test and appeal taken to the Commissioner of Internal 
 Revenue, which appeal having been disallowed, plain- 
 tiff brought this action to recover the money so paid. 
 
 The complaint also states that prior to the closing 
 of the books for the distribution of the 'stock dividend', 
 sales of the Company's stock were made in the open 
 market at prices ranging from $360 to $382 per share, 
 and that subsequent thereto the prices ranged from 
 $234 to $268 a share (fol. 10). These figures show 
 that the market value of plaintiff's holdings was prac- 
 
3 
 
 tically unchanged by the action of the directors, two 
 of the parent shares being equivalent to three subse- 
 quent to the distribution. 
 
 The issue of law presented in this case is whether 
 Congress has power to include in the amount for 
 which an individual is liable under the Income Tax 
 Law of 1 91 6, the "cash value" of new shares which 
 are received upon the declaration of a 'stock dividend'. 
 
 The complaint alleges that such a tax is in viola- 
 tion of Article I, Section 3, clause 3, and Article I, 
 Section 9, clause 4, of the Constitution requiring that 
 direct taxes be apportioned according to population, 
 and that it is not included within the provisions of the 
 Sixteenth Amendment permitting the taxation of 
 "incomes" without apportionment. 
 
 The applicable parts of the Income Tax Law of 
 191 6 are found in 39 Stat. 756, Ch. 463, Part I, Sec- 
 tion 1 (b) : 
 
 "In addition to the income tax imposed by 
 subdivision (a) of this Section (herein refer- 
 red to as the Normal Tax) there shall be levied, 
 assessed, collected and paid upon the total net 
 income of every individual or in the case of a 
 non-resident alien the total net income from all 
 sources within the United States, an additional 
 income tax. . . ." 
 
 Section 2 (a) 
 
 "The net income of the taxable person shall 
 include gains, profits and income derived from 
 salaries, wages or compensation for personal 
 service of whatever kind and in whatever form 
 paid, or from professions, vocations, busi- 
 
 568105 
 
nesses, trades, commerce or sales, or dealings 
 in property, whether real or personal, growing 
 out of the ownership or use of or interest in 
 any real or personal property, also from inter- 
 est, rent, dividends, securities, or the transac- 
 tion of any business carried on for gain or 
 profit, or gains or profits and income derived 
 from any source whatever; Provided, that the 
 term 'dividends' as used in this title shall be 
 held to mean any distribution made or ordered 
 to be made by a corporation, joint-stock com- 
 pany, association or insurance company out of 
 its earnings or profits, accrued since March 
 first, nineteen hundred and thirteen, and pay- 
 able to its shareholders, whether in cash or in 
 stock of the corporation, joint-stock company, 
 association, or insurance company, which stock 
 dividend shall be considered income, to the 
 amount of its cash value." 
 
 There was considerable doubt about the meaning 
 of the term "cash value" which was interpreted by the 
 collector to mean in the present case "par value". 
 This is plainly an arbitrary figure, for the complaint 
 admits that any share was worth from $234 to $268 
 subsequent to the readjustment. 
 
 The War Revenue Act of October 3, 191 7, 40 Stat. 
 300, Ch. 63, Section 12, amends the above to read: 
 
 "which stock dividends shall be considered in- 
 come to the amount of the earnings or profits 
 so distributed" 
 
 but this change of course does not affect the present 
 case, which is concerned solely with income under the 
 Act of 19 1 6. 
 
POINT I. 
 
 THE TAX IS SOUGHT TO BE LAID UPON THE PROPERTY 
 IN QUESTION SOLELY BY REASON OF OWNERSHIP 
 AND CANNOT BE SUSTAINED UNLESS IT IS AUTHOR- 
 IZED BY THE SIXTEENTH AMENDMENT. 
 
 Before the Sixteenth Amendment there were two 
 kinds of income with respect to taxability under the 
 Federal Constitution. 
 
 (a) Gains and profits from "Business, priv- 
 ileges, employments, and vocations" whether of 
 corporations or of individuals. 
 
 Pollock v. Farmers' Loan & Trust Co., 158 
 U. S. 601, 637. 
 
 A tax upon such gains and profits was an excise 
 subject to the constitutional requirement as to geo- 
 graphical uniformity. 
 
 Pollock v. Farmers' Loan & Trust Co., 158 
 
 U. S. 601,635; 
 Brushaber v. Union Pacific R. R. Co., 240 
 
 U. S. 1. 
 Stanton v. Baltic Mining Co., 240 U. S. 103. 
 
 The Corporation Tax Act of 1909 fell within this 
 category. 
 
 Fint v. Stone Tracy Co., 220 U. S. 107. 
 Stratton's Independence, Ltd., v. Howbert, 
 
 231 U. S. 399. 
 Doyle v. Mitchell, Bros. Co., 247 U. S. 179, 
 
 182, 183. 
 Hays v. Gauley Mountain Coal Co., 247 U. S. 
 189, 191, 192. 
 
6 
 
 (b) Income from real or personal property, 
 as such, taxed by reason of ownership. 
 
 A tax upon such income is not an excise, but a 
 direct tax. The question involved in the Pollock case 
 related to this sort of income, and it was held that as 
 the tax was a direct tax, Congress had no constitu- 
 tional power to impose it without the required appor- 
 tionment among the States (according to population 
 (Const., Art. I, Sees. 2 and 9). 
 
 In the case at bar, we are concerned solely with 
 this direct tax. 
 
 "Direct taxes", which are within the restriction of 
 Article I, Sees. 2 and 9, include not only capitation 
 taxes and taxes upon lands, houses, and other real 
 property, but also all taxes on personal property or 
 investments, including income from either real or per- 
 sonal property, taxed because of ownership. Taxes 
 on investments in corporate stocks, laid directly be- 
 cause of ownership, are in this class. 
 
 Pollock v. Farmers' Loan & Trust Co., 158 
 U. S. 601, 637. 
 
 The Sixteenth Amendment removed the require- 
 ment of apportionment only in the case of taxes on 
 incomes. It provides: 
 
 "The Congress shall have power to lay and 
 collect taxes on incomes, from whatever source 
 derived, without apportionment among the sev- 
 eral States, and without regard to any census or 
 enumeration." 
 
 The history of this Amendment is well known. It 
 was adopted for the purpose of avoiding the effect of 
 
the decision in the Pollock case, and of permitting Con- 
 gress to levy a tax on incomes without apportionment. 
 Taxes on "income" from whatever source derived were 
 thus placed in the same category and could be levied 
 without apportionment, being subject in the same man- 
 ner as excises to the constitutional requirement as to 
 geographical uniformity. 
 
 Brushaber v. Union Pacific R. R. Co., 240 
 U. S. pp. 18, 19. 
 
 The sole question, therefore, is : What is "income" ? 
 
 There is nothing in the Sixteenth Amendment 
 which authorizes Congress to levy, without apportion- 
 ment, a tax on anything which does not come within 
 the proper definition of "income". It was, obviously, 
 not the intention to authorize Congress to levy a direct 
 tax on property, except as to income, or otherwise to 
 amend, to qualify, or in any way to restrict the require- 
 ments which have existed ever since our Constitution 
 was adopted, that direct taxes on property can be levied 
 by Congress only if properly apportioned among the 
 States. 
 
 In some of the five cases involving questions under 
 the Income Tax Section of the 19 13 Tariff Law, re- 
 ported in 240 U. S., pp. 1-26; 103-126, the limitations 
 of Article I, Sections 2 and 9, of the Constitution, re- 
 quiring that direct taxes be apportioned, were urged as 
 restricting certain operations of the law with respect to 
 the facts in the cases before the Court, and the 
 Supreme Court sustained the law as against the con- 
 tentions there urged. In none of them, however, was 
 the present question presented. 
 
 In Stanton v. Baltic Mining Co., 240 U. S. 103, the 
 
8 
 
 question related to the tax on mining corporations, and 
 it was found that the tax there under consideration 
 was not "a tax upon property as such, because of its 
 ownership", but like the tax considered in Stratton's 
 Independence, Ltd., v. Howbert, supra, was a "true 
 excise", levied on the results of the business of the cor- 
 poration, "in carrying on mining operations". 
 
 That any attempt under the guise of an income tax 
 law to levy an unapportioned direct tax on real or per- 
 sonal property could not be sustained is evident from 
 the statements in the opinion of the Supreme Court 
 delivered by the Chief Justice in the Brushaber case at 
 pages 18, 19: 
 
 "the whole purpose of the amendment was 
 to relieve all income taxes when imposed from 
 apportionment from a consideration of the 
 source whence the income was derived . . . 
 it was drawn with the object of maintaining the 
 limitations of the constitution and harmonizing 
 their operation. We say this because it is to be 
 observed that although from the date of the 
 Hylton case because of statements made in the 
 opinions in that case it had come to be accepted 
 that direct taxes in the constitutional sense were 
 confined to taxes levied directly on real estate 
 because of its ownership, the Amendment con- 
 tains nothing repudiating or challenging the 
 ruling in the Pollock case that the word direct 
 had a broader significance since it embraced also 
 taxes levied directly on personal property be- 
 cause of its ownership, and therefore the amend- 
 ment at least impliedly makes such wider sig- 
 nificance a part of the Constitution — a condi- 
 tion which clearly demonstrates that the pur- 
 pose was not to change the existing interpreta- 
 
tion except to the extent necessary to accom- 
 plish the result intended, that is, the prevention 
 of the resort to the sources from which a taxed 
 income was derived in order to cause a direct 
 tax on the income to be a direct tax on the 
 source itself and thereby to take an income tax 
 out of the class of excises, duties, and imposts 
 and place it in the class of direct taxes." 
 
 Again, in Stanton v. Baltic Min. Co., (supra) Mr. 
 Chief Justice White said (p. 113) : 
 
 "We are here dealing solely with the re- 
 striction imposed by the Sixteenth Amend- 
 ment on the right to resort to the source 
 whence an income is derived in a case where 
 there is power to tax for the purpose of taking 
 the income tax out of the class of indirect to 
 which it generically belongs and putting it in 
 the class of direct to which it would not other- 
 wise belong in order to subject it to the regula- 
 tion of apportionment." 
 
 Finally, the Court said, referring to the Sixteenth 
 Amendment, "As pointed out in recent decisions, it 
 does not extend the taxing power to new or excepted 
 subjects, but merely removes all occasion, which other- 
 wise might exist, for an apportionment among the 
 States of taxes laid on Income", per Mr. Justice Van 
 Devanter, Peck v. Lowe, 247 U. S. 165, 172. 
 
 See also, Southern Pacific Co. v. Lowe, 247 
 U. S. 330, 335. 
 
 The doctrine of the Pollock case remains the law 
 of the land, except so far as a tax on "income" has 
 
10 
 
 been removed through the Constitutional Amendment 
 from the application of that doctrine. 
 
 It is also apparent that there was no intention to 
 authorize Congress to coin at will definitions of "in- 
 come" and prescribe that something which is not, in 
 any true sense of the word, income shall be income for 
 the purposes of taxation. Congress cannot by legis- 
 lative fiat put a subject of a tax in a different category 
 from that in which it properly belongs, for that would 
 be to subject the constitutional restrictions to the leg- 
 islative will. 
 
 What constitutes income is exclusively a matter 
 for determination of the courts. 
 
 In the present case there is no room for disputing 
 the fact that the tax is levied upon property solely by 
 virtue of its ownership. The Standard Oil Company 
 of California had paid its excise tax under the Cor- 
 poration Tax Act of 1909 and its income tax under 
 the Income Tax Laws of 19 13 and 19 16. There is no 
 pretense here that the present tax is laid upon the 
 corporation, or by reason of any privilege or business 
 of the corporation. The tax is levied upon the in- 
 dividual stockholder's income, simply because of his 
 ownership of the stock in question. The tax upon the 
 stock by virtue of the stockholder's ownership is, in 
 the very nature of things, a direct tax which must be 
 apportioned unless it can be said that this stock, issued 
 in the circumstances we have stated, is income within 
 the meaning of the Sixteenth Amendment. It is our 
 contention that it is not. 
 
11 
 
 POINT II. 
 
 THE DECISION IN TOWNE v. EISNER, 245 U. S. 418, WAS 
 NOT BASED UPON THE GROUND THAT THE SURPLUS 
 UNDERLYING THE 'STOCK DIVIDEND' WAS ACCUMU- 
 LATED PRIOR TO MARCH 1, 1913, BUT UPON THE 
 GROUND THAT THE 'STOCK DIVIDEND' WAS ESSEN- 
 TIALLY NOT INCOME. 
 
 In Towne v. Bisner, the shares of stock constituting 
 the 'stock dividend' were issued in the year 1914 under 
 a corporate resolution adopted in December, 1913. 
 The Supreme Court based its decision squarely upon 
 the proposition that the 'stock dividend' was, in its na- 
 ture, not income. The ruling did not proceed upon the 
 ground that the surplus, which was subsequently capi- 
 talized, had been accumulated before March 1, 191 3. 
 It is manifest that the reasoning of the Court would 
 have required exactly the same conclusion if the sur- 
 plus in that case had been accumulated after March 1, 
 1913. In delivering the opinion of the Court, Mr. 
 Justice Holmes said (pp. 426-427) : 
 
 "Notwithstanding the thoughtful discussion 
 that the case received below we cannot doubt 
 that the dividend was capital as well for the pur- 
 poses of the -Income Tax Law as for distribu- 
 tion between tenant for life and remainderman. 
 What was said by this court upon the latter 
 question is equally true for the former. 'A 
 stock dividend really takes nothing from the 
 property of the corporation, and adds nothing 
 to the interests of the shareholders. Its prop- 
 erty is not diminished, and their interests are 
 not increased .... The proportional inter- 
 
12 
 
 est of each shareholder remains the same. The 
 only change is in the evidence which represents 
 that interest, the new shares and the original 
 shares together representing the same propor- 
 tional interest that the original shares repre- 
 sented before the issue of the new ones'. Gib- 
 bons v. Mahon, 136 U. S. 549, 559, 560. In short, 
 the corporation is no poorer and the stockholder 
 is no richer than they were before. Logan County 
 v. United States, 169 U. S. 255, 261. If the 
 plaintiff gained any small advantage by the 
 change, it certainly was not an advantage of 
 $417,450, the sum upon which he was taxed. It 
 is alleged and admitted that he receives no more 
 in the way of dividends and that his old and 
 new certificates together are worth only what 
 the old ones were worth before. If the sum 
 had been carried from surplus to capital ac- 
 count without a corresponding issue df stock 
 certificates, which there was nothing in the na- 
 ture of things to prevent, we do not suppose 
 that any one would contend that the plaintiff 
 had received an accession to his income. Pre- 
 sumably his certificate would have the same 
 value as before. Again, if certificates for 
 $1,000 par were split up into ten certificates 
 each, for $100, we presume that no one would 
 call the new certificates income. What has hap- 
 pened is that the plaintiff's old certificates have 
 been split up in effect and have diminished in 
 value to the extent of the value of the new." 
 
 This language is unequivocal, but the conclusion to 
 be drawn from it that the decision had been based 
 solely upon the nature of the 'stock dividend' and not 
 upon the time when the surplus was accumulated, is 
 
13 
 
 put beyond any possible question by the later decisions 
 of the Supreme Court. 
 
 Thus, in Lynch v. Hornby, 24.J U. S. 339, there had 
 been a distribution of dividends by a lumber company 
 in the year 191 4 of which 76 per cent, was derived 
 from conversion into money of property owned by the 
 corporation prior to March 1, 1913. In short, the divi- 
 dend was an extraordinary one based in very large 
 part upon an accumulated surplus represented in great 
 measure by an appreciation in value of the company's 
 timber lands. The Court held, however, that as the 
 dividends were received in 1914 they were taxable as 
 income under the Federal Income Tax Act, even 
 though "they were extraordinary in amount and might 
 appear upon analysis to be a mere realization in pos- 
 session of an inchoate and contingent interest that the 
 stockholder had in a surplus of corporate assets pre- 
 viously existing". The Court thus denned its position: 
 
 "Dividends are the appropriate fruit of 
 stock ownership, are commonly reckoned as in- 
 come, and are expended as such by the stock- 
 holder without regard to whether they are de- 
 clared 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 stock- 
 holder is, in the ordinary case, a different entity 
 from the corporation, and Congress was at lib- 
 erty to treat the dividends as coming to him ab 
 extra, and as constituting a part of his income 
 when they came to hand" (id., p. 344). 
 
 It is thus clearly apparent that had the shares con- 
 stituting the 'stock dividend' in the Towne case been 
 
14 
 
 considered to be income, the fact that they represented 
 a surplus accumulated before March I, 191 3, would not 
 have precluded the imposition of the tax, as that fact 
 did not preclude the imposition of the tax upon the 
 distribution of the surplus so accumulated by the cor- 
 poration in Lynch v. Hornby. The distinction was not 
 in the time when the surplus had been accumulated but 
 in the fact that in Lynch v. Hornby there was actually 
 appropriated to the stockholder through the dividend 
 a certain amount of property, which became the stock- 
 holder's individual property and was no longer a con- 
 tingent interest in corporate assets, while in the Towne 
 case there was a mere capitalization of surplus which 
 "took nothing from the property of the corporation and 
 added nothing to the interest of the shareholder". 
 
 This was distinctly stated in Peabody v. Bisner, 
 247 U. S. 347. In that case, the Union Pacific Railroad 
 Company declared an extra dividend in the year 19 14 
 consisting in part of certain shares of stock of the 
 Baltimore & Ohio Railroad Company, these shares hav- 
 ing been owned by the Union Pacific Railroad Com- 
 pany prior to March 1, 191 3. The Court held that 
 although the dividend was an extraordinary one and a 
 distribution in specie of a portion of the corporate 
 assets, still it was to be considered income and taxable 
 as such. The Court expressly referred to the case of 
 Towne v. Bisner, and explicitly stated the ground upon 
 which the former decision rested, that is, that it was a 
 'stock dividend' and not, in its nature, income. The 
 Court, after referring to the ruling in the District 
 Court in the Towne case, said: 
 
 "The latter case" (that is, the Towne case) 
 "has since been reversed (245 U. S. 418), but 
 
15 
 
 only upon the ground that it related to a stock 
 dividend which in fact took nothing from the 
 property of the corporation and added noth- 
 ing to the interest of the shareholder, but 
 merely changed the evidence which repre- 
 sented that interest. ... In this case" 
 (that is, the Peabody case) "the plaintiff in 
 error stands in the position of the ordinary 
 stockholder, whose interest in the accumulated 
 earnings and surplus of the company are not 
 the same before as after the declaration of a 
 dividend; his right being merely to have the 
 assets devoted to the proper business of the 
 corporation and to receive from the current 
 earnings or accumulated surplus such dividends 
 as the directors in their discretion may declare ; 
 and without right or power on his part to con- 
 trol that discretion. 
 
 "It hardly is necessary to say that this case 
 is not ruled by our decision in Towne v. Eisner, 
 since the dividend of Baltimore & Ohio shares 
 was not a stock dividend but a distribution in 
 specie of a portion of the assets of the Union 
 Pacific, and is to be governed for all present 
 purposes by the same rule applicable to the dis- 
 tribution of a like value of money. It is con- 
 trolled by Lynch v. Hornby, this day decided, 
 ante, 339." (Italics ours.) 
 
 The very latest decision of the Supreme Court on 
 this subject (December 9, 1918) shows the Court's 
 firm adherence to the view that where the transaction 
 under consideration makes the tax payer "no richer 
 than before" the Court will hold the new evidence of 
 property principal and not income. 
 
 Gulf Oil Corporation v. Lewellyn, Collector, 
 39 Supreme Court Rep. 35. 
 
16 
 
 POINT III. 
 
 THERE IS NO BASIS FOR THE CONCLUSION THAT THE 
 WORD 'INCOME' IN THE SIXTEENTH AMENDMENT 
 HAS A BROADER MEANING THAN THE WORD 'IN- 
 COME' IN THE INCOME TAX ACT OF 1913 UNDER 
 WHICH THE QUESTION AROSE IN THE TOWNE CASE. 
 
 The Income Tax Act of October 3, 191 3 (38 Stat. 
 114) under which the case of Tozvne v. Bisner arose, 
 provided as follows : 
 
 "A. Subdivision 1. That there shall be 
 levied, assessed, collected and paid annually 
 upon the entire net income arising or accruing 
 from all sources in the preceding calendar year 
 to every citizen of the United States, whether 
 residing at home or abroad, and to every person 
 residing in the United States, though not a citi- 
 zen thereof, a tax of 1 per centum per annum 
 upon such income, except as hereinafter pro- 
 vided; and a like tax shall be assessed, levied, 
 collected, and paid annually upon the entire net 
 income from all property owned and of every 
 business, trade, or profession carried on in the 
 United States by persons residing elsewhere. 
 
 "Subdivision 2 (providing for the surtax). 
 
 "Every person subject to this additional tax 
 shall, for the purpose of its assessment and col- 
 lection, make a personal return of his total net 
 income from all sources, corporate or otherwise, 
 for the preceding calendar year. 
 
 "B. That, subject only to such exemption 
 and deductions as are hereinafter allowed, the 
 net income of a taxable person shall include 
 
17 
 
 gains, profits, and income derived from salaries, 
 wages, or compensation for personal service of 
 whatever kind and in whatever form paid, or 
 from professions, vocations, businesses, trade, 
 commerce, or sales, or dealings in property, 
 whether real or personal, growing out of the 
 ownership or use of or interest in real or per- 
 sonal property, also from interest, rent, divi- 
 dends, securities, or the transaction of any law- 
 ful business carried on for gain or profit, or 
 gains or profits and income derived from any 
 source whatever, including the income from but 
 not the value of property acquired by gift, be- 
 quest, devise, or descent: . . . 
 
 "That in computing net income for the pur- 
 pose of the normal tax there shall be allowed as 
 deductions: . . . seventh, the amount re- 
 ceived as dividends upon the stock or from the 
 net earnings of any corporation, joint stock 
 company, association, or insurance company 
 which is taxable upon its net income as herein- 
 after provided . . . 
 
 "D. . . . Provided further, That 
 persons liable for the normal income tax only, 
 on their own account or in behalf of another, 
 shall not be required to make return of the in- 
 come derived from dividends on the capital stock 
 or from the net earnings of corporations, joint- 
 stock companies or associations, and insurance 
 companies taxable upon their net income as 
 hereinafter provided." 
 
 It is perfectly clear that had the stock dividend in 
 the Towne case been considered to be 'income' in its 
 nature, it would have been subject to the surtax under 
 
18 
 
 these provisions of the Act of 191 3. The Act reached 
 "the entire net income" arising "from all sources". It 
 embraced all "dividends" without qualification and 
 "gains or profits and income derived from any source 
 whatever". There is not the slightest ground for the 
 exclusion from these broad descriptive phrases of any- 
 thing which was in its nature 'income' , which had 
 accrued during the tax period and which was not 
 excepted by the terms of the Act. It was in this view 
 that the Supreme Court held in Lynch v. Hornby that 
 the Act reached extraordinary dividends from surplus 
 which had been accumulated before March 1, 191 3, 
 even where the surplus embraced the increased value 
 of the property of the corporation. While the distri- 
 bution was an extraordinary one, it was held to be 
 within the comprehensive words of the Act covering 
 income from all sources. The Supreme Court expressly 
 overruled the contention that the words of the Act of 
 19 1 3 could be read in connection with the explicit pro- 
 vision of the later Income Tax Act of 191 6 so as to 
 exclude dividends declared out of earnings or profits 
 which had accrued prior to March 1, 191 3. The later 
 Act of 19 16 expressly excluded dividends out of earn- 
 ings or profits which had accrued before March 1, 191 3 
 {ante, p. 4), but the Supreme Court held that no such 
 qualification could be read into the broad words of the 
 Act of 191 3 {Lynch v. Hornby, 247 U. S. 344-345). 
 The only ground for holding the 'stock dividend' in the 
 Towne case not to be taxable, although the shares were 
 issued in the year 191 4 under a corporate resolution of 
 December, 191 3, was that the 'stock dividend' was not 
 income in its nature. And this being so, it necessarily 
 
19 
 
 follows that it was just as much excluded from the 
 authority conferred by the Sixteenth Amendment as it 
 was from the provision of the Act of 191 3. If Con- 
 gress had the power to tax the 'stock dividend', because 
 the 'stock dividend' was income, there is no escape from 
 the conclusion that it did tax it in the Act of 191 3. And, 
 if the 'stock dividend' in the Towne case was not within 
 that Act, it was only by virtue of the fact that it was 
 not income in any sense for the purpose of taxation as 
 such. 
 
 It in no way militates against this view that a given 
 word may not have the same meaning as used in dif- 
 ferent statutes or in the Constitution and a statute. As 
 Mr. Justice Holmes said in the Towne case, "A word 
 is not a crystal, transparent and unchanged, it is the 
 skin of a living thought and may vary greatly in color 
 and content according to the circumstances and the 
 time in which it is used". This was said in the Towne 
 case in denying the motion to dismiss the writ of error. 
 The Government urged that there was nothing before 
 the Court but the construction of a statute and hence 
 that there was no propriety in a direct writ of error. 
 In short, the motion to dismiss was upon the ground 
 that, as the same word was used in both Constitution 
 and statute, no constitutional question could be in- 
 volved. The plaintiff in error, however, had contended 
 that if the Act of Congress was construed to authorize 
 a tax upon the 'stock dividend' in question, the Act was 
 unconstitutional. As Mr. Justice Holmes said, the 
 Government had applied the force of the Constitution to 
 the plaintiff upon the assertion that the statute had au- 
 thorized it to do so, and, of course, the plaintiff in error 
 
20 
 
 was entitled to take his appeal to the Supreme Court, 
 urging that the Act was invalid if it had the meaning 
 for which the Government had contended and which 
 the Court below had assigned to it. 
 
 The point of the decision in this aspect was that 
 the fact that the same word as used in both Consti- 
 tution and statute did not eliminate the constitutional 
 question. The party insisting that he was taxed uncon- 
 stitutionally through the application of the statute, still 
 had his right to go to the tribunal which, according to 
 the distribution of appellate jurisdiction, was to de- 
 termine constitutional questions. But the Supreme 
 Court having jurisdiction of the writ of error what- 
 ever it might think of the question whether the 'stock 
 dividend' was or was not income, then proceeded to 
 determine the case, not upon the theory of a limited use 
 of the word 'income' in the statute, but with regard 
 to the essential characteristics of the 'stock dividend', 
 holding that it was not income in its nature. 
 
 The character of this determination is not to be 
 obscured by the ruling on the question of jurisdiction. 
 Because the same word may be used in different senses 
 in the Constitution and a statute, and thus a constitu- 
 tional question as well as a question of statutory con- 
 struction may be involved, it does not follow that the 
 reasoning of the decision on the merits may not be so 
 fundamental and controlling with respect to the mean- 
 ing of the word as to determine the question of consti- 
 tutional interpretation. The Supreme Court had jur- 
 isdiction to determine the meaning of the word 'in- 
 come' both as used in the statute and as used in the 
 Constitution, but in determining that the 'stock divi- 
 
21 
 
 dend' did not fall within the description of income, it 
 based its conclusion upon reasoning which had no ref- 
 erence to the special time or circumstance of the statute 
 but to the nature of the property itself, and its con- 
 clusion that the 'stock dividend' was not income was 
 thus based upon a ground applicable both to the Consti- 
 tution and to the statute. In fact the statute was 
 enacted immediately after the Sixteenth Amendment 
 was adopted and manifestly with the same intent. 
 
 The truth is that the possible distinction, presented 
 in the Towne case, between the meaning of the word 
 'income' as used in the Constitution, and its meaning 
 as used in the statute, lay in the circumstance that the 
 'stock dividend' there was based upon a surplus accumu- 
 lated before the Sixteenth Amendment was adopted, 
 that is, before March i, 191 3. If the Court had con- 
 sidered 'stock dividends' to be income in their nature, 
 and thus within the purview of the Sixteenth Amend- 
 ment, the Court might then have said that, while this 
 was true, the statute did not intend to embrace divi- 
 dends derived from corporate accumulations which 
 had accrued before the effective date of the Act. But 
 the Court was of the contrary view. The Court was of 
 the opinion, as shown by its later decisions in Lynch v. 
 Hornby and Peabody v. Eisner, that the Act of 191 3 
 did reach dividends subsequently declared, although 
 derived from corporate accumulations antedating 
 March 1, 1913. It was of the view that the Act of 
 191 3 reached dividends thus derived, even though they 
 were extraordinary or distributed corporate assets in 
 specie. 
 
 The possible distinction with respect to the scope 
 
of the statute was thus eliminated and the Court hence 
 came to deal with the essential quality of 'stock divi- 
 dends' and with the fundamental and controlling ques- 
 tions whether they were in their nature 'income'. We 
 cannot doubt, said the Court, "that the dividend was 
 capital". And thus, holding that it was 'capital' and 
 not 'income', upon the consideration, not of time, cir- 
 cumstance or limitation peculiarly relating to the stat- 
 ute, but of the nature of the so-called 'stock dividend', 
 that is, of the shares issued, the reasoning of the Court 
 excluded the 'stock dividend', not simply from the opera- 
 tion of the statute, but from that of the constitutional 
 Amendment itself. 
 
 For the purpose of reaching property of this sort, 
 whose nature has thus been determined authoritatively, 
 the word 'income' in the Amendment cannot be 
 deemed to be any more effective than the word 'in- 
 come' as used in the Act of 1913. 
 
 POINT IV. 
 
 'STOCK DIVIDENDS' ARE NOT INCOME WITHIN THE 
 MEANING OF THE SIXTEENTH AMENDMENT. 
 
 A 'stock dividend' is not income to the stockholder 
 receiving it, but is a mere readjustment of the evi- 
 dence of the stockholder's interest already owned. 
 The 'stock dividend' takes nothing from the property 
 of the corporation and adds nothing to the interests 
 of the stockholders. The only change in substance is 
 that, instead of the property represented thereby being 
 
23 
 
 distributed to stockholders, it is permanently fixed as 
 capital so that it cannot be distributed. 
 
 The situation here presented is a typical one and 
 the facts to which the question is addressed are 
 familiar. 
 
 A corporation is not bound to distribute all its 
 earnings in dividends. The directors may properly 
 decide to use a portion of the earnings for the develop- 
 ment of business, for the extension of plant, for bet- 
 terments and for working capital. The undivided 
 surplus of a corporation is not, normally, idle money; 
 it is, normally, invested money. It is money invested 
 in property, or embarked in the corporate enterprise; 
 that is the reason it is not paid out in dividends. If 
 the directors have not transcended the broad limits of 
 their judgment, the stockholders cannot complain be- 
 cause earnings are invested instead of being dis- 
 tributed. 
 
 The interest of the stockholders, with respect to 
 the property of the corporation, is an interest in the. 
 aggregate assets of the company, subject to the pay- 
 ment of debts. It is not an interest in the segregated 
 portion representing the original subscriptions; it is 
 not an interest limited to an amount equal to the par 
 value of their shares; it is not an interest limited to 
 any particular portion of the corporate property, in 
 the absence of special charter provisions, but is simply 
 an interest in all the corporate assets. When these 
 assets are swelled by the addition of undivided profits, 
 the interest of the stockholders in these accumulations 
 is precisely the same as their interest in any other 
 property of the corporation. "The property of every 
 
24 
 
 company may consist of three separate distinct things, 
 which are its capital stock, its surplus, its franchise. 
 But these three things, several in the ownership of the 
 company, are united in the ownership of the share- 
 holders. The share stock covers, embraces, repre- 
 sents all three in their totality, for it is a business 
 photograph of all the corporate possessions and possi- 
 bilities." {People ex rel. W. U. T. Co. v. Coleman, 126 
 N. Y. 433, 438.) 
 
 When dividends are declared the amounts of the 
 dividends are separated from the corporate property 
 and are received by the stockholders respectively as 
 their separate property. But until dividends separat- 
 ing money or property from the corporate assets in 
 this way are declared, the stockholders continue to re- 
 tain the interest in all these assets represented by their 
 stock, the extent and value of their aggregate interests 
 depending not upon the sums originally contributed to 
 capital, but upon the extent and value of all the assets 
 of the corporation, including its accumulations, after 
 deducting liabilities. When a so-called 'stock divi- 
 dend' is declared, the company does not distribute but 
 continues to hold the property upon which the stock 
 issue rests. Its undivided profits previously invested 
 in the enterprise continue to be so invested. Instead 
 of being a "dividend" in any proper sense, the effect 
 of the action is that there shall be no dividends of the 
 accumulations capitalized. The aggregate interests 
 of the stockholders remain unchanged and their pro- 
 portional interests remain unchanged. 
 
 Thus, a 'stock dividend', or increase of capital stock 
 
25 
 
 against surplus accumulations, accomplishes two 
 things : 
 
 ( i ) The amount represented by the 'stock divi- 
 dend' is permanently classified so that it cannot be paid 
 out as dividends. 
 
 (2) The number of shares is increased without 
 affecting the title of the corporation to any part of the 
 corporate property and without adding to the ratable 
 interests of the stockholders. 
 
 Upon a liquidation immediately before the 'stock 
 dividend ' the stockholder would have received pre- 
 cisely the same amount as he would have received upon 
 a liquidation immediately after the 'stock dividend'. 
 So far as the paper, or stock certificate, issue is con- 
 cerned, it is an evidence of an interest already owned 
 and permanently capitalized. 
 
 These plain incidents of the transaction have been 
 repeatedly and authoritatively described. 
 
 "The corporate property remains the same 
 after the stock is increased as before and the 
 interest of each stockholder in the corporate 
 property is also unchanged." 
 
 Kaufman v. Charlottesville Woolen Mills 
 Co., 93 Va. 673, 675. 
 
 "After a stock dividend a corporation has 
 just as much property as it had before . . . after 
 such a dividend the aggregate of the stockhold- 
 ers own no more interest in the corporation than 
 before. The whole number of shares before 
 the stock dividend represented the whole prop- 
 erty of the corporation, and after the dividend 
 
they represent that and no more. A stock divi- 
 dend does not distribute property, but simply 
 dilutes the shares as they existed before." 
 
 Williams v. Western Union Telegraph Co., 
 93 N. Y. 162, 189. 
 
 "There is a clear distinction between the or- 
 dinary cash dividend, no matter when earned, 
 and a stock dividend declared as in the case at 
 bar. The one is a disbursement to the stock- 
 holder of accumulated earnings, and the cor- 
 poration at once parts irrevocably with all in- 
 terest therein. The other involves no disburse- 
 ment by the corporation. It parts with nothing 
 to the stockholder. The latter represents not 
 an actual dividend, but certificates of stock 
 which evidence in a new proportion his interest 
 in the entire capital, including such as by invest- 
 ment of accumulated profits has been added to 
 the original capital." 
 
 DeKovenv. Alsop, 205 111. 309. 
 
 "It is the characteristic feature of a stock 
 dividend that the property of the corporation 
 itself remains unchanged, but that each one of 
 the shares of the increased stock represents a 
 smaller fractional interest than before in the 
 total amount of the corporate property. On the 
 other hand, it is the characteristic feature of a 
 dividend declared and paid wholly from the net 
 profits or undivided earnings that it does dimin- 
 ish the property of the corporation by exactly 
 the amount of the dividend so paid out, while 
 it leaves the fractional interest represented by 
 each share of the capital stock exactly where it 
 was before. Gibbons v. Mahon, 136 U. S. 549, 
 559, 56o." 
 Gray v. Hemenway, 212 Mass. 239. 
 
27 
 
 "The word 'dividends' if unqualified, sig- 
 nifies dividends payable in money. The word 
 'income' has a broader meaning, but hardly 
 broad enough to include things not separated 
 in some way from the principal. It is not 
 synonymous with 'increases'. The value of 
 stock may be increased by good management, 
 prospects of business, and the like. But such 
 increase is not income. It may also be increased 
 by the accumulation of surplus; but so long as 
 that surplus is retained by the corporation 
 either as surplus or as increased stock, it can in 
 no proper sense be called income." 
 Spooner v. Phillips, 62 Conn. 62, 68. 
 
 "It is also one of the incidents of a stock div- 
 idend that the shareholder who receives his pro 
 rata proportion of the new issue, while he ac- 
 quires the ownership of more shares, adds noth- 
 ing to his proportionate ownership of the assets 
 of the corporation. His holding, after the new 
 issue, bears precisely the same ratio to the total 
 of the outstanding shares as did his previous 
 holding to the previous total {Terry v. The 
 Bagle Lock Co., 47 Conn. 141, 165). The un- 
 derlying idea of a cash dividend, on the other 
 hand, is the distribution to shareholders as the 
 rewards of the corporate enterprise of a portion 
 of the profits or surplus assets of the corpora- 
 tion. . . . Whatever form the distribution 
 takes, the result always is the reduction of both 
 the corporate assets and surplus by just the 
 amount of the distribution. Something is taken 
 from the corporation and given to the stockhold- 
 ers. All which is distributed becomes released 
 
28 
 
 from all corporate control and goes under the 
 dominion of the share owners." 
 
 Green v. Bissell, 79 Conn. 547, 551. 
 See also, 
 
 Terry v. Eagle Lock Co., 47 Conn. 141. 
 
 Brinley v. Grou, 50 Conn. 66. 
 
 Bonch v. Sproule, 12 App. Cas. 385. 
 
 Jones v. Evans (1913), 1 Ch. 23. 
 
 In re Carson, Irish Reports (1915), Vol. I, 
 p. 321. 
 
 Guinness, Trustee, v. Guinness, Cases Ct. of 
 Session, 5th Series, Vol. 6, p. 104. 
 
 Minot v. Paine, 99 Mass. 101. 
 
 Davis v. Jackson, 152 Mass. 58. 
 
 D'Ooge v. Leeds, 176 Mass. 558. 
 
 Hyde v. Holmes, 198 Mass. 287. 
 
 Brown v. Lamed, 14 R. I. 371, 373. 
 
 Billings v. Warren, 216 111. 281. 
 
 Lancaster v. Mason, 152 No. Car. 660. 
 
 GWotf Western Mining & Mfg. Co. v. Harris, 
 128 Fed. 321, 326. 
 
 A genuine dividend constitutes a debt between the 
 corporation and the shareholders; 1 * once declared it 
 may not be rescinded 2 * and an action may be brought 
 on the debt. 1 * 
 
 It is otherwise with a stock issue made to share- 
 holders (commonly called a 'stock dividend'), for, as 
 the directors do not divide anything and in substance 
 
 r *King v. Paterson, 29 N. J. L. 504; Hunt v. O'Shea, 69 N. H. 600; 
 Lockhart v. Van Alstyne, 31 Mich. 76; Stoddard v. The Shetucket 
 Foundry Co., 34 Conn. 542. 
 
 ** Wheeler Beers & Others v. The Bridgeport Spring Co., 42 Conn. 
 17; Stoats v. Bio graph Co., 236 Fed. 454. 
 
29 
 
 merely readjust the symbols by which the shareholders 
 own the net assets, they may recall their own action 
 and leave the shareholders without grievance. 
 
 In Staats v. Biograph Co., 236 Fed. 454, the Cir- 
 cuit Court of Appeals for the Second Circuit, holding 
 that the action of a board of directors in declaring a 
 'stock dividend' might be rescinded, said (p. 457) : 
 
 "In this case it does not escape observation 
 that the plaintiff's right to a stock dividend, if 
 he has such a right and can enforce it, would 
 gain him nothing. We say it would gain him 
 nothing, because while a stock dividend would 
 increase the number of his shares, it propor- 
 tionately diminishes the value of each of his 
 shares, leaving the aggregate value as it was 
 before. He acquires the ownership of more 
 shares but he adds nothing to his proportionate 
 ownership of the assets of the corporation." 
 
 The question of the nature of a 'stock dividend' 
 was considered by the Supreme Court in the leading 
 case of Gibbons v. Mahon, 136 U. S. 549, where it was 
 decided that it is in its nature capital and not income. 
 
 That was a case of a will bequeathing stock in a 
 corporation and government bonds in trust to pay "the 
 dividends on said stock and the interest on said bonds 
 as they accrue" to a daughter of the testator, and di- 
 recting that upon her death "the said stock, bonds, 
 and income shall revert to the estate of the trustee." 
 The corporation accumulated earnings from time to 
 time, before and after the death of the testator, which 
 were invested in its permanent works and plant. It 
 declared a 'stock dividend' representing these accumu- 
 
lated earnings and the question was whether this 
 'stock dividend' was income. It was held to be capital 
 and that it should go to the remainderman, only the 
 dividends which might be received on such stock being 
 payable to the tenant for life. 
 
 After reviewing the authorities of other jurisdic- 
 tions, Mr. Justice Gray discussed the nature of a 
 'stock dividend'; 
 
 "Money earned by a corporation remains 
 the property of the corporation, and does not 
 become the property of the stockholder, unless 
 and until it is distributed among them by the 
 corporation. The corporation may treat it 
 and deal with it either as profits of its business, 
 or as an addition to its capital. Acting in good 
 faith and for the best interests of all con- 
 cerned, the corporation may distribute its earn- 
 ings at once to the stockholders as income; or 
 it may reserve part of the earnings of a pros- 
 perous year to make up for a possible lack of 
 profits in future years; or it may retain por- 
 tions of its earnings and allow them to accumu- 
 late, and then invest them in its own works and 
 plant, so as to secure and increase the perma- 
 nent value of its property" (p. 588). 
 
 "When a distribution of earnings is made 
 by a corporation among its stockholders, the 
 question whether such distribution is an ap- 
 portionment of additional stock representing 
 capital, or a division of profits and income, de- 
 pends upon the substance and intent of the 
 action of the corporation, as manifested by 
 its vote or resolution ; and ordinarily a dividend 
 declared in stock is to be deemed capital, and 
 
31 
 
 a dividend in money is to be deemed income, of 
 each share." 
 
 "A stock dividend really takes nothing from the 
 property of the corporation, and adds nothing to the 
 interests of the shareholders. Its property is not 
 diminished, and their interests are not increased. 
 After such a dividend, as before, the corporation has 
 the title in all the corporate property; the aggregate 
 interests therein, of all the shareholders are repre- 
 sented by the whole number of shares; and the pro- 
 portional interest of each shareholder remains the 
 same. The only change is in the evidence which rep- 
 resents that interest, the new shares and the original 
 shares together representing the same proportional 
 interest that the original shares represented before 
 the issue of new ones" (pp. 559-60). 
 
 "The resolution is clearly an apportionment 
 of the new shares as representing capital, and 
 not a distribution or division of income. As 
 well observed by Mr. Justice James, delivering 
 the opinion of the Court below: 'Certificates 
 of stock are simply the representative of the 
 interest which the stockholder has in the capi- 
 tal of the corporation. Before the issue of 
 these two hundred and eighty new shares, this 
 trustee held precisely the same interest in this 
 increased plant in the capital of the corporation 
 that she held afterwards. She merely had a 
 new representative of an interest that she 
 already owned, and which was not increased 
 by the issue of the new shares. A dividend is 
 something with which the corporation parts, 
 but it parted with nothing in issuing this new 
 stock. It simply gave a new evidence of own- 
 
ership which already existed. They were not 
 in any sense, therefore, dividends for which 
 this trustee had to account to the cestui que 
 trust. She stood after the issue of the new 
 shares just as she had stood before; and the 
 trustee was obliged to treat them just as she 
 did, namely, as a part of the original, and to 
 pay the dividends to the cestui que trust' " 
 (P. 5°9)- 
 
 Gibbons v. Mahon was long held under advisement 
 by the Court, and it is apparent that it was decided 
 after the most thorough consideration. We have 
 quoted at length from the opinion, because the ratio 
 decidendi renders unavailing the efforts which have 
 been made to distinguish this case. The Court ex- 
 plicitly rests its decision upon the essential nature of 
 the transaction — that is, upon a consideration of the 
 essential quality of a 'stock dividend' based there, as 
 here, on accumulated surplus invested in plant and 
 property and by appropriate resolution permanently 
 classified as capital. The opinion makes it clear that 
 it was not a rule particularly applicable to wills, or 
 trusts, but the nature and effect of the corporate action 
 which determined the conclusion of the Court. If the 
 'stock dividend' was not receivable as income, when if 
 income the claimant would have been entitled to receive 
 it, it could hardly be said that it should be taxed as 
 income. Had it been income, the cestui que trust 
 would have succeeded, but because the Court consid- 
 ered it not to be income she lost her suit. If the 'stock 
 dividend' was not income for the purpose of distribu- 
 tion to the beneficiary of the income, we cannot con- 
 
ceive that it could have been regarded, had an income 
 tax law been in operation, as income for the purpose 
 of taxing it. 
 
 Gibbons v. Mahon was an exposition by which the 
 final authority defined to this extent, by exclusion, the 
 meaning of "income". The usual rule is that when a 
 word which has received judicial construction is sub- 
 sequently used in Federal legislation it should be pre- 
 sumed to have been used in the sense determined by the 
 Court (Kepner v. United States, 195 U. S. 100, 124; 
 Latimer v. United States, 223 U. S. 501, 504). And 
 this principle, it is submitted, should be applied in the 
 construction of the Sixteenth Amendment. Authori- 
 tative judicial decision is our glossary of terms used in 
 statutes and constitutions; and it was this exposition 
 of the meaning of 'income' in Gibbons v. Mahon which 
 the court adopted, without qualification, in Towne v. 
 Eisner, 245 U. S. 418. 
 
 We are concerned here with the property interest 
 represented by the stock in question upon which the 
 plaintiff had been taxed. This stock represents (1) 
 the right to have the corporate property managed ac- 
 cording to the fundamental compact or contract of 
 membership; (2) the right to receive dividends, when 
 duly declared, that is, amounts separated from the cor- 
 porate assets and vested in the stockholders individ- 
 ually; and, (3) the ratable interest in the aggregate of 
 the corporate assets to which the stockholders would 
 be entitled upon liquidation. 
 
 With respect to management, the stockholder's 
 rights are unchanged save to the extent that the 
 accumulated surplus, which is represented by the new 
 
34 
 
 stock, is no longer subject to the discretion of the 
 directors in distribution but is classified as capital and 
 must be retained by the corporation as such. 
 
 With respect to dividends that may be declared 
 upon this stock, — whenever any such dividend is de- 
 clared and there is thus segregated from the corporate 
 property an amount which the stockholder receives, he 
 will be taxable accordingly. 
 
 It is argued that the effect is the same as though 
 a cash dividend had been declared, and its amount re- 
 ceived by the plaintiff, and she had then invested this 
 amount in the new stock. The same argument was 
 made unavailingly in Tozvne v. Eisner. It is manifest 
 that the two things mentioned, instead of being the 
 same, are different, both legally and practically. When 
 the cash dividend is declared and the amount is re- 
 ceived, the stockholder obtains something which he 
 owns and which he may reinvest or not as he pleases. 
 He receives property in his exclusive ownership, and 
 he exercises the freedom of choice. In the case of a 
 'stock dividend', he obtains nothing but an evidence of 
 what he already owns; he has no freedom to invest or 
 not invest; and the investment is permanently capital- 
 ized. This distinction was pointed out in Davis v. Jack- 
 son, 152 Mass. 58. 
 
 It is argued further that the certainty that these 
 earnings of the corporation could thenceforth never be 
 distributed as dividends, was a valuable assurance of 
 the continued solvency of the company to the stock- 
 holder, and that this assurance was subject to a tax 
 as income of the individual stockholder. But before 
 the 'stock dividend' the stockholder's interest in the 
 
35 
 
 corporate assets could not be taken away, except 
 through mismanagement or losses, and his interest 
 continues to be subject to these contingencies as before. 
 Previously, if there were distribution in cash, he would 
 receive his dividend and own the amount. The propo- 
 sition that the certainty that a man will never receive 
 a given fund is equivalent to his actual receipt of that 
 fund will appeal less to the shareholder's sense of logic 
 than to his sense of humor. 
 
 The argument that a 'stock dividend' is income 
 fails to distinguish between the effect of the dollar 
 sign printed on the certificates of stock as indicating 
 the amount contributed to "capital", and the interest of 
 the stockholder in the aggregate corporate assets, with 
 which this dollar sign, or the par value of his shares, 
 has nothing to do. As to the corporation, its net assets 
 are divided into two groups, "capital" and "surplus", 
 with different legal attributes, and the dividing line 
 between the two groups is shown by the nominal or par 
 value of the company's stock, or the amount of the con- 
 tributed "capital". 
 
 In the case at bar, for example, The Standard Oil 
 Company of California had $49,686,656 of capital 
 stock, and $94,538,919. of assets. The $49,686,656 of 
 capital was divided into 496,866 shares of the par 
 value of $100. each. These $49,686,656 represented, 
 in a general sense, a trust fund to be used by the cor- 
 poration in the conduct of its business and for the pay- 
 ment of its debts ; none of it could lawfully be separated 
 from the company and paid to its stockholders. The 
 other $44,852,263. of its assets represented surplus 
 which the company was free to dispose of in any 
 
36 
 
 manner that it saw fit. There were 496,866 shares of 
 stock outstanding; the dollar mark on each certificate, 
 indicating the par value of each share, was of im- 
 portance in indicating the amount of the contributed 
 capital stock, and therefore the dividing line between 
 these two groups of its net assets. 
 
 But there was no such distinction with regard to 
 the stockholder's interest in the aggregate corporate 
 assets. As to this the dollar mark on his certificate 
 was immaterial. Each share of stock represented 
 1/496,866 part of the net assets of the corporation, 
 and those assets might amount to $1,000,000. or 
 $50,000,000, and this was true whether his stock had 
 a nominal par value or whether, as is permitted in vari- 
 ous States, it was "no par value" stock. 
 
 When it is argued that in receiving a 'stock divi- 
 dend', a stockholder receives from the corporation 
 something of value which must therefore be income, 
 there is an inaccuracy in terms. If I exchange a two- 
 dollar bill with the money changer for two one-dollar 
 bills, I have, it is true, received from him something 
 of value, but my property interest remains entirely 
 unchanged, and I have surely not received any 
 "income". 
 
 If the Standard Oil Company of California had 
 outstanding 496,866 shares of capital stock of the 
 nominal or par value of $100. each, and had issued in 
 exchange therefor 993,732 shares of the nominal or 
 par value of $50. each, each stockholder would have 
 received an increased number of tangible evidences of 
 his ownership in the assets of the corporation. He 
 would have no greater interest in the assets of the cor- 
 
37 
 
 poration than he had before, and the dividends he 
 might thereafter receive on his holdings of $50. shares 
 would be just as large as if he received dividends on 
 his original $100. holdings. But the Government 
 would not contend that such an alteration of the stock- 
 holder's certificates constituted income. 
 
 It undoubtedly will be conceded by the Govern- 
 ment that if a corporation having a million dollars 
 of capital and with no surplus, waters its stock and 
 issues a 50 per cent, 'stock dividend' to its stock- 
 holders, the new stock, not representing an increase 
 of assets, would not constitute taxable income in the 
 hands of the shareholder; the receipt by the stock- 
 holder of certificates of stock having an increased 
 nominal or par value does not increase the stock- 
 holder's real interest in the corporation, and therefore 
 the change does not constitute income. 
 
 The effect of this concession cannot be overcome. 
 It is conceded that the increase of the number of 
 shares into which the assets of the corporation are 
 divided, or the issue of a new series of fractional cer- 
 tificates, does not constitute income to the stockholder 
 if the corporation has no accumulated surplus, even 
 though the nominal or par value of the shares of 
 stock owned by each stockholder is thereby increased. 
 It is conceded that mere increase in the number of 
 shares into which the capital of a corporation is divided 
 does not constitute income, and this regardless of the 
 question whether the corporation has available accumu- 
 lated surplus or not. And it is just as true that the 
 stockholder's ■ interest in the aggregate corporate 
 assets remains unchanged when there is an increase 
 
38 
 
 of stock based on accumulated surplus. The change is 
 simply that the amount is permanently capitalized so 
 that it cannot be distributed without liquidation; on 
 liquidation the stockholder would receive no more than 
 before. 
 
 Of course the salability of the new shares presents 
 no more argument for the existence of "income" than 
 does the salability of the old shares at an increased 
 price because of the accumulated earnings back of 
 them. A sale in either case would have the same 
 effect. 
 
 If one had 9,000 shares previously, and received 
 4,500 additional shares through a 'stock dividend' based 
 on surplus accumulations, he of course, could sell any 
 portion of the total 13,500 shares. And if he sold 
 4,500 of the 13,500 shares he would receive the equiva- 
 lent in cash. But he could have realized the same 
 amount prior to the 'stock dividend' by selling 3,000 
 shares of his original 9,000 shares. His intrinsic in- 
 terest is the same, and the transaction has not affected 
 its value. 
 
 It is evident that Congress has suffered from 
 "polarization" of words as Judge Dickinson put it in 
 Penn. Mutual Life Ins. Co. v. Lederer (D. C. E. D. 
 Pa. Feb. 4, 1918) 247 Fed. 559, under the 19 13 law. 
 
 "As readers and hearers we should be ever 
 on guard to prevent our minds playing any 
 tricks upon us by being affected by what a fa- 
 mous writer has happily called the 'polariza- 
 tion' of words. The word 'dividends' partakes 
 somewhat of the character of such words. To 
 
the ears of those fortunate enough to be placed 
 within hearing distance of the word, it has a 
 pleasant sound suggestive of the 'cutting of a 
 ripe melon'. It means a share of profits. . . . 
 Such 'dividends' mean merely the distribution 
 of the whole or part of the 'net income' to the 
 happy individuals who have a right to share 
 in it. 
 
 As a consequence, counsel for defendant 
 manifest an inclination to dwell upon the word 
 'dividend', and to speak of what policy holders 
 receive as a 'dividend'. Counsel for plaintiff 
 show a tendency to avoid the use of the term, 
 or, when they do employ it, they are fond of 
 qualifying it by a slighting phrase. It is a 
 'so-called' dividend. We do not share either in 
 this fondness for or aversion to the use of the 
 word. It is clear that the profit-sharing 
 thought is altogether an applied meaning, 
 which the word at times properly has. It may, 
 however, be properly employed when the 
 thought of profit is wholly absent, and the word 
 has its etymological meaning of a unit portion 
 of something which has been divided." 
 
 The Courts have always recommended that mere 
 appreciation in value of capital assets is not to be called 
 income. 
 
 "The mere fact that property has advanced 
 in value between the date of its acquisition and 
 sale does not authorize the imposition of the tax 
 on the amount of the advance. Mere advance 
 in value in no sense constitutes the gains, 
 profits, or income specified by the statute. It 
 
40 
 
 constituted and can be treated merely as in- 
 crease of capital." 
 
 Gray v. Darlington, 15 Wall. 63, 66.* 
 
 In the words of Mr. Justice McKenna in Lynch v. 
 Turrish, 247 U. S. 221, 231, speaking with approval of 
 Gray v. Darlington: 
 
 "Indeed, the case decides that such advance 
 in value is not income at all, but merely increase 
 of capital and not subject to a tax as income." 
 
 In the case of the Baldwin Locomotive Works v. 
 McCoach (3 C. C. A. 1915), 221 Fed. 59, which arose 
 under the Corporation Tax Law of 1909, which meas- 
 ured the tax by the income of the corporation, the 
 Court said: 
 
 "We agree with the District Court that this 
 increase of valuation was not income within 
 the meaning of the statute. Nothing whatever 
 was added to the corporate property, which re- 
 mained exactly the same after the appraisement 
 as before. The only thing done was to put 
 upon the company's books an expert opinion 
 that certain property was worth a certain sum, 
 and this can hardly be said to be income, or 
 even gain, in any proper sense. The company 
 
 *Under the British Income Tax Act (16 & 17 Vict. c. 34) it is 
 established that appreciations in value of capital assets, even after the 
 realization of profits by sale, do not constitute taxable income except 
 in cases of transactions by dealers or other persons who buy and sell 
 for purposes of profits. Tebrau (Johore) Rubber Syndicate, Limited, 
 v. Farmer, S. T., 5 Income Tax Cases, 658; Stevens v. The Hudson's 
 Bay Company, 5 Income Tax Cases, 424; The Assets Company, Lts. v. 
 The Inland Revenue, Cases in the Court of Session, 4th Series, Vol. 
 24, P. 578. 
 
41 
 
 could not become either richer or poorer by 
 making a few book entries that merely recorded 
 a new estimate of how much it was worth." 
 
 Exactly the same situation is presented when the 
 market value of a share of stock increases because of 
 accumulated earnings. Until separation takes place, 
 which happens when a cash dividend is declared, there 
 is no taxable income. Again the courts have recog- 
 nized that such appreciation is not income, for nothing 
 has come in, part of which can be taken by the govern- 
 ment for revenue purposes. 
 
 In Lynch v. Hornby, 247 U. S. 339, the Supreme 
 Court said, through Mr. Justice Pitney, in reference 
 to the undivided surplus : 
 
 "As to these, however, just as we deem the 
 legislative intent manifest to tax the stock- 
 holder 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" (p. 343). 
 
 Finally, the same reason exists for holding that 
 'stock dividends' shall not be included within the term 
 "income". It is not necessary to show again what 
 happened when the Standard Oil Company of Califor- 
 nia declared its 'stock dividend', it is merely sufficient to 
 show that plaintiff has not received anything with 
 which to pay the tax. She has received new shares 
 but her old shares represented precisely the same value ; 
 in fact she is no richer at the end of the year than at 
 the beginning; and as in all the cases discussed above, 
 the one thing necessary has not taken place — realiza- 
 
42 
 
 tion of gain. She may never realize any gain. Whether 
 she does or not will depend on the ultimate liquida- 
 tion so far as the shares themselves are concerned. If 
 dividends are received on the new shares, so that she 
 does receive gain in this way, she will be taxable on 
 such dividends. But until that point is reached the plain- 
 tiff is immune from taxation under an income tax law. 
 She objects to the payment of a tax as having received 
 some income when just the opposite thing has hap- 
 pened — she has been definitely assured that she will 
 not receive it. 
 
 It is submitted therefore that when Congress was 
 authorized to tax "incomes" it was not the intention to 
 allow it to tax a change in the evidence of ownership 
 which is all that a 'stock dividend' represents. 
 
 POINT V. 
 
 judgment should be rendered overruling the 
 demurrer and awarding to the plaintiff 
 the sum sued for. 
 
 Murray, Prentice & Howland, 
 
 Attorneys for Plaintiff. 
 
 Charles E. Hughes, 
 George Welwood Murray, 
 
 Of Counsel. 
 
14 DAY USE 
 
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 This book is due on the last date stamped below, or 
 
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 Renewed books are subject to immediate recall. 
 
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 JAN 1 3 1957 
 
 
 
 
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 MAY 30 1957 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 tMliliioKK 56 Univ HS^ rnia 
 
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