Mr. Arnold Raum, of Washington, D.C., for petitioner.
Mr. Roland L. Redmond, of New York City, for respondent.
Mr. Justice JACKSON delivered the opinion of the Court.
The question in this case is whether the Acts of Congress and the administrative regulations thereunder afford a basis on which we may reconsider the decision in [318 U.S. 371, 372] Eisner v. Macomber, 252 U.S. 189 , 40 S.Ct. 189, 9 A.L.R. 1570, and pass on the Government's request that if be overruled.
During the Calendar year 1939 respondent owned 101 shares of common stock of the Standard Oil Company of New Jersey. Twice during the year that corporation made appropriate transfers from earned surplus to its capital accounts, in amounts less than the net accumulation of earnings and profits subsequent to February 28, 1913, and against them issued stock dividends. On June 15, 1939, respondent received a dividend of 1.01 such shares having a fair market value of $42.93. On December 15, 1939, she received a further dividend of 1.53 shares, which had a fair market value of $66.08. These dividends were in common stock identical with the stock on which they were declared, which was the only stock outstanding at the time they were made. The dividend stock was not sold, redeemed, or in any way realized upon, and the taxpayer did not include it as income in her return for 1939. The Commissioner did so include it, and on December 8, 1941, sent her a notice of deficiency in the amount of $9.60. The Board of Tax Appeals reversed his determination, and the Circuit Court of Appeals for the Second Circuit affirmed on the authority of Eisner v. Macomber, supra. 129 F.2d 321. Because of the importance of the question we granted certiorari. 317 U.S. 619 , 63 S.Ct. 206, 87 L.Ed. --.
The tax is asserted under the general provision of 22(a) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code 22(a), that income includes 'dividends,' together with the specific provision of 115(f)(1), 26 U.S.C.A. Int.Rev.Code 115(f)(1), that: '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.' 1 [318 U.S. 371, 373] 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. 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, 1918, 245 U.S. 418 , 38 S.Ct. 158, L.R.A.1918D, 254. Congress had meanwhile provided that a 'stock dividend shall be considered income, to the amount of its cash value.' 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, 1920, 252 U.S. 189 , 40 S.Ct. 189, 9 A.L.R. 1570. 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 criticised. 4 [318 U.S. 371, 374] Although Eisner v. Macomber dealt only with a dividend of common stock to common stockholders, it was at once accepted as the basis for a broader exemption. The Treasury ruled that receipt of dividend stock generally was not income, and Congress provided in 201(d) of the Revenue Act of 1921, 42 Stat. 227, that 'A stock dividend shall not be subject to tax ....'5 Treasury Regulations under this statute and subsequent re- enactments construed it as convering all dividends paid in stock of the distributing corporation. 6
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, 1921, 257 U.S. 156 , 42 S.Ct. 63; Rockefeller v. United States, 1921, 257 U.S. 176 , 42 S.Ct. 68; Cullinan v. Walker, 1923, 262 U.S. 134 , 43 S.Ct. 495; Weiss v. Stearn, 1924, 265 U.S. 242 , 44 S. Ct. 490, 33 A.L.R. 520; Marr v. United States, 1925, 268 U.S. 536 , 45 S.Ct. 575
[318 U.S. 371, 375] 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. 7 March 30, 1936, this Court granted certiorari in Koshland v. Helvering, 298 U.S. 441 , 56 S.Ct. 767, 105 A.L.R. 756, in which the taxpayer challenged the validity of the apportionment Regulations. 297 U.S. 702 , 56 S.Ct. 669. 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. [318 U.S. 371, 376] While the Court was considering stock dividends in the Koshland case, Congress was considering them in connection with the pending Revenue Act for 1936.
On March 3, 1936, the President had suggested the enactment of a tax upon the undistributed income of corporations. 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. 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. 10 Serious consideration of this method, which had been employed in [318 U.S. 371, 377] earlier times, 11 was foreclosed by the belief that Eisner v. Macomber made it 'impossible' to put into effect. 12 [318 U.S. 371, 378] The statements of members of Congress and of responsible Treasury officials at the hearings and debates on the Act are at variance with the present assertion of the Government that Congress intended 115(f)(1) to challenge or override the decision to which it had in other sections of the Act accommodated itself.
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 corporation13-could be declared and the undistributed- profits tax avoided without the necessity of distributing assets. 14 No testimony was given, however, that divi- [318 U.S. 371, 379] dends such as we have in this case were legally taxable or intended to be taxed. 15 [318 U.S. 371, 380] As reported by the House Ways and Means Committee and passed in the House, 115(f)(1) of the Bill provided: 'A distribution made by a corporation to its shareholders in stock of the corporation or in rights to acquire stock of the corporation shall be treated as a taxable dividend to the extent that such distribution constitutes income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution and represents a distribution of earnings or profits accumulated after February 28, 1913.'16 The Committee Report stated that: 'It is provided in Sec. 115(f) that stock dividends shall be subject to tax to the extent that such dividends constitute income to the shareholder within the meaning of the sixteenth amendment to the Constitution.'