U.S. Supreme Court KOSHLAND v. HELVERING, 298 U.S. 441 (1936)

[Page 298 U.S. 441, 442]

Mr. Justice ROBERTS delivered the opinion of the Court.

The writ of certiorari was granted (297 U.S. 702, 56 S.Ct. 669) in this case to resolve a conflict between the decision below1 and one by the Circuit Court of Appeals for the Sixth Circuit. [Footnote 2]

[Page 298 U.S. 441, 443]

share. In computing the profit realized by the petitioner the Commissioner allocated to the common stock so received, in each instance, a proportionate amount of the cost of the preferred stock. He thereby decreased the resulting cost basis per share and ncreased the gain. The Board of Tax Appeals reversed holding that the dividends were taxable income, were not stock dividends within the meaning of the Revenue Acts,3 and their receipt did not reduce the cost basis of the preferred stock. The Circuit Court of Appeals reversed the Board and approved the Commissioner's action.

The petitioner contends, first, that the dividends she received were not stock dividends exempted from taxation by the Revenue Acts; and, secondly, if exempted, they were none the less income and cannot be treated as returns of capital in computing capital gain or loss. The respondent answers that the distributions were stock dividends because made in the capital stock of the corporation and come within the plain meaning of the provisions exempting stock dividends from income tax; accordingly, the Treasury regulations have consistently and continuously treated them as returns of capital, and required the original cost to be apportioned between the shares originally acquired and those distributed as dividends to obtain the cost basis for the calculation of gain or loss. We hold that the dividends were income and may not be treated as returns of capital.

The Revenue Act of 1913 imposed an income tax on dividends. [Footnote 4] In Towne v. Eisner, 245 U.S. 418, 38 S.Ct. 158, L.R.A. 1918D, 254, it was held that where a corporation declared a dividend on its common stock, in the form of common stock, the dividend was not income within the intendment of the act.

[Page 298 U.S. 441, 444]

The Revenue Act of 1916 provided that a stock dividend should be considered income to the amount of its cash value. [Footnote 5] In Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 9 A.L.R. 1570, it was decided that a dividend in the corporation's common stock paid to the then common stockholders was not income within the meaning of the Sixteenth Amendment and therefore the effort to tax such dividends exceeded the power granted by the Amendment. It was said that such a dividend was not income because, by its payment, no severance of corporate assets was accomplished and the pre-existing proportionate interests of the stockholders remained unaltered. After the decision the Treasury revoked regulations to the effect that a dividend paid in the corporation's stock is income and issued amended regulations, broadly phrased, to exempt all income in the form of stock dividends, whether the dividend shares be of the same class as those theretofore held by the stockholder or of a different class, and prescribing the method of allocating the original cost as between the old and the new stock for purposes of calculating gain or loss upon realization. Subsequently Congress adopted the Revenue Act of 1921 which provided, in section 201(d): 'A stock dividend shall not be subject to tax.' 6 The reason for the exemption was the decision in Eisner v. Macomber, supra. The reports of both the House and the Senate Committees dealing with the bill state that the act 'modifies the definition of dividends in existing law by exempting stock dividends from the income tax, as required by the decision of the Supreme Court in Eisner v. Macomber, 252 U.S. 189 ( 40 S.Ct. 189, 9 A.L.R. 1570).'7

[Page 298 U.S. 441, 445]

Although Eisner v. Macomber affected only the axation of dividends declared in the same stock as that presently held by the taxpayer, the Treasury gave the decision a broader interpretation which Congress followed in the act of 1921. Soon after the passage of that act, this court pointed out the distinction between a stock dividend which worked no change in the corporate entity, the same interest in the same corporation being represented after the distribution by more shares of precisely the same character, and such a dividend where there had either been changes of corporate identity or a change in the nature of the shares issued as dividends whereby the proportional interest of the stockholder after the distribution was essentially different from his former interest. [Footnote 8] Nevertheless the successive statutes and Treasury regulations respecting taxation of stock dividends remained unaltered. [Footnote 9] We give great weight to an administrative interpretation long and consistently followed, particularly when the Congress, presumably with that construction in mind, has re-enacted the statute without change. [Footnote 10] The question here, however, is not merely of our adopting the administrative construction, but whether it should be adopted if in effect it converts an income tax into a capital levy.

[Page 298 U.S. 441, 447]

governs where the statute merely expresses a general rule and invests the Secretary of the Treasury with authority to promulgate regulations appropriate to its enforcement. But where, as in this case, the provisions of the act are unambiguous, and its directions specific, there is no power to amend it by regulation. [Footnote 14] Congress having clearly and specifically declared that in taxing income arising from capital gain the cost of the asset disposed of shall by the measure of the income, the Secretary of the Treasury is without power by regulatory amendment to add a provision that income derived from the capital asset shall be used to reduce cost.

[Page 298 U.S. 441, 448]

of Miles v. Safe Deposit & Trust Co. of Baltimore, 259 U.S. 247, 253, 42 S. Ct. 483, the cost of all the shares is properly distributed between the investment and its accretions, between the old shares and the new. The Regulations so provide. Regulations 45, 1916 Act, Article 1547; Regulations 65, 1924 Act, Articles 1547 and 1548; Regulations 69, 1926 Act, Articles 1547 and 1548; Regulations 74, 1928, Act, Articles 627 and 628; Regulations 77, 1932 Act, Articles 627 and 628; Regulations 86, 1934 Act, Articles 115-7 and 115-8. Footnotes

Footnote 1 Commissioner v. Koshland (C.C.A.) 81 F.(2d) 641.

Footnote 2 Commissioner v. Tillotson Mfg. Co., 76 F.(2d) 189.

Footnote 3 Revenue Act of 1928, 115(f), c. 852, 45 Stat. 791, 822 (26 U.S.C. A. 115(f) and note); Revenue Act of 1926, 201(f), c. 27, 44 Stat. 9, 11 (26 U.S.C.A. 115 note): 'A stock dividend shall not be subject to tax.'

Footnote 4 38 Stat. 114, 166, 167.

Footnote 5 39 Stat. 756, 757, 2. Compare Revenue Act of 1918, 201, 40 Stat. 1057, 1059.

Footnote 6 42 Stat. 227, 228. The same provision was repeated in all subsequent Revenue Acts; Revenue Acts of 1924 and 1926, 201(f) (43 Stat. 254, 44 Stat. 10, 26 U.S.C.A. 115 note); Revenue Acts of 1928 and 1932, 115(f), 26 U.S.C.A. 115(f) and note; Revenue Act 1934, 115(f), 26 U.S. C.A. 115(f).

Footnote 7 H.R. 350, 67th Cong., 1st Sess., p. 8. Senate Report No. 275, 67th Cong., 1st Sess., p. 9.

Footnote 8 United States v. Phellis, , 42 S.Ct. 63; Rockefeller v. United States, 257 U.S. 176, 42 S.Ct. 68; Cullinan v. Walker, 262 U.S. 134, 43 S.Ct. 495; Marr v. United States, 268 U.S. 536, 45 S.Ct. 575.

Footnote 9 See Regulations 65 and 69, Articles 1547, 1548; Regulations 74 and 77, Articles 627, 628; Regulations 86, Articles 115-7, 115-8.

Footnote 10 Poe v. Seaborn, 282 U.S. 101, 116, 51 S.Ct. 58; McCaughn v. Hershey Chocolate Co., 283 U.S. 488, 492, 51 S.Ct. 510; McFeely v. Commissioner, 296 U.S. 102, 108, 56 S.Ct. 54, 101 A.L.R. 304.

Footnote 11 45 Stat. 815 (26 U.S.C.A. 111 note).

Footnote 12 45 Stat. 818 (26 U.S.C.A. 113 note).

Footnote 13 Regulations 74, Articles 58, 628, and 600.

Footnote 14 Manhattan General Equipment Co. v. Commissioner of Internal Revenue, , 56 S.Ct. 397, and cases cited.