U.S. Supreme Court HELVERING v. GOWRAN, 302 U.S. 238 (1937)

[Page 302 U.S. 238, 242]

for construction. It extends to all stock dividends. Such was the construction consistently given to it by the Treasury Department. [Footnote 1] The purpose of Congress when enacting section 115(f) may have been merely to comply with the requirement of the Constitution as interpreted in Eisner v. Macomber, , 40 S.Ct. 189, 9 A.L.R. 1570; and the comprehensive language in section 115(f) may have been adopted in the erroneous belief that under the rule declared in that case no stock dividend could be taxed. But such facts would not justify the Court in departing from the unmistakable com-

[Page 302 U.S. 238, 244]

section 115(f) cannot, in view of its history, be taken as a declaration of congressional intent that the value of all stock dividends shall be immune from tax not only when received but also when converted into money or other property. Gain on them is, therefore, to be computed as provided in sections 111 and 113 (26 U.S.C.A. 111 and note 113 note), by the 'excess of the amount realized' over 'the cost of such property' to the taxpayer. As the cost of the preferred stock to Gowran was zero, the whole of the proceeds is taxable.

Gowran asserts that if this 'basis of zero' theory is accepted, the proceeds are taxable not as determined by the Commissioner but as a capital gain at a different rate and under different regulations. This depends upon whether the preferred stock received as a dividend was a 'capital asset,' defined by section 101(c)(8), 26 U.S.C.A. 101 note, as 'property held by the taxpayer for more than two years.' The record is silent as to when Gowran acquired the common stock upon which the preferred was issued as a dividend, but it may be assumed that he had held it for more than two years. For that fact is immaterial since the dividend stock had been held for only three months. Whether taxed by Congress or not, it was income, substantially equivalent for income tax purposes to cash or property, and under section 115(b), 26 U.S.C.A. 115(b) and note, was presumed to have been made 'out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits.' In no sense, therefore, can it be said to have been 'held' by Gowran prior to its declaration. [Footnote 2] Since the proceeds

[Page 302 U.S. 238, 245]

were therefore not 'capital gains,' they were taxable at the normal and surtax rates applicable to ordinary income. [Footnote 3]

[Page 302 U.S. 238, 247]

ing, supra, or in Helvering v. Salvage, , 56 S.Ct. 375, is opposed to such procedure.

If the Court of Appeals had accepted the theory, it would have been open to the taxpayer to urge, in view of the new issue presented, that he should have the opportunity to establish before the Board additional facts which would affect the result. [Footnote 6] As we accept the new theory, leave is granted Gowran to apply to the lower court for that purpose.

Reversed. Footnotes

[Footnote *] Rehearing denied 302 U.S. 781, 58 S.Ct. 478, 82 L.Ed. --.

Footnote 1 Eisner v. Macomber was decided March 8, 1920. Soon thereafter, the Treasury Department declared, in a series of decisions and regulations, that no stock dividend was taxable. Treas. Dec. 3052, 3 C.B. 38 (August 4, 1920); Treas. Dec. 3059, 3 C.B. 38 (August 16, 1920); Office Dec. 732, 3 C. B. 39 (October 28, 1920). Office Dec. 801, 4 C.B. 24 (January 5, 1921) provided: 'A stock dividend paid in true preferred stock is exempt from the tax the same as though the dividend were paid in common stock.' Then followed legislation in the precise form embodied in section 115(f) of the Revenue Act of 1928 (26 U.S.C.A. 115(f) and note). See section 201(d) of the Revenue Act of 1921, 42 Stat. 227, 228; section 201(f) of the Revenue Act of 1924, 43 Stat. 253, 255; section 201(f) of the Revenue Act of 1926, 44 Stat. 9, 11; section 115(f) of the Revenue Act of 1932, 47 Stat. 169, 204 (26 U.S.C.A. 115(f) and note); section 115(f) of the Revenue Act of 1934, 48 Stat. 680, 712 (26 U.S.C.A. 115(f). Article 628 of the regulations in force in 1928 provided: 'Stock dividends.-The issuance of its own stock by a corporation as a dividend to its shareholders does not result in taxable income to such shareholders, but gain may be derived or loss sustained by the shareholders from the sale of such stock. The amount of gain derived or loss sustained from the sale of such stock, or from the sale of the stock in respect of which it is issued, shall be determined as provided in Articles 561 and 600.'

Koshland v. Helvering, 298 U.S. 441, 56 S.Ct. 767, 105 A.L.R. 756, was decided May 18, 1936. On June 22, 1936, Congress, in enacting the Revenue Act of 1936, provided in section 115(f), 26 U.S.C.A. 115(f): '(1). General Rule. 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 shareholders within the meaning of the Sixteenth Amendment to the Constitution.' 49 Stat. 1648, 1688. See, also, section 115(h), 26 U.S.C.A . 115(h).

Footnote 2 Article 501 of regulations 74 states that 'if the taxpayer has held for more than two years stock upon which a stock dividend has been declared, both the original and dividend shares are considered to be capital assets.' But this was based upon the erroneous premise that stock dividends could not be income, and was part of an administrative scheme to apportion some of the cost of the original shares to the stock received by way of dividend. This arrangement we declared in Koshland v. Helvering, 298 U.S. 441, 56 S.Ct. 767, 105 A.L.R. 756, to be without statutory authority, and the same must be said of the regulation involved here.

Footnote 3 See Burnet v. Harmel, 287 U.S. 103, 105, 106 S., 53 S.Ct. 74, 75; Helvering v. New York Trust Co., 292 U.S. 455, 463, 54 S.Ct. 806, 808; McFeely v. Commissioner, 296 U.S. 102, 106, 107 S., 56 S. Ct. 54, 55, 101 A.L.R. 304.

Footnote 4 See also Hurwitz v. Commissioner, 45 F.2d 780 (C.C.A.2); Superheater Co. v. Commissioner, 38 F.2d 69 (C.C.A.2); Commissioner v. Linderman, 84 F.2d 727 (C.C.A.3); Dickey v. Burnet, 56 F.2d 917 (C.C.A.8); Lewis-Hall Iron Works v. Blair, 57 App.D.C. 364, 23 F.2d 972; cf. Dobbins v. Commissioner, 31 F.2d 935 (C.C.A.3); Seufert Bros. Co. v. Lucas, 44 F. 2d 528 (C.C.A.9); Hughes v. Commissioner, 38 F.2d 755 (C.C.A.10).

Footnote 5 Compare Darcy v. Commissioner, 66 F.2d 581 (C.C.A.2); Helvering v. Gregory, 69 F.2d 809 (C.C.A.2), affirmed , 55 S.Ct. 266, 97 A.L.R. 1355; Alexander Sprunt & Son, Inc., v. Commissioner, 64 F.2d 424 (C.C.A.4); Helvering v. Bowen, 85 F.2d 926 (C.C.A.4); Atlanta Casket Co. v. Rose, 22 F.2d 800 (C.C.A.5); J. & O. Altschul Tobacco Co. v. Commissioner, 42 F.2d 609 (C.C.A.5); Crowell v. Commissioner, 62 F.2d 51 ( C.C.A.6); Schweitzer v. Commissioner, 75 F.2d 702 (C.C.A.7), reversed on other grounds Helvering v. Schweitzer, 296 U.S. 551, 56 S.Ct. 304; Christopher v. Burnet, 60 App.D.C. 365, 55 F.2d 527; Beaumont v. Helvering, 63 App.D.C. 387, 73 F.2d 110.

Footnote 6 Compare Woodward v. Boston Lasting Machine Co., 60 F. 283 (C.C.A.); Id., 63 F. 609 (C.C.A.1).