U.S. Supreme Court
KOSHLAND v. HELVERING, 298 U.S. 441
(1936)
298 U.S. 441
KOSHLAND
v.
HELVERING.
No. 774.
Argued May 1, 1936.
Decided May 18, 1936.
Mr. John
C. Altman, of San Francisco, Cal., for petitioner.
Mr. J. P. Jackson, Asst. Atty. Gen.,
for respondent. [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. 2
The question is whether, under the
Revenue Acts of 1926 (44 Stat. 9) and 1928 (45 Stat. 791), a taxpayer who
purchases cumulative nonvoting preferred shares of a corporation upon which a
dividend is subsequently paid in common voting shares must, upon a sale or
other disposition of the preferred shares, apportion their cost between
preferred and common for the purpose of determining gain or loss.
The petitioner, in 1924 and 1926,
purchased preferred stock of Columbia Steel Corporation. The company's articles
of incorporation provided that holders of preferred stock should receive annual
dividends of $7 a share in cash or, at the company's option, one share of
common stock for each share of preferred. Dividends on the preferred were to be
paid in full before any could be paid on the common; the common had voting
rights, the preferred none. The preferred was redeemable at $105 per share,
plus accrued dividends; and upon dissolution or liquidation was entitled to
preferential payment of $100 per share, plus accrued dividends, and no more.
The common alone was entitled in such event to the assets of the corporation
remaining after payment of the preferred.
In each of the years 1925 to 1928,
inclusive, the company had a surplus sufficient to pay the preferred dividends
in cash, but elected to pay them in common stock. The petitioner received, in
each of those years, shares of common stock as dividends on her preferred. In
1930 the corporation redeemed its preferred stock at $105 per [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. 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. [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. 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 [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. 8 Nevertheless the successive statutes and
Treasury regulations respecting taxation of stock dividends remained unaltered.
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. 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.
We are dealing solely with an income
tax act. Under our decisions the payment of a dividend of new common shares,
conferring no different rights or interests than did the old, the new
certificates, plus the old, representing the same proportionate interest in the
net assets [298 U.S. 441, 446] of
the corporation as did the old, does not constitute the receipt of income by
the stockholder. On the other hand, where a stock dividend gives the
stockholder an interest different from that which his former stock holding
represented he receives income. The latter type of dividend is taxable as
income under the Sixteenth Amendment. Whether Congress has taxed it as of the
time of its receipt, is immaterial for present purposes.
The relevant capital gains
provisions of the Revenue Act of 1928 are section 111(a):
'The
gain from the sale or other disposition of property shall be the excess of the
amount realized therefrom over the adjusted basis
provided in section 113'11 and Section 113:
'The
basis for determining the gain or loss from the sale or other disposition of
property acquired after February 28, 1913, shall be the cost of such property'
(with exceptions having no relevancy here).12
The property disposed of was the
petitioner's preferred stock. In plain terms the statute directs the
subtraction of its cost from the proceeds of its redemption, if the latter sum
be the greater. But we are told that Treasury regulations13 long in force
require an allocation of the original cost between the preferred stock
purchased and the common stock received as dividend. And it is said that while no
provision of the statute authorizes a specific regulation respecting this
matter, the general power conferred by the law to make appropriate regulations
comprehends the subject. Where the act uses ambiguous terms, or is of doubtful
construction, a clarifying regulation or one indicating the method of its
application to specific cases not only is permissible but is to be given great
weight by the courts. And the same principle [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. 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.
The judgment is
REVERSED.
Mr. Justice STONE and Mr. Justice
CARDOZO are of the opinion that the judgment should be affirmed.
The meaning of the Act of Congress
exempting stock dividends from taxation as income at the time of distribution
has had a practical construction through administrative action and legislative
acquiescence. Even though the meaning may have been uncertain in the beginning,
it has now become fixed in accordance with long continued practice. Morrissey
v. Commissioner, 296
U.S. 344, 355 , 56 S.Ct.
289; Helvering v. Minnesota Tea Co., 296
U.S. 378, 384 , 56 S.Ct. 269. This is not denied
in the opinion of the court. Congress did not intend, however, when it refused
to tax the newly acquired shares as income in praesenti
to exclude them from taxation in futuro if disposed
of at a profit. A tax upon a gainful use either of capital or of income, when
the gain is fully realized, is a true tax upon income and not a capital levy.
The question is merely one as to how the profit shall be computed. Following
the analogy [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, 257
U.S. 156 , 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, 297
U.S. 129 , 56 S.Ct. 397,
and cases cited.