(46 S.Ct.) mulated undivided profits so appearing was | tribution will be considered to have been the undistributed balance of the profits made from current earnings; that such diviearned in the year 1916, which was shown on the books as closed under date of December 31, 1916, and appeared in the surplus account; that this balance was sufficient in amount to meet these two dividends; and that it must be deemed to have been applied in paying them. In short, the claim of the Douglas estate is that Congress, in providing by section 31 (b) that dividends shall be deemed to have been paid "from the most recently accumulated undivided profits or surplus," meant from such balance as, at the time of the payment of the dividend, is shown by the undivided profits or surplus account of the preceding fiscal year. The Douglas estate, apparently, does not contend that under the 1917 act dividends are not to be taxed at all, unless there was an existing balance of taxable profits in the surplus or undivided profits account from which they can be considered to have been paid. To have so contended would have been to impute to Congress the intention of exempting from taxation the dividends received in 1917 by those individuals who were stockholders in corporations which earned in 1917 large sums and paid them out in dividends during that year, but which had no earned surplus *210 at the close of their fiscal year on De*cember 31, 1916, or whose earned surplus consisted wholly of profits earned prior to March 1, 1913. The Douglas estate grafts upon the section an implied condition or limitation. Its position seems to be that section 31 (b) applies if, and only if, at the time of the payment of the dividend, there was on hand an undistributed part of the taxable earnings of some prior fiscal year or years. In other words, it asserts that Congress, in providing that a distribution to shareholders should "be dends, in that event, would be taxable as income under section 2 (a) of the Revenue Act of 1916, 39 Stat. 757, as amended by section 1200 of the 1917 act, 40 Stat. 329 (Comp. St. 1918, § 6336b [a]); and that the 1917 rates would apply. Whether, at the time these 1917 dividends were paid, there was in the surplus account as of December 31, 1916, such funds sufficient for their payment, as the Circuit Court of Appeals appears to have found, we have no occasion to consider; for we are of the opinion that, in any event, the District Court was right in holding that these 1917 dividends must be deemed to have been paid out of the 1917 earnings, and that the stockholder was taxable thereon at the 1917 rate. *211 The legislative history of section 31 (b) is relied upon by the Douglas estate in support of its construction. On the other hand, the government relies upon the legislative history of the Revenue Act of 1918 (Act of February 24, 1919, c. 18, 40 Stat. 1057 [Comp. St. Ann. Supp. 1919, § 6336a et seq.]), passed by the same Congress which enacted the Revenue Act of 1917. Inquiries into the detail of legislative history are sometimes helpful in removing a doubt presented by the language used in a statute. Penn Mutual Life Ins. Co. v. Lederer, 252 U. S. 523, 537, 40 S. Ct. 397, 64 L. Ed. 698. But we have no occasion here to resort to that aid in construing the phrase in question. To ascertain its meaning, we need only bear in mind the general character of the income tax, the specific practices of corporations concerning profits and dividends, the prior income tax legislation to which section 31 (b) is an amendment, and the time of the latter's enactment. Ordinarily, an income tax is laid upon all deemed to have been made from the most re-taxable income actually received during the cently accumulated undivided profits or surtax year, and the tax is payable at the tax plus," implied the condition, "if there are such accumulated profits or surplus not exrate of the year in which it is received, alempt from taxation"; that if there are avail- though none of the income may have been able no such undivided profits or surplus, ac-earned by the taxpayer during that year, or, crued subsequent to March 1, 1913, the dis where the income consists of dividends, although the corporation may not have earned in that year any part of the profits of which 2 This, as a business matter, could easily be done, The Act of and is, in fact, done by many corporations. Nearly the dividend is a distribution. every business with a well-developed accounting October 3, 1913, c. 16, § II, 38 Stat. 114, 166, system can, at any time, without the formal peri- the first income tax law enacted after the odic inventory or closing of its books usual at the end of a fiscal year, determine approximately the adoption of the Sixteenth Amendment, was amount of its current earnings, the amount accrued construed by the Treasury Department as since the beginning of its fiscal year, and the part embodying this general rule without any exthereof undistributed. Many corporations do make ception. Consequently the Treasury exacted such approximate ascertainment of profits monthly, or oftener; and, relying upon their system of cost such payment on account of all income reaccounting, they make distributions of current earn-ceived by the taxpayer after March 1, 1913, ings without a closing of the books, as the Phelps the effective date of the amendment, although Dodge Corporation did in 1917. This is shown by the record to be true of the Phelps Dodge Corporation. It paid during 1917 regular and extra dividends on June 28, on September 28, and on December 28, aggregating $8,100,000, which were declared, in its report to stockholders, to have been paid by it "out of earnings for the year 1917." it appeared that all of the income had been earned before that date, either by the taxpayer or by the corporation whose profits were distributed as a dividend. The correctness of the Treasury's construction was ques tioned; and before the second income tax *212 law was enacted (Act Sept. 8, 1916, c. 463, | ply declaring that the dividends were paytitle I, 39 Stat. 756 [Comp. St. § 6336a]), low- able out of the earnings of earlier years; er federal courts had, in Lynch v. Hornby, and if there were still on hand such sufficient 236 F. 661, 149 C. C. A. 657, held the Treas- surplus earnings from the period prior to March 1, 1913, the dividends would be exempt from all tax. It was apparently to obviate such inequalities that Congress provided by section 31 (b) for an objective considearned the profits, as well as the date when the taxpayer received his share of them in the form of the dividend. By implying the condition stated above the Douglas estate escapes from a position which would otherwise impute to Congress the intention of enabling the war profits of 1917 and subsequent years actually distributed as dividends to escape from the war taxes. But in implying the condition it imputes to Congress, which was seeking to prevent discrimination against stockholders in those corporations which had on January 1, 1917, surplus profits earned since March 1, 1913, the intention of grossly discriminating in their favor; for, if this condition is read into the act, stockholders in corporations which had no such surplus on December 31, 1917, are taxable on 1917 dividends at the high 1917 rates; while those in corporations which had such surplus are taxable on 1917 dividends at the lower rates of 1916 or earlier years. ury *construction to be erroneous. There had also been serious contention that, as construed by the Treasury, the provision was, when applied to dividends, both unconstitu-eration of the date when the corporation tional and unjust.3 These contentions apparently prevailed with Congress when, in framing the 1916 act, it raised the normal tax rate from 1 per cent. to 2 per cent. and the maximum additional tax (supertax) from 6 per cent. to 13 per cent. The 1916 act, by a proviso to section 2, limited the tax on dividends to distributions "made or ordered to be made by a corporation out of its earnings or profits accrued since March first, nineteen hundred and thirteen. * "Soon after came the war, the great need of the government for large revenues, and the large war profits. Congress enacted the 1917 War Income Tax Law, which raised the normal tax rate to 4 per cent. and the maximum additional tax to 63 per cent., and it made the provision retroactive,. in the main, to January 1 of that year. While the 1917 act was under consideration, it was recognized that this rapid increase in the income tax rate might result in unjust discrimination, if no change were made in the then existing rule governing the taxation of dividends. All profits earned by members of a partnership would be taxed at the rate prevailing in the year in which they were earned, although actually withdrawn in a later year, when the tax rate was much higher. On the other hand, the tax upon the profits of a corporation earned in 1916 or earlier would, if paid out in 1917 as dividends, be taxed at the high 1917 rates. There would be similar discrimination among the holders of stock in different corporations. The stockholders in those corporations which had deferred the distribution of profits *213 *214 *Congress did not use the words "surplus account" or "undivided profits account." Its language is "undivided profits or surplus." The word "surplus" is a term commonly employed in corporate finance and accounting to designate an account on corporate books. But this is not true of the words "undivided profits." The surplus account represents the net assets of a corporation in excess of all liabilities including its capital stock. This surplus may be "paid-in surplus," as where the stock is issued at a price above par; it may be “earned surplus," as where it was derived holly from undistributed profits; or it may, among other things, represent the increase in valuation of land or other assets *earned prior to 1917, either generally from prudence or specifically with a view to stab-made upon a revaluation of the company's ilizing over a long period the rate of divi- fixed property. See La Belle Iron Works v. dend, would be at a great disadvantage as United States, 256 U. S. 377, 385, 41 S. Ct. compared with the stockholders in those cor- 528, 65 L. Ed. 998. As used in section 31 (b) porations which had pursued the practice of the term undoubtedly means that part of the distributing each year substantially all prof- surplus which was derived from profits its earned. On the other hand, if corpora- which, at the close of earlier annual accounttions were left free to determine out of what ing periods, were carried into the surplus acyear's profits dividends paid in 1917 and sub-count as undistributed profits. On the other sequent years should be deemed to have been made, a corporation with a surplus derived from earnings made prior to 1917 could, while accumulating the profits of the war years, pay dividends on which its stockholders would escape the heavy war tax, by sim The decision in this court of Lynch v. Hornby, 247 U. S. 339, 38 S. Ct. 543, 62 L. Ed. 1149, which sustained the Treasury's construction and held the act constitutional, was not rendered until June 3, 1918. See, also, Peabody v. Eisner, 247 U. S. 347, 38 S. Ct. 546, 62 L. Ed. 1152. hand, the term "undivided profits" has not acquired in corporate finance and accounting a like fixed meaning. It is not known as designating generally in business an account on the corporation's books, as distinguished from profits actually earned, but not yet distributed. Few business corporations estab The Committee on Accounting Terminology of the American Association of Public Accountants was for years engaged in preparing a list of definitions. That contained in the Year Book of 1913 (46 S.Ct.) lish an "undivided profits" account." By the words, the course to be pursued under most corporations the term "undivided prof-section 31 (b) becomes consistent with the its" is employed to describe profits which general purpose evidenced by other parts of *215 have *neither been distributed as dividends nor carried to surplus account upon the closing of the books; that is, current undistributed earnings. In the act. Its general aim was clearly to make the dividend, in whatever year paid, bear the tax rate of the year in which the profits of which it was a distribution had been earned, and for this purpose to treat as a That this is the natural meaning of the unit the profits of the whole tax year. term "undivided profits" is indicated by the providing measures for the attainment of action of both Douglas and his estate. That that aim, it could be of no practical signifithis is the meaning in which it was used by cance whether, at the time of the payment of Congress is confirmed by the use of the ex- the dividend, these profits appeared in a surpression "earnings and profits" later in the plus or undivided profits account (as the profsame paragraph," and also by the use of the its earned within part of a year would, where term "undivided profits" in section 207 a corporation closed its books monthly, quar(Comp. St. 1918, § 6336h). If it be accept-terly, or semiannually) or whether they still ed as the meaning in which Con*gress used rested as current earnings without formal determination or specific allocation. *216 8 pp. 176-227, gives at page 226 this definition: "Undivided Profits.-Earnings or profits which have not been divided among the partners in a firm or the stockholders in a corporation." 'The Interstate Commerce Commission prescribes for the various classes of corporations subject to its supervision about 13 different forms of accounts, all of which include a general balance sheet. The number of items on the liability side of this balance sheet varies in these several forms from 8 to 33. There is no item, "undivided profits," in any form. See Besides this general aim, Congress had the special aim of making the war profits pay the high war taxes.9 To this end it was essential that the law should, in determining the applicable tax rate, disregard any declaration of the corporation as to what year's profits were being distributed. Not only was it essential that every such declaration of the corporation should be disregarded, but also that the dividend should not thereupon be deemed to have been paid from the profits of the earliest year (since March 1, 1913) of which *217 By incorporated banks the term is commonly employed to designate the account in which profits are carried more or less temporarily, in contradistinction to the account called surplus in which are carried amounts treated as permanent capital, and there remained accumulated *profits available which may have been derived from payments for for distribution. To accomplish the purpose stock in excess of par, or from profits which have been definitely devoted to use as capital. of Congress it was necessary that the diviFidelity Title & Trust Co. v. United States, 259 U. dend be deemed to have been paid out of the S. 304, 308, 42 S. Ct. 514, 66 L. Ed. 953. available profits or earnings of the most recent year or years. Its intention so to provide was adequately expressed by the use of the phrase "most recently accumulated" in connection with the words "undivided profits or surplus." As, in the case at bar, there were profits of the year 1917 ample to cover all dividends, those here in suit must be deemed to have been paid therefrom. Reversed. • Douglas received (see note 2, supra) from Phelps Dodge Corporation during 1917 six other dividends, aggregating $738,900, which were confessedly paid out of the 1917 profits, and which were reported by him as taxable in his return to the Commissioner of Internal Revenue. The two dividends here in question were reported by him in his return as not taxable, solely on the ground that they were "depletion dividends." It was on this ground only that the estate, in its applications to the Treasury, sought recovery of the amount in suit. Section 31 (b): But nothing herein shall be construed as taxing any earnings or profits accrued prior to March first, nineteen hundred and thirteen, but such earnings or profits may be distributed in stock dividends or otherwise, exempt from the tax, after the distribution of earnings and profits accrued since March first, nineteen hundred and thirteen, has been made. This subdivision shall not apply to any distribution made prior to August sixth, nineteen hundred and seventeen, out of earnings or profits accrued prior to March first, nineteen hundred and thirteen." In section 207 of the same act, which deals with the war excess profits tax on corporations and makes the tax dependent on the amount of the invested capital, the term "undivided profits" is likewise used. That section, in paragraph (a) 3 defines invested capital as including "paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year." Mr. Justice VAN DEVANTER, Mr. Justice MCREYNOLDS, Mr. Justice SUTHERLAND, and Mr. Justice BUTLER dissent. To discourage the hoarding of profits in order to avoid the tax, two supplemental provisions were incorporated in the act. By section 3, incorporating section 3 of the Revenue Act of 1916 (Comp. St. 1918, § 6336c) Congress taxed as income received by the stockholder his proportion of profits earned by the corporation and fraudulently hoarded by it to avoid payment of the tax. By section 1206(2), adding section 10 (b) to the Revenue Act of 1916 (Comp. St. 1918, § 6336] [b]), it subjected the corporation to an additional tax of 10 per cent. on undistributed income not employed in the business, unless invested in obligations of the United States. (269 U. S. 190) CENTRAL UNION TELEPHONE Co. v. (Argued Oct. 13, 1925. Decided Nov. 23, 1925.) No. 37. 1. Courts 391 (2)-Under Illinois statute, taking case on appeal or writ of error to Appellate Court waives right to review of constitutional questions. Under 3 Starr & C. Ann. St. Ill. p. 3114, par. 89, where case involves constitutional question, it must be taken on error or appeal to the Supreme Court, and, if taken to the Appellate Court on other grounds, the constitutional questions are waived, and writ of error from United States Supreme Court to state Supreme Court will not lie to review decision refusing to hear constitutional questions because of such waiver, whether the constitutional questions involve state or federal Constitution. 2 Courts 366(1)-State court's construction of state statutes binding on Supreme Court, unless so unreasonable as to obstruct federal rights. State court's construction of state statute, unless so unreasonable or unfair in its application to those asserting a federal right as to obstruct it, is binding on Supreme Court. passed an ordinance which in effect imposes a tax of 50 cents a pole upon every person, firm, or corporation owning, controlling, or occupying any such poles in the streets of 193 Edwardsville. The city brought *suit for the amount due under the tax law at 50 cents a pole. A jury was waived, and after a hearing the court entered judgment for $3,000 against the company. The circuit court held that neither the ordinance by which the Central Telephone Company was permitted to occupy the streets, nor the subsequent resolution accepted by the Central Union Telephone Company, constituted a contract, and that the tax law was not, therefore, a violation of the Constitution of the United States, in impairing a contract, or in depriving the company of property without due process of law. Upon this record an appeal was taken to the Appellate Court of the state for the Fourth Circuit. That court transferred the case to the Supreme Court of Illinois, on the ground that the Appellate Court had no jurisdiction of it. The City of Edwardsville v. Central Union Telephone Co., 302 Ill. 362, 134 N. E 716. The Supreme Court held that, as the appeal had been taken to the Appellate Court and errors assigned which that court had jurisdiction to hear, the case was improperly In Error to the Supreme Court of the State transferred to the Supreme Court, and reof Illinois. *192 manded it to the Appellate Court, which gave judgment, affirming the circuit court. 227 III. App. 424. The plaintiff then obtained a certiorari from the Supreme Court to review the decision of the Appellant Court, and in that hearing the Supreme Court declined to hear the constitutional questions, on the ground that they had been waived by the failure to carry the case from the circuit court directly to the Supreme Court to review those questions. 309 Ill. 482, 141 N. E. 206. [1] Paragraph 89, section 88 (3 Starr & Curtiss' Annotated Illinois Statutes, p. 3114), reads as follows: "Par. 89. Appeal from Trial Court to Appel *Mr. Chief Justice TAFT delivered the late Court-From Trial Court to Supreme Court. opinion of the Court. The city of Edwardsville in July, 1882, by ordinance granted to the Central Union Telephone Company a right in its streets to erect and maintain the necessary poles and wires for the operation of a telephone system. The Central Telephone Company transferred its rights to the Central Union Telephone Company. Later the city council adopted a resolution requesting the Central Union Telephone Company to furnish to the city, free of charge, one telephone and such additional telephones as the city council might call for at a reduction of 25 per cent. from the regular rates, and the right to attach, without charge, fire and police alarm wires to the top cross-arm of each pole. The company filed its acceptance of this resolution as provided in the resolution. It maintains 1,000 poles in the city of Edwardsville. The city in 1914 *194 Sec.. 88. Appeals from and writs of error to circuit courts, the superior court of Cook county, the criminal court of Cook county, county courts and city courts in all criminal cases, below the grade of felony, shall be taken directly to the Appellate *Court, and in all criminal cases above the grade of misdemeanors, and cases in which a franchise or freehold or the validity of a statute or construction of the Constitution is involved, and in all cases relating to revenue, or in which the state is interested as a party or otherwise, shall be taken directly to the Supreme Court." The construction of this statute has been uniformly held to be that, where a question involves the Constitution, it must be taken on error or appeal to the Supreme Court, and that, if it be taken to the Appellate Court on other grounds, the party taking the appeal or suing out the writ of error shall be held For other cases see same topic and KEY-NUMBER in all Key-Numbered Digests and Indexes (46 S.Ct.) to have waived the constitutional questions. ↑ he may have the nonconstitutional questions Indiana Millers Ins. Co. v. People, 170 Ill. considered and decided, but he gives up the 474, 49 N. E. 364; Robson v. Doyle, 191 Ill. right to raise constitutional objections in any 566, 61 N. E. 435; Case v. Sullivan, 222 Ill. court. There is some complaint that counsel 56, 78 N. E. 37; Poe v. Ulrey, 233 Ill. 56, 84 could not infer that the constitutional quesN. E. 46; Haas Co. v. Amusement Co., 236 tions referred to in the statute were federal Ill. 452, 86 N. E. 248, 12 L. R. A. (N. S.) 620, questions, because the Supreme Court of Illi127 Am. St. Rep. 297; Scott v. Artman, 237 nois had not so decided before this case. We Ill. 394, 86 N. E. 295; Comm'rs v. Shockey, have not been able to determine, from the 238 Ill. 237, 87 N. E. 335. The city, there- Illinois decisions cited above, whether any of fore, moves to dismiss the writ of error. the constitutional questions held to be waived It is objected on behalf of the plaintiff in therein were federal until the present case. error that the words "validity of a statute It is not, however, a forced or strained interor construction of the Constitution" refer to pretation to hold that "cases * * in the Constitution of Illinois and not to the which the validity of a statute or construcfederal Constitution. The Supreme Court of tion of the Constitution is involved" include Illinois has held otherwise in this case. City | validity under, or construction of, both Conof Edwardsville v. Central Union Tel. Co., 309 Ill. 482, 483, 484, 141 N. E. 206. But counsel for plaintiff in error insist that it is for this court to determine finally whether a litigant in a state court has waived his federal right, citing Davis v. O'Hara, 266 U. S. 314, 45 S. Ct. 104, 69 L. Ed. 303; Davis v. Wechsler, 263 U. S. 22, 44 S. Ct. 13, 68 L. Ed. 143; American Railway Exp. Co. v. Levee, 263 U. S. 19, 44 S. Ct. 11, 68 L. Ed. 140; Truax v. Corrigan, 257 U. S. 312, 324, 42 S. Ct. 124, 66 L. Ed. 254, 27 A. L. R. 375; Union Pacific Railway Co. v. Public Service Commission, 248 U. S. 67, 39 S. Ct. 24, 63 L. Ed. 131. But there is nothing in these cases which justifies this court in ignoring or setting aside a required form of practice under the appellate statutes of the state by which federal constitutional rights, as well as state constitutional rights, may be asserted in the Supreme Court of the state or be held to be waived, if the practice gives to the litigant --and many cases are there cited. [2] It seems to us that the practice under the statute of Illinois above quoted is entirely fair. If the litigant has a constitutional question, federal or state, he may take the case directly to the Supreme Court and have that question decided, together with all the other questions in the case, and then, if the federal constitutional question is decided against him, he may bring it here by writ of error or application for certiorari. If he elects to take his case to the Appellate Court, stitutions. When so declared by the state court, it should bind us, unless so unfair or unreasonable in its application to those asserting a federal right as to obstruct it. This is no such case. *196 *The case of Prudential Insurance Co. v. Cheek, 259 U. S. 530, 42 S. Ct. 516, 66 L. Ed. 1044, 27 A. L. R. 27, is relied upon to sustain the writ in this case. In that case there was a trial by jury, resulting in a verdict in favor of the plaintiff. The defendant reserved its constitutional points, and appealed from the resulting judgment to the state Supreme Court, which refused to take jurisdiction, on the ground that all constitutional questions had been decided by it on a former appeal, and, because the verdict, being only for $1,500, was less than the jurisdictional amount required by the statute, transferred the cause to the St. Louis Court of Appeals for final disposition. The St. Louis Court of Appeals, in conformity to the former opinion of the Supreme Court on the constitutional questions, affirmed the judgment, and refused the application for certification of the case to the Supreme Court. A writ of error from this court to the St. Louis Court of Appeals followed, and a motion to dismiss the writ was made, on the ground that the judgment of the Court of Appeals was not that of the highest court of the state in which a decision in the suit could be had. The motion was denied, and the case considered on its merits. There is nothing in that case which conflicts with granting the motion to dismiss in this. The plaintiff in error had exhausted every means to test the question in the Supreme Court of Missouri, and had lost, and on the second hearing a writ of error properly lay to the highest court to which the case could be taken, which was the intermediate court. Here the law of the state under the statute, as many times construed, required the appeal on constitutional grounds to be taken directly from the circuit court to the Supreme Court of Illinois. It elected, instead, to go to the Appellate Court, with the consequences well understood, and thereby it |