(40 Sup.Ct.) ing the grounds for the refusal by the Com- it be borne in mind that the Minnesota Rate mission to receive the proof or report con- Cases were decided after the passage of the cerning it, challenged the right to the relief act in question. sought. A demurrer to the answer as stating no defense was overruled by the trial court, which denied relief without opinion. In the Court of Appeals, two judges sitting, the judgment of the trial court was affirmed by a divided court, also without opinion, and the case is here on writ of error to review that judgment. [2] Finally, even if it be further conceded that the subject-matter of the valuations in question which the act of Congress expressly directed to be made necessarily opened a wide range of proof and called for the exercise of close scrutiny and of scrupulous analysis in its consideration and application, such assumption, we are of opinion, affords no basis for refusing to enforce the act of Congress, or what is equivalent thereto, of exerting the general power which the act of Congress gave, and at the same time disregarding the essential conditions imposed by Congress upon its exercise. The judgment of the Court of Appeals is therefore reversed, with directions to reverse that of the Supreme Court, and direct the Supreme Court to grant a writ of mandamus in conformity with this opinion. It is obvious from the statement we have made, as well as from the character of the remedy invoked, mandamus, that we are required to decide, not a controversy growing out of duty performed under the statute, but one solely involving an alleged refusal to discharge duties which the statute exacts. Admonishing, as this does, that the issue before us is confined to a consideration of the face of the statute and the nonaction of the Commission in a matter purely ministerial, it serves also to furnish a ready solution of the question to be decided, since it brings out in bold contrast the direct and express command of the statute to the Commission to act concerning the subject in hand, EISNER, Internal Revenue Collector, v. MAand the Commission's unequivocal refusal to obey such command. [1] It is true that the Commission held that its nonaction was caused by the fact that the command of the statute involved a consideration by it of matters "beyond the possibility of rational determination," and called for "inadmissible assumptions," and the indulging in "impossible hypotheses" as to subjects "incapable of rational ascertainment," and that such conclusions were the necessary consequence of the Minnesota Rate Cases, 230 U. S. 352, 33 Sup. Ct. 729, 57 L. Ed. 1511, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916A, 18. COMBER. (252 U. S. 189) (Argued April 16, 1919. Restored to Docket for Reargument, May 19, 1919. Reargued Oct. 17 and 20, 1919. Decided March 8, 1920.) No. 318. 1. COURTS 92 REASONING FURNISHING BASIS FOR CONCLUSION NOT OBITER. Reasoning of the court, which furnishes the entire basis for the conclusion reached, cannot be regarded as obiter dictum. 2. CONSTITUTIONAL LAW 18—AMENDMENT TO BE CONSTRUED IN CONNECTION WITH ORIG- The Income Tax Amendment (Const. Amend. We are of opinion, however, that, consider-16) must be construed in connection with the ing the face of the statute and the reasoning taxing clauses of the original Constitution, and of the Commission, it results that the conclu- the effect attributed to them before the amendsion of the Commission was erroneous, an er- ment was adopted. ror which was exclusively caused by a mistak *188 3. INTERNAL REVENUE 7-EFFECT OF INCOME TAX AMENDMENT STATED. Const. Amend. 16, did not extend the taxthe necessity which otherwise might exist for ing power to new subjects, but merely removed an apportionment among the states of taxes laid on income. INCOME TAX AMENDMENT NOT TO BE EXTENDED BY CONSTRUCTION. 4. INTERNAL REVENUE 4 Const. Amend. 16, should not be extended en *conception by the Commission of its relation to the subject, resulting in an unconscious disregard on its part of the power of Congress and an unwitting assumption by the Commission of authority which it did not possess. And the significance which the Commission attributed to the ruling in the Minnesota Rate Cases, even upon the assumption that its view of the ruling in those cases was not a mistaken one, but illustrates in a different form the disregard of the power of Congress which we have just pointed out, since, as Congress indisputably had the authority to impose upon the Commission the duty in question, it is impossible to conceive how the Minnesota Rate ruling could furnish NITION OF INCOME NOT CONCLUSIVE. ground for refusing to carry out the comThe question of what constitutes income, mands of Congress, the cogency of which con- within Const. Amend. 16, cannot be concluded sideration is none the less manifest, though by any definition which Congress may adopt. by loose construction, so as to repeal or modi- 7-STATUTORY DEFI For other cases see same topic and KEY-NUMBER in all Key-Numbered Digests and Indexes 6. INTERNAL REVENUE 7-"INCOME" DE-14. INTERNAL REVENUE 2-TAX ON INTER- "Income" is the gain derived from capital, from labor, or from both combined; something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and received or drawn by the recipient for his separate use, benefit, and disposal. [Ed. Note.-For other definitions, see Words and Phrases, First and Second Series, Income.] 7. CORPORATIONS 65-NATURE OF STOCKHOLDER'S INTEREST. The interest of a stockholder is a capital interest, and his certificates of stock are but evidence of it. S. CORPORATIONS Revenue Act Sept. 8, 1916, § 2 (Comp. St. § 6336b), providing that stock dividends shall be considered income, if construed as imposing the tax on the stockholder's interest in the accumulated and undivided profits, rather than on the dividend, is invalid, as taxing property because of ownership, without apportionment according to population. Mr. Justice Brandeis, Mr. Justice Clarke, Mr. Justice Holmes, and Mr. Justice Day, dissenting. In Error to the District Court of the United States for the Southern District of New 65-STOCKHOLDER CAN-York. NOT WITHDRAW ANY PART OF CORPORATE PROPERTY. Short of liquidation, or until dividend declared, a stockholder may not withdraw any part of either capital or profits from the enterprise; his interest not pertaining to any part, divisible or indivisible, but to the entire assets, business, and affairs of the company. 9. CORPORATIONS 65-TITLE TO PROPERTY IS IN CORPORATION, NOT IN STOCKHOLDERS. The interest of a stockholder in the property, etc., of the company is not that of an owner, since the corporation has full legal and equitable title to the whole. 10. INTERNAL REVENUE 7 DEND NOT "INCOME." Action by Myrtle H. Macomber against Mark Eisner, as Collector of Internal Revenue for the Third District of the State of New York. Judgment for plaintiff on demurrer, and defendant brings error. Affirmed. Mr. Assistant Attorney General Frierson, for plaintiff in error. Messrs. Charles E. Hughes and George Welwood Murray, both of New York City, for defendant in error. 199 *Mr. Justice PITNEY delivered the opinion of the Court. This case presents the question whether, by virtue of the Sixteenth Amendment, Congress has the power to tax, as income of the stockholder and without apportionment, a stock dividend made lawfully and in good faith against profits accumulated by the corporation since March 1, 1913. A stock dividend, consisting of new stock issued to the stockholders in proportion to their previous holdings, for profits capitalized, without any distribution of profits, is not "income," within Const. Amend. 16, and Revenue Act, Sept. 8, 1916, § 2 (Comp. St. § 6336b), in so far as it provides for the taxation thereof as It arises under the Revenue Act of Septemincome, without apportionment of the tax ac-ber 8, 1916 (39 Stat. 756 et seq., c. 463 [Comp. cording to population, violates Const. art. 1, St. § 6336a et seq.]), which, in our opinion § 2, cl. 3, and section 9, cl. 4. 11. INTERNAL REVENUE 7-PROFIT ON SALE OF STOCK RECEIVED AS DIVIDEND IS "INCOME." If a stockholder receiving a stock dividend sells the stock so received any profit on the sale is income, and, so far as it may have arisen since the Sixteenth Amendment, is taxable by Congress without apportionment according to population. 12. INTERNAL REVENUE 7 CORPORATION MUST BE TREATED AS ENTITY IN DETERMINING WHAT CONSTITUTES INCOME. In determining whether stock dividends constitute income, taxable under Const. Amend. 16, the corporation must be treated as a separate entity, as it is only by recognizing such separateness that any dividend can be regarded as income of the stockholder. 13. INTERNAL REVENUE 7 ENRICHMENT THROUGH INCREASE IN VALUE OF CAPITAL INVESTMENT NOT INCOME." Enrichment through increase in value of capital investment is not income, within Const. Amend. 16. (notwithstanding a contention of the govern*200 ment that will be *noticed), plainly evinces The facts, in outline, are as follows: 1 Title I.-Income Tax. Sec. 2. (a) That, subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and income derived, . also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever: Provided, that the term "dividends" as used in this title shall be held to mean any distribution made or ordered to be made by a corporation, out of its earnings or profits accrued since March first, nineteen hundred and thirteen, in stock of the corporation, and payable to its shareholders, whether in cash or ... which stock dividend shall be considered income, to the amount of its cash value. For other cases see same topic and KEY-NUMBER in all Key-Numbered Digests and Indexes (40 Sup.Ct.) under the Act of October 3, 1913 (38 Stat. 114, 166, c. 16), which provided (section B, p. 167) that net income should include "dividends," *202 and also "gains or profits and income de*rived from any source whatever." Suit having been brought by a stockholder to recover the tax assessed against him by reason of the dividend, the District Court sustained a demurrer to the complaint. 242 Fed. 702. The court treated the construction of the act as inseparable from the interpretation of the Sixteenth Amendment; and, having referred to Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601, 15 Sup. Ct. 912, 39 L. Ed. 1108, and quoted the Amendment, proceeded very properly to say (242 Fed. 704): $100,000,000, had shares of stock outstand- | 1913, was taxable against the stockholder ing, par value $100 each, amounting in round figures to $50,000,000. In addition, it had surplus and undivided profits invested in plant, property, and business and required for the purposes of the corporation, amounting to about $45,000,000, of which about $20,000,000 had been earned prior to March 1, 1913, the balance thereafter. In January, 1916, in order to readjust the capitalization, the board of directors decided to issue additional shares sufficient to constitute a stock dividend of 50 per cent. of the outstanding stock, and to transfer from surplus account to capital stock account an amount equivalent to such issue. Appropriate resolutions were adopted, an amount equivalent to the par value of the proposed new stock was transferred accordingly, and the new stock duly issued against it and divided among the stockholders. Defendant in error, being the owner of 2,200 shares of the old stock, received cer *201 "It is manifest that the stock dividend in question cannot be reached by the Income Tax Act and could not, even though Congress expressly declared it to be taxable as income, unless it is in fact income." tificates for 1,100 additional *shares, of which It declined, however, to accede to the con18.07 per cent., or 198.77 shares, par value tention that in Gibbons v. Mahon, 136 U. S. $19,877, were treated as representing surplus 549, 10 Sup. Ct. 1057, 34 L. Ed. 525, "stock earned between March 1, 1913, and January dividends" had received a definition suffi1, 1916. She was called upon to pay, and did ciently clear to be controlling, treated the pay under protest, a tax imposed under the language of this court in that case as obiter Revenue Act of 1916, based upon a supposed dictum in respect of the matter then before income of $19,877 because of the new shares; it (242 Fed. 706), and examined the question and an appeal to the Commissioner of Inter- as res nova, with the result stated. When the nal Revenue having been disallowed, she case came here, after overruling a motion to brought action against the Collector to re- dismiss made by the government upon the cover the tax. In her complaint she alleged ground that the only question involved was the above facts, and contended that in im- the construction of the statute and not its posing such a tax the Revenue Act of 1916 constitutionality, we dealt upon the merits violated article 1, § 2, cl. 3, and article 1, 8 with the question of construction only, but 9, cl. 4, of the Constitution of the United disposed of it upon consideration of the esStates, requiring direct taxes to be appor-sential nature of a stock dividend disregardtioned according to population, and that the stock dividend was not income within the meaning of the Sixteenth Amendment. A general demurrer to the complaint was overruled upon the authority of Towne v. Eisner, 245 U. S. 418, 38 Sup. Ct. 158, 62 L. Ed. 372, L. R. A. 1918D, 254; and, defendant having failed to plead further, final judgment went against him. To review it, the present writ of error is prosecuted. The case was argued at the last term, and reargued at the present term, both orally and by additional briefs. ing the fact that the one in question was based upon surplus earnings that accrued before the Sixteenth Amendment took effect. Not only so, but we rejected the reasoning of the District Court, saying (245 U. S. 426, 38 Sup. Ct. 159, 62 L. Ed. 372, L. R. A. 1918D, 254): man. "Notwithstanding the thoughtful discussion that the case received below we cannot doubt that the dividend was capital as well for the purposes of the Income Tax Law as for distribution between tenant for life and remainderWhat was said by this court upon the We are constrained to hold that the judg- latter question is equally true for the former. ment of the District Court must be affirmed: 'A stock dividend really takes nothing from First, because the question at issue is control- the property of the corporation, and adds nothled by Towne v. Eisner, supra;, secondly, being to the interests of the shareholders. Its cause a re-examination of the question with property is not diminished, and their interests the additional light thrown upon it by elaborate arguments. has confirmed the view that the underlying ground of that decision is sound, that it disposes of the question here presented, and that other fundamental considerations lead to the same result. In Towne v. Eisner, the question was whether a stock dividend made in 1914 against surplus earned prior to January 1, are not increased. *203 The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones.' Gibbons v. Mahon, 136 U. S. 549, 559, 560 [10 Sup. Ct. 1057, 34 L. Ed. 525]. In short, the corporation is no poorer and the stockholder is no richer than they were before. Logan est that the stockholder had in a surplus of corCounty v. United States, 169 U. S. 255, 261 porate assets previously existing." [18 Sup. Ct. 361, 42 L. Ed. 737].. If the plaintiff gained any small advantage by the change, it certainly was not an advantage of $417,450, the sum upon which he was taxed. What has happened is that the plaintiff's old certificates have been split up in effect and have diminished in value to the extent of the value of the new." In Peabody v. Eisner, 247 U. S. 349, 350, 38 Sup. Ct. 546, 547 (62 L. Ed. 1152), we observed that the decision of the District Court in Towne v. Eisner had been reversed "only upon the ground that it related to a stock dividend which in fact took nothing from the property of the corporation and added nothing to the interest of the shareholder, but merely changed the evidence which repre the Peabody Case from the Towne Case upon the ground that "the dividend of Baltimore & Ohio shares was not a stock dividend but a distribution in specie of a portion of the assets of the Union Pacific." This language aptly answered not only the reasoning of the District Court but the ar-sented that interest," and we distinguished gument of the Solicitor General in this court, which discussed the essential nature of a stock dividend. And if, for the reasons thus expressed, such a dividend is not to be regarded as "income" or "dividends" within the meaning of the act of 1913, we are unable to see how it can be brought within the meaning of "incomes" in the Sixteenth Amendment; it being very clear that Congress intended in that act to exert its power to the extent permitted by the amendment. In Towne v. Eisner it was not contended that any construction of the statute could make it narrower than the constitutional grant; rather the contrary. [1] Therefore Towne v. Eisner cannot be *205 regarded as turn*ing upon the point that the surplus accrued to the company before the act took effect and before adoption of the amendment. And what we have quoted from the opinion in that case cannot be regarded as obiter dictum, it having furnished the entire basis for the conclusion reached. We adhere to the view then expressed, and The fact that the dividend was charged might rest the present case there, not because against profits earned before the act of 1913 that case in terms decided the constitutional took effect, even before the amendment was question, for it did not, but because the conadopted, was neither relied upon nor allud- clusion there reached as to the essential ed to in our consideration of the merits in nature of a stock dividend necessarily prethat case. Not only so, but had we consid-vents its being regarded as income in any ered that a stock dividend constituted income true sense. in any true sense, it would have been held taxable under the act of 1913 notwithstand*204 ing it was *based upon profits earned before the amendment. We ruled at the same term, in Lynch v. Hornby, 247 U. S. 339, 38 Sup. Ct. 543, 62 L. Ed. 1149, that a cash dividend extraordinary in amount, and in Peabody v. Eisner, 247 U. S. 347, 38 Sup. Ct. 546, 62 L. Ed. 1152, that a dividend paid in stock of another company, were taxable as income although based upon earnings that accrued before adoption of the amendment. In the former case, concerning "corporate profits that accumulated before the act took effect," we declared (247 U. S. 343, 344, 38 Sup. Ct. 543, 545 [62 L. Ed. 1149]): Nevertheless, in view of the importance of the matter, and the fact that Congress in the Revenue Act of 1916 declared (39 Stat. 757 [Comp. St. § 6336b]) that a "stock dividend shall be considered income, to the amount of its cash value," we will deal at length with the constitutional question, incidentally testing the soundness of our previous conclusion. [2] The Sixteenth Amendment must be construed in connection with the taxing clauses of the original Constitution and the effect attributed to them before the amendment was adopted. In Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601, 15 Sup. Ct. 912, 39 L. Ed. 1108, under the Act of August 27, 1894 (28 Stat. 509, 553, c. 349, § 27), it was held that taxes upon rents and profits of "Just as we deem the legislative intent mani- real estate and upon returns from investfest to tax the stockholder with respect to such ments of personal property were in effect accumulations only if and when, and to the direct taxes upon the property from which extent that, his interest in them comes to frui- such income arose, imposed by reason of tion as income, that is, in dividends declared, so ownership; and that Congress could not we can perceive no constitutional obstacle that stands in the way of carrying out this intent impose such taxes without apportioning them when dividends are declared out of a pre-exist- among the states according to population, as ing surplus. Congress was at liberty required by article 1, § 2, cl. 3, and section 9, under the amendment to tax as income, with-cl. 4, of the original Constitution. out apportionment, everything that became in- [3] Afterwards, and evidently in recognicome, in the ordinary sense of the word, after tion of the limitation upon the taxing power the adoption of the amendment, including divi- of Congress thus determined, the Sixteenth dends received in the ordinary course by a stock- Amendment was adopted, in words lucidly exholder from a corporation, even though they pressing the object to be accomplished: * * * were extraordinary in amount and might appear upon analysis to be a mere realization in "The Congress shall have power to lay and possession of an inchoate and contingent inter-collect taxes on incomes, from whatever source *206 (40 Sup.Ct.) may be defined as the gain derived from capderived, without apportionment among the sev-ital, from labor, or from both combined," eral states, and without regard to any census or provided it be understood to include profit enumeration." gained through a sale or conversion of capital assets, to which it was applied in the Doyle Case, 247 U. S. 183, 185, 38 Sup. Ct. 467, 469 (62 L. Ed. 1054). As repeatedly held, this did not extend the taxing power to new subjects, but merely removed the necessity which otherwise might exist for an apportionment among the states of taxes laid on income. Brushaber v. Union Pacific R. R. Co., 240 U. S. 1, 17-19, 36 Sup. Ct. 236, 60 L. Ed. 493, Ann. Cas. 1917B, 713, L. R. A. 1917D, 414; Stanton v. Baltic Mining Co., 240 U. S. 103, 112 et seq., 36 Sup. Ct. 278, 60 L. Ed. 546; Peck & Co. v. Lowe, 247 | U. S. 165, 172, 173, 38 Sup. Ct. 432, 62 L. Ed. 1049. [4] A proper regard for its genesis, as well as its very clear language, requires also that this amendment shall not be extended by loose construction, so as to repeal or modify, except as applied to income, those provisions of the Constitution that require an apportionment according to population for direct taxes upon property, real and personal. This limitation still has an appropriate and important function, and is not to be overridden by Congress or disregarded by the courts. Brief as it is, it indicates the characteristic and distinguishing attribute of income essential for a correct solution of the present controversy. The government, although basing its argument upon the definition as quoted, placed chief emphasis upon the word "gain," which was extended to include a variety of meanings; while the significance of the next three words was either overlooked or misconceived. "Derived from— capital"; "the gain-derived-from-capital," etc. Here we have the essential matter: not a gain accruing to capital; not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and coming in, being "derived" —that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal-that is income derived from property. Nothing else answers the description. The same fundamental conception is clearly set forth in the Sixteenth Amendment"incomes, from whatever source derived"— *208 the essential thought being expressed *with a conciseness and lucidity entirely in harmony with the form and style of the Constitution. [5] In order, therefore, that the clauses cited from article 1 of the Constitution may have proper force and effect, save only as modified by the amendment, and that the latter also may have proper effect, it becomes essential to distinguish between what is and what is not "income," as the term is there used, and to apply the distinction, as cases arise, according to truth and substance, without regard to form. Congress cannot by any definition it may adopt conclude the matter, since it cannot by legislation alter the Con-sential character, be brought within the defCan a stock dividend, considering its esstitution, from which alone it derives its power to legislate, and within whose limita- had to the nature of a corporation and the To answer this, regard must be tions alone that power can be lawfully exerstockholder's relation to it. cised. We refer, of the case at bar, organized for profit, and course, to a corporation such as the one in having a capital stock divided into shares to which a nominal or par value is attributed. The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the inition? crop; the former depicted as a reservoir holder is a capital interest, and his certifi[7-9] Certainly the interest of the stocksupplied from springs, the latter as the out-cates of stock are but the evidence of it. let stream, to be measured by its flow during They state the number of shares to which a period of time. For the present purpose we require only a clear definition of the term he is entitled and indicate their par value and how the stock may be transferred. They show that he or his assignors, immediate or remote, have contributed capital to the enter *207 "in*come," as used in common speech, in order to determine its meaning in the amendment, and, having formed also a correct judg-prise, that he is entitled to a corresponding ment as to the nature of a stock dividend, we interest proportionate to the whole, entitled shall find it easy to decide the matter at issue. to have the property and business of the [6] After examining dictionaries in com- company devoted during the corporate exmon use (Bouv. L. D.; Standard Dict.; Web- istence to attainment of the common objects, ster's Internat. Dict.; Century Dict.), we entitled to vote at stockholders' meetings, find little to add to the succinct definition to receive dividends out of the corporation's adopted in two cases arising under the Cor-profits if and when declared, and, in the event poration Tax Act of 1909 (Stratton's Inde- of liquidation, to receive a proportionate pendence v. Howbert, 231 U. S. 399, 415, 34 share of the net assets, if any, remaining Sup. Ct. 136, 140 [58 L. Ed. 285]: Doyle v. after paying creditors. Short of liquidation, Mitchell Bros. Co., 247 U. S. 179, 185, 38 or until dividend declared, he has no right Sup. Ct. 467, 469 [62 L. Ed. 1054]), "Income to withdraw any part of either capital or 40 SUP.CT.-13 |
