Robert H. Jackson

“ Our task ends if we erase Eisner v. Macomber and give Congress a clean slate on which to write. Then and only then can Congress design a tax system treating stock dividends consistently. So long as Congress has to guess whether or not this Court will overrule Eisner v. Macomber, any interim treatment which it gives stock dividends may have to be readjusted after this Court speaks so as to remove inequities which may have resulted.
I think Eisner v. Macomber should be overruled. The Sixteenth Amendment gives Congress the power 'to lay and collect taxes on incomes, from whatever source derived'. ”

“ It would unsettle tax administration and subject the Treasury itself to many demands in ways that we cannot anticipate and provide for. Many have sold dividend stocks and paid the postponed tax at higher rates than if they had been taxed as is now proposed. Many have paid on the sale of the original stock because of allocation of part of the dividend to reduce the cost base thereof. Many corporations have been refused deductions on account of this type of stock dividend in computing their undistributed corporate earnings tax, which would become entitled to them. ”

“ If this regulation be construed to narrow the Act so as to tax only stock dividends permitted by Eisner v. Macomber, I would have less reluctance in striking it down than I have had in other instances.
But there is said to be lack of wisdom in this interpretation of the Act. It is argued that it would be disruptive of tax administration. It is urged that a decision which now overruled Eisner v. Macomber would be unfair because it would be retroactive. Those matters are none of our business. Every revenue act which Congress has passed has a retroactive effect. ”

“ For it is the accumulation of corporate earnings over a period of time which marks any real accrual of wealth to the stockholders. The narrow question here is whether Congress has the power to make the receipt of a stock dividend based on earnings an occasion for recognizing that accrual of wealth for income tax purposes. Congress has done so through the formula of computing the 'income' to the stockholders at the 'fair market value' of the stock dividends received. ”

“ At the hearings of the Congressional Committees the proposed tax was attacked as being a measure which would have the effect of forcing the distribution by corporations of assets needed in their business. Its supporters anticipated the decision of this Court in the Koshland case and countered with statements that dividends taxable as income to the shareholders-which would have the effect of avoiding the undistributed-profits tax on the corporation [13] could be declared and the undistributed-profits tax avoided without the necessity of distributing assets. ”

“ If the statute is to be literally read, use of 'does' instead of some word of futurity indicates that the time of enactment or at the latest the time of receipt of the dividend is the critical one for determining taxability. Under either view these dividends would not be taxable. The parties are agreed that for the purposes of this decision the meaning of the Constitution must be found in the decisions of this Court, and when these dividends were received Eisner v. Macomber fixed the meaning contrary to the Government's position. ”

“ Helvering, decided May 18, 1936 the Supreme Court decided that stock dividends represented taxable income where they give 'the stockholder an interest different from that which his former stockholdings represented.' It is, therefore, beyond any question of doubt, that under our proposal, corporations would be able to retain all money profits needed for carrying on their business without any additional corporate tax.'↑ 80 Cong.Rec. ”

“ Macomber. Article 115-7 of Regulations 94, issued under the Revenue Act of 1938, set forth references to the Court's decisions in many cases, and said: 'A stock dividend does not constitute income if the new shares confer no different rights or interest than did the old-the new certificates plus the old representing the same proportionate interest in the net assets of the corporation as did the old.' Three examples followed, the second relating to a dividend identical with the one before us. ”

“ The Government acknowledges the hardship which would be incident to the rule we are now asked to declare, and promises its assistance in obtaining legislative correction. It says that: 'We are informed by the Treasury that it has no intention of harassing taxpayers with respect to liability for past years, and that if Eisner v. Macomber is overruled it intends immediately to recommend to Congress legislation which would relieve taxpayers of any unfair retroactive burden that might result from such overruling. ”

“ Justice Brandeis stated in his dissent in Eisner v. Macomber, 252 U.S. at page 237, 40 S.Ct. at page 204, 64 L.Ed. 521, 9 A.L.R. 1570, that Amendment was designed to include 'everything which by reasonable understanding can fairly be regarded as income.' Stock dividends representing profits certainly are uncome in the popular sense. 'From a practical common-sense point of view there is something strange in the idea that a man may indefinitely grow richer without ever being subject to an income tax.' Powell, Income From Corporate Dividends, 35 Harv.L.Rev. ”

“ In that case, the case of Koshland against Helvering, the Court distinguished clearly and unequivocally between a normal stock dividend of the same kind and nature as the stock on which the dividend was declared and a stock dividend of a distinctly different nature from the stock on which the dividend was declared. ”

“ The wealth of stockholders normally increases as a result of the earnings of the corporation in which they hold shares. I see no reason why Congress could not treat that increase in wealth as 'income' to them. [57] See Collector v. Hubbard, 12 Wall. 1, 18, 20 L.Ed. 272; Helvering v. National Grocery Co., 304 U.S. 282, 288, 58 S.Ct. 932, 82 L.Ed. 1346; Powell, The Stock-Dividend Decision and The Corporate Nonentity, 5 Nat.Tax Assoc.Bull. ”

“ Some years ago the Supreme Court in a sharp decision determined that we could not do in the United States with regard to earned dividends that were not distributed what they do in other countries, especially in England, require the shareholder to pay his tax on his income just the same whether his company had refused to distribute it or not.↑ § 27 (f) of H.R. 12395, 74th Cong., 2d Sess., which became § 27 (e) of the Revenue Act of 1936, 49 Stat. ”

“ There are many dividends received in stock and stock rights that are distinguishable from the character of stock dividends in the Macomber case, supra, and are actual realized taxable income. As we see it, a stock dividend that is not taxable is one in which the relative interest of each shareholder of a corporation is unchanged in his stock ownership.' [18] He submitted a legal memorandum furnished by Arthur Kent, Acting Chief Counsel of the Bureau of Internal Revenue, setting forth cases dealing with the taxability of stock dividends, sixteen of which including Eisner v. ”

“ The Koshland case was decided by this Court on May 18, 1936.↑ Cf. the income tax of partners. Sec. 182 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code § 182, provides: 'In computing the net income of each partner, he shall include, whether or not distribution is made to him * * * (c) His distributive share of the ordinary net income or the ordinary net loss of the partnership, computed as provided in section 183 (b) .' A partner is chargeable with his allocable share of the partnership earnings even where they could not be distributed to him by reason of local law. ”

“ This Court has denied retroactive effects to amendments to valid Treasury Regulations which have survived reenactment of the statute, even in the absence of any affirmative indication that the subject-matter of the statute and Regulation was called to the attention of Congress. ”

“ There is no reason to doubt that this Court may fall into error as may other branches of the Government. Nothing in the history or attitude of this Court should give rise to legislative embarrassment if in the performance of its duty a legislative body feels impelled to enact laws which may require the Court to re-examine its previous judgments or doctrine. [52] The Court differs, however, from other branches of the Government in its ability to extricate itself from error. ”

“ Macomber. [39] Section 115 (f) (1) was reenacted while the Treasury Regulation and rulings on its meaning stood unamended and in their original form. [40]
The Treasury adhered to its earlier views of the meaning of § 115 (f) (1) by repromulgating its former Regulation under the Revenue Act of 1938 and under the Internal Revenue Code, [41] and it stood unamended at the time of the receipt of the stock dividends here in question. Congress in 1939 enacted basis provisions incorporating the language of § 115 (f) (1) . ”

“ Graham, 268 U.S. 501, 45 S.Ct. 601, 69 L.Ed. 1067, as to the constitutionality of taxation of salaries of federal judges; United States v. Darby, 312 U.S. 100, 657, 61 S.Ct. 451, 85 L.Ed. 609, 132 A.L.R. 1430, overruled Hammer v. Dagenhart, 247 U.S. 251, 38 S.Ct. 529, 62 L.Ed. 1101, 3 A.L.R. 649, Ann.Cas.1918E, 724, as to Congressional power over labor in manufacture; West Coast Hotel Co. v. ”