13

In the light of these views upon gain, profit and income, we must construe the meaning of the statutory exemption of gifts from gross income by § 22 (b) (3). The broad import of gross income in $22 (a) admonishes us to be chary [330] of extending any words of exemption beyond their plain meaning. Cf. Heiner v. Colonial Trust Co., 275 U. S. 232, 235; United States v. Stewart, 311 U. S. 60, 63. "Gifts," however, is a generic word of broad connotation, taking coloration from the context of the particular statute in which it may appear. Its plain meaning in its present setting denotes, it seems to us, the receipt of financial advantages gratuitously.

The release of interest or the complete satisfaction of an indebtedness by partial payment by the voluntary act of the creditor is more akin to a reduction of sale price than to financial betterment through the purchase by a debtor of its bonds in an arms-length transaction. In this view, there is no substance in the Commissioner's differentiation between a solvent or insolvent corporation or the taxation of income to the extent of assets freed from the claims of creditors by a gratuitous cancellation of indebtedness. Lakeland Grocery Co. v. Commissioner, 36 B. T. A. 289. Cf. Madison Railways Co. v. Commissioner, 36 B. T. A. 1106; Spokane Office Supply Co. v. Commissioner, B. T. A. Docket No. 86762, memo. op. of April 29, 1939; Model Laundry v. Commissioner, B. T. A. Docket No. 93493, memo. op. of January 15, 1940. See also Haden Co. v. Commissioner, 118 F. 2d 285, which supports the Commissioner.

The Board of Tax Appeals decided that these cancellations were not gifts under § 22 (b) (3). It was said:

"No evidence was introduced to show a donative intent upon the part of any creditor. The evidence indicates, on the contrary, that the creditors acted for purely business reasons and did not forgive the debts for altruistic reasons or out of pure generosity." 44 B. T. A. 425, 428.

With this conclusion we cannot agree. We do not feel bound by the finding of the Board because it reached its conclusions, in our opinion, upon an application of erroneous legal standards. Section 22 (b) (3) exempts [331] gifts. This does not leave the Tax Court of the United States free to determine at will or upon evidence and without judicial review the tests to be applied to facts to determine whether the result is or is not a gift. The fact that the motives leading to the cancellations were those of business or even selfish, if it be true, is not significant. The forgiveness was gratuitous, a release of something to the debtor for nothing, and sufficient to make the cancellation here gifts within the statute.

Affirmed.

MR. JUSTICE RUTLEDGE took no part in the consideration or decision of this case.

MR. JUSTICE FRANKFURTER, dissenting:

When Congress wished to exempt income "attributable to the discharge. . . of any indebtedness" it did so explicitly. It defined such exemption with particularity and only to a limited extent, as illu

13 Helvering v. Clifford, 309 U. S. 331, 334.

strated by the various enactments, including § 114 of the Revenue Act of 1942, all of which appear to throw light leading away from and not towards the conclusion drawn from them by the Court. In the absence of such specific exemption of what as a practical matter may be income, determination of whether it is or is not income should be left to the tribunal whose special business it is to ascertain the controverted facts and the reasonable inferences from them. In deciding that, in the circumstances of the present case, the debt cancellations were not gifts and therefore taxable, the Board of Tax Appeals (now the Tax Court of the United States) did not invoke wrong legal standards. It knew well enough the difference between taxable income and gifts. It applied these legal concepts to its interpretation of the facts. That its judgment should not be upset is counselled by wise fiscal as well as judicial administration.

MR. JUSTICE JACKSON joins in this dissent.

2. HELVERING, COMMISSIONER OF INTERNAL REVENUE, v. GRIFFITHS

(318 U. S. 371.

No. 467-Decided March 1, 1943)

A holder of common stock in a corporation which had but the one class of stock outstanding received, in 1939, stock dividends (based on earnings and profits subsequent to February 28, 1913) in common stock identical with the stock on which they were declared. The dividend stock was in no way realized upon in 1939. Held, upon consideration of the legislative history and administrative construction, that Congress, by §§ 22 (a) and 115 (f) (1) of the Internal Revenue Code, did not intend to tax such stock dividends; and that there is no occasion to reconsider Eisner v. Macomber, 252 U. S. 189. Pp. 372, 404. 129 F. 2d 321, affirmed.

CERTIORARI, 317 U. S. 619, to review the affirmance of a decision of the Board of Tax Appeals which reversed the Commissioner's determination of a deficiency in respondent's income tax.

MR. JUSTICE JACKSON delivered the opinion of the Court.

The question in this case is whether the Acts of Congress and the administrative regulations thereunder afford a basis on which we may reconsider the decision in [372] Eisner v. Macomber, 252 U. S. 189, and pass on the Government's request that it be overruled.

During the calendar year 1939 respondent owned 101 shares of common stock of the Standard Oil Company of New Jersey. Twice during the year that corporation made appropriate transfers from earned surplus to its capital accounts, in amounts less than the net accumulation of earnings and profits subsequent to February 28, 1913, and against them issued stock dividends. On June 15, 1939, respondent received a dividend of 1.01 such shares having a fair market value of $42.93. On December 15, 1939, she received a further dividend of 1.53 shares, which had a fair market value of $66.08. These dividends were in common stock identical with the stock on which they were declared, which was the only stock outstanding at the time they were made. The dividend stock was not sold, redeemed, or in any way realized upon, and the taxpayer did not include it as income in her return for 1939. The Commissioner did so include it, and on December 8, 1941, sent her a notice of deficiency in the amount of $9.60. The Board of Tax Appeals reversed his determination, and the Circuit

Court of Appeals for the Second Circuit affirmed on the authority of Eisner v. Macomber, supra. 129 F. 2d 321. Because of the importance of the question we granted certiorari.

The tax is asserted under the general provision of § 22 (a) of the Internal Revenue Code that income includes "dividends," together with the specific provision of § 115 (f) (1) that: "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 shareholder within the meaning of the Sixteenth Amendment to the Constitution." 1

[373] Was Congress thereby saying that such a dividend as we have here is not being taxed, in view of the Eisner v. Macomber decision, or was it saying that regardless of that decision it is being taxed? Events which must be considered to determine which Congress intended begin with the enactment of the Revenue Act of 1913, which taxed corporate "dividends" in general but said nothing of stock dividends in particular.2 The Treasury attempted to tax them, and this Court held that a dividend of common stock paid on stock of the same kind was not income within the meaning of the Act, intimating, however, that as used in the Sixteenth Amendment "income" might have a wider scope. Towne v. Eisner, 245 U. S. 418 (1918). Congress had meanwhile provided that a "stock dividend shall be considered income, to the amount of its cash value."3 Under that Act the Commissioner asserted that a dividend in common stock paid on common stock constituted income when received. This Court held it was not income within the meaning of the Sixteenth Amendment, chiefly for the reason that income had not been severed from capital or realized by such a distribution. Eisner v. Macomber, 252 Ú. S. 189 (1920). This decision was by a divided Court, Justices Holmes and Brandeis each writing a dissenting opinion, in which respectively Justices Day and Clarke joined. It was promptly and sharply criticised.*

[374] Although Eisner v. Macomber dealt only with a dividend of common stock to common stockholders, it was at once accepted as the basis for a broader exemption. The Treasury ruled that receipt of dividend stock generally was not income, and Congress provided in $201 (d) of the Revenue Act of 1921 that "A stock dividend shall not be subject to tax . . ."5 "5 Treasury Regulations under this statute

153 Stat. 1, 9, 47. Sec. 22 (a) provides that "Gross income' includes gains, profits, and income derived from. . . dividends Sec. 115 (a) provides that "The term 'dividend' means any distribution made by a corporation to its shareholders, whether in money or in other property. . 53 Stat. 1, 46.

2 Sec. II B of this Act, 38 Stat. 114, 167, provided that "net income . . . shall include gains, profits, and income derived from dividends

8 $2 (a) of the Revenue Act of 1916, 39 Stat. 756, 757.

4 Seligman, Implications and Effects of the Stock Dividend Decision (1921), 21 Columbia Law Review 313; Warren, Taxability of Stock Dividends as Income, (1920) 33 Harvard Law Review 885 cf. Powell, Constitutional Aspects of Federal Income Taxation, in The Federal Income Tax (Columbia University Lectures, 1921) 51; Ballantine, Corporate Personalty in Income Taxation (1921), 34 Harvard Law Review 573; Powell, Income from Corporate Dividends, (1922) 35 Harvard Law Review 363; Clark, Eisner v. Macomber and Some Income Tax Problems, (1920) 29 Yale Law Journal 735. But cf. Fairchild, The Stock Dividend Decision, (1920) 5 National Tax Association Bulletin 208.

5 T. D. 3052, 3059, 3 Cum. Bull. 38; 0. D. 732, 3 Cum. Bull. 39; O. D. 801, 4 Cum. Bull. 24 42 Stat. 227, 228. The House Report stated that this Act modified "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." H. Rep. No. 350, 67th Cong., 1st Sess., pp. 8-9. The Senate Report was to the same effect. S. Rep. No. 275, 67th Cong., 1st Sess., p. 9.

and subsequent reenactments construed it as covering all dividends paid in stock of the distributing corporation."

There the matter stood for nearly fifteen years, although in the meantime this Court pointed out in reorganization cases that a distinction existed between the type of stock dividend before it in Eisner v. Macomber and one which gave the stockholder a different stock, or different proportionate interests, than before. United States v. Phellis, 257 Ú. S. 156 (1921); Rockefeller v. United States, 257 U. S. 176 (1921); Cullinan v. Walker, 262 U. S. 134 (1923); Weiss v. Stearn, 265 U. S. 242 (1924); Marr v. United States, 268 U. S. 536 (1925).

[375] Inaction did not mean, however, that persons who received stock dividends were escaping all support of the revenues. Taxation was only postponed, as is taxation of many securities taken in corporate reorganizations, until sale or other realization has occurred. Their proceeds when realized have always been taxable as income. The Treasury had come to compute the postponed tax under Regulations which as to some classes of stock apportioned the cost basis between the old stock and the dividend stock in accordance with their respective fair market values at the time the stock dividend was issued. On March 30, 1936, this Court granted certiorari in Koshland v. Helvering, 298 U. S. 441, in which the taxpayer challenged the validity of the apportionment Regulations. 297 U. S. 702. She had owned certain preferred stock and had received a dividend of common shares thereon. The preferred was thereafter redeemed, and the Commissioner applied the allocation rule, which reduced the cost basis of this old stock. This, of course, increased her gain on the redemption of the old stock and added to her tax. She argued that her dividend, notwithstanding Eisner v. Macomber, to which she gave a narrow reading, was constitutionally taxable as income at the time received. The Court held unanimously and squarely that the dividend in question did constitute income within the Sixteenth Amendment, and in effect limited Eisner v. Macomber to the kind of dividend there dealt with. But it did not overrule that decision or question its authority as to dividends such as we have in this case. With two Justices dissenting it struck down the apportionment regulations as being beyond statutory authorization.

[376] While the Court was considering stock dividends in the Koshland case, Congress was considering them in connection with the pending Revenue Act for 1936.

8

On March 3, 1936, the President had suggested the enactment of a tax upon the undistributed income of corporations. On March 26, 1936, and while the taxpayer's petition for certiorari in the Koshland case was pending, a Subcommittee of the House Ways and Means Committee recommended that such a tax be enacted in lieu of the existing capital-stock, excess-profits, and income taxes on corpora

See Article 1548, Treasury Regulations 62 (promulgated under the Revenue Act of 1921), 65 (promulgated under the Revenue Act of 1924) and 69 (promulgated under the Revenue Act of 1926); Article 628, Treasury Regulations 74 (promulgated under the Revenue Act of 1928) and 77 (promulgated under the Revenue Act of 1932); Article 115-8 of Treasury Regulations 86 (promulgated under the Revenue Act of 1934).

Article 1548, Treasury Regulations 62; Articles 1548, 1599, Treasury Regulations 65 and 69; Articles 600, 628, Treasury Regulations 74.

8 H. Doc. No. 418, 74th Cong., 2d Sess., pp. 2-3.

9

tions. It was thought by some authorities that imposition directly upon shareholders of a tax based on their pro rata shares of corporate earnings would be more satisfactory than the undistributedprofits tax.10 Serious consideration of this method, which had been employed in [377] earlier times," was foreclosed by the belief that Eisner v. Macomber made it "impossible" to put into effect.12

[378] The statements of members of Congress and of responsible Treasury officials at the hearings and debates on the Act are at variance with the present assertion of the Government that Congress intended § 115 (f) (1) to challenge or override the decision to which it had in other sections of the Act accommodated itself.

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

9 H. R. Committee Print, March 26, 1936, 74th Cong., 2d Sess., Hearings on the Revenue Act, 1936, House Ways and Means Committee, 74th Cong., 2d Sess., pp. 5-8. 10 See statement of Congressman Vinson, 83 Cong. Rec. 2780: "After the decision of the Supreme Court in 1920, it was no longer possible for us to impose a tax upon the shareholder with respect to the undivided profits of a domestic corporation. We were forced to adopt the system of levying a special penalty tax on the corporation itself, which has been exceedingly difficult to enforce in the courts and is nothing like as effective as if we could ignore the corporation and tax the shareholder direct upon his undistributed earnings in the profits of the corporation."

See also, Hearings on the Revenue Act, 1936, House Ways and Means Committee, 74th Cong., 2d Sess., pp. 193, 745; cf. Hearings on the Revenue Act, 1936, Senate Finance Committee, 74th Cong., 2d Sess., pp. 210-211, 256-257; H. R. Rep. No. 1860, 75th Cong., 3d Sess., pp. 2-3; Report of the Subcommittee of House Committee on Ways and Means, Proposed Revision of the Revenue Laws, 75th Cong., 3d Sess., January 14, 1938, pp. 2-3. For earlier proposals, see statement of Oliphant, General Counsel of the Treasury, Hearings on the Revenue Act, 1936, House Ways and Means Committee, 74th Cong., 2d Sess., p. 658; id. at 820; Martin, Taxation of Undistributed Corporate Profits, (1936) 35 Michigan Láw Review 44, 45 et seq.

11 The Revenue Act of 1864, 13 Stat. 218, 282, provided that "gains and profits of all companies, whether incorporated or partnership shall be included in estimating the annual gains, profits, or income of any person entitled to the same, whether divided or otherwise." Compare The Collector v. Hubbard, 12 Wall. 1, 17, with Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601, and Eisner v. Macomber, 252 U. S. 189, 218, 230-232. See also, 13 Stat. 480: 14 Stat. 5, 478: 16 Stat. 258.

12 Congressman Hill objected to a proposal that stockholders be taxed like partners, on the ground that Eisner v. Macomber stood in the way. Hearings on the Revenue Act, 1936, House Ways and Means Committee, 74th Cong., 2d Sess., pp. 96, 97, 98. Congressman Lewis stated: "I do not know that it is fully understood by the public that this roundabout device of compelling the distribution of the real income of the corporation to its shareholders, so that the shareholders may be called upon to pay taxes upon their income, is due to a decision of a divided court. 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.

"Now, if that decision of the Court should be reversed, what we are doing here, or attempting to do in order to reach the taxpayer here, the method of our attempt, would not be necessary. Not ours the fault of all this clumsiness and indirection of approach to a necessary public object." Id. at 193.

Later he said: "Of course, we cannot reach the net earnings of the corporations as earnings of the individual stockholders until the earnings are distributed as dividends." Id. at 321. See also, id. at 745, 83 Cong. Rec. 3125.

In the Senate debates, Senator Black stated in response to a question whether it was "legally possible to say to each corporation, 'Make a report of the proportionate earnings of each stockholder,' as we would to a partnership, and then let the stockholder make his return?" that "Unfortunately that was done about 60 years ago, and while it is my recollection that the Supreme Court itself sustained the act, it later, by another divided opinion, changed its mind and struck down the act as being in contravention of the Constitution. So that it is impossible to tax the undistributed profits which remain in the corporate Treasury as a part of the individual incomes of the stockholders." 80 Cong. Rec. 8813. Compare colloquv between Congressman Lewis and Alvord, infra, note 37: Helvering v. National Grocery Co., 304 U. S. 282: Heiner v. Mellon, 304 U. S. 271; Helvering v. Gerhardt, 304 U. S. 405, 425. But see Powell, The Stock-Dividend Decision and the Corporate Nonentity, (1920) 5 National Tax Association Bulletin 201; Clark, supra, note 4, at 742: Traynor, Tax Decisions of the Supreme Court, 1937 Term, (1938) 33 Illinois Law Review 371, 388.