tenant if it was a regular or ordinary dividend, and belongs to the remainderman if it was an extraordinary dividend.

2. The so-called Massachusetts rule, declared in 1868 by Minot v. Paine, 99 Mass. 101, 96 Am. Dec. 705, that a dividend representing profits, whether regular, ordinary, or extraordinary, if in cash belongs to the life tenant, and if in stock belongs to the remainderman.

3. The so-called Pennsylvania rule declared in 1857 by Earp's Appeal, 28 Pa. 368, that where a stock dividend is paid, the court shall inquire into the circumstances under which the fund had been earned and accumulated out of which the dividend, whether a regular, an ordinary, or an extraordinary one, was paid. If it finds that the stock dividend was paid out of profits earned since the decedent's death, the stock dividend belongs to the life tenant; if the court finds that the stock dividend was paid from capital or from profits earned before the decedent's death, the stock dividend belongs to the remainderman.

This court adopted in Gibbons v. Mahon as the rule of administration for the District of Columbia the so-called Massachusetts rule, the opinion being delivered in 1890 by Mr. Justice Gray. Since then the same question has come up for decision in many of the states. The so-called Massachusetts rule, although approved by this court, has found favor in only a few states. The so-called Pennsylvania rule, on the other hand, has been adopted since by so many of the states (including New York and California), that it has come to be known as the "American rule." Whether, in view of these facts and the practical results of the operation of the two rules as shown by the experience of the thirty years which have elapsed since the decision in Gibbons v. Mahon, it might be desirable for this court to reconsider the question there decided, as some other courts have done (see 29 Harvard L. Rev. 551), we have no occasion to consider in this case. For, as this court there pointed out (136 U. S. 560, 1059, 34 L. ed. 525), the question involved was one "between the owners of successive interests in particular shares," and not, as in Bailey v. Railroad Co., 22 Wall. 604, 22 L. ed. 840, a question "between the corporation and the government, and [which] depended upon the terms of a statute carefully framed to pre

vent corporations from evading payment of the tax upon their earnings.'

We have, however, not merely argument; we have examples which should convince us that "there is no inherent, necessary and immutable reason why stock dividends should always be treated as capital." Tax Commissioner v. Putnam, 227 Mass. 522, 533, 116 N. E. 904, L. R. A. 1917F, 806. The Supreme Judicial Court of Massachusetts has steadfastly adhered, despite ever-renewed protest, to the rule that every stock dividend is, as between life tenant and remainderman, capital and not income. But in construing the Masachusetts Income Tax Amendment, which is substantially identical with the federal amendment, that court held that the Legislature was thereby empowered to levy an income tax upon stock dividends representing profits. The courts of England have, with some relaxation, adhered to their rule that every extraordinary dividend is, as between life tenant and remainderman, to be deemed capital. But in 1913 the Judicial Committee of the Privy Council held that a stock dividend representing accumulated profits was taxable like an ordinary cash dividend, Swan Brewery Company, Limited v. The King, L. R. 1914 A. C. 231. In dismissing the appeal these words of the Chief Justice of the Supreme Court of Western Australia were quoted (page 236) which show that the facts involved were identical with those in the case at bar:

"Had the company distributed the £101,450 among the shareholders and had the shareholders repaid such sums to the company as the price of the 81,160 new shares,, the duty on the £101,450 would clearly have been payable. Is not this virtually the effect of what was actually done? I think it is."

Sixth. If stock dividends representing profits are held exempt from taxation under the Sixteenth Amendment, the owners of the most successful businesses in America will, as the facts in this case illustrate, be able to escape taxation on a large part of what is actually their income. So far as their profits are represented by stock received as dividends they will pay these taxes not upon their income but only upon the income of their income. That such a result was intended by the people of the United States when adopting the Sixteenth

Amendment is inconceivable. Our sole duty is to ascertain their intent as therein expressed.' .** In terse, comprehensive language befitting the Constitution, they empowered Congress "to lay and collect taxes on incomes from whatever source derived." They intended to include thereby everything which by reasonable understanding can fairly be regarded as income. That stock dividends representing profits are so regarded, not only by the plain people, but by investors and financiers, and by most of the courts of the country, is shown, beyond peradventure, by their acts and by their utterances. It seems to me clear, therefore, that Congress possesses the power which it exercised to make dividends representing profits, taxable as income, whether the medium in which the dividend is paid be cash or stock, and that it may define as it has done what dividends representing profits shall be deemed income. It surely is not clear that the enactment exceeds the power granted by the Sixteenth Amendment. And, as this court has so often said, the high prerogative of declaring an act of Congress invalid, should never be exercised except in a clear case.‡‡

"It is but a decent respect due to the wisdom, the integrity and the patriotism of the legislative body, by which any law

** Compare Rugg, C. J., Tax Commissioner v. Putnam, 227 Mass. 522, 524, 116 N. E. 904, 910 (L. R. A. 1917F, 806): "It is a grant from the sovereign people and not the exercise of a delegated power. It is a statement of general principles and not a specification of details. Amendments to such a charter of government ought to be construed in the same spirit and according to the same rules as the original. It is to be interpreted as the Constitution of a state and not as a statute or an ordinary piece of legislation. Its words must be given a construction adapted to carry into effect its purpose."

"It is our duty, when required in the regular course of judicial proceedings, to declare an act of Congress void if not within the legislative power of the United States; but this declaration should never be made except in a clear case. Every possible presumption is in favor of the validity of a statute, and this continues until the contrary is shown beyond a rational doubt. One branch of the government cannot encroach on the domain of another without danger. The safety of our institutions depends in no small degree on a strict observance of this salutary rule." The Sinking Fund Cases, 99 U. S. 700, 718, 25 L. ed. 496 (1878). See also Legal Tender Cases, 12 Wall. 457, 531, 20 L. ed. 287 (1870; Trade Mark Cases, 100 U. S. 82, 96, 25 L. ed. 550 (1879). See American Doctrine of Constitutional Law by James B. Thayer, 7 Harvard L. Rev., 129, 142. "With the exception of the extraordinary decree rendered in the Dred Scott case, all of the acts or the portions of the acts of Congress invalidated by the courts before 1868 related to the organization of courts. Denying the power of Congress to make notes legal tender seems to be the first departure from this rule." Haines, American Doctrine of Judicial Supremacy, p. 288. The first legal tender decision was overruled in part two years later (1870), Legal Tender Cases, 12 Wall. 457, 20 L. ed. 287; and again in 1883, Legal Tender Case, 110 U. S. 421, 4 Sup. Ct. 122, 28 L. ed. 204.

is passed, to presume in favor of its validity, until its violation of the Constitution is proved beyond all reasonable doubt.' Ogden v. Saunders, 12 Wheat. 213, 269, 6 L. ed. 606.

Mr. Justice CLARKE concurs in this opinion.19

PEABODY v. EISNER

(Supreme Court of the United States, 1918. 247 U. S. 347, 38 Sup. Ct. 546, 62 L. ed. 1152, 3 Am. Fed. Tax R. 2995.)

Mr. Justice PITNEY delivered the opinion of the Court. This case arose under the federal Income Tax Act of October 3, 1913 (38 Stat. 114, 166, c. 16). The controversy is over the first cause of action set up by plaintiff in error in a suit against the collector for the recovery of an additional tax exacted in respect of a certain dividend received by plaintiff in the year 1914 the facts being as follows: On and prior to March 1, 1913, and thenceforward until payment of the dividend in question, petitioner was owner of 1,100 shares (out of a total of 2,000,000 shares outstanding) of common stock of the Union Pacific Railroad Company, of the par value of $100 each, and during the same period the company had large holdings of the common and preferred stocks of the Baltimore & Ohio Railroad Company. On March 2, 1914, the Union Pacific declared and paid an extra dividend upon each share of its common stock, amounting to $3 in cash, $12 in par value of preferred stock of the Baltimore & Ohio, and $22.50 par value of the common stock of the same company; the result being that petitioner received as his dividend upon his holding of Union Pacific common stock $3,300 in cash, 132 shares of Baltimore & Ohio preferred and 24712 shares of Baltimore & Ohio common stock. In his income return for 1914 he included as taxable income $4.12 per share of this

in

19 For comments on the decision, see E. H. Warren, Taxability of Stock Dividends as Income, (1920) 33 Harvard L. Rev. 885; T. R. Powell, Stock Dividends, Direct Taxes and the Sixteenth Amendment, (1920) 20 Columbia L. Rev. 536; Charles E. Clark, Eisner v. Macomber, and Some Income Tax Problems, (1920) 29 Yale L. Jour. 735; Eustace Seligman, Implications and Effects of the Stock Dividend Decision, (1921) 21 Columbus L. R. 313. Suppose a corporation distributes a cash dividend of 100 per cent; the stockholders orally agree before the distribution to indorse the dividend checks back to the corporation in exchange for its stock. If this is done, does the stockholder realize any taxable income from the transaction? See U. S. v. Mellon, (1922) 281 Fed. 645, 2 Am. Fed. Tax R. 1926; U. S. v. Davison, (1924) 1 F. (2nd) 465, 5 A. Fed. Tax R. 5079.

dividend, or $4,532 in all, and paid his tax upon the basis of this return. Afterwards he was subjected to an additional assessment upon a valuation of the balance of his dividend, and this, having been paid under protest, is the subject of the present suit, the theory of which is that the entire earnings, income, gains, and profits from all sources realized by the Union Pacific Railroad Company from March 1, 1913, to March 2, 1914, remaining after the payment of prior charges, did not exceed $4.12 per share of the Union Pacific common stock, and that the cash and Baltimore & Ohio stock disposed of in the extra dividend (so far as they exceeded the value of $4.12 per share of Union Pacific) did not constitute a gain, profit, or income of the Union Pacific, and therefore did not constitute a gain, profit, or income of the plaintiff arising or accruing either in or for the year 1914 or for any period subsequent to March 1, 1913, the date when the Income Tax Law took effect. The District Court overruled this contention upon the authority of Southern Pacific Co. v. Lowe, Collector, 238 Fed. 847, and Towne v. Eisner, Collector, 242 Fed. 702. The latter case has since been reversed (245 U. S. 418, 38 Sup. Ct. 158, 62 L. ed. 372), but 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 represented that interest. Southern Pacific Co. v. Lowe, Collector, 247 U. S. 330, 38 Sup. Ct. 540, 62 L. ed. 1142, has been reversed this day, but only upon the ground that the Central Pacific Railway Company, which paid the dividend, and the Southern Pacific Company, which received it, were in substance identical corporations because of the complete ownership and control which the latter possessed over the former as stockholder and in other capacities, so that while the two companies were separate legal entities, yet in fact and for all practical purposes the former was but a part of the latter, acting merely as its agent and subject in all things to its direction and control, and for the further reason that the funds represented by the dividend were in the actual possession and control of the Southern Pacific Company as well before as after the declaration of the dividend. In this case the plaintiff in error stands in the position of the ordinary stockholder, whose interest in the accumulated earnings and surplus of the company are not the same before as after the declar