It is something which has grown out of or issued from capital, leaving the capital unimpaired and intact." Gavit v. Irwin (Col.), (D. C., N. D. N. Y. 1921) 275 Fed. 643.

66

107 (d) Anything which accrued prior to March 1, 1913, was part of the taxpayer's principal when" the Act of 1913 became effective. U. S. v. Guinzburg, (C. C. A., Second Cir. 1921) 278 Fed. 363.

107 (e) Interest due on corporate bonds for the six month period ending Feb. 28, 1913, but payable on March 1, 1913, was not taxable income to the bondholder under the Act of 1913. Plant v. Walsh (Col.), (D. C., D. Conn. 1922) 280 Fed. 722.

107 (f) In case of doubt a taxing statute must be construed in favor of the taxpayer. Plant v. Walsh (Col.), (D. C., D. Conn. 1922) 280 Fed. 722.

107 (g) A Delaware corporation was organized for the purpose of taking over and continuing the business of a New Jersey corporation. All of the stockholders of the latter corporation except the holders of a few shares exchanged common and preferred stock of the New Jersey corporation for common and preferred stock of the Delaware corporation. The few shares which were not so exchanged were purchased for cash by the Delaware corporation. The authorized capital stock of the Delaware corporation was considerably in excess of the stock exchanged. The remaining stock was in part sold for cash at the time of the reorganization and in part held for future sale as additional working capital was needed. The Delaware corporation through exchange and purchase acquired all of the stock of the New Jersey corporation, after which it dissolved the latter, transferring to itself the assets and liabilities and continuing the business of the New Jersey corporation. The assets of the New Jersey corporation which were transferred to the Delaware corporation consisted largely of surplus of the former. These transactions involved two distinct entities, organized under the laws of different states, with different powers and with different capital. Plaintiff exchanged his stock in one of these entities for stock in the other. This was an exchange of property" on which a taxable gain was realized under the Act of 1916. Marr v. U. S., (1923) 58 Ct. Cl. 658.

66

108 An officer of a corporation under an agreement for additional compensation overdrew his stipulated salary account prior to March 1, 1913. In December, 1913, he was credited $50,000, leaving an overdraft of $20,000. The corporation deducted the amount credited to him from its own gross income for 1913. The court held that he was required to pay income tax imposed by the Act of 1913, on the whole amount credited him in 1913. Holbrook v. Moore (Col.), (D. C., E. D. Mo. 1921), Fed.

109 Commissions which accrued and were payable to an insurance agent on second and subsequent premiums after March 1, 1913, were taxable income to him

when received, although the policies under which he earned the commissions were written by him prior to that date. Edwards v. Keith (Col.), (C. C. A., Second Cir. 1916) 231 Fed. 110, affirming Id., (D. C., E. D. N. Y. 1915) 224 Fed. 585; Woods v. Lewellyn (Col.), (C. C. A., Third Cir. 1918) 252 Fed. 106.

110 The provision in Sec. 213, Act of 1918, requiring the salaries of Federal Judges to be included in taxable income is repugnant to Article 3, Sec. 1, of the Federal Constitution, in that it diminishes the salary of such judges "during their continuance in office." Evans v. Gore (Col.), (1920) 253 U. S. 245, reversing Id., (D. C., W. D. Kentucky 1919) 262 Fed. 550, where the judge was appointed before the Act took effect; and Graham v. Miles (Col.), (D. C., D. Md. 1922) 284 Fed. 878, where the judge was appointed after the Act took effect.

111 (a) Money obtained by embezzlement is not taxable income to the embezzler under the Act of 1917. Rau v. U. S., (C. C. A., Second Cir. 1919), 260 Fed. 130.

111 (b) The word "income" has the same meaning in the subsequent income tax acts that it had in the Act of 1909. Merchants' Loan & Trust Co., Trustee v. Smietanka (Ex-Col.), (1921) 255 U. S. 509.

111 (c) A terminal company was organized for the equal benefit of three railroad companies and for the purpose of securing to these companies terminal facilities in Louisville, said railroad companies owning the capital stock in equal proportions. It was not organized for the purpose of making any pecuniary profit from the undertaking.” The railroad companies were charged the same amount for switching per car, and were required to make good any deficit in proportion to the use made of the terminal. They guaranteed the principal and interest of the mortgage bonds of the terminal company. It was provided that unless otherwise agreed by the railroad companies, no dividends should be declared, and that "all surplus and net earnings should constitute a reserve fund for additions to improvements and reconstruction of the property of the terminal company." The payments made by the railroad companies, including the interest on the bonds of the terminal company, constituted income in the nature of rentals to the latter, under the Acts of 1913, 1916 and 1917. Hamilton (Col.) v. Kentucky & I. Terminal R. Co., (C. C. A., Sixth Cir. 1923) 289 Fed. 20.

111 (d) The normal tax of two percent required to be withheld and paid by the obligor under Sec. 1205 of the Act of 1917, in the case of bonds with tax-free covenant clause was the tax of the obligee and not the obligor. The tax so paid constituted income to the obligee or bondholder under Sec. 1200 of the Act of 1917. Massey v. Lederer (Col.), (D. C., E. D. Penn. 1921) 277 Fed. 123. Contra: Pitney v. Duffy (Ex.-Col.), (D. C., D. N. J. 1923) 291 Fed. 621.

Act of 1924.

sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transac

112 A corporation which leased its property and discontinued business was required to pay an income tax under the Act of 1913, upon rentals paid by the lessee directly to the stockholders of the lessor corporation. West End Street Ry. Co. v. Malley (Col.), (C. C. A., First Cir. 1917) 246 Fed. 625, Certiorari denied, (1918) 246 U. S. 671; Rensselaer & S. R. Co. v. Irwin (Col.), (C. C. A., Second Cir. 1918) 249 Fed. 726, affirming Id., (D. C., N. D. N. Y. 1917) 239 Fed. 739, Certiorari denied, (1918) 246 U. S. 671; Northern R. Co. of N. J. v. Lowe (Col.), (C. C. A., Second Cir. 1918) 250 Fed. 856.

113 (a) The Act of 1913 imposed an excise tax for the months of January and February, 1913, to be measured by the net income as defined by said Act of 1913. Dividends received during said two months were a part of the corporation's gross income. Butterick Co. v. U. S., (D. C., S. D. N. Y. 1917) 240 Fed. 539. See S. [3], f. n. 223 (a), p. 179.

113 (b) A stockholder was taxable under the Act of 1913 on dividends declared and paid to him in the ordinary course by a corporation (and not by way of a single final liquidating dividend on the surrender of his stock) from a surplus accumulated prior to March 1, 1913. Lynch (Col.) v. Hornby, (1918) 247 U. S. 339, reversing Id., (C. C. A., Eighth Cir. 1916) 236 Fed. 661; Peabody v. Eisner (Col.), (1918) 247 U. S. 347. In the latter case the dividend received was the stock of another corporation. Union Pacific Coal Co. v. Skinner (Col.), (1920) 252 U. S. 570, affirming Id., (C. C. A., Eighth Cir. 1918) 249 Fed. 152; Stoffregen v. Moore (Col.), (D. C., E. D. Mo. 1920) 264 Fed. 232.

113 (e) In a reorganization plan of a New Jersey corporation, a new corporation was organized under the laws of Delaware, to which was transferred all of the assets and good will of the New Jersey corporation as an entirety and as a going concern. The Delaware corporation assumed all of the obligations of the New Jersey corporation, except its funded debt and capital stock, and the latter corporation received in return for the transfer of its assets and good will, certain cash, debenture stock and common stock of the Delaware corporation. The cash and a part of the debenture stock received were used in retiring the preferred stock and bonds of the New Jersey corporation; and the common stock received was distributed by the New Jersey corporation to its stockholders as a dividend; viz., two shares of stock of the Delaware corporation for each share of stock of the New Jersey corporation owned and retained by its stockholders. The capital of the New Jersey corporation remained unimpaired, the dividend of the stock of the Delaware corporation being paid from surplus. The respective personnel of the stockholders and officers of the two corporations were identical. The New Jersey corporation held debenture stock of the Delaware corporation equal in par value to the par value of its outstanding capital stock and collected dividends thereon and distributed the same to its stockholders; otherwise it did no business. The receipt of the dividend of the common stock of the Delaware corporation by the stockholders of the New Jersey corporation constituted income to them under the Act of 1913 in the amount of the fair market value thereof when received. U. S. v. Phellis,

(1921) 257 U. S. 156, reversing Id., (1921) 56 Ct. Cl. 157.

*

113 (d) "Disregarding the slight looseness of construction, we interpret gains, profits, and income derived from dividends,' etc., as meaning not that everything in the form of a dividend must be treated as income, but that income derived in the way of dividends shall be taxed. Hence, the inquiry must be whether the shares of stock in the new company received by claimant as a dividend by reason of his ownership of stock in the old company constituted a gain derived from capital, not a gain accruing to capital, nor 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, and coming in, that is, received or drawn by the claimant for his separate use, benefit and disposal." Act of 1913. U. S. v. Phellis, (1921) 257 U. S. 156, reversing Id., (1921) 56 Ct. Cl. 157.

113 (e) "It is the appropriate function of a dividend to convert a part of a surplus thus accumulated from property of the company into property of the individual stockholders; the stockholder's share being thereby released to and drawn by him as profits or income derived from the company. That the distribution reduces the intrinsic capital value of the shares by an equal amount is a normal and necessary effect of all dividend distributions, whether large or small, and whether paid in money or in other divisible assets; but such reduction constitutes the dividend none the less income derived by the stockholders, if it represents gains previously acquired by the corporation." Act of 1913. U. S. v. Phellis, (1921) 257 U. S. 156, reversing Id., (1921) 56 Ct. Cl. 157.

113 (f) In a case in which stock on March 1, 1913, was worth twice its original cost, due to the appreciation in value of the assets of the corporation, and in 1914 the stockholder received a single final liquidating dividend equal to its value on the former date in return for the surrender of his stock, there was no taxable income to him, inasmuch as he received merely the cash value of the stock on March 1, 1913. Lynch (Col.) v. Turrish, (1918) 247 U. S. 221, affirming Id., (C. C. A., Eighth Cir. 1916) 236 Fed. 653. The decision of the lower court was affirmed, but the reasons given were not approved by the Supreme Court.

**

113 (g) A stock dividend declared from surplus accrued prior to March 1, 1913, was not taxable income to the stockholder under the Act of 1913. "A stock dividend really takes nothing from the property of the corporation and adds nothing to the interests of the shareholders. The corporation is no poorer and the stockholder is no richer than they were before.'' Towne v. Eisner (Col.), (1918) 245 U. S. 418, reversing Id., (D. C., S. D. N. Y. 1917) 242 Fed. 702; Lormis (Col.) v. Wattles, (C. C. A., Eighth Cir. 1920) 266 Fed. 876.

113 (h) Where one corporation owned all or practically all of the stock of another corporation, controlling the latter to such an extent that they were actually merged into one enterprise, dividends declared subsequent to March 1, 1913, by the controlled corporation from surplus accumulated prior to that date were not taxable income to the controlling or stock

Act of 1917.

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."

holding corporation under the Act of 1913. Southern Pacific Co. v. Lowe (Col.), 247 U. S. 330, reversing Id., (D. C., S. D. N. Y. 1917) 238 Fed. 847; Gulf Oil Corp. v. Llewellyn (Col.), (1918) 248 U. S. 71, reversing Id., (C. C. A., Third Cir. 1917) 245 Fed. 1, and affirming Id., (D. C., W. D. Penn. 1916) 242 Fed. 709. The reasons given in the latter decision, however, were not approved.

An

113 (i) A Kansas corporation was engaged in producing, purchasing, and selling crude petroleum and transporting it through pipe lines which it owned. Ohio corporation was engaged in producing and manufacturing petroleum and mineral oil and transporting it through pipe lines which it owned. The Supreme Court in a suit involving these corporations held that with respect to the transportation business they were subject to regulation by the Interstate Commerce Commission, and with respect to the remainder of their business they were subject to regulation by the Federal Trade Commission. In order to avoid a possible conflict of federal authority it was deemed advisable to separate the pipe line properties from the other properties. Accordingly each corporation organized a new corporation to which it transferred its pipe line properties. In each case the pipe line properties represented the surplus of the corporations, the capital stock of each remaining unimpaired. The consideration was that the new corporation organized by the Kansas corporation issue directly to the stockholders of the latter the total issue of new stock; and in the case of the Ohio corporation that the new corporation organized by it issue to the Ohio corporation the total issue of new stock. The resolution of the Ohio corporation providing for the formation of the new corporation and the transfer to it of the pipe line properties also provided that the new stock received by the Ohio corporation should be distributed immediately to its stockholders. Both plans were consummated. They were not materially different. In each case the stock received by the stockholders of the old corporations constituted a dividend, and was taxable as income in the amount of its par value. John D. Rockefeller v. U. S., also New York Trust Co. v. Edwards (Col.), (1921) 257 U. S. 175, affirming Id., (D. C., S. D. N. Y. 1921) 274 Fed. 952.

113 (j) A corporation made large earnings over a period of years, which it kept invested in extensions and development work of its subsidiaries. It required additional capital, which it raised by increasing its capital stock, and selling a portion of such increased stock for cash. At the same time it 'declared a cash dividend of 100%, as an inducement to its stockholders to subscribe for the additional issue. As a condition precedent to said increase in capital stock and the declaration of said dividend, the principal stockholders agreed to subscribe and pay for their share of the new issue in cash and to accept their share of the cash dividend in stock; and also to take and pay the corporation cash at par for any shares of stock which any stockholders should refuse to accept in payment of said cash dividend or to subscribe and pay for in cash. At the time said cash dividend was declared there was insufficient cash to pay the same, and it would not have been declared had not the principal

stockholders entered into the aforesaid agreement. Defendant was a party to said agreement and accepted his dividend in stock and subscribed and paid cash for the shares of stock properly allocable to him. He received no cash from the corporation. The dividend to him constituted a stock dividend, and, hence, not income, under the Act of 1913. U. S. v. Mellon, (C. C. A., Third Cir. 1922) 281 Fed. 645, affirming Id., (D. C., W. D. Penn. 1919) 279 Fed. 910.

113 (k) Under the Act of 1913, dividends were taxable to stockholders, regardless of whether paid from profits of the corporation accumulated before or after March 1, 1913. Harder v. Irwin (Col.), (D. C., N. D. N. Y. 1923) 285 Fed. 402; Douglas v. Edwards (Col.), (C. C. A., Second Cir. 1924) 298 Fed. 229, affirming Id., (D. C., S. D. N. Y. 1922) 287 Fed. 919. 113 (1) A dividend declared prior to March 1, 1913, although payable subsequent thereto, constituted capital to the stockholders on March 1, 1913, the effective date of the Sixteenth Amendment, and not income at the date of payment under the Act of 1913. U. S. v. Guinzburg, (C. C. A., Second Cir. 1921) 278 Fed. 363; Plant v. Walsh (Col.), (D. C., D. Conn. 1922) 280 Fed. 722.

113 (m) "By the declaration of a dividend, the earnings of the company to the extent declared were separated from the property of the corporation, and were appropriated by that action to the then stockholders, who became creditors of the corporation for the amount of the dividend. The relation then created was that of debtor and creditor. It is the separation of the earnings from the balance of the corporate property together with the promise to pay arising from the declaration of the dividend that works this change. The holder of stock, with respect to the dividend is on a par with the other creditors of the corporation." U. S. v. Guinzburg, (C. C. A., Second Cir. 1921) 278 Fed. 363.

113 (n) It is an accepted principle that for purposes of statutory construction within certain limits resort may be had to subsequent statutes. Douglas v. Edwards (Col.), (C. C. A., Second Cir. 1924) 298 Fed.

229.

114 The Act of 1913, which imposed a tax on income derived from all sources, was not invalid in so far as it imposed a tax upon income derived from the exportation to and sale of goods in foreign countries. The tax was not upon exports; the transaction was complete before the income arose for taxation. Peck & Co. Inc. v. Lowe (Col.), (1918) 247 U. S. 165, affirming Id., (D. C., S. D. N. Y. 1916) 234 Fed. 125.

115 In 1918 a corporation sold all of its assets to another corporation, except cash in bank, accounts receivable, and certain insurance policies, receiving therefor cash and capital stock of the vendee corporation. In accordance with the agreement, the stock of the vendee was issued directly to the stockholders of the vendor. The vendor paid its obligations and retired its preferred stock, delivering the cancelled certificates of the latter to the vendee. All of its assets were exhausted by these acts. The vendor was taxable on the gain derived from the sale of its capital assets to the vendee. U. S. v. Cedarburg Milk Co., (D. C., E. D. Wisc. 1922) 288 Fed. 997.

Act of 1924.

tion of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period.

SEC. 213. (b) The term gross income" does not include the following items, which shall be exempt from taxation under this title:

SEC. 213. (b) (1) The proceeds of life insurance policies paid upon the death of the sured;

SEC. 213. (b) (2) The amount received by the insured as a return of premium or premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract;

SEC. 213. (b) (3) The value of property acquired by gift, bequest, devise, or descent (but the

Act of 1918.

dends, securities, or the transaction of any business carried on for gain or proft, or gains or profits and income derived from any source whatever. The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period; but

SEC. 213. (b) Does not include the following items, which shall be exempt from taxation under this title:

SEC. 213. (b) (1) The proceeds119 of life insurance policies sured 120 to indvidual beneficiarpaid upon the death of the inies or to the estate of the insured;

SEC. 213. (b) (2) The amount received by the insured as a return of premium or premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract;

SEC. 213. (b) (3) The value of property acquired by gift, be

116 (a) In taxing statutes the literal meaning of words employed is most important, for such statutes are not to be extended by implication beyond the clear import of the language used. If words are doubtful, the doubt must be resolved against the government and in favor of the taxpayer. If a person sought to be taxed comes within the letter of the law, he must be taxed regardless of the hardship; but if he does not, he is free from the tax, regardless of how apparently within the spirit of the law the case may otherwise appear to be. U. S. v. Merriam and U. S. v. Anderson, (1923) 263 U. S. 179, affirming Id., (C. C. A., Second Cir. 1923) 282 Fed. 851.

116 (b) The conditional or unconditional voluntary disposition of personal property by will is a bequest. It must be presumed that Congress in using the term "bequest" in Sec. B of the Act of 1913 had in mind that meaning well known and sanctioned by judicial construction. Merriam v. U. S., (C. C. A., Second Cir. 1922) 282 Fed. 851.

116 (c) The words "acquired by gift, bequest, devise or descent," were used as words of exception and not of exemption in Sec. B of the Act of 1913. Merriam v. U. S., (C. C. A., Second Cir. 1922) 282 Fed. 851.

116 (d) Beque sts to certain individuals named, who

were also appointed executors and trustees under the will, with the provision that "The bequests herein made to my said executors are in lieu of all compensation or commissions to which they would otherwise be entitled as executors or trustees,' constituted property acquired by "bequest" and not "compensation for personal service" under Sec. B of the Act of 1913. Under this will actual service as a condition of payment was not required. All that was necessary was that the individuals clothe themselves with the character of executors and trustees to be entitled to the bequests. U. S. v. Merriam and U. S. v. Anderson, (1923) 263 U. S. 179, affirming Id., (C. C. A., Second Cir. 1922) 282 Fed. 851, and reversing Id., (D. C., S. D. N. Y. 1921) 275 Fed. 109.

116 (e) Where certain property was placed in trust under the terms of a will with the direction that a portion of the income be paid to the grandchild of the testator and the remainder thereof to her father during his life, but in no event longer than the infancy of the grandchild or her natural life should she die before attaining majority, the amounts so paid to the father were not income to him but bequests, under Sec. B of the Act of 1913, since he had no interest and never could have any in the capital of the trust