Southern Pacific Co. v. Lowe, 247 U.S. 330 (1918)

Southern Pacific Co. v. Lowe

No. 462

Argued March 4, 5, 6, 1918
Decided June 3, 1918
247 U.S. 330

ERROR TO THE DISTRICT COURT OF THE UNITED STATES

FOR THE SOUTHERN DISTRICT OF NEW YORK

Syllabus

Accumulations that accrued to a corporation through surplus earnings or appreciation in property value, before the adoption of the Sixteenth Amendment (February, 1913), and the effective date (March, 1913), of the Income Tax Act of 1913 (Act October 3, 1913, c. 16, 38 Stat. 166), are to be regarded as its capital, not as its income for the purposes of that act.

Although, in general, the Income Tax Act of 1913, unlike that of June 30, 1864, treated corporate earnings as not accruing to the shareholders until the time when a dividend was paid (Lynch v. Hornby, post,339), and although in ordinary cases the mere accumulation of adequate surplus does not entitle a shareholder to dividends until the directors, in their discretion, declare them, yet, where the shares of a corporation were all owned, and its property and funds possessed, and its operations and affairs completely dominated, by another corporation, so that the two were in substance but one, and where dividends from the one to the other were consummated, after the Act of 1913 became effective, by a mere paper transaction -- formal vote of the directors of the first company and entries on the books of the two -- and represented merely what the second company was entitled to have as shareholder before January 1, 1913, from a surplus theretofore accumulated, held that such dividends were not taxable as income of the shareholding company within the true intent and meaning of the Income Tax Act of 1913.

238 F. 847 reversed.

The case is stated in the opinion.