Helvering v. Gowran, 302 U.S. 238 (1937)
Helvering v. Gowran
No. 27
Argued October 22, 1937
Decided December 6, 1937
302 U.S. 238
CERTIORARI TO THE CIRCUIT COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
Syllabus
1. Dividends of preferred stock to common stockholders whereby they acquire an interest in the corporation essentially different from that represented by their common stock are income within the meaning of the Sixteenth Amendment. P. 241.
2. Although Congress has power to tax such dividends, they are exempted by § 115(f) of the Revenue Act of 1928, which declares that "A stock dividend shall not be subject to tax." P. 241.
3. A common stockholder received a dividend of preferred stock worth $100 per share and several months later disposed of it to the corporation for cash at that valuation.
Held:
(1) That the whole of the proceeds of the sale were taxable as income. P. 243.
The computation is under §§ 111 and 113, Revenue Act of 1928, which provide that the gain from conversion of property into money shall be computed at the excess of the amount realized over the "cost" of the property, which in this case was zero.
(2) The stock dividend was not to be likened to gifts and legacies, as to which there are special provisions of the Act excluding them from gross income and prescribing the basis for computing gain from later disposition of the property -- §§ 113(a)(2); 22(b)(3). P. 243.
(3) Section 115(f) cannot, in view of its history, be taken as a declaration of Congressional intent that the value of all stock dividends shall be immune from tax not only when received, but also when converted into money or other property. P. 244.
(4) The rates applicable were those prescribed for ordinary income, not the rate for "capital gains" from "property held by the taxpayer for more than two years." § 101(c)(8). Id.
If it be assumed that the common stock was held by the taxpayer for more than two years, the fact is immaterial, since the dividend stock had been held for only three months, and was income substantially equivalent for income tax purposes to cash or property, and, under § 115(b), was presumed to have been made "out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits."
4. The Circuit Court of Appeals may affirm a decision of the Board of Tax Appeals upon a theory not presented to or considered by the Board, but acceptance of the new theory may involve granting the taxpayer an opportunity to establish additional facts. P. 245.
87 F.2d 125 reversed.
Certiorari, 301 U.S. 676, to review a judgment which reversed a decision of the Board of Tax Appeals, 32 B.T.A. 820, sustaining an income tax assessment.