247 U.S. 330 (1918), 462, Southern Pacific Co. v. Lowe

Docket Nº:No. 462
Citation:247 U.S. 330, 38 S.Ct. 540, 62 L.Ed. 1142
Party Name:Southern Pacific Co. v. Lowe
Case Date:June 03, 1918
Court:United States Supreme Court

Page 330

247 U.S. 330 (1918)

38 S.Ct. 540, 62 L.Ed. 1142

Southern Pacific Co.



No. 462

United States Supreme Court

June 3, 1918

Argued March 4, 5, 6, 1918




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.

Page 331

PITNEY, J., lead opinion

MR. JUSTICE PITNEY delivered the opinion of the Court.

This case presents a question arising under the Federal Income Tax Act of October 3, 1913, c. 16, 38 Stat. 114, 166. Suit was brought by plaintiff in error against the Collector to recover taxes assessed against it and paid under protest. There ware two causes of action, of which only the second went to trial, it having been stipulated that the trial of the other might be postponed until the final determination of this one. So far as it is presented to us, the suit is an effort to recover a tax imposed upon certain dividends upon stock, in form received by the plaintiff from another corporation in the early part of the year 1914, and alleged by the plaintiff to have been paid out of a surplus accumulated not only prior to the effective date of the act, but prior to the adoption of the Sixteenth Amendment to the Constitution of the United States. The district court directed a verdict and judgment in favor of the Collector, 238 F. 847, and the case comes here by direct writ of error under § 238, Judicial Code, because of the constitutional question. That our jurisdiction was properly invoked is settled by Towne v. Eisner, 245 U.S. 418, 425.

The case was submitted at the same time with several other cases arising under the same act and decided this day, viz., Lynch, Collector v. Turrish, ante, 221, Lynch v. Hornby, post, 339, and Peabody v. Eisner, post, 347.

The material facts are as follows: prior to January 1, 1913, and at all times material to the case, plaintiff, a corporation organized under the laws of the State of Kentucky, owned all the capital stock of the Central Pacific Railway Company, a

Page 332

corporation of the State of Utah, including the stock registered in the names of the directors.1 This situation existed continuously from the incorporation of the Railway Company in the year 1899. That company is the successor of the Central Pacific Railroad Company, and acquired all of its properties, which constitute a part of a large system of railways owned or controlled by the Southern Pacific Company. The latter company, besides being sole stockholder, was in the actual physical possession of the railroads and all other assets of the Railway Company, and in charge of its operations, which were conducted in accordance with the terms of a lease made by the predecessor company to the Southern Pacific and assumed by the Railway Company, the effect of which was that the Southern Pacific should pay to the lessor company $10,000 per annum for organization expenses, should operate the...

To continue reading