Lynch v. Hornby

• Decision Date: 03 June 1918
• Docket Number: No. 422,422
• Citation: 38 S.Ct. 543,62 L.Ed. 1149,247 U.S. 339
• Parties: LYNCH, Collector of Internal Revenue, v. HORNBY
• Court: U.S. Supreme Court

247 U.S. 339

38 S.Ct. 543

62 L.Ed. 1149

LYNCH, Collector of Internal Revenue,

v HORNBY.

No. 422.

Argued March 4, 5, and 6, 1918.

Decided June 3, 1918.

Mr. Solicitor General Davis, for petitioner.

Messrs. A. W. Clapp and Newell Clapp, both of St. Paul, Minn., and H. Oldenburg, of Carlton, Minn., for respondent.

Mr. Justice PITNEY delivered the opinion of the Court.

Hornby, the respondent, recovered a judgment in the United States District Court against Lynch, as Collector of Internal Revenue, for the return of $171, assessed as an additional income tax under the Act of October 3, 1913 (chapter 16, 38 Stat. 114, 166), and paid under protest. The Circuit Court of Appeals affirmed the judgment (236 Fed. 661, 149 C. C. A. 657), and the case comes here on certiorari. It was submitted at the same time with Lynch, Collector, v. Turrish, 247 U. S. 221, 38 Sup. Ct. 537, 62 L. Ed. ——, Southern Pacific Co. v. Lowe, Collector, 247 U. S. 330, 38 Sup. Ct. 540, 62 L. Ed. ——, and Peabody v. Eisner, Collector, 247 U. S. 347, 38 Sup. Ct. 546, 62 L. Ed. ——, arising under the same act, and this day decided.

The facts, in brief, are as follows: Hornby, from 1906 to 1915, was the owner of 434 (out of 10,000) shares of the capital stock of the Cloquet Lumber Company, an Iowa corporation, which for more than a quarter of a century had been engaged in purchasing timber lands, manufacturing the timber into lumber, and selling it. Its shares had a par value of $100 each, making the entire capital stock $1,000,000. On and prior to March 1, 1913, by the increase of the value of its timber lands and through its business operations, the total property of the company had come to be worth $4,000,000, and Hornby's stock, the par value of which was $43,400, had become worth at least $150,000. In the year 1914 the company was engaged in cutting its standing timber, manufacturing it into lumber, selling the lumber, and distributing the proceeds among its stockholders. In that year it thus distributed dividends aggregating $650,000, of which $240,000, or 24 per cent. of the par value of the capital stock, was derived from current earnings, and $410,000 from conversion into money of property that it owned or in which it had an interest on March 1, 1913. Hornby's share of the latter amount was $17,794, and, this not having been included in his income tax return, the Commissioner of Internal Revenue levied an additional tax of $171 on account of it, and this forms the subject of the present suit.

The case was tried in the District Court and argued in the Circuit Court of Appeals together with Lynch, Collector, v. Turrish, 236 Fed. 653, 149 C. C. A. 649, and was treated as presenting substantially the same question upon the merits. In our opinion it is distinguishable from the Turrish Case, where the distribution in question was a single and final dividend received by Turrish from the Payette Company in liquidation of the entire assets and business of the company and a return to him of the value of his stock upon the surrender of his entire interest in the company, at a price that represented its intrinsic value at and before March 1, 1913, when the Income Tax Act took effect.

In the present case there was no winding up or liquidation of the Cloquet Lumber Company, nor any surrender of Hornby's stock. He was but one of many stockholders, and had but the ordinary stockholder's interest in the capital and surplus of the company; that is, a right to have them devoted to the proper business of the orporation and to receive from the current earnings or accumulated surplus such dividends as the directors in their discretion might declare. Gibbons v. Mahon, 136 U. S. 549, 557, 10 Sup. Ct. 1057, 34 L. Ed. 525. The operations of this company in the year 1914 were, according to the facts pleaded, of a nature essentially like those in which it had been engaged for more than a quarter of a century. The fact that they resulted in converting into money, and thus setting free for distribution as dividends, a part of its surplus assets accumulated prior to March 1, 1913, does not render Hornby's share of those dividends any the less a part of his income within the true intent and meaning of the act, the pertinent language of which is as follows (38 Stat. 166, 167):

'A. Subdivision 1. That there shall be levied, assessed, collected and paid annually upon the entire net income arising or accruing from all sources in the preceding calendar year to every citizen of the United States, * * * and to every person residing in the United States, * * * a tax of 1 per centum per annum upon such income, except as hereinafter provided. * * *

'B. That, subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and income derived from salaries, wages, or compensation for personal service, * * * also from interest, rent, dividends, securities, or the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever.'

Among the deductions allowed for the purpose of the normal tax is:

'Seventh, the amount received as dividends upon the stock or from the net earnings of any corporation, * * * which is taxable upon its net income as hereinafter provided.'

There is a graduated additional tax, commonly known as a 'surtax,' upon net income in excess of $20,000, including income from dividends, and for the purpose of this additional tax——

'the taxable income of any individual shall embrace the share to which he would be entitled of the gains and profits, if divided or distributed, whether divided or distributed or not, of all corporations * * * formed or fraudulently availed of for the purpose of preventing the imposition of such tax through the medium of permitting such gains and profits to accumulate instead of being divided or distributed.'

It is evident that Congress intended to draw and did draw a distinction between a stockholder's undivided share or interest in the gains and profits of a corporation, prior to the declaration of a dividend, and his participation in the dividends declared and paid; treating the latter, in ordinary...