Lynch v. Turrish

• Decision Date: 03 June 1918
• Docket Number: No. 421,421
• Citation: 38 S.Ct. 537,62 L.Ed. 1087,247 U.S. 226,247 U.S. 221
• Parties: LYNCH, Collector of Internal Revenue, v. TURRISH
• Court: U.S. Supreme Court

247 U.S. 221

38 S.Ct. 537

247 U.S. 226

62 L.Ed. 1087

LYNCH, Collector of Internal Revenue,

v TURRISH.

No. 421.

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 Carleton, Minn., for respondent.

Mr. Justice McKENNA delivered the opinion of the Court.

Suit to recover an income tax, paid under protest, assessed under the Act of October 3, 1913, c. 16, 38 Stat. 166.

The facts, as admitted by demurrer, are these: Respondent, Turrish, who was plaintiff in the trial court, made a return of his income for the calendar year 1914 which showed that he had no net income for that year; afterwards the Commissioner of Internal Revenue made a supplemental assessment showing that he had received a net income of $32,712.08, which, because of specific deductions and exemptions, resulted in no normal tax, but as the net income exceeded the sum of $20,000 the Commissioner assessed an additional or super tax of 1 per cent. upon the excess, resulting in a tax of $127.12 which was sought to be recovered. The reassessment was based upon certain sums received by the plaintiff in the year 1914 as distributions from corporations subject to the Income Tax Law and held by the Commissioner to be ncome derived from dividends received by the plaintiff on stock of domestic corporations; of which the sum of $79,975, received as a distribution from the Payette Lumber & Manufacturing Company, and without which no tax could have been levied against the plaintiff, is here in dispute.

Prior to March 1, 1913, and continuously thereafter until the surrender of his stock as hereinafter mentioned, plaintiff was a stockholder in the Payette Company, which was organized in the year 1903 with power to buy, hold, and sell timber lands, and in fact never engaged in any other business than this except minor businesses incidental to it. Immediately after its organization this company began to invest in timber lands, and prior to March 1, 1913, had thus invested approximately $1,375,000.

On March 1, 1913, the value of its assets was not less than $3,000,000 of which sum the value of the timber lands was not less than $2,875,000. The increase was due to the gradual rise in the market value of the lands. At that date the value of Turrish's stock was twice its par value, or $159,950, and about that time he and all the other stockholders gave an option to sell their stock for twice its par value. The holders of the option formed another company, called the Boise-Payette Lumber Company, and transferred the options to it. The options having been extended to December 31, 1913, the new company informed the Payette Company and its stockholders shortly before this date that instead of exercising the option it preferred and proposed to purchase all of the assets of the Payette Company, paying to that company such a purchase price that there would be available for distribution to its stockholders twice the par value of their stock. The stockholders by resolution authorized this sale, and, pursuant to this and a resolution of the directors, the Payette Company transferred to the new company all of its assets, property, and franchises, and upon the completion of the transaction found itself with no assets or property, except cash to the amount of double the par value of its stock which had been paid to it by the new company, and with no debt, liabilities, or obligations except those which the new company had assumed. The cash was distributed to the stockholders on the surrender of their certificates of stock, and the company went out of business. In this way, upon the surrender of his shares, Turrish received $159,950, being double their par value.

The Commissioner of Internal Revenue considered that of this sum one-half was not taxable, being the liquidation of the par value of Turrish's stock, but that the other half was income for the year 1914 and taxable under the act of 1913.

The question in the case is thus indicated. The District Court took a different view from that of the Commissioner of Internal Revenue and therefore overruled the demurrer to Turrish's complaint and entered judgment for him for the sum prayed, which judgment was affirmed by the Circuit Court of Appeals for the Eighth Circuit. 236 Fed. 653, 149 C. C. A. 649.

The point in the case seems a short one. It, however, has provoked much discussion on not only the legal but the economic distinction between capital and income and by what processes and at what point of time the former produces or becomes the latter. And this in resolution of a statute which concerns the activities of men and intended, it might be supposed, to be without perplexities and readily solvable by the off-hand conceptions of those to whom it was addressed.

The provisions of the act, so far as material to be noticed, are the following: That there is assessed

'upon the entire net income arising or accruing from all sources in the preceding calendar year to every * * * person residing in the United States * * * a tax of 1 per centum per annum upon such income. * * *' Paragraph A, subd. 1.

In addition to that tax, which is denominated the normal income tax, it is provided that there shall be levied 'upon the net in ome of every individual an additional income tax * * * of 1 per centum per annum upon the amount by which the total income exceeds' certain amounts, and the person subject to the tax is required to make a personal return of his total net income from all sources under rules and regulations to be prescribed by the Commissioner of Internal Revenue. Subdivision 2.

By paragraph B it is provided that, subject to certain exemptions and deductions,

'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.'

After specifying the exemptions and deductions allowed, the law declares as follows:

'The said tax shall be computed upon the remainder of said net income of each person subject thereto, accruing during each preceding calendar year ending December thirty-first: Provided, however, that for the year ending December thirty-first, nineteen hundred and thirteen, said tax shall be computed on the net income accruing from March first to December thirty-first, nineteen hundred and thirteen, both dates inclusive. * * *' Paragraph D.

It will be observed, therefore, that the statute levies a normal tax and an additional tax upon net incomes derived from whatever source, 'arising or accruing' each preceding calendar year ending December 31, except that for the year ending December 31, 1913, the tax shall be computed on the net income accruing from March 1, 1913, to December 31, 1913.

And in determining the application of the statute to Turrish we must keep in mind that on the admitted facts the distribution received by him from the Payette Company manifestly was a single and final dividend in liquidation of the entire assets and business of the company, a return to him of the value of his stock upon the surrender of his entire interest in the company, and at a price that represented its intrinsic value at and before March 1, 1913, when the act took effect.

The District Court and the Circuit Court of Appeals decided that the amount so distributed to Turrish was not income within the meaning of the statute, basing the decision on two propositions, as expressed in the opinion of the Circuit Court of Appeals, by Sanborn, Circuit Judge: (a) The amount...