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Helvering v. Gowran, 302 U.S. 238, 58 S.Ct. 154, 82 L.Ed. 224, 37-2 USTC P 9571, 19 A.F.T.R. 1226, 1938-1 C.B. 300

Facts

On June 29, 1929, the Hamilton Manufacturing Company declared a dividend of $14 per share on its common stock, payable in preferred stock. Gowran, a common stockholder, received 533 shares of preferred stock. When he sold this stock for $53,371.50, he did not report it as taxable income, treating it instead as a capital gain. The Commissioner of Internal Revenue assessed a deficiency, arguing that the proceeds from the sale were taxable income.

On June 29, 1929, the Hamilton Manufacturing Company, a Wisconsin corporation, had outstanding preferred stock of the par value of $100 a share and common stock without par value. On that day the directors declared from the surplus earnings a dividend of $14 a share on the common stock, payable on July 1, 1929, in preferred stock at its par value.

Issue

The main legal issue was whether the stock dividend received by Gowran was taxable as income under the Revenue Act of 1928.

The government contends that section 115(f) should be read as prohibiting taxation only of those stock dividends which the Constitution does not permit to be taxed; and that, since by the dividend Gowran acquired an interest in the corporation essentially different from that theretofore represented by his common stock, the dividend was taxable.

Rule

The court applied section 115(f) of the Revenue Act of 1928, which states that 'a stock dividend shall not be subject to tax.'

Nevertheless, by section 115(f) it enacted in 1928, as it did in earlier and later Revenue Acts, that ‘a stock dividend shall not be subject to tax.’ The prohibition is comprehensive.

Analysis

The court analyzed the nature of the stock dividend and determined that it did not constitute taxable income. It emphasized that the prohibition against taxing stock dividends was comprehensive and clearly expressed in the statute. The court also noted that the value of the stock received and sold was the same, leading to no taxable gain.

The court likened a nontaxable stock dividend to a tax-free gift or legacy and said: ‘One who receives a tax-free gift and later sells it, in the absence of statute providing otherwise, is taxed upon the profit arising from the difference in its value at the time he receives it and the sale price.'

Conclusion

The Supreme Court reversed the decision of the lower court, holding that the stock dividend received by Gowran was not taxable as income.

Reversed.

Who won?

H. C. Gowran prevailed in the case because the Supreme Court upheld the Board of Tax Appeals' ruling that the stock dividend was not taxable under the Revenue Act.

The taxpayer sought a review by the Circuit Court of Appeals. The Commissioner again urged that the stock dividend was taxable; and then, for the first time, contended that, even if it was not taxable, the determination of the deficiency should be affirmed, because within the tax year the stock had been sold at its par value and, as its cost had been zero, the entire proceeds constituted income.

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