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appealcorporationregulation
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Koshland v. Helvering, 298 U.S. 441, 56 S.Ct. 767, 80 L.Ed. 1268, 105 A.L.R. 756, 36-1 USTC P 9294, 17 A.F.T.R. 1213, 1936-1 C.B. 219

Facts

Corinne S. Koshland purchased preferred stock of Columbia Steel Corporation in 1924 and 1926, which entitled her to annual dividends. Although the company had sufficient surplus to pay these dividends in cash, it opted to pay them in common stock from 1925 to 1928. When the corporation redeemed the preferred stock in 1930, the Commissioner of Internal Revenue allocated a portion of the cost of the preferred stock to the common stock received as dividends, which increased Koshland's reported gain. The Board of Tax Appeals initially ruled in favor of Koshland, but the Circuit Court of Appeals reversed this decision.

The petitioner received, in each of those years, shares of common stock as dividends on her preferred.

Issue

Whether a taxpayer who purchases cumulative nonvoting preferred shares and receives dividends in common voting shares must apportion their cost between preferred and common shares for the purpose of determining gain or loss upon sale or disposition.

The question is whether, under the Revenue Acts of 1926 (44 Stat. 9) and 1928 (45 Stat. 791), a taxpayer who purchases cumulative nonvoting preferred shares of a corporation upon which a dividend is subsequently paid in common voting shares must, upon a sale or other disposition of the preferred shares, apportion their cost between preferred and common for the purpose of determining gain or loss.

Rule

The Revenue Acts of 1926 and 1928 stipulate that the gain from the sale or other disposition of property shall be the excess of the amount realized over the adjusted basis, which is the cost of such property.

The Revenue Act of 1921 which provided, in section 201(d): ‘A stock dividend shall not be subject to tax.'

Analysis

The court analyzed the nature of the dividends received by Koshland, determining that they constituted taxable income rather than returns of capital. The court emphasized that the statutory provisions were unambiguous and that the Treasury regulations could not alter the clear directive of the law regarding the treatment of income derived from capital gains.

But where, as in this case, the provisions of the act are unambiguous, and its directions specific, there is no power to amend it by regulation.

Conclusion

The Supreme Court reversed the decision of the Circuit Court of Appeals, holding that the dividends received by Koshland were taxable income and could not be treated as returns of capital that would reduce the cost basis of her preferred stock.

The judgment is Reversed.

Who won?

The Commissioner of Internal Revenue prevailed in the case, as the Supreme Court ruled that the dividends received by Koshland were taxable income, thereby supporting the Commissioner's allocation of the cost basis.

The meaning of the Act of Congress exempting stock dividends from taxation as income at the time of distribution has had a practical construction through administrative action and legislative acquiescence.

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