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Keywords

corporation

corporationrespondent

Related Cases

Lynch v. Hornby, 247 U.S. 339, 38 S.Ct. 543, 62 L.Ed. 1149, 1 USTC P 20, 3 A.F.T.R. 2992

Facts

Hornby owned 434 shares of the Cloquet Lumber Company, which had significantly increased in value from $43,400 to at least $150,000 between 1906 and 1915. In 1914, the company distributed dividends totaling $650,000, of which $410,000 came from the conversion of property owned before the Income Tax Act took effect. Hornby did not include his share of this amount in his income tax return, leading to the assessment of an additional tax of $171 by the Commissioner of Internal Revenue.

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.

Issue

Whether the dividends received by Hornby from the Cloquet Lumber Company, which included amounts derived from property owned prior to the enactment of the Income Tax Act, were taxable as income under the Act.

Rule

The Income Tax Act of 1913 stipulates that the net income of a taxable person includes gains, profits, and income derived from various sources, including dividends, regardless of whether they are from current earnings or accumulated surplus.

‘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.’

Analysis

The Supreme Court analyzed the provisions of the Income Tax Act and determined that dividends declared and paid in the ordinary course of business by a corporation to its stockholders after March 1, 1913, are taxable as income. The Court emphasized that the source of the dividends, whether from current earnings or from a surplus accumulated prior to the Act, does not exempt them from being classified as income for tax purposes.

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.

Conclusion

The Supreme Court reversed the lower court's judgment, ruling that Hornby's share of the dividends was taxable income under the Income Tax Act of 1913, and remanded the case for further proceedings.

It results from what we have said that it was erroneous to award a return of the tax collected from the respondent, and that the judgment should be Reversed, and the cause remanded to the District Court for further proceedings in conformity with this opinion.

Who won?

E. J. Lynch, Collector of Internal Revenue, prevailed in the case because the Supreme Court found that the dividends received by Hornby were taxable income under the provisions of the Income Tax Act.

The Supreme Court ultimately reversed the decision, holding that the dividends were taxable income under the Income Tax Act of 1913.

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Charles McCandless Tile Service v. U. S., 191 Ct.Cl. 108, 422 F.2d 1336, 25 A.F.T.R.2d 70-870, 70-1 USTC P 9284

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