TAXATION - INCOME TAXATION OF STOCK DIVIDENDS

Authors

Donald H. Larmee, University of Michigan Law SchoolFollow

Abstract

The petitioner purchased cumulative non-voting preferred stock in a corporation. In subsequent years the company elected to pay, and the petitioner received, dividends in common voting stock. Later the company redeemed its preferred stock. In computing the profit made by the petitioner at the time of redemption, the commissioner allocated to the common stock a proportionate share of the original cost of the preferred stock. He thereupon taxed as income the difference between the redemption figure and the allocated portion of the cost. The stockholder protested, claiming that the stock dividends should be treated as income in the years in which received, though not taxable under statutes in effect at that time. In reversing the decision of the circuit court of appeals, which had upheld the commissioner's action, the Supreme Court held that the dividends paid a preferred stockholder in common stock were income and may not be treated as return of capital. The Court carefully distinguished between stock dividends which confer no different rights than the existing stock, and stock dividends which give the stockholder an interest different from his former holdings. The latter type of dividend is taxable as income und.er the Sixteenth Amendment. The minority dissented on the grounds that the method followed by the treasury regulations had been long in practice and had been supported by the Court in a prior decision. Koshland v. Helvering, 298 U. S. 441, 56 S. Ct. 767 (1936).

Recommended Citation

Donald H. Larmee, TAXATION - INCOME TAXATION OF STOCK DIVIDENDS, 35 Mich. L. Rev. 692 (1937).
Available at: https://repository.law.umich.edu/mlr/vol35/iss4/26