## Facts

- A corporation voted on December 17, 1913 to transfer $1,500,000 of accumulated surplus (earned before January 1, 1913) to capital and to issue 15,000 new shares as a stock dividend to shareholders of record on December 26, 1913.
- The distribution occurred January 2, 1914; shareholder Henry Towne received 4,174.5 shares.
- The federal collector treated the stock dividend as the equivalent of $417,450 in cash income and assessed an income tax under the Income Tax Act of 1913.
- Towne paid the tax under protest and sued to recover, arguing the stock dividend was not “income” under the statute and that, if the statute taxed it, the Sixteenth Amendment would not permit that result.

## Issues

1. Whether the Supreme Court had direct-review jurisdiction because the case presented a question about the scope of the Sixteenth Amendment, rather than only statutory interpretation.
2. Whether a stock dividend representing surplus transferred to capital is “income” to the shareholder within the meaning of the Income Tax Act of 1913.

## Decision

- The Court held it had jurisdiction because the pleadings raised a constitutional question about the scope of the Sixteenth Amendment, even though the Court could resolve the case on statutory grounds.
- The Court reversed the judgment for the government.
- The Court held that the value of new shares issued as a stock dividend representing surplus transferred to capital was not taxable to shareholders as “income” under the 1913 Act.
- The Court declined to decide the constitutional meaning of “income” under the Sixteenth Amendment because the case was decided on statutory interpretation.

## Legal Principles

- A direct writ of error lies when the case presents a constitutional question, even if statutory interpretation may dispose of the case.
- Statutory terms may have context-dependent meanings; a term’s meaning in a statute is not necessarily identical to its meaning in the Constitution.
- A stock dividend that merely capitalizes surplus and leaves the shareholder’s proportional interest unchanged is not a realized gain to the shareholder and, absent clear statutory language, is not treated as taxable “income” under the 1913 Act.
- Courts may avoid constitutional adjudication when a nonconstitutional ground resolves the dispute.

## Conclusion

The Supreme Court held that a stock dividend reflecting a recapitalization of accumulated surplus into additional shares was not “income” taxable to the shareholder under the Income Tax Act of 1913, and it reversed the tax judgment while reserving the constitutional question.


Towne v. Eisner, 245 U.S. 418 (1918)