*874 1. A stock dividend of 5 percent cumulative preferred stock paid to holders of common stock, the only outstanding class of stock, is taxable under the Revenue Act of 1936.
2. The preferred stock was issued on June 1, 1936. With respect to such dividends, Held, the Revenue Act of 1936 was retroactively effective from January 1, 1936.
3. Held, that the issuing corporation had accumulated and current earnings and profits sufficient to pay such stock dividend.
*416 The Commissioner determined deficiencies in the income taxes of the petitioners for the year 1936 in the following respective amounts:
| Alfred E. Stern | $60,471.85 |
| Irvin Stern | 13,249.79 |
| Fanny C. Holzheimer | 12,176.00 |
*417 The sole issue is whether or not a 5 percent cumulative preferred stock dividend declared and paid to the petitioners by the Progress Tailoring Co. on its common stock held by them, constituted taxable income.
FINDINGS OF FACT.
The petitioners are residents of Chicago, *875 Illinois, and filed their income tax returns for the year 1936 with the collector of internal revenue for the first district of Illinois.
By appropriate action on March 17, 1936, and April 3, 1936, respectively, the board of directors and stockholders of the Progress Tailoring Co., a Delaware corporation (hereinafter called Progress), amended the charter of that corporation, which theretofore had only 4,000 shares of common stock of $100 par value per share, so that the company was authorized to issue 4,000 shares of its common stock of $100 par value per share and 5,000 shares of its preferred stock of $100 par value per share.
On May 20, 1936, petitioners Alfred E. Stern, Irvin Stern, and Fanny C. Holzheimer owned 750,200, and 300 shares, respectively, of Progress. 1 At that time 2,000 shares of such stock were outstanding and it was the only class of stock then issued by Progress. On that day the board of directors of Progress declared a dividend of 5 percent cumulative preferred stock, series A, to the holders of its common stock at the rate of one and one-fourth shares of such preferred stock for each share of common stock.
*876 On June 1, 1936, Alfred Stern received 937 1/2 shares of the preferred stock, Irvin Stern received 250 shares thereof, and Fanny C. Holzheimer received 375 shares thereof as such stock dividend. The resolution authorizing the payment of the preferred stock dividend is as follows:
RESOLVED that this Corporation issue 2500 shares of its authorized Preferred Stock of the par value of $100 each to be designated as "Series A" and the corporation shall obligate itself to pay out of its surplus or net earnings fixed cumulative dividends on said Preferred Stock Series A at the rate of 5% per annum.
FURTHER RESOLVED that the sum of $250,000 be transferred from the surplus account to the capital account and applied in payment of the issuance of said 2500 shares of 5% cumulative Preferred Stock Series A,
FURTHER RESOLVED that a stock dividend of 2500 shares of the 5% cumulative Preferred Stock Series A be and the same is hereby declared payable June 1, 1936 to the holders of record of the common stock at the close of business on the 20th day of May, 1936, at the rate of one and one-quarter shares of said Preferred Stock for each share of Common Stock held.
RESOLVED that a dividend*877 of $7.50 per share on the issued and outstanding shares of Common Stock be and the same is hereby declared out of the net *418 profits of the Company payable June 1, 1936 to stockholders of record at the close of business on the 20th day of May, 1936.
The stock dividend so declared and issued had a fair market value of $100 per share on June 1, 1936.
During 1936 the petitioners received cash dividends as follows:
| Date | Alfred E. Stern | Irvin Stern | Fanny C. Holzheimer |
| June 1, 1936 | $5,625.00 | $1,500.00 | $2,250.00 |
| September 10, 1936 | 33,750.00 | 8,750.00 | 7,500.00 |
| October 1, 1936 * | 1,562.50 | 416.67 | 625.00 |
| December 1, 1936 | 67,500.00 | 17,500.00 | 15,000.00 |
The total stock and cash dividends distributed by Progress in 1936 were as follows:
| June 1, 1936, stock dividend | $250,000.00 |
| June 1, 1936, cash dividend | 15,000.00 |
| September 10, 1936, cash dividend | 50,000.00 |
| October 1, 1936, cash dividend | 4,166.67 |
| December 1, 1936, cash dividend | 100,000.00 |
| Total | 419,166.67 |
The cash dividends were paid pursuant to resolutions providing that they be paid "out of the net profits of the company."
The Progress*878 Tailoring Co. was originally incorporated as an Illinois corporation in September 1898. It manufactured and sold men's made to measure suits and overcoats. In April 1924 it was reorganized as "The Progress Tailoring Company", the Delaware corporation heretofore called Progress. No loss or gain from the transaction was reflected on Progress' books or on its return for 1924.
Progress incorporated as sole owner or acquired all of the capital stock of the following corporations, engaged in the same kind of business:
| Name | Incorporated or acquired | Dissolved |
| Spencer Mead Co | 1913 | 1931. |
| Stone Field Corporation | 1930 | Exists. |
| Certified Tailoring Corporation | 1930 | Exists. |
| Fort Wayne Tailoring Co | 1930 | Exists. |
| Pioneer Tailoring Co | 1922 | Exists. |
| W. Z. Gibson, Inc | 1922 | Exists. |
| Washington Tailoring Co | 1921 | No record. |
| First National Tailoring Co | 1930 | No record. |
All of the above corporations were Illinois corporations except the Fort Wayne Tailoring Co., which was incorporated in Indiana. From 1913 to 1934 none of the corporations paid dividends to Progress.
*419 In the years 1926, 1930, and 1936 Progress redeemed its preferred stock having*879 the par value of $50,000, $50,000, and $160,000, respectively.
Progress' books showed a loss of $243,709.15 sustained in 1921. Included therein were losses of $70,684.75 and $58,947.94 sustained by the Spencer Mead Co. and the Washington Tailoring Co., respectively. In 1928 Progress' books showed a loss of $22,563.03, resulting from a profit of $11,132.87 earned by it and losses of the Spencer Mead Co., W. Z. Gibson, Inc., and Pioneer Tailoring Co. in the amounts of $5,015.36, $6,514.63, and $10,118.90, respectively. In 1930 Progress' books showed an aggregate loss of $86,580.14, composed of its own loss of $54,516.38 and composite losses of $32,067.51 sustained by its subsidiaries. Progress included an item of $23,500 representing good will written off.
In 1931 the loss of Progress, as reflected on its books, was $109,124. That figure represented its own loss of $12,950.30 and losses of six subsidiaries aggregating $96,173.66. In 1931 Progress charged off items termed the good will of the Spencer Mead Co. and the Stone Field Co. in the amounts of $27,423 and $20,000, respectively. In 1932 the loss appearing on Progress' books included its own loss of $26,686.90 and $23,355.39*880 in losses of the six subsidiaries. The total amount of losses thus sustained by the subsidiaries in the several years was $302,858.14.
As of December 31, 1935, Progress had earnings and profits accumulated since February 28, 1913, available for distribution in an amount not less than $292,851.80.
In 1936 Progress received from the Fort Wayne Tailoring Corporation, W. Z. Gibson, Inc., the Pioneer Tailoring Co., and the Stone Field Corporation dividends aggregating $175,000. During that year it paid the above mentioned cash dividends of $169,166.67 and the preferred stock dividend of $250,000.
The tax return of Progress for 1936 showed net income of $287,877.84, on which was computed a normal tax of $19,633.95 and total normal and surtax of $32,395.44. In its computation a dividends paid credit of $169,166.67 was claimed, with a resultant remainder subject to surtax of $98,703.24. By adjustments, explained at the hearing, the net income before deducting taxes was reduced to $287,627.69. The net income of 1936 available for dividends was not less than $268,031.26.
OPINION.
VAN FOSSAN: The petitioners' denial of the taxability of the preferred stock dividend in controversy*881 rests on five contentions.
The first is that the stock dividend was not taxable under the law when distributed, They support this contention by the argument *420 that from the date of passage of the Revenue Act of 1921 until June 22, 1936, the day on which the Revenue Act of 1936 was enacted, all stock dividends were exempt from taxation by specific provision of the intervening revenue acts. With the 1936 Act, however, the law was changed. Constitutionality was made the test. The stock dividend in question here was not constitutionally exempt from taxation. It gave the holder of common stock an interest different from that represented by his common stock and, hence, was taxable. Koshland v. Helvering,298 U.S. 441; Strassburger v. Commissioner, 124 Fed.(2d) 315, affirming memorandum orinion dated February 10, 1941; Frank J. and Hubert Kelly Trust,38 B.T.A. 1014; Albert E. Smith,39 B.T.A. 80; Edith B. Bass,45 B.T.A. 1117.
We are not unmindful of the recent decision of the United States Circuit Court of Appeals for the Ninth Circuit in *882 Sprouse v. Commissioner, 122 Fed.(2d) 973, reversing John M. Keister,42 B.T.A. 484, but with all deference we adhere to our view as expressed in the Kelly Trust, Smith, Keister, and Bass cases and affirmed in the Strassburger case.
Petitioners' second contention is a corollary to the first and based on the premise that the Revenue Act of 1936 does not apply retroactively to January 1, 1936. The petitioners contend that because of the restrictive character of the language used in the act it is effective only on June 22, 1936, and thereafter. They quote section 1, which reads: "The provisions of this title shall apply only to taxable years beginning after December 31, 1935", and section 1003, which reads: "Except as otherwise provided, this Act shall take effect upon its enactment." They thereupon contend that section 1 limits the applicability of the act by excluding a taxable year beginning before December 31, 1935, and ending after the enactment of the act. As to this question generally, we refer to *883 Winterbottom Book Cloth Co., Ltd.,43 B.T.A. 572, where we said: "Albeit the act [1936] was not approved until June 22, 1936, there is nothing unusual in the fact that the provisions of the act and its taxing scope dated back to the beginning of the year 1936."
Moreover, section 115(a)(2) and section 115(f)(1) of the Revenue Act of 1936, 2 peculiarly applicable to the cases at bar, clearly contemplate *421 that all dividends declared and paid during the year 1936 shall be subject to the provisions of the 1936 Act and thus do "otherwise provide" that the applicable date is not June 22, 1936, but January 1, 1936.
*884 The third contention of the petitioners is that although Congress has the power to enact retroactive provisions in income tax legislation, the circumstances of the present case render the imposition of the tax so arbitrary and oppressive as to be a denial of due process of law. They argue that, through their controlled directors, they would not have declared the dividend if they had suspected its taxability. They point with particular emphasis to the high rate of tax to be paid by one petitioner. This argument, which might be made in almost any instance involving the retroactive effect of a taxing statute, fails to impress us. The dividend was declared on May 20, 1936. At that time the tax status of the petitioners was only a matter of conjecture.
The petitioners cite Welch v. Henry,305 U.S. 134, to support their position, but we note in the Court's opinion the following statement:
Property taxes and benefit assessments of real estate, retroactively applied, are not open to the objection successfully urged in the gift cases. * * * Similarly a tax on the receipt of income is not comparable to a gift tax. We can not assume that stockholders would refuse*885 to receive corporate dividends even if they knew that their receipt would later be subjected to a new tax or to the increase of an old one.
It is well established that a taxpayer has no vested right in the existing rates of taxation, exemptions, credits, etc. Welch v. Henry, supra;United States v. Hudson,299 U.S. 498; Milliken v. United States,283 U.S. 15. In the cases at bar the petitioners are in no better position than the taxpayers who were parties in the cited cases.
The petitioners' fourth point is that, in any event, the stock dividends under consideration did not constitute income under the Sixteenth Amendment to the Constitution. They advance the same argument as that made under the first point and suggest that in the Kelly Trust, Keister, and Strassburger cases the Board erroneously applied the statement of the court in the Koshland case that a stockholder receives income when a stock dividend gives him "an interest different from that which his former stock holdings represented." As stated heretofore, we reaffirm the conclusion reached in those cases.
The petitioners' final argument*886 is that even if the stock dividend be held taxable, Progress did not have sufficient earnings and profits accumulated since February 28, 1913, from which to pay, in 1936, all of the stock dividends and the cash dividends paid on the preferred and common stock.
*422 During 1936 Progress paid dividends of $250,000 in its preferred stock and $169,166.67 in cash, or a total of $419,166.67. Its income for the year, available for dividends, was not less than $268,031.26. The amount of its earnings and profits accumulated from March 1, 1913, to January 1, 1936, was at least $292,851.80. Therefore, the aggregate amount of earnings and profits from March 1, 1913, to the end of 1936 available for dividends, was $560,883.06. This sum was ample to cover all distributions made during 1936.
Petitioners' chief contention with respect to this phase of the cases is that all of the losses of the subsidiaries of Progress, aggregating $302,858.14, must be deducted in determining its earnings and profits during the period from March 1, 1913, to January 1, 1934. They claim that the subsidiaries were only "departments" of Progress and were maintained solely to take advantage of the "trade*887 names" borne by those companies.
The obvious answer to this contention is that in making the above computation of earnings and profits accumulated between March 1, 1913, and December 31, 1935, the losses of subsidiaries have been deducted and the earnings and profits to December 31, 1936, are nevertheless sufficient to cover the dividends. It may be added, however, that if an issue were made over the propriety of such deductions, the evidence does not support petitioners' position as to the status of the subsidiaries.
The books of Progress showed definite, determinable sums charged as losses from the operations of the various subsidiaries. They had their own sales and expense accounts, kept separately from the Progress items. Progress, as the parent company, supervised the several operations of its subsidiaries, which had their own individual outlets. In fact, the consolidated return of Progress and its subsidiaries for the year 1924 shows the assets and liabilities of each affiliated corporation. Items such as inventories, accounts receivable, advertising, sample books, etc., owned by the subsidiaries appear thereon. One asset common to all subsidiary companies is an item*888 called "trade name", but that is a possession of those companies individually and not of Progress.
In 1934, when the privilege of filing a consolinated return was withdrawn (except to railroad corporations), the subsidiaries proceeded to declare and pay dividends to Progress. In so far as the record shows, their several operations were carried on precisely as in the preceding years. Their corporate entity was preserved; their corporate identity recognized; and their corporate functions exercised. The petitioners cite various cases holding that when subsidiaries are nothing more than "voiceless departments or instrumentalities of the parent corporation" their separate entities may be disregarded. The *423 facts in the cases at bar do not bring them within the scope of such decisions. The effect of this conclusion, if applied in the present cases, would be to increase by a large sum the amount of earnings and profits available for distribution in 1936.
Decisions will be entered under Rule 50.
Footnotes
1. Due to an obvious error in the amended petitions, those figures are misstated therein. ↩
*. On preferred stock. ↩
2. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
(a) DEFINITION OF DIVIDEND. - The term "dividend" when used in this title (except in section 203(a)(3) and section 207(c)(1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.
* * *
(f) STOCK DIVIDENDS. -
(1) GENERAL RULE. - A distribution made by a corporation to its shareholders in its stock or in rights to acquire its stock shall not be treated as a dividend to the extent that it does not constitute income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution↩.