dend distributes no profits; that under the Act of 1916 "the tax is on the stockholder's share in corporate earnings," when in truth a stockholder has no such share, and receives none in a stock dividend; that "the profits are segregated from his former capital, and he has a separate certificate representing his invested profits or gains," whereas there has been no segregation of profits, nor has he any separate certificate representing a personal gain, since the certificates, new and old, are alike in what they represent,-a capital interest in the entire concerns of the corporation.

We have no doubt of the power or duty of a court to look through the form of the corporation and determine the question of the stockholder's right, in order to ascertain whether he has received income taxable by Congress without apportionment. But, looking through the form, we cannot disregard the essential truth disclosed; ignore the substantial difference between corporation and stockholder; treat the entire organization as unreal; look upon stockholders as partners, when they are not such; treat them as having in equity a right to a partition of the corporate assets, when they have none; and indulge the fiction that they have received and realized a share of the profits of the company which in truth they have neither received or realized. We must treat the corporation as a substantial entity separate from the stockholder, not only because such is the practical fact, but because it is only by recognizing such separateness that any dividend-even one paid in money or property-can be regarded as income of the stockholder. Did we regard corporation and stockholders as altogether identical, there would be no income except as the corporation acquired it; and while this would be. taxable against the corporation as income under appropriate provisions of law, the individual stockholders could not be separately and additionally taxed with respect to their several shares even when divided, since if there were entire identity between them and the company they could not be regarded as receiving anything from it, any more than if one's money were to be removed from one pocket to another.

Conceding that the mere issue of a stock dividend makes the recipient no richer than before, the government nevertheless contends that the new certificates measure the extent to which the gains accumulated by the corporation have made him the richer. There are two insuperable difficulties with this: In the first place, it would depend upon how long he had held the stock whether the stock dividend indicated the extent to which he had been enriched by the operations of the company; unless he had held it throughout such operations, the measure would not hold true. Secondly, and more important for present purposes, enrichment through increase in value of capital investment is not income in any proper meaning of the

term.

The complaint contains averments respecting the market prices of stock such as plaintiff held, based upon sales before and after the

stock dividend, tending to show that the receipt of the additional shares did not substantially change the market value of her entire holdings. This tends to show that in this instance market quotations reflected intrinsic values,—a thing they do not always do. But we regard the market prices of the securities as an unsafe criterion in an inquiry such as the present, when the question must be, not what will the thing sell for, but what is it in truth and in essence. It is said there is no difference in principle between a simple stock dividend and a case where stockholders use money received as cash dividends to purchase additional stock contemporaneously issued by the corporation. But an actual cash dividend, with a real option to the stockholder either to keep the money for his own or to reinvest it in new shares, would be as far removed as possible from a true stock dividend, such as the one we have under consideration, where nothing of value is taken from the company's assets and transferred to the individual ownership of the several stockholders and thereby subjected to their disposal.

The government's reliance upon the supposed analogy between a dividend of the corporation's own shares and one made by distributing shares owned by it in the stock of another company calls for no comment beyond the statement that the latter distributes assets of the company among the shareholders, while the former does not; and for no citation of authority except Peabody v. Eisner, 247 U. S. 347, 349, 350.

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That Congress has power to tax shareholders upon their property interests in the stock of corporations is beyond question; and that such interests might be valued in view of the condition of the company, including its accumulated and undivided profits, is equally clear. But that this would be taxation of property because of ownership, and hence would require apportionment under the provisions of the Constitution, is settled beyond peradventure by previous decision of this court.

The government relies upon The Collector v. Hubbard (Brainard v. Hubbard) (1870) 12 Wall. 1, 17, 20 L. ed. 272, 278, which arose under § 117 of the Act of June 30, 1864 (chap. 173, 13 Stat. at L. 223, 282, Comp. Stat. § 6368, 4 Fed. Stat. Anno. 2d ed. p. 324), providing that "the gains and profits of all companies, whether incorporated or partnership, other than the companies specified in this section, shall be included in estimating the annual gains, profits, or income of any person entitled to the same, whether divided or otherwise." The court held an individual taxable upon his proportion of the earnings of a corporation although not declared as dividends, and although invested in assets not in their nature divisible. Conceding that the stockholder for certain purposes had no title prior to dividend declared, the court nevertheless said: (p. 18) "Grant all that, still it is true that the owner of a share of stock in a corporation holds the share with all its incidents, and that among those incidents is the right to receive all future dividends; that is,

his proportional share of all profits not then divided. Profits are incident to the sshare to which the owner at once becomes entitled provided he remains a member of the corporation until a dividend is made. Regarded as an incident to the shares, undivided profits are property of the shareholder, and as such are the proper subject of sale, gift, or devise. Undivided profits invested in real estate, machinery, or raw material for the purpose of being manufactured are investments in which the stockholders are interested, and when such profits are actually appropriated to the payment of the debts of the corporation they serve to increase the market value of the shares, whether held by the original subscribers or by assignees." In so far as this seems to uphold the right of Congress to tax without apportionment a stockholder's interest in accumulated earnings prior to dividend declared, it must be regarded as overruled by Income Tax Cases (Pollock v. Farmers' Loan & T. Co.) 158 U. S. 601, 627, 628, 637. Conceding The Collector v. Hubbard was inconsistent with the doctrine of that case, because it sustained a direct tax upon property not apportioned among the states, the government nevertheless insists that the 16th Amendment removed this obstacle, so that now the Hubbard Case is authority for the power of Congress to levy a tax on the stockholder's share in the accumulated profits of the corporation even before division by the declaration of a dividend of any kind. Manifestly this argument must be rejected, since the Amendment applies to income only, and what is called the stockholder's share in the accumulated profits of the company is capital, not income. As we have pointed out, a stockholder has no individual share in accumulated profits, nor in any particular part of the assets of the corporation, prior to dividend declared.

Thus, from every point of view, we are brought irresistibly to the conclusion that neither under the 16th Amendment nor otherwise has Congress power to tax without apportionment a true stock dividend made lawfully and in good faith, or the accumulated profits behind it, as income of the stockholder. The Revenue Act of 1916, in so far as it imposes a tax upon the stockholder because of such dividend, contravenes the provisions of article 1, § 2, cl. 3., and article 1, 89, cl. 4, of the Constitution, and to this extent is invalid notwithstanding the 16th Amendment.

Judgment affirmed.

Justices Holmes, Day and Brandeis dissented.

Note.-Peck v. Lowe, 247 U. S. 165, (1918), a tax levied under the Federal Income Tax Law upon the net income of a domestic corporation derived from the business of shipping goods to foreign countries, and there selling them is not forbidden by the provision of Article 1, sec. 9 of the Constitution that "no tax or duty shall be laid on articles exported from any state." It was contended by the plaintiff, a domestic corporation, that Congress may no more burden exports and exportation by indirection than by a tax directly upon the article exported. The Court held that the clause forbidding an export duty of such nature must be interpreted to mean any tax which directly burdens the exportation. Where the tax is not laid on the articles themselves,

while in the course of exportation, the true test of its validity is whether it "so directly and closely" bears on the "process of exporting" as to be in substance on the exportation. The tax in question is not laid on the articles. On the contrary it is an income tax laid generally on net incomes.

Section 2.

POWER OF CONGRESS OVER COMMERCE.

Sub-Section A.

EXTENT OF THE FEDERAL POWER.

1. In General.

GIBBONS v. OGDEN.

9 WHEATON, 100. 1824.

One Aaron Ogden filed a bill praying for an injunction in the Court of Chancery of New York against Thomas Gibbons. The bill set out the several acts of the legislature of that State which secured to Robert R. Livingston and Robert Fulton the exclusive navigation of all the waters within the jurisdiction of the State, with boats moved by steam or fire, for a certain term of years, which had not expired at the time the suit was brought. The statutes also authorized the court to award an injunction, restraining any person whatever from navigating those waters with boats of that description. Livingston and Fulton had assigned to one John R. Livingston, who in turn had assigned to the complainant, Ogden, the right to navigate the waters between Elizabethtown and other places in New Jersey and the City of New York. Gibbons, the defendant, in violation of the exclusive privilege held by Ogden, was running two steamboats between New York and Elizabethtown. The injunction prayed for was granted, but Gibbons in his answer stated that his boats were duly enrolled and licensed to be employed in carrying on the coasting trade, under an Act of Congress of February 18th, 1793, and he insisted on his right by virtue of such license to navigate the waters between the two ports. An appeal from the order granting the injunction was taken to the highest court of New York State, which upheld the injunction, from which decree the cause was carried to the United States Supreme Court.

CHIEF JUSTICE MARSHALL delivered the opinion of the court:

The appellant contends that this decree is erroneous, because the laws which purport to give the exclusive privilege it sustains, are repugnant to the Constitution and laws of the United States. They are said to be repugnant

1. To that clause in the Constitution which authorizes Congress to regulate commerce.

2. To that which authorizes Congress to promote the progress of science and useful arts.

The State of New York maintains the constitutionality of these laws; and their legislature, their council of revision, and their judges, have repeatedly concurred in this opinion.

*

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The words are: "Congress shall have power to regulate commerce with foreign nations, and among the several States, and with the Indian tribes."

The subject to be regulated is commerce; and our Constitution being, as was aptly said at the bar, one of enumeration, and not of definition, to ascertain the extent of the power, it becomes necessary to settle the meaning of the word. The counsel for the appellee would limit it to traffic, to buying and selling, or the interchange of commodities, and do not admit that it comprehends navigation. This would restrict a general term applicable to many objects, to one of its significations. Commerce, undoubtedly, is traffic, but it is something more, it is intercourse. It describes the commercial intercourse between nations, and parts of nations, in all its branches, and is regulated by prescribing rules for carrying on that intercourse. The mind can scarcely conceive a system for regulating commerce between nations, which shall exclude all laws concerning navigation, which shall be silent on the admission of the vessels of the one nation into the ports of the other, and be confined to prescribing rules for the conduct of individuals, in the actual employment of buying and selling, or of barter.

If commerce does not include navigation, the government of the Union has no direct power over that subject, and can make no law prescribing what shall constitute American vessels, or requiring that they shall be navigated by American seamen. Yet this power has been exercised from the commencement of the government, has been exercised with the consent of all, and has been understood by all to be a commercial regulation. All America understands, and has uniformly understood, the word "commerce," to comprehend navigation. It was so understood, and must have been so understood, when the Constitution was framed. The power over commerce, including navigation, was one of the primary objects for which the people of America adopted their government, and must have been contemplated in forming it. The convention must have used the word in that sense, because all have understood it in that sense; and the attempt to restrict it comes too late.

If the opinion that "commerce," as the word is used in the Constitution, comprehends navigation also, requires any additional confirmation, that additional confirmation is, we think, furnished by the words of the instrument itself. * * *

The 9th section of the 1st article declares that "no preference shall be given, by any regulation of commerce or revenue, to the