279 U.S.

340
49 S.Ct. 333
73 L.Ed. 729

POSADOS, Collector of Internal Revenue of the Philippine

Islands,
v.
WARNER, BARNES & CO., Limited. SAME v. MENZI.
Nos. 251, 252.
Argued Feb. 26, 1929.
Decided April 22, 1929.

Mr. Wm. Cattron Rigby, of Washington, D. C., for petitioner.

Mr. Martin Taylor, of New York City, for respondents.
Mr. Justice BUTLER delivered the opinion of the Court.

1No. 251.
2

Respondent sued petitioner in the court of first instance of Manila to recover a

tax alleged to have been illegally imposed on a stock dividend. The tax was
levied under Act 2833 of the Philippine Islands, approved March 7, 1919, as
amended by Act 2926, March 26, 1920. The provision here involved is
substantially like that in section 2(a) of the Revenue Act of 1916 for the United
States (39 Stat. 757), which was held invalid in Eisner v. Macomber, 252 U. S.
189, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570. The trial court deemed that
and other decisions of this court authoritative, held the stock dividend was not
income, and gave judgment for plaintiff. Defendant appealed to the supreme
court. One of the justices was disqualified because, as Attorney General, he had
acted for the defendant in this case. The appeal was submitted to the court
consisting of eight justices, who divided evenly. Then the case was referred to
the first division, consisting of five justices. Section 138, Revised
Administrative Code of 1917. The opinion of the division, four justices
concurring and one dissenting, upheld the lower court, and thereupon the
Supreme Court affirmed the judgment.

There was an agreed statement of facts, the substance of which follows.

Respondent is a British corporation authorized to carry on business in the
Philippine Islands. In 1923, it owned stock in a domestic corporation and
received a dividend of profits accruing since March 1, 1913, which was paid by
the company in its shares, having a par value of 43,500 pesos. Petitioner, as
collector of internal revenue, included the amount in respondent's income for
1923 and levied thereon the tax in question. Respondent paid under protest,
requested petitioner to refund the amount, and, that being refused, brought this
suit.

Section 1(a) imposes an annual normal tax of 3 per cent. upon the net income
of individuals, and section 1(b) provides that, in addition to such tax, there shall
be levied and paid upon such income graduated surtaxes at specified rates.

Section 2(a) provides: '* * * The taxable net income of a person shall include
gains, profits, and income derived from salaries * * * also from * * * dividends
* * * or gains, profits and income derived from any source whatever.'

Section 10(a) provides: 'There shall be * * * paid annually upon the total net
income received in the preceding calendar year from all sources by every
corporation * * * a tax of three per centum upon such income * * * including
the income derived from dividends. * * *' Section 25(a) provides: 'The term
'dividends' as used in this law shall be held to mean any distribution made or
ordered to be made by a corporation * * * out of its earnings or profits accrued
since March first, nineteen hundred and thirteen, and payable to its
shareholders, whether in cash or in stock of the corporation. * * * Stock
dividend shall be considered income, to the amount of the earnings or profits
distributed.'

The petitioner admits that, strictly speaking, a stock dividend is not income. But
he insists, and respondent concedes, that, in the absence of constitutional
restriction, such dividends may be taxed. And the parties agree that the tax in
question is within the scope and intent of the statute.

The Supreme Court held that the tax on stock dividends is a property tax and
that the graduated rates infringe the provision of section 3 of the Organic Act of
August 29, 1916, c. 416, 39 Stat. 545 (48 USCA 1008), which declares that
the rule of taxation in the Islands shall be uniform. But in this case that point
has no foundation in fact. The graduated rates are applied and imposed only
upon individuals. Section 1(b). Corporations such as respondent are subject
only to a flat rate of 3 per cent. Section 10(a). And that rate applied to the stock

dividend produced 1,305 pesos, the tax paid. The rule of uniformity was not
transgressed.
9

And in support of the judgment below it is insisted that the provision imposing
a tax upon stock dividends violates that clause of section 3 of the Organic Act
which declares: 'That no bill which may be enacted into law shall embrace
more than one subject, and that subject shall be expressed in the title of the bill.'

10

Act 2833 is entitled: 'An act establishing the income tax, making other
provisions relating to said tax, and amending certain sections of act numbered
twenty-seven hundred and eleven.' The insular Supreme Court held that the
subject of the act was not adequately expressed because a tax on stock
dividends is one upon capital, while the title specified only the income tax. But
in our opinion that is too strict a construction. Provisions in substance the same
as that above quoted are found in many state constitutions. The purpose is to
prevent the inclusion of incongruous and unrelated matters in the same measure
and to guard against inadvertence, stealth and fraud in legislation. When bills
conform to such requirements, their titles serve conveniently to apprise
legislators and the public of the subjects under consideration. Courts strictly
enforce such provisions in cases that fall within the reasons on which they rest.
But, as freedom required or convenient for the effective exertion of the
legislative power ought not unnecessarily or lightly to be interfered with, the
courts disregard mere verbal inaccuracies, resolve doubts in favor of validity,
and hold that, in order to warrant the setting aside of enactments for failure to
comply with the rule, the violation must be substantial and plain. Louisiana
Southern Bank v. Pilsbury, 105 U. S. 278, 289, 26 L. Ed. 1090; Montclair v.
Ramsdell, 107 U. S. 147, 153, 2 S. Ct. 391, 27 L. Ed. 431; Read v. Plattsmouth,
107 U. S. 568, 578, 2 S. Ct. 208, 27 L. Ed. 414; City of South St. Paul v.
Lamprecht Bros. Co. (C C. A.) 88 F. 449, 451. Johnson v. Harrison, 47 Minn.
575, 50 N. W. 923, 28 Am. St. Rep. 382; Cooley's Constitutional Limitations
(7th Ed.) p. 202 et seq.; Sutherland, Statutory Construction (2d Ed.) 111,
115-118. The Philippine income tax law was passed before our decision in
Eisner v. Macomber, supra. The Revenue Acts of 1916 and 1918 (19 Stat. 756;
40 Stat. 1057), after which that measure was patterned, treated stock dividends
as income. It was then well known by those giving attention to that sort of
taxation that Congress treated stock dividends as taxable income. The inclusion
of such distributions within the meaning of 'income' as used in taxing statutes
was not calculated or likely to mislead. The title was sufficient to notify
legislators and others interested that the bill might include and tax stock
dividends. Tax Commissioner v. Putnam, 227 Mass. 522, 531, 116 N. E. 904,
L. R. A. 1917F, 806. And that form of property was not so unrelated to the
subject of the bill as expressed in the title that its inclusion was within the

mischief which the quoted provision of the Organic Act was intended to
prevent. The point cannot be sustained.
11

In Fisher v. Trinidad, 43 Phil. 973, the insular Supreme Court held that stock
dividends are not taxable as income under the act here under consideration. The
opinion of the first division in this case cites that decision and states that it has
become a rule of property. Respondent supports that view, argues that the
shareholders and the corporation had a right to rely on that decision, and asserts
that it disposes of the issues here presented.

12

The question in that case arose upon demurrer to the complaint. The decision
was announced October 30, 1922. Subsequently, the taxpayer withdrew his
protest and the case was dismissed as moot six months before this suit was
commenced. 45 Phil. 751. The even division of the eight justices and the
opinion of the first division in this case make it clear that the Supreme Court
itself did not consider the question of the taxability of stock dividends as
income to be foreclosed. The decisions of the highest court of the Philippines
on such questions are reviewable here. The doctrine of stare decisis does not
apply with full force prior to decision in the court of last resort. The
circumstances negative the claim that the case established any 'rule of
property.' Calhoun G. M. Co. v. Ajax G. M. Co., 27 Colo. 1, 11, 59 P. 607, 50
L. R. A. 209, 83 Am. St. Rep. 17.

13

Moreover, Fisher v. Trinidad merely decided that 'stock dividends' are not
taxable as 'income' under the act. Petitioner does not combat that view or claim
that such distributions do constitute income. The Philippine Legislature has
power to lay a tax in respect of the advantage resulting to recipients from the
allotment and delivery of such dividend shares. Swan Brewing Co. v. Rex.
(1914) A. C. 231. Respondent rightly concedes that, there being no
constitutional restriction, such dividends may be taxed and that the statute
discloses a purpose to tax them. The decision of this court in Eisner v.
Macomber rested on constitutional provisions not applicable to the Philippine
Islands.

14

Respondent suggests no ground on which the judgment of the lower court can
be sustained.

No. 252.
15
16

Respondent sued petitioner in the court of first instance of Manila to recover a

tax on a stock dividend. That court held the tax valid but the Supreme Court

reversed, following its decision in No. 251.

17

Respondent owned capital stock in Menzi & Co., Inc., a corporation organized
under the laws of the Philippines. In 1923, that company paid to respondent out
of profits made after March 1, 1913, a dividend in stock of the par value of
50,000 pesos. The collector included that amount in respondent's income for
that year, and, by reason of such inclusion, assessed and collected from him a
tax of 637.87 pesos.

18

This case differs from No. 251 in that here the taxpayer is an individual subject
to surtaxes on income while corporations are subject to a flat rate. The Supreme
Court held that, as stock dividends do not constitute income, the tax is on
property and that therefore the specified graduated rates violate the rule of
uniformity. But the record does not disclose the rate at which the tax was
assessed or show any facts to support the suggestion that the required equality
was lacking.

19

In other respects, this case is the same as No. 251.

20

Judgments reversed.