This case brings here for review a judgment which applies Section 42, Revenue Act of 1938, so as to 'accrue' corporate dividends on the date of their declaration rather than the later record or payment dates. The result is that the dividends are taxable as income to a decedent taxpayer instead of to his estate.
Certiorari was granted because of a conflict in conclusion between Tar Products Corporation v. Commissioner of Internal Revenue, 3 Cir., 130 F.2d 866, 143 A.L.R. 593, and this case as to the date of accrual of corporate dividends. The resolution of this conflict is complicated by further conflicts between the decision below and those in other circuits as to whether the governing rule is to be drawn from federal or state law. Helvering v. McGlue's Estate, 4 Cir., 119 F.2d 167, 171; Commissioner of Internal Revenue v. Cohen, 5 Cir., 121 F.2d 348, 349.
The decedent, Henry W. Putnam, died on March 30, 1938. Prior to his death several corporations in which he owned stock declared dividends which by the resolutions were payable and were paid to stockholders of record on dates which were subsequent to his death. Each of these dividends, aggregating in all $24,051.75, was held by the Commissioner to constitute income to the decedent under the provisions of Section 42. The Board of Tax Appeals decided that the time of accrual depends upon the varying state decisions as to when a corporate debt arises upon a declaration of dividend with a provision for its payment to stockholders of record on some future date. 45 B.T.A. 517. This resulted in an agreement in part with the Commissioner's determination.
The Circuit Court of Appeals was of the view that federal law controlled the disposition of the controversy and that the dividend accrued on its declaration. Commissioner of Internal Revenue v. Guaranty Trust Co., etc., 2 Cir., 144 F.2d 756.
We think the federal law controls. A federal revenue act applicable throughout the nation fixes liability on the decedent taxpayer under Section 42 if the dividend is 'accrued.' The meaning of that word in this section should be uniform unless Congress has shown an intention to permit its meaning to be varied by state law. Burnet v. Harmel, 287 U.S. 103, 110, 53 S.Ct. 74, 77, 77 L.Ed. 199; Palmer v. Bender, 287 U.S. 551, 555, 53 S.Ct. 225, 226, 77 L.Ed. 489; United States v. Pelzer, 312 U.S. 399, 402, 403, 61 S.Ct. 659, 660, 661, 85 L.Ed. 913. Section 42 lays down the test of accrual for the taxation of a decedent's income and the definition of the meaning and extent of that test is a federal responsibility. The present problem is closely akin to that resolved in Lyeth v. Hoey, 305 U.S. 188, 193, 59 S.Ct. 155, 158, 83 L.Ed. 119, 119 A.L.R. 410. In that case an heir received a sum in settlement of litigation over a will. Its taxability as income under the federal statute depended upon the meaning of the statutory exemption 'acquired by inheritance.' The law of the testator's domicile held sums paid as will compromises were not inheritances. Acting on the principle that in the interest of uniformity exemptions under federal statutes should be determined by federal courts, we reached a contrary federal rule. The same principle leads to our conclusion in this case.
We recently examined the Congressional purpose in the enactment of Section 42. Helvering v. Enright's Estate, 312 U.S. 636, 61 S.Ct. 777, 85 L.Ed. 1093. That purpose was to cover into income the 'accruals' theretofore unreported as income of a decedent taxpayer who reported on a cash basis. By 'accrual' the income so accrued became subject to income tax as decedent's income. These 'accruals' had theretofore escaped taxation as the income of decedent, because no cash was received during decedent's life. Moreover, such payments were held not to be the income of decedent's estate on the theory that the 'accrual' was a part of the corpus of the estate at death and therefore the estate's subsequent receipt of the 'accruals' as cash was not income to the estate. Helvering v. Enright's Estate, supra, 312 U.S. at page 639, 61 S.Ct. at page 779, 85 L.Ed. 1093. In the instant case there is no avoidance of income taxes such as Section 42 was designed to prevent. If the dividend does not 'accrue' to decedent on the date of declaration so as to be taxable as income to him, it will appear as an item of income in the income tax return of the estate or of the stockholder who owns the stock on the record date. Taxwise, it may be important upon whom the tax falls as the sum assessed may vary according to the tax bracket of the taxpayer. This result, however, is apart from the purpose of Congress in enacting Section 42 and is not significant in the interpretation of the section.