Page:Harvard Law Review Volume 32.djvu/961

925 INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 925 is from United States bonds, and state taxation of corporate fran- chises measured by earnings some of which are from United States bonds. Flint v. Stone Tracy Co.^ permitted income from state bonds to be included in the measure of a federal excise on doing busi- ness in corporate capacity. Lynch v. Hornby ^ held that cash divi- dends paid to stockholders after the effective date of the federal income tax law of 19 13 were taxable to them as income, although the dividends were the fruit of a surplus accumulated by the cor- poration before the enactment of the Sixteenth Amendment. Cor- porate income which was exempt is taxable when transmuted into stockholder's income. Corporate income which cannot be taxed may be made the measure of a tax on doing business in corporate form. Here are precedents to lean on in sanctioning state taxation of stockholder's income without regard to its economic lorigin, and state taxation of income from United States bonds when the tax is not formally on income, but on a privilege measured by income. On the other hand, the distinction between the subject and the measure of the tax was dishonored by the court when Kansas sought to tax extra-state property in the guise of a tax on the privilege of a foreign corporation to do local business in connection with interstate business, ^ and the distinction between the shareholder's interest in the corporation and the property held by the corporation was disregarded when California sought to tax the stockholders of a national bank on the full value of their shares, without deduction for the contribution made to that value by the shares of another national bank owned by the corporation.^^ Obviously in dealing with the issues now under consideration the Supreme Court is at liberty to accept or reject formal distinctions as it chooses. That is one of the characteristic merits and demerits of formal distinc- tions. It is a demerit in that it makes prophecy and logical con- sistency difficult or impossible. It is a merit in that it permits a court to reach such results as its best judgment dictates. We have already indicated the reasons which may be advanced, in support of the position that the Supreme Court should adhere to " 220 U. S. 107, 31 Sup. Ct. Rep. 342 (1911). « 247 U. S. 339, 38 Sup. Ct. Rep. 543 (1918). '^ Note 42, supra.
 * Note 41, supra.