The strongest argument in favor of the plaintiffs in the present case is that the Treasury Department itself has made rulings which were contrary to the theory for which it here contends.Revenue Ruling 24, Cum.Bull.1953-1, p. 262, is summarized in the headnote thus:
'The distribution of principal cash to an income life beneficiary of a trust in lieu of a nontaxable stock dividend which was not permitted to be distributed under State law, does not result in taxable income to the life beneficiary except to the extent that income was realized by the trust upon conversion of the dividend stock to cash and was properly distributed with the principal.'
The basis for this 1953 Revenue Ruling appears in the statement therein that 'The Bureau has for many years followed its position * * * that income of a trust retains in the hands of the beneficiary the same character which it possessed in the hands of the trustee.'Revenue Ruling 24 cites as a precedent I.T. 1622, Cum.Bull. II-I (1923) which states in par:
'Since, under the doctrine laid down in Eisner v. Macomber, (1920, 252 U.S. 189, 40 S. Ct. 189, 64 L. Ed. 521) supra, a stock dividend is not income in the hands of the trustee, it can not be considered income when distributed by the trustee to the beneficiaries.'
This quotation shows the error in the reasoning of the Treasury Department. In the Eisner case the Supreme Court held that stock dividends are not taxable for income tax purposes, saying, 252 U.S. at page 202, 40 S. Ct. at page 191, quoting from Towne v. Eisner, 1918, 245 U.S. 418, 38 S. Ct. 158, 62 L. Ed. 372:
'A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their interests are not increased. * * * The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones.'
The doctrine of Eisner v. Macomber, 1920, 252 U.S. 189, 40 S. Ct. 189, 64 L. Ed. 521, has no application to a distribution from a trust estate to beneficiaries and it should not have been applied to trust situations. It is true, as the Supreme Court pointed out, that a stock dividend takes nothing from the property of a corporation and adds nothing to the interests of the shareholders, but it is not true, and this shows the error in the reasoning of the Treasury Department, that a distribution from a testamentary trust to its beneficiaries takes nothing from the trust estate and adds nothing to the interests of the beneficiaries. A distribution from a testamentary trust to life beneficiaries necessarily takes something from the trust and the remaindermen. It gives something to the life beneficiaries at the expense of the remaindermen.
It is entirely clear that the law is as it has been enunciated by the First and Second Circuits. The law so enunciated will be followed and the administrative pronouncements of the Treasury Department antedating the 1954 Code will be disregarded.
Judgment will be entered in favor of the defendant in each case.