and [243] the present relation of the company is the outcome of the settlement, and, it may be said, is the substitute of the [244] rights and control the Southern Pacific, as lessee, had of the Central Pacific Railroad Company.

Was it a justifiable substitute? The answer should be in the affirmative. When the Act of 1898 was passed, the situation was serious, the problem complex, and because the problem was complex three Cabinet officers were selected to solve it. These were the Secretary of the Treasury, the Secretary of the Interior, and the Attorney General. Their prominence in the government, their official concern with the subjectmatter, assured fidelity in the execution of the trust, and repels charge or intimation that they were, or could be, actuated by anything other than a strict consideration of duty and the exercise of their trust. And their ability assured judgment in the selection of means. The problem, it is to be remembered, was something more than to ascertain the amount of the debt. It involved, it might be, foreclosure of the government's liens, and, it might also be, government ownership and all that that

about the same amount. It was to be rescued from this subordination, and given independent and certain solvency. The power given to the commissioners was necessary to and commensurate with the purpose. The power was "to settle the indebtedness" "upon such terms and in such manner" as "might be" "agreed upon," and to take "such security as" might "seem expedient." The only limitation was that the payment was not to be extended more than ten years.

Necessarily, therefore, there was power to view the situation and judge of it, its legal and practical aspects, and what was possible in law and fact in the interest of all concerned to be done, and it may be presumed that the commission found that there was nothing exigent in the [245] situation, or that demanded the separation of the Southern Pacific from the Central Pacific, and that the guaranty of the former could be accepted, and all that would follow from it. And it is to be remembered that the action of the commission received the sanction of the President, and was reported to Congress. If either had objected, the settlement as planned could not have been accomplished, and both would have objected if they had discerned anything sinister or inimical to law in it or that would result from it.

It is said, however, that there was no Q. And that plan could not have been carried through without the intervention and aid of the Southern Pacific Company? The question was objected to.

Q. Mr. Speyer, considering the terms required by the act of Congress, namely, the requirement that the entire debt of fiftyeight million, eight hundred thousand dollars, in round numbers, would have to be paid in ten years, in twenty semiannual instalments, would anyone at all familiar with the Central Pacific affairs know that the Central Pacific, with its own resources and credit, could not comply with those conditions?

affirmative approval by Congress, and that its approval cannot be assumed from nonaction.

The government makes much of this, ignoring all else, and ventures, in a kind of desperation against the circumstances, the incredible assertion that Congress was ignorant of the guaranty of the Southern Pacific and its contributing efficiency. And this against an irresistible presumption to the contrary and in defiance of the fact that the Attorney General reported to Congress the terms of settlement, and that the notes taken in settlement were guaranteed by the Southern Pacific; and in defiance of the further fact that the bonds that it was provided were to be deposited as security for the notes with the Secretary of the Treasury had indorsed upon them the guaranty of the Southern Pacific, and that the financial and commercial journals of the country, addressing the business world, the world that was to accept the notes which Congress authorized the Secretary to sell, explained the settlement and the relation of the Southern Pacific to it, and the assurance of safety and value the guaranty of the Southern Pacific gave.

I need not dwell on the contention of the government; the court has not been impressed by it. The court's view is, rejecting that of the district court, that there was no acceptance by the commission of the Southern Pacific's [246] guaranty which carried obligation, and that the guaranty was the prompting of interest on the part of the Southern Pacific. I concede the latter. The enterprise that is necessary, and is exhibited in the conduct of great railroad systems whose traffic is concerned with a continent, is not induced by the altruistic, it is, and naturally must be, prompted by interest; but it, as other transactions of the business world, is entitled to legal sanction and remedy.

The court asserts an interest in the Southern Pacific that urged its guaranty, but does not explain the interest. It is of pertinent concern to consider what it was. It manifestly was no other than the relation of the company to the Central Pacific Railway Company through stock ownership. The company would necessarily have no concern or interest in the Central Pacific (the new company), or the payment of the

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old company's debts to the government, if it was to be separated from the Central Pacific and declared a competitor and a business antagonist; and this must have been apparent to everyone connected with the transactions if they gave any reflection to them,-anything but a haphazard and reckless attention, inconsiderate of practical and legal consequences. This cannot be assumed and the contrary must be; that is, that the guaranty of the Southern Pacific was accepted as necessary to the settlement of the debt.

I repeat, and summarize, that the situation was of great concern to the government. Its solution was the consummation desired, and through the aid of the Southern Pacific. The company's guaranty was assurance to the business world that behind the notes and bonds of the Central Pacific were the great properties of the Southern Pacific and the competency of its management. And the company made sacrifices in addition to the guaranty, and they and it were accepted by the government, and therefore, the benefit that the company expected cannot be denied it.

[247] There was no thought in anyone's mind that the acquisition of stock by the Southern Pacific in the Central Pacific would be a restraint upon competition, or a detriment to the public interest. The attitude of those concerned in the transaction can be accurately realized by the reflection that the interest-control, if it may be so called

that the Southern Pacific acquired in or over the new company (the Railway Company) was not greater nor more offensive to law than it had in or over the old company (the Railroad Company). The latter control existed from the enactment of the law until it was superseded by the agreement,-a period of eight years. And there was no revulsion against or condemnation of the control, not by the government, whose duty it was to proceed against it if it violated the Anti-trust Law; not by any business interest, though for such interest the law was enacted as a protection. This suit was not brought until 1914,fifteen years after the agreement; not, however, by the government of the agreement, but by the government of a much later time.

I think, however, that the decree of the District Court should be affirmed.

259 U. S.

V.

SAFE DEPOSIT & TRUST COMPANY OF

BALTIMORE, Guardian of Frank R.
Brown.

(See S. C. Reporter's ed. 247-255.) Internal revenue — income tax - subscription rights.

1. The preferential right of existing stockholders in a corporation to subscribe at a specified price for an equivalent number of shares of a new issue of capital stock authorized by state statutes and certain resolutions of the stockholders, in and of itself constituted no gain, profit, or income taxable under U. S. Const., 16th Amend[For other cases, see Internal Revenue, III.

ment.

b, in Digest Sup. Ct. 1908.] Internal revenue income tax - proceeds of sale of stock subscription | rights.

2. Only so much of the proceeds of a sale of the preferential right of existing stockholders in a corporation to subscribe at a specified price for an equivalent number of shares of a new issue of capital stock, authorized by state statutes and certain resolutions of the stockholders, as represented a realized profit over and above the cost to the stockholders of what was sold, is taxable as income, under the Act of February 24, 1919, and such profit is properly computed by adding to the fair market value of each share of the old stock at the date of acquisition (in this case its value when turned over to the guardian of the minor son of a deceased stockholder) the sum required to be paid to the corporation for each share of the new stock, and by treating the total as the cost of each two shares, one of which was to pass to the purchaser of the right, the acquisition and sale both being within the same taxing year. [For other cases. see Internal Revenue, III. b, in Digest Sup. Ct. 1908.]

IN ERROR to the District Court of the United States for the District of

Note. As to income tax on sales of property-see note to State ex rel. Bundy v. Nygaard, L.R.A.1917E, 566.

On right of existing stockholders to subscribe for increase of stock-see notes to Stokes v. Continental Trust Co. 12 L.R.A.(N.S.) 969, and Glenn v. Kittanning Brewing Co. L.R.A.1918D, 741.

On accretions of value determined by sale as income-see note to Merchants' Loan & T. Co. v. Smietanka, 15 A.L.R. 1311.

See same case below, 273 Fed. 822.
The facts are stated in the opinion.

Mr. William C. Herron argued the cause, and, with Solicitor General Beck, filed a brief for plaintiff in error:

The sale of the rights to subscribe to the stock in the Hartford Fire Insurance Company in the case at bar produced taxable income to some extent.

Eisner v. Macomber, 252 U. S. 189, 212, 64 L. ed. 521, 530, 9 A.L.R. 1570, 40 Sup. Ct. Rep. 189; Merchants' Loan & T. Co. v. Smietanka, 255 U. S. 509, 65 L. ed. 751, 15 A.L.R. 1305, 41 Sup. Ct. Rep. 386; Hays v. Gauley Mountain Coal Co. 247 U. S. 189, 62 L. ed. 1061, 38 Sup. Ct. Rep. 470; United States v. Cleveland, C. C. & St. L. R. Co. 247 U. S. 195, 62 L. ed. 1064, 38 Sup. Ct. Rep. 472.

In the case of a stock dividend, when the new stock has been issued, the effect is to transfer the amount of the dividend from the surplus of the corporation to its capital account.

Eisner v. Macomber, 252 U. S. 189, 210, 64 L. ed. 521, 530, 9 A.L.R. 1570, 40 Sup. Ct. Rep. 189.

Taking the definition of income adopted by this court, and applying it to a right to subscribe to new shares, after an analysis of the nature of said right, it appears that the method adopted by the Treasury Department in the case at bar is the prop

er method.

United States v. Phellis, 257 U. S. 156, ante, 180, 42 Sup. Ct. Rep. 63.

Mr. Arthur W. Machen, Jr., argued the cause and filed a brief for defendant in error:

A sale of a stockholder's right to subscribe to his quota of new shares is a sale of capital assets.

Towne v. Eisner, 245 U. S. 418, 62 L.

ed. 372, L.R.A.1918D, 254, 38 Sup. Ct. Rep. 158; Eisner v. Macomber, 252 U. S. 189, 64 L. ed. 521, 9 A.L.R. 1570, 40 Sup. Ct. Rep. 189; Peabody v. Eisner, 247 Ü. S. 347, 62 L. ed. 1152, 38 Sup. Ct. Rep. 546; Rockefeller v. United States, 257 U.' S. 176, ante, 186, 42 Sup. Ct. Rep. 68; United States v. Phellis, 257 U. S. 156, ante, 180, 42 Sup. Ct. Rep. 63; Doyle v. Mitchell Bros. Co. 247 U. S. 179, 62 L. ed. 1054, 38 Sup. Ct. Rep. 467; Real Estate Trust Co. v. Bird, 90 Md. 229, 44 Atl. 1048; Gray v. Portland Bank, 3 Mass. 364, 3 Am. Dec. 156; Jones v. Concord & M. R. Co. 67 N. H. 119, 38 Atl.