Miles v. Safe Deposit & Trust Co. of Baltimore

Background

A Maryland corporation acting as guardian for an infant inherited 35 shares of a Connecticut insurance company. That company doubled its authorized shares and gave existing shareholders the right to buy new shares at $150 each, one new share for each old share. With court permission the guardian sold the subscription rights for the 35 shares for $12,546.80 (about $358.48 per right), and the Commissioner taxed the entire amount as income under the 1919 tax law. The guardian paid the tax under protest and sued to recover it.

Reasoning

The Court considered whether the subscription right itself was taxable income or part of the guardian’s capital interest. It held the right was like a stock dividend or a capital enhancement and not income by itself. But when part of that capital interest is sold at a gain, the realized profit is taxable. The District Court computed cost using the old shares’ fair market value ($710 each, as used for estate tax purposes) plus the $150 issue price, treated the sale as a sale of part of the capital interest, and found a taxable gain of $2,746.80. The Supreme Court agreed, citing the same approach in prior decisions and Treasury guidance for dividing cost between old and new shares.

Real world impact

The ruling means guardians, trustees, and stockholders who sell subscription rights are taxed only on actual profit over their cost, not on full proceeds. Retained shares are not treated as taxable gain until sold, and ordinary market events affecting purchasers do not change the seller’s taxable amount.