Appeals from the Baltimore City Court; Prendergast, J.
Brune, C. J., and Henderson, Horney, and Marbury, JJ., and Menchine, Associate Judge, Third Judicial Circuit, specially assigned. Horney, J., delivered the opinion of the Court.
These appeals present a question as to whether the receipt by stockholders of payments made in liquidation of a domestic or foreign corporation are taxable as income under the provisions of the state income tax laws.*fn1
The assessed taxpayers are all residents of Maryland. The dissolved corporation was the Monumental Radio Corporation. It had been incorporated under the laws of Maryland on July 12, 1926, and from that date until 1956, it had engaged in the business of operating a radio station in Baltimore.
When the plan of liquidation recommended by the board of directors and approved by the stockholders became effective, the corporation, as of June 15, 1956, had 38,667 shares of stock outstanding of the par value of $1 a share. As of the same date, the earned surplus was $503,120.05 accumulated from operations and $337,240.30 had been realized as a capital gain from the sale of assets. The corporation had no capital surplus or paid in surplus. Prior to the effective date of the liquidation plan, the sum of $812,007 had been deposited with a depository to provide for the initial payment of $21 a share to the stockholders in exchange for their certificates of stock.
Of the sum deposited, $38,667, representing the total par value of the outstanding stock, was a return of capital, and the balance of $773,340 was paid out of the earned surplus. The stockholders, on turning in their certificates, were issued, in lieu thereof, transferable receipts evidencing their right to future payments to be made out of the sum remaining after all liabilities of the corporation and the liquidating expenses had been paid. On or about October 10, 1957, a final sum of $61,867.20, or $1.60 per share, was deposited in the depository to be paid to the holders of the receipts. For several years prior to the adoption of the liquidation plan, the stock of the corporation had been actively traded in the over-the-counter market.
The appellant, John P. Rafferty, had purchased 150 shares of the stock for $29 per share, for a total of $4,350, and, since he received payments totaling only $3,390 under the plan of liquidation, his capital loss was $960. The appellant, Louise V. Lyons, had inherited 4,088 shares valued for estate tax purposes at $28 per share, for a total of $114,464, and, having received only $92,388.80 under the plan, her capital loss was $22,075.20. And the appellant, L. Waters Milbourne, owned 14,160 shares which he had acquired by purchase, inheritance and gift, at an average cost of $12.28 per share, for a total of $173,884.80, but, having received $320,016 under the plan, his capital gain was $146,131.20.
The assessments levied by the Comptroller of the Treasury against these appellants were made under the authority of § 288 (c) imposing a tax on taxable net income of individuals and corporations. In § 285, it is specified that taxable net income is the gross income of the taxpayer, less the deductions (allowed by § 281 or § 282 as limited by § 283) and the exemptions (allowed by § 286). In § 280, gross income is defined as "income from whatever source derived" and includes dividends as one of the enumerated sources, but subsection (a) of § 280 specifically provides that gross income shall not include "capital gains realized from the sale, exchange or other disposition of property held by a taxpayer." And, in § 279 (j), the meaning of dividend is said to be:
"[A]ny distribution made by a corporation (domestic or foreign) out of its net profits, whenever earned, to its stockholders or members, whether such distribution be made in cash or other property, except stock of the same class in the corporation. Amounts paid in liquidation or dissolution of a corporation shall be treated as dividends to the extent that they represent earnings of the corporation." [Italicization added.]
The appellants advance three contentions as to why the judgments appealed from should be reversed. Two of them concern the nature of the liquidation transaction and are somewhat interrelated. The other concerns the constitutionality of the statute imposing the tax. They say: (i) that the disposition of their stock during 1956 (the year in which the dissolution of the corporation became effective) was a sale, exchange or other disposition within the terms of § 280 (a) or § 283 (a); (ii) that that part of the payments received in 1956 represented a return of their capital investment and was not therefore includable in gross income under § 280; and (iii) that the imposition of an income tax on the return of capital invested in the stock violates Articles 15 and 23 of the Maryland Declaration of Rights and the due process clause of the Fourteenth Amendment to the Constitution of the United States. But there is no contention here, and apparently there ...