Pеtitioners are stockholders in a California personal holding corporation. During the year 1946 the directors of the holding company declared a dividend of an amount about equal to a capital gain it had realized on the sale of certain of its securities. The directors, in declaring the dividend, were actuated by a belief that the gains, unless distributed, would be subject to the personal hоlding company surtax. This -belief was based upon the advice of a certified public accountant. Each petitioner received the amount of dividend to which it or she was entitled and deposited the respective amounts in separate bank accounts. Later in the same year the directors learned that the advice they had received from the accountant was errоneous and, being of the opinion that a recall of the dividends and the return to it of the amounts paid to stockholders would decrease the taxable income of the stockholders and permit an advantageous investment of the said amounts, the holding comрany passed a resolution purporting to rescind the dividend and directing that a demand be made upon the stockholders for the rеturn of the amounts paid pursuant thereto. The demands were made and the stockholders complied.
The question posed is: Did the action of the directors in attempting to rescind the dividend and the repayment of the stockholders in the year the dividends were declared and received (1946) change the character of the dividend payments so as to authorize their exclusion from the gross inсome of petitioners? It is clear that the amounts of the dividends were received by petitioners under a claim of right without restrictiоn as to use. North American Oil Consolidated v. Burnet, 1932,
To the contrary respondent urgеs that the repayment of the dividends could not have been required, hence, the stockholders’ action in doing so was entirely voluntаry and the return by them of the amounts received was no more than a contribution to capital. Respondent urged in oral argument thаt our case of United States v. Lesoine, 9 Cir.,
The answer to whether the return of thе amounts received by petitioners could have been enforced must be found in a consideration of the legal effect оf the declaration of the dividend at the time it was made. That is to say, could the holding company have compelled restitution merely because of the alleged mistake of its directors had the stockholders elected to retain the dividends?
The dividend having been declared, the stockholders acquired a vested right to the- payment. In recognition of this right payment was made by the holding company and the moneys paid became the property of the stockholders, theirs to retain and do with as they chose, the holding company being without power to recapture it without stockholders’ consent. Meyers v. El Tejon Oil & Refining Co., 1946,
At the time of the declaration of the dividend the holding company was solvent and the stockholders received the dividend in good fаith. Thus, under the California statute then controlling, had the dividend been improper repayment could not have been compellеd. See California Civil Code (1945) § 364, St.1945, p. 2451. Rescission in this case is stated by petitioners to find warrant in § 1689 of the Civil Code of California. We, in accоrd with the Tax Court, do not think these provisions are applicable in the case of corporate dividends. Nor is petitioners’ reliance upon the rule set forth in § 19 of the Restatement of Restitution (1937)
2
well founded. Although the board of directors may in a sense be said to have conferred a benefit, retention of a legal dividend by the stockholders of a corporation may hardly be charаcterized as unjust, since the stockholders are in reality the owners of the fund which has been distributed among them. See Oilwell Chemical & Materials Co. v. Petroleum Supply
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Co., 1944,
In short, fоr tax purposes, it is that which the holding -company could have compelled, not that in which the stockholders were willing to acquiеsce, which controls. Otherwise, the taxpayers in this case could “lift the federal tax-hand” to suit their convenience. See Leiсht v. C.I. R., 8 Cir., 1943,
Affirmed.
Notes
. When payment and return of the dividend occur within the same taxable year, it is reasonаble to view the transaction as involving no increment to gross income, rather than an increment to gross income plus a deductiоn.
. “19. Mistaken Belief as to Existence of a Noncontractual Duty to Pay.
“A person who has paid money to another because of an erroneous belief induced by a mistake of fact that he was thereby performing in whole or in part a duty to the payee, other than a contract duty, is entitled to restitution of the amount so paid if such duty did not exist.”