164 N.E. 723 | NY | 1928
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *5 A deed of trust, made in 1917, gave the net income of shares of stock to stated beneficiaries with remainders over. By its terms, the trustee was to have the privilege, acting with the consent of others, to allocate stock dividends to capital rather than to income. This privilege was exercised. There is no question that the allocation would be lawful if the trust had been created in 1922 or later (Pers. Prop. Law [Cons. Laws, chap. 41], §§ 10 and 17-a, as amended by L. 1922, ch. 452, and L. 1926, ch. 843). The question is whether it is to be condemned as an unlawful accumulation under a trust previously founded.
The rule in this State was settled, until changed in 1926 as to subsequent trusts by an amendment of the statute (L. 1926, ch. 843, amending Pers. Prop. Law, § 17-a), that as between life beneficiary and remainderman a stock dividend would be reckoned as principal or income according to the origin of the surplus out of which it was declared. To the extent that it distributed a surplus existing at the *8
creation of the trust, it would be allocated to principal; to the extent that it distributed a surplus earned thereafter, it would be allocated to income (Matter of Osborne,
We have no thought to revive a controversy so inveterate by debating these conflicting views. All that concerns us now is to remember that the decisive test was not one of legality; it was one of presumable intention. Some of the earlier cases went upon the theory that the whole dividend should go to income (McLouth
v. Hunt,
If the decisive question in the earlier cases was the question of intention, the decisive one here is the question of legality. So far as intention is concerned, the founder has said that a stock dividend shall be principal, if the trustee shall so declare. The only doubt is whether a rule of law stands in the way of his desire. The rule against accumulations in this State goes back to the Revised Statutes. For the benefit of minors, "an accumulation of the interest money, the produce of stock or other income or profits arising from personal property, may be directed," to continue not longer than the term of the minority (R.S. part II, chap. IV, title 4, § 3). "All directions for the accumulation of the interest, income or profit of personal property, other than such as are herein allowed, shall be void" (§ 4). Later revisions, though they have changed the verbiage of this restriction, have not worked a change of substance (Pers. Prop. Law, §§ 10, 16). Does the founder of a trust "direct" an illegal accumulation within the meaning of these statutes when he provides that a stock dividend, made possible by earnings of the corporation after the trust has been created, may be allocated to principal?
We said a while ago that the declaration of such a dividend destroys potential income by turning surplus into capital. The act by which this is done is not an accumulation by the individual shareholder, who may have nothing to do with it. It is no more his act than a refusal by the directors to vote out surplus cash (Matter of Kernochan,
The truth indeed is that what is income in one relation may at times be principal in another. "Words," as we are told, "are flexible" (Int. Stevedoring Co. v. Haverty,
There is thus a twilight zone. Some things are always income, such as accruing interest or rent. Some are always principal, such as farms or factories or dwellings, held without change of title as part of an original investment, or even shares of stock so held in the absence of a change of form. Some may be one or the other for this purpose or for that. Stock dividends in the true sense, i.e., dividends capitalizing surplus as distinguished from those payable in the stock of a subsidiary (People ex rel. Clark v. Gilchrist,
Dicta are quoted in support of the contention that to allocate such a dividend to capital is to accumulate unlawfully (Matterof Osborne, supra, at p. 475; Matter of Megrue,
The decision of this appeal is unaffected by the amendments of the statute in 1922 and 1926. The first (L. 1922, ch. 452) makes provision to the effect that thereafter a founder of a trust may direct that stock dividends be added to the principal, and that no unlawful accumulation shall result therefrom. This was a precautionary measure, to guard against the acceptance of dicta to the contrary. The second (L. 1926, ch. 843) prescribes a new presumption as to trusts thereafter founded. For trusts then in being, the presumable intention is to allocate the dividend to the income, or, more accurately, to apportion it under the rule already stated. For trusts subject to the statute, the presumable intention is to add the dividend to principal. In the one case as in the other the presumption may be reversed by the declaration of the founder.
The judgments should be affirmed, with costs payable out of the fund, and the question certified answered "yes."
POUND, CRANE, ANDREWS, LEHMAN, KELLOGG and O'BRIEN, JJ., concur.
Judgments affirmed, etc. *14