312 Mass. 204 | Mass. | 1942
The question presented by this appeal from a decision of the Appellate Tax Board is whether a dividend amounting to $3,255 received by Perley G. Flint, a resident of Massachusetts — herein referred to as the taxpayer ■—in the year 1934 upon certain shares of stock held by him in the Field and Flint Co. — herein referred to as the corporation — was taxable as income under the provisions of the income tax law. See St. 1933, c. 307, § 9; St. 1935, c. 489, § 1. If within the meaning of the governing statute this dividend was a “distribution of capital” it was not taxable, but if it was a distribution of “accumulated profits” it was taxable. G. L. (Ter. Ed.) c. 62, § 1, subsection (g). The Appellate Tax Board decided that the dividend in question was, in part, a “distribution of capital” and granted a partial abatement. The taxpayer, however, contends that the entire dividend was such a distribution and that the entire tax upon such dividend should be abated.
In the recent case of Commissioner of Corporations & Taxation v. Filoon, 310 Mass. 374 — decided after the decision by the Appellate Tax Board in the present case — G. L. (Ter. Ed.) c. 62, § 1, subsection (g), was interpreted and applied to the facts found by the Appellate Tax Board in that case. The decision of the present case depends upon the application of subsection (g) as interpreted in that case to the facts found by the Appellate Tax Board in the present case. The question with respect to the source of the distribution by dividend is to be determined from the standpoint of the corporation making the distribution. Page 377. (a) The word “capital” as used in subsection (g) “means property invested in the corporation by the stockholders” whether representing “ ‘legal capital,’ that is, property sufficient to balance the capital stock liability,” or “paid in surplus” or “capital surplus” in any form.
According to the findings of the Appellate Tax Board the “capital” of the corporation within the meaning of said subsection (g), prior to the transactions hereinafter outlined, was $970,700 represented by fully paid capital stock in that amount. The “legal capital” of the corporation and its capital stock liability were, therefore, of this amount. The corporation, however, suffered losses, and the accumulated net losses at the end of the year 1928 amounted to $210,027.60. By reason of the accumulated losses the corporation at the end of that year reduced its capital stock in accordance with statutory provisions to $700,000, a reduction of $270,700. There is no finding that this reduction was accompanied by any return of capital to the shareholders. At the end of the year 1931 a further reduction of capital stock was made in accordance with statutory provisions to $400,000. This reduction of capital stock by the amount of $300,000 was accompanied by a return of capital to the shareholders of $107,100, and
At the close of the year 1933 there were accumulated net losses amounting to $222,758.92, and the net worth of the corporation was $594,911.08 — $194,911.08 in excess of the capital stock liability. During the year 1934 the earnings of the corporation amounted to $26,815.17, and the corporation distributed by dividend to its shareholders $36,075 which includes the amount thereof paid to the taxpayer involved in the present case. At the end of the year 1934 the accumulated net losses of the corporation amounted to $195,943.75, and the net worth of the corporation was $585,651.25 — $185,651.25 in excess of its capital stock liability.
The Appellate Tax Board held that, of the dividend amounting to $36,075, $7,248.75 — the amount by which the “capital surplus item” resulting from the reduction of capital stock in 1931 was greater than the excess of the net worth of the corporation at the end of the year 1934 over its capital stock liability — was a distribution of capital not subject to taxation as income of the shareholders, but that the remaining $28,826.25 — the sum of the increase in surplus from the last reduction of capital stock in 1931 to the end of 1933 ($2,011.08) and the earnings of the corporation in the year 1934 ($26,815.17) — was not such a distribution and was subject to taxation as income in the hands of the shareholders. The taxpayer contends that this decision is erroneous as matter of law on the facts found and that the entire amount of the dividend was a distribution of capital and, consequently, that no part of this amount was subject to taxation as income.
The ground of the decision of the Appellate Tax Board was that the “reduced capital [of the corporation] . . . and any actual surplus resulting from the last readjustment [the reduction of capital stock in 1931] constituted the fund with regard to which earnings and distributions were to be judged.” The Appellate Tax Board in its opinion recognized the principle later laid down by this court in the
The Appellate Tax Board was in error in ruling that the reductions of capital stock took the case out of the general principle requiring that the excess of losses over prior “accumulated profits” be made good before the corporation could be said to have “accumulated profits” — subject to income taxation in the hands of the shareholders when distributed — so that as stated by the Appellate Tax Board the “reduced capital” and any “actual surplus” resulting from the reduction of capital stock “constituted the fund with regard to which earnings and distributions were to be judged” for the purpose of determining whether distributions were out of “capital” or “accumulated profits” within the meaning of subsection (g). Doubtless the conclusion stated by the Appellate Tax Board is true for some purposes. Such a reduction of capital stock — not accompanied by a return of property to the shareholders — has the effect of transforming “legal capital” into “capital surplus,” and it may well be that the right of the corporation to pay dividends may be affected by such a transformation, though no such question is here involved. See
It is suggested that the present case is distinguishable from the Filoon case on the ground that in the present case the reductions of capital stock were made in accordance with statutory requirements. Indeed, the Appellate Tax Board in reaching its decision in this case distinguished on this ground its own decision in the Filoon case — which was in substance affirmed by this court after the decision of the Appellate Tax Board in the present case. But the cases are not to be distinguished on this ground. The record in the Filoon case did not show in express terms either that the reduction of capital stock in that case was made in accordance with statutory requirements or that it was not so made. The record showed merely that “the par value of the 3,000 shares of common stock was reduced from $100 to $50 per share.” In this state of the record it was to be assumed that the reduction of capital stock was made legally in accordance with statutory authorization, and this court in the Filoon case dealt with this reduction on that assumption.
On principle, however, a reduction of capital stock in accordance with statutory authorization, when not accom
It is also suggested that the present case is distinguishable from the Filoon case on the ground that in that case, unlike the present case, the “accumulated net losses” were not accumulated before the reduction of capital stock. But the cases are not to be distinguished on this ground. The record in the Filoon case showed that the capital stock of the corporation there involved was reduced on some date within a period of about three years during which the losses were accumulated. But the record did not show whether any part of these losses was accumulated before the reduction of the capital stock. Since, however, as has already been pointed out, a reduction of capital stock does not have the effect, for the purpose of determining the amount of the “capital” of the corporation, of wiping out prior accumulated losses, it is immaterial whether the losses are accumulated before or after the reduction of capital stock.
The Appellate Tax Board in the present case treated one or both of the reductions of capital stock as a “reorganization or readjustment, by whatever term it may be designated,” of the corporation. The word “readjustment” has no particular significance. And we are not here concerned with the meaning of “reorganization” as used in any spe
It follows that the decision of the Appellate Tax Board was based upon an erroneous ruling of law, and the question remains whether the case should be remanded for further findings of fact or should be disposed of on the findings already made. We reach the latter conclusion. No contention is made that the “capital” of the corporation was reduced so as to render taxable any part of the dividend here in question unless by reason of the reductions of its capital stock here considered. While no other aspect of
The tax assessed upon the taxpayer by reason of the dividend in question amounted to $167.74, and this amount with interest of $3.53 has been paid. This entire amount must be abated. And costs are awarded against the commissioner. Provision for repayment to the taxpayer of the amount so abated, that has been paid, with interest thereon at the rate of six per cent per annum from the time when the tax was paid, and costs, if awarded, is made by statutes. G. L. (Ter. Ed.) c. 58A, § 13, as amended; c. 62, § 46, as amended. Notwithstanding what was said in Commissioner of Corporations & Taxation v. Tousant, 309 Mass. 84, 90, no specific order for such repayment and for payment of interest and costs need be made by the Appellate Tax Board or by this court, since without such an order the statutory provisions require such repayment and payment of interest and costs, if awarded, when abatement is granted. Compare, however, as to local taxes, G. L. (Ter. Ed.) c. 59, § 64, as amended.
Abatement is granted in the amount of $171.27, with costs.