7 N.Y.2d 1 | NY | 1959
Lead Opinion
This appeal presents once more the problem of allocation of stock distributions as between principal and income of a trust under the rule laid down in Matter of Osborne (209 N. Y. 450). For the first time, however, we are faced with the question whether that part of a stock distribution which is supported by a transfer of capital surplus represents a distribution of earnings within the meaning of that rule.
The trust with which we are concerned was established by Oliver H. Payne under an indenture executed in 1915. By its terms, the income was payable to William Bingham, II, for life and, on his death without surviving descendants, the trust was to terminate and the principal distributed to the then living descendants of Mary Payne Bingham, a sister of the settlor of the trust. The life beneficiary died in February of
The trustee brought this proceeding, pursuant to article 79 of the Civil Practice Act, to settle its accounts. The trust had contained 26,500 shares of the stock of the Standard Oil Company of Indiana and 4,100 shares of the stock of Borg-Warner Corporation. During Bingham’s lifetime, each of these companies effected an extraordinary stock distribution, in consequence of which the trust received an additional 26,500 shares from Standard and an additional 8,200 shares from Borg-Warner.
We turn, first, to the action taken by the two corporations in effecting the distribution of the additional stock certificates. In each instance, the company transferred to stated capital, or to its capital stock account, its entire capital surplus and sufficient earned surplus to support the additional shares at their par value in the capital stock account. To be more specific, Standard, with 16,229,856 additional shares of $25 par value stock to be issued, transferred $405,746,400
As already indicated, the trustee held 26,500 shares of Standard prior to the 1954 increase in the number of its shares and received certificates representing an additional 26,500 shares; and, having held 4,100 shares of Borg-Warner before that company increased its shares in 1955, the trustee received certificates representing an additional 8,200 shares.
The trust indenture before us makes no provision for the allocation of ‘1 stock dividends ’ nor does it elaborate on the meaning of the words “ rents, issues, profits and income ” in the provision granting such interests to the income beneficiary. Since the indenture was executed in 1915, long before the effective date of section 17-a of the Personal Property Law, the trustee was confronted with the question of whether any of the additional shares of Standard or Borg-Warner represented income of the trust and, if so, how many. It resolved the problem by applying to the shares involved (26,500 shares of Standard and 8,200 shares of Borg-Warner) the percentages in which earned surplus and capital surplus had contributed in each case to the necessary supplementation of the capital stock account, thereby arriving at the number of new shares which it regarded as representing a distribution or division of corporate earnings. And, having then ascertained that awarding such number of shares to income would not impair the “ intact value ” of the trust corpus within the meaning of the Osborne rule,
The parties have accepted the applicability of the Osborne rule and, in view of that, we are not required to consider whether the rule should be repudiated or restricted, as it, or some counterpart, has been by the courts and legislatures of other jurisdictions which had at one time applied a similar rule. (See, e.g., 3 Scott, Trusts [2d ed., 1956], § 236.3, pp. 1816-1817; Restatement, Trusts [Supp. 1948], § 236; Bowles v. Stilley’s Ex’r., 267 S. W. 2d 707 [Ky.]; Langdell v. Dodge, 100 N. H. 118; Cunningham Estate, 395 Pa. 1; see, also, Matter of Lindsay, 11 Misc 2d 374.) Our sole task is to determine whether the Osborne rule, fairly applied, required the trustee to allocate to the income beneficiary more stock than it had. '
The appellants claim, in effect, that, because some earnings were transferred to the capital stock account in each case, the entire accompanying increase in the number of shares represents a distribution or division of earnings to which the income beneficiary became entitled, except to the extent that it might reduce the “ intact value ” of the trust’s investment in particular shares. It is their submission that the income beneficiary is entitled to all earnings accumulated by the corporation since the trustee acquired the stock. And, although they must concede that, until the corporation effects a distribution of its earnings, the income beneficiary cannot obtain them, they contend that any distribution to its stockholders of cash or shares of the company’s own stock represents such a distribution of the corporate earnings. Their only concession to principal is that the trust’s “ intact value ” may not he impaired. The source of the distribution is deemed immaterial on the ground that principal is to be assured its ‘
The appellants’ suggestion that, by virtue of Osborne, an income beneficiary has such a claim upon corporate earnings that he can demand all corporate distributions, whatever their nature and whatever their source, until that claim has been made good, not only is unsupported by precedent, but is thoroughly unsound. In point of fact, the nature of each distribution is important and its source of particular significance. For example, an extraordinary dividend in property acquired by a corporation prior to the acquisition of its stock by a trust — or out of earnings accumulated prior thereto — is trust principal, even though the company may have accumulated earnings well in excess of the value of the dividend since that time. (See United States Trust Co. v. Heye, 224 N. Y. 242; Macy v. Ladd, 227 NN. Y. 670.) The distribution by the corporation of something which can be identified as capital may not be treated as a distribution of earnings, despite the fact that there have been earnings of equivalent or greater value accumulated during the life of the trust. This completely invalidates the appellants’ theory that all distributions which leave trust principal “ intact ” — i.e., which do not exceed corporate earnings realized after the acquisition of the stock by the trust — go to income. It makes clear the necessity for looking to the source of the “dividend” and determining whether that which is being distributed was, in fact, earned by the company since the trust acquired the stock and still retains its status as earnings. Obviously, we cannot trace specific dollars of earnings or of capital as they are received and disbursed, but that does not justify our treating all corporate distributions as distributions of earnings. If the appellants were correct and an income beneficiary were to be held entitled to anything issued by the corpora
The rule which assigns to the income beneficiary stock issued against the capitalization of earnings is based on the proposition that the stock dividend is, in effect, a distribution of such earnings even though they are actually being retained in the business. (See Equitable Trust Co. v. Prentice, 250 N. Y. 1, 8, 12.) In reality, as the court observed in the Prentice case, “‘A stock dividend does not distribute property, but simply dilutes the shares as they existed before ’ ” (250 N. Y., at p. 12). The rule as applied has proved to be generous to the average income beneficiary since it has made no attempt to equate the true value of the stock to be received by him with the amount of earnings capitalized and, in addition, has ignored the fact that through receipt of the stock he obtains a proportionate interest not only in any remaining undistributed earnings and in corporate capital assets of every kind, but also in all earnings in the future.
Nor may we overlook the fact that, to the extent that the source of any stock dividend is capital surplus, there is no significant possibility of injury to the life tenant if the stock is retained as part of the corpus. A substantial part or, indeed, all of the capital surplus may never have represented earnings of the enterprise. A common instance is the so-called ‘ ‘ paid-in surplus ”, representing the difference between the par value or stated value of shares issued by the corporation and the actual consideration received by it for such shares. The Borg-Warner resolution which declared the stock dividend expressly referred to paid-in surplus as comprising part of the capital surplus to be transferred to capital for the issuance of the new shares. If the entire paid-in capital had been added to the statutory capital in the first instance, no one would even have suggested that the income beneficiary could assert any right to
It is true that some capital surplus may have had its origin in what were once earnings. Frequently, capital surplus is created through the use of earnings to support ordinary stock dividends which the income beneficiary will already have received. A rule of the New York Stock Exchange, required and enforced by the Securities and Exchange Commission, demands that, when a stock dividend is declared, the earned surplus account of the corporation must be charged with the market value of the stock to be distributed, not merely its par or stated value. (See N. Y. Stock Exchange — Company Manual, § A-13; Rappaport, SEC Accounting Practice and Procedure [1956], p. 312.)
Accepting, as we do, the prevailing view that a transfer from capital surplus to the capital stock account does not constitute a capitalization or distribution of earnings when that transfer represents 100% of the capitalization accompanying a stock distribution, it necessarily follows that we may not treat such a transfer as a capitalization of earnings simply because, as in the present case, it represents less than 100%.
To recapitulate. In Matter of Osborne (209 N. Y. 450, supra) and the cases preceding it, we adopted the fiction that the capi
This does not mean that we need now decide whether an entirely new approach to the problem of corporate stock distributions is called for or whether the rules which we have followed are wrong and should be modified. As our discussion has made manifest, what the appellants contend for is an extension, rather than merely an application, of the Osborne' rule — a rule which already has been recognized as too favorable to the income beneficiary and has been repudiated by the Legislature of this State as to trusts created after 1926 (Personal Property Law, § 17-a) as well as by the legislatures and courts of many other jurisdictions that originally had adopted it. (See authorities cited, p. 8.)
In each of the instances here under consideration, there has been a partial capitalization out of earned surplus, which concededly represents a capitalization of earnings. A significant part of the total capitalization, however, has come from capital surplus, and it is impossible to identify this as earnings. Under the circumstances, it is our firm conclusion that the income beneficiary has been awarded the very maximum number of shares which he could possibly claim under any supportable theory and is entitled to no more of the stock than the trustee has apportioned to him. What has been done is consistent with our practice of arbitrarily identifying with those earnings which are capitalized in conjunction with a stock distribution all new shares that are supported by those earnings. With respect to
The order should be affirmed, with costs to all parties appearing separately and filing separate briefs, payable out of the estate.
. Standard issued one additional share for every share of its capital stock outstanding — referred to as “a stock dividend of 100%” — and Borg-Warner issued two additional shares of its stock for each of its outstanding shares.
. Some references in record indicate this figure was $405,746,409.
. Application of the “ intact value ” principle, the court wrote in Matter of Osborne, simply requires that, “in all cases of extraordinary dividends, either of money or stock, sufficient of the dividend must be retained in the corpus of the trust to maintain that corpus unimpaired and the remainder thereof must be awarded to the life beneficiary ” (209 N. Y., at pp. 484-485).
. By their acceptance of the trustee’s allocation to income of 15,095.73 shares of Standard and of 1,311 shares of Borg-Wamer, the respondents have confined the issue before us to whether the trustee has allocated too little to income or, conversely, too much to principal; the possibility that the trustee may have assigned too much to income and too little to principal is not in issue.
. Where the dividend exceeds 25%, the Stock Exchange rule treats the distribution as a stock split rather than a stock dividend.
Dissenting Opinion
(dissenting). By indenture dated September 7, 1915 Oliver H. Payne set up a trust for the benefit of William Bingham, II, measured by two lives in being. Under the provisions of the indenture, the trustee was to apply the ‘ ‘ rents, issues, profits and income ’ ’ of the trust fund to the use of the life beneficiary. The trust terminated on February 17, 1955 when the income beneficiary died. The trust having come to an end and the distribution of the corpus thereof having become necessary, the present proceeding was commenced under article 79 of the Civil Practice Act by the trustee, the United States Trust Company of New York, for a settlement of its final account and first supplemental account thereto.
During the life of the trust two extraordinary stock distributions were received by the trustee, one from the Standard Oil Company (Indiana), and the second from Borg-Warner Corporation. Special Term settled the final and first supplemental accounts, but expressly reserved for subsequent decision and settlement the proper allocation, between corpus and income, of those extraordinary stock distributions. Thereafter, objections were filed to the accounts, and the trustee’s proposed apportionment of the dividends was attacked. The objections were dismissed by Special Term, except for the question of whether certain items had properly been deemed capital surplus in trust contemplation. As to that question a reference was ordered, with the distribution of the shares, contingent upon the reference, held in abeyance pending it. On appeal, the
As long ago as 1915 it was said that the question as to whether stock dividends are to be treated as income (belonging to the life tenant) or as corpus (belonging to the remainderman) ‘ ‘ has perplexed the courts of both this country and England for a century.” (7 R. C. L., § 266, p. 289.) And, in an annotation appearing in the 1908 volume of L. R. A. (N. S.), the following comment was made concerning this problem: ‘ ‘ Few legal questions present greater intrinsic difficulties, or have called forth a greater contrariety of views and opinions, as well as of practical results * * (12 L. R. A. [N. S.], p. 769.) The passage of time has not served to eliminate or lessen the difficulties.
It goes without saying that whether in a particular case a stock dividend made by a corporation during the term of a life estate belongs to the life tenant or the remainderman, that is, is to be regarded as income or principal, is primarily a question of the settlor’s intention as manifested in the instrument by which, the trust was created. ‘ ‘ This is expressly or impliedly recognized by all of the cases on the subject.” (12 L. R. A. [N. S.], p. 769; see, also, 18 C. J. S., Corporations, § 471, p. 1123.) In the great majority of cases, however, the language of the will or of the trust instrument merely directs the payment of ‘
Notwithstanding the divergence of views, the courts are generally agreed that a dividend which is not a distribution of earnings, but of capital assets of the corporation, belongs to the remainderman and that any dividend derived from a mere
With respect to the distribution of stock dividends representing earnings, as distinguished from capital assets, most jurisdictions follow one of three divergent rules, the so-called Kentucky rule, Massachusetts rule and Pennsylvania rule.
The Kentucky rule, in substance, is that in the absence of a manifested contrary intent by the trustor, a dividend declared out of earnings, whether' of stock or cash, ordinary or extraordinary, and regardless of the time that the fund from which the dividend is made was earned, goes in its entirety to the one entitled to the income at the time the dividend is declared (18 C. J. S., Corporations, § 471, subd. d, p. 1136; Hite’s Devisees v. Hite’s Executor, 93 Ky. 257).
Under the Massachusetts rule all stock dividends are considered capital going to the remainderman while all cash or property dividends, ordinary or extraordinary, are considered income belonging to the life tenant (18 C. J. S., Corporations, § 471, subd. b, p. 1126). This rule is predicated on the theory that there is an actual severance of the subject matter of the dividend from the corporate assets where cash and property dividends are involved, but that stock dividends involve only readjustments of the corporate structure, the corporate assets remaining the property of the corporation as fully as they were before (Minot v. Paine, 99 Mass. 101).
The Pennsylvania rule, or apportionment rule, as it is otherwise described, in essence, is that whether an extraordinary cash dividend or stock dividend declared during the term of the trust is to be considered as income belonging to the life tenant, or as capital belonging to the remainderman, is to be determined by the time, with relation to the commencement of the life term, when the fund out of which the dividend is declared accumulated. If the dividend is declared from earnings which accrued before the trust began, it is awarded to corpus; if it is declared from earnings which accrued thereafter, it is awarded to income; and, if it is declared from earnings some of which accrued prior to the commencement of the life of the trust and some of which
The Supreme Court of Missouri has succinctly summed up the three rules as follows (Hayes v. St. Louis Union Trust Co., 317 Mo. 1028, 1043): “ The three doctrines may be summed up by saying the Massachusetts rule considers the character of the dividend, the Pennsylvania rule the source of the dividend, and the Kentucky rule the time of the dividend.” (Emphasis in original.)
Oddly enough, New York, during different periods, has followed all three rules. Prior to 1913 the Kentucky rule was in force in this State (Matter of Kernochan, 104 N. Y. 618). In 1913 we adopted the Pennsylvania rule (Matter of Osborne, 209 N. Y. 450; Ann. 50 L. R A. [N. S.] 510). Finally, in 1926 the Legislature amended section 17-a of the Personal Property Law, which amendment embodies the Massachusetts rule. By its terms the amendment applies only to trusts created subsequent to 1926. Inasmuch as the trust here came into being in 1915 while the Pennsylvania-Osborne rule was in force, it is that rule which must be applied and the parties have accepted the applicability of that rule. That being so, a more detailed consideration of the Pennsylvania rule is called for.
Judge Fuld properly points out that the parties herein have accepted the applicability of the Osborne rule, and that thus our sole task is to determine whether that rule requires an allocation of the shares of stock different from that proposed by the trustee. The parties, of necessity, accepted the Osborne rule as formulated by our court and as used by all the courts of our State. (See Pratt v. Ladd, 253 N. Y. 213.) So settled was the rule thought to be that no appeal of the identical issue present herein was even argued in our court in the Pratt case. Moreover, in Equitable Trust Co. v. Prentice (250 N. Y. 1), Chief Judge Cabdozo undertook to explain the Osborne rule (see quotation, infra). Finally, the Legislature in 1926 changed the Osborne rule by statute, but did not purport to make the provision retroactive. We construed it (Personal Property Law, § 17-a) to be prospective only. (Equitable Trust Co. v. Prentice, supra.) Under the Osborne rule, the shares of stock are not
“ The method of accomplishing this result [maintaining corpus intact in the face of extraordinary dividends] is not difficult. The intrinsic value of the 'trust investment is to be ascertained by dividing the capital and the surplus of the corporation existing at the time of the creation of the trust by the number of shares of the corporation then outstanding, which gives the value of each share, and that amount must be multiplied by the number of shares held in the trust. The value of the investment represented by the original shares after the dividend has been made is ascertained by exactly the same method. The difference between the two shows the impairment of the corpus of the trust * * * If the dividend is in stock the amount of impairment in money must be divided by the intrinsic value of a share of the new stock, and the quotient gives the number of shares to be retained to make the impairment good — the remaining shares going to the life beneficiary. Market value, good will and like considerations cannot be considered in apportioning a dividend.” (Emphasis added.)
As will be seen the intrinsic value, or the value to be kept intact, is book value, rather than market or any other value.
The intact value formula is succinctly explained in 130 A. L. B. (p. 544) as follows: “ * * * it involves a comparison of the book or intrinsic value of each share of stock as of the commencement of the life interest in the trust (determined by dividing the total capital and surplus accumulated at that time by the total number of shares of the corporation then outstanding) with the book or intrinsic value of each share after the dividend (determined by dividing the total of capital and surplus as it then stands by the original number of shares if the dividend is declared in cash, and by the total number of shares, new and
The Pennsylvania-Osborne rule is based on the presumption that the creator of the trust intended to confer every benefit upon the income beneficiary (since the life beneficiary is normally the principal object of the creator’s bounty) and to give to the remainderman only that value which at the death of the creator was legally or equitably represented by the stock. In discussing the cases applying the Pennsylvania-Osborne rule, Chief Judge Cardozo pointed up this concept of 1 ‘ presumable intention ” in the case of Equitable Trust Co. v. Prentice (250 N. YU. 1, supra) where he said (p. 8): “ The thought back of them is this: A surplus in the treasury of a corporation, even though not income for the shareholder, is potentially a fund that may be converted into income. The declaration of a stock dividend destroys this potential income, and turns the surplus into capital. The effect may be at times to thwart the plan of apportionment between life tenant and remainderman as conceived at the foundation. A founder of a trust has conveyed shares to a trustee to pay the income to a wife or child for life with remainder upon death to others. Did he mean in thus apportioning his estate that potential income might be cut down through the vote of the corporate managers so that the beneficiary never could resort to it, and principal increased to the profit of remainderman, perhaps unknown or unborn? We have
That, then, is the presumption upon which the Pennsylvania rule is based. Of course, the creator’s “ presumable intention ” cannot be effectuated until such time as the corporation declares a dividend. When it is declared, the courts are presented with the opportunity necessary to carry out the ‘ ‘ presumable intention.” The intact value formula is the means by which they do so.
There is one ramification to the Pennsylvania rule. That is, that the principal or corpus of the trust, i.e., the original book value of the shares, is not necessarily to remain static. Phrased differently, not every increase in the value of the trust estate is income. “ Any natural increase in the value of the trust estate remains principal. Gain by increment in capital valuation goes to principal.” (Matter of Hagen, 262 N. Y. 301, 305; see, also, United States Trust Co. v. Heye, 224 N. Y. 242.) Accordingly, as later cases disclosed, in applying the Osborne formula, increments to the book value after acquisition by the trust in the form of capital increases traceable to the original corpus must be added to the book value as it was at time of acquisition and the resulting value is the value to be kept intact.
With the foregoing principles in mind, we turn to the problem presented by the instant case.
It should be noted that the facts are not in issue, the parties having entered into a stipulation with respect thereto, including the accuracy of the facts contained in reports prepared by an accounting firm showing the adjustments in the capital, capital surplus and earned surplus of • the two corporations for the crucial periods.
Prior to December 1, 1954 the trustee held 26,500 shares of stock of Standard Oil Company (Indiana). On that date it received an additional 26,500 shares from the corporation. The distribution of these shares was'based upon a corporate resolution to the effect that “ a stock dividend of 100% on the capital stock of this company issued and outstanding, including treasury stock, be and hereby is declared payable out of capital surplus and the remainder out of earned surplus, on the 1st day of December, 1954 to stockholders of record at the close of business on the 25th day of October, 1954.” The distribution
Prior to January 12, 1955 the trustee held 4,100 shares of stock in Borg-Warner. On that date it received an additional 8,200 shares from the corporation. The distribution of these shares was based upon the stockholders’ approval and a corporate resolution to the effect that the corporate officers “ are authorized and directed to transfer from the corporation’s capital surplus account (designated on the books as ‘ Capital in excess of par value ’) to stated capital the total amount of capital surplus, including all paid-in-surplus * * * and to transfer from earned surplus (designated on the books as ‘ Earnings retained for use in the business ’) to stated capital the balance necessary to increase the stated capital by an amount equal to $5 times the number by which the issued common shares are increased as a result of the reclassification of shares ”. The corporation thereupon transferred from the capital surplus account to stated capital the sum of $21,340,734, and from the consolidated retained earnings account the sum of $4,061,354, to cover the 5,080,417 additional $5 par value shares issued.
As to the Standard Oil shares: In arriving at a proposed division of these shares between corpus and income, the trustee proceeded on the assumption that to the extent that the additional shares had been charged against or capitalized out of “ capital surplus ”, the distribution was a stock split (to which corpus was entitled without regard to any apportionment formula), not a stock dividend• (to be submitted to the application of the intact value formula). Since $174,612,840 of the total of $405,746,409 capitalized had been charged against capital surplus, the trustee concluded that 43.0350%, or 11,404.27 of the additional shares, represented a stock split and belonged to corpus. The trustee then applied the intact value formula and found no impairment of corpus, as a consequence of which it determined that the balance of 15,095.73 shares belonged to income.
As to the Borg-Warner shares: In arriving at a proposed division of these shares, the trustee proceeded on the same
To restate, in brief form, the manner in which the trustee made its calculations: (1) it began with the assumption that, to the extent that the additional shares had been charged against ‘ ‘ capital surplus ’ ’, the distribution was a stock split rather than a stock dividend; (2) on the basis of that assumption the trustee immediately gave to corpus the prorata portion of the new shares charged by the corporation to its capital surplus; (3) it then applied the intact value rule, found no impairment of intact value, and, therefore, allocated the remaining shares to income.
Had the intact value formula been applied to the entire Standard Oil stock distribution of 26,500 shares, income would have received the entire distribution since the intact value (including capital increments) of such portion of the trust estate was not impaired by such distribution. As shown above under the trustee’s formula, corpus received 11,404.27 and income received 15,095.73 of the additional shares.
Had the intact value formula been applied to the entire Borg-Warner stock distribution of 8,200 shares, an impairment of intact value of the trust estate would have resulted. The impairment could be remedied by the addition of 4,463.9702 shares to corpus. The balance of 3,736.0298 shares would go to income. As shown above under the trustee’s formula, corpus received 6,888.97 shares and income received 1,311.03 of the additional shares.
Appended to this opinion is a detailed breakdown of the computations made by the trustee and by the objectants, as compiled in the brief amicus curice of a guardian ad litem of four infants interested in the estate of Harry Payne Bingham. The compila
The objectants-appellants argue that the intact value formula (which includes crediting corpus with capital increments) should have been applied to the entire Standard Oil and Borg-Warner stock distributions, with the results above indicated.
The crux of the controversy, then, is whether in determining the respective rights of income beneficiaries and remaindermen, a stock distribution, charged for corporate purposes in part against capital surplus and in part against earned surplus, (a) is a stock dividend — in which event objectants-appellants must prevail — or (b) is partially a stock split and partially a stock dividend in which event we must hold that the trustee applied the correct formula in allocating the stock.
In resolving the question we are obliged to concern ourselves with the substance of the transaction, not the form in which the corporation has seen fit to clothe it and not the name the corporation has chosen to confer upon it (Matter of Osborne, 209 N. Y. 450, 476, supra).
A stock dividend has been defined as one ‘ ‘ payable in the stock of the corporation declaring or authorizing the dividend ’ ’ and which ‘ ‘ merely evidences the transfer of an accumulated surplus to the capital account of the corporation” (4 White, Corporations [12th ed.], pp. 34-35); as a “dividend, capitalizing surplus ” (Equitable Trust Co. v. Prentice, supra); and, most recently, as a “ distribution of stock by a corporation to its stockholders evidencing and accompanied by the transfer of accumulated surplus to the corporation’s capital account * * * A stock split, on the other hand, results from the simple increase in the number of shares without altering surplus or segregating earnings ” (Matter of Fosdick, 4 N Y 2d 646, 653).
Undeniably the stock distributions made by Standard Oil and Borg-Warner were accompanied by transfers of accumulated surplus to the corporation’s capital accounts. Stated otherwise, the additional shares received by the trustee represented a capitalization of surplus, not merely, as in a stock split, a division of the previously owned shares into smaller components without any addition to the corporate capital. What gives
We would point up a further reason why the capital surplus, as recorded on the corporate books, is not automatically representative of the capital increments to which a trust corpus is
Undoubtedly, the unimportance of corporate labels is more readily apparent where the corporation has but one surplus account. For example, in this case if the corporations had placed all of their surplus into an account entitled “ earned surplus ’ ’ no one could deny the application of the intact value formula to the entire dividend. It was not until about 1920 that for corporate accounting purposes separate accounts were established designated as “ capital surplus ” and as “ earned surplus.” Prior to that time all increase, whether derived from capital profits or from ordinary earnings, was shown in a single ‘ ‘ surplus ’ ’ account or in a “ profit and loss ’ ’ account. Consequently, in the early cases where we were concerned with the apportionment of stock dividends the corporations involved had only one surplus account (which included both capital profits and ordinary earnings), and it was out of such a combined surplus account that the stock dividends were capitalized. Nevertheless, we at no time suggested that the stock dividends should be allocated to corpus to the extent that they may have been capitalized out of capital profits. The reason is clear. All that the remaindermen are entitled to is the original book value plus natural capital increments. The income beneficiary is entitled to everything else. Such is the Osborne rule. Whether the surplus is in one account, generally denominated ‘ ‘ surplus ’ ’, or in two accounts, denominated “ capital surplus ” and ‘ ‘ earned surplus ’ ’, the apportionment under the Osborne-intact-value formula must be made in the same way, with the same result on the respective property rights of the life beneficiary and of the remaindermen.
It appearing that the trustee erred in treating as a stock split so much of the stock distribution as was capitalized out of
I note that objectants-appellants have filed three notices of appeal. The relief sought by all three of them is the same, namely, our review of the Appellate Division disposition effected in an order of that court dated November 22, 1957. By the first notice of appeal objectants-appellants appealed from that order; by the second notice of appeal objectants-appellants appealed from Special Term’s order on remittitur which carried out the order of the Appellate Division and, in addition, ordered a second supplemental account covering a period beyond that which was involved on the appeal to the Appellate Division and which, therefore, is beyond that involved on the appeal to this court; finally, by the third notice of appeal object-ants-appellants appealed from a still later order of Special Term which provided for final discharge of the trustee and approved the trustee’s second supplemental account. This proceeding was brought to settle the trustee’s final account and the first supplemental account to it. The Appellate Division order finally settled such accounts and, so, is the order properly appealed to this court (Civ. Prac. Act, § 591, subd. 2). As indicated above, that order should be reversed and the matter remitted to Special Term for further proceedings in accordance with the opinion herein. The appeals from the subsequent orders of Special Term, dated March 12,1958, and May 16,1958, are superfluous and should be dismissed.
Judges Desmond, Dye, Van Voorhis and Burke concur with Judge Fuld; Chief Judge Conway dissents in an opinion in which Judge Froessel concurs.
Order affirmed.
