1926 BTA LEXIS 2493 | B.T.A. | 1926
Lead Opinion
The sole question at issue is whether the document quoted in the findings of fact is a stock certificate or an evidence of indebtedness, resulting in the question whether or not the so-called dividends were, in fact, dividends on stock or interest on an indebtedness.
It will be noted that the certificate in question (1) represents a part of the authorized capital stock of the corporation; (2) it is issued, in the ordinary form of a preferred stock certificate; (3) it provides for quarterly dividends, such dividends to be cumulative; (4) it is not secured by mortgage or otherwise and does not purport to carry precedence over creditors; and (5) the date designated for retirement was fixed in each certificate, and, in event of its being called at any time prior to such date, in addition to payment of all accrued dividends, a premium of 2 per cent was provided for.
While it is the generally accepted rule that the name given to the instrument is not conclusive of its character and that inquiry will be made as to its real character, there is in this particular case no material evidence that this instrument is not what it purports to be on its face. The taxpayer points out that the instrument provided for a definite maturity date, a stipulated dividend, that the company will not convey or incumber a certain leasehold without the consent of the stockholders, or incur indebtedness in excess of
In Indiana it is well settled that preferred stock is not in effect a loan and that the owner thereof is not a corporation creditor.
It is, however, contended by appellees that the purchase of preferred stock in an Indiana corporation is in effect a loan; but this position is untenable. The holder of preferred stock is a shareholder in the corporation. He is not a corporation creditor, and has no rights as such. His rights are those of the common shareholder, except as those rights are limited by the statute and the contract, and the additional right to have his dividends paid out of the earnings and his stock redeemed out of the assets in preference to the common shareholder. 1 Cook on Corporations, §§ 267-271; Burns’ Ann. St. 1901, §§ 5066, 5067, 5068. The purchase of stock of a corporation is not a loan to the corporation of the amount of said stock. None of the elements of debtor apd creditor exist. The purchase of stock is the purchase of so much of an interest in the assets and affairs of such corporation. Grover v. Cavanaugh, 40 Ind. App. 340; 82 N. E. 104.
Ordinarily, a preferred stockholder, even though the preferred dividend is in terms guaranteed, is not to be regarded as a creditor of the corporation, so as to be entitled to compete with other creditors-in the distribution of the assets of the corporation, or for any other purpose; he is a stockholder like the holders of common stock, the only difference being that he is entitled to a certain preference over them.
This view is sustained by many leading authorities. Warren v. King, 108 U. S. 389; Armstrong v. Union Trust & Savings Bank, 248 Fed. 268; Spencer v. Smith, 201 Fed. 647; Grover v. Cavanaugh, 40 Ind. App. 340; 82 N. E. 104. In the case of Armstrong v. Union Trust & Savings Bank, supra, there was a ten-year retirement provision and the dividend provision was denominated as “interest,”' but the court held that a holder of such preferred stock was not a creditor but had only the rights of a stockholder.
In the instant appeal it is not necessary to rely upon the authorities quoted, as the lang'uage of the instrument is certain and unambiguous. The first paragraph provides:
This Certifies that-is the holder of-fully paid up and non-assessable shares of the par value of One Hundred Dollars each of the first Preferred Stock of The Leasehold Realty Company, transferable only on the books of the Company in person or by proxy on the surrender of this certificate.
Throughout the instrument there are frequent references to “ dividends,” “ preferred stock,” and “ stockholder.” There is nothing in the instrument to give the strained construction that the taxpayer
The taxpayer further argues that, since its minute book did not disclose a record of a formal declaration of dividends at each installment period, the dividends were unauthorized and that the payments made were, therefore, expense items. It is clear, however, that the amounts were entered upon its books under a “ Dividend Account,” were entered expressly as “ Dividends,” and were undoubtedly acquiesced in by the directors and stockholders. As these payments were 'fixed by the express contract in the certificates and as there was in fact sufficiently earned income for a surplus, the taxpayer may not have considered it necessary to make a formal declaration of dividends at each period, but the mere failure to enter the authorization in its records or expressly to authorize the dividends each time would not, in itself, void the dividends to the extent that the corporation itself can take advantage of its own errors.
Testing the instrument here involved in the light of many decisions of our higher courts and by the provisions of the instrument itself, we conclude and hold that the certificates in question are stock certificates and not evidence of indebtedness, and that the periodical payments thereon were dividends and not interest. Appeal of I. Unterberg & Co., Inc., 2 B. T. A. 274; Appeal of Kentucky River Coal Corporation, 3 B. T. A. 644.
The deficiency for the year 1919 is $133.28; for 1920, $384-24; and for 1921, $U846. Order will be entered accordingly.
