Chapman, C. J.
We must regard the principle as settled, that stock dividends are to tie regarded as principal, and cash dividends as income, and that the question whether dividends are to be deemed of principal or of income is to be determined by the votes of the corporation. Minot v. Paine, 99 Mass. 101 In the present case, we have to determine the character of the dividends in question.
*551The trustees held ninety shares of stock in the Old Colony and Newport Railway Company. The company made a regular semiannual dividend; but had a large amount of accumulated earnings, which had accrued subsequently to the death of the testator, and, instead of dividing the money, they invested it in the purchase of shares of their own stock. This they might legally do, taking the transfer to a trustee, instead of investing the money in the stocks of some other company, or lending it, in order that it- might be earning some income until they should be ready to divide or otherwise dispose of it. In October 1863 they created 8849 new shares, of the par value of $100 each, to be issued and disposed of as the directors should think proper. On the 15th of the following December, they voted that the right of taking 5157 of these shares at par be offered to the shareholders, (not including the company in its corporate capacity,) at the rate of twenty per cent, of a new share for each old share; and if any shareholder should not avail himself of the privilege offered, before the 9th of the next January, the directors might sell such shares as were not taken. They also voted an extra dividend of forty per cent., one half in the shares which they had purchased as before stated, and one half in cash, derivable from the cash to be received from the sale of the newly created shares.
The purchased shares represented cash invested so as to earn an income. If the directors had sold them and divided the avails, there could have been no doubt that it was a cash dividend. Or if the investment had been in the stocks of other corporations, and the stocks divided, it would have been the same. As it was, the dividend did not affect the value of the shares upon which it was made, relatively to the whole capital stock of the company. The shares originally held by the trustees constituted the same fractional part of the whole capital stock after the dividend, as before. In substance, as well as in intent, it was a cash dividend, though it was not such in form; and the substance and intent must govern the transaction. Daland v. Williams, 101 Mass. 571.
The newly created shares constituted an increase of the cap*552ital stock of the company, and affected the relative value of the shares held by the trustees. They held a smaller proportion of the whole capital stock after the creation of the shares, than before. Shareholders were authorized by vote of the company to take each his proportion of these shares at par; or allow the directors to sell them, and take each his dividend out of the avails. One who took the shares took them as capital stock, and not as income; and one who permitted the directors to sell them, and took his proportion in cash, took the avails of capital stock which he had allowed to be sold. As the money to be received by the. company for shares sold was not to be invested in improvements of the road or additions, but to be distributed in form of a dividend, the 5157 shares were simply an increase of the nominal value of the corporate property which constituted capital stock.
Thus it appears that the trustees, by neglecting to take the shares, which would have been capital and not income if they had taken them, and by allowing the directors to sell them and pay them the avails, have changed the form of the transaction, but not its substance. They have received what stands in place of a part of the capital stock of the road, as really as if they had received the shares and sold them. In substance, it is a dividend of newly created stock, with an option to have it turned into cash by a sale of the stock. It ought to be held by the trustees as representing capital, and not income.
Decree accordingly.