210 Wis. 109 | Wis. | 1933
The following opinion was filed November 9, 1932:
The paragraph of the will of Es-chines P. Matthews by which the trust was created is set forth in the margin.
On the other hand, it is contended by the representative of the last surviving legatee that the depreciation reserve fund lost its capital character and became restored to income for purposes of the present case by reason of the fact that the profit on the sale of the Matthews Building exceeded the total cost of the property.
It appears that the Matthews Building Company pur- ■ chased the real estate known as the Matthews Building for $240,000. At the time of the sale of the property the books of account of the Matthews Building Company disclosed no surplus earnings nor undivided profits and on that day the property was sold for $1,300,000. Thereafter the Matthews Building Company ceased to do business and proceeded to liquidate its assets. The land and improvements were purchased by the company as a unit and were disposed of by it without separate valuation. The argument of the remaindermen is that when there was charged against current income an amount which was carried to depreciation reserve, it was a sum necessary to make good loss by way of depreciation on the building and it thereby became a capital asset and as such belonged to the remaindermen. The contention of the representative of the surviving legatee
The question presented involves a liquidating dividend of a corporation which was solvent and against which creditors had no claims. In determining the rights of term owners as against remaindermen this state applies the Pennsylvania or American rule. It does not accept the stamp placed upon the transaction by the corporation nor is it influenced under the circumstances of this case by the fact that it is a cash instead of a stock dividend. Under the so-called American rule, whether an extraordinary cash dividend (which would include a liquidating dividend) or a stock dividend declared during the term of a life tenant is to be considered as income belonging to the life tenant or as corpus belonging to the remainderman depends upon whether or not the fund out of which the dividend is declared is accumulated out of earnings during the term or whether it is derived from income accumulated before the commencement of the term or from appreciation of capital assets.
If the income is distributed or distributable to stockholders during the term, no matter what form it may take or what changes may occur in its form before distribution takes place and irrespective of whether or not the distribution is made in the form of a cash or stock dividend, when it is derived from income earned during the term it belongs
It is also held that dividends declared out of appreciation of capital assets constitute corpus and are payable to the remaindermen. Miller v. Payne, 150 Wis. 354, 136 N. W. 811.
Logically, of course, if the remainderman benefits by the appreciation of capital assets, he should bear the loss consequent upon a depreciation of the same assets. It was so held in Estate of Gerlach, supra, but in that case it was found that it was the intent of the testator that the corpus should be preserved intact to the extent of the par value of the capital stock. The loss due to depreciation over and above that amount was held to be the loss of the remainder-man.
This leads us to inquire as to the nature of the fund represented by the depreciation reserve account. Depreciation in ordinary use means the loss in value of some destructible property over and above current repairs. 2 Cook, Corporations (8th ed.) p. 1902.
It is not necessary for us in the decision of this case to enter into a discussion of the niceties of accounting in relation to depreciation. It appears that the amount charged to the account in this case was one that was reasonable, fair, and such as customarily charged by those having the administration of similar properties. There is no element of bad faith or of manipulation for ulterior purposes in this transaction. It is undisputed that the amount of the account was withdrawn from current income. The testator provided that the life tenant was to have “the use and net income” of the shares. In determining net income, sound accounting practice requires a withholding of some part of gross income on account of depreciation, the theory being that it is necessary in order to preserve intact that part of the corpus upon which it is computed. If some part of the corpus is
The fact that in accordance with sound accounting practice a sum has been withheld from current earnings and set up in a depreciation account does not under the rule obtaining in this state determine the question. The ultimate question is, Did the income so withheld lose its character as income and, if so, when and how? There is in this case no showing that the building had in fact depreciated in value. There is no claim that any part of the fund had been in any way applied other than by setting it up on the books. It is considered that this is not sufficient to deprive the fund of its character as income. It being current income, it remained income although not distributed by way of a dividend until there was an actual or a constructive incorporation of the fund in the corpus. The sum could not be withheld from income for the purpose of adding it to the corpus but only for the purpose of maintaining or to that extent restoring it. The so-called American rule is not a rule of thumb. Each case requires consideration upon its own facts. Under this rule it may not be determined from a balance sheet that a certain item is income because the assets exceed the liabilities including capital stock. The surplus above capital stock may have been derived from
By the Court. — Order affirmed.
A motion for a rehearing was denied, with $25 costs, on January 10, 1932.
“Fifth. I hereby give and bequeath the use and the net income of the remainder of my shares of the capital stock of said Matthews Building Company, now owned by me, to wit: six hundred (600) shares, or the proceeds from the sale thereof should the same be sold before my decease, to my brother, Quincy A. Matthews, to my sister, Laura A. Matthews, and to my sister, Mrs. Martha Ober, of Chagrin Falls, Ohio, and to the survivor or survivors of them, living at the time of my decease, in equal parts, share and share alike, during their lives, and until the decease of the last survivor of them. After the decease of the last survivor of my said brother and sisters, I give and bequeath said six hundred (600) shares of stock, or the proceeds from the sale thereof, should the same be sold as aforesaid, to the following named charitable organizations, of Milwaukee, Wisconsin, in equal parts, share and share alike, to wit: to the Milwaukee Protestant Home for the Aged, Milwaukee Orphans Asylum, Associated Charities of Milwaukee, and Wisconsin Humane Society.”