322 Mass. 446 | Mass. | 1948
The trustees under the will of Arthur E. Childs, hereinafter called the taxpayers, appeal from a decision by a majority of the Appellate Tax Board refusing to abate an income tax assessed by the commissioner against the taxpayers on dividends received by the taxpayers in liquidation of the American Investment Securities Company, hereinafter called the securities company, a Maine corporation, in which the taxpayers held stock.
The decisive facts may be simply stated. On December 27, 1944, the day of its dissolution, the assets of the securities company consisted in part of cash on hand which was the proceeds of the winding up of its business and of the sale of various securities, and in part of shares of stock which it held in Columbian National Life Insurance Company and in Jefferson Standard Life Insurance Company.
The taxpayers concede that a tax is properly assessable to them with respect to the earned surplus of the securities company, but they contend that an income tax is not assessable to them with respect to a mere increase in value of capital assets of that company which were merely distributed in kind without the actual realization by the company of any profit through a sale or its equivalent.
General Laws (Ter. Ed.) c. 62, § 1, provides that “income” of certain described classes received during the preceding calendar year shall be taxed at the rate of six per cent per annum. Subsection (b) describes as one of the classes of taxable income “Dividends, other than stock dividends paid in new stock of the company issuing the same,” on shares in foreign corporations, with exceptions not material in this case. Subsection (g) reads, “No distribution of capital, whether in liquidation or otherwise, shall be taxable as income under this section; but accumulated profits shall not be regarded as capital under this provision.” The question is whether the distribution in final liquidation of shares of stock in another corporation which were purchased with paid in capital but which have
The commissioner contends that this question has already been determined in his favor. We think it is still open. In Boston Safe Deposit & Trust Co. v. Commissioner of Corporations & Taxation, 262 Mass. 1, it would seem that the question here presented may have been involved as to part of the assets, but the effect of a lack of any actual realization by the corporation of increased value of capital assets through sale or its equivalent was not there stressed in either of the briefs and was not mentioned in the opinion. The question principally discussed was whether profits had become capital by being devoted to capital uses. That was also the principal question discussed in Moore v. Tax Commissioner, 237 Mass. 574, mentioned in Boston Safe Deposit & Trust Co. v. Commissioner of Corporations & Taxation, supra. In the Moore case, however, the distribution was entirely in cash and the court inferred from agreed facts “that the excess of general assets over the capital stock assets represents gains and profits which had accrued from the successful management of the business for many years.” 237 Mass. at page 575. In United States Trust Co. v. Commissioner of Corporations & Taxation, 299 Mass. 296, the exact amount distributed as accumulated profits was found by the board and was not disputed. See 299 Mass, at page 298, and original papers, record, pages 22, 28. The case of Tilton v. Tax Commissioner, 238 Mass. 596, upon, which the board relied, was decided at a time when stock dividends were taxable as income. Some expressions in that case may be thought to aid the commissioner in this case, but whatever may be said of a stock dividend as income (Tax Commissioner v. Putnam, 227 Mass. 522, 534-536), there was in that case no “distribution” of any assets of the corporation, and, especially in view of later cases, we do not think the Tilton case can be considered an authoritative interpretation of G. L. (Ter. Ed.) c. 62, § 1 (g). In the cases of Lapham v. Tax Commissioner, 244 Mass. 40, and Follett v. Commissioner of Corporations & Taxation,
When we give to the words of subsection (g) their ordinary meaning, both “capital” and “accumulated profits” must refer to something which the corporation previously had but which it has distributed, and therefore to the status of that thing as capital or accumulated profits before distribution. Those words cannot refer to the status of the thing distributed as being capital or accumulated profits in the hands of the stockholder after distribution. This is fully recognized in cases decided more recently than those hereinbefore cited. Boston Safe Deposit & Trust Co. v. Commissioner of Corporations & Taxation, 298 Mass. 263, 266. Commissioner of Corporations & Taxation v. Filoon, 310 Mass. 374, 380. Flint v. Commissioner of Corporations & Taxation, 312 Mass. 204, 205-206. Commissioner of Corporations & Taxation v. Church, 318 Mass. 268, 269. In our opinion the four cases last cited preclude us from treating the distribution of the insurance stocks by way of dividend as in itself a realization by the securities company of a profit arising from their increased value. This accords with what seems to be the better view as to the construction of the words “earnings or profits” in a provision of the Federal act which is analogous to subsection (g). IT. S. C. (1940 ed.) Title 26, § 115 (a), as amended by Act of June 25, 1947, 61 IT. S. Sts. at Large, 179. Mertens, Law of Federal Income Taxation, §§ 9.49, 9.50, 9.68.
Moreover, it would seem that the inclusion in “accumulated profits” of unrealized appreciation in market value of capital assets might lead to serious complications. If such unrealized appreciation must be included in “accumulated profits,” would it not. follow that unrealized depreciation in such assets must be deducted from “accumulated profits”? See Commissioner of Corporations & Taxation v. Filoon, 310 Mass. 374, 386. If this is so, might it not frequently be necessary, even in cases of ordinary cash dividends of a going corporation, to appraise its capital assets in order to determine whether there had not been sufficient depreciation in capital assets to. wipe out the “accumulated profits” from which, supposedly, the dividend was paid? It does not seem that the Legislature could have intended that the “accumulated profits” of subsection (g) would vary from day to day with fluctuations in the market value of capital assets.
In view of what has been said we think it must now be recognized that the statement in United States Trust Co. v. Commissioner of Corporations & Taxation, 299 Mass. 296, at page 303, “It is settled in this Commonwealth that under G. L. (Ter. Ed.) c. 62, § 1 (g), the sum taxable is the excess of the amount distributed as dividends over the par value of the stock,” is subject to the qualifications (1) that under subsection (g) “capital” “means property invested in the corporation by the stockholders” (Commis
The parties have agreed upon the computation of the abatement. In accordance with their agreement
Abatement is granted in the amount of $26,785.26 with costs.