242 F. 702 | S.D.N.Y. | 1917
This is an action to recover income taxes paid upon stock dividends under protest. The directors and stockholders of the Yale & Towne Manufacturing Company, having a surplus, all of which was earned prior to January 1,
The act of October 3, 1913, provides (section B):
“ * * * The net income of a taxable person, shall include gains, profits, and income derived from * * * interest, rent, dividends, securities, or the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever.”
The ruling of the Treasury Department (Decision 2274, issued December 22, 1915) provides:
“Stock dividends paid from the net earnings or the established surplus or undivided profits of corporations * * * are held to be the equivalent of •cash and to constitute taxable income under the same conditions as cash •dividends.”
“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, •and without regard to any census or enumeration.”
I cannot, however, accede to the contention of the plaintiff that stock dividends had received such a clear definition in the case of Gibbons v. Mahon, 136 U. S. 549, 10 Sup. Ct. 1057, 34 L. Ed. 525. That, like most, .if not all, of the cases where the question has arisen, involved
These varying rules laid down for the guidance of trustees have been to a considerable extent rules of convenient administration. The English and Massachusetts law, which the Supreme Court adopted in Gibbons v. Mahon, supra, has the advantage of avoiding the difficulty and expense of investigating the facts upon which any apportionment must be based.
After the decision of Lowry v. Farmers’ Loan & Trust Co., 172 N. Y. 137, 64 N. E. 796, it was thought by many New York trustees that extraordinary dividends, whether of cash or stock, if derived from an accumulation of corporate profits and thus appearing in the corporate resolutions, were distributable to the life tenant, irrespective of when they were earned. New York trustees began to rely upon this decision as laying down a definite, even if a rather unjust, rule, when a series of cases of which the Matter of Osborne, supra, was the culmination, practically, though not in terms, overruled Lowry v. Farmers’ Loan & Trust Co., and established the method of apportionment I have mentioned.
The cases relating to distribution of extraordinary dividends by trustees are particularly designed to keep the corpus intact under all circumstances, and to furnish trustees with definite rules of conduct. A court may well hold that extraordinary dividends are always capital, because it thinks that so much trouble and expense is avoided that this consideration outweighs occasional injustice to the life tenant. The Supreme Court laid stress upon this consideration in Gibbons v. Mahon, supra, and Mr. Justice Gray remarked that the method of apportionment could not, “ * * * without producing great embarrassment and inconvenience, be left open to be tried and determined by the courts * * * and by a distinct and separate investigation * * * of the affairs and accounts of the corporation.”
I confess that, if strict justice between life tenant and remainderman is to be attained, I can imagine no other method than that of apportionment possible. The criterion adopted in these cases between life
“As to tlie distinction between stock and money that is too tbin; and if tbe law is that this extraordinary profit if given in the shape of stock shall be considered capital it must be capital if given as money.”
See Will of Pabst, 146 Wis. 330, 131 N. W. 739.
It is not important whether in any given case the present stock dividend would belong to the life tenant or remainderman of a trust. In either event, within the meaning of the Income Tax Law, it must be regarded as income, whether it be added to the corpus of the trust or paid to the beneficiary. The Circuit Court of Appeals for the Eighth Circuit, in the cases of Lynch v. Turrish, 236 Fed. 653, 149 C. C. A. 649, and Lynch v. Hornby, 236 Fed. 661, 149 C. C. A. 657, use language inconsistent with the conclusion I have reached in discussing extraordinary cash dividends paid from moneys received by a corporation prior to the time the Income Tax Act went into effect. These dividends,- however, were not derived from corporate earnings, but from appreciation of capital which had been converted into cash. They were, therefore, in no sense income, and were not subject to a tax, as the Supreme Court had already held in the case of Gray v. Darlington, 15 Wall. 63, 21 L. Ed. 45, in construing the old Income Tax Act passed during the Civil War.
The recent case of Brushaber v. Union Pacific R. R., 240 U. S. 1, 36 Sup. Ct. 236, 60 L. Ed. 493, held, following Stockdale v. Insurance Cos., 20 Wall. 323, 22 L. Ed. 348, that the Income Tax Act under consideration could not be assailed because of its retroactive character, and that Congress could impose a tax upon income, even when received during a portion of the year prior to the passage of the act. The stock dividend in question, or an equivalent cash dividend, would not belong to the stockholder until declared by the board of directors, so that it was in no proper sense income of the stockholder until that time.
The whole matter turns on the new rights which the stockholder gets by the declaration of the stock dividend. The market value of the totality of his holdings may for the time remain the same as before. But as the New York Court of Appeals, in the case of Williams v. Western Union, 93 N. Y. 162, said when speaking of the surplus of the Western Union before the declaration of a stock dividend:
“ * * * it was not beyond the reach of the dividend-making power, of the directors,” but after the dividend was declared, “so far as the solvency and responsibility of a corporation is concerned, they are increased, * * * where it has a surplus of property to correspond to the amount of shares*708 issued. In such case the surplus property is secured and impounded for the benefit of the creditors of the corporation and for the public, so that thereafter it can never be legally divided, withdrawn, or dissipated in any way.”
The new stock/purchased and paid for out of earnings which have been added permanently to capital, is as truly income of the stockholder as the cash from which it was derived was income of the corporation. This cash has by the action of the directors become capital of the corporation, but in its place the stockholder has received new shares, representing a permanent interest in the company, not subject to abatement by dividend distributions which have a value capable of realization in cash. His rights are different from those he had before the dividend was declared, and the shares of stock evidencing the new appropriation of the earnings and creating the new rights are income.
It may be said that in Edwards v.- Keith, supra, moneys representing income had not yet come in, whereas in the case at bar they were in the hands of the corporation. Such a distinction, however, treats the stockholder as though he were entitled to a dividend if the money were in the treasury of the corporation. That such is not the correct rule is a principle permeating the whole law of corporations. To go counter to it here would be to require investigations in every case as to when the property out of which dividends are paid accrued to the corporation itself. Indeed, the very year the Income Tax Act was passed it probably was true that a good many of the corporations which were paying their regular dividends were not earning them, but were paying them out of past earnings. Can it be supposed for a moment that Congress intended to require no income tax of the citizen because the regular dividend he received would not have been received at all, if it had depended upon the earnings of the corporation during that year? The real stumbling block which affects every one, and I confess has affected me, is the taxation of very large accumulations of earnings distributed by corporations after the passage of the act. Certainly a mere matter of size can make no difference in determining whether the property taxed is income or not. The doubt I have felt in reaching my conclusion has not been due to the nature of stock dividends, but to the difficulty which Judge Sanborn found in Lynch v. Turrish, supra, in determining whether Congress intended to tax earnings at all which had accrued in the hands of the corporation prior to the passage of the act, but were distributed later. In other words, in determining whether practically to ignore the corporate form and treat earnings whenever distributed as though declared in law at the time they were earned.
The plaintiff has established no claim to a repayment of it, and the demurrer to his complaint is sustained.