#### The People of the State of New York ex rel. the Tetragon Company, Relator, *v.*William Sohmer, as Comptroller of the State of New York, Respondent.

Third Department,

May 6, 1914.

Tax — franchise tax—when corporation engaged in business within the meaning of section 182 of the Tax Law — distribution of capital, what constitutes — capital stock defined.

A corporation formed for the purpose of taking title to undivided interests in certain real property for convenience in litigation, which, after a conveyance to it by one who had inherited undivided interests therein, in return for the entire stock which she issued to her fohr children in equal shares, held and leased such property and represented its stockholders in important litigation until the trustees under the wills of former owners in whom were vested the power of sale of said real estate had sold the same and paid to the corporation its share, and, after payment of counsel fees and disbursements, conveyed the balance to the stockholders, must be held to have been engaged in business within this State, within the meaning of section 182 of the Tax Law, and is liable for the payment of a franchise tax, pursuant to the provisions of sáid section.

But the moneys received from said trustees upon the sale of the real property and by them paid to the corporation and by it distributed to the stockholders, constituted a distribution of capital and not the payment of a dividend.

The words “capitalstock,” as used in section 182 of the Tax Law, mean not the share stock, but the property of the corporation.

Certiorari issued out of the Supreme Court and attested on the 14th day of November, 1913, directed to William Sohmer, as Comptroller of the State of New York, commanding him to certify and return to the office of the clerk of the county of Albany all and singular his proceedings had in determining the franchise tax against the relator for the year ending October 31, 1910.

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      *Parsons, Closson & McIlvaine [Herbert Parsons*and *Tompkins McIlvaine*of counsel], for the relator.

*Thomas Carmody, Attorney-General [Franklin Kennedy, Deputy Attorney-General,*of counsel], for the respondent.

Lyon, J. :

The relator is a domestic corporation organized in 1906 with a capital stock of $1,500 divided into sixty shares of $25 each. The purposes for which the corporation was formed, as stated in its certificate of incorporation, were to acquire, buy, invest in, hold, improve, manage, lease, sell, mortgage, pledge and deal in real and personal property in this and other States and countries. Such purpose and the acts of the relator, as stated in relator’s amended capital stock report for the year ending October 31, 1910, were as follows: *“*To take title to undivided interests in certain real property situated in the City óf New York, which property was in litigation and subject to a large amount of arrears of taxes and assessments and street opening and other proceedings in which further assessments would be levied; said undivided interests in said property had been inherited from former owners under whose wills the litigation had arisen. For purposes of convenience and the litigation it was thought best to temporarily hold the title to said undivided interests through a corporation. All the Company has done has been to hold the bare legal title to said undivided interests until the property could all be sold. When the property has all been sold the Company will be dissolved. * * * The Company has never improved, sold, mortgaged or dealt with any of the property in which it now or formerly had an interest, nor has the Company received any income or rents therefrom.”

Upon the hearing before the Comptroller the following testimony was given on behalf of the relator relating to the purposes of the formation of the company: *“*Q. As a matter of fact, the real purpose of the organization of the company was to have a holding company to hold the interests of these four stockholders ? A. Yes, on account of this litigation. The litigation lasted for some years after 1906, and it was becoming embarrassing for an individual, especially as there were a great many heirs in the litigation as it was. It was hard to serve *435them. They were people who traveled a great deal and they were away from the vicinity of New York all the tune. It was delaying litigation to have them away because they were constantly being served with papers; and, for the further reason, as I stated before, it was becoming embarrassing in the payment of taxes and counsel fees and that sort of thing. It would be more convenient to handle it as a corporation. Q. The corporation actually performed the duties for which it was incorporated ? A. I should say frankly that it accomplished its purpose.”

Upon the formation of the corporation Mrs. Mary E. Wright, who had inherited undivided two-thirds and one-fifth interests in said real estate, the title to which was in litigation, conveyed said interests to said corporation by quitclaim deed, and as the consideration for such conveyance received the entire capital stock of the company, which under her direction was issued to her four children in equal shares, and they continued to hold the same until the voluntary dissolution of the company in March, 1913. The litigation having terminated favorably as to the interests so conveyed by Mrs. Wright, the trustees, under the wills of former owners in whom were vested the powers of sale of said real estate, in March, 1910, sold the properties, with the exception of one parcel, at public auction, realizing for the former interests of Mrs. Wright, after deducting the expenses of administration, $102,785.02, of which $5,000 was for convenience paid to said stockholders direct, $25,849.02 was paid on account of legal services and disbursements, and the bal- . anee of $71,936 was paid to said company, and by it deposited in bank and immediately distributed to the shareholders of the company. The relator estimated the value of its interest in the unsold parcel of real estate October 31, 1910, at $48,000.

The State Comptroller treated the sum of $76,936 so paid by said trustees to the relator and its stockholders as a dividend of 5,000 per cent paid on the capital stock employed by the relator in the State during the year ending October 31, 1910, and assessed upon said corporation a tax of one-fourth of a mill for each one per cent of said dividend, which tax amounted to the sum of $1,875. The relator duly applied for a revision and resettlement of said assessment, which, after hearing had, the *436State Comptroller refused to modify. Said sum not having heen promptly paid, the State Comptroller imposed a penalty of $93.75, which tax and penalty the relator paid under protest September 7, 1911, and thereupon instituted this proceeding, claiming that the determination of the Comptroller was erroneous and illegal, for the reasons that the relator, during the year ending October 31, 1910, was not engaged in business, nor was any portion of its capital stock employed in business within this State within the meaning and intendment of the Tax Law; and that the said amount distributed to its shareholders did not constitute a dividend, but was a distribution of surplus capital, and that if the corporation was subject to any tax it should have been computed upon the basis of $48,000, the appraised value of the capital stock October 31, 1910. There is no claim that any portion of the capital of the relator was employed otherwise than as hereinbefore stated, but as appears from the record the relator held and leased the interests formerly owned by Mrs. Wright in the various parcels of real estate, and represented its stockholders as a litigant in important litigation which extended to the Court of Appeals, to that end employing and paying counsel and serving to expedite the litigation and as a conveniencé and relief to its stockholders and others concerned in it. It had a president, secretary, treasurer, and a board of directors through whom the moneys received by it from said trustees and on deposit in bank were paid out by it in satisfaction of obligations and distributed among its stockholders. The relator concedes that it accomplished the purpose for which it was incorporated.

In view of these facts we think the relator must be held to have been engaged in business within the intendment of section 182 of the Tax Law (Consol. Laws, chap. 60; Laws of 1909, chap. 62). *(People ex rel. Waclark Realty Co.*v. *Williams,*198 N. Y. 54; *People ex rel. Vandervoort Realty Co.*v. *Glynn,*194 id. 387; *People ex rel. Fourteenth Street Realty Co.*v. *Kelsey,*110 App. Div. 797; affd., 184 N. Y. 572; *People ex rel. Coney Island Jockey Club*v. *Sohmer, 155*App. Div. 842; affd., 210 N. Y. 549.)

The second question to be considered is whether the distribution to its stockholders of the proceeds of the sale of its inter*437ests in the real property constituted a distribution of capital or the payment of a dividend. As bearing upon the decision of this question it is entirely immaterial in what sum the relator was capitalized, whether for $1,500 or $150,000, which was approximately the value of the interests conveyed to it by Mrs. Wright, which, prior to the time of such conveyance, had been determined by the Supreme Court to be valid. The value of the capital stock is the value of the property of the corporation without regard to the amount of the capital stock. The term *“*capital stock ” means not share stock, but the property of the corporation. Capital stock and capital are practically the equivalent of each other when considered as a basis for a franchise tax. *(People ex rel. Commercial Cable Co.*v. *Morgan,*178 N. Y. 433.) The relator by such purchase parted with its entire issue of capital stock and became vested with the title to Mrs. Wright’s interests in the real property as its sole asset, and it appears from the evidence that the relator never received any sum on account of its leases of such interests, or from any source aside from the proceeds of the sale of the real property; and the evidence also shows that the real property was worth no more at the time it was sold by the trustees in 1910 than at the time the relator purchased it in 1906, and hence that no profit had accrued thereon. We think the moneys received from said trustees upon the sale of the real property and by them paid to the relator and by it distributed to the stockholders constituted a distribution of capital, and not the payment of a dividend. However, the relator having been engaged in business within this State, is liable for the payment of a franchise tax pursuant to the provisions of section 182 of the Tax Law. The determination of the Comptroller should, therefore, be annulled, with $50 costs and disbursements to the relator and the matter remitted to the Comptroller to determine the franchise tax in accordance with this opinion.

All concurred.

Determination of the Comptroller annulled, with fifty dollars costs and disbursements to relator, and matter remitted to the Comptroller to determine the franchise tax in accordance with the opinion.