#### The People of the State of New York ex rel. The Pullman Company, Appellant, *v.*Martin H. Glynn, as Comptroller of the State of New York, Respondent.

Third Department,

January 22, 1909.

Tax— assessment of franchise tax — review on appeal—when distribution of additional stock may be treated as dividend.

A'franchise tax is imposed upon that part of the capital stock of a corporation which is employed within this State. It is the stock itself, not the dividend, which is taxable. If a corporation pays no dividend the tax is computed upon the appraised value of .the stock, but where a'dividend is paid it indicates the value of the stock, and the tax is determined by the amount of the dividend.

The Appellate Division will not disturb a decision of the Comptroller assessing a franchise tax, unless clearly shown to be erroneous.

Whether a distribution of additional stock *pro rata*among stockholders is a dividend representing profits, or is an adjustment of the capital account, depends upon the circumstances of each case. If such distribution represents surplus earnings, it will be treated as a dividend and may be considered as such in determining the amount of the franchise tax.

*333Cebtiobabi issued out of the Supreme Court and attested on the 1st day of June, 1908, directed to Martin H. Glynn, as Comptroller of the State of Yew 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 a franchise tax against the relator under section 182 of the Tax Law as amended. (See Laws of 1896, chap. 908, '§ 182, as amd. by Laws of 1907, chap. 734.)

*Cumming & Webster [Robert C. Cumming*of counsel], for the relator.

*William S. Jackson, Attorney-General,*and *Timothy I. Dillon, Deputy Attorney-General,*for the respondent.

Kellogg, J.:

The franchise tax is imposed upon that part of the capital stock of the corporation which is employed within the State. It is the stock and not the dividend which is taxable. Where a corporation pays no dividend the stock is appraised and the tax is computed upon the appraised value. Where a dividend is paid it is an indication of the value of the stock, and the tax upon the stock is determined by the amount of such dividend.

A dividend is a corporate profit set aside, declared and ordered by the directors to be paid to the stockholders upon demand or at a fixed time. (Cook Corp. [6th ed.] § 534.) Whether in this case the distribution of additional capital stock was a distribution of profits or an adjustment of capital account is the material question. The relator had full knowledge upon that question, but upon a hearing before the Comptroller failed to give any information upon the subject. The decision of the Comptroller as to assessments and taxation, unless clearly shown to be erroneous, will not be disturbed. *(People ex rel. Postal Telegraph Co.*v. *Campbell,*70 Hun, 507; *People ex rel. Westchester F. I. Co.*v. *Davenport,*91 N. Y. 574; *People ex rel. Burke*v. *Wells,*184 id. 275, 279.)

Stock, scrip and bond dividends, so called, have frequently been declared and have been before the court for consideration, and I think the general understanding in commercial affairs and with the courts is that they represent a benefit to the stockholders and a distribution of profits. Whether a distribution of stock *pro rata**334among the stockholders of a corporation is a dividend representing profits or an adjustment of capital account depends upon the circumstances of each case, and if such distribution represents surplus earnings it may fairly be treated as a dividend and as the income from the original stock. *(Chester*v. *Buffalo Car Mfg. Co.,*70 App. Div. 443 ; 183 N. Y. 425 ; *McLouth v*. *Hunt,*154 id. 179 ; *Lowry*v. *Farmers’ L. & T. Co.,*172 id. 137.)

This court has held that a distribution of stock *pro rata*among the stockholders, which does' not represent profits but an excess of capital, Cannot be considered as a basis for computing the tax under this statute. *(People ex rel. North American Trust Co.*v. *Knight,*96 App, Div. 120.)

Assuming as wé must for the purposes of this case that this issue of stock so distributed represented, surplus profits, it is clear that it inay' properly be taken into consideration in determining the amount of the relator’s tax. If the relator is now able to distribute $26,000,000 of surplus profits earned, it means that it has failed for. some reason to distribute annually the net earnings of the corporation fairly applicable to dividends, and has deemed it wise, 'instead of making such distribution annually, to distribute it at one time. If the surplus earnings of the corporation fairly applicable to dividends had been, distributed from time to time during the various years covered by this statute, the relator would have paid to the State a much larger sum as a tax tha.n it has paid, and if it now distributes such surplus in a lump it is not injured by having the lump sum treated as a basis for computing the amount of the tax. Aside from the bare question of interest from year to year it is quite immaterial to¡ the State and to the relator whether the distribution of surplus profits and the tax computed thereon is spread over many years or Included in one year. The result is in either casé that the amount of net profits distributed by the relator to its stockholders has been used for the purpose of determining the amount of its tax.

"We, therefore, concludé that the determination should be confirmed, with costs and disbursements against the relator. ■

Determination unanimously confirmed, with fifty dollars costs and disbursements "against the relator.