Court Opinion

ID: 4629180
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:04:54.062652+00
Date Added: 2024-06-11T07:57:20.256718
License: Public Domain

FRANKLIN J. MATCHETTE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Matchette v. CommissionerDocket No. 40710.United States Board of Tax Appeals26 B.T.A. 909; 1932 BTA LEXIS 1225; August 29, 1932, Promulgated 1932 BTA LEXIS 1225">*1225  On January 23, 1923, a corporation declared a dividend, payable February 10, 1923, to stockholders of record on January 26, 1923.  On February 3, 1923, petitioner, a stockholder in said corporation, sold and delivered 3,650 shares of his stock "together with any dividend which may be paid hereafter upon said stock prior to the certificates therefor being transferred upon the books of said company," as part consideration for the issuance to him of all of the stock of an investment company.  On February 13, 1923, the stock was transferred of record and on February 16, 1923, petitioner received a check including said dividend.  On February 20, 1923, petitioner paid said dividend to the corporation to which he had transferred the stock.  Held, neither under the law of corporations nor by the terms of the contract of sale did the dividend belong to the investment company and petitioner is taxable on same, as income received.  R. Kemp Slaughter, Esq., Hugh C. Bickford, Esq., and William P. McCool, Esq., for the petitioner.  W. F. Gibbs, Esq., for the respondent.  VAN FOSSAN 26 B.T.A. 909">*910  This proceeding was brought to redetermine deficiencies in the1932 BTA LEXIS 1225">*1226  income tax of the petitioner for the years 1922, 1923, 1924 and 1925 in the sums of $39,025.91, $50,737.60, $4,693.65 and $1,224.76, respectively.  The petitioner alleges that the respondent erred in determining: (1) That the basis for ascertaining gain or loss upon the sale of the preferred and common stock of the Richmond Radiator Company did not $40exceed per share for the preferred and $20 per share for the common stock.  (2) That a dividend of $127,750 received by the petitioner from the New York Hotel Statler Company, Inc., in 1923 and paid over by him to the Matchette Investment Company constituted gross income of the petitioner.  (3) That a dividend of $2,501.25 payable December 31, 1924, but received by the petitioner in 1925 constituted gross income of the petitioner for the year 1924.  The first issue was settled by a stipulation that the fair market price or value of the stock on March 1, 1913, was $88.50 per share for the preferred and $20 per share for the common stock.  The facts were stipulated.  From the stipulation and the pleadings we find as follows.  FINDINGS OF FACT.  The petitioner is a resident of New York City.  He kept his accounts for the1932 BTA LEXIS 1225">*1227  years under consideration and filed his Federal income-tax returns for such years upon a cash receipts and disbursements basis.  The shares of stock of the Richmond Radiator Company involved in this proceeding were acquired by the petitioner in December, 1912.  The fair market price or value of such stock on March 1, 1913, was $88.50 per share for the preferred and $20 per share for the common stock.  The petitioner's cost for the stock of said Richmond Radiator Company involved in this proceeding was $88.50 per share for the preferred and $20 per share for the common stock.  The petitioner made the following sales of the Richmond Radiator Company stock at the indicated times and prices: YearClassSharesPrice1922Common1,000$6,000.001922Preferred50040,000.001923Common5003,500.001924Common2003,000.001925Preferred20023,386.001925Common40756.4026 B.T.A. 909">*911  From prior to January 23, 1923, and until February 3, 1923, the petitioner was the owner and holder of 7,555 shares of common stock of the Servidor Company and 5,651 shares of common stock of New York Hotel Statler Company, Inc. (hereinafter called the1932 BTA LEXIS 1225">*1228  Hotel Company), a corporation duly organized and existing under the laws of the State of New York.  On January 23, 1923, the said Hotel Company declared a dividend out of its surplus or net profits of $35 per share on its common stock, payable February 10, 1923, to stockholders of record on January 26, 1923.  On February 3, 1923, the petitioner made a written offer to the Matchette Investment Company (hereinafter called the Investment Company), a corporation then duly organized and existing under the laws of the State of Delaware, to purchase 11,205 shares of the capital stock of the said Investment Company and pay there for by assigning to it 7,555 shares of the common stock of the Servidor Company and 3,650 shares of the common stock of the Hotel Company, "together with any dividend which may be paid hereafter upon said stock prior to the certificates therefor being transferred upon the books of said Company." The said offer was duly accepted by the Investment Company on the same date.  The shares of stock of the Hotel Company referred to in said agreement represented 3,650 shares of the 5,651 shares of the same stock referred to hereinbefore.  Pursuant to the said agreement1932 BTA LEXIS 1225">*1229  said 3,650 shares of common stock of the Hotel Company and 7,555 shares of common stock of the Servidor Company were thereupon assigned and delivered to the Investment Company under the terms of said agreement and 11,205 shares of stock of the Investment Company were issued to the petitioner, Nellie S. Matchette and Percival S. Kaufman.  The shares of stock issued to Nellie S. Matchette and Percival S. Kaufman were held by them as nominees for the petitioner.  The said 11,205 shares of stock of the Investment Company comstituted the entice issued stock of the said company.  The 3,650 shares of stock of New York Hotel Statler Company assigned by petitioner on February 3, 1923, were transferred of record to Matchette Investment Company on February 13, 1923.  On or about February 16, 1923, the petitioner, as the record holder on January 26, 1923, of 5,651 shares of common stock of the Hotel Company, including the 3,650 shares referred to above, received from that company a check for $197,785, representing the dividend declared January 23, 1923, on said stock.  Because the said check included dividends on 2,001 shares other than the 3,650 shares referred to above on February 16, 1923, the1932 BTA LEXIS 1225">*1230  petitioner deposited it to his order in the Irving Bank-Columbia Trust Company, New York City, 26 B.T.A. 909">*912  and on February 20, 1923, drew his check to the order of the Investment Company for $127,750, representing the amount of said dividend on the 3,650 shares assigned to the said company pursuant to the aforesaid agreement of February 3, 1923.  The said check was thereupon delivered to the Investment Company and was deposited by it in its bank account.  The following are the entries on the petitioner's cash book reflecting these transactions: 1923 Feb. 16Irving BankDepositto N Y Hot StDiv on 2001 shares70,035.00Match Inv. Coon 3650 shares127,750.0020Matchette Inv. Co.Due Investment Co. for dividendon 3650 shares of N Y Hotel Statler Co com stock 127,750.00The Investment Company included the said dividend of $127,750 in its Federal income-tax return for 1923.  From January 26, 1923, and until after January 7, 1925, the petitioner individually was the owner and holder of the remaining 2,001 shares of common stock of said Hotel Company not assigned to the Investment Company, as aforesaid.  On December 20, 1924, the1932 BTA LEXIS 1225">*1231  said Hotel Company declared a dividend of $1.25 per share on its common stock, payable December 31, 1924, to stockholders of record on December 15, 1924.  On December 31, 1924, the said Hotel Company put in the United States mail at Buffalo, New York, where the said company had its principal office, a postpaid wrapper addressed to the petitioner in New York City, containing its check for $2,501.25 payable to the petitioner, representing such dividend on the 2,001 shares owned by the petitioner.  The said check reached the petitioner in the ordinary course of mail on or after January 2, 1925, but prior to January 7, 1925.  OPINION.  VAN FOSSAN: The first alleged error now at issue in this case is the respondent's determination that a dividend of $127,750 received by the petitioner from the Hotel Company on February 16, 1923, and paid over by him to the Investment Company on February 20, 1923, constituted income to the petitioner.  Briefly reviewing the facts, we find that on January 23, 1923, the Hotel Company declared a dividend payable on February 10, 1923, to stockholders of record on January 26, 1923.  On February 3, 1923, petitioner sold 3,650 shares of the Hotel Company1932 BTA LEXIS 1225">*1232  stock to the Investment Company, "together with any dividend which may be paid 26 B.T.A. 909">*913  hereafter upon stock prior to the certificates therefor being transferred upon the books of said company." The stock certificates were assigned and delivered to the Investment Company.  They were transferred of record on the corporate books of the Hotel Company on February 13, 1923.  The dividend was paid February 16, 1923.  It is fundamental that a dividend belongs to the owner of the stock at the time of declaration.  Fletcher Cyc. corp., sec. 3700; ; . And this is true of dividends declared to stockholders of record on a certain date but payable at a future date - such a dividend belongs to the owner of the stock when declared.  Nor, in the absence of agreement to the contrary, will a sale of the stock afterwards carry the dividend with it though it may not be payable or paid until after the date of the sale.  hopper v. On the other hand, it is also fundamental that in the absence of a contrary agreement, the vendee gets all dividends declared after a sale of the stock.  Applying1932 BTA LEXIS 1225">*1233  these principles to the facts, it is clear that, unless the terms of the agreement of sale provided otherwise, the dividend dechared January 23 to stockholders of record January 26 belonged to petitioner, Matchette, the stockholder of record until February 13, 1923.  When the stock was sold on February 3 it did not ipso facto carry with it the dividend previously declared to stockholders of record on January 26, 1923.  That the parties to the sale recognized this principle of law is evident from the fact that they made specific provision as to the disposition of the dividends.  They provided that the stock was to carry with it "any dividend which may be paid hereafter upon said stock prior to the certificates therefor being transferred upon the books of said company." The certificates were transferred of record on February 13, 1923.  The dividend was paid February 16 by check to petitioner's order.  Therefore, the dividend was not paid prior to the transfer of the certificates of record.  It follows that neither by the operation of the law of corporations nor by the terms of the contract of sale of the stock did petitioner sell the dividend to the Investment Company.  Petitioner1932 BTA LEXIS 1225">*1234  was entitled to receive the dividend by the terms of the resolution of declaration; he did not part with the same when he sold the stock; he actually received the dividend from the declaring corporation; it became income to him on receipt and his subsequent disposition of the same is immaterial to the question at issue.  The principles underlying , relied on by petitioner are not in conflict with the above.  In fact, so far as applicable that decision supports the above conclusion.  There the question was whether the date of declaration or the date of payment 26 B.T.A. 909">*914  fixed the time of distribution.  The Supreme Court held the date of payment was the date of distribution.  Here the basic question is the ownership of the dividend.  Other cases cited by petitioner are either not pertinent to this question or are plainly distinguishable.  The respondent is sustained in respect to the taxability of the dividend.  The second issue involves the taxability in 1924 or 1925 of dividends declared by the Hotel Company on December 20, 1924, payable December 31, 1924, to stockholders of record on December 15, 1924.  Under our recent decision1932 BTA LEXIS 1225">*1235  in , promulgated July 26, 1932, and the reasoning thereof, such dividends constitute gross income to the petitioner for 1924.  See also . In the case at bar the facts supporting that conclusion are even stronger than in the Shearman case, since the dividends were payable on December 31, 1924, to stockholders of record on December 15, 1924.  At any time on December 31, 1924, the petitioner could have demanded and received his dividends from the Hotel Company.  There was no limiting circumstance such as existed in ; affd.,. The mailing of a check to him was a voluntary act on the part of the corporation having no special legal significance.  Decision will be entered under Rule 50.