Court Opinion

ID: 8178562
Source: CourtListenerOpinion
Date Created: 2022-09-09 22:24:36.989433+00
Date Added: 2024-06-11T16:40:04.919368
License: Public Domain

Bitz, Judge,
(dissenting) :
The degree of finality which ordinarily attaches to a decision of the United States Supreme Court has made me hesitate to dissent in this case from the opinion of the majority of my brethren.- The reasoning of the opinions expressing views different from that I entertain does not convince me, it does not even create a doubt in my mind as to the correctness of the decree appealed from. It seems to me that the majority opinion lays too much stress upon the relation of the stockholder to the’corporate entity, and loses sight of the fact that the corporation is in no wise interested in the controversy^ It can make no difference to the corporation which of the parties gets the stock dividend. -It will have just the same assets and property when it is given to the life tenant as when given to the remainderman. The whole question must be, what is the right between the remainderman and the life tenant? Can it be doubted that when the trust was created the testator intended the life tenant to have everything the property set aside for his benefit earned during his life? What matters it whether these earnings are paid in money, in stock or in some other species of property? It is said that when a stock dividend is declared, the corporation parts with nothing, that it retains all of the physical assets. Quite true. But that is not the question. Does not the stockholder get something? When it issues its’ shares of stock as a dividend, it as effectually parts with the control over those shares as it does with the money paid upon the declaration of a cash dividend. This view is very aptly expressed by the Supreme Judicial Court of Massachusetts in the case of Tax Commissioner v. Putnam, 227 Mass., 522, 116 N. E. 904, as follows: “It was the issuance to the stockholder of a new thing of value, transferable, transmissible *711and saleable, separate and apart from that which before he had possessed. ... In essence the thing which had been done is to distribute a symbol representing an accumulation of profits, which, instead of being paid out in cash, is invested in the business, thus augmenting its durable assets. In this aspect of the case the substance of the transaction is no different from what it w'ould be if a cash dividend had' been declared with the privilege of subscription to an equivalent amount of new shares. The stock dividend was declared strictly out of an accumulation of earnings applied to business uses, and not out of increased market value of capital investment. That which the stockholder had before was a. fractional interest in the property of the corporation. So' far as concerned the accumulation of profits, there was a. possibility that they might be paid out in -whole or in part as a cash dividend by authority of the corporation. By the' issue of the stock dividend that possibility is gone, and the' stockholder nov has evidence of a permanent interest in the-corporate enterprise, of which he cannot be deprived.” This: language perhaps seems strangs coming from that court, but in that case it was held that a stock dividend was income and subject to be taxed as such under the laws of Massachusetts. I confess my mind is not subtle enough to conceive any reason why these stock dividends are income for the purpose of taxation, and are not income as between the life tenant and the remainderman. Under that decision these dividends go to the remainderman because they are not income, and then when he gets them they are taxed by the state because they are income. The Supreme Court of Kentucky in the case of Hite v. Hite, 19 L. R. A. 173, so aptly expresses the views I entertain that I quote the following from the opinion: “Where a dividend, although declared in stock, is based upon the earnings of the company, it is in reality whether called by one name or another, the income of the capital invested in it. It is but a mode of distributing the profit. If it be not income, what is it?' If it- is, then it is rightfully and equitably the property of the life tenant. If it be. really profit, then he should have it, whether paid in stock or money. A stock dividend proper is the issue of new shares paid for *712by the transfer of a sum equal to their par value from the profit and loss account to that representing capital stock; and realty a corporation has no right to declare a dividend either in cash or stock, except from its earnings; and a singular state of case — it seems to us, an unreasonable one — is presented if the company, although it rests with it whether it will declare a dividend, can bind the courts as .to the proper ownership of it, and by the mode of payment substitute its will for that of the testator, and favor the life tenants or the remaindermen, as it may desire. It cannot, in reason, be considered that the testator contemplated such a result. The law regards substance, and not form, and such a rule might result not only in a violation of the testator’s intention, but it would give the power to the corporation to beggar the life tenants, who, in this case, are the wife and children of the testator, for the benefit of the remaindermen, who may perhaps be unknown to the testator, being unborn when the will was executed. We are unwilling to adopt a rule which to us seems so arbitrary, and devoid of reason and justice. If the dividend be in fact a profit, although declared in stock, it should be held to be income. It has been so held in Pennsylvania and many other states, and we think it the correct rule.” It w'ould serve no good purpose to review in detail the authorites supporting this view. It is supported by the New York Court of Appeals in the cases of In re Osborne, 209 N. Y. 450, and McLouth v. Sexton, 154 N. Y. 179; by the Supreme Court of Pennsylvania in the cases of Earp’s Appeal, 28 Pa. St. 368, Smith’s Estate, 140 Pa. St. 344, and Moss’s Appeal, 83 Pa. St. 264; by the Supreme Court of New Hampshire in the cases of Holbrook v. Holbrook, 74 N. H. 201, and Lord v. Brooks, 52 N. H. 72; by the Supreme Court of Delaware in the case of Bryan v. Aiken, 86 Atl. 674; by the Supreme Court of Maryland in the cases of Thomas v. Gregg, 78 Md. 545, Atlantic Coast Line Dividend Cases, 102 Md. 73, Northern Central Ry. Dividend Cases, 94 Atl. 338, Miller v. Deposit Co., 96 Atl. 766, and Coudon v. Updegraff, 117 Md. 71; by the Supreme Court of Tennessee in Pritchett v. Nashville Trust Co., 96 Tenn., 472; by the Supreme Court of Kentucky in the cases of Hite v. Hite, 93 Ky., 257, and *713Cox v. Gaulbert, 148 Ky., 407; by the Supreme Court of Vermont in the ease of In re Heaton’s Estate, 96 Atl. 21; by the Supreme Court of South Carolina in the cases of Wallace v. Wallace, 90 S. C. 61, and Cobb v. Fant, 36 S. C. 1; by the Coart of Chancery of New Jersey in VanDoren v. Olden, 19 N. J. Eq. 176, and Ashhurst v. Field, 26 N. J. Eq., 1; by the Supreme Court of Mississippi, in the case of Simpson v. Millsaps, 31 So., 912; by the Supreme Court of Wisconsin in the case of Soehnlein v. Soehnlein, 146 Wis., 330; by the Supreme Court of Minnesota in the case of Goodwin v. McGaughy, 108 Minn. 248; and by the Supreme Court of Iowa in the ease of Kalback v. Clark, 133 Ia. 215. The curious practitioner will find the authorities extensively collated in monographic notes to the cases of Re Heaton, L. R. A. 1916 D. 201; In re Osborne, Am. Cases, 1915 A, 298; and Holbrook v. Holbrook, 12 L. R. A. (N. S.), 768.
In the opinion of the majority some analogy is found between stock dividends, or rather the property from which stock dividends are declared, and the increase in the value of the property because of its location, or because of changed values for any other reason. If this stock dividend was declared out of enhanced values of the corporate property, undoubtedly it would not be earnings, but the allegation in the bill in this case is that it is declared from actual earnings of the company since the death of the testator. I would readily admit that declaration of a stock dividend which did not have the earnings of the company for a basis would not be income, and so do all the authorities above cited.
It is also argued that stock dividends are frequently declared when cash dividends would be impracticable, the corporation finding it best to keep the earnings to meet strained conditions that may arise in the future. This may be entirely true, but I am unable to see what difference it would make to the corporation whether a dividend declared out of the earnings is held to be income or principal. It would have just the same property to meet future strained conditions if the stock was in the hands of a life tenant as it would have if it was in the hands of the remainderman. There seems to be some fear that a holding that these stock dividends de-
*714'dared out of earnings are income would be disastrous to the business of the corporation. This position, however, is entirely assumed without any real' basis for it. The corporation's affairs are not differently affected in the one case than in the other. The most that can be said for the rule that stock dividends are part of the capital is that it is a rule of convenience, that it furnishes an easy method for the administration of the trust estates by the trustee, but it entirely disregards the interest of the life tenant, and may in this case deprive him of the means of support provided for him by his ancestor.
Judge Williams joins in this dissent.