Court Opinion

ID: 5239729
Source: CourtListenerOpinion
Date Created: 2022-01-06 17:22:49.709092+00
Date Added: 2024-06-11T08:27:47.360161
License: Public Domain

Howard, J. (dissenting):
The relator, the Queens County Water Company, is a corporation which was formed for the purpose of supplying water within the territory known, prior to the Greater Hew Tork charter, as the town of Hempstead. The water company had acquired and held for a considerable time, prior to 1911, certain lands which it finally determined were not necessary for its use. Believing itself unauthorized to deal in real estate the relator *526conceived the idea of selling the land outright to the Norumbega Company, a friendly corporation, the stockholders of which were stockholders of the relator. This it did. In payment for these lands the latter corporation assumed mortgages on the property transferred aggregating about $24,000, and gave its note to the relator for $176,000. It also issued its capital stock to the amount of $700,000, all of which stock it distributed direct to the stockholders of the relator ratably, according to their holdings. These lands cost the relator about $200,000, and the $24,000 in mortgages assumed and the $176,000 note given represent that amount. The Comptroller fixed the amount of the relator’s franchise tax, under section 186 of the Tax Law (Consol. Laws, chap. 60; Laws of 1909, chap. 62), on excess dividends, at $21,945. This was based on a report of the relator concerning the above-described sale of the real estate, and also upon its regular annual report to the effect that its paid-up capital stock for the year ending October 31, 1911, was $1,050,000, and that it had declared dividends to the amount of $73,500, and that the rate per annum of said dividend was seven per cent. That is, the Comptroller held the $700,000 of hTorumbega stock to be dividends paid by the relator to its stockholders within the meaning of section 186 of the Tax Law. . Was this stock dividends ? That is the question before us.
Section 186 of the Tax Law, so far as relevant here, reads: “Every corporation, * * * formed for supplying water, * * * shall pay to the State for the privilege of exercising its corporate franchises or carrying on its business in such corporate or organized capacity in this State, an annual tax which shall be five-tenths of one per centum upon its gross earnings from all sources within this State, and three per centum upon the amount of dividends declared or paid in excess of four per centum upon the actual amount of paid-up capital employed by such corporation, joint-stock company or association.” By this provision of the Tax Law corporations of the character of the relator were required to pay a certain tax for the privilege of exercising corporate franchises or carrying on business. This tax was to be measured each year by the dividends declared in the previous year. The purpose *527of the law was to tax the corporation according to its prosperity. A corporation earning and paying no dividends in a given year in excess of four per centum was required to pay no tax the next year — that is, no tax except the gross earnings tax; whereas the same corporation earning and paying a dividend above four per centum in some subsequent year would be required, the following year, to pay the tax specified.
“ Dividends,” within the meaning of section 186 of the Tax Law, has a well-defined meaning. Dividends as here spoken of cannot be made out of capital; they can only be made out of surplus profits arising from the business of the corporation. (Stock Corp. Law [Consol. Laws, chap. 59; Laws of 1909, chap. 61], § 28; People v. Albany Ins. Co., 92 N. Y. 458.) Neither the real estate in question nor the stock arising from its sale was made from the surplus profits arising from the business of the relator. The sale of these lands in no manner measured the price which the water company was required under section 186 of the Tax Law to pay for the privilege of doing business in 1912. The real estate was capital, not dividends; and the stock of the Norumbega Company was only another form of capital. In a certain sense the stock might be said to be a distribution of capital, but in no sense can it be considered dividends arising from surplus profits within the meaning of section 28 of the Stock Corporation Law and section 186 of the Tax Law.
But the Comptroller contends that the lands themselves were purchased, partly at least, out of surplus funds and were, therefore, when sold and paid for in stock, in reality, dividends. He has undertaken to establish this by an elaborate display of figures taken from the books of the relator. The president of the relator, a person proven to be entirely familiar with the affairs and books of the corporation, swears positively that all these lands were purchased from capital and not from surplus funds. In the absence of proof to the contrary by a professional accountant or other expert we must assume this evidence to be true.
In the Comptroller’s brief it is asserted that the issuance of the Norumbega stock by the Norumbega Company directly to the stockholders of the relator was an attempt by the relator *528to evade a formal declaration of a dividend, as well as an attempt to evade the stock transfer tax; that this device was resorted to by the relator because it feared the levying of the very tax in question. Of course any attempt of this sort at evasion would be wholly ineffectual if the stock were in fact dividends, but no matter what may have been the purpose of the relator, and no matter what may have been its fears, the fact remains that this stock .was not dividends but capital, and, therefore, not taxable under section 186 of the Tax Law.
There is no dispute about the excess dividends of $31,500. The tax on this, amounting to $945, should stand. It follows, however, from the reasoning above that the tax on the $700,000 Norumbega stock should be canceled.
Woodward, J., concurred.
Determination confirmed, with fifty dollars costs and disbursements.