OPINION.
Johnson, Judge:
Petitioner, as sole shareholder of Studios, received in 1942 a dividend of $800,000. The parties are agreed that $104,-610.56 of this amount was earnings and profits if the dividend of $203,091, declared September 11, 1930, reduced Studios’ accumulated earnings and profits in the fiscal year ended June 30, 1931, and that $239,059.58 thereof was earnings and profits if, as the Commissioner determined, the prior dividend reduced accumulated earnings, profits, and paid-in capital in the fiscal year ended June 30,1933. Studios, be it noted, had more than ample earnings and profits in the fiscal year 1931 to pay the dividend in full, but subsequent losses had reduced this accumulation by June 1933. As a consequence the amount of earnings and profits available in 1942 for payment of the $800,000 dividend depends upon the amount absorbed by the prior dividend, and that in turn depends upon whether the prior dividend reduced earnings and profits in the fiscal year 1931 or in the fiscal year 1933.
Contending that distribution occurred in the fiscal year 1931, petitioner stresses that, pursuant to the declaration of September 11,1930, the amount of the dividend was charged to surplus; apportioned among the several shareholders, and individually credited to them on the corporate books; that consistently Studios reported the amount on its income.tax return for 1931 as “Dividends Payable,” and even if the shareholders be deemed to have postponed distribution by their failure to withdraw, still the declaration vested them with a right to it which of itself reduced the corporate surplus. Respondent argues/ to the contrary, that the dividend was not distributed until 1933; that it was reported by shareholders as received in 1933; and that the time of actual payment fixes the date on which the corporate earnings and profits are reduced, as was held in Emily D. Proctor, 11 B. T. A. 235, and cases therein cited.
It was recognized in the Proctor case that:
* * * as between a stockholder and a corporation, the declaration of a dividend brings into existence the status of a debtor and creditor, and the earnings and profits of the corporation to the extent of such a declaration are separated from the other property of the corporation. United States v. Guinzburg, supra [278 Fed. 363]; Plant v. Walsh, supra [280 Fed. 722]; and Appeal of A. H. Stange, supra [1 B. T. A. 810].
This rule has been applied in holdings that a corporation’s invested capital is reduced by the amount of a dividend declared, Gregg Co., Ltd,., 25 B. T. A. 81; Belmont Iron Works, 9 B. T. A. 216; W. E. Caldwell Co., 6 B. T. A. 47, even in the form of promissory notes, R. E. Burdick, 24 B. T. A. 1297, and that until payment the amount of a declared dividend is borrowed capital owed to the shareholders, Bulger Block Coal Co., 71 Ct. Cls. 636; 48 Fed. (2d) 675. The law of California here applicable conforms to the general rule, and was succinctly stated in Smith v. Taecker, 133 Cal. App. 351; 24 Pac. (2d) 182, as follows:
* * * the mere declaration of a dividend creates debts against the corporation in favor of the stockholders as individuals. Where the resolution declares a dividend on a future date, title to said dividend vests in the stockholder on ■the date fixed in the resolution.
From this it follows that in the fiscal year 1931 Studios became legally bound to pay the declared dividend.of $203,091 to its shareholders; that this amount could no longer be listed among its assets, but represented an indebtedness; and that surplus was thereby decreased. The evidence discloses that recognition was given by appropriate book entries to these consequences: The surplus account was debited with the amount and a corresponding credit was entered in a liability account styled dividends payable, on which the part of the total dividend due to each shareholder was individually indicated.
Respondent argues, none the less, that the date of payment or distribution to the shareholders fixes the year in which surplus was decreased, and, because there was no transfer of the amounts due the several shareholders from the dividends payable account to their respective individual accounts until the fiscal year 1933, he insists that the latter year is the year of distribution and, hence, the year in which surplus was reduced, under Mason v. Routzahn, 275 U. S. 175, and United States v. Phillips (C. C. A., 3d Cir.), 24 Fed. (2d) 195, as construed in the Proctor opinion, supra. In considering this argument we stress as of crucial significance that those cases involve the liability of the recipient shareholder for tax on a dividend and not the effect of the declaration or payment on the corporation’s own financial structure. We accept as settled that “the date of payment, not the date of the declaration of the dividend, is the date of distribution,” Mason v. Routzahn, supra. But, assuming, arguendo, that the shareholders did not receive the dividend until the corporation’s fiscal year 1933, we do not regard as applicable to the issue in this case the rule that a shareholder, whether on the cash or accrual basis, is not to be treated as receiving a dividend until his existing right to it has been satisfied by payment, actual or constructive. That rule is one of convenience rather than of strict law, as was pointed out by the Seventh Circuit Court of Appeals in Commissioner v. American Light & Traction Co., 156 Fed. (2d) 398, holding a shareholder on an accrual basis taxable in 1937 on a dividend actually paid in 1937, although his absolute right to it had ripened in 1936 by virtue of the declaration. And, while the Board of Tax Appeals in the Proctor case, supra, treated a special dividend as paid from available surplus, although a regular dividend, previously declared but unpaid, would have absorbed such surplus, it expressly recognized that the declaration brought into existence the relation of debtor to the shareholders, as appears from the above quoted excerpt, and then reasoned:
* * * we think it beside the point that the corporation may for a profit and loss statement or accounting purposes, or as showing the status existing between the corporation and its shareholders, show its earnings and profits to be reduced by a declaration of a dividénd not then paid. The dividend declared must give way to the dividend paid in so far as the taxability of the same in the hands of the stockholders is concerned. It is to tax that which is first distributed by payment rather than declaration that the statute seeks to and does reach. [Italics supplied.]
In this proceeding, however, we are not concerned with the taxability of the dividend declared on September 11, 1930, in the hands of the stockholders, but only with the effect of that dividend on corporate surplus. In the fiscal year 1931 the amount of it was properly charged against surplus; this charge remained unreversed thereafter, and whatever may have been the correct year for taxing the dividend to the stockholders, we are of opinion and hold that the accumulated earnings and profits of Studios were reduced in the fiscal year 1931 by the declared dividend of $203,091.
In reaching the foregoing conclusion, we have assumed, arguendo, that the dividend declared on September 11,1930, was not distributed until the fiscal year 1933, as respondent argues and petitioner denies.
Free access — add to your briefcase to read the full text and ask questions with AI
OPINION.
Johnson, Judge:
Petitioner, as sole shareholder of Studios, received in 1942 a dividend of $800,000. The parties are agreed that $104,-610.56 of this amount was earnings and profits if the dividend of $203,091, declared September 11, 1930, reduced Studios’ accumulated earnings and profits in the fiscal year ended June 30, 1931, and that $239,059.58 thereof was earnings and profits if, as the Commissioner determined, the prior dividend reduced accumulated earnings, profits, and paid-in capital in the fiscal year ended June 30,1933. Studios, be it noted, had more than ample earnings and profits in the fiscal year 1931 to pay the dividend in full, but subsequent losses had reduced this accumulation by June 1933. As a consequence the amount of earnings and profits available in 1942 for payment of the $800,000 dividend depends upon the amount absorbed by the prior dividend, and that in turn depends upon whether the prior dividend reduced earnings and profits in the fiscal year 1931 or in the fiscal year 1933.
Contending that distribution occurred in the fiscal year 1931, petitioner stresses that, pursuant to the declaration of September 11,1930, the amount of the dividend was charged to surplus; apportioned among the several shareholders, and individually credited to them on the corporate books; that consistently Studios reported the amount on its income.tax return for 1931 as “Dividends Payable,” and even if the shareholders be deemed to have postponed distribution by their failure to withdraw, still the declaration vested them with a right to it which of itself reduced the corporate surplus. Respondent argues/ to the contrary, that the dividend was not distributed until 1933; that it was reported by shareholders as received in 1933; and that the time of actual payment fixes the date on which the corporate earnings and profits are reduced, as was held in Emily D. Proctor, 11 B. T. A. 235, and cases therein cited.
It was recognized in the Proctor case that:
* * * as between a stockholder and a corporation, the declaration of a dividend brings into existence the status of a debtor and creditor, and the earnings and profits of the corporation to the extent of such a declaration are separated from the other property of the corporation. United States v. Guinzburg, supra [278 Fed. 363]; Plant v. Walsh, supra [280 Fed. 722]; and Appeal of A. H. Stange, supra [1 B. T. A. 810].
This rule has been applied in holdings that a corporation’s invested capital is reduced by the amount of a dividend declared, Gregg Co., Ltd,., 25 B. T. A. 81; Belmont Iron Works, 9 B. T. A. 216; W. E. Caldwell Co., 6 B. T. A. 47, even in the form of promissory notes, R. E. Burdick, 24 B. T. A. 1297, and that until payment the amount of a declared dividend is borrowed capital owed to the shareholders, Bulger Block Coal Co., 71 Ct. Cls. 636; 48 Fed. (2d) 675. The law of California here applicable conforms to the general rule, and was succinctly stated in Smith v. Taecker, 133 Cal. App. 351; 24 Pac. (2d) 182, as follows:
* * * the mere declaration of a dividend creates debts against the corporation in favor of the stockholders as individuals. Where the resolution declares a dividend on a future date, title to said dividend vests in the stockholder on ■the date fixed in the resolution.
From this it follows that in the fiscal year 1931 Studios became legally bound to pay the declared dividend.of $203,091 to its shareholders; that this amount could no longer be listed among its assets, but represented an indebtedness; and that surplus was thereby decreased. The evidence discloses that recognition was given by appropriate book entries to these consequences: The surplus account was debited with the amount and a corresponding credit was entered in a liability account styled dividends payable, on which the part of the total dividend due to each shareholder was individually indicated.
Respondent argues, none the less, that the date of payment or distribution to the shareholders fixes the year in which surplus was decreased, and, because there was no transfer of the amounts due the several shareholders from the dividends payable account to their respective individual accounts until the fiscal year 1933, he insists that the latter year is the year of distribution and, hence, the year in which surplus was reduced, under Mason v. Routzahn, 275 U. S. 175, and United States v. Phillips (C. C. A., 3d Cir.), 24 Fed. (2d) 195, as construed in the Proctor opinion, supra. In considering this argument we stress as of crucial significance that those cases involve the liability of the recipient shareholder for tax on a dividend and not the effect of the declaration or payment on the corporation’s own financial structure. We accept as settled that “the date of payment, not the date of the declaration of the dividend, is the date of distribution,” Mason v. Routzahn, supra. But, assuming, arguendo, that the shareholders did not receive the dividend until the corporation’s fiscal year 1933, we do not regard as applicable to the issue in this case the rule that a shareholder, whether on the cash or accrual basis, is not to be treated as receiving a dividend until his existing right to it has been satisfied by payment, actual or constructive. That rule is one of convenience rather than of strict law, as was pointed out by the Seventh Circuit Court of Appeals in Commissioner v. American Light & Traction Co., 156 Fed. (2d) 398, holding a shareholder on an accrual basis taxable in 1937 on a dividend actually paid in 1937, although his absolute right to it had ripened in 1936 by virtue of the declaration. And, while the Board of Tax Appeals in the Proctor case, supra, treated a special dividend as paid from available surplus, although a regular dividend, previously declared but unpaid, would have absorbed such surplus, it expressly recognized that the declaration brought into existence the relation of debtor to the shareholders, as appears from the above quoted excerpt, and then reasoned:
* * * we think it beside the point that the corporation may for a profit and loss statement or accounting purposes, or as showing the status existing between the corporation and its shareholders, show its earnings and profits to be reduced by a declaration of a dividénd not then paid. The dividend declared must give way to the dividend paid in so far as the taxability of the same in the hands of the stockholders is concerned. It is to tax that which is first distributed by payment rather than declaration that the statute seeks to and does reach. [Italics supplied.]
In this proceeding, however, we are not concerned with the taxability of the dividend declared on September 11, 1930, in the hands of the stockholders, but only with the effect of that dividend on corporate surplus. In the fiscal year 1931 the amount of it was properly charged against surplus; this charge remained unreversed thereafter, and whatever may have been the correct year for taxing the dividend to the stockholders, we are of opinion and hold that the accumulated earnings and profits of Studios were reduced in the fiscal year 1931 by the declared dividend of $203,091.
In reaching the foregoing conclusion, we have assumed, arguendo, that the dividend declared on September 11,1930, was not distributed until the fiscal year 1933, as respondent argues and petitioner denies. A close review of the facts established convinces us not only that surplus was reduced, but also that the shareholders received the dividend in the fiscal year 1931, and the decision reached is thus fortified. By the declaration, the dividend was payable on December 15, 1930; surplus was charged with the amount as of the date of the declaration, and each shareholder’s part was credited individually in the dividends payable account. Although the shareholders were indebted to Studios and the balances in their accounts varied frequently, there was no transfer to their individual accounts until June 27, 1933, when they directed the corporation by letter’to credit a part to the debts, and the remainder was then credited for the first time to their individual accounts. Eespondent argues that only then a distribution was made whereby the corporate earnings and profits were reduced. He stresses that December 15,1930, has no significance, “because absolutely nothing was done by anybody on that date,” .not even a crediting of the dividend to the shareholders’ individual accounts. It is equally true, however, that nothing was done from September 11,1930, date of the declaration, until June 27, 1933, when the shareholders directed the disposition to be made of the dividends, and among such directions, which were immediately carried out, was an assignment of $28,000 of the dividend due Mary Pickford and Douglas Fairbanks for application to the debt of Feature Productions, Inc. Obviously, on June 27,1933, the shareholders had an unqualified control over the dividends which the corporation recognized, and, if “nothing was done” after the entries made at the time of the declaration, we must assume that the shareholders had the same absolute control in the fiscal year 1931 that they had in the fiscal year 1933.
A dividend credited to a shareholder and unqualifiedly subject to his command is taxable to him as distributed in the year of the credit, whether or not actually withdrawn, Baker v. United States, 84 Ct. Cls. 428; 17 Fed. Supp. 976; Jacobus v. United States, 80 Ct. Cls. 357; 9 Fed. Supp. 41; Hadley v. Commissioner (App. D. C.), 36 Fed. (2d) 543; Brooks v. Commissioner (C. C. A., 4th Cir.), 35 Fed. (2d) 178; E. Gordon Perry, 28 B. T. A. 497; cf. Avery v. Commissioner, 292 U. S. 210, for a shareholder “cannot postpone his income taxes by leaving his dividend with his corporation,” A. D. Saenger, Inc. v. Commissioner (C. C. A., 5th Cir.), 84 Fed. (2d) 23; certiorari denied, 299 U. S. 577. And, although the shareholders here erroneously reported the dividend on their income tax returns for 1933, such treatment by them is immaterial to the issue, Valley Lumber Co. of Lodi, 43 B. T. A. 423; the corporation, on the contrary, properly listed it as a liability in its return for the fiscal year 1931. Payments by credit have been held sufficient to support the corporation’s claim for a dividends paid credit, Valley Lumber Co. of Lodi, supra; Atlantic Land Co., 43 B. T. A. 74; Valley Tractor & Equipment Co., 42 B. T. A. 311.
* * * The test in such cases is whether the right of the stockholder has so matured as to subject the dividend credited on the corporation’s books to the complete control of the stockholder and remove it from the control of the corporation. Whenever that test is satisfied, the book credit is regarded as the equivalent of cash and constitutes payment of the dividend. ***[R. H. Bouligny, Inc., 45 B. T. A. 456].
We are of opinion that the test has been satisfied by the crediting of the dividend to the shareholders on September 11,1930, and, as it was payable on December 15, 1930, the shareholders had complete control from that date, as is apparent from their directed disposition of the dividend in 1933 without further corporate action. The distribution, therefore, was made in the fiscal year ended June 30, 1931, and a for-tiori, the corporate surplus was then reduced.
In accordance with the stipulation, we find that $104,610.56 of the dividend of $800,000 received by petitioner in 1942 constituted a distribution of earnings and profits.
Reviewed by the Court.
Decision will be entered v/nder Rule 50.
Hill, dissents.