People ex rel. Queens County Water Co. v. Travis

Kellogg, P. J. : The relator owned about 538 acres of land around or adjoining its plant, which it purchased some years ago for the protection of its water supply and drainage area. About 1911 it determined that it was not necessary to retain said lands for that purpose and that the company should dispose of them. The Norumbega Company was formed by the relator’s stockholders, and controlled by them, with a capital stock of $100,000, and it purchased the lands, giving therefor its capital stock, assuming mortgages upon the property of $24,000 and giving its note to the relator for $116,000. The apparent purchase price was $900,000. The land cost the relator about $200,000, but was worth more than that sum when sold to the new company. The capital stock of the new company was distributed by it to the stockholders of the relator’s company, and represented the amount given for the land with the mortgages and note. The Comptroller has treated this distribution of stock as a $100,000 dividend made by the relator, and this certiorari challenges that determination. If the company purchased these lands of the relator for $100,000 of its stock, the mortgages and the note, and turned the stock and note over to the relator, and the relator upon its accounts treated the stock as profits and distributed it pro rata among its stockholders, it could not seriously be questioned but that the relator had thereby paid a dividend. The only question remaining would be what was the value or amount of the dividend. The courts care but little for form, and are only [523] interested in determining what is the substance and effect of the transaction. Clearly the land was worth more than its cost, and the new company gave for the land more than the cost price. The excess of the selling price over the purchase price represents profits to the company, and is represented by the stock issued by the Norumbega Company. It is immaterial whether the relator entered these profits upon its books and distributed them itself among its stockholders, or caused the purchaser to make the distribution. If the purchaser made the distribution, it could only be done for the purpose of convenience, or perhaps to make a saving in taxation. The result, however, is the same; the stockholders of the relator company have received a profit from the sale of its lands. It does not make any difference what form a distribution of profits by a corporation takes; such distribution is to all intents and purposes a dividend. (Hartley v. Pioneer Iron Works, 181 N. Y. 73.) Evidently the Norumbega Company owns no property other than this land, and its capital stock was issued solely for the land. Section 55 of the Stock Corporation Law prohibits stock corporations from issuing stock or bonds except for money, labor done or property actually received for the use and lawful purposes of such corporation, and provides that any corporation may purchase property and may issue stock to the amount of the value thereof in payment therefor, and that in the absence of fraud in the transaction the judgment of the directors as to the value of the property purchased shall be conclusive. If the transaction was honest, as we must assume it was, the Norumbega Company issued its stock only for actual value, and, therefore, the stock was worth par. All reasonable presumptions are in favor of the decision of the Comptroller, and we cannot assume for the purpose of annulling his determination that the land was put into the company at an exorbitant price in positive violation of law. We, therefore, assume that the real estate purchased by the Norumbega Company was worth $900,000. If it was not worth that sum, proof should have been made to the Comptroller. Before the sale the land was the property of the relator. After the sale relator did not decrease the amount of its capital [524] stock, but it caused a distribution of $100,000 to be made to its stockholders. Section 28 of the Stock Corporation Law provides: “The directors of a stock corporation shall not make dividends, except from the surplus profits arising from the business of such corporation, nor divide, withdraw or in any way pay to the stockholders or any of them, any part of the capital of such corporation, or reduce its capital stock, except as authorized by law.” A corporation may begin business with a surplus contributed by its stockholders, and may thereafter divide that surplus, and such division is treated as a distribution of original capital or surplus contributed and nót as a dividend. In such a case the stockholders are only withdrawing from the company the moneys which they paid to it for temporary use, over and above the capital stock. But for any other money received or earned by the company, it is difficult to see how it can make or cause a distribution of them to be made otherwise than by a dividend from surplus'profits, bio proceedings were taken for the reduction of the capital stock of the relator, and no such reduction is alleged. The capital remained the same as before. It is not claimed that any sum was ever contributed by the stockholders to the company except the original capital. Therefore, this distribution caused to be made on account of profits which the company had derived from the sale of lands represented profits, and was a dividend. If a water power company, in disregard of the charter and the law, takes a flier in Wall street and makes a substantial profit, it can only distribute those profits to its stockholders as a dividend. It may attempt to call them something else, but the fact remains it is distributing profits to its stockholders. The profits were not realized in its legitimate business, but it earned the profits for its stockholders and caused them to be distributed. It is immaterial, therefore, whether the water company made these profits by selling water or by selling land. It purchased the land for a proper corporate purpose in the belief that such purchase was necessary to protect the interests of the company. After it became satisfied by the changed condition that it was unnecessary to hold it longer, it made the sale, reaping a profit therefrom. Such profit, therefore, arose in the legitimate business [525] of the corporation. The Horumbega Company could not determine how these profits were to be distributed, but distributed them by the direction of the relator. The relator had its capital and surplus invested in its business. It purchased the land apparently upon credit, giving its bonds or obligations therefor. It is immaterial whether it was purchased with profits, with the credit of the company, or otherwise. The fact remains the land was purchased by the company in the regular transaction of. its business, and was later sold at a profit. The capital stock has not been decreased, but remains as it was before the sale. The amount received for the lands above the cost, $200,000, was, therefore, profits, and was distributed by the relator to its stockholders. We are not interested as to what induced the relator to do this business in the manner which it adopted. It controlled the situation, made its plan and carried it out. The fact, however, remains that the lands were worth more than they cost; that there was a profit in the sale and that profit has been distributed by the direction of the relator to its, stockholders. Aside from the fact that full-paid stock was issued for this land, there is but little to show its actual value except that it was worth more than it cost. It may be unfortunate for the relator that it did not show the actual value of the land, but perhaps by issuing full-paid stock for it the directors who .had participated in the transaction were not in a position to contend that the land was worth less than the stock, the note and the obligations assumed. The determination should, therefore, be affirmed, with costs. All concurred, except Howard, J., dissenting in opinion, in which Woodward, J., concurred.