People ex rel. Adams Electric Light Co. v. Graves

Hill, P. J. The petitioner is a corporation engaged in the business of selling and distributing electricity and is subject to a franchise tax as provided by section 186 of the Tax Law (as amd. by Laws of 1933, chap. 461), and particularly that part which requires it to pay “ 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 in this State.” Prior to May 16, 1933, the capital of this corporation was $49,915.83. There were 2,316 shares of no par value, each representing $21.55 of paid-in capital. Its surplus at that time was $101,051.70. On that date, by resolution of the board of directors, $90,084.17 of the surplus was transferred to the capital account. This transfer has been determined by the Tax Commission to be a dividend for the purpose of fixing the amount of the tax under the above-quoted portion of the law. We are reviewing that determination. After the transfer, each of the shares of stock represented $60.45 of paid-in capital. “ For the purpose of any rule of law or of any statutory provision relating to the amount of the capital stock of a corporation, the capital of any corporation authorized to issue shares without par value shall be deemed to be the capital stock of such corporation.” (Stock Corp. Law, § 13.) Therefore, by the transfer, the capital stock in the hands of the stockholders of the corporation was increased $90,084.17. Thereafter if the stockholders still desired to have shares of stock that represented only $21.55 each of paid-in capital, they had only to file a certificate and issue 4,180 (plus a fraction) additional shares (Stock Corp. Law, §§ 36, 37, 38) and each of the 6,496 shares would represent $21.55 of paid-in capital. True this transfer did not increase the wealth of the stockholders for they owned a contingent interest in the surplus of the corporation as well as its capital. Nevertheless the resolution of the board of directors changed the stockholders’ contingent and [239] separately untransferable ownership and interest in the corporate surplus into salable and exchangeable capital stock in the corporation. (Rockefeller v. United States, 257 U. S. 176, 183.) A dividend payable in stock issued against an earned surplus that had been transferred to the capital account is taxable. “ Stock, scrip and bond dividends, so called, have frequently been declared and have been before the court for consideration, and I think the general understanding in commercial affairs and with the courts is that they represent a benefit to the stockholders and a distribution of profits. * * * If such distribution represents surplus earnings it may fairly be treated as a dividend and as the income from the original stock.” (People ex rel. Pullman Co. v. Glynn, 130 App. Div. 332, 333; affd. on opinion below, 198 N. Y. 605.) To the same effect: People ex rel. Wedgewood R. Co. v. Lynch (262 N. Y. 202); People ex rel. Eastern Building Corp. v. Lynch (245 App. Div. 787). This transaction lacks only an increase in the number of shares, which may be effected as earlier mentioned, to correspond completely with a stock dividend. Even though the stockholders were not enriched, the change from a contingent interest in the corporate surplus to a transferable share of the capital was in effect a dividend and taxable. (Eisner v. Macomber, 252 U. S. 189; People ex rel. Fox Film Corp. v. Loughman, 259 N. Y. 30.) The determination of the State Tax Commission should be confirmed. Crapser and Bliss, JJ., concur; Rhodes, J., dissents, with an opinion, in which Heffernan, J., concurs.