Gibbons v. Mahon

• Decision Date: 19 May 1890
• Citation: 136 U.S. 549,10 S.Ct. 1057,34 L.Ed. 525
• Parties: GIBBONS v. MAHON
• Court: U.S. Supreme Court

136 U.S. 549

10 S.Ct. 1057

34 L.Ed. 525

GIBBONS v. MAHON.

May 19, 1890.

[Statement of Case from pages 549-551 intentionally omitted] H. E. Davis, for appellant.

[Argument of Counsel from pages 551-557 intentionally omitted] J. Hubley Ashton, for appellee.

Mr. Justice GRAY, after stationg the case as above, delivered the opinion of the court.

The question presented by the claims made in the bill and answer and by the arguments of counsel is whether the 280 new shares of stock in the Washington Gas-Light Company are to be treated as dividends, to the whole or part of the principal of which the plaintiff is entitled under the will or are to be treated as an increase of the capital of the trust fund, and the plaintiff therefore entitled to receive only the income thereof. The court below held that the new shares must be treated as capital, the income only of which was payable to the plaintiff. She contends that the new shares are in the nature of a dividend to the whole of which she is entitled, or, if that position should not be maintained, that so much of the new shares as represents earnings made by the corporation since the death of the testatrix should be held to be income payable to her. Upon full consideration of the case, on reason and authority, this court is of opinion that the decision below is correct. The distinction between the title of a corporation, and the interest of its members or stockholders in the property of the corporation is familiar and well settled. The ownership of that property is in the corporation, and not in the holders of shares of its stock. The interest of each stockholder consists in the right to a proportionate part of the profits whenever dividends are declared by the corporation, during its existence under its charter, and to a like proportion of the property remaining, upon the termination or dissolution of the corporation, after payment of its debts. Van Allen v. Assessors, 3 Wall. 573, 584; Delaware Railroad Tax, 18 Wall. 206, 230; Tennessee v. Whitworth, 117 U. S. 129, 136, 6 Sup. Ct. Rep. 645; New Orleans v. Houston, 119 U. S. 265, 277, 7 Sup. Ct. Rep. 198. Money earned by a corporation remains the property of the corporation, and does not become the property of the stockholders, unless and until it is distributed among them by the corporation. The corporation may treat it and deal with it either as profits of its business or as an addition to its capital. Acting in good faith, and for the best interests of all concerned, the corporation may distribute its earnings at once to the stockholders as income, or it may reserve part of the earnings of a prosperous year to make up for a possible lack of profits in future years, or it may retain portions of its earnings and allow them to accumulate, and then invest them in its own works and plant, so as to secure and increase the permanent value of its property. Which of these courses shall be pursued is to be determined by the directors, with due regard to the conditior of the company's property and affairs as a whole; and, unless in case offraud or bad faith on their part their discretion in this respect cannot be controlled by the courts, even at the suit of owners of preferred stock, entitled byexp ress agreement with the corporation to dividends at a certain yearly rate, 'in preference to the payment of any dividend on the common stock, but dependent on the profits of each particular year, as declared by the board of directors.' Railroad Co. v. Nickals, 119 U. S. 296, 304, 307, 7 Sup. Ct. Rep. 209. Reserved and accumulated earnings, so long as they are held and invested by the corporation, being part of its corporate property, it follows that the interest therein, represented by each share, is capital, and not income, of that share, as between the tenant for life and the remainder-man, legal or equitable, thereof. Whether the gains and profits of a corporation should be so invested and apportioned as to increase the value of each share of stock for the benefit of all persons interested in it, either for a term of life or of years, or by way of remainder in fee, or should be distributed and paid out as income, to the tenant for life or for years, excluding theremainder- man from any participation therein, is a question to be determined by the action of the corporation itself, at such times and in such manner as the fair and honest administration of its whole property and business may require or permit, and by a rule applicable to all holders of like shares of its stock, and cannot, without producing great embarrassment and inconvenience, be left open to be tried and determined by the courts as often as it may be litigated between persons claiming successive interests under a trust created by the will of a single shareholder, and by a distinct and separate investigation, through a master in chancery or otherwise, of the affairs and accounts of the corporation, as of the dates when the provisions of the will of that shareholder take effect, and with regard to his shares only. In ascertaining the rights of such persons, the intention of the testator, so far as manifested by him, must of course control; but when he has given no special direction upon the question as to what shall be considered principal and what in come, he must be presumed to have had in view the lawful power of the corporation over the use and apportionment of its earnings, and to have intended that the determination of that question should depend upon the regular action of the corporation with regard to all its shares. Therefore, when a distribution of earnings is made by a corporation among its stockholders, the question whether such distribution bution is an apportionment of additional stock representing capital, or a division of profits and income, depends upon the substance and intent of the action of the corporation, as manifested by its vote or resolution; and ordinarily a dividend declared in stock is to be deemed capital, and a dividend in money is to be deemed income, of each share. A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their interests are not increased. After such a dividend, as before, the corporation has the title in all the corporate property; the aggregate interests therein of all the shareholders are represented by the whole number of shares; and the proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of new ones.

In Bailey v. Railroad Co., 22 Wall. 604, cited for the plaintiff, the point decided was that certificates, issued by a railroad corporation to its stockholders, as representing earnings which had been used in the construction and equipment of its road, and payable, at the option of the company, with dividends like those paid on the stock, were within that provision of the internal revenue laws, which enacted that any railroad company 'that may have declared any devidend in scrip or money due or payable to ts stockholders,' 'as part of the earnings, profits, income, or gains of such company, and all profits of such company carried to the account of any fund, or used for construction, shall be subject to and pay a tax of five per centum on the amount of all such' 'dividends or profits, whenever and wherever the same shall be payable, and to whatsoever party of person the same may be payable.' Acts June 30, 1864, c. 173, § 122, (13 St. 284;) July 13, 1866, c. 184, § 9, (14 St. 138, 139.) The question at issue was not between the owners of successive interests in particular shares, but between the corporation and the government, and depended upon the terms of a statute carefully framed to prevent corporations from evading payment of the tax upon their earnings. The opinion delivered by Mr. Justice CLIFFORD, though containing some general expressions which, taken by themselves, might seem to ignore the settled distinction (affirmed by this court in earlier and later cases above cited) between the property of the corporation and the interests of the shareholders yet explicitly recognized that 'net earnings of such a company may be expended in constructing or equipping the railroad, or in the purchase of real estate or other properties,' and 'may be distributed in dividends of stock or of scrip or of money;' that 'purchasers of stock have a right to claim and receive all dividends subsequently declared, no matter when the fund appropriated for the purpose was earned;' that, 'as a general rule, stock dividends, even when they represent net earnings, become at once a part of the capital of the company;' and that 'such a dividend, if earned and declared, necessarily increases the value of the old stock, if new stock is not issued, and in that mode reaches substantially the same result.' 22 Wall. 635-637.

In Great Britain it is well settled that where a corporation, whether authorized or unauthorized by law to increase its capital stock, accumulates and invests part of its earnings, and afterwards apportions them among its shareholders as capital, the amount so apportioned must be deemed an accretion to the capital of each share, the income of which only is payable to a tenant for life. From the beginning of this century it has been established, by decisions of the court of chancery in England, and of the house of lords on appeal from Scotland, that where a bank, having no power by law to increase its capital stock, has used its accumulated profits as floating capital, and invested them in securities which can be turned into cash at pleasure, an extraordinary dividend or bonus declared out of such profits is capital, and not income, of each share, as between owners of the life-interest...