Boston Safe Deposit & Trust Co. v. Commissioner of Corporations and Taxation

• Court: Supreme Judicial Court of Massachusetts
• Citation: Boston Safe Deposit & Trust Co. v. Commissioner of Corporations and Taxation, 298 Mass. 263, 10 N.E.2d 105 (Mass. 1937)
• Decision Date: 17 September 1937
• Parties: BOSTON SAFE DEPOSIT AND TRUST COMPANY, executor, v. COMMISSIONER OF CORPORATIONS AND TAXATION.

298 Mass. 263

10 N.E.2d 105

BOSTON SAFE DEPOSIT AND TRUST COMPANY, executor, v. COMMISSIONER OF CORPORATIONS AND TAXATION.

Supreme Judicial Court of Massachusetts, Suffolk.

September 17, 1937

April 8, 1937.

Present: RUGG, C.

J., FIELD, DONAHUE LUMMUS, & QUA, JJ.

Tax, On income. Corporation, Dividend, Dissolution.

Where the by-laws of a corporation provided for cumulative "dividends" on its preferred stock and required that, upon its dissolution, preferred stockholders should be "paid in full, both the par amount of their shares and the unpaid dividends accrued thereon," and on its dissolution there was no surplus nor accumulated income or profits, so much of a sum paid to a preferred stockholder as represented accumulated "unpaid dividends" was under G.L. (Ter Ed.) c. 62, Section 1 (g) not taxable as income, since the entire sum paid was from capital.

APPEAL by a taxpayer, filed in the Supreme Judicial Court for the county of Suffolk on January 27, 1937, from a decision by the Board of Tax Appeals.

A. Brown, (H.

W. Knowlton with him,) for the taxpayer.

J. J. Ronan Assistant Attorney General, for the Commissioner of Corporations and Taxation.

R. G. Boyd, by leave of court, submitted a brief as amicus curiae.

QUA, J. St. 1933 c. 307, Section 9, provided that income received by any inhabitant of the Commonwealth during certain specified years from dividends on shares of corporations, with certain exceptions not here material, should be taxed at the rate of six per cent, and that the provisions of G.L.c. 62 as amended (except Section 1, subsection [b]) should apply to such taxation. G.L.c. 62, Section 1 (g), which was thus made applicable, read as follows, "No distribution of capital, whether in liquidation or otherwise, shall be taxable as income under this section; but accumulated profits shall not be regarded as capital under this provision."

Facts found by the Board of Tax Appeals are these: During the year 1933 James W. C. Lewis, of whose estate the appellant is executor, owned preferred stock in Danforth, Clark & Co., a foreign corporation. The by-laws of the corporation provided for cumulative dividends on the preferred stock at the rate of ten per cent and that in the event of any liquidation or dissolution or winding up of the corporation the preferred stockholders should "be entitled to be paid in full, both the par amount of their shares and the unpaid dividends accrued thereon, before any amount shall be paid to the holders of the common stock." In 1932 the stockholders voted to liquidate the assets and to dissolve the corporation, and during the year 1933 the entire assets were distributed among the shareholders. At the time of dissolution a substantial amount of unpaid dividends had accrued on the preferred stock. The amount available for distribution was less than the total par value of the preferred stock plus all the dividend accumulations, so that nothing was left for the common stockholders, but nevertheless it was large enough to pay the par value of the preferred stock and part of the arrears of dividends, so that Lewis received a total of $259,954.03 in cash on account of his preferred stock, which had originally been issued at par for $202,500. For several years the corporation had lost money and had a deficit which by the time of liquidation had increased to nearly $250,000.

The commissioner assessed against Lewis a tax upon $57,454.03, being the difference between the sum received by Lewis in liquidation and the original par value of his preferred stock, on the theory that such difference represented dividends taxable under the act of 1933. The appellant, on the other hand, contends that the entire sum received by Lewis was a distribution of capital and therefore not taxable because of G.L.c. 62, Section 1 (g) hereinbefore quoted.

We are of the opinion that the appellant's contention is sound. The sum received by Lewis in distribution on account of the unpaid cumulative dividends comes within the literal words of G.L ...