Boston Safe Deposit and Trust Co., Trustee, v. Commissioner of Corp.

• Decision Date: 25 November 1930
• Citation: 273 Mass. 187
• Parties: BOSTON SAFE DEPOSIT AND TRUST COMPANY, trustee, v. COMMISSIONER OF CORPORATIONS AND TAXATION.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

273 Mass. 187

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

Supreme Judicial Court of Massachusetts, Suffolk.

November 25, 1930

November 7, 8 1929.

Present: RUGG, C.

J., CROSBY, PIERCECARROLL, & WAIT, JJ.

Tax, On income.Statute, Construction.Corporation, Dividend, Corporate action, Reorganization.Evidence, Presumptions and burden of proof.Agency, Existence of relation.Contract, Construction.Practice, Civil, Report, Findings by judge.The provisions of St. 1922, c. 449, Section 1, amendingG.L.c. 62,

Section 5 (c), do not extend to income, even though received in a corporate reorganization, derived from sources other than those specified in said Section 5 (c) and taxable under other clauses of the income tax law at different rates; and therefore do apply to the subject of taxation classified in G.L.c. 62, Section 1 (b), in the amended form appearing in St. 1925, c. 343, Section 7.

Commonly, the assertion of a corporation as to the nature of its corporate action, made in good faith and not obviously wrong nor designed as a cover for some ulterior design, is accepted as true; although the substance and intent of the action taken as shown by the votes, are to be ascertained, courts do not usually undertake to review the character of the internal management of corporations as defined and declared by their votes.Per RUGG, C.J.

A corporation operating and manufacturing railroad cars procured the organization of a second corporation for the purpose of taking over its manufacturing department, transferred the assets of that department to the second corporation and received all of its capital stock in return therefor.Subsequently, in order definitely to separate its business as a common carrier from its manufacturing business, the first corporation brought about a "reorganization" by the incorporation of a third corporation and by the establishment of a committee with whom the stockholders of the first corporation might deposit their stock, one ultimate purpose being that such stockholders should have two and one half shares of the stock of the third corporation in place of each share held by them in the first corporation.The first corporation thereupon exchanged all the shares of the second corporation for shares in the third corporation and declared a dividend payable in shares of the third corporation, one half share on each share of the first corporation.The committee, with whom had been deposited shares in the first corporation, exchanged each of those shares for two shares in the third corporation.The committee received all shares in the third corporation without discrimination between those received under the dividend declared and those received in the exchange made by them.The first corporation continued in business as an operator of cars.The capital of the first and second corporations remained unimpaired.Held, that

(1) The distribution of one half share of stock in the third corporation on each share of stock in the first corporation constituted a dividend to the stockholders of the first corporation: it was not an exchange of stock nor a mere inseparable part of a single reorganization of one or more corporations, where new shares received represented the same interest in the same assets as the old shares surrendered; and it was not within the scope of St. 1922, c.

449, Section 1, amendingG.L.c. 62, Section 5 (c);(2) That distribution was not a distribution of capital within the meaning of G.L.c. 62, Section 1 (b), in the amended form appearing in

St. 1925, c.

343, Section 7, and (g): the dividend was paid out of the accumulated surplus and profits of the first corporation;

(3) The dividend was taxable under G.L.c. 62, Section 1 (b), as so amended, and (g).

Upon consideration of all the terms of the agreement between the reorganization committee above mentioned and those shareholders of the first corporation who deposited their stock with the committee, viewed in the light of the conduct of the committee and of all the other surrounding circumstances, it was held, that

(1) The committee were constituted merely the agents of the depositing stockholders and had no title nor beneficial interest in the shares deposited or the stock dividend declared thereon;

(2) The tax on that dividend properly was to be assessed to the stockholders and not to the committee.

Where a judge of the Superior Court, who heard without a jury upon an agreed statement of facts a complaint for abatement of an income tax, found and ruled that the complainant was not entitled to an abatement, ordered the entry of judgment for the respondent and reported the complaint to this court, the general finding imported a finding of all the incidental facts essential to the conclusion reached of which the primary facts were reasonably susceptible; and such findings were not reviewable.

TWO COMPLAINTS for abatement of income taxes, filed in the Superior Court on January 26, 1929, and January 28, 1929, respectively, the first complaint subsequently having been amended.

The complaints were heard together in the Superior Court without a jury by Weed, J., upon the pleadings and an agreed statement of facts.Material facts are stated in the opinion.The judge found and ruled that neither complainant was entitled to an abatement.He ordered the entry of judgment for the respondent for his expenses and costs and reported the complaints for determination by this court.

A. Lincoln, (J.

Codman with him,) for the complainant Dodge.

C.M. Rogerson, (J.P. Carr with him,) for the complainantBoston Safe Deposit and Trust Company, trustee.

R.A. Cutter, Assistant Attorney General, for the respondent.

RUGG, C.J.These are complaints for abatements of income taxes.G.L.c. 62Section 47, as amended by St. 1926, c. 287, Section 3.An income tax was assessed by the defendant on the distribution to the complainants as stockholders in the Pullman Company an Illinois corporation, of one half share of the stock of Pullman Incorporated, a Delaware corporation, as dividend upon each share of stock of the Pullman Company owned by them.The validity of this tax is challenged.The relevant facts are these: The complainants, prior to the events here pertinent, were owners of shares of stock in the Pullman Company.The original business of that corporation was operating sleeping and parlor cars and manufacturing freight and passenger cars and other railroad equipment.In 1924, the Pullman Car & Manufacturing Corporation was organized for the purpose of taking over the manufacturing department of the Pullman Company.The capital stock of that corporation was divided into 500,000 shares with a total par value of $50,000,000.The plant and assets in the manufacturing department of the Pullman Company were transferred to that corporation and the Pullman Company received and continued to own all the capital stock of that corporation.In 1927, the Pullman Company was the owner of this stock and was also conducting the business of operating sleeping and parlor cars.Its capital stock was divided into 1,350,000 shares with a par value of $135,000,000.The value of its net assets at all times here material was greatly in excess of the par value of its capital stock.The value of the net assets of the Pullman Car & Manufacturing Corporation was also, at all times here material, in excess of the par value of its capital stock.In February, 1927, the Pullman Company decided to divide, definitely and clearly, its business as a common carrier operating sleeping and parlor cars from its business as a manufacturer, and to separate all its business into these two component parts, each under a distinct corporate entity.To accomplish that purpose a "reorganization" was voted.The plan adopted to that end was to appoint a reorganization committee with which those stockholders of the Pullman Company who desired to participate might deposit their stock.An important reason for a reorganization committee was to secure the advantages accruing from a union of interests and concert of action among the stockholders.One ultimate aim of the reorganization, as stated in the resolution of the directors of the Pullman Company, was that, when completed, each stockholder who participated should have two and one half shares of capital stock of no par value, of the new corporation, for each share of stock previously held in the Pullman Company, and also that the pro rata property interests of each stockholder who should not participate would be duly preserved.The plan was not to become operative unless the owners of at least two thirds of the capital stock of the Pullman Company should participate.In fact, 1,269,186 shares out of the total 1,350,000 shares were deposited and the plan was carried out.The complainants participated in the plan and deposited their stock with the reorganization committee.All steps were taken pursuant to proper votes of each of the corporations concerned and under the direction of the reorganization committee.A new corporation, Pullman Incorporated, was organized under the laws of Delaware with 3,375,000 shares of capital stock without par value.The assets of the Pullman Company, including its stock in the Pullman Car & Manufacturing Corporation, were appraised at $269,845,746.43, and the assets of the Pullman Car & Manufacturing Corporation at $72,759,726.81.These appraisals were known to the interested corporations.The latter corporation, on July 8, 1927, declared and on July 11, 1927, paid to the Pullman Company as its sole stockholder a cash dividend of $18,790,577.53.Thus the value of its assets was reduced to $53,969,149.28, being exactly one fifth of the appraised value of the assets...