Commissioner of Corporations and Taxation v. Filoon
| Decision Date | 29 December 1941 |
| Citation | 310 Mass. 374,38 N.E.2d 693 |
| Parties | COMMISSIONER OF CORPORATIONS AND TAXATION v. JOHN W. FILOON, executor. |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
October 5, 1938.
Present: FIELD, C.
J., DONAHUE, QUA & DOLAN, JJ.
Tax, On income. Corporation, Capital, Income. Evidence, Presumptions and burden of proof. Words, "Capital," "Accumulated profits," "Paid-in surplus," "Capital surplus," "Income."
Upon an appeal by the commissioner of corporations and taxation from a decision by the Appellate Tax Board granting an abatement of an income tax, the question before this court was whether, upon facts found by the board, the taxpayer as a matter of law had sustained the burden of proving that he was entitled to the abatement.
The standpoint from which to determine whether a dividend paid to a stockholder was, under Section 1 (g) of G. L. (Ter. Ed.) c. 62, a distribution of "capital" and therefore not taxable, or of "accumulated profits" and therefore taxable, is that of the corporation and not that of the stockholder: it is immaterial whether the stockholder received by the dividend more or less than the amount actually invested by him. Determination of the question whether a corporate dividend was, under
Section 1 (g) of G L. (Ter. Ed.) c. 62, a distribution out of "capital" or out of "accumulated profits" must be made as of the time of such distribution. To sustain an abatement of an alleged income tax granted by the Appellate
Tax Board on the ground that a dividend received by the taxpayer was, under Section 1 (g) of G. L. (Ter. Ed.) c. 62, a distribution by a corporation out of "capital" and not out of "accumulated profits," where the record on an appeal by the commissioner, while showing that the distribution was made in a certain year, did not show at what time during that year it was made, it must appear from the facts found by the board that at no time during that year could the distribution have been from "accumulated profits."
In Section 1 (g) of G. L. (Ter. Ed.) c. 62, the word "capital" means property invested in the corporation by its stockholders including both such invested property as is necessary to balance its capital stock liability, commonly called "legal capital," and such as is in excess of that liability, commonly called "paid-in surplus" or "capital surplus"; and the words "accumulated profits" mean property earned by the corporation as distinguished from such investments.
Upon the question whether a corporate dividend paid during a certain year was a distribution of capital within Section 1 (g) of G. L. (Ter. Ed.) c. 62, it was determined that an impairment of capital existing at the beginning of the year through losses in corporate operations was so large that there was no reasonable probability that it was restored at the time of the distribution in view of the amount of net earnings from corporate operations shown during the entire year, although only the net earnings for the entire year appeared and the dates during the year when the earnings accrued and the date when the distribution was made did not appear.
A dividend paid by a corporation was as matter of law a distribution out of capital within Section 1 (g) of G. L. (Ter. Ed.) c. 62, and consequently was nontaxable as income received by a stockholder where net earnings of the corporation through its operations previous to the time of such payment were not sufficient to restore an impairment of capital.
Dividends paid by a corporation following the making of net earnings subsequent to a period when its capital was impaired as a matter of law continued to be distributions out of capital under Section 1 (g) of G.
L. (Ter. Ed.) c. 62, and nontaxable as income received by a stockholder until at a time of such a dividend all such impairment of capital had been restored.
APPEALS, on March 8, 1938, from decisions of the Appellate Tax Board. J. B. Sullivan, Assistant Attorney General, for the Commissioner of Corporations and Taxation.
E. L. Twomey, (G.
A. Sawyer with him,) for the taxpayer.
A. L. Newton, R.
M. Dry, by leave of court submitted a brief as amici curiae.
These are appeals by the commissioner of corporations and taxation from two decisions by the Appellate Tax Board granting abatement of income taxes assessed upon income from dividends of the V. & F. W. Filoon Company, a Massachusetts corporation -- herein referred to as the corporation -- received by Fred W. Filoon of Brockton -- herein referred to as the taxpayer -- during the years 1933 and 1934 respectively. G. L. (Ter. Ed.) c. 58A; St. 1937, c. 400. The taxpayer died after the entry of the appeals in this court and they were defended here by his executor.
The burden of establishing that the taxpayer was entitled to abatement was upon him. Staples v. Commissioner of Corporations & Taxation, 305 Mass. 20, 26. The facts were found by the Appellate Tax Board. The appeals from its decisions bring before us only the issues of law "raised in the proceedings before the board." G. L. (Ter. Ed.) c. 58A, Section 13, as amended by St. 1933, c. 321, Section 7; see St. 1937, c. 400, Sections 1, 4. The questions hereinafter considered appear to have been so raised.
Statute 1933, c. 307, Section 9 (), provides that income No exception to this provision is here material. G. L. (Ter. Ed.) c. 62, Section 1, relating to the tax upon certain classes of income including dividends of Massachusetts corporations, provides in subsection (g): "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." See also St. 1935, c. 480, Section 1.
Under these statutes the taxpayer was not subject to an income tax on the dividends here in question received by him if they were distributions of capital within the meaning of G. L. (Ter. Ed.) c. 62, Section 1, subsection (g). The fundamental issue of law between him and the commissioner is whether, on the facts found by the board, the dividends were such distributions or were distributions of accumulated profits. The board ruled, in substance, that they were distributions of capital and on this ground abated the income taxes assessed upon such dividends. The commissioner contends that the board was wrong.
The board found the following facts: During the year 1933 the taxpayer was the owner of one thousand shares of prior preferred stock of the corporation upon which he received dividends of $6 per share in four instalments of $1,500 each, totalling $6,000. He reported the amount in his 1934 income tax return of income received during 1933 as "prior Preferred Stock dividend paid out of Paid-in Capital Surplus." The commissioner assessed an income tax thereon of $360. During the year 1934 the taxpayer was the owner of one thousand shares of prior preferred stock, and one thousand four hundred fifty shares of preferred stock of the corporation. He received during that year $6,000 in dividends paid on the former stock and $8,700 paid on the latter. He reported these amounts in his 1935 income tax return of income received during 1934 as "paid out of Paid-in capital and surplus." The commissioner assessed an income tax thereon of $882 and ten per cent thereof ($88.20) as an additional income tax under St. 1935, c. 480, Section 1. The board ordered abatements on the ground that these taxes were improperly assessed. Adjustments on account of interest paid and other items resulted in abatement of the tax assessed on account of income of the year 1933 of $402.87, and on account of income of the year 1934 of $996.82.
The question whether the distributions made by the dividends paid to the taxpayer as above described were distributions of capital within the meaning of G. L. (Ter. Ed.) c. 62, Section 1 subsection (g), is to be determined from the standpoint of the corporation making the distributions rather than from the standpoint of the stockholder receiving the dividends. Boston Safe Deposit & Trust Co. v. Commissioner of Corporations & Taxation, 298 Mass. 263 , 266. Facts found by the board relating to the financial condition of the corporation are as follows: On January 1, 1930, the corporation, which had been in business for about twenty years, was capitalized at $600,000, represented by three thousand shares of common stock of a par value of $100 per share and three thousand shares of preferred stock of the same par value per share. Of this total capital, $500,000 had been paid in and $100,000 represented a stock dividend of one thousand shares of common stock of the par value of $100 per share. As of January 1, 1930, there was an earned surplus in the amount of $81,137.60. (The fiscal year of the corporation during the years in question apparently ran from December 1 to November 30 inclusive.) On November 28, 1930, there was transferred to the surplus account of the corporation the sum of $36,250, representing amounts due from the corporation to the taxpayer, who was the principal stockholder in the corporation. "On November 17, 1931, the par value of the 3,000 shares...
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