Dodge v. Comm'r of Corp. & Taxation

• Decision Date: 28 November 1930
• Citation: 174 N.E. 109,273 Mass. 187
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: DODGE v. COMMISSIONER OF CORPORATIONS AND TAXATION. BOSTON SAFE DEPOSIT & TRUST CO. v. SAME.

273 Mass. 187

174 N.E. 109

DODGE

v.COMMISSIONER OF CORPORATIONS AND TAXATION.

BOSTON SAFE DEPOSIT & TRUST CO.

v.SAME.

Supreme Judicial Court of Massachusetts, Suffolk.

Nov. 28, 1930.

Report from Superior Court, Suffolk County; Weed, Judge.

Separate suits by Edward Sherman Dodge and by the Boston Safe Deposit & Trust Company against the Commissioner of Corporations and Taxation, for abatement of income tax. On report from the Superior Court.

Judgment for defendant.

A. Lincoln and J. Codman, both of Boston, for complainant dodge.

C. M. Rogerson and J. P. Carr, both of Boston, for complainant Boston Safe Deposit & Trust Co.

R. A. Cutter, Asst. Atty. Gen., for respondent.

RUGG, C. J.

These are complaints for abatements of income taxes. G. L. c. 62, § 47, as amended by St. 1926, c. 287, § 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 $50,00,000. 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 of the Pullman Company. On July 12, 1927, these events occurred: The Pullman Company voted to and did exchange its 500,000 shares of stock in the Pullman Car & Manufacturing Corporation for 675,000 shares of no par value of Pullman Incorporated. The directors of the Pullman Company declared a dividend, payable in the 675,000 shares of the capital stock of Pullman Incorporated thus acquired, distributable to stockholders on August 15, 1927. It was recited in the vote that this dividend was a step in and a part of the reorganization of the Pullman Company. This was a dividend of one half a share of the capital stock of Pullman Incorporated on each share of capital stock in the Pullman Company. The reorganization committee requested the delivery to them of this dividend stock and the directors of the Pullman Company voted to make delivery in accordance with that request. The reorganization committee offered, in behalf of and as agents for the depositing stockholders of the Pullman Company, to exchange all such stock deposited with them for shares in Pullman Incorporated without par value, on the basis of two shares of stock of Pullman Incorporated for each share of stock in the Pullman Company upon certain conditions. That offer was accepted. Deliveries of stock in conformity with the foregoing offers, votes, declarations and request were made on August 15, 1927. The reorganization committee received two shares of Pullman Incorporated by way of exchange for each deposited share of Pullman Company, and one half share of Pullman Incorporated by way of dividend on each deposited share of Pullman Company. Certificates of stock of Pullman Incorporated due to the complainants as depositors with the reorganization committee were delivered to the complainants on August 27, 1927, but without discrimination between such certificates declared as dividends and those delivered in exchange for transfer of shares of stock in the Pullman Company. Shareholders of record in the Pullman Company on July 30, 1927, resident in this Commonwealth, to the number of 260, holding 4992 shares, did not deposit their shares with the reorganization committee and received directly the dividend paid by the Pullman Company in stock of Pullman Incorporated. The Pullman Company, on August 15, 1927, was and at all times since has continued to be in existence as a corporation actively engaged in the business of operating sleeping and parlor cars. It has continued to pay cash dividends upon its shares including those held by Pullman Incorporated and those owned by shareholders who did not deposit their shares under the reorganization plan. The result of the reorganization was that the new corporation, Pullman Incorporated, owned the great majority of the capital stock of the Pullman Company and all the capital stock of the Pullman Car & Manufacturing Corporation.

The defendant assessed a tax at the rate of six per cent on the aggregate value, as determined by him, of the one half shares of stock of Pullman Incorporated declared as dividend, and on August 15, 1927, distributed to the reorganization committee on its order by the Pullman Company on the shares of stock of the Pullman Company deposited by the complainants with the reorganization committee. This tax was levied on the theory that that one half share was a dividend received as income and taxable as such. There is no dispute as to the valuation made by the defendant. The contention of the complainants is that the stock thus received was not income, was not received by them as income, and was not subject to any tax as income.

The relevant statutes are these: G. L. c. 62, § 1(b) (as finally amended by St. 1925, c. 343, § 7) and (g). ‘Income of the classes described in subsections (a), (b), (c) and (e) received by any inhabitant of the commonwealth during the preceding calendar year, shall be taxed at the rate of six per cent per annum. * * * (b) Dividends, other than stock dividends paid in new stock of the company issuing the same, on shares in all corporations * * * organized under the laws of any state * * * other than this commonwealth [with exceptions not here relevant] * * * (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.’ G. L. c. 62, § 5(c) [as finally amended by St. 1922, c. 449, § 1], so far as pertinent is in these words: ‘Income of the following classes received by any inhabitant of the commonwealth during the preceding calendar year shall be taxed as follows: * * * (c) The excess of the gains over the losses received by the taxpayer from purchases or sales of intangible personal property, whether or not said taxpayer is engaged in the business of dealing in such property, shall be taxed at the rate of three per cent per annum. * * * If, in any exchange of shares upon the reorganization of one or more corporations * * * the new shares received in exchange for the shares surrendered represent the same interest in the same assets, no gain or loss shall be deemed to accrue from the transaction until a sale or further exchange of such new shares in made.’

A main contention of the...