Gable v. South Carolina Tax Com'n

• Decision Date: 31 January 1939
• Docket Number: 14811.
• Parties: GABLE v. SOUTH CAROLINA TAX COMMISSION.
• Court: South Carolina Supreme Court

1 S.E.2d 244

189 S.C. 346

GABLE v. SOUTH CAROLINA TAX COMMISSION.

No. 14811.

Supreme Court of South Carolina

January 31, 1939

John M. Daniel, Atty. Gen., and Claude K. Wingate, both of Columbia, for appellant.

Braxton C. Wallace, of Greenwood, for respondent.

STABLER Chief Justice.

This action was brought on January 29, 1938, for the recovery of $3,360.42 and $374.39 normal income tax and intangible tax paid by the plaintiff, the first item having been paid under protest. A jury trial, by agreement of the parties, was waived, and the matter was heard by his honor, Judge Gaston who gave judgment for the plaintiff and ordered a refund of such taxes, with interest.

The facts, as agreed to, are as follows: The plaintiff, who is one of the nine shareholders of the company, is the owner of 43 1/3 shares, out of a total of 1,000 outstanding shares of the capital stock of Dibert, Stark and Brown, Ltd., a Louisiana corporation, which has an authorized and paid-in capital of $100,000. There has been no change in the paid-in capital, or in the number of outstanding shares since the organization of the company. In 1900, or thereabout, the corporation purchased a considerable acreage of land and growing timber in the State of Louisiana, the timber being bought with the idea of cutting and marketing the same in due course. On January 1, 1921, the company had a surplus of $1,670,130.34, which had accumulated from earnings prior to that date, and a further and an additional surplus of $1,350,642.07, which represented the increase in value of the stumpage owned, and as determined by the Federal Government in 1919 (but as of March 1, 1913) for Federal income tax purposes; the increase in the value of the stumpage being due to the fact that the Government appraised the standing timber, which cost only $1.058 per thousand feet, at $8 per thousand feet. Subsequently to 1921, this timber surplus was converted into a cash surplus, and at December 31, 1933, the company had a surplus of $1,195,556.80 from converted stumpage and other profits accumulated prior to 1921, and a further surplus of approximately $100,000 accumulated from current earnings.

During each of the years 1934, 1935 and 1936, the company paid a cash dividend of $300,000, this being 300% of capital or $300 per share. The plaintiff in this action, in each of these years, received $13,000. For 1934 he reported $367.20, for 1935 he reported $2,254.39, and for 1936 he reported $1,965.51 as taxable income to both the Federal and the State Governments, but did not report, respectively, $12,632.80 $10,745.61 and $11,034.49, because the company had advised him that the Federal Government had determined that this portion of the income was nontaxable for Federal taxes. All of the timber was cut out in 1934, and since that date the company has been in process of disposing of the stock on hand, dismantling and disposing of the sawmill and equipment and doing everything possible to convert their miscellaneous assets into cash.

The first South Carolina income tax law was enacted in 1922, and made retroactive to January 1, 1921, and the first act taxing dividends for both normal and surtax was enacted in 1933 (Act May 31, 1933, 38 St. at Large, p. 567). The act of 1934 (Act April 16, 1934, 38 Stat. at Large, 1571), in the nature of an amendment to the act of 1933, "merely raised the non-taxable interest and dividends from $100.00 to $200.00, and made changes in the percentage rate at which the excess is taxable."

The sole question presented by the appeal, as counsel agree, is whether or not the respondent is liable, under the special facts of the case, for normal income tax and intangible tax on the dividends paid to him during the years 1934, 1935 and 1936, as above indicated.

The appellant argues that the amounts received by Gable as dividends were income and not returns of capital, as claimed by him. Gable insists, however, that these amounts were not income for the particular years in which they were received; that the actual income had come into being, in the increased value of his shares, long before the income tax statutes were ever enacted in South Carolina. In other words, he claims that he should not be taxed, because the corporation paying the dividends paid them out of a surplus which it had earned and accumulated prior to the enactment of the South Carolina income tax law and the so-called intangible tax law. There being no South Carolina case directly in point, Federal decisions are relied upon, the respondent citing Lynch v. Turrish, 247 U.S. 221, 38 S.Ct. 537, 62 L.Ed. 1087, 1090, and the appellant, Lynch v. Hornby, 247 U.S. 339, 38 S.Ct. 543, 545, 62 L.Ed. 1149, the opinions in these cases being filed on the same day.

Under the facts peculiar to the present case, were the amounts received income or were they returns of capital? Dividends have been defined as a "fund set apart out of profits, to be apportioned among the shareholders." 18 C.J. 1406. In Lynch v. Hornby, supra, the Court had this to say thereabout: "Dividends are the appropriate fruit of stock ownership, are commonly reckoned as income, and are expended as such by the stockholder without regard to whether they are declared from the most recent earnings, or from a surplus accumulated from the earnings of the past, or are based upon the increased value of the property of the corporation. The stockholder is, in the ordinary case, a different entity from the corporation, and Congress was at liberty to treat the dividends as coming to him ab extra, and as constituting a part of his income when they came to hand." See also Hadden v. South Carolina Tax Commission, 183 S.C. 38, 190 S.E. 249; State ex rel. Moon Company v. Wisconsin Tax Commission, 166 Wis. 287, 165 N.W. 470; Stoffregen v. Moore, D.C., 264 F. 232; Skinner v. Union Pacific Coal Co., 8 Cir., 249 F. 152, 153. In the last named case, the Judge writing the opinion said: "We have not been cited to any decision holding that a dividend is income of the stockholder as fast as the profits out of which it is paid are accumulated by the corporation. On the other hand, the courts have uniformly held that the stockholder acquires no interest whatever in such a dividend until it is paid." From these decided cases, and from others that might be cited, it seems clear that the surplus of a corporation does not belong to the stockholder, and that he has no title thereto, so long as it remains a surplus; and that he acquires title to it only when dividends are declared and paid to him.

Counsel for respondent, however, calls attention to the holding in the Turrish case, that while the stockholder has "no title for certain purposes to the earnings of the corporation, net or other, prior to a dividend being declared," earnings "might become capital by investment in permanent improvements and thereby increase the market value of the shares," [247 U.S. 221, 38 S.Ct. 539.] and contends that we have here such a case--not the ordinary one. In other words, that this case is almost identical in its facts with the Turrish case, where it was held that the dividends paid were not taxable.

For the purpose of comparison, we quote here the facts of that case, as stated by the Court in its opinion:

"Prior to March 1, 1913, and continuously thereafter until the surrender of his stock as hereinafter mentioned, plaintiff was a stockholder in the Payette Company, which was organized in the year 1903 with power to buy, hold, and sell timber lands, and in fact never engaged in any other business than this except minor businesses incidental to it. Immediately after its organization this company began to invest in timber lands, and prior to March 1, 1913, had thus invested approximately $1,375,000.

"On March 1, 1913, the value of its assets was not less than $3,000,000 of which sum the value of the timber lands was not less than $2,875,000. The increase was due to the gradual rise in the market value of the lands. At that date the value of Turrish's stock was twice its par value, or $159,950 and about that time he and all the other stockholders gave an option to sell their stock for twice its par value. The holders of the option formed another company, called the Boise-Payette Lumber Company, and transferred the options to it. The options having been extended to December 31, 1913, the new company informed the Payette Company and its stockholders shortly...