Lynch v. Turrish

• Decision Date: 04 September 1916
• Docket Number: 4651.
• Citation: 236 F. 653
• Parties: LYNCH, Collector of Internal Revenue, v. TURRISH.
• Court: U.S. Court of Appeals — Eighth Circuit

236 F. 653

LYNCH, Collector of Internal Revenue, v. TURRISH.

No. 4651.

United States Court of Appeals, Eighth Circuit.

September 4, 1916

This writ of error was sued out to reverse a judgment which the plaintiff below, Turrish, recovered against Lynch, the collector, for the return to him of $127.12, which the collector had assessed against him as an additional income tax under the Tariff Act of October 3, 1913, c. 16, Sec. II A, 38 Stat. 166, 3 U.S.Comp.Stat. 1913, Secs. 6319, 6320 6321, and which he had paid under protest. The facts were alleged in the plaintiff's complaint and admitted by demurrer. The Payette Lumber & Manufacturing Company was a corporation organized in 1903, with a capital stock of $1,500,000, divided into 15,000 shares, of the par value of $100 each, of which Turrish owned, in 1913 and 1914, 799 3/4 shares, of the par value of $79,975. The Payette Company began, immediately after its organization in 1903, to invest its capital in timber lands in the state of Idaho, and, prior to March 1, 1913, it had invested $1,375,000 thereof therein and the remainder thereof in other assets, the ownership of which was incidental to the owning, holding, and preservation of the timber lands. During this time it did no business except such as was incidental to the ownership and care of these lands, and it made no dividends or payments of any kind to its stockholders. On March 1, 1913, the Payette Company still owned all the property and assets it had invested its capital in, and the value of these assets was not less than $3,000,000. The increase in the value of its property was due entirely to the gradual increase in the value of its timber lands between 1903 and March 1, 1913, and the value of the stock of Mr. Turrish was then twice its par value, or $159,950. In March, 1913, Mr. Turrish and all the other stockholders of the Payette Company gave an option in writing to purchase their stock for twice its par value. The holders of this option formed another corporation, to which they transferred their option, and that company preferred to purchase the property of the Payette Company to purchasing its capital stock. Thereupon, in December, 1913, that company offered to sell all its property to the Boise-Payette Company, the new corporation which held the option to purchase its stock, for $3,000,000 in cash, on condition that the new company would assume its debts and liabilities. The offer was accepted, and in March, 1914, the transaction was consummated. The Payette Company then had no assets but the $3,000,000 in cash and no liabilities not assumed by the Boise-Payette Company. It then distributed the $3,000,000 among its stockholders, who surrendered their stock, and the corporation has since been dormant. In the distribution of the proceeds of the property of the company Mr. Turrish received $159,950, which was twice the par value of his stock. The Commissioner of Internal Revenue deemed one-half of this sum, or the par value, and the actual value in 1903, of the stock of Turrish, capital returned to him, and the other half, or the increase of the actual value of his stock between 1903 and March 1, 1913, by reason of the gradual advance during that time in the value of the timber lands of the Payette Company, income derived by him in 1914 from a dividend received from a domestic corporation subject to the income tax law. On this ground he assessed against Turrish an additional income tax of $127.12 on account of the second half of the $159,950. Turrish paid this tax under protest and brought this action for the return of the amount he paid. The court below was of the opinion that no part of this $159,950 was income taxable under the act of October 3, 1913, and it accordingly overruled the demurrer and rendered judgment for the plaintiff.

Alfred Jaques, U.S. Atty., of Duluth, Minn., for plaintiff in error.

A. W. Clapp, of St. Paul, Minn. (N. H. Clapp, of St. Paul, Minn., H. Oldenburg, of Carlton, Minn., and Harold J. Richardson, of St. Paul, Minn., on the brief), for defendant in error.

Before SANBORN, ADAMS, and CARLAND, Circuit Judges.

SANBORN Circuit Judge (after stating the facts as above).

Is the amount in excess of the par value, and of the actual value of his stock in 1903, derived by a stockholder of a domestic corporation subject to the Income Tax Law (38 Stat. 166, c. 16, Sec. II, A, 3 U.S.Comp.Stat. 1913, Secs. 6319, 6320, 6321), exclusively from the increase in the value of his stock prior to March 1, 1913, the effective date of that act, on account of the gradual advance in the value of the property of the corporation prior to that date, but first realized by him in cash by the distribution in 1914 by a dividend to all the stockholders of the corporation of all the proceeds of the sale in March, 1914, of all the property of the corporation, income, gains, or profits of the stockholder taxable under that law? The negative answer to this question seems at first to be reasonable: (1) Because no income, gains, or profits accrued to the stockholder during the year 1914, or after March 1, 1913; his property remained of the same value and gained nothing during that time; and (2) because the sale of the property of the corporation in 1914 and the distribution of its proceeds to the stockholders was a mere change of the form, without increase of the value, of the property he owned before the Income Tax Law took effect. Counsel for the United States, however, contend that the $79,975 which measures the increase in the value of the stock of the plaintiff between 1903 and March 1, 1913, derived from the gradual advance during that time of the value of the timber land of the corporation is taxable as his income: (1) Because he had no interest in the increased value of the property of the corporation until the dividend which distributed the proceeds of the sale of its property was declared in 1914; (2) because upon this distribution, and not before he first obtained an interest in this increased value, and thus in 1914 for the first time, it became income to him; and (3) because this $79,975 was derived from a dividend received by him in 1914. To sustain the first two contentions counsel invokes the general rule that a stockholder has no legal title or right to the income, gains, or profits of his corporation until the dividends of that income, or of those gains or profits, have been declared, and cites Hyatt v. Allen, 56 N.Y. 553, 15 Am.Rep. 449, and like cases in support of that rule. But the tax authorized by the act under consideration is an annual tax on the income, gains, or profits arising or accruing after March 1, 1913, in the calendar year preceding the levy, and neither the rule itself nor any rational application of it is determinative of the question in what year this alleged income accrued or arose, or of the question whether the proceeds of the dividend were income or capital. If it were, then the entire $159,950, would, by the same mark, have become his income, gains, and profits when the distribution was made in 1914, for it was all distributed to him by the same dividend, and until that dividend was declared he had no better legal title or right to any of the property of the corporation, or to the proceeds of any of it, than he had to the increased value of its timber land.

It is true that a corporation holds the legal title of, and the right to manage, control, and convey, its property, and that a stockholder is without that title and right. But, after all, the corporation is nothing but the hand or tool of the stockholders, in which they hold its property for their benefit. They are the equitable and beneficial owners of all its property, and it is the mere holder and manager of it for them. The benefit of every increase in the value of its property is their benefit, and the injury of every decrease of the value of its property is their injury. They may by appropriate action at any time require and compel it to sell all its property and to distribute its proceeds among them, and may thus strip it of all its capital, all its income, surplus, gains, and profits, and leave it penniless. So in reality, as against its stockholders, a corporation has no and they have all the beneficial interest in its property. Every substantial increase in the value of its property immediately and proportionately increases the actual value of their stock, and every substantial decrease of its value immediately and proportionately decreases the actual value of their stock. Whether the value of the property of a corporation is increased by a gradual advance through a series of years of the value of the same real or personal property held throughout, or by undivided income, gains, or profits the actual value of its stock is immediately and proportionately increased, and the holders of that stock may at any time convey their respective beneficial interests in that enhanced value in those undivided profits and in all the other property of the corporation by sale, gift, or devise. The Collector v. Hubbard, 12 Wall. 1, 20 L.Ed. 272. The position that a stockholder in a corporation has no interest in the enhanced value of its property, or in its undivided income, gains, profits, or surplus, until a dividend thereof is declared, is untenable and may not prevail.

It is admitted by the demurrer that in this case the value of the property of the corporation increased solely by reason of the advance in the value of its timber lands from $1,500,000 in 1903 to $3,000,000 on March 1, 1913, that the value of the stock of the plaintiff from the same cause proportionately increased from $79,975 in 1903 to $159,950 on March 1, 1913 and that no further increase of value, gain, income, or profit resulted before or by reason of the...