Maloney v. Western Cooperage Co.

• Decision Date: 13 May 1939
• Docket Number: No. 9032.,9032.
• Citation: 103 F.2d 992
• Parties: MALONEY, Collector of Internal Revenue, v. WESTERN COOPERAGE CO.
• Court: U.S. Court of Appeals — Ninth Circuit

103 F.2d 992 (1939)

MALONEY, Collector of Internal Revenue, v. WESTERN COOPERAGE CO.

No. 9032.

Circuit Court of Appeals, Ninth Circuit.

May 13, 1939.

James W. Morris, Asst. Atty. Gen., and Sewall Key, James P. Garland, and Clarence E. Dawson, Sp. Assts. to Atty. Gen., and Carl C. Donaugh, U. S. Atty., of Portland, Or., for appellant.

Charles E. McCulloch and Fletcher Rockwood, both of Portland, Or. (Carey, Hart, Spencer & McCulloch, of Portland, Or., of counsel), for appellee.

Before DENMAN, MATHEWS, and HEALY, Circuit Judges.

HEALY, Circuit Judge.

Appellee brought suit against the Internal Revenue Collector to recover federal excise taxes assessed and collected under § 213 of the National Industrial Recovery Act, 48 Stat. 206. After a trial to the court on stipulated facts judgment was awarded in appellee's favor.

The National Industrial Recovery Act became effective June 16, 1933. § 213(a) imposed an excise tax of 5% upon the receipt of dividends by any person other than a domestic corporation, the tax to be withheld at the source. The section provides that the tax imposed "shall not apply to dividends declared before the date of the enactment of this act."

On January 16, 1933 appellee's board of directors at their annual meeting adopted a resolution reading as follows: "Resolved, that the Secretary and Treasurer of this Company be and he is hereby authorized, empowered and directed to pay monthly dividends of ½ of 1% each month for the year 1933 whenever in his judgment there are moneys available to pay the same and further that whenever in the judgment of said Secretary and Treasurer there are moneys available to increase the amount of said dividends for any month or months thereof, said Secretary and Treasurer is hereby authorized, empowered and directed to pay such additional dividends."

This resolution was identical in form with resolutions adopted in previous years, under which appellee had paid dividends of ½ of 1% each month during the period from January, 1925, to the end of 1932.

Appellee had common stock outstanding of the par value of $2,976,600. It paid dividends to the holders of this stock during 1933, from January to November inclusive, at the rate of ½ of 1% each month, and for December at the rate of 1%. There was no board authorization for the payment of these dividends other than the January resolution. Taxes were assessed on the dividends paid for the month of June and the ensuing months, and the suit against the collector is for the recovery of the amount paid pursuant to the assessment.¹

During 1933 appellee's earned surplus available for the payment of dividends at all times exceeded $500,000, and at all times during that year it had earnings and profits accumulated subsequent to February 28, 1913, in excess of $300,000.² It was stipulated that throughout the year there was money available in the taxpayer's treasury to pay dividends on its common stock in amounts not less than ½ of 1% per month on all outstanding shares.

The trial court concluded that the resolution of January 16, 1933, created a debtor and creditor relationship between the taxpayer and its stockholders for the payment of dividends to the amount of ½ of 1% per month throughout the year, and that the Commissioner had improperly disallowed the taxpayer's claim for refund. Judgment was entered accordingly.

The Bureau of Internal Revenue has ruled (I.T. 2744, XII-2 Cumulative Bulletin 402) that: "Following the established rule of construction the expression `dividends declared' as used in the statute is to be construed and applied according to its accepted legal meaning. Stated briefly, the declaration of a dividend by the board of directors of a corporation has the legal effect of creating the relationship of debtor and creditor between the corporation and the stockholder, and the rights of the stockholder as such creditor become immediately vested regardless of the fact that the dividend may be payable at some future time. In order for a dividend to be fully `declared' within the meaning of the statute the action taken by the board of directors must be such as to create the relationship of debtor and creditor between the corporation and the stockholder, and the debt so created must be a legal and enforceable debt which is definite, final, and irrevocable. A dividend so declared of course effects an appropriation of surplus to the payment of the debt created."

This ruling is merely declaratory of a generally accepted principle, and the parties are in agreement that it affords the proper test to be applied here. As said by this court in United States v. Southwestern Portland Cement Co., 9 Cir., 97 F.2d 413, 415, a declaration of dividend which does not create "a definite, final, irrevocable and enforceable debt against the corporation in favor of the stockholders is not a fully declared dividend."

The authority or direction of appellee's board to pay these dividends, given to its Secretary-Treasurer, was subject to the qualification that they were to be paid whenever in the judgment of that officer there were monies...