People ex rel. Clark v. Gilchrist

• Citation: 153 N.E. 39,243 N.Y. 173
• Parties: PEOPLE ex rel. CLARK v. GILCHRIST et al., STATE TAX COMMISSION.
• Decision Date: 09 July 1926
• Court: New York Court of Appeals Court of Appeals

243 N.Y. 173

153 N.E. 39

PEOPLE ex rel. CLARK

v.GILCHRIST et al., STATE TAX COMMISSION.

Court of Appeals of New York.

July 9, 1926.

Certiorari by the People, on the relation of Robert S. Clark, against John F. Gilchrist and others, constituting the State Tax Commission, to review a determination of the Commission confirming an assessment of income tax for the year 1920 against the relator. The assessment was confirmed by the Appellate Division (214 App. Div. 117, 211 N. Y. S. 679), and relator appeals by permission.

Order of Appellate Division reversed, determination of State Tax Commission annulled, and proceeding remitted, with directions.

Appeal from Supreme Court, Appellate Division, Third Department.

Nathan L. Miller, D. A. Embury, and H. Bartow Farr, all of New York City, for appellant.

Charles E. Hughes, George Welwood Murray, Winthrop W. Aldrich, and Harrison Tweed, all of New York City, amici curiae.

Albert Ottinger, Atty. Gen. (Henry S. Manley, of Falconer, of counsel), for respondents.

CARDOZO, J.

The Singer Manufacturing Company capitalized its surplus in December, 1920, and declared a stock dividend. By force of that declaration, a dividend of 10,642 shares was received by the trustees under the will of Alfred Corning Clark, stockholders of record. Following the rule in Matter of Osborne, 209 N. Y. 450, 103 N. E. 723, 823,50 L. R. A. (N. S.) 510, Ann. Cas. 1915A, 298, the trustees paid the shares to the appellant, a beneficiary of the trust. The question is whether the dividend should be added to the annual tax return as part of the income of the year.

The Income Tax Law of New York (Consol. Laws, c. 60) is framed upon the model of the federal Income Tax Act, though the two differ in some particulars. The correspondence is so close, however, that decisions under the federal act are important aids to the construction of the statute of the state.

The federal act of 1913 (38 Stat. 114) imposes a tax on the net income, gains, or profits, derived from interest, rents, or dividends. The Supreme Court of the United States held, in Towne v. Eisner, 245 U. S. 418, 38 S. Ct. 158, 62 L. Ed. 372, L. R. A. 1918D, 254, that the word ‘dividend’ as there used does not include stock dividends which capitalize the profits of the company declaring them.

The next federal act, that of 1916 (39 Stat. 756), adds a provision that dividends shall include any distribution out of earnings or profits accruing since March 1, 1913, whether in cash or in stock of the corporation, which stock dividend shall be considered income to the amount of its cash value. Construing this act, the Supreme Court of the United States held, in Eisner v. Macomber, 252 U. S. 189, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570, that the intention of Congress was to tax stock dividends as income, but that the intention could not prevail, for the reason that the power of Congress under the Sixteenth Amendment to the federal Constitution is confined to the taxation of ‘income’ in the proper sense, and does not extend to income enlarged by artificial definitions. No such limitation affects the power of the states.

A third federal act, that of 1918 (40 Stat. 1058), was adopted before the decision in Eisner v. Macomber, and its provisions as to dividends do not differ in essentials from the provisions there considered.

Our own income tax was adopted in February, 1919. The term ‘imcome’ is defined (section 359, subd. 1) as including ‘gains, profits, and income’ derived from interest, rent and dividends, and a ‘dividend’ is defined (section 350, subd. 8) as meaning ‘any distribution made by a corporation out of its earnings or profits to its shareholders or members, whether in cash or in other property or in stock of the corporation.’

In March, 1920, the Attorney General filed with the comptroller an opinion to the effect that under the statute of New York a stock dividend in the strict sense is not a gain, profit, or income, and is not taxable as such. This ruling did not apply to dividends payable in the stock of a subsidiary corporation or of any corporation other than the one by which the dividend was declared. Peabody v. Eisner, 247 U. S. 347, 38 S. Ct. 546, 62 L. Ed. 1152;U. S. v. Phellis, 257 U. S. 156, 42 S. Ct. 63, 66 L. Ed. 180. It did not apply to dividends of treasury stock, i. e., stock previously issued, but lawfully reacquired by the corporation for later distribution. The stock dividends which, in the view of the Attorney General at that time, were excluded from the tax, are those distributed among shareholders in proportion to their previous holdings as evidence of a new capitalization of surplus or undivided profits.

The administrative officers of the state accepted this ruling, and adhered to it thereafter in the enforcement of the statute. Article 61 of the personal income tax regulations issued by the comptroller in November, 1921, contains the statement: ‘A true stock dividend is not taxable as a dividend.’ Taxpayers made their returns upon the faith of this pronouncement. Successive Legislatures came together and dissolved without condemning or annulling it. Till the decision under review, taxgatherer and taxpayer rested upon the comptroller's regulation, whether it was legal or illegal, and conformed to it in practice.

The state tax commission, in ruling against the taxpayerin this case, drew a distinction between the receipt of a stock dividend by virtue of one's legal title as a shareholder and the receipt of a like dividend as the beneficiary of a trust. To the shareholder the stock dividend is not a profit, for the ‘old and new certificates together are worth only what the old ones were worth before.’ Towne v. Eisner, supra. To the cestui que trust for life, the splitting up of the certificates is a distribution of what would otherwise be corpus for the use of the remaindermen. In the view of the commission, what is income within the meaning of a will or deed of trust is income also, and not corpus, within the meaning of the statute. Undoubtedly, the same conclusion would have been reached if the appellant, instead of being the beneficiary of a trust, had been the holder of a legal estate for life. The owner of the fee, to borrow the phraseology of the law of real estate, is exempt; the beneficiary or life tenant is held.

The Appellate Division disregarded that distinction in its disposition of the appeal. By its ruling, stock dividends are taxable as income unconditionally and always. Apart from the special definitions of the statute, they may be classified as capital. None the less, they have the quality of income for the purpose of taxation, and this for the reason that, in the view of the Appellate Division, the statute (section 350, subd. 8) so describes them. That premise accepted, the conclusion, of course, follows that the comptroller's regulation, in force since 1921, is an unauthorized exercise of power. The ruling, therefore, was that stock dividends, whether paid to the legal owner of the shares or to the beneficiary of a trust, are gains, profits, and income subject to the tax.

We find it unnecessary to determine whether the statutory definitions as they stood at the time of the decision of the court below confirm that decision or undo it. Conflicting readings of the statute, or, more accurately, of the meaning of the lawmakers, have been pressed upon us at out bar with subtle and ingenious argument. Later legislation relieves us of the duty of making choice between them. The decision of the Appellate Division was made in September, 1925. At the first opportunity thereafter, the Legislature (L. 1926, ch. 543) changed the definition of a dividend by excluding therefrom stock dividends in the strict sense, and did this by a statute declared to be retroactive as of January 1, 1919. In such circumstances we apply the law as it stands at the time of our decision. Robinson v. Robins Dry Dock & Repair Co., 238 N. Y. 271, 281, 144 N. E. 579, 36 A. L. R. 1310;McMaster v. Gould, 240 N. Y. 379, 385, 148 N. E. 556, 40 A. L. R. 792.

By section 1 of the new act, ‘the word ‘dividend’ means any distribution made by a corporationout of its earnings or profits to its shareholders or members, whether in cash, or in other property or in stock of the corporation, other than stock dividends as herein defined. ‘Stock dividends' means new stock issued, for surplus or profits capitalized, to shareholders in proportion to their previous holdings.’

By section 2, ‘stock dividends when received by a shareholder shall not be subject to tax but if before or after the distribution of any such dividend the corporation proceeds to cancel or redeem its stock at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be treated as a taxable dividend and included in gross income; provided, however, that any stock dividend shall be considered in computing gain, profit or income upon the sale, exchange or other disposition of the stock upon which a stock dividend has been declared or of the stock included in such stock dividend.’

By section 3, the act is to take effect immediately, with retroactive operation.

The Attorney General would have us hold that even under this act a distinction is to be drawn between stock dividends in the hands of a shareholder of record and stock dividends in the hands of the beneficiary of a trust. He concedes that in the one situation the dividends are no longer to be classed as income. He insists that in the other, i. e., upon allocation or payment to the beneficiary, the quality of capital is lost, and that of income re-established. We are persuaded that the Legislature had no thought of thus distinguishing the incidents of an equitable right from those of legal ownership or title. The propriety of such a...