Opinion
No. E-568.
April 14, 1930.
Action by the Henry Vogt Machine Company against the United States.
Petition dismissed.
This case having been heard by the Court of Claims upon a stipulation of facts signed on behalf of plaintiff by its attorneys, Humphreys Day, and on behalf of defendant by Assistant Attorney General Herman J. Galloway and the evidence, the court makes the following amended findings of fact:
I. Plaintiff, the Henry Vogt Machine Company, is a corporation, organized and existing under and by virtue of the laws of the state of Kentucky, having its principal office and place of business in Louisville, Ky., and at all times hereinafter mentioned was engaged in the manufacture of certain lines of machinery.
II. At its organization, in the year 1890, the plaintiff had capital stock of $250,000, fully paid up, divided into 2,500 shares of common stock, having a par value of $100 each. In the year 1910 a 100 per cent. stock dividend was declared and the capitalization was increased to $500,000, divided into 5,000 shares of common stock, at a par value of $100 each. All of the said 5,000 shares had been duly issued and were outstanding on February 1, 1916.
III. At a meeting of the stockholders of the corporation held on February 3, 1916, a resolution was passed increasing the capitalization to $1,000,000, the additional $500,000 to be divided into 5,000 shares par value of $100 each, 6 per cent. cumulative preferred stock. At the same meeting a resolution was adopted declaring a dividend of $500,000 to the stockholders of the corporation, payable in the said preferred stock authorized to be issued.
IV. Thereupon, the capitalization of the company was duly increased and the said preferred stock was duly issued to the stockholders of the corporation in payment of the said 100 per cent. dividend declared that day.
V. At the said stockholders' meeting of February 3, 1916, the following resolution was adopted: "Resolved that this corporation do and it hereby does declare a cash dividend of one hundred per cent. (100%) to be paid in stock six (6) and twelve (12) months from date hereof, and to be credited to each of the stockholders in proportion to his holding of stock as of February 3, 1916, the said dividend so declared to bear interest at the rate of four per cent. (4%) per annum from date. This dividend is to be charged to and paid out of the undivided surplus account of the company. Said dividends chargeable to surplus of March 1, 1913."
VI. On the third day of February, 1916, the 5,000 shares of common stock of the company had been issued and held as follows:
G.A. Daeuble, Jr. ........... 2 shares H.E. Vogt ................... 2 shares Matilda Vogt ................ 20 shares G.A. Heuser ................. 110 shares Annie V. Heuser ............. 710 shares Henry Vogt .................. 4,156 shares
VII. On February 3, 1916, there were credited to the individual accounts of the said stockholders in the books of the company the following amounts:
G.A. Daeuble, Jr. ........... $ 200.00 H.E. Vogt ................... 200.00 Matilda Vogt ................ 2,000.00 G.A. Heuser ................. 11,000.00 Annie V. Heuser ............. 71,000.00 Henry Vogt .................. 415,600.00
the said $500,000 being charged on the same date to the plaintiff's undivided surplus account, with the indorsement "Dividend to be credited to stockholders as per minutes Feby 3/16 payable in 6 12 mo., int. to be allowed on this div. 4%." On the minute book of the company and its general annual statement for the year ending August 31, 1916, prepared by auditors, these credits were carried with the name and account of each stockholder as "borrowed money," and in plaintiff's income and profits tax return, hereinafter referred to, credit was taken for them as an "open account" obligation of the company.
The amounts so credited on February 3, 1916, to G.A. Daeuble, Jr., H.E. Vogt, and G.A. Heuser were on April 1, 1916, severally charged to them on the books of the company. Henry Vogt's individual account was credited with the total of $11,400 and $11,400 par value of common stock in the company, held by Henry Vogt, was thereupon transferred to the said G.A. Daeuble, Jr., H.E. Vogt, and G.A. Heuser. On October 30, 1918, their individual accounts with the company balanced.
The aforesaid sum of $2,000 credited to Matilda Vogt was wholly withdrawn by her October 31, 1917, in cash and her individual account charged accordingly. On October 30, 1918, she had a net credit of $230, which was withdrawn by her February 16, 1920, and her account thereby balanced.
The sum of $71,000, so credited to Annie V. Heuser (Mrs. G.A. Heuser) remained intact in her individual account up to January 3, 1919, on which date it was applied in part payment of 470 shares of 6 per cent. cumulative preferred stock and 470 shares of common stock of the company, issued to her on that day (finding X), and her account was charged accordingly on the books of the company.
She did not have sufficient additional credits to pay the balance due on this issue, the deficiency being $1,703.85, until on July 1, 1919, by which time credits on account of dividends on her preferred stock were enough to give her a net credit of $797.56, which she withdrew on that date, balancing her account.
At the time the sum of $415,600 was credited as aforesaid to Henry Vogt's individual account, the said Henry Vogt had overdrawn his account and was thereby shown as indebted to the company to the extent of $103,133, and entry of the credit of $415,600 accordingly gave him a net credit balance of $312,467 only. At no time thereafter prior to January 3, 1919, nor on that date, when 1,200 shares of common stock and 1,200 shares of 6 per cent. cumulative preferred stock were issued to him, as shown herein in finding X, was there a net credit in his individual account amounting to $415,600 or over. On January 3, 1919, the net credit in his account, exclusive of the $240,000 charge referred to in finding X herein, was $294,386.15, and the balance of $54,386.15 was withdrawn by him January 17, 1919, in cash, closing the account.
In the fiscal year ending August 31, 1916, the general cash statement of the company showed as paid out of individual profits of $1,038,578.58 two dividends of $500,000 each, totaling $1,000,000, leaving undivided profits on August 31, 1916, of $38,578.58.
VIII. Thereafter, on the last business day of August of each year, there was credited on the books of the company to each of the said stockholders 4 per cent. interest on the amount standing to his credit on the books of the company, including therein the balance of the amount of the dividend above referred to in finding VII, and the said interest was deducted in plaintiff's tax returns as interest paid.
IX. At the regular annual meeting of the stockholders of the company, held on October 30, 1918, a resolution was adopted increasing the capitalization of the company from $1,000,000 to $1,500,000, the additional $500,000 to be divided into 2,500 shares of 6 per cent. cumulative preferred stock of the par value of $100 each and 2,500 shares of common stock of the par value of $100 each. There is no proof that this increase of capitalization was related in any way with the resolutions adopted by the stockholders February 3, 1916.
X. On January 3, 1919, there were issued to Henry Vogt from the said increase of capitalization 1,200 shares of common stock and 1,200 shares of 6 per cent. cumulative preferred stock. On the same day there were issued to Annie V. Heuser 470 shares of 6 per cent. cumulative preferred stock and 470 shares of common stock of the company. There was credited on January 3, 1919, on the books of the company to the capital stock account $334,000 and there was charged to the individual account of Henry Vogt $120,000 for the preferred stock so issued to him and $120,000 for the common stock so issued to him. On the same day, there was charged to the individual account of Annie V. Heuser $47,000 for the preferred stock so issued to her and $47,000 for the common stock so issued to her.
XI. On or about October 22, 1918, the plaintiff filed its income and excess profits tax returns for the year ending August 31, 1918, signed by Henry Vogt as president and G.A. Heuser as treasurer, and reported thereon, among other things, the following items:
Net income for taxable year ............ $ 383,538.10 Invested capital for taxable year ................................. 1,266,786.98 Total income and profits tax ........... 105,498.04
XII. The act of Congress, approved February 24, 1919, known as the Revenue Act of 1918 ( 40 Stat. 1057), provided a change in the rates at which income received by or accrued to the plaintiff after January 1, 1918, should be taxed. Pursuant to said act plaintiff, on or about April 18, 1919, filed an amended income and profits tax return for the fiscal year ended August 31, 1918, in which it is reported as follows:
Net income for taxable year ...... $ 383,538.10 Invested capital for taxable year ........................... 1,273,069.17 _____________ Total income and profits tax for the fiscal year ended August 31, 1918 ....................... $ 184,538.88
XIII. The items included by the plaintiff in computing the invested capital of $1,273,069.17 referred to in the last preceding finding were as follows:
Capital stock paid up and outstanding at the close of August 31, 1917 — Preferred ....................... $ 500,000.00 Common .......................... 500,000.00 _____________ $1,000,000.00 Earned surplus and undivided profits ........................... 289,349.35 _____________ $1,289,349.35 Add: Reserve for bad accounts set up August 30, 1915, not deductible in computing tax ........................... $ 17,800.00 _____________ $1,307,149.35 Deduct: Dividends, $30,000, and income tax, $11,946.30, prorated ..... 34,080.18 _____________ Invested capital for fiscal year ended August 31, 1918 ......... $1,273,069.17
XIV. Upon the taxable income reported in the aforesaid returns, income and excess profits taxes were assessed by the Commissioner of Internal Revenue against the plaintiff for the fiscal year ended August 31, 1918, in the amount of $184,538.88. The plaintiff paid to the collector of internal revenue at Louisville, Ky., the sum of $184,538.88, to wit: $105,498.04 on February 8, 1919; $20,000 on March 10, 1919; $20,000 on June 16, 1919; and $39,040.84 on August 31, 1919. Said sum of $184,538.88 was paid by the said collector into the Treasury of the United States.
XV. On or about November 8, 1919, the plaintiff under the provisions of the Revenue Act of 1918 ( 40 Stat. 1057), filed its corporation income and profits tax return for the fiscal year ended August 31, 1919, on the form furnished to it therefor by the Commissioner of Internal Revenue and reported thereon as follows:
Net income for taxable year ............ $ 282,282.95 Invested capital for taxable year ................................. 1,790,559.12 Income and profits tax ................. 78,078.66
XVI. The items included by the plaintiff in computing the invested capital of $1,790,559.12 referred to in the last preceding finding were as follows:
Capital stock paid up and actually outstanding as at August 31, 1918 — Preferred ........................ $ 500,000.00 Common ........................... 500,000.00 _____________ $1,000,000.00 Earned surplus and undivided profits ............................ 618,643.15 _____________ $1,618,643.15 Changes in invested capital during the year: Capital stock of $336,000.00 and $5,000.00, issued January 3, 1919, and April 6, 1919, respectively, prorated .......... $222,945.22 Dividends and taxes prorated .... 51,029.25 _____________ 171,915.97 _____________ Invested capital for the fiscal year ended August 31, 1919 ............................... $1,790,559.12
XVII. Upon the taxable income reported in the aforesaid return, income and profits taxes were assessed by the Commissioner of Internal Revenue against the plaintiff for the fiscal year ended August 31, 1919, in the amount of $78,078.66. The plaintiff paid to the collector of internal revenue at Louisville, Ky., the sum of $78,078.66 to wit: $14,090.53 on November 10, 1919; $19,519.66 on February 10, 1920; $19,519.67 on May 14, 1920; $19,519.67 on August 16, 1920; and credits of $4,417.08 and $1,012.06 on account of an overpayment of taxes for the years 1917 and 1918, respectively. The said tax was paid by the said collector into the Treasury of the United States.
XVIII. On or about the 31st day of March, 1923, the plaintiff filed a claim for refund in the sum of $127,012.94, income and profits taxes alleged to have been erroneously and illegally assessed and collected from the plaintiff for the fiscal years ending August 31, 1918, and August 31, 1919, therein claiming for the first time that the amount theretofore shown as borrowed money was in reality an undistributed stock dividend.
XIX. On or about the 19th day of June, 1925, the Commissioner notified plaintiff that its claim for refund had been allowed in part. The refund of $47,422.69 indicated in said letter was made to the plaintiff on or about August 26, 1925. That part of plaintiff's claim relating to the matters here in suit was by the Commissioner on June 19, 1925, rejected as follows:
"This office holds that the dividends declared February 3, 1916, cannot be included in invested capital, inasmuch as the amounts were credited to the stockholders' individual accounts, the stock not being issued until January, 1919, and then not in proportion to the amounts credited to the individual accounts."
XX. No action has been taken upon this claim other than herein set forth before Congress or any other department of the Government or in any court. No person other than the plaintiff is the owner thereof or interested therein. No assignment or transfer of this claim or of any part thereof or interest therein has been made. The plaintiff is a citizen of the United States and has at all times borne true allegiance to the government of the United States and has not in any way voluntarily aided, abetted, or given encouragement to rebellion against said government.
Humphreys Day, of Washington, D.C., for plaintiff.
Herman J. Galloway, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GRAHAM and GREEN, Judges.
This case involves the question whether a certain dividend declared by the plaintiff was a stock or cash dividend. If the former, it was not subject to the tax imposed; if the latter, it was. The Commissioner of Internal Revenue held it to be a cash dividend and assessed the plaintiff for taxes on that basis. The plaintiff is seeking a recovery of the amount so assessed, upon the ground that the dividend was a stock dividend.
The contention grows out of the following resolution: "Resolved that this corporation do and it hereby does declare a cash dividend of one hundred per cent. (100%) to be paid in stock six (6) and twelve (12) months from date hereof, and to be credited to each of the stockholders in proportion to his holding of stock as of February 3, 1916, the said dividend so declared to bear interest at the rate of four per cent. (4%) per annum from date. This dividend is to be charged to and paid out of the undivided surplus account of the company."
This is primarily a question of fact and it might have been disposed of by the findings. The burden is on the plaintiff to show that the Commissioner was wrong in concluding that this was a cash dividend. The actual question here is whether plaintiff is entitled to consider a certain dividend declared on February 3, 1916, as a stock dividend in computing its invested capital for the fiscal years which ended August 31, 1918, and August 31, 1919.
On February 1, 1916, the plaintiff had a capitalization of $500,000, divided into 5,000 shares of common stock of $100 each. On February 3, 1916, the stockholders in meeting increased the capital stock by issuing $500,000 six per cent. cumulative preferred stock divided into 5,000 shares of the par value of $100 each, and, at the same meeting, declared a stock dividend of $500,000 which dividend was paid by the issuance of the stock. It will thus be seen that this increase of capital stock was at once disposed of by this stock dividend, leaving the corporation as it was without any stock from which the dividends, in dispute here, could be paid. At the same meeting of the stockholders, at which this first stock dividend just mentioned was declared, the resolution above quoted declaring "a cash dividend of 100% to be paid in stock six and twelve months from date" was adopted. There was no stock at the time from which this last dividend could be paid.
The plaintiff is contending that the latter dividend was a stock dividend and not a cash dividend, and upon that theory it is seeking to recover taxes paid on the basis of its being a cash dividend. A brief statement of some of the salient facts seems necessary, but before proceeding to this recitation it is well to say that, while the above resolution stated that this was a cash dividend payable in stock, the resolution itself and its wording are not controlling, if the subsequent action of the company and the parties in interest shows the contrary; or to put it differently, the board of directors cannot convert a cash dividend into a stock dividend by a simple resolution, and, if the resolution does not comport with the facts, the facts must control.
As stated, when this resolution was passed the authorized stock of the company had been exhausted by the declaration of the stock dividend for $500,000, and there was no stock authorized to be issued to meet this cash dividend payable in stock. This cash dividend, which it is claimed was a stock dividend, was payable at six and twelve months after it was declared and bore interest at the rate of 4 per cent. from the date of declaration, which interest was regularly credited on the books of the company to the respective stockholders according to their allotment of the cash dividend. The proceeds of this dividend were credited to each stockholder according to stock holdings on the books of the company as "borrowed money" and were treated by the company and stockholders as cash to be drawn against at the pleasure of each stockholder. The dividend was charged as a special dividend to "Undivided Surplus" and the contemporaneous entry on the books of the company says nothing of stock, but has this statement: "Dividend to be credited to stockholders as per minutes Feby. 3/16 payable in 6 and 12 mo., int. to be allowed on this div. 4%."
The general cash statement of the company for August 31, 1916, in the stockholders' minute book, stated this dividend as "dividend paid $500,000," and was taken out of undivided profits. And the annual statement of the company for that year, prepared by auditors, has "borrowed money" with the name and account of each stockholder stated. The statement was presented in the stockholders' meeting and entered on the minute book of the corporation as ordered. The dividend was by some of the stockholders immediately withdrawn after issuance and by others later withdrawn in whole or in part from their account as cash. The sum of $500,000 covering this dividend was also charged the same day to the plaintiff's undivided surplus account. When plaintiff made its tax return the outstanding amounts credited to each of the stockholders were taken credit for as "open account" obligation. Some of the stockholders withdrew the whole amount credited to them and others parts of it.
The principal stockholder in the company was Henry Vogt. A brief glance at his account with the company will be informative. At the time this dividend was declared, February 3, 1916, he had overdrawn his account with the company in the sum of $103,133. He controlled the majority of the stock of the company. Between the issuing of the stock and January 3, 1919, he never had a net credit in his individual account amounting to $415,600, his share of the dividend. It was always kept below that amount.
The plaintiff in its income tax returns which were signed by Henry Vogt as president and G.A. Heuser as treasurer showed "borrowed money" from individuals, with the amount due each stockholder. From the date of the declaration and payment of this dividend, February 3, 1916, until October 30, 1918, no more capital stock could be or was issued or sold. On that date the stockholders in meeting voted to increase the capital stock by $500,000, one-half common and one-half preferred, and on the same day Henry Vogt purchased $240,000 of the stock and Mrs. G.A. Heuser $94,000, they being the only stockholders at the time to whom the company owed any considerable money. There is nothing in the records of the company or its proceedings at this last meeting to indicate or even suggest that this increase of stock which was a part of the $344,000 and which was sold to Vogt and Mrs. Heuser was related in any way to the dividend declared February 3, 1916, and the facts show that it was not.
At the time Vogt bought this last stock he had a credit of $294,386.15 on the books of the company. He used $240,000 of it to pay for this stock and drew out the balance, $54,386.15. Mrs. Heuser did not have sufficient to her credit to pay for her stock of $94,000, but paid for it a few months afterwards.
As stated, the company made its returns for the years 1916, 1917, and 1918, treating this dividend as borrowed money and was assessed on the basis of such returns, and not until March 31, 1923, did it make any claim that this was a stock dividend. It then filed a claim for refund on income and profits taxes paid based upon the claim that this was a stock dividend. The interest paid on this dividend, which was regularly entered on the books to the credit of each stockholder, was on the company's returns regularly deducted as "interest paid."
Without extending this opinion further, we are clearly of the opinion that this was a cash dividend, and, being such, the plaintiff has no grounds upon which to recover. But more than this, the plaintiff has not met the burden of proof and shown satisfactorily that the judgment and action of the Commissioner were erroneous. The petition should be dismissed, and it is so ordered.
WILLIAMS and LITTLETON, Judges, did not hear this case and took no part in the decision thereof.
BOOTH, Chief Justice, and GREEN, Judge, concur.