Opinion
No. 33844
Decided June 16, 1954.
Taxation — Intangible property — Shares of stock of corporation — Corporation split stock — Shares of each shareholder proportionately increased — Shareholder's return for taxation — Value of shares as income-producing investment measured, how.
Where a corporation, at the close of the calendar year 1950, splits its common stock, whereby the number of shares held by each shareholder is proportionally increased without payment of consideration for such additional shares, a shareholder who is a resident of Ohio is required, under the intangible tax law of Ohio, to return as of January 1, 1951, the total number of shares of the corporation then owned by him, and such shares are taxable as an income-producing investment whose value is measured by the income yield received by the shareholder from the original shares during the previous year and not by the value of the original shares as an income-producing investment measured by the income yield from such shares for the previous year, and the value of additional shares as a non-income-producing investment.
APPEAL from the Board of Tax Appeals.
This is an appeal by the Tax Commissioner of Ohio to this court from a decision of the Board of Tax Appeals rendered on December 7, 1953, with respect to an intangible tax assessment made by the Tax Commissioner against the appellee taxpayer on certain shares of stock of Masonite Corporation received by him pursuant to the declaration of a stock-split made by the corporation in December 1950. Hereinafter, the Tax Commissioner will be designated as commissioner, the taxpayer as Marsh, and the corporation as Masonite. The facts pertaining to this appeal are not in dispute. The controversy arises over the interpretation and application of applicable statutes to the facts involved.
Marsh is a director and shareholder of Masonite. Throughout the year 1950, until December 28, 1950, he was the owner of 2,500 shares of no par common stock of Masonite. During the calendar year 1950, he received dividends on each of these shares in the following amounts on the following dates: 50 cents on February 28; 50 cents on May 31; 50 cents on August 26; $1 extra dividend on August 26; and 50 cents on December 28, making a total of $3 per share or a grand total of $7,500.
Pursuant to a meeting of the shareholders of Masonite held December 6, 1950, the number of authorized shares of no par common stock was doubled (effective December 28), as a result of which Marsh received 2,500 additional shares of no par common stock, making a total of 5,000 shares then and thereafter held by him.
The resolution adopted by the shareholders at this meeting by which the stock-split was accomplished provided for the amendment of the fourth article of the corporate charter, as follows:
"Fourth: * * * two million (2,000,000) shares shall be common stock, without par value.
"At the time this amendment becomes effective, and without any further action on the part of the corporation or its stockholders, each share of common stock without par value then issued and outstanding shall be changed and reclassified into two fully paid and nonassessable shares of common stock, without par value. The capital account of the corporation shall not be increased or decreased by such change and reclassification. To reflect the said change and reclassification, each certificate representing shares of common stock without par value theretofore issued and outstanding shall represent a like number of shares of common stock without par value issued and outstanding after such change and reclassification; and the holder of record of each such certificate shall be entitled to receive a new certificate representing a number of shares of common stock without par value of the kind authorized by this amendment, equal to the number of shares represented by said certificate for theretofore issued and outstanding shares, so that upon this amendment becoming effective each holder of record of a certificate representing theretofore issued and outstanding common stock of the corporation will have or be entitled to certificates representing in the aggregate two shares of common stock without par value of the kind authorized by this amendment for each share of common stock without par value of which he was the holder prior to the effectiveness of this amendment."
As a result of this action, there was no change in the capital account or in the total money value of the no par common stock held by each shareholder of Masonite. No cash dividends were authorized or paid on the stock in the calendar year 1950 subsequent to the stock-split. Subsequent to the stock-split, the value of each share of the no par common stock of Masonite, according to quotations on the New York Stock Exchange, was reduced one-half, and the cash dividends received on each share in the calendar year 1951 were one-half of what was received on each share in the year 1950.
When Marsh made his intangible tax return for the year 1951, as of tax listing day January 1, 1951, he represented that at the beginning of the year he owned as an investment 2,500 shares of Masonite upon which he had received for the previous year an income yield of $3 per share or a total of $7,500; that on December 28, 1950, he acquired an additional 2,500 shares of Masonite, which were specified as "new"; and that at the end of the year he owned 5,000 shares of Masonite stock.
The commissioner found that an income yield of $3 per share was produced from Marsh's investment in the 2,500 shares of stock owned by him throughout the year 1950 and assessed them accordingly. With reference to the 2,500 shares received by Marsh from the stock-split on December 28, 1950, the commissioner found that these shares were not income producing for the year 1950 and assessed them for 1951 as a non-income-producing investment at three mills per dollar of fair value which the commissioner found to be $31.125 per share.
Marsh protested the assessment of the 2,500 additional shares as a non-income-producing investment and took an appeal from the order of the commissioner to the Board of Tax Appeals.
That board reversed the order of the commissioner, holding that Marsh was chargeable with the tax based upon an "income yield" of $7,500 on his first block of Masonite stock of 2,500 shares as his only taxable investment for the year 1951, and that his second block of 2,500 shares of such stock acquired on December 28, 1950, did not become an investment until the year 1951, during which year it must be reflected as an income producing or a non-income-producing investment for the succeeding tax year.
The commissioner appealed to this court from the decision of the Board of Tax Appeals.
Messrs. Black, McCuskey, Souers Arbaugh, for appellee.
Mr. C. William O'Neill, attorney general, and Mr. W.E. Herron, for appellant.
The issue to be determined is: Where a corporation, at the close of a calendar year, splits its common stock, whereby the number of shares held by each shareholder is proportionally increased without payment of consideration for such additional shares, is a shareholder who is a resident of Ohio required, under the intabgible tax law of Ohio, to return as of January 1 for that year the total number of shares of the corporation then owned by him, and are such shares taxable as an income-producing investment whose value is measured by the income yield received by the shareholder from the original shares during the previous year and not by the value of the original shares as an income-producing investment measured by the income yield from such shares for the previous year, and the value of additional shares as a non-income-producing investment?
The pertinent part of Section 5323, General Code (Section 5701.06, Revised Code), is as follows:
"The term `investments' as used in this title, includes the following:
"Shares of stock in corporations, associations and joint stock companies, under whatever laws organized * * *."
The pertinent part of Section 5388, General Code (Section 5711.22, Revised Code), is as follows:
"In listing investments, the amount of the income yield of each for the calendar year next preceding the date of listing shall, excepting as otherwise provided in this chapter, be stated in dollars and cents and the assessment thereof shall be at the amount of such income yield; but any property defined as investments in either of the first two subparagraphs of Section 5323 of the General Code which has yielded no income during such calendar year shall be listed and assessed as unproductive investments, at the true value thereof, in money, on the day as of which such investments are required to be listed." (Italics supplied.)
The pertinent part of Section 5389, General Code (Section 5701.10, Revised Code), is as follows:
"`Income yield' as used in Section 5388 of the General Code, and elsewhere in this title means the aggregate amount paid as income by the obligor, trustee or other source of payment to the owner or owners * * * of an investment, whether including the taxpayer or not, during such year, and includes the following:
"* * * in the case of shares of stock, the dividends so paid or distributed * * * whether such payment or distribution is in cash, notes, debentures, bonds, other property or shares of stock, excepting stock of like kind and character of the corporation declaring the dividend * * *." (Italics supplied.)
Under this plan of intangible taxation, the tax listing date is January 1 of each year, and the income yield of an income producing investment for the preceding year is the measuring stick to determine the value of the investment and the amount of the tax to be paid. In case of a non-income-producing investment, the tax is fixed at three mills on its true value in money. Shares of stock received prior to tax listing date are investments as of that date and subject to tax in the succeeding year.
It seems clear and indisputable that Marsh's investment which produced the income yield of $7,500 for the year 1950 was his interest in Masonite which, prior to December 28, 1950, was represented by 2,500 shares of the common stock, and after December 28, 1950, and on January 1, 1951, by 5,000 shares of the same stock without any change in the investment. Before December 28, 1950, he owned 2,500 shares out of a total of 675,276 shares, or .37 per cent of the corporate shares. After December 28, 1950, and on January 1, 1951, he owned 5,000 shares out of a total of 1,350,552 shares, or .37 per cent of the corporate shares. The investment remained exactly the same although after December 28, 1950, by the split it was represented by twice as many units, each worth one half as much as each of the previous units. The tax is based on the value of the investment and Marsh's investment was in no way changed by the stock-split.
This operation and its consequences are well reflected and expressed in the following statement in the case of Towne v. Eisner, Collr., 245 U.S. 418, 62 L.Ed., 372, 38 S.Ct., 158:
"`A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their interests are not increased. * * * The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones.' Gibbons v. Mahon, 136 U.S. 549, 559, 560. In short, the corporation is no poorer and the stockholder is no richer than they were before. Logan County v. United States, 169 U.S. 255, 261. If the plaintiff gained any small advantage by the change, it certainly was not an advantage of $417,450, the sum upon which he was taxed. * * * What has happened is that the plaintiff's old certificates have been split up in effect and have diminished in value to the extent of the value of the new." See, also, Eisner, Collr., v. Macomber, 252 U.S. 189, 64 L.Ed., 521, 40 S.Ct., 189, 9 A.L.R., 1570, and Millar et al., Admrs., v. Mountcastle, 161 Ohio St. 409.
The total result of the change in the capital structure of Masonite was that the income yield of $7,500 received by Marsh in 1950 was from an investment represented by 2,500 shares of stock before December 28, 1950, and by 5,000 shares of stock after December 28, 1950. It follows that on January 1, 1951, the income yield of $7,500 for the year 1950 was produced by the investment represented by 5,000 shares and not by 2,500 shares. The position of the commissioner that the income yield of $7,500 should be deemed to be the income yield on 2,500 of the 5,000 shares outstanding as of January 1, 1951, and that the remaining 2,500 shares should be regarded as a non-income-producing investment would result in double taxation of Marsh's investment so far as the tax related to the latter group of shares. This position is unrealistic and untenable.
Although on a different basis, the decision of the Board of Tax Appeals is affirmed.
Decision affirmed.
WEYGANDT, C.J., MIDDLETON, TAFT, ZIMMERMAN, STEWART and LAMNECK, JJ., concur.