Hayes v. St. Louis Union Trust Co. ( 1927 )

This is a suit to construe a trust declared in the will of Joseph M. Hayes, who died a citizen and resident of St. Louis on January 14, 1919. The plaintiffs are three of his children, together with the divorced wife and the widow-administratrix of another child who died after the institution of the suit. The defendants are the testamentary trustees and the testator's remaining living children and his grandchildren — the latter all minors and children of a living daughter. The answers of all of them joined in praying a construction of the will.

The will placed the testator's residuary estate in trust, the net income therefrom to be paid in equal shares to his children and their descendants, per stirpes, until the death of the last surviving child, when the then principal and undistributed income were directed to be divided equally, per stirpes, among his grandchildren then living and the descendants of any such as might be deceased. The trust assets included 200 shares of the common capital stock of the American Tobacco Company.

About fifteen months after Mr. Hayes's death, in May, 1920, the Tobacco Company declared a 75 per cent stock dividend payable August 1, 1920, out of its "Common Capital Stock B," which had all the rights of ordinary common stock except that it was non-voting. Pursuant thereto stock certificates for 150 shares of the stock were issued and delivered to the trustees. On September 1 and December 1, 1920, and March 1, 1921, respectively, the Company declared three further dividends of three per cent, payable March 1, 1923, in the same Stock B at par, and issued to the trustees scrip or dividend certificates therefor, each of the face value of $1050. At the maturity of the certificates the trustees received the stock called for thereby. The point in controversy is whether these stock and scrip dividends are "income" within the meaning of the will and as such go to the life beneficiaries — as the plaintiffs contend — or whether they constitute merely accretions to the principal or corpus of the trust estate — as the defendants maintain. It was decreed by the learned chancellor below that the trustees should charge themselves with the four dividends as trust income, and that the stock realized thereon should be distributed among the life tenants. The defendants have appealed. The puzzling question presented is one of first impression in this State.

The case has been twice argued here by able counsel, and by leave of court briefs have been filed by three amici curiae. There are nine briefs, citing or leading to the examination of more than three hundred authorities, in addition to a record of some length, which reviews the financial history of the American Tobacco Company since 1904 and sets out much statistical data pertaining thereto.

At the outset it is to be remembered that the question is nothing more or less than one of the testator's actual intention, if discernible from the will — illuminated by competent and material extrinsic evidence concerning the subjects and objects of the bequests, if and insofar as ambiguity with respect thereto may lurk behind the written provisions of the instrument. This rule of construction is inexorably followed in this State, and in all other jurisdictions in this country so far as we know. A proper consideration of the matter leads first, therefore, to a scrutiny of the will itself.

The will is dated September 30, 1915. There are two codicils, the first dated November 2, 1917, and the second December 14, 1918, just one month to a day before the testator's death. After providing in clause 1 for the payment of his debts, etc., and in clause 2 making a small specific bequest, clause 3 leaves the residuary estate to trustees, and continues as follows: "said trustees shall take charge and possession of said rest and residue of my estate, collect the income, rents, issues and profits thereof and therefrom, and after deducting all proper and legal charges and expenses incident to the management of said property and the execution of the trusts herein and hereby created, dispose of the net income from said trust property as follows, . . ." Then follow provisions requiring a division of "said net income" among his children and their descendants perstirpes until the death of the last surviving child, and directing that past and future advancements to his children he charged against "said income" due them respectively. It is then provided that on the death of the last surviving child "the principal of and accumulated and undistributed income from said trust estate" shall be divided in equal shares among the testator's then living grandchildren and their descendants, perstirpes, following which appears a proviso that in the final distribution no advancement to a child shall be charged against the descendants of that child, together with directions respecting disbursements to minor distributees, either of principal or "net income." To this is added that "all payments of income" shall be in monthly installments as nearly equal as practicable and as nearly on the first day of the month as may be found convenient.

Clause 4 of the will forbids the anticipation by any distributee of his share of the principal of the trust estate or of "the net income therefrom or any installment of such income" by way of sale, hypothecation or other disposal thereof, and declares such distributive shares shall not be subject to the debts of the distributees until actually paid over to them; and that no devise or bequest to any female legatee shall be subject to any right, interest or control of any husband of hers.

The codicil of November 2, 1917, specifies that five per cent of the aggregate advancements made by the testator to his children living or survived by issue shall be charged annually against "the annual net income" payable to such children or their descendants, respectively; and further provides that if any child or descendant resist the probate of the will or any codicil thereof, or contest the same, the bequests for such child or descendant shall be thereby annulled. The codicil of December 14, 1918, makes provision for the wife of one of his sons out of the "net income" bequeathed said son, during her lifetime, on specified conditions. Except as modified by this and the preceding codicil, the original will is ratified and confirmed.

From the foregoing summary it is apparent that the face of the will fails specifically to declare the testator's intention with reference to whether stock dividends should be regarded as principal or income. Dehors the will, evidence was admitted showing that the testator conducted in St. Louis an incorporated wholesale business in woolens, spending each year three or four months in the East. In 1913 he retired from business. He was a widower, and at the time of his death two of his daughters, both unmarried, lived with him. Another daughter was married and lived in Boston. His (then) three sons were all in business away from home, one, apparently, married and the two others single. Two of the eight children mentioned in the will died childless before the testator's death, and one afterwards, None of the children were self-supporting; at least, the father gave each a monthly allowance. He loved all his children. When he died his estate, realty excluded, appraised nearly $630,000, of which over seventy per cent was invested in stocks. The estimated value of the personalty in the trust was about $400,000. The assessed value of the trust realty was slightly over $120,000. The actual net income from the entire trust estate for the year ending August 6, 1923, was $41,000 in round numbers. The executors made final settlement June 15, 1920, and, apparently, the trust assets were surrendered to the trustees on or about that date, but neither the gross income nor the expenses of the trust estate for any period were given in evidence. The record does not reveal when the testator acquired the original 200 shares of common stock from which the dividends in controversy were derived, what he paid therefor, or the market value of the stock at any time.

A large part of the record is devoted to the corporate and financial history of the American Tobacco Company from the time of its organization in September, 1904, up to the year 1922. Much of this consists of tables giving the earnings, surplus and dividends for each year, and of resolutions passed by the board of directors and by the stockholders. It is obviously impossible to go into these facts and figures in detail. Suffice it to say that the respondents advance two theories; first, they lay claim to the whole of the four stock dividends (a) under their construction of the will, (b) and also under a rule of law designated as the "Kentucky rule;" and, second, if unsustained in their first contention, they claim a part of the dividends under a rule of law known as the "Pennsylvania rule."

It was in support of this second theory that the statistical evidence was introduced. The gist thereof is that when the testator died on January 14, 1919, the American Tobacco Company had a surplus of $44,584,333.10; that after the testator's death the surplus had increased from earnings about $13,000,000 on August 1, 1920, when the 75 per cent stock dividend was declared. Inasmuch as this increase was earned after the death of the testator the respondents maintain they should be allotted a proportion of the shares of common stock B received by the trust estate on the four several stock dividends, representing that portion of the surplus earned after the testator's death, as compared with the whole surplus.

As the evidence fails to show when the testator acquired the 200 shares of stock upon which the disputed dividends were earned (except that it was before 1918), there is no way of telling what information he had concerning the earning capacity of the stock, or how far that consideration may have influenced him in making his will; but for the sake of such incidental information as it may give, we append a table of the dividends paid by the stock from the time he wrote the will in 1915:

Year Dividends 1915 20% cash 1916 20% cash 1917 20% cash 1918 20% cash scrip convertible into Stock B 1919 (10% scrip, Stock B, ( no cash option. (10% cash 1920 (10% cash (75% stock dividend of Stock B, ( 6% dividends of Stock B, payable 3, 1, 23 1921 ( 3% dividend of Stock B, ( payable 3, 1, 23 ( 9% cash, 19 (4.75% stock of another ( corporation 1922 12% cash.

The foregoing is a sufficient, and perhaps too full, statement of the facts.

1. (a) We have already indicated our conclusion that the will on its face does not specifically declare the intention of the testator with reference to whether the stock dividends in controversy are to be regarded as corpus or income. But inasmuch as respondents earnestly urge a contrary view, the point calls forProfits. further discussion. They stress that provision of the will which says: "Said trustees shall . . . collect the income, rents, issues and profits (of the trust estate) and after deducting all proper and legal charges and expenses incident to the management of said property and the execution of the trusts herein and hereby created, dispose of the net income from said property" (italics ours) to the distributees. Respondents assert the meaning of the provision is broadened by the use of the word "profits;" and that the language signifies everything in the way of advantage or profit accruing to the trust estate, citing U.S. Trust Co. v. Heye, 224 N.Y. 242, 253-4, 120 N.E. 645. They therefore maintain that the trust clause may be epitomized in two equations: income, rents, issues and profits=gross income of every kind, including stock dividends; gross income — expenses — net income.

(b) It may readily be admitted, for the purpose of discussion, that everything in the nature of a return collected by the trust estate should be credited to the income account thereof — but it must be a return, not simply capital increment, and it must becollected. This raises, but does not answer, the ultimate question under consideration, as to whether stockIncome. dividends represent something actually going to the shareholder (the trust estate), or merely something going to the corporation itself and thereby swelling only thecorpus of the trust, without adding to its income except as may indirectly result thereafter from an increased yield on the augmented corpus.

(c) A point is made, also, on the circumstance that the life beneficiaries of the trust are the testator's children, whereas the remaindermen are only grandchildren and perhaps lineal descendants unborn. It is suggested the testator had, presumably, greater affection for the former, and from this anPreference inference is drawn that he intended them tofor Children. receive stock dividends. We are not impressed with this argument, either in the light of the provisions of the will, the extrinsic evidence showing the relations between the parties, or of human nature itself. On the contrary, the fact that the will exacted repayment of advancements from the children and their descendants out of the income, but exempted the final beneficiaries from such payments out of the corpus; the fact that the trust is a spendthrift trust; and the fact that the testator a month before his death by codicil threatened with disinheritance any beneficiary who resisted the will — a provision obviously directed at his children, rather than the three minor grandchildren — all these considerations point rather to the conclusion that the testator desired the corpus of the estate to be held inviolate and intact. The proof that the children were improvident does not weaken this conclusion. To sum up the whole matter, we are unable to see anything in the will or the extrinsic evidence which warrants us in attaching to the words "net income" used in the trust clauses a meaning other than that which the law would give them unaided when applied to the subject-matter in litigation — stock dividends. To an inquiry on that point we now direct ourselves.

2. The will gives the life beneficiaries the net income of thetrust estate. To ascertain the net income, the estate must be looked to in solido (Tuckerman v. Currier, 54 Colo. 25, 125 P. 210, Ann Cas. 1914 C, 599, 607) and the expenses subtracted from gross receipts. But since it is tacitly admitted the financial condition of the estate when the suit wasMoney or filed did not preclude the disbursement of the dividendSpecie. stock as "net income," and since there is no clear testamentary direction that installments of income shall be paid in money, we can and shall treat the case as involving the title to the stock in specie, as did the trial court.

3. (a) When the right to the income from corporate stock is separately lodged in the holder of a life or term estate — whether or not through an intermediary trust — the proper application of stock dividends as between the particular estate and the reversion or remainder presents a question which "has perplexed the courts of both this country and England for a century." [7 R.C.L. p. 289, sec. 266.] Concerning the problem it has been said: "Few legal questions present greater intrinsic difficulties, or have called forth a greater contrariety of views and opinions, as well as of practical results . . ." [Annotation: 12 L.R.A. (N.S.) 769.] For a survey of the many theories and formulas which have been advanced it will suffice to refer to the following: 14 C.J. pp. 829-34, secs. 1255-63; 7 R.C.L. pp. 289-92, sec. 266; 17 R.C.L. p. 630, sec. 21; Annotations: 54 Am. Rep. 264, 14 A.S.R. 633, 118 A.S.R. 162; 12 Ann. Cas. 650, 23 Ann. Cas. 1218, 35 Ann. Cas. 311; 16 L.R.A. 461, 12 L.R.A. (N.S.) 768, 35 L.R.A. (N.S.) 563, 50 L.R.A. (N.S.) 510, L.R.A. 1916 Dall. 211; 24 A.L.R. 9, 42 A.L.R. 448.]

In subsequent discussion, for convenience we shall use the term "income" in referring to the life or term beneficiaries, and the word "corpus" as representing the reversioners, remaindermen, or, in this case, the trust estate which holds the reversionary interest for the ultimate beneficiaries.

(b) The conflict of opinion seems to be confined to stock dividends representing earnings — that is to say, stock dividends based on capitalized surplus or net profits actually or presumptively traceable to such earnings. In the case of corporations engaged in a "wasting" business, such as mining or timber cutting, etc., sometimes capital consumed in the regular course of operation is treated as earnings. With this exception there appears to be practical unanimity on the proposition that stock dividends go to corpus if attributable not to earnings but to capital — made available for distribution through unearned enhancement in the value of capital assets, liquidation, reduction of capital or the like. [7 R.C.L. p. 291; 17 R.C.L. p. 632; 14 C.J. p. 829; 24 A.L.R. 15, 92.] We are now attempting merely to state the general rules prevailing in other jurisdictions, and are not concerned with their soundness or specific application. As regards stock dividends based on earnings, three rules have grown up, the so-called Massachusetts rule, Pennsylvania rule and Kentucky rule. There is another called the American rule, but it is little more than a loose classification of all doctrine opposed to the Massachusetts rule, combining parts of the Pennsylvania and Kentucky rules.

4. Under the Massachusetts rule, broadly stated, cash or property dividends belong to income and stock dividends tocorpus. [17 R.C.L. 630.] The theory is that in the case of cash and property dividends there is an actual severance of the subject of the dividend from the corporate assets, whereas stock dividends involve only readjustments of the corporate structure, the corporate assets remaining the property of the corporation as fully as they were before. The leading case is Minot v. Paine,99 Mass. 101, 96 Am. Dec. 705, decided in 1868. In applying the rule, while the courts permit the corporate action in declaring the dividend to characterize the dividend — that is, whether it be cash or stock — yet they look to the substance of the act, rather than its form, in determining this question. The rule is followed in these jurisdictions: United States Court, Connecticut, Georgia, Illinois, Maine, Massachusetts, New York, North Carolina, Ohio, Virginia, West Virginia and Rhode Island; with serious doubt raised as to the latter State by a comparatively recent case. [Rhode Island Hospital Trust Co. v. Peckham, 42 R.I. 365, 107 A. 209.]

5. The Pennsylvania rule makes no distinction between cash dividends and stock dividends. It raises the presumption that the settlor of a trust covering corporate stock intended the stock to be the corpus or principal of the trust only to the extent of its book or intrinsic value at the beginning of the trust. The rule therefore allocates any extraordinary dividend from earnings, declared during the running of the life or term estate, by determining whether the basic earnings accrued before or after the trust began; if the former, it is awarded to corpus: if the latter, to income; if both, the dividend is apportioned accordingly. [14 C.J. 832, 17 R.C.L. 631, 7 R.C.L. 290.] The leading case is Earp's Appeal, 28 Pa. 368, decided in 1857. It will be seen that the effect of the rule is to make the money value of the dividend-producing stock at the beginning of the estate the principal or corpus of the estate — rather than the stock itself. Starting from this premise, the rule disregards the form of the dividend and the corporate action in giving it that form. The doctrine is in effect in California, Iowa, Maryland, Minnesota, Mississippi, New Hampshire, New Jersey, Pennsylvania, South Carolina, Tennessee, Vermont and Wisconsin. Some of these states are not committed to the apportionment feature of the rule.

6. The Kentucky rule, likewise, makes no distinction between cash and stock dividends. The time when the dividend isdeclared is the criterion. Any dividends from earnings, cash or stock, ordinary or extraordinary, declared during the term of the principal estate, belong to income — without regard to whether such earnings accrued prior or subsequent to the beginning of the estate. [14 C.J. 834, 24 A.L.R. 38.] The leading case is Hite v. Hite, 93 Ky. 257, 20 S.W. 778, 40 A.S.R. 189, 19 L.R.A. 173, decided in 1892. The doctrine is followed in Kentucky and Delaware.

7. The Massachusetts rule has been criticised by some courts in other jurisdictions, and by text-writers and annotators. It has been characterized as a rule of convenience and not of justice. On the other hand the Pennsylvania rule has been commended and said to be growing in favor. This latter observation, however, seems not in accord with recent developments. The Supreme Court of Ohio in Lamb v. Lehmann, 110 Ohio St. 59, 143 N.E. 276, 42 A.L.R. 437, decided in 1924, adopted the Massachusetts rule, and in New York the rule appears to have been put into effect by a statute in 1926, both as regards income taxation (Laws New York 1926, vol. 1, p. 939, chap. 543) and general personal property law (Laws New York 1926, vol. 2, p. 1563, chap. 843). The Kentucky rule was followed in New York prior to 1913. In fact, until that time. [12 L.R.A. (N.S.) p. 775.] In that year in Re Osborne, 209 N.Y. 450, 103 N.E. 723, 50 L.R.A. (N.S.) 510, 35 Ann. Cas. 311, the Pennsylvania rule was adopted. Speaking of the legislative change from the Pennsylvania rule to the Massachusetts rule, the New York Court of Appeals recently said in People v. Gilchrist, 243 N.Y. 173, 153 N.E. 39, 41: "The rule previously applied had resulted in so many complications and obscurities as to be almost unworkable in practice. [United States Trust Co. v. Heye, 224 N.Y. 242, 120 N.E. 645; Bourne v. Bourne, 240 N.Y. 172, 148 N.E. 180.] It involved elaborate accountings for the purpose of determining how far the dividends were the result of profits accumulated before the creation of the trust, and how far the result of profits accumulated thereafter. The Legislature evinced its will that there should be an end to these complexities hereafter in the administration of the law of trusts."

8. The three doctrines may be summed up by saying the Massachusetts rule considers the character of the dividend, the Pennsylvania rule the source of the dividend, and the Kentucky rule the time of the dividend. In our opinion the first of these method is more nearly correct.

9. (a) What is the principal or corpus of the estate in cases of this kind — is it the corporate stock itself, or its value at a given time? Undoubtedly, the former. If the trust asset were land, the fact would be clear. With reference toIncome or stock, the same view is taken in other phases of trustCorpus. administration, even in those states following the Pennsylvania or Kentucky rule. For instance, it is uniformly conceded that if corporate stock, so held in trust, increase in value through the accumulation of corporate earnings after the beginning of the trust, and if no dividends are declared, the whole increase belongs to corpus, even upon a sale of the stock. [17 R.C.L. p. 632; 21 C.J. pp. 945-6, 1041; Annotations, L.R.A. 1915 C, 851, 13 A.L.R. 1009; Smith v. Hooper,95 Md. 16, 26, 51 A. 844; First National Bank of Canton v. Mulholland, 123 Miss. 13, 85 So. 111, 13 A.L.R. 1000; Olcott v. Estate of Charles F. Hoffman, 127 Misc. 399, 216 N.Y.S. 267, 269; McCoy v. McCloskey (N.J. Eq., 1922) 117 A. 473, 474.]

(b) Another illustration: When a corporation issues new stock the market value of which is above par — not as a stock dividend, but for subscription and purchase — the appurtenant legal right of its stockholders to subscribe for the same at par is a valuable right, for they can take the stock and sell it at a profit, or sell the option or privilege; and yet thisIncrement. right is generally held to belong to corpus, even though the premium be due to surplus or net profits earned after the beginning of the trust. [17 R.C.L. p. 632; Annotations, 24 A.L.R. p. 84, 42 A.L.R. p. 458.] In the same way, where the new stock is sold by the corporation and it realizes the premium, the profit is regarded as an accretion to the corporate capital and not as income in measuring the rights of life tenants and remaindermen to the income from stock of the corporation. [Dickinson's Estate, 285 Pa. 449, 453,132 A. 352.] These holdings can be justified on no other theory than that the dividend yielding stock, not its value when the trust began, is the principal or capital of the trust estate.

10. (a) The corporate stock being the true capital of the trust, no rule attempting to allocate stock dividends thereon can be fundamentally sound unless it consults the peculiar relation between a corporation and its stockholders, and the essential nature of corporate stock and stock dividends. Considering these, it may be said without citation of authority (for theEarnings. cases are in entire harmony on the point) that the earnings and profits of a corporation remain the property of the corporation until severed from corporate assets and distributed as dividends. Until that time stockholders have no property interest therein. Control of the corporation is entrusted to its board of directors, and, of necessity they must be left free to deal with the corporate property as prudent management and the exigencies of the enterprise may suggest — so long as they act in good faith. Net profits may be paid out as dividends, or held against a rainy day, or treated as floating capital and invested in additional property, or, if permanent expansion of capital is desired, the profits may be transferred to the corporation's fixed capital and a stock dividend declared. In this last event, if the extension exceed the limit of authorized capitalization already fixed by the stockholders, their consent to any necessary enlargement or change is usually required (14 C.J. 495), certainly in this State. [Secs. 9740, 10159. R.S. 1919: Laws 1923, pp. 315, 362; Laws 1925, p. 168; Laws 1927, p. 388.] In this sense it may be said a stock dividend and the appropriation of corporate earnings thereto have the sanction of the stockholders, themselves, previously or contemporaneously given. Such consent of the stockholders of the American Tobacco Company was obtained in the instant case.

(b) The outstanding shares of stock are simply units of interest in the corporation, as conducted by its directors, officers and (in some matters) shareholders. They evidence an intangible right to participate according to the amount of stock held, in the immunities and benefits of the corporation. [Armour Bros. Banking Co. v. St. Louis Nat. Bank, 113 Mo. 12,Units of 19, 20. S.W. 690; Richardson v. Busch, 198 Mo. 174, 95Interest. S.W. 894; 7 Words Phrases, p. 6477; 4 Words Phrases (2nd Series) p. 566.] In other words, the aggregate stockholdings of a shareholder represent his fractional interest in the corporation, and not a mere investment of so much money. That this is true, is illustrated by the rule of law (already referred to) giving a shareholder the right to subscribe for new stock in proportion to his then holdings. One of the reasons assigned therefor is that the stockholder is entitled to maintain his proportional interest in the corporation. [14 C.J. 394; 7 R.C.L. 206; Stokes v. Continental Trust Co., 186 N.Y. 285,78 N.E. 1090, and annotations in 12 L.R.A. (N.S.) 969; Knapp v. Publishers Geo. Knapp Co., 127 Mo. 53, 72, 29 S.W. 885; Maynard v. Doe Run Lead Co., 305 Mo. 356, 370, 265 S.W. 97.] The rule applies alike whether his interest he great or small. Where the new stock is voting stock the right is of paramount importance. Where the stock is issued as a stock dividend offsetting capitalized net profits previously earned, and therefore already represented by the original stock at its enhanced value, the right is substantial and of material value.

(c) A stock dividend is not in any true sense a dividend at all. The latter implies a division, a severance from the corporate assets of the subject of the dividend, and a distribution thereof among the stockholders. [McLaran v. Crescent Planing Mill Co., 117 Mo. App. 40, 93 S.W. 819; 14 C.J. p. 798; 5 Thompson on Corporation (2 Ed.) p. 84, sec. 5270.] TheStock issuance of a stock dividend is, in its last analysis,Dividend. nothing more than an incident or process in corporation bookkeeping. The important step is the increasing of the fixed capital of the corporation. The outstanding shares of stock are increased to balance, either by adding to their number or raising their par value. When the stock has no par value, it seems even this is unnecessary. Nothing is taken from the corporation. Nothing is given to the stockholders — rather the contrary, for corporate profits theretofore available for distribution in dividends are permanently appropriated to its fixed capital. The title to all corporate property remains in the corporation as before. The proportional interest of each stockholder continues the same: the only change is in the evidence of his interest in the corporation — that is, the number of his shares of stock is increased and the book value of each share correspondingly decreased, or the face value of his shares of stock is raised to or toward what their intrinsic value was before.

(d) What has been stated in the preceding three paragraphs is but a recapitulation of what has been better said in such cases as Gibbons v. Mahon, 136 U.S. 549, 34 L. Ed. 525, 10 Sup. Ct. Rep. 1057; Towne v. Eisner, 245 U.S. 418, 62 L. Ed. 372, 38 Sup. Ct. Rep. 158, L.R.A. 1918 D, 254; Eisner v. Macomber,Income. 252 U.S. 189, 64 L. Ed. 521, 40 Sup. Ct. Rep. 189, 9 A.L.R. 1570; Lamb v. Lehmann, 110 Ohio St. 59,143 N.E. 276, 42 A.L.R. 437. Many other well-reasoned authorities to the same effect are cited in the briefs. The inescapable conclusion is that the integrity of the principal or capital of the trust estate cannot be preserved unless the appellant trustees, who are the corporate stockholders in this case, be accorded the same legal rights that any individual stockholder would be conceded without hesitation. To say the stock distributed in stock dividends shall be taken away from them and turned over to the life beneficiaries is to deprive the trust estate of its proportionate interest in the corporation — the disaster of which would be apparent, if the principal stock in this case were 51% of the voting stock of a corporation and the dividend stock had similar rights. The testator might have so provided in his will, but, unless his mere direction that the "net income" of the trust estate be paid to the life beneficiaries can be so construed, he did not do so; and logic and the analogies of the law forbid that construction. The stock dividends are not "income," for nothing has come in to the trust estate, in the sense of being severed from the corporation.

11. (a) Glancing, briefly, at the criticisms of the so-called Massachusetts rule, raised in a number of cases. It has been said that the application of this rule allows the directors of corporations to usurp the jurisdiction of the courts, by permitting corporate action instead of judicial investigation to determine what corporate earnings shall go toMassachusetts income and what to corpus: that the rule is anRule. unjust rule of convenience, enforced because the courts shrink from the labor of making a just allotment of corporate earnings; and that boards of directors, by persistence in declaring stock dividends, may "starve" the life beneficiaries in trusts such as the one here.

(b) In our opinion these criticisms are not justified. If corporate action does in fact determine the status of corporate property, the courts ought to be bound by the fact. They are in other matters. The rule is not to be condemned for its simplicity. A long while ago it was said Simplicitas est legibusamica, et nimia subtilitas in jure reprobatur. [4 Coke, 5 b.] The intricacies of accounting met in the enforcement of the Pennsylvania rule are a source of embarrassment to the courts that follow it, and of expense and uncertainty to litigants, as well. Such investigations are, themselves, often inaccurate and arbitrary, but trustees hardly dare proceed without resorting to them. Finally, there is no injustice, so far as we can see, in regarding a life or term estate in capital stock, or its income, as a section of the full ownership with like advantages and disadvantages for the time being. The testator might have been deprived of cash income had the corporation declared only stock dividends in his lifetime: and yet he saw fit to purchase and hold the stock and leave it in trust for his progeny. He could have sold his dividend stock, it is true, but that would have whittled down his capital, and he says in the will this must not be done. He could have done the same thing by selling off fragments of his own original shares. A reference to the table of dividends set out on a preceding page of this opinion will show that no diminishment of cash income has followed in this case; but, regardless of that, the Massachusetts rule subjects income to no hazards worse than those to which the Pennsylvania rule exposes corpus from corporate mismanagement and mischance.

12. The basis of four ruling in this case is that the stock dividends were not income of the trust estate, but an accretion to the corpus, because of their nature and because they represent no money or property severed from capital assets. The converse of that ruling would be that money or property which is severed from corporate assets by appropriate actionApplication of the governing body of the corporation and paid asof Rule. dividends, would be income; but as to this further application of the rule, and its relation to the distribution of capital assets, profits and earnings, we express no opinion, an adjudication of such questions being unnecessary to a decision of this case.

The judgment and decree are, accordingly, reversed, and the cause remanded with directions to enter a decree requiring the appellant trustees to account for the stock dividend of 150 shares of common capital stock B of the American Tobacco Company received by them on or about August 2, 1920, and the three dividend certificates issued by said corporation dated, respectively, September 1, 1920, December 1, 1920 and March 1, 1921, and the shares of said common capital stock B received by them on said certificates, as corpus of the trust estate.Lindsay, C., concurs; Seddon, C., not sitting.