ESTATE OF PUTNAM v. COMMISSIONER , 45 B.T.A. 517 ( 1941 )

ESTATE OF HENRY W. PUTNAM, DECEASED, GUARANTY TRUST COMPANY OF NEW YORK, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ESTATE OF PUTNAM v. COMMISSIONER

Docket Nos. 102689, 102690.

United States Board of Tax Appeals

45 B.T.A. 517; 1941 BTA LEXIS 1111;

October 28, 1941, Promulgated

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Where dividends are declared payable in future to stockholders of record on a future date and a stockholder dies after the declaration of dividend but before the future record date, held:

(1) The question of whether such dividends are corporate debts upon declaration and thus accruable to decedent must be determined by the law of the corporation's domicile.

(2) Such dividends declared by corporations domiciled in New Jersey are accruable to decedent, following Estate of Lewis Cass Ledyard, Jr.,44 B.T.A. 1056">44 B.T.A. 1056.

(3) Such dividends declared by corporations domiciled in Delaware, Pennsylvania, and Maine are not corporate debts upon declaration, but only upon future record dates, it not appearing that the law of these states is contrary to the general rule, to which the laws of New York and New Jersey are exceptions.

J. H. Nichols, Esq., for the petitioner.

L. A. Spalding, Esq., for the respondent.

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KERN

In Docket No. 102690, the respondent determined a deficiency in income tax liability in the amount of $1,509.13 against Henry W. Putnam, the decedent. This deficiency is based upon the exclusion from taxable income of the decedent of dividends in the amount of $2,400 declared prior to decedent's death, but not payable, however, until a month after his death and then to stockholders of record as of a week after his death. The respondent partially disallowed an accrual for taxes paid, the disallowance amounting to $34.09.

In Docket No. 102689, the respondent determined a deficiency in income tax liability against the decedent's estate in the amount of $2,658.64, based on the failure to report $21,651.75 in dividends received by the estate, although declared prior to the decedent's death. A second factor in this docket was the asserted failure to report $557.42 in dividends received by the estate, because deemed by the estate to be nontaxable.

In its petition in Docket No. 102689 the petitioner claims an overpayment by the estate of $2,400 in dividends now sought to be taxed as income of the decedent, and claims that respondent erred in adding to the gross income of the estate the amount of $21,651.75.

In its petition in Docket No. 102690 the petitioner claims that respondent erred in refusing to exclude from decedent's gross income as reported in the income tax return for 1938 the amount of $21,651.75 which petitioner alleges was not the income of the decedent. Petitioner also claims respondent erred in adding to decedent's gross income the amount of $2,400.

These two proceedings were consolidated for hearing and decision.

The sole question presented is whether dividends declared prior to the death of an individual stockholder, payable to stockholders of record on record dates subsequent to his death and payment dates subsequent to such record dates, are properly includible in the income tax return of that individual, or whether they are properly includible in the income tax return of his estate.

FINDINGS OF FACT.

The facts in these proceedings have been fully stipulated and are as follows:

1. The late Henry W. Putnam died on March 30, 1938. At the time of his death and at all times during 1938 until the time of his death he was a citizen of the United States of America and a resident of the Savoy-Plaza Hotel, Fifth Avenue and 59th Street, in the Borough of Manhattan, City, County and State of New York.

2. Guaranty Trust Company of New York is a corporation incorporated and existing under the laws of the State of New York, having its principal office and place of business at No. 140 Broadway, in said Borough of Manhattan.

3. Said Guaranty Trust Company of New York qualified as Executor of the Estate of said Henry W. Putnam in the Surrogates' Court of the County of New York on June 16, 1938, and is still qualified and acting as such executor.

4. The Petitioner is the Estate of said Henry W. Putnam, deceased, Guaranty Trust Company of New York, Executor.

5. Said Henry W. Putnam at the date of his death owned 4,800 shares of Common Stock of The American Smelting & Refining Company, a New Jersey corporation. A dividend of $2,400 (50?? per share) on said shares owned by said decedent was declared by said Company on March 1, 1938, payable on May 31, 1938, to stockholders of record on May 6, 1938. The petitioner received said dividend in the amount of $2,400 on or about May 31, 1938.

6. The Petitioner also received dividends in the total amount of $21,651.75 on shares of stock owned by said decedent at the date of his death on or about the payment dates as set forth below:

Dividend of $1.25 per share on 1,255 shares General Motors Corporation (a Delaware corporation) $5 Preferred Stock, declared on February 7, 1938, payable on May 2, 1938, to stockholders of record on April 4, 1938	$1,568.75
Dividend of 50?? per share on 50 shares United Profit Sharing Corporation (a Delaware corporation) Preferred Stock, declared on February 24, 1938, payable on April 30, 1938, to stockholders of record on March 31, 1938	$25.00
Dividends of 25?? per share on 1,100 shares of Westinghouse Air Brake Manufacturing Company (a Pennsylvania corporation) Common Stock, declared on November 16, 1937, payable on April 30, 1938, July 30, 1938, and October 31, 1938, to stockholders of record on March 31, 1938, June 30, 1938, and September 30, 1938, respectively	825.00
Dividend of 15?? per share on 2,000 shares Hecker Products Corporation (a New Jersey corporation) Common Stock, declared on March 23, 1938, payable on May 2, 1938, to stockholders of record on April 9, 1938	$300.00
Dividend of 20?? per share on 290 shares Philadelphia Company (a Pennsylvania corporation) Common Stock, declared on March 18, 1938, payable on April 25, 1938, to stockholders of record on April 1, 1938	58.00
Dividend of 87 1/2?? per share on 1,000 shares United States Smelting, Refining & Mining Company (a Maine corporation) 7% Preferred Stock, declared on March 23, 1938, payable on April 15, 1938, to stockholders of record on April 1, 1938	875.00
Dividend of $1 per share on 18,000 shares American Can Company (a New Jersey corporation) Common Stock, declared on March 29, 1938, payable on May 16, 1938, to stockholders of record on April 25, 1938	18,000.00
Total	$21,651.75

7. The Petitioner duly filed with the Collector of Internal Revenue for the Second District of New York, at the Custom House, in said Borough of Manhattan, a 1938 United States income tax return on Form 1040 for said decedent for the period from January 1, 1938, to March 30, 1938, the date of death of said decedent, and a 1938 United States fiduciary income tax return on Form 1041 for the Estate of said decedent for the period from March 30, 1938, the date of death of said decedent, to December 31, 1938.

8. The Petitioner included in said return for the Estate of said decedent for the period from March 30, 1938, to December 31, 1938, said dividend of $2,400 described in paragraph 5 above.

9. The Petitioner included in said return for said decedent for the period from January 1, 1938, to March 30, 1938, the dividends in the total amount of $21,651.75 described in paragraph 6 above.

OPINION.

KERN: The question which this proceeding poses is whether dividends declared prior to the death of decedent but which, by the terms of the declaration, are payable only to stockholders of record as of a date subsequent to decedent's death are accruable to decedent and taxable as his income, or are taxable as the income of his estate.

Upon this question the law of the domicile of the corporation declaring the dividend is controlling and it is to such law that we must look in determining whether and at what time a corporate debt arises pursuant to such declaration. ; .

In those cases it was held that under the laws of New York and New Jersey, in which states the corporations involved were domiciled, a corporate debt arises upon the declaration of a dividend even though the dividend is payable to stockholders of record on some future date.

That rule, however, in effect in New York and New Jersey, does not represent the weight of authority. The rule in Connecticut and Massachusetts is to the effect that where dividends declared are, by the terms of the declaration, payable to stockholders of record at some future date, the corporate debt on account of such dividend does not arise until the future record date. ; ; ; ; ; . Dicta in decisions in other states are in accord. See ; ; . This latter rule seems to be that recognized by the Federal courts. ; . See . However, compare , wherein the Circuit Court of Appeals for the Ninth Circuit erroneously and unnecessarily cites , as authority for a general rule, whereas it is obvious that it merely stated the rule existing in New York. Compare also , wherein a contrary rule is stated on the sole authority of New York decisions. This latter rule of substantive corporation law was recognized by us as the general rule of the applied in . This case was reversed, but on the ground that the law of New York, the state in which the corporation was domiciled, was not in accord with the rule which we there took and which we now, after careful consideration, continue to take as representing the weight of authority.

In the absence of a convincing showing that the law of the corporation's domicile is to the contrary, we shall continue to apply the rule which we consider to represent the weight of authority, viz., that, where a corporation declares a dividend payable in the future to stockholders of record on some future date, a corporate debt on account of such dividend does not arise until such future date and, in the event a stockholder dies before such future record date, the dividend is not accruable to him and is not taxable as his income.

In the instant proceeding the corporations declaring the dividends involved were domiciled in New Jersey, Delaware, Pennsylvania, and Maine. As to the dividends declared by the New Jersey corporations, we hold, pursuant to , that they were taxable as income of decedent. As to the dividends declared by the Delaware, Pennsylvania, and Maine corporations, we hold that they were not accruable to decedent and taxable as his income, but were taxable as the income of his estate.

Reviewed by the Board.

Decision will be entered under Rule 50.

ARUNDELL, SMITH, TURNER, MELLOTT, and OPPER dissent.