Crellin v. Commissioner

AMY H. CRELLIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

EDWARD W. CRELLIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

WILLIAM H. JACKSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Crellin v. Commissioner

Docket Nos. 5766-5768.

United States Board of Tax Appeals

12 B.T.A. 234; 1928 BTA LEXIS 3572;

May 31, 1928, Promulgated

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Held, on the evidence that the dividends involved herein were cash dividends and not stock dividends.

H. Maurice Darling, Esq., for the petitioners.

George G. Witter, Esq., for the respondent.

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MARQUETTE

These proceedings are for the redetermination of deficiencies in income tax asserted by the respondent for the year 1917 as follows: Amy H. Crellin, $431.10; Edward W. Crellin, $7,760.85, and William H. Jackson, $11,446.76.

The issues raised by the pleadings are (1) whether certain dividends received by the petitioners in the year 1917 were stock dividends or taxable dividends, and (2) if they were taxable, whether they were paid from surplus accumulated prior to December 31, 1916.

The cases of Edward W. Crellin, Docket No. 5767, and William H. Jackson, Docket No. 5768, were consolidated for hearing and decision, and it was stipulated that the decision in those cases would control the decision in the case of Amy H. Crellin, Docket No. 5766.

FINDINGS OF FACT.

The petitioners are individuals residing at Pittsburgh, Pa. The petitioner Amy H. Crellin is the wife of the petitioner Edward W. Crellin.

Prior to March 1900 the petitioners Edward W. Crellin and William H. Jackson formed a partnership with one Berkley N. Moss, each owning a one-third interest therein, to carry on the business of manufacturing structural steel for bridges, water tanks, and other purposes. In March, 1900, they organized the Des Moines Bridge & Iron Works, hereinafter called the Des Moines Co., under the laws of Iowa, which succeeded to the assets and business of the partnership. Each of the three former partners owned an equal number of shares of the capital stock of this corporation, and there was an oral agreement that their interests would remain equal. In 1911 Moss sold his stock in the corporation to Crellin and Jackson, and from that date Crellin and Jackson, and their families, owned in equal amounts the greater part of the shares of the corporation. There was an oral understanding between Jackson and Crellin that they would continue to own the capital stock of the corporation in equal shares, it being understood that the shares held by their respective families would be considered their shares for the purposes of the agreement.

In the year 1907 the Des Moines Co. established a branch office at Pittsburgh, Pa. Within a few years this branch became more important than the main office, and in the year 1916 it was incorporated as the Pittsburgh-Des Moines Co. under the laws of Pennsylvania. Crellin and Jackson owned practically all of the Pittsburgh Company's stock in equal proportions, and they had an oral agreement that they would keep their interests and those of their families equal. The original capital of the Pittsburgh Company was paid in as follows: The Des Moines Co. issued dividend checks to Crellin and Jackson; they endorsed the checks back to the company, and it in turn transferred the amount of the checks to the Pittsburgh Company, which issued its stock therefor.

The Pittsburgh Company was created in order to escape the Pennsylvania tax on foreign corporations doing business in that State. No change was made in the manner of conducting the business; separate books were kept, but the Des Moines Company and the Pittsburgh Company were thought of, and referred to by the officers and employees thereof, as the Des Moines branch and the Pittsburgh branch. The two corporations worked as a unit. Tools, material, workmen and orders were freely shifted from Des Moines to Pittsburgh, and vice versa, as the needs of the moment required. The salaries paid to Crellin and Jackson were made up by the corporations in practically equal amounts.

Beginning in 1902 certain of the more valued employees of the Des Moines Company were given the opportunity to purchase stock in that corporation at par, and beginning some time in 1917 the employees of the Pittsburgh Company were given the opportunity to purchase stock in that corporation at par. The shares so issued constituted a special class of common stock, known as "Employees Stock," which differed from the common stock issued to Crellin and Jackson, and their families, in that the employee could not sell or transfer his stock to any other person, and upon leaving the employ of the company he was required to return his stock to the company, which bound itself to take the stock at par. Employees owning stock could cash their dividend checks or turn them back to the company for more stock, as they wished. If the employees elected to turn back their dividend checks and take stock, they were given the privilege of taking stock in either of the companies.

From March, 1900, to the end of the year 1917 only small amounts were drawn by Crellin and Jackson as salary, and all the profits of the two corporations were turned back into the business, except as hereinafter noted.

In the years prior to 1908 the surplus of the Des Moines Company was capitalized at the end of each year by transferring it by means of entries debiting the shop accounts, or gain and loss account, and crediting the capital stock account. Beginning in 1908 checks were drawn when the directors authorized a dividend, and these checks were endorsed and returned to the company by Crellin and Jackson and stock issued to them for the amount of the checks. There was always an understanding between Crellin and Jackson that this would be done. Moss was also a party to this arrangement until his retirement in 1911. Except in the years 1911, 1913, and 1914, the total amounts of the dividend checks largely exceeded the amount of the cash on hand, the surplus of the corporation being represented principally by materials and supplies on hand, and buildings and equipment.

During the year 1917 the officers of the Des Moines Company and the Pittsburgh Company were E. W. Crellin, president; W. H. Jackson, secretary-treasurer, and G. A. Smith, vice president.

On January 22, 1917, the directors of the Des Moines Company declared a 37 per cent dividend by the following resolution:

The Secretary and Treasurer made the financial report of the Corporation as of December 31st, 1916, showing surplus of $206,442.33, and reported that after paying the dividends on the Preferred Stock due January 15, 1917, and providing for the Government Income Taxes, the general taxes and bonuses on Capital Stock, that a dividend of 37 per cent. might be paid on the Common Capital Stock moved that such dividend be paid upon such stock for the prorata portion of the year 1916. Seconded by G. A. Smith, the motion carried and a dividend of 37 per cent. on the Common Stock was ordered paid in accordance with the schedule appearing on the following page. * * *

A check for the amount of the dividend due each stockholder, pursuant to the foregoing resolution, was drawn by the company and actually delivered to the stockholder. The Crellin family received dividend checks in the total amount of $73,260, the Jackson family received checks in the total amount of $73,620, and the other stockholders received checks in the total amount of $50,678.16. All of the checks received by the Jackson family, and all of the checks received by the Crellin family, excepting two checks in the amount of $629, were endorsed back to the Des Moines Company.

When these dividend checks were endorsed back to the Des Moines Company the amounts thereof were credited to the Pittsburgh Company by the following entry on the books of the Des Moines Company:

January 26, 1917.	Debit to Cash.
Cr. PGH. D.M. CO. (Per a/c Amy H. Crellin)	$31,820.00
Cr. PGH. D.M. CO. (Per a/c E. W. Crellin)	40,182.00
Cr. PGH. D.M. CO. (Per a/c W. H. Jackson)	5,550.00
Cr. PGH. D.M. CO. (Par a/c W. H. Jackson)	67,710.00
	145,262.00

On the books of the Pittsburgh Company the personal accounts of Amy H. Crellin, E. W. Crellin, and W. H. Jackson, were respectively credited with the amount of the checks which had been turned back to the Des Moines Company, and the Des Moines Company was charged on the books of the Pittsburgh Company with the total amount so credited. Thus there resulted an increased credit of $73,260 to the Jacksons on the books of the Pittsburgh Company, an increased credit of $72,002 to the Crellins on the books of the Pittsburgh Company, and a total debit to the Des Moines Company of $145,262. At the time the January dividend was declared and paid by the Des Moines Company, there were 5,444 shares of capital stock outstanding, of which 1,980 shares were held by the Crellin family, 1,980 shares by the Jackson family, and 1,444 shares by outsiders. Of the 1,444 shares held by outsiders, the holders of 658 shares took Des Moines Company stock in exchange for their dividend checks, the holders of 625 shares took Pittsburgh stock, and the holders of 161 shares elected to take cash.

On January 29, 1917, the directors of the Pittsburgh Company declared a 37 per cent dividend by the following resolution:

The Secretary-Treasurer reads the Financial Statement of the Corporation as of December 30, 1916, showing a surplus of $94,043.59 and reported that after paying the dividends on the Preferred Stock due January 15, 1917, and providing for the Government Income Taxes, the general taxes, and bonus on capital stock, that a dividend of 37 per cent. might be paid on the common capital stock, and moved that such a dividend be paid on such stock.

Seconded by E. W. Crellin. The motion carried and a dividend of 37 per cent. on the common capital stock was ordered paid in accordance with the following schedule:

DISTRIBUTION OF PITTSBURGH-DES MOINES COMPANY COMMON STOCK DIVIDENDS.

Name.	Shares.	37 per cent dividend.
W. H. Jackson	1225	$45,325.00
E. W. Crellin	1053	38,961.00
Amy H. Crellin	172	6,364.00
G. A. Smith	2	74.00
Max Whitacre	45	1,665.00
	2497	$92,389.00

Dividend checks were issued to the Crellins and the Jacksons in the amount of $45,325 to each family. Upon the receipt of the dividend checks the Crellins and the Jacksons endorsed them back to the Pittsburgh Company and the amounts thereof were credited to their personal accounts on the books of that company, making a total increase of $118,585 to the personal credit of the Jackson family, and a total increase of $117,327 to the personal credit of the Crellin family on account of the dividends declared on January 22, 1917, by the Des Moines Company, and on January 29, 1917, by the Pittsburgh Company. On January 31, 1917, the Pittsburgh Company issued to the Crellin family 1,160 shares of its capital stock of a total par value of $116,000, and also issued to the Jackson family 1,160 shares of its capital stock of a par value of $116,000. Since the total credit to the Jackson family on account of the dividends mentioned amounted to $118,585, and the total credit to the Crellin family on account of said dividends amounted to $117,327, there remained, after the issuance to each family of stock of the Pittsburgh Company of the par value of $116,000, a balance of $2,585 to the credit of the Jackson family and a balance of $1,327 to the credit of the Crellin family on account of said dividends.

Max Whitacre and G. A. Smith, who were, on the dates the January dividend of the Pittsburgh Company were declared and paid, the owners of 45 shares and 2 shares, respectively, of the capital stock of the Pittsburgh Company, turned back their dividend checks to the company for shares of the capital stock of the Pittsburgh Company and the Des Moines Company, respectively.

On August 27, 1917, the Des Moines Company declared a 10 per cent dividend by the following resolution:

The Secretary-Treasurer called attention to the financial statement of the Corporation and to the amount which had been carried as Material Inventory Reserve Account from the earnings of 1916, and after discussion it was decided that owing to the high prices which steel had maintained during the year, that this reserve was unnecessary, and therefore, moved that a dividend of 10% be paid from this 1916 material reserve account upon the common capital stock of this Company as shown by the books outstanding July 1, 1917, in accordance with the rule for participation which has been followed in the past by the Company.

The motion was seconded by G. A. Smith and carried, and a dividend of 10% on the common capital stock was ordered paid in accordance with the schedule appearing on the following page.

* * *

On August 31, 1917, dividend checks were issued to the Crellin and Jackson families in the amount of $19,800 each and these checks, except two amounting to $340, were endorsed back to the company, which on September 6, 1917, and September 8, 1917, debited cash and credited the Pittsburgh Company "(Per a/c of W. H. Jackson)" etc., with the amounts thereof. The Pittsburgh Company took up these credits by charging the Des Moines Company and crediting the personal accounts of the Jacksons and Crellins with the same amount. No stock was issued by the Pittsburgh Company to the Jacksons and Crellins at this time for the reason that the Pittsburgh Company had issued to each family $14,500 of stock in February, 1917, and $19,500 of stock in March 1917, under the circumstances hereinafter set forth.

On August 27, 1917, and August 31, 1917, the Crellins and the Jacksons owned 3,960 shares out of 5,812 shares of the capital stock outstanding in the Des Moines Company, the remaining 1,852 shares being held by employees. As to these 1,852 shares, the holders of 709 shares took Des Moines Company stock in exchange for their dividend checks, and the holders of 1,143 shares elected to take cash.

The Pittsburgh Company in the spring of 1917 was insufficiently capitalized and unable to properly care for the business incidental to war conditions. In order that the company might make as good a showing as possible in obtaining contracts and have its capital stand as high as possible, Jackson and Crellin arranged in February, 1917, that instead of having the company borrow additional capital on its own notes, they would borrow on their notes $50,000 in February and $40,000 in March, and make advances to the company from the proceeds of the notes. However, in order to prevent these advances from appearing as accounts payable, Crellin and Jackson agreed to take stock in the company to the extent of the advances so that on the financial statement of the company the stock so issued would balance the advances. Crellin and Jackson each transferred to the Pittsburgh Company from the proceeds of personal loans the amounts of $19,500 on February 8, 1917, and $14,500 on March 27, 1917. The company debited cash and on the same dates it issued capital stock in the same amounts to Crellin and Jackson, and their families. These issues of stock had the form of purchases and sales, but by agreement between Crellin and Jackson they were issued in anticipation of a subsequent dividend. On August 8, 1917, the Pittsburgh Company paid the joint note for $40,000 from the proceeds of which Crellin and Jackson loaned the company $39,000, and on August 28, 1917, it paid the joint note for $50,000, from the proceeds of which they had loaned the company $29,000. The amounts so paid were charged to the personal accounts of Crellin and Jackson and cash was credited with the same amount.

On August 27, 1917, the Pittsburgh Company declared a dividend of 10 per cent by the following resolution:

The Secretary and Treasurer called attention to the financial statement of the Corporation and to the amount which had been carried as Material Inventory Reserve Account, from the earnings of 1916, and after discussion it was decided that owing to the high prices which steel had maintained during the year, that this reserve was unnecessary, and therefore moved that a dividend of 10 per cent. be paid from this 1916 material reserve account upon the common capital stock of this company as shown by the books outstanding July 1, 1917, in accordance with the rule for participation which has been followed in the past by the company.

The motion was seconded by G. A. Smith and carried, and a dividend of 10% on the common capital stock was ordered paid in accordance with the schedule appearing on the following page.

* * *

On August 31, 1917, the company issued dividend checks to the Crellin family in the amount of $26,703.27 and dividend checks in the same amount were also issued to the Jackson family. These checks were duly endorsed by the Crellins and Jacksons and were returned to the Pittsburgh Company and the amounts thereof were credited to the personal accounts of the Jacksons and Crellins, cash being debited.

On September 30, 1917, the Pittsburgh Company issued capital stock to the Jackson family and the Crellin family in the amount of $25,000 each and charged the same to their personal accounts.

On August 27, 1917, and August 31, 1917, the Crellins and the Jacksons held 5,450 shares of the 6,042 shares of the capital stock of the Pittsburgh Company outstanding, the remaining 592 shares being held by employees. As to these 592 shares the holders of 309 shares elected to take cash.

The Des Moines Company and the Pittsburgh Company, at the times they declared the dividends hereinbefore mentioned, had surplus at least equal to the amounts of the dividends. However, the cash available on January 22, 1917, to meet the dividend of the Des Moines Company declared on that date, which amounted to $197,198.16, was $5,163.20. The cash available on August 30, 1917, to meet the dividend declared by the Des Moines Company on August 27, 1917, which amounted to $57,988.39, was $14,645.26. The cash available on January 30, 1917, to meet the dividend declared by the Pittsburgh Company on January 29, 1917, which amounted to $92,389, was $7,248.51. The cash available on August 30, 1917, to meet the dividend declared by the Pittsburgh Company on August 27, 1917, which amounted to $59,014.94, was $32,733.17.

The Crellins and the Jacksons had personal accounts only with the Pittsburgh Company; they had no personal accounts with the Des Moines Company.

The petitioners in their income-tax returns for the year 1917 treated the dividends as above set forth as stock dividends and not taxable as income. The respondent, upon audit of the returns, determined that the dividends were taxable and that there were deficiencies in tax as hereinbefore set forth.

OPINION.

MARQUETTE: These three proceedings are identical as to the facts and the issue involved. The issue is whether certain distributions declared and made by the Des Moines Company and the Pittsburgh Company are taxable dividends or stock dividends. The distributions in question are (1) that of the Des Moines Company declared on January 22, 1917; (2) that of the Pittsburgh Company declared on January 29, 1917; and (3) and (4) those of both companies declared on August 27, 1917. The petitioners contend that the distributions were stock dividends. This contention is controverted by the respondent.

It may be stated at the threshold of this inquiry that the four dividends, in so far as they were paid to the stockholders of the two companies other than the Crellins and the Jacksons, were taxable, regardless of the fact that some of the stockholders may have exchanged their dividend checks for stock. They were given the option of either cashing their checks or exchanging them for stock, and that fact is of itself sufficient to render them taxable and not stock dividends. Eisner v. Macomber,252 U.S. 189">252 U.S. 189. It is therefore necessary to consider these dividends only in so far as they were paid to the petitioners and their families. For convenience we will first consider the two dividends of the Des Moines Company.

In the case of Towne v. Eisner,245 U.S. 418">245 U.S. 418, the court, in pointing out some of the essential characteristics of a stock dividend, said, through Mr. Justice Holmes:

* * * 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.

The language just quoted was repeated, with approval, by the Supreme Court in Eisner v. Macomber, supra.

We are of the opinion, for the reasons hereinafter stated, that the dividends declared by the Des Moines Company do not conform to the requirement of a stock dividend just pointed out, and that it is unnecessary to determine whether they possess the other characteristics of a stock dividend. The declarations of dividends in January and in August were followed by the issuance of dividend checks. The petitioners in each instance endorsed the checks and returned them to the company. The Des Moines Company thereupon credited upon its books the amount of these checks to the Pittsburgh Company. Subsequently, the Pittsburgh Company issued its own stock to the petitioners to absorb these credits. That this constituted a stock dividend by the Des Moines Company, as the petitioners contend, we can not agree, in the light of what the Supreme Court has stated in Towne v. Eisner, supra, and Eisner v. Macomber, supra.Upon the issuance of dividend checks and the transfer of the amount thereof to the Pittsburgh Company, the assets of the Des Moines Company were diminished by the amount of the checks and the assets of the Pittsburgh Company were increased by the same amount. The dividends had become fully separated and segregated from the assets of the Des Moines Company, and the stock which the petitioners received did not represent any interests in the property of that company.

It is argued, however, by the petitioners that the Des Moines Company and the Pittsburgh Company were affiliated corporations, constituting in fact a single economic unit, and that the dividends in question were stock dividends notwithstanding the fact that they were paid to the petitioners in stock of the Pittsburgh Company. This contention is, we think, fallacious. The provisions of the several revenue acts providing for the filing of consolidated returns by affiliated corporations, that is, by two or more corporations where certain conditions exist in regard to the ownership or control of their capital stock, lay down a rule of taxation and not a rule of property. Assuming, but not deciding, that the Des Moines Company and the Pittsburgh Company were affiliated within the purview of the Revenue Act of 1917 and entitled to file a consolidated return of income and invested capital, they were, nevertheless, two separate, distinct legal entities, organized in different jurisdictions, with different laws governing their existence. Each owned its own property, separate and apart from the other, just as fully and completely as if they were not affiliated for purposes of taxation, and neither held any of the capital stock of, or had or exercised any dominion or control over the other. The fact that the majority of the capital stock of each corporation was held by the same individuals and that the same persons held identical offices in each company, does not change the situation. The two corporations were, nevertheless, separate legal entities and neither one had any right in or title to the property of the other. We are of the opinion that the two dividends declared and paid by the Des Moines Company were cash dividends or dividends paid in stock of the Pittsburgh Company, and in either case they resulted in taxable income to the petitioners. Peabody v. Eisner,247 U.S. 347">247 U.S. 347.

The circumstances surrounding the two dividends of the Pittsburgh Company differ from those pertaining to the dividends of the Des Moines Company, in that the dividend checks issued to the Crellins and the Jacksons by the Pittsburgh Company were endorsed back to that company, which issued its stock to Crellin and Jackson in approximately the full amount of the checks. However, the dividends were, in our opinion, taxable to the petitioners.

The resolutions declaring the dividends were in the ordinary form for declaring cash dividends and there is nothing therein to indicate that they were intended to be paid in stock. On the contrary, as we have pointed out above, the stockholders, other than the Crellins and the Jacksons, had at all times the option of cashing their dividend checks or exchanging them for stock, and as to these stockholders, the dividends were clearly taxable. As to Crellin and Jackson it appears that they endorsed back their checks to the corporation and were later issued stock because they had agreed between themselves that they would do so and thus keep their interests in the corporation equal. This was their voluntary contract to which the corporation was not a party, and for the reasons hereinafter set forth, it could not convert into a stock dividend what would otherwise be a taxable dividend. Furthermore, it may be noted that these dividends also lacked one of the essential characteristics of a stock dividend pointed out in Towne v. Eisner, and Eisner v. Macomber, supra, namely that in a true stock dividend "the proportional interest of each shareholder remains the same." After each of the dividends under consideration, the proportionate interests of the stockholders of the Pittsburgh Company were materially changed, the interests of the Jacksons and the Crellins being increased, and the interests of the other stockholders being diminished.

The situation here presented is in many respects similar to that found in W. J. Hunt,5 B.T.A. 356">5 B.T.A. 356, wherein we discussed at length the question of stock dividends. The facts in that case were as follows:

On December 1, 1917, the board of directors of the Merchants Bakery, Inc., adopted a resolution recommending to the stockholders that the capital stock of the corporation be increased from $65,000 to $100,000, and that the additional issue of $35,000 of capital stock be offered to the stockholders at par in proportion to their respective holdings. At a special meeting of the stockholders of the corporation called on December 1, 1917, the recommendation of the board of directors submitted on the same date was by resolution adopted by the stockholders, and the capital stock was increased to $100,000 in accordance with the recommendation made by the board of directors. On December 24, 1917, at a meeting of the board of directors of the corporation, the following resolution was adopted:

* * * Resolved: that the business of the company showed that its operation had been so prosperous in the year 1917 as to justify the payment of an extra dividend. Now, Therefore, Be it resolved that an extra dividend of $60 per share is hereby declared payable on the stock outstanding as of January 1, 1917.

Subsequent to the adoption of the resolution by the board of directors and the stockholders at the meetings held on December 1, 1917, but prior to the declaration of the dividend on December 24, 1917, it was agreed by all of the stockholders, including those who were members of the board of directors, that they would take stock and pay for it with the money distributed by the corporation to the extent of $35,000, and that checks received from the corporation should be deposited to the credit of the individual stockholders, whose checks in payment for stock would be simultaneously deposited. At the meeting of the board of directors on December 24, 1917, the stockholders delivered to the treasurer of the corporation their personal checks aggregating $35,000. These checks were given in payment for stock but were not to be presented for payment until the corporation's checks representing the pro rata share of the dividend due each stockholder were deposited. Some of the stockholders who signed and delivered checks to the corporation had no money in the banks upon which they were drawn; others were for amounts in excess of the respective balances of the personal bank accounts of the makers, and by agreement they were held by the corporation until January 2, 1918, when the checks of the corporation were made out in favor of all the stockholders in amounts aggregating $39,000. The treasurer of the corporation deposited the checks issued to the stockholders in the bank to the personal credit of the stockholders and simultaneously deposited to the credit of the corporation the checks given it by the stockholders. When the dividend was declared the corporation had a surplus in excess of $39,000, but actually had only $10,600 in cash when the dividend checks were issued. In holding that the dividend was a cash dividend and not a stock dividend, we said in part:

The taxpayer relies in support of his contention upon the cases of United States v. Mellon,281 Fed. 645; United States v. Davison, 1 Fed.(2d) 465; and Appeal of Theresa Zellerbach,2 B.T.A. 1076">2 B.T.A. 1076.

Whether, in any case, a dividend is a stock or cash dividend is a question of fact and the question must be decided upon the peculiar facts in each case. While the Board will look through form to substance in order to arrive at what actually occurred, it is sometimes difficult to determine what is mere form and what is in fact substance. The form which a transaction takes frequently determines what the transaction is.

* * *

In this case, however, there was a segregation of the profits of the corporation. The corporation issued its check to the stockholders for their proportionate share of the corporate earnings. Each stockholder endorsed the check and turned it back to an officer of the corporation who deposited to the stockholder's credit, whereupon the checks given by the stockholders for stock were presented and paid. The fact that the stockholders, in accordance with an agreement entered into among themselves, purchased stock from the corporation with a portion of the money received, is to our mind not controlling. It does not mean that the stockholder did not receive from the corporation his proportionate part of the earnings. His proportionate part of the profits of the corporation became separated from the corporate funds and in every substantial sense of the word was income derived and separated from capital. What a stockholder does with his part of the earnings of the corporation when these earnings have become separated from corporate funds and become the property of the stockholder, seems to us to be not material in the consideration of the case.

* * *

It was urged by the petitioner that he and all the other stockholders had an oral agreement to the effect that they would take the dividend in cash but would apply it on the purchase of new stock. It does not appear, however, that this was the action of the corporation or that any such agreement was entered into by the corporation. Without such an agreement on the part of the corporation itself, the stockholders were not legally bound to subscribe for the new stock, nor were they under any legal duty to apply the checks in payment for new stock. The agreement among the Stockholders can not alter the action of the corporation in declaring a cash dividend. Agreements made by stockholders as such are not to be treated as the contract of the corporation unless the corporation formally ratifies or adopts them. De La Vergne Co. v. German Savings Institution,175 U.S. 40">175 U.S. 40; Moore & Handley Hardware Co. v. Towers Hardware Co.,87 Ala. 206">87 Ala. 206; 6 So. 41">6 So. 41.

By the overwhelming weight of authority, when the power to do particular acts or general authority to manage the affairs of the corporation is vested in the directors or trustees, it is vested in them not as individuals, but as a board, and as a general rule they can act so as to bind the corporation, assuming that there is no ratification or estoppel, only when they act as a board and at a legal meeting. Kansas City Hay-Press Co. v. Devol,72 Fed. 717; Ames v. Goldfield Merger Mines Co.,227 Fed. 292.

The members of the governing body of a corporation are agents of the corporation only as a board and not individually. Hence, it follows that they have no authority to act save when assembled at a board meeting. The separate action individually of the persons composing such governing body is not the action of the constituted body of men clothed with corporate power. Commercial Brewing Co. v. McCormick,225 Mass. 504">225 Mass. 504; 114 N.E. 812">114 N.E. 812; Citizens' Securities Co. v. Hammel,14 Cal. App. 564">14 Cal.App. 564; 112 Pac. 731.

In this case, even if it be conceded that the individual members of the board of directors could have legally bound the corporation, it is not alleged by any witness that the agreement referred to was other than an agreement between the stockholders, those who were to receive the dividends, and it related to what they would do with their dividends and not to the manner in which the corporation would distribute their dividends. There is no evidence that the directors as such undertook to act for the corporation. The resolution declaring the dividend did not recognize any such agreement as having been made. It is true that the corporation may have acted and very likely did act upon the assumption that the stockholders, in accordance with the agreement among themselves, would purchase stock with their dividends, but this is not sufficient to change what was declared by the corporation to be a cash dividend to a stock dividend. The stockholders were not legally bound to take stock.

* * *

The dividend which was declared in this case, according to the resolution by which it was declared, was a cash dividend. The fact that the recipients of that dividend agreed to apply it to the purchase of stock is not sufficient to change the nature of the transaction. It is not material what the recipients of the dividend agreed to do with it when it was received. A violation of the agreement of the stockholders to purchase stock with that dividend would not have given the corporation a right to sue for the application of that money to the purchase of stock.

* * *

When the dividend in this case was declared it took the form of a cash dividend. The resolution made no reference to anything else. The resolution represented the action of the corporation and there was no evidence that it did not correctly reflect the corporate action. If we concede that the corporation had knowledge of the agreement among its stockholders and relied upon that agreement in declaring the cash dividend, it does not alter the situation. If the stockholders had not desired to take stock, the corporation could not have relied upon the agreement to compel them to do so. It seems to us that under the facts the stockholders had an option to take and retain the cash or to purchase stock with it.

The petitioners rely on the cases of United States v. Mellon,279 Fed. 910, affd. 281 Fed. 645; United States v. Davison, 1 Fed.(2d) 465, affd. 9 Fed.(2d) 1022; Weiss v. Stearn,265 U.S. 242">265 U.S. 242; and Theresa Zellerbach,2 B.T.A. 1076">2 B.T.A. 1076. However, the facts in these cases are easily distinguishable from the facts in the instant case and hence the decisions therein are not decisive of the issue here.

Counsel for the petitioners also strenuously urged in support of their contention that when the dividends under consideration were declared the corporations did not have sufficient cash to pay them. We attach no great weight to that fact. As we said in Eugene E. Paul,2 B.T.A. 150">2 B.T.A. 150:

* * * We do not regard the fact that the corporation had insufficient cash on hand to pay the dividend as of controlling importance. It had a surplus in excess of the dividend declared, and the indebtedness to its stockholders existed irrespective of that fact. The right to declare a dividend from surplus profits was exercised by the directors and it became their duty to provide ways and means to make payment thereof. If surplus profits have in fact been earned and are invested in property used in the business of a corporation, a dividend may properly be paid by borrowing money. * * *

We are of the opinion that the two dividends paid by the Pittsburgh Company were cash dividends and taxable to the recipients.

The petitioners introduced no evidence in support of their other assignment of error, and on the pleadings that issue must be decided in favor of the respondent.

Reviewed by the Board.

Judgment will be entered on 15 days' notice, under Rule 50.

MILLIKEN

MILLIKEN, dissenting: I can not concur in the entire opinion, for it seems to me that, as to some of the dividends, the decisions of the United States Circuit Court of Appeals for the Third Circuit (the circuit in which these petitioners reside), in United States v. Mellon,281 Fed. 645, and United States v. Davison, 9 Fed.(2d) 1022, are contrary to the decision here made.

TRUSSELL agrees with the dissent.