Summary
In Donkel v. Evatt, Tax Commr. (1941), 138 Ohio St. 76, 32 N.E.2d 841, this court specifically held that even the amount of cash dividends on shares of common stock could not be recognized as part of the "income yield" of such shares unless such cash dividends were paid, to use the words of the statute, "as income."
Summary of this case from Cobourn v. BowersOpinion
No. 28374
Decided March 19, 1941.
Taxation — Listing personal property — Intangibles — Return of capital from paid-in-surplus capital account, not income yield — Sections 5388 and 5389, General Code.
The term "income yield" as used in Sections 5388 and 5389, General Code, contemplates cash amounts paid as income earnings on capital investment and does not embrace a return of capital from a paid-in-surplus capital account.
APPEAL from Board of Tax Appeals.
This is a statutory appeal by a taxpayer from an adverse decision by the state Board of Tax Appeals.
From the transcript of the record and proceedings before such board, which transcript contains a stipulation of facts and a number of exhibits, it appears that William J. Donkel, the appellant, was the owner of 520 shares of the common stock of the Kent-Owens Machine Company, an Ohio corporation of Toledo engaged principally in the fabrication of heavy machinery to order, requiring a considerable outlay of capital to carry on manufacturing operations. The stock was purchased by the appellant for $100 per share when the company was organized.
Prior to December 1, 1932, the company's capital structure consisted of 4,500 shares of seven per cent preferred stock of the par value of $100 per share and of 2,000 shares of common stock, also having a par value of $100 per share. In December 1932, by corporate action in proper form and by reason of unfavorable business conditions, the par value of the common stock was reduced from $100 to $25 per share, the number of shares remaining the same. This lessened the stated capital account by $150,000, which amount was transferred to a new account designated as "paid-in surplus."
During 1935 the company paid out of earned surplus dividends amounting to $1.50 per share on each share of its common stock, and in 1936 the amount distributed from the same source was seven dollars per share. The appellant returned such dividends for taxation and paid the tax thereon.
In 1935 an additional dividend of three dollars per share on the common stock was authorized by the directors, "to be paid from the paid-in surplus." (Italics ours.) In 1936 the same thing occurred, except the amount was four dollars per share.
The resolutions approving these additional dividends stipulated and directed that they should be paid from the paid-in surplus of the company. Every shareholder concerned was notified in writing by the company that the source of such additional dividends was "paid-in surplus."
It is insisted that none of the earnings of the company have ever been placed in the paid-in-surplus account, and the company was meticulous in distinguishing the dividends from earned surplus and the distributions from the segregated paid-in surplus.
Therefore, the precise question presented is whether the dividend of three dollars per share paid in cash to the appellant in 1935 and the dividend of four dollars per share paid to him in cash in 1936, coming from the "paid-in-surplus" account, constituted "income yield" within the meaning of that term as used in Sections 5388 and 5389, General Code, prior to their amendment in 118 Ohio Laws, 609 and 657.
An affirmative answer was given by the Board of Tax Appeals, and such determination is now here for review.
Messrs. Williams, Eversman Morgan, Mr. Merwyn G. Leatherman and Mr. Robert L. Peters, for appellant.
Mr. Thomas J. Herbert, attorney general, and Mr. Perry L. Graham, for appellee, William S. Evatt, tax commissioner.
Those parts of the Intangible Tax Law of Ohio which are pertinent read as follows:
"Section 5388. * * * 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; * * *."
"Section 5389. * * * '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, or holder or holders of an investment, whether including the taxpayer or not, during such year, and includes the following:
"* * * in the case of shares of stock, the cash dividends so paid; * * *." (Italics ours.)
It is appellant's contention that the definition of "income yield" in Section 5389, General Code, as applied to the present case, contemplates cash dividends paid as income earnings on capital investment, and does not include return of capital to a shareholder in the form of a cash distribution from a segregated paid-in-surplus account consisting wholly of capital.
On the other hand, the position of the appellee Tax Commissioner is that all the dividends paid to the appellant in cash during the tax years in question, viz., 1935 and 1936, were clearly an income to him, and since they were paid in cash the mandatory language of the statute required that they be included in the measure of the taxable value of the shares.
The proposition is well established that taxing statutes are to be strictly construed in favor of the citizen on whose property the burden of taxation is sought to be imposed. Watson, Jr., Exr., v. Tax Commission, 135 Ohio St. 377, 381, 21 N.E.2d 126, 128. And the General Corporation Act of Ohio recognizes and sanctions the distribution of capital from a paid-in-surplus account in the form of dividends when notification of that fact is given to the affected shareholders. Section 8623-38 ( a) and ( d), General Code; Gates Ohio Corporation Law Practice Forms (3 Ed.), 64, 67, 234, Sections 48, 49, 138.
The record before us indicates a situation where in 1932 a corporation desired an additional amount of surplus to present a favorable statement. To accomplish this result, the shareholders agreed to a reduction in the par value of the common shares. The amount realized from such action was transferred to a capital surplus account and segregated. As business conditions changed it became feasible to make restitution to those shareholders whose shares had been reduced from a stated value of $100 to $25. This was in the nature of a return to them of a portion of their original capital investment.
No chicanery or legerdemain is apparent in the procedure followed for the purpose of enabling the common shareholders to evade the taxes imposed under the Ohio Intangible Tax Law.
Our interpretation of Sections 5388 and 5389, General Code, corresponds with that of the appellant. In relation to the pending case the term "income yield" means distribution from earnings and does not embrace the return of capital.
The case of Watson, Jr., Exr., v. Tax Commission, supra, does not dispose of this controversy. It was there held that a stock dividend was not a cash dividend and therefore was not included within the statutory definition of "income yield." The court did not consider or decide whether a cash distribution from a paid-in-surplus account consisting of capital should be treated as "income yield."
Other cases from foreign jurisdictions cited by the appellee are not persuasive. None of them deal with the taxability as income of payments made from a purely capital account disconnected with earnings derived from usual business operations.
Upon the basis of the views expressed, the decision of the Board of Tax Appeals is reversed.
Decision reversed.
WEYGANDT, C.J., TURNER, MATTHIAS, HART and BETTMAN, JJ., concur.
WILLIAMS, J., dissents.