*1580 A meeting of the petitioner's board of directors was held, at which three of the five members were present. The other two were not notified of the meeting prior thereto. The declaration of a dividend at the above meeting served to reduce surplus for invested capital purposes.
*81 The Commissioner determined deficiencies of $55,212.78 and $13,018.15 in the petitioner's income and profits taxes for the years 1918 and 1919, respectively. Certain errors assigned by the petitioner, including the denial of special assessment, and an affirmative allegation by the respondent regarding the petitioner's invested capital for each year, were waived by the parties. The only remaining assignment of error is that the Commissioner erred in reducing the petitioner's invested capital by $880,017.77, the amount of a dividend alleged to have been illegally declared. The cases were consolidated.
FINDINGS OF FACT.
The parties filed a stipulation as follows:
The taxpayer is a corporation organized under the laws of the State of New York and is engaged in the*1581 manufacture, sale, and exportation of cars and railroad equipment, having its principal office and place of business at Hackensack, New Jersey.
The authorized capital stock of the company during the calendar years 1918 and 1919 was $300,000, all of which was and is issued and outstanding.
The officers of the taxpayer are: William C. Gregg, President; Louis D. Gregg, Treasurer; Otis T. Gregg, Secretary;
*82 The board of directors consists of five members, the three officers above named, Burr Gregg and Hiram Merritt. Mr. William C. Gregg is the father of Louis D., Otis T. and Burr Gregg. Mr. Merritt is the father-in-law of Louis D. Gregg. All of the stock of the corporation is owned by the board of directors.
Article V of the by-laws of the taxpayer provides:
Regular meetings of the Board may be held at the principal offices of the company on each and every week day at nine o'clock in the forenoon or on call of the President.
There is no provision in the by-laws as to giving notice of directors' meetings except as above provided.
On May 11, 1918, at 4:00 P.M. a meeting of the board of directors of the taxpayer was held at which were present, William C. Gregg, *1582 Louis D. Gregg, and Hiram Merritt.
At said meeting of the board of directors of the taxpayer, an extraordinary dividend of 293.33925 2-3 per cent was declared payable to stockholders of record on said May 11, 1918. Such dividend amounted to $880,017.77, and represented practically the entire surplus of the corporation.
On July 15, 1918, a regular annual meeting of the stockholders of the taxpayer was held at which were present W. C. Gregg, owning 2204 shares, L. D. Gregg, owning 265 shares and Hiram Merritt, owning 1 share. W. C. Gregg held a general power of attorney from W. B. Gregg, who owned 265 shares, and L. D. Gregg held a general power of attorney from O. T. Gregg, who owned 265 shares.
At said annual meeting of stockholders the following resolution was unanimously carried:
Resolved that all the acts of the directors and executive committee in the discharge of their duties since the last annual meeting of stockholders be approved.
The following is a statement of the invested capital, the borrowings, the sales charged, the profits and the Federal income tax paid, for the years 1914 through 1918:
| 1914 | 1915 | 1916 | 1917 | 1918 | |
| Invested capital | $865,922 | $899,733 | $990,346 | $1,281,292 | 1 $1,551,070 |
| 2 591,149 | |||||
| Borrowings: | |||||
| January | 88,900 | None. | 75,000 | None. | None. |
| February | 68,900 | None. | 75O00 | None. | None. |
| March | 8,900 | None. | 50,000 | None. | None. |
| April | 8,900 | None. | None. | None. | None. |
| May | None. | None. | None. | None. | 1 None. |
| 2 395,000 | |||||
| June | None. | None. | None. | None. | 395,000 |
| July | None. | None. | None. | None. | 420,000 |
| August | 11,900 | None. | 25,000 | None. | 240,000 |
| September | None. | None. | (3) | None. | 240,000 |
| October | None. | None. | None. | None. | 140,000 |
| November | None. | None. | None. | None. | (4) |
| December | None. | 75,000 | None. | None. | None. |
| Sales charged | 536,728 | 867,882 | 1,196,826 | 1,196,632 | 1,779,713 |
| Profits | 65,810 | 23,613 | 473,945 | 431,369 | 347,574 |
| United States tax paid | 658 | 2,436 | 9,479 | 140,966 | 149,910 |
The deficiency claimed for 1918 has been recomputed by the respondent as a result of a supplemental field audit and the amount in controversy in Appeal Docket No. 4648 has been reduced to $5,571.03.
*83 The deficiency claimed for 1919 has been recomputed by the respondent as a result of a supplemental field audit and the amount in controversy in Appeal Docket No. 9923 has been reduced to $9,983.46.
The remaining issues raised by the pleadings in both appeals, Docket Nos. 4648 and 9923, other than the issue as to the legality of the dividend of May 11, 1918, are waived.
Article 5 of the petitioner's by-laws, part of which is contained in the above stipulation, further provides as follows:
The annual meeting of the Board of Directors for the election of officers shall be held immediately following the final adjournment of the annual meeting of the stockholders; or if the stockholders should fail to hold their annual meeting on the said fifteenth of July, the annual meeting of the Board of Directors may nevertheless be held at twelve o'clock noon on said date. * * * A majority of*1584 the Directors shall constitute a quorum with authority to transact business.
From July 15, 1910, to May 11, 1918, and including the meeting on the latter date, sixty-two meetings of the board of directors were held. The time of day of such meetings was not uniform but varied from 8 a.m. to 5 p.m. Only three were held at 9 a.m. At four of the meetings all of the directors were present; at twenty-two, one was absent; and at thirty-six, two were absent. At forty-six of the meetings, other than those held after stockholders' meetings, no notice was sent to absent directors. The business transacted at these meetings consisted of the election of officers, the purchase of machinery and supplies, the declaration of dividends, and various other affairs. At the above mentioned meetings, with the exception of the one on May 11, 1918, dividends were declared in the amounts and under the circumstances as follows:
| Date of declaration | Amount of dividend | Directors absent without notice |
| Per cent | ||
| June 28, 1912 | 3 | 2 |
| Apr. 10, 1913 | 3 | 2 |
| Sept. 22, 1913 | 3 | 2 |
| Nov. 5, 1913 | 3 | 2 |
| June 8, 1914 | ||
| 9 | 1 | |
| Mar. 1, 1915 | 6 | 1 |
| June 12, 1915 | 10 | 2 |
| Dec. 31, 1915 | 35 | 2 |
| June 5, 1916 | 35 | 2 |
| June 21, 1916 | 20 | 2 |
| Dec. 30, 1916 | 6 | 1 |
| Jan. 11, 1917 | 37 | 0 |
| Jan. 24, 1917 | 15 | 2 |
*1585 The petitioner's by-laws provide that an annual meeting of the stockholders shall be held on the fifteenth of July of each year, beginning with the year 1904, at 10 o'clock in the forenoon; notice of such meetings shall be given by the secretary by mail to the last known address of the stockholders of record, at least forty days before each annual meeting; each stockholder shall be entitled to one vote for every share of stock owned by him; and representation by proxy, duly executed in writing, shall be allowed, but such authority *84 in writing shall be delivered to and kept by the secretary before the same shall be used at any meeting of the stockholders.
On August 6, 1917, William Burr Gregg went to France as a member of the American Expeditionary Forces. Prior thereto, and under date of August 4, 1917, he executed an instrument appointing William C. Gregg his true and lawful attorney, and authorizing William C. Gregg, among other things, to vote, as his proxy, any shares of stock held by him in any corporation. In December, 1917, Otis T. Gregg went to France as a member of the American Expeditionary Forces. Prior thereto, and under date of December 21, 1917, he executed*1586 an instrument appointing William C. Gregg and Louis D. Gregg, jointly and severally, his true and lawful attorneys, with full power and authority to sell, transfer or do any other act concerning any stocks or bonds which he owned. Prior to the meeting of the petitioner's stockholders held on July 15, 1918, William C. Gregg wrote Burr Gregg, informing the latter that he had received his notice of such meeting, would act for him as his attorney, and knew of no special business to come before the meeting.
In 1918 the petitioner's business activities were being directed away from the manufacture of sugar cane cars, in which it had formerly engaged to a considerable extent, to the building of railroad equipment for the French and American Armies. Its plants were running at full capacity. Louis Gregg, the third son of William C. Gregg, was twenty-eight years of age. He was married, but was subject to the draft unless he was entitled to exemption on account of the nature of the business in which the petitioner was engaged. No attempt was made to find out whether or not he was so entitled.
About two weeks prior to May 11, 1918, William C. Gregg returned from a three-months' visit*1587 in Europe. During that period he saw Otis and Burr Gregg. He told them that the petitioner's business was going on as usual, that the petitioner had all the business that it could handle, and that profit possibilities were good. He said nothing to them at that time about curtailing the business. During his visit William C. Gregg was nearly captured by the Germans. When he returned to the United States he was distressed about the war situation, and was pessimistic concerning its outcome. He wanted to distribute the petitioner's surplus and reduce its operations to a minimum until war conditions cleared up.
The following is a copy of the minutes of the meeting of the petitioner's board of directors held on May 11, 1918:
Minutes of Meeting of the Directors of The Gregg Co., Ltd. held at their office at Lodi, N.J., at 4:00 P.M. Saturday, May 11, 1918 at which were present
William C. Gregg
Louis D. Gregg
Hiram Merritt
constituting a majority of the board.
*85 William C. Gregg, President, made the following statement:
In view of restrictions on the business of The Gregg Co. Ltd. caused by the war which have suddenly cut us off from the usual varied activities*1588 of the past, and in view of the fact that two of our directors are already in the U.S. Army in France, that our sole managing director Louis D. Gregg is of draft age and that I feel myself unable to undertake alone to manage any considerable portion of the volume and variety of business heretofore successfully undertaken by our company, I recommend that we curtail rapidly the scope of the business and reduce the surplus, even distributing the entire surplus, leaving the capital represented by the capital stock issued on which to operate the business until further curtailment may be effected. I have to report that an inventory has been taken and a statement is furnished you to-day of the condition of the Co. as of Apr. 30, 1918 showing an addition to surplus from Jan. 1 to Apr. 30, of $71,309.63. These profits come largely from sales on hand and uncompleted on December 31, 1917.
On motion of Hiram Merritt, seconded by Louis D. Gregg and unanimously carried it was resolved that a dividend of 293.33925 2/3% be declared from surplus and that the treasurer of the Company be instructed to pay same to Stockholders of record on May 11, 1918 the dividend to be paid out of undistributed*1589 surplus earned during the following periods
| from earnings Jan. 1, 1918 to Apr. 30, 1918 | $71,309.63 = 23,769.87 2/3% |
| from earnings Jan. 1, 1917 to Dec. 31, 1917 | 245, 684.36 = 81,894.78 2/3% |
| from earnings Jan. 1, 1916 to Dec. 31, 1916 | 128,902.46 = 42,967.48 2/3% |
| from earnings Jan. 1, 1915 to Dec. 31, 1915 | 67,839.33 = 22,613.11 % |
| from earnings Jan. 1, 1914 to Dec. 31, 1914 | 19,577.64 = 6,525.88 % |
| from earnings prior to Jan. 1913 | 346,704.35=115,568.11 2/3% |
| $880,017.77 = 293,339.25 2/3% |
all earnings for the year Jan. 1, 1913 to Dec. 31, 1913 having already been distributed in dividends.
There being no further business to come before the board the meeting was adjourned.
At the time of the above meeting, the petitioner had $300,000 or $400,000 in cash and securities. Its plant, fixed assets, merchandise on hand, and accounts receivable were of such amounts that, in order to have paid the dividend in cash with its own funds, it would have been necessary to sell the plant and discontinue business. On May 11, 1918, a check was issued by the petitioner to each of the stockholders for the amount of his share of the dividend. At or about the same time*1590 the personal check of each stockholder for an amount which would make good the petitioner's check was deposited to its account. The total amount of the stockholders' checks deposited to the petitioner's account was $445,000.
Neither Otis nor Burr Gregg was notified of the meeting on May 11, 1918. When Otis received word of the action taken he wrote a letter to his father disapproving the action. William C. Gregg received the letter about the middle of June, 1918. Meanwhile, Otis discussed the situation with Burr, who agreed with him in protesting the action. At some time during August, 1918, Otis received a reply *86 from his father in which the latter acknowledged that the action of May 11, 1918, had been too hasty and had been unnecessary as the war turned out. He suggested to Otis that he take it up when he returned to the United States.
When Otis was about to leave for the United States, Burr requested that he represent him in straightening out the matter, restoring the petitioner's capital, and going ahead progressively with the business. Burr Gregg remained in Europe on business for the petitioner after he was discharged from the Army. Otis Gregg arrived*1591 in the United States in the latter part of December, 1918, as a hospital patient. He was in various hospitals until he returned to the petitioner's service in the first part of April, 1919. An attorney was consulted with respect to the action of May 11, 1918. He advised the Greggs that such action was illegal. Thereafter, on April 29, 1919, a meeting of the petitioner's board of directors was held, the minutes of which are as follows:
Minutes of a special meeting of the Board of Directors of The Gregg Co. Ltd. held at the office of the Company at Lodi, N.J., on the 29th day of April, 1919, at 2 o'clock p.m.
Present: Messrs. W. C. Gregg, L. D. Gregg, O. T. Gregg and Hiram Merritt.
The President, W. C. Gregg, presided and the Secretary, O. T. Gregg, recorded the minutes.
The secretary presented the notice of the meeting with due proof of the service of a copy thereof upon each Director, and on motion such notice and proof of service were ordered filed.
O. T. Gregg stated in substance that the meeting had been called at his request and because of his objection to the illegal action of the Board of Directors taken at a meeting held May 11, 1918, declaring a dividend of*1592 293.33925 2-3%. He stated that no notice of that meeting had been given him and that he had not waived the notice of the meeting to which he was entitled as a Director of the Company. He further stated that when he was informed and believed that no notice of the meeting had been given any of the Directors, and none of the Directors had waived such notice, although but three of the five Directors of the Company attended the meeting. He called the attention of the Board to the fact that upon learning of the action taken at such meeting, he had objected to it. While he was at that time in active service in the U.S. Army in France and would be ordinarily glad to yield his judgment to that of the Board, especially under those circumstances, yet the declaration of so large a dividend and the distribution of the entire surplus of the Company was so serious a departure from the plans of the Company as formulated prior to his engagement in the war, and was in his judgment so detrimental to the best interests of the Company, that he felt impelled both as a Director and a Stockholder of the Company, that he felt impelled both as a Director and a was clearly illegal, now insists that the dividend*1593 be repaid to the Company.
The President referred to the fact that on May 11, 1918, two of the Directors of the Company, O. T. Gregg and W. B. Gregg, were in the U.S. Army in France and another director, L. D. Gregg. was of draft age, while a fourth Director resided at Newburg, N.Y. and was not, and never had been, active in the management of the Company, except in board meetings. The President *87 stated that under these circumstances it had seemed to him to be advisable to very greatly curtail the business of the Company, and he had in fact even contemplated its complete liquidation. It would have been quite impossible for him alone to continue the volume of business which the Company had usually had on hand, and if L. D. Gregg had been drafted, or fallen ill, the complications would have been serious. He further stated that it should be recalled that in May, 1918, the outlook for the success of the Allies and the termination of the war was not bright and that it then appeared as though every man of draft age might be called upon for service before the war could be brought to an end. It was entirely possible that the action of the Board in distributing the entire surplus*1594 was unwise, but they had used their best judgment under the circumstances. The illegality of their action had not occurred to him at the time, but was clear to him now, and so far as he was personally concerned, if any director or stockholder was dissatisfied, he was prepared to vote to rescind the action taken at the meeting of May 11, 1918, and repay the dividend which he has received.
L. D. Gregg and Mr. Merritt coincided with the statement of the President.
O. T. Gregg stated that he realized that what had been done had been in good faith, but as it was clearly illegal and detrimental to the interests of the Company, he would still urge rescission of the action taken at the meeting of May 11, 1918.
O. T. Gregg thereupon moved that because of its illegality the action of the Board of Directors at a meeting of the Board held May 11, 1918, declaring a dividend of 293.33925 2/3% be reconsidered, and such action rescinded.
The motion was seconded by Mr. L. D. Gregg and being stated by the President was unanimously carried.
The President stated that as a result of the motion now adopted the repayment to the Company of the dividend paid the stockholders would be necessary*1595 and asked whether interest was to be paid. He stated that he had invested the dividend received by him largely in Government Securities, and in view of the fact that the dividend had been declared and paid in good faith he believed that in justice to everyone the stockholders should be permitted to turn over to the Company (in lieu of interest) the amount of income derived from the investment of the dividend of May 11, 1918.
In the discussion which followed, O. T. Gregg called attention to the fact that as the dividend had been illegally declared, the funds distributed had at all times been the funds of the Company and that in considering methods whereby the funds might be restored to the Company, some method should be devised whereby the stockholders should neither gain nor lose by the transaction, to accomplish which purpose each stockholder should return the amount of his dividend and in addition all interest received on investments made with the dividends as well as gains from sales of securities purchased therewith, deducting all losses made on such sale.
The Treasurer, L. D. Gregg, stated that in his opinion the interest and gains would exceed the losses in the plan proposed*1596 by O. T. Gregg.
Upon motion of O. T. Gregg duly seconded by L. D. Gregg and unanimously adopted, it was
RESOLVED: That each stockholder be required to return to the Company at once the amount of the dividend received by him and all income and gains on sales derived therefrom, less any losses on such sales, and accompany same with a statement thereof.
There being no further business to come before the Board, the minutes were read and the meeting adjourned.
*88 Subsequent to April 29, 1919, the petitioner's stockholders returned to it the amount of the dividend of May 11, 1918, together with interest, dividends, and gains derived therefrom while in their hands. If they had been paid in securities, the same securities were returned. If they had been paid in cash, cash was returned; or if securities had been purchased with such cash, those securities were given to the petitioner. If such securities had depreciated in value since purchase by the stockholders, the petitioner was not compensated therefor. From May 11, 1918, to April 29, 1919, each stockholder was at all times financially able to return his share of the dividend to the petitioner.
On December 29, 1919, a*1597 meeting of the petitioner's board of directors was held, at which all members of the board were present, and the following action was taken:
Resolved that a dividend of $1,029,163.66, constituting the entire undistributed earnings of the Company since Mar. 1, 1913 be declared; that $780,000 of such undistributed earnings be transferred from surplus to capital account, and that portion of the dividend declared be paid in Stock of the Company at par, the balance of the dividend, being $249,163.66 to be paid in cash.
Later in the same day a cash dividend of $546,282.10, constituting the petitioner's undistributed surplus earned prior to March 1, 1913, was declared.
OPINION.
MURDOCK: The record in this cases does not disclose the computation of the petitioner's invested capital used by the Commissioner in determining the deficiencies, and we do not know exactly what he has done as a result of the declaration of the dividend on May 11, 1918. It appears, however, from the statements attached to the deficiency notices, that he has reduced invested capital for each year to some extent on account of this dividend. The petitioner claims that the deficiencies result from the failure*1598 of the Commissioner, in determining invested capital, to treat the dividend as invested capital between the time of its attempted declaration and the time of its restoration. We will assume that this is what he has done.
There is a statement in the stipulation that "the remaining issues * * * other than the issue as to the legality of the dividend of May 11, 1918, are waived." The petitioner argues from this statement that the Board has only to determine whether or not the dividend was legal. However, the parties may not stipulate as to the law and, in our opinion, the real issue is, Did the dividend declaration serve to reduce surplus, and in this way justify the Commissioner in reducing invested capital? The petitioner contends that the attempted declaration was illegal and entirely ineffective, and in the alternative it contends that even if it were effective to some *89 extent it did not reduce invested capital by more than the amount of cash and securities actually paid to the stockholders after subtracting the amount of the checks which the stockholders paid to the corporation at the same time. It contends that the purported declaration of the dividend was void*1599 because no notice of the directors' meeting was given to the absent directors.
The management of a corporation, including the power to declare dividends, is vested usually in a board of directors. The members of the board are entitled as a general rule either to be present at its meetings or to receive notice thereof. However, the requirement of notice may be dispensed with in cases of emergency arising when directors are absent or inaccessible, and action taken under such circumstances is binding on the corporation and valid. See ; . Cf. ; . If the meeting is a regular meeting, notice is presumed. Directorate action taken without notice to absent directors, and under circumstances requiring such notice, is only voidable. . Unless such action offends against the public or the rights of creditors are involved, it may be ratified by a majority of the stockholders of the corporation. *1600 ; 99 N.Ed. 138; ; ; ; ; . Moreover, where a corporation pays dividends which are informally declared, but the payment is not unlawful as an impairment of capital, a violation of the rights of creditors, or otherwise, the corporation may be estopped to deny the validity thereof. . Subject to the same conditions, a corporation may be bound by informal action, where its practice is to allow its affairs, including the declaration of dividends, to be conducted informally. See ; ; ; *1601 ; . A corporation may declare a dividend whenever it has surplus profits equal to or greater than the amount of the dividend. The fact that it does not have ready cash with which to pay does not render the dividend illegal. ; . Upon the declaration of a dividend a corporation becomes the debtor of the stockholder for his proportionate part thereof, and the amount of the dividend is no longer a part of the company's assets. ; ; affd. ; .
*90 A meeting of the petitioner's board of directors was held at 4 p.m. on May 11, 1918. William C. Gregg, the president, Louis D. Gregg, the secretary, and Hiram Merritt were present. They were three of the five members of the petitioner's board of directors. They owned 2,470 of the 3,000 shares of stock outstanding. At the meeting a dividend of approximately*1602 293 per cent was declared. The dividend was paid in the manner heretofore stated. The other two directors were with the American Expeditionary Forces in France, and had no notice of the meeting. When they learned of the dividend action, one of them communicated his disapproval to William C. Gregg. After receipt thereof by the latter an annual meeting of the petitioner's stockholders was held, and a resolution was passed approving "all the acts of the directors and executive committee in the discharge of their duties since the last annual meeting of stockholders."
Under the above authorities the declaration of the dividend was not void. In deed, in the light of the circumstances existing at the time; the nature of the business in which the petitioner was engaged; the inaccessibility of the absent directors, who beyond all reasonable probability would have been unable to attend; and the concession by both parties that the directors present at the meeting, constituting a quorum of the board, acted in good faith and according to their best judgment, we can not say that the action was not valid as an emergency measure. We are also unable to find that the meeting in question was*1603 not a regular meeting, in which case notice would be presumed.
In any event, the irregularity of the meeting made the declaration at most voidable. On July 15, 1918, after William C. Gregg had received word of Otis' disapproval of the dividend action, a stockholders' meeting was held at which no attempt was made to rescind or restore the dividend. On the contrary, a resolution was passed approving the acts of the directors. Cases are cited by counsel for the petitioner holding that directorate action can not be ratified by the same directors voting as stockholders. Those cases, however, deal with acts which result in a fraud on the corporation, its stockholders or creditors. They have no application to this case.
Furthermore, the petitioner is in no position to set up the invalidity of the action of May 11, 1918. It not only paid the dividend, but as a general practice it allowed its affairs to be conducted informally. At forty-six of the sixty-two directors' meetings held between July 15, 1910, and May 11, 1918, directors were absent without notice. It was not shown that notice was waived. Acquiescence in these informal methods implies ratification. *1604
*91 Aside, however, from any question of estoppel or of ratification or acquiescence, either by the stockholders or the petitioner, its contention is without merit. The scheme of taxation under the various revenue acts has as its basis an annual accounting period. The tax must be computed in the light of facts as they exist during each such period, and a taxpayer is not permitted to await the final results of particular transactions in order to compute the amount of his tax. Since the declaration and payment of the dividend were at most voidable, we are of the opinion that the petitioner's invested capital was reduced, at least, until the dividend was restored. Cf. ; .
We can not agree with the petitioner's alternative contention that the action of May 11, 1918, was illegal or inconsequential at least to the extent of $445,000 because the petitioner did not have funds with which to pay that amount of the dividend. The case is distinguishable on its facts from *1605 , and other cases upon which the petitioner relies.
The action of the Commissioner in connection with the only issue here raised is approved.
Judgment will be entered under Rule 50.