*3848 The date of payment of a dividend, rather than the date of declaration, is controlling in determining the extent to which a stockholder is to be taxed by reason of the payment thereof.
*235 This proceeding results from the determination of respondent of a deficiency in income tax for the calendar year 1920, in the amount of $6,239.36.
FINDINGS OF FACT.
Petitioner is an individual with residence at Proctor, Vt., and filed her income-tax return for the calendar year 1920 with the collector of internal revenue at Burlington, Vt. The petitioner was, at all times during the calendar year 1920, the owner of 8,000 shares of the preferred capital stock of the Vermont Marble Co., a corporation organized under the laws of the State of Vermont, with its *236 principal office and place of business at Proctor, Vt. The authorized, issued and outstanding capital stock of the said Vermont Marble Co. was as follows, at all times during the year 1920:
| Class | Share par | Authorized | Issued and |
| value | outstanding | ||
| Preferred | $100 | 2,000,000 | $2,000,000 |
| Employees' second preferred | 100 | 1,000,000 | 468,000 |
| Common | 100 | 4,000,000 | 4,000,000 |
*3849 The preferred stock certificate of the Vermont Marble Co. provided as follows:
The holders of preferred stock shall be entitled out of the net profits to cumulative dividends at the rate of 5 per cent per annum, payable quarterly on the first day of February, May, August and November, in preference to and with priority over any payment of dividends on the common stock and also to share pro rata with the common stock in any dividends declared by the board of directors out of the net profits of any year after the common stock has received 3 per cent in dividends for that year.
The employees' second preferred stock certificate provided as follows:
The holders of Employees' Second Preferred stock shall be entitled out of the net profits after the payments of 5% per annum cumulative dividends on the preferred stock, to non-cumulative dividends at the rate of 3% per annum in preference to and with priority over any payment of dividends on the common stock and also to share pro rata with the common stock and the preferred stock in any dividends declared by the Board of Directors out of the net profits of any year after the common stock has received 3% in dividends for that year.
*3850 The common stock certificate provided as follows:
This certifies that is the owner of shares of $100 each, of the capital stock of the Vermont Marble Company (common shares) transferable only on the books of the corporation by the holder hereof in person or by attorney upon surrender of this certificate properly endorsed.
The certificates of stock, the material portions of which are set forth above, were those issued by the said Vermont Marble Co. to the owners of its respective classes of stock and set forth the rights, privileges and preferences, if any, of the respective classes of stockholders in the Vermont Marble Co.
On December 31, 1919, the said Vermont Marble Co. had, according to its books, an earned surplus of $4,098,193.12. The earnings and profits accumulated by said corporation, subsequent to February 28, 1913, were in the amount of $662,933.16 on January 2, 1920, and $675,804.33 on January 5, 1920.
On January 2, 1920, the board of directors of said corporation passed the following resolution:
*237 PROCTOR, VERMONT, January 2, 1920.
The regular meeting of the Board of Directors was held this day at three o'clock, all the Directors being present*3851 except Mr. Morse, Mr. Higbee and Mr. Bixler.
It was voted to pay a dividend of five dollars ($5) per share during the year 1920, on the Preferred Stock of the Company, payable in four quarterly installments of one dollar and twenty-five cents ($1.25) each on the first days of February, May, August and November.
It was voted to pay a dividend of three dollars ($3) per share during the year 1920 on the Employes Second Preferred Stock of the Company, payable in three installments of one dollar ($1) each, on February 14th, April 15th and June 15th.
It was voted to pay a dividend of three dollars ($3) per share during the year 1920 on the Common Stock of the Company, payable in three installments of one dollar ($1) each on February 14th, April 15th, and June 15th.
It was voted to pay on January 5, 1920, a special dividend of thirty dollars ($30) per share on the Common, Employes Second Preferred and Preferred Stock of the Company out of the surplus accumulated in the years 1919, 1912, and the years prior thereto, seventy-five per cent, based upon the par value of the bonds and disregarding fractions of one thousand dollars, payable in Liberty Bonds at the market price in New*3852 York at the close of business today, and the balance in cash.
Pursuant to the action taken by the board of directors of the said company, as mentioned and referred to in the preceding paragraph, the $5 per share dividend on the preferred stock, the $3 per share dividend on employees' second preferred stock, and the $3 per share dividend on common stock were duly paid by the said company in the total sum of $234,040, and on January 5, 1920 the said company paid the dividend of $30 per share on all classes of its outstanding capital stock, numbering 64,680 shares (20,000 shares preferred, 4,680 employees' second preferred, and 40,000 common) in the amount of $1,940,400. There was no accrual and no entries made upon the books of the said company with respect to the payment of dividends until actual payments were made in accordance with the resolutions of the board of directors.
The petitioner received, on January 5, 1920, on account of the said declaration and payment, $240,000 by reason of the ownership of 8,000 shares of the preferred stock.
The respondent has determined that $83,600 of the $240,000, or $10.45 per share, received by the petitioner as aforesaid, represented*3853 the portion of such $240,000, which was paid by the said company out of its earnings and profits accumulated subsequent to February 28, 1913. In arriving at this determination, the respondent has taken as the basis the earnings and profits accumulated subsequent to February 28, 1913, and to January 5, 1920, the date the dividend was paid, in the amount of $675,804.33.
The respondent has not used as a basis the earnings and profits accumulated subsequent to February 28, 1913, as they existed on January 2, 1920, the date the dividend was declared, in the amount *238 of $662,933.16, nor has the respondent deducted from said accumulated earnings and profits the amounts of dividends declared on January 2, 1920, on the preferred, employees' second preferred, and common stock in the total sum of $234,040.
OPINION.
MILLIKEN: This proceeding relates solely to the dividend paid to the petitioner on January 5, 1920, and error is assigned in that the respondent determined too great a part thereof to be taxable pursuant to section 201 of the Revenue Act of 1918. No controversy exists as to the year of taxation or the rates pertaining thereto.
*3854 It is the contention of counsel for petitioner that by the declaration of the dividends of January 2, 1920, there were first declared the regular dividends on the several classes of stock; that such declaration was a necessary condition procedent to the payment of the 30 per cent special dividend here in question; that by such declaration of the regular dividends, the earnings and profits accumulated since February 28, 1913, which were on hand that day, were correspondingly reduced, leaving the payment of the special dividend from such residue, part being represented by earnings and profits accumulated prior to February 28, 1913, and part payable from earnings and profits accumulated subsequent thereto. The principles of law are also urged that the declaration of the dividend, to the extent of such a declaration, separates the earnings and profits from the other property of the corporation and appropriates such earnings to the then stockholders who become creditors of the corporation for the payment of the dividend. ; *3855 ; and .
The respondent, on the other hand, takes the position that the 30 per cent special dividend, having preceded in payment the regular dividends, shall be deemed to have been paid from the earnings and profits accumulated since February 28, 1913, without regard to any adjustment by reason of the declaration of the regular dividends and that the earnings and profits accumulated since February 28, 1913, on hand at January 5, 1920, should be applied in toto to the payment on January 5, 1920, of the dividend here in question.
It is unquestionably true that, as between a stockholder and a corporation, the declaration of a dividend brings into existence the status of a debtor and creditor, and the earnings and profits of the corporation to the extent of such a declaration are separated from the other property of the corporation. ;; and *3856 Nor is there occasion to question our prior decision of the effect upon the invested capital of a corporation of the declaration of a dividend. See , and compare the *239 decision of the United States District Court for the Western District of Pennsylvania in .
The solution of the question here at issue is a decidedly different one from those just referred to and we must decide in the light of section 201 of the Revenue Act of 1918 whether, for the purposes of Federal taxation, the distribution occurs at the date of declaration or the date of payment of a dividend as concerns the taxability of the same when received by the stockholder. The question is answered by the decision of the United States Supreme Court in . The court stated:
Since two of the dividends paid in 1917 were declared in 1916, it becomes necessary for us to consider whether these also are to be deemed distributions made in 1917, as it is only to such that the section applies. It declares*3857 that the dividend is income of the shareholders in the year in which it is "received." We think it clear that, for this purpose, the date of payment, not the date of the declaration of the dividend, is the date of distribution; and as all the dividends here in question were paid in 1917, the provision as to the rate is applicable to all.
See also the decision of the Circuit Court of Appeals for the Third Circuit in the case of .
Section 201 defines the term "dividend" to mean any distribution made by a corporation to its shareholders or members out of the earnings or profits accumulated after February 28, 1913. Construing the above in the light of the decision in , the section defines a dividend to mean any payment made by a corporation to its shareholders. In the case at bar, the payment was made on January 5, 1920, and we think it beside the point that the corporation may for a profit and loss statement or accounting purposes, or as showing the status existing between the corporation and its shareholders, show its earnings and profits to be reduced by a declaration*3858 of a dividend not then paid. The dividend declared must give way to a dividend paid in so far as the taxability of the same in the hands of the stockholders is concerned. It is to tax that which is first distributed by payment rather than declaration that the statute seeks to and does reach.
The date of payment governing rather than the date of declaration, it follows that petitioner should report and be taxed pursuant to the provisions of section 201, on the proportionate part of the dividends paid on January 5, 1920, as is represented by the earnings and profits accumulated since February 28, 1913, which were on hand that day as set forth in the findings of fact.
The , in so far as inconsistent herewith, is overruled.
Reviewed by the Board.
Judgment will be entered for the respondent.