This was an action at law by Haas Bros., a corporation, to recover certain additional income and profit taxes imposed by the Commissioner of Internal Revenue. A jury was waived by written stipulation of the parties, and the case has been brought here for review on the special findings made by the court below, from which it appears:
That the plaintiff is a corporation organized under the laws of the state of California, engaged in the wholesale grocery business in the city and county of San Francisco, and is and always has been a close family corporation; that until his death, May 31,1916, William Haas was the president and dominant head of the corporation; that on January 1, 1917, and during the year 1917, the capital stock of the corporation was $600,000, divided in 600 shares of the par value of $1,000 each, owned by members of the Haas family, and that during the calendar year 1916 the corporation earned a profit of $290,216.87 in the conduct of its business. That on January 8,1917, the directors of the corporation adopted the following resolutions:
“Resolved, that the amount of $288,000 be credited to the reserve account and that $2,216.87 be carried forward to the profit and loss account of this corporation.”
“Resolved, that this corporation does declare a cash dividend from the reserve account of $480 per share payable immediately to the stockholders of record on January 1, 1917, as they are respectively entitled thereto.”
That the resolution declaring a dividend of $288,000 did not express the true intention of the board of directors; that in adopting
“That the surplus of this corporation be increased from two hundred thousand dollars ($200,000.00) to four hundred thousand dollars ($400,000.00).
“This additional amount to be raised by subscription of three hundred thirty-three s%oo dollars ($333.33) per share by the stockholders of record on this date, according to the number of shares held by each.”
That on the same day, without further resolution of the directors, dividends amounting to the sum of $88,000 were paid to the stockholders on their proportionate shares, out of cash then on hand; that interest at the rate of 6 per eent. per annum was paid to stockholders from January 1, 1917, to May 21,1917, on the entire sum of $288,000; that the entries in the books of the plaintiff crediting the stockholders with their proportionate shares of the sum of $288,000, declared as a dividend by the above resolution, were technical bookkeeping entries and were not a record of any actual transaction; that the payment of interest to the stockholders on their proportionate shares was unauthorized, and such payments were made by mistake, and that the sum of $288,000, declared as a dividend by the aforesaid resolution did not thereby or otherwise become capital borrowed by the plaintiff from its stockholders, but, on the contrary, the whole thereof was a part of the invested capital of the plaintiff, used by it in its business at all times from January 1,1917, to May 21,1917. Upon the audit of the income and profit tax return of the plaintiff for the year 1917/ the Commissioner of Internal Revenue reduced its invested capital from January 1, 1917, to May 21, 1917, by the sum of $288,000, and imposed an additional tax in the sum of $13,042.88; that the additional tax was paid under protest, and that a demand for a refund was rejected.
As conclusion of law the court found that the reduction of the invested capital of the plaintiff from January 1, 1917, to May 21, 1917, by the sum of $288,000, and the imposition of the additional assessment was unauthorized and unlawful. On these findings judgment was entered in favor of the plaintiff for the amount of the additional tax so imposed, with interest and costs.
The amount of profits depends in a measure on the amount of the invested capital. The term “invested capital” for any year, means the average invested capital for the year, averaged monthly. 40 Stat. 306, § 207 (Comp. St. § 6336%h). In the ease of corporations, it means (1) actual cash paid in; (2) the actual cash value, at the time of payment, of assets other than cash paid in; and (3) paid in or earned surplus and undivided profits used or employed in the business; but does not include money or other property borrowed by the corporation. 39 Stat. 1001, § 202.
The question before us is: Did the amount of the dividend declared by the resolution of January 7 cease to be a part of the invested capital of the defendant in error from and after the date of the resolution and until the adoption of the second resolution on May 21? Taken at its face value, the resolution would seem to have that effect.
“The declaration of a dividend is the act of the corporation in setting apart a portion of its net or surplus profits for distribution among the stockholders according to their respective interests.” 14 C. J. 806.
“The declaration of a dividend creates a debt against the corporation in favor of each stockholder to the amount due him as to his pro rata share, and this is true although the dividend is made payable at a future date, or ‘at the pleasure of the company,’ or ‘such time as may be directed by the board.’ ” Id. 815.
But, in eases of this kind, tbe rights of parties can neither be established nor impaired by' tbe bookkeeping methods employed, or by tbe names given tbe various items. Douglas v. Edwards (C. C. A.) 298 F. 229, 234. Tbe government was not es-topped by tbe records kept by tbe corporation, and for tbe like reason, tbe corporation was not estopped by its own récords, because every estoppel must be mutual. Tbe court below found, in substance, that tbe resolution declaring tbe dividend did not express tbe true intention of tbe directors; that, in adopting tbe resolution, they merely followed a precedent, in form and language, established in previous years, believing this tbe proper course to pursue; that they understood and believed that a dividend was declared when actually paid out of cash on band available for that purpose and not before; that they knew that tbe corporation bad no funds with which to pay dividends, and did not know that tbe resolution would impose any obligation on tbe corporation, nor did .they intend that it should. This finding we think is in accord with tbe testimony. In previous years when dividends were declared, tbe amounts were actually paid to tbe stockholders on tbe same day or not later than tbe day following. In this instance, no payments on account of dividends were made for a period of nearly five months, and, so far as tbe record discloses, no demands were made against tbe corporation. At tbe expiration of that period tbe directors concluded that there would be no cash available for tbe payment of dividends in excess of tbe sum of $88,000, and they then went through tbe formality of levying a stock assessment in tbe sum of $200,000/ as an offset against tbe dividends previously declared. To all intents and purposes, tbe result was tbe same as if tbe directors bad taken no action whatever until tbe date of tbe latter resolution, and bad then declared a dividend of $88,000 only.
While tbe facts in tbe two eases differ, tbe language of tbe court in Eaton v. English & Mersick Co. (C. C. A.) 7 F.(2d) 54, 57, is applicable here.
“An examination of tbe resolutions, upon which tbe government relies in this case, shows that their adoption did not work a severance of tbe part declared from tbe remainder of tbe accumulated earnings. It created no separate fund distinct from tbe capital stock or surplus profits. No fund was at any time deposited anywhere to pay tbe so-called ‘dividend.’ If at any time after tbe resolution was passed tbe company bad filled, there was no fund ‘set aside’ which bad so become tbe property of tbe shareholders that it could not have been reached at any time by tbe creditors of tbe corporation. Moreover, at tbe time this so-called dividend was declared, there was no ‘fund’ which could have been set aside, out of which it could have been paid in cash as tbe findings of fact made by tbe district judge show ‘that said sum of $391,892.13 was not in cash, but was invested in machinery, material in process, manufactured stock, accounts due from customers, and cash essential to tbe operation of tbe business; that no physical division or allocation of sueb property was ever made to tbe several stockholders.”
It was contended on the argument tha't the judgment is excessive in any view of tbe case, inasmuch as at least $88,000 should have been deducted from tbe invested capital between January 1 and May 21. But in tbe view taken by the court below there was in effect no declaration of a dividend until tbe latter date.
Tbe case is by no means free from doubt, but tbe conclusion reached by tbe court below is an equitable one, and its judgment is therefore affirmed.