Morris Gray & another, trustees, vs. Augustus Hemenway & others

Massachusetts Supreme Judicial Court1910-05-19

206 Mass. 126

Summary · law.co

Holding. The court affirmed the decree, holding that a 50 percent cash dividend paid by the railroad company constitutes income to be distributed to life tenants, and the shareholders' optional opportunity to invest half the dividend in stock of a separate corporation does not alter the dividend's character as income.

The trustees of Augustus Hemenway's estate sought clarification on whether a dividend paid by the Delaware, Lackawanna and Western Railroad Company should be distributed to life tenants as income or held as capital for remaindermen. The railroad company declared a 50 percent cash dividend while simultaneously offering shareholders the opportunity to invest half of that dividend in a newly formed coal company. Although the railroad had accumulated a massive surplus exceeding $84 million (largely invested in subsidiaries), the company structured the payment as an absolute cash dividend in standard form, with stock subscription in the new entity remaining entirely optional.

The court determined that the character of the payment was controlled by its actual form and substance. Because the railroad company paid the dividend in cash as a completed distribution, it constituted income regardless of the shareholders' subsequent option to use those proceeds for a stock purchase. The court rejected any suggestion that the cash dividend was merely a façade disguising a true stock dividend of the corporation itself. The new coal company was legally independent and had no corporate control over the railroad, and the dividend's conversion to income was triggered by the corporation's decision to distribute its surplus earnings.

Summary generated by law.co from the public-domain opinion. The opinion text itself is public domain.

Key issues

Whether a cash dividend from accumulated corporate surplus should be treated as income or capital in trust administration
Whether an optional stock subscription opportunity offered to dividend recipients changes the classification of a cash payment
Whether a corporation's motive in declaring a dividend affects its income or capital treatment

Procedural posture

The appeal involved a question of law regarding proper characterization of a dividend distribution for purposes of administering a testamentary trust.

Authorities cited

No cited authorities resolved to law.co cases yet.

Opinion · public domain

majority opinion

Knowlton, C. J.

The only question raised by the appeal in this case is whether a certain dividend, made by the Delaware, Lackawanna and Western Railroad Company upon shares held by the plaintiffs as trustees under the will of Augustus Hemenway, is to be treated by them as income going to the life tenants, or as capital going to the remaindermen. At the time of this dividend the railroad company, in conducting its business, had accumulated a large surplus, amounting to more than $84,000,000, most of which was invested in stocks and bonds of subsidiary companies, and a part in cash. The vote of the directors declaring this dividend was in part as follows: “ Resolved, That an extra dividend of fifty (50) per cent be hereby declared, payable on July 20th, 1909, to stockholders of record at the close of business on July 1st.” This was the only part of the vote that referred directly to this subject. There followed in the same vote a declaration of a stock dividend of fifteen per cent payable in capital stock of the company, with a statement of the reasons for making the stock dividend.

-In the notice sent to stockholders there was a statement that a decision of the Supreme Court of the United States had de dared it to be unlawful for the corporation to transport, in interstate commerce, coal owned by it, and that a coal selling company had been organized with a capital of $6,800,000, to which it was proposed that the railroad corporation as a seller should contract to sell and deliver at the mines the coal which it mined and purchased. Stockholders of the railroad company were invited to take stock in the new coal company to an amount equal to one half of the cash dividend to which they were entitled, and to appropriate half of the dividend to payment for the shares subscribed for. A blank was enclosed adapted to use for this purpose. Perhaps it was expected that most of the stockholders would accept the invitation; for it might have been anticipated that the stock in the coal selling company would soon be worth more than par.

But the dividend of fifty per cent was an absolute cash dividend, made in the usual form. While the stockholders had an option to take stock in a new company, they were not obliged to do so. The new corporation had no legal connection with the old one. There was a plan to make mutually profitable contracts between the two corporations, but neither had any control of the other in its corporate capacity. While the very great surplus held by the railroad company was legally capital as between life tenant and remainderman until it was divided, it was in fact the earnings of the original capital, and there was good reason why it, or a large part of it, should be divided and treated as income. When the corporation elected to divide it it became income, and the fact that the stockholders might use one half of it, if they chose, to pay for a subscription which they were invited to make to the capital stock of a new corporation, did not change its character. We do not think the facts warrant a finding that the making of the dividend payable in cash was intended by the directors to be a mere form, to cover up that which was really a stock dividend of the corporation. The case is governed by the decisions in Minot v. Paine, 99 Mass. 101, Davis v. Jackson, 152 Mass. 58, Lyman v. Pratt, 183 Mass. 58, Hyde v. Holmes, 198 Mass. 287, and Hemenway v. Hemenway, 181 Mass. 406, 411.

Decree affirmed.