The People of the State of New York ex rel. North American Trust Company, Relator, v. Erastus C. Knight, as Comptroller of the State of New York, Respondent

The People of the State of New York ex rel. North American Trust Company, Relator, v. Erastus C. Knight, as Comptroller of the State of New York, Respondent. Taxation of á corporation —the return of money advanced by stockholders to increase the surplus is not considered a dividend. The stockholders-of a trust company in 1899 paid into the treasury thereof the " sum of $500,000 for the purpose of increasing its surplus. Subsequently, in ' 1900, the said trust company was merged in' another trust company, and for . the purpose of equalizing the surplus and undivided profits of the two companies $200,000 was returned to the stockholders of the first-mentioned trust company out of thé §500,000 contributed by them.. , ______:" Held, that the return" of such $200,000 did not constitute a dividend within the meaning of that term as used in section. 182 of the Tax Law (Laws of 1896, chap. 908). Certiorari issued out of the Supreme Court and attested on the 2d day of August, 1901, directed to Erastus C. Knight, as Comptroller of the State of New York, commanding him to certify and Return to the office of the clerk of the county of Albany all and singular his proceedings had in relation to the refusal to revise and readjust an account, for taxes against the relator for the year ending October 31, 1900: The relator is a domestic corporation with a paid-up" capital stock Of $2,000,000. On January 1 and July 1, 1900, if paid dividends of two and one-half per centum on such capital, aggregating live per centum for the year." In August and September, 1899, its stockholders paid into its treasury in cash the sum of $500,000 for the purpose of having that sum added to the surplus of the company. Thereafter, and on May 1,1900, there was a merger between the relator and the International Banking and Trust Company. The company after the "merger continued thé business in the name of the relator thé sainé as before. ■ Prior to such inergér there was an audit of the accounts and books of the relator which showed that its surplus and undivided profits were greater in proportion to its capital than the surplus and undivided profits "of the International Banking and Trust Company. For the purpose of making an equalization of the proportion, and about May 1, 1900,' $200,000 was returned by the relator to its stockholders. The Comptroller has regarded that as a dividend of ten per cent upon its capital stock, which added to the dividend of five per cent above mentioned makes fifteen per cent for the year. He assessed the capital stock for the year in question at a valuation of $1,508,440, and upon this a tax was imposed of one-fourth of a mill for each one per centum of dividends, that is to say, a tax of three and three-fourths mills upon dividends of fifteen per cent, making a total tax of $5,656.65. This writ is brought to review the denial of the application of the relator for a revision or readjustment of such account for taxes. Edmund L. Cole, for the relator. John Cunneen, Attorney-General, and William H. Wood, Deputy Attorney-General, for the respondent. [MAJORITY — Chester, J.:] Chester, J.: The relator makes no question as to the valuation placed upon the capital stock. Its sole contention is that the $200,000 returned to the stockholders were not “ dividends ” within the meaning of that word as used in section 182 of the Tax Law (Laws of 1896, chap. 908), under which the tax was imposed; that consequently the divi-' dends for the year in question were only five per cent on the capital stock instead of fifteen per cent, and, therefore, that the rate of taxation should be reduced from three and three-fourths mills for each fifteen per centum to one and one-half mills upon the capital stock subject to taxation under said section. While there was proof before the Comptroller that before the merger the surplus of the relator was $1,200,000, made up of $500,000 cash contributed by its stockholders and $700,000 earnings of the relator, yet the proof is also entirely clear and undisputed that such $200,000 returned to the stockholders during the year in question was not from any such earnings, but was a return to them of a part of their cash contribution to such surplus, made prior to the merger. When such contribution was made no additional stock was issued for it and it simply went to add to the value of the stock already held by those so contributing. Section 23 of the Stock Corporation Law (Laws of 1890, chap. 564, as amd. by Laws of 1892, chap. 688) provides that “ the directors of a stock corporation shall not make dividends, except from the surplus profits arising from the business of such corporation.” It seems clear that the. $200,000 so returned cannot fairly be regarded as from the “ surplus profits” of the company, for it did not in any sense arise from its profits or earnings in the course of its business, but was contributed solely for the purpose of strengthening the company and adding to its working capital. That being so it was not a dividend within the meaning of the law. We think for these reasons that the Comptroller should have revised the account for taxes in accordance with the contention of the relator, and should have modified the tax by imposing it at the rate of one and one-half mills instead of three and three-fourths mills. The determination of the Comptroller should be modified by reducing the tax to $2,262.66, and as so modified affirmed, with fifty dollars costs and disbursements to the relator. All concurred. Determination of the Comptroller modified by reducing the tax to $2,262.66, and as so modified confirmed, with fifty dollars costs and disbursements to the relator."