Reporter's Statement of the Case MATILDA R. DODGE AND HOWARD B. BLOOMER, AS ADMINISTRATORS WITH THE WILL ANNEXED OF THE ESTATE OF JOHN F. DODGE, DECEASED, v. THE UNITED STATES [No. D-191. Decided October 17, 1927] Income tax; decree ordering distribution; income received when dividend is distributed.-Under the income-tax laws dividends become income in the hands of the stockholders upon their distribution by the corporation, and not prior thereto at a date which a court in ordering distribution fixes as the time when the distribution should have been made. The Reporter's statement of the case: Mr. Hugh Satterlee for the plaintiffs. Mr. Edward A. Barnes was on the briefs. Mr. Alexander H. McCormick, with whom was Mr. Assistant Attorney General Herman J. Galloway, for the defendant. The court made special findings of fact, as follows: I. Plaintiffs, Matilda R. Dodge and Howard B. Bloomer, were duly appointed administrators with the will annexed of the estate of John F. Dodge, deceased, and at the time of the filing of the petition herein the said Matilda R. Dodge and Howard B. Bloomer were the qualified and acting administrators with the will annexed of the estate of John F. Dodge, deceased. II. On the first day of January, 1915, and continuously thereafter until on or about the first day of August, 1919, John F. Dodge, now deceased, was the owner and holder of 1,000 shares, of the par value of one hundred dollars each, of the capital stock of the Ford Motor Company, a Michigan corporation, having a capital stock of $2,000,000. III. At the close of the fiscal year ending July 31, 1916, the Ford Motor Company had, in addition to its capital Reporter's Statement of the Case stock of $2,000,000, a surplus of approximately $112,000,000, including net earnings for the fiscal year ending on that date of approximately $60,000,000; cash on hand of $52,550,771.92, also other assets consisting of bonds, notes, and accounts receivable aggregating approximately $9,500,000. The total liabilities of the Ford Motor Company, other than its capital stock, were approximately $14,000,000. Its cash assets at said time exceeded its total liabilities by more than $48,000,000. [As was afterwards judicially determined, the surplus profits of said company then on hand in cash, amounting to more than $52,500,000, exceeded any amount that could be reasonably required or against the objection of stockholders retained for the purposes of the business of the company.] IV. In previous years it had been the practice of the directors of the Ford Motor Company to declare regular monthly dividends amounting to 60 per cent per annum, or $1,200,000, upon the $2,000,000 nominal stock of said company, and from time to time to declare large special dividends out of the earnings accumulated in excess of the requirements of the business and the sum required to pay the current regular dividends. After the close of the fiscal year ending July 31, 1916, the directors of the Ford Motor Company failed to make any distribution other than the regular dividends at the rate of 60 per cent per annum on the nominal capital and permitted and allowed the gains and profits to accumulate beyond the reasonable needs of the business. V. On September 23, 1916, John F. Dodge, together with his brother, Horace E. Dodge, who at said time was the holder of an equal amount of said stock in the Ford Motor Company with John F. Dodge, addressed a letter to the president of the Ford Motor Company and sent a copy of same to each member of the board of directors of said company, as follows: "We have for some time, as you know, been endeavoring to make an appointment to see you for the purpose-as you assumed and informed one of your associates of discussing the affairs of the Ford Motor Company from the standpoint Reporter's Statement of the Case of our interest as stockholders and with a view to securing action by the board of directors looking to a very substantial distribution from its cash surplus as dividends. "Not having been able to make an appointment to discuss the matter with you personally as we very much desired to do, we write you this letter upon the subject. "The conditions shown by your recent financial statement-showing approximately $60,000,000 of net profits for the past year and cash surplus in bank exceeding $50,000,000 it seems to us would suggest, without the action being requested, the propriety of the board taking prompt action to distribute a large part of the accumulated cash surplus as dividends to the stockholders to whom it belongs. "While we would be sorry to have any controversy over the matter, we feel that your attitude toward the stockholders of the company is entirely unwarranted. "The statements that you have made that the stockholders are and have been receiving as dividends all they are entitled to-shows a most extraordinary state of mind if it represents your real feelings. "While a dividend of five per cent per month, sixty per cent per annum, on the capital stock of the company, $2,000,000, on its face would seem to be a large dividend, the fact is, however, that the assets of the company representing its surplus is as much the property of the stockholders as the assets representing the capital stock, and the stockholders are as much entitled to a dividend that will give them returns on their surplus investment as their capital stock. "Looking at the situation in this way, the dividend being paid the stockholders is only a little above one per cent on their capital employed in the business and entirely out of proportion to what the stockholders are entitled to. In view of the existing circumstances, we ask that you promptly call a meeting of the board of directors to consider the situation, and lay before them our views as stockholders as outlined in this letter, and we desire to say in this connection that we conceive it to be the duty of the board of directors to distribute as a minimum a special dividend of not less than fifty per cent of the accumulated cash surplus of the company. "Another matter that we desire brought to the attention of the board is our contention as stockholders that the company has no right to use the company's earnings in the continued extension of the plants and property of the company; indeed, from our point of view, they have already exceeded their authority in this direction. Reporter's Statement of the Case "We would be pleased to have your acknowledgment of the receipt of this letter, and advise that you have called a meeting of the board of directors for the purpose of considering and acting upon the matters referred to in it." VI. The directors of said Ford Motor Company failed and refused to take any action in compliance with the request as made in the letter dated September 23, 1916, and thereupon on November 2, 1916, John F. Dodge and Horace E. Dodge filed a bill in chancery in the Circuit Court for the County of Wayne, State of Michigan, against the Ford Motor Company and its directors praying that said Ford Motor Company be required by decree of court to distribute to the stockholders of the corporation as dividends at least 75% of the then accumulated cash surplus of the company, and for the future that they be required to distribute all of the earnings of the company except such as might be reasonably required for emergency purposes in the conduct of such business. In December, 1916, following a hearing upon a prayer in said bill for a temporary injunction, the circuit court granted an injunction restraining during the pending of the suit and until the further order of the court the using or appropriating of the accumulated cash profits on hand of the Ford Motor Company for the establishment of a smelting plant. [The suit in which said bill in chancery was filed afterwards came to a hearing, and on November 7, 1917, the circuit judge before whom said suit was pending filed therein an opinion in which he found: "All that complainants asked on September 23 was 50% of the profits of 1916 be declared as special dividends, and in view of the announced policy of the company and its plans for duplication of its plant, the relief should be measured by the demand; retention under the circumstances is an abuse of discretion. To that relief, complainants are entitled, but credit should be given for dividends declared during fiscal year ending July 31, 1917."] On December 5, 1917, a decree was entered in said circuit court in said cause, as follows: Reporter's Statement of the Case STATE OF MICHIGAN-IN THE CIRCUIT COURT FOR THE COUNTY OF WAYNE, IN CHANCERY John F. Dodge and Horace E. Dodge, complainants, No. 56660, vs. Ford Motor Company et al., defendants At a session of said court held in the courthouse in the city of Detroit on the fifth day of December, in the year one thousand nine hundred and seventeen. Present: Honorable George S. Hosmer, circuit judge. This case having come on to be heard upon the bill of complaint taken as confessed by the defendant, James Couzens, and upon the answers of the other defendants thereto, and proofs upon the issues raised by said pleadings having been taken, some in open court and some by reading in open court by consent of all parties, the transcript of testimony taken before the circuit court commissioner of this court on the application for a preliminary injunction heretofore made in this cause; and arguments having been made and briefs having been filed by counsel for the respective parties, and due deliberation upon and consideration of all thereof having been had, and the court having filed in this cause an opinion in writing in which certain matters of fact and of law are found and determined: Now, therefore, for the reasons of fact and of law so found and determined, the court does hereby order, adjudge, and decree: First. The defendants, Henry Ford, Edsel B. Ford, Frank L. Klingensmith, Horace H. Rackham, and James Couzens, as the board of directors of the defendant, Ford Motor Company, shall within thirty days from the entry hereof declare a dividend upon all of the shares of stock of said defendant, Ford Motor Company, in an amount equivalent to onehalf of, and payable out of the accumulated cash surplus of said defendant, Ford Motor Company, on hand at the close of the fiscal year ending July 31, 1916, less the aggregate amount of the special dividends declared and paid after the filing of the bill of complaint in this suit and during the fiscal year ending July 31, 1917, which amount so to be declared as a dividend is nineteen million two hundred seventyfive thousand three hundred eighty-five and dollars ($19,275,385.96). 96 100 Second. The defendant, Ford Motor Company, shall pay the said sum of nineteen million two hundred seventy-five thousand three hundred eighty-five and dollars ($19,275,385.96) to the stockholders of said defendant, Ford Motor Company, pro rata to the number of shares of stock held by each, as a special dividend out of the accumulated |