The opinion of the court was delivered by: WORTENDYKE
The Court derives its jurisdiction in this action from the provisions of 28 U.S.C. § 1346(a)(1).
The suit is for the recovery of Federal Estate taxes paid on the estate of John F. Boyle, Jr., or, in the alternative, for a refund of Federal Income taxes for the years 1955 through 1958, paid by Joseph Keane and Hudson County National Bank as Executors of the Estate of Regina T. Boyle, deceased; Annie Egner; Catherine B. Kip; and James J. Boyle, James McMahon, James Boyle and Hudson County National Bank as executors of the Estate of John F. Boyle, Jr., deceased, are the claimants for the Federal Estate tax refund. Katherine Boyle, Fred Egner and Edward Kip are joined as parties plaintiff only because they field joint Federal Income tax returns for the years in question with their respective spouses.
There being no genuine issue as to any material fact, the plaintiffs have moved the Court for summary judgment, and the Government has moved to dismiss the amended complaint, for summary judgment and for leave to amend its answer to the amended complaint.
John F. Boyle, Jr. (hereinafter testator) died on December 8, 1953, a resident of Jersey City, New Jersey, leaving a last will and testament duly admitted to probate by the Surrogate of Hudson County, by whom letters testamentary were duly issued to his appointed executors. Testator was survived by his wife, Regina Boyle, two sisters, Annie Egner and Catherine B. Kip, and a brother, James J. Boyle. Testator's will divided his estate into four equal shares among his widow, two sisters and brother. The corpus of testator's estate included stock in various corporations, including 1,250 shares of common stock of John F. Boyle Company (Boyle Company), a New Jersey corporation engaged in the manufacture of paper box board at 500 Montgomery Street, Jersey City. Those 1,250 shares constituted the entire outstanding capital stock of the Boyle Company.
Testator's widow, Regina Boyle, died January 31, 1957, and is represented in this suit by her executors.
Among the current assets of the Boyle Company at the time of testator's death, in addition to stocks in nationally-known business corporations, were 1,282 shares of cumulative preferred stock of the Hudson Dispatch Company (hereinafter Dispatch) which had been purchased by the Boyle Company in 1952 for $ 384,600.00. It is with this item of corporate assets alone that we are here concerned.
Dispatch, also a New Jersey corporation, published a newspaper and conducted a job-printing business in this State. At the time of testator's death in 1953, there were outstanding 5,000 shares of common stock and 2,481 shares of preferred stock of Dispatch, of which the Boyle Company owned 1,282 shares of the preferred, as noted above. The certificate of incorporation of Dispatch provided as follows:
'The respective holders of the Preferred stock shall be entitled to receive, when and as declared from the surplus or net earnings of the corporation, yearly dividends at the rate of eight per centum per annum and no more, payable quarterly on dates to be fixed by the by-lows of the corporation. The dividends on the Preferred Stock shall be cumulative, and shall be payable before any dividends on the Common Stock shall be paid or set apart; so that if, in any year, the dividends declared and paid upon the Preferred Stock shall not amount to eight per centum, the deficiency shall be payable before any dividends shall be thereafter paid upon or set apart for the Common Stock; provided, however, that whenever all cumulative dividends on the Preferred Stock for all previous years shall have been declared and become payable, and the accrued quarterly installments for the current year shall have been declared, and the corporation shall have paid such cumulative dividends for previous years, and such accrued quarterly installments, or shall have set aside from its surplus or net profits a sum sufficient for the payment thereof, the Board of Directors may declare dividends on the Common Stock payable then or thereafter out of any remaining surplus or net profits.'
'In the event of any liquidation or dissolution or winding up of the corporation, whether voluntary or involuntary, the holders of the Preferred Stock shall be entitled to be paid in full, both the par value of their shares and the unpaid dividends accrued thereon before any amount shall be paid to the holders of the Common Stock; * * *.'(Emphasis supplied.)
On August 21, 1952 (prior to testator's death), the Board of Directors of Dispatch adopted a resolution for the payment to 'preferred stockholders of record eight dollars per share on the outstanding preferred shares of stock. This represents a part payment of accrued dividends on preferred stock.' This dividend was the first which had been declared upon the preferred stock of Dispatch, no dividends having been declared or paid on that stock for approximately 25 years preceding the adoption of that resolution. However, at each quarterly meeting subsequent to that of August 21, 1952, the Board of Directors of Dispatch declared substantial dividends on the preferred stock, which were paid to the then holders of that stock. During the lifetime of testator, the dividends on the 1,282 shares of cumulative preferred stock were paid to the Boyle Company, which was the owner of the stock. At the date of testator's death, the period of preferred dividends arrearage accumulation had been reduced to 20 1/2 years, but the Boyle Company continued to receive from Dispatch, after testator's death, additional quarterly payments on account of that arrearage until the dissolution of the Boyle Company in December, 1954. That dissolution effected a distribution of the assets of the Boyle Company at that time to testator's estate, which held all of the common stock of the Boyle Company. The estate, in turn, distributed the plant and equipment owned by the Boyle Company to the four beneficiaries under testator's will, who thereafter operated the Company as a partnership, instead of as a corporation. The securities owned by the Boyle Company, including the Dispatch preferred stock which it owned, were distributed in equal shares to the beneficiaries under testator's will.
For purposes of the Federal Estate tex return, testator's executors employed a Certified Public Accountant to determine a value for the Boyle Company stock as of December 8, 1953, the date of testator's death. Because that stock was closely held, the accountant computed its value at the book value of the assets of the Company, without, however, taking into account the effect of the earning power of the operating assets of the Company upon their fair market value. The accountant's recommendation respecting the valuation of the Boyle Company stock in testator's estate was adopted by his executors. In computing the market value of the Dispatch stock, to be reflected in his valuation of the Boyle Company stock, the accountant took the sum of the par value ($ 128,200.00) and 20 1/2 years of accumulated dividends ($ 210,248.00), or an aggregate of $ 338, 448.00. This figure represented the total purchase price of $ 384,600.00 ($ 128,200.00 par value and $ 256,400 representing 25 years of accumulated but unpaid dividends) paid by the Boyle Company for the Dispatch stock, as adjusted by the 4 1/2 years of dividend arrearages which had been paid to the Company subsequent to its acquisition of the stock but prior to the testator's death. This valuation figure for the Dispatch stock was accepted by the Commissioner of Internal Revenue as the basis for the assessment of the Estate tax upon testator's estate. The Estate tax return was filed February 18, 1955; the taxes shown due were paid March 14, 1955; and a minor deficiency was thereafter assessed and paid on January 6, 1956. It was not until October 23, 1961, more than five and a half years after the final payment of Federal Estate taxes, and more than six and a half years after the filing of the Estate tax return, that testator's executors filed a claim for refund of Federal Estate taxes under 26 U.S.C. § 6532 (I.R.C.1954). The claim was rejected because not filed within the three-year period of limitations prescribed by Section 910 of the Internal Revenue Code of 1939. That the claim is barred by that section is conceded by the parties.
After the assets of the Boyle Company had been turned over to the Boyle Estate and, in 1955, by the executors to the beneficiaries under the testator's will, the Board of Directors of Dispatch continued to declare dividends on the Dispatch preferred stock, and the individual plaintiffs reported the receipt of these dividends in their respective income tax returns for the year of receipt. These distributees claimed that such receipts were non-taxable to them as income, because they had been reflected in the valuation of the stock for Estate tax purposes. On audit of the Income tax returns of these individuals, the Commissioner assessed deficiencies upon the ground that all dividends received by them from Dispatch, in the period 1955/1958 inclusive, constituted taxable income to the individual plaintiffs for the respective years in which received. Payment of the assessed deficiencies was made, and timely claims for refund were filed (on May 10, 1961). Upon rejection of these claims for refund, this action was timely instituted by the individual Income taxpayers. The disallowance of these refund claims was based upon the grounds that (1) the preferred stock dividend arrears annually received by the plaintiff Income taxpayers were taxable dividends, and did not constitute a distribution of the corpus of testator's estate; (2) the payments did not come within the purview of Section 691(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 691(a) as 'income in respect of decedent'; (3) the payments did not come within the purview of Sections 1311 to 1315 of the Internal Revenue Code of 1954, 26 U.S.C. §§ 1311-1315, dealing with correction of error in Federal tax determinations.
At the time of testator's death, he owned no Dispatch stock. The 1,282 shares of Dispatch preferred stock were owned by the Boyle Company, all of the stock of which the testator owned. Moreover, the Boyle Company, on the date of testator's death, neither owned nor had any right to the 20 1/2 years of then unpaid cumulative dividends on Dispatch preferred stock because the Board of Directors of Dispatch had not declared any such dividends, nor committed itself to do so. The Internal Revenue Code of 1954, 26 U.S.C. § 316 defines 'dividend' as 'any distribution of property made by a corporation to its shareholders * * * out of its earnings and profits accumulated after February 28, 1913, or * * * out of its earnings and profits of the taxable year * * * without regard to the amount of the earnings and profits at the time the distribution was made.' See Avery v. C.I.R., 1934, 292 U.S. 210, 54 S. Ct. 674, 78 L. Ed. 1216; Tar Products Corp. v. Commissioner of Internal Revenue, 3 Cir.1942, 130 F.2d 866, 143 A.L.R. 593; C.I.R. v. American Light & Traction Co., 7 Cir.1946, 156 F.2d 398, 167 A.L.R. 300.
The Supreme Court, in Estate of Putnam v. Commissioner, 1945, 324 U.S. 393, at p. 400, 65 S. Ct. 811, at p. 814-815, 89 L. Ed. 1023, had this to say, respecting a stockholder's interest in stock earnings:
'Stock does not earn an identifiable separate taxable share of corporate profits for its owner before the corporation makes those profits available to the stockholder. It is not the earnings of a corporation but the separation of those earnings by a completed dividend which assigns a part of those earnings to a stockholder. The price a stockholder would receive on a stock sale after declaration and before the record date would reflect corporate earnings but would not reflect the declaration or non-declaration of a dividend. As the same ...