
    The People of the State of New York ex rel. The Mercantile Safe Deposit Company, Relator, v. William Sohmer, as Comptroller of the State of New York, Respondent.
    Third Department,
    September 10, 1913.
    Tax—franchise tax—dividend — capital employed “ during the preceding year ” — Tax Law, section 182, construed.
    Upon certiorari to review the proceedings of the State Comptroller in determining a franchise tax, it appeared that the relator, immediately after its incorporation, with an authorized capital stock of $500,000, only $300,000 of which was ever issued, purchased for the sum of $200,000 the good will, business and lease of another company, and at once engaged in the prosecution of such business; that the remaining $100,000 received from the sale of its capital stock was and still is invested in dividend-paying securities; that the rental value of premises occupied by the relator having increased in value, a suit was brought against it for the cancellation of the lease, which was settled about May 1, 1910, by the relator surrendering the lease and the payment to it of $1,050,000 and the giving of a new lease; that May 3, 1910, the relator divided pro rata among the holders of its $300,000 of capital stock said $1,050,000, and in July, 1910, reduced its capital stock to $100,000, and that the State Comptroller in fixing the amount of the franchise tax, under section 182 of the Tax Law, deducted from the said $1,050,000 the sum of $200,000 as representing the invested capital of the relator, and treated the division of the $1,050,000 as a division of capital or assets, and treated the balance of $850,000, together with the sum of $38,250, the amount of prior dividends, as the aggregate of the dividends made or declared by the relator during the year ending October 31, 1910, and assessed the same as the dividends paid upon $100,000 of capital stock.
    
      Held, that the said $850,000 constituted a dividend made or declared within the meaning of section 182 of the Tax Law;
    That the Comptroller erred in assessing the tax upon the sum of $100,000 as par value of the capital stock during the year ending October 31, 1910. Such tax should have been computed upon the basis of $300,000.
    The provision of section 182 of the Tax Law, requiring payment by a corporation of an annual tax “to be computed upon the basis of the amount of its capital stock employed during the preceding year within this State” should not be construed as requiring all such stock to be employed during the entire year.
    Certiorari issued out of the Supreme Court and attested on the 31st day of August, 1912, directed to William Sohmer, 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 determining the franchise tax against the relator for the year ending October 31, 1910.
    
      Alexander & Green [Allan McCulloh and Campbell E. Locke of counsel], for the relator.
    
      Thomas Carmody, Attorney-General [Franklin Kennedy, Deputy Attorney-General, of counsel], for the respondent.
   Lyon, J.:

The relator was incorporated in December, 1875, under the laws of this State with an authorized capital stock of $500,000, only $300,000 of which was ever issued. Immediately following its incorporation it purchased from, the Mercantile Trust Company, which was carrying on the business of safekeeping and guaranteeing personal property in the building of the Equitable Life Assurance Society at No. 120 Broadway in the city of New York, for the sum of $200,000, the good will, business and lease of that company, and itself at once engaged in the prosecution of such business. The remaining $100,000 received from the sale of its capital stock the relator invested in dividend-paying securities and the same is still so invested. In January, 1883, the relator and the Equitable Society entered into a leasehold agreement which was the subject of later modifications, and which in October, 1900, was renewed and extended for the period of fifty years from January 1, 1901, with the privilege to the relator of a further extension of fifty years.

During the months of January, April and May, 1910, the relator paid to its stockholders dividends aggregating $38,250, or 12% per cent upon its issued capital stock. ■ •

As one of the results of the insurance investigation of 1905, it appeared that the relator was paying but $23,000 yearly rental for premises the rental value of which was $95,000 per annum, and accordingly an action was brought by the new management of the Equitable Society to obtain a cancellation of this lease. The suit was settled on or about May 1, 1910, by the relator surrendering the lease and the Equitable Society paying to the relator the sum of $1,050,000 and giving a new lease for the term of twenty-five years with the privilege to either party, at any time, of terminating the lease by giving to the other party six months’ notice of its desire so to do. May 2, 1910, the relator divided pro rata among its $300,000 holders of stock said $1,050,000 and in July, 1910, reduced its capital stock to $100,000. Ooncededly the capital stock of relator has at all times been worth at least par.

In fixing the amount of the annual franchise tax to be paid by the relator under the Tax Law (Consol. Laws, chap. 60 [Laws of 1909, chap. 62], § 182) the State Comptroller deducted from the said $1,050,000 the sum of $200,000 as representing the capital of the relator invested in its lease, good will and business, being the sum at which the same had been carried as an asset upon the books of the company, and treated the division of the same as a division of capital or assets, and treated the balance of $850,000 together with the sum of $38,250, the amount of the prior dividends declared by the relator as before stated, or the total of $888,250, as the aggre gate of the dividends made or declared by the relator during the year ending October 31, 1910, and assessed the same as the dividehd paid upon $100,000 of capital stock or at the rate of 888% per cent, and fixed the tax to be paid by relator at $22,206.25.

The Comptroller having refused to revise and readjust said assessment, the relator has brought the matter before us for review.

The relator in its petition for the writ of certiorari complains that the Comptroller erred in two particulars: 1. In treating $850,000 of the said $1,050,000 as a dividend made or declared within the meaning of section 182 of the Tax Law, and 2. In assessing the tax upon the sum of $100,000 as being the par value of the capital stock of the petitioner during the year ending October 31, 1910.

The first ground of complaint does not seem to be well founded. The sum of $850,000 was no part of the capital but was the product of capital. It was derived from an increase in value of the assets of the company. It represented the profit of relator upon its lease, and its division among the stockholders constituted a dividend from surplus profits. (Roberts v. Roberts-Wicks Co., 184 N. Y. 257; Lowry v. Farmers’ Loan & Trust Co., 172 id. 137; People ex rel. Pullman Co. v. Glynn, 130 App. Div. 332; affd., 198 N. Y. 605; Commonwealth v. Western Land & Improvement Co., 156 Penn. St. 455.)

As to the second ground of complaint we think the tax should have been computed upon the basis of $300,000, as the amount of the capital stock of relator employed during the preceding year. That sum was the amount of the relator’s capital stock from November 1, 1909, to July 7, 1910, a period of eight months and six days, and $100,000 was the amount of relator’s capital stock from July 7, 1910, to October 31, 1910, a period of three months and twenty-four days. The dividends for the year, aggregating $888,250, were declared and paid before the reduction of the capital stock to $100,000 and constituted dividends of 296XV per cent to each holder of the $300,000 of capital stock. The statute requiring the payment to the State Treasurer, annually in advance of an annual tax “ to be computed upon the basis of the amount of its capital stock, employed during the preceding year within this State, and upon each dollar of such amount,” should not he construed as requiring that all such capital stock must be employed during the entire year in order to furnish the basis for the computation of the tax. The expression “during the preceding year ” was evidently used in the sense of “ within the preceding year.” Such seems to have been the construction given to it by the court in People ex rel. N. Y. C. & H. R. R. R. Co. v. Gaus (200 N. Y. 328), in which it was held that the franchise tax should be computed upon the basis of the whole outstanding stock at the end of the tax year, and as a six per cent stock, although about twenty per cent of the stock had been outstanding but ten months and had paid a less dividend than six per cent, hut at that rate per annum.

In the proceeding at bar the Comptroller assessed the dividends which had been paid to the holders of $300,000 of stock, aggregating 296XV per centum of the par value of the stock, at three times that per centum, or at 888% per centum, upon one-third such amount of capital stock, claiming that under the case of People ex rel. N. Y. C. & H. R. R. R. Co. v. Gaus (supra) the amount of dividends paid must be assessed upon the amount of stock outstanding October 31, 1910, as the Comptroller had to assume that the amount of the then outstanding stock was the amount which would be employed the succeeding year. While the amount of tax to be paid by the relator would be the same in each case, we think the Gaus case cannot be considered an authority for the proposition contended for. The question was not there up for determination, and in that case the capital stock of the relator was as large on October thirty-first as at any time during that tax year. We think the statute, did not necessarily contemplate computing the tax upon the amount' of the capital stock outstanding on October thirty-first. Such practice might give rise to abuses upon the part of corporations. The statute requires that the computation be upon the basis of the amount of the capital stock • employed during the preceding year within this State and upon each dollar of this amount, and that the tax shall be at the rate of one-fourth of a mill for each one per centum of dividends made or declared upon the par value of the capital stock during the year. As all the dividends were declared by the relator upon the whole $300,000 of stock and aggregated 296tV per centum thereof, we think that was the basis which should have been adopted by the Comptroller in making the computation.

In its brief the relator suggests that the value of the lease purchased by it from the Mercantile Trust Company should also be deducted from the sum of $1,050,000 in case the court should hold that such sum, less the price paid for the good will, business and lease, constituted profits. The value of the lease so purchased by relator in 1875 was not attempted to be shown upon the hearing, and there is nothing in the evidence from which its value can be ascertained.

Furthermore, the president of the relator testified that relator’s original lease with the Equitable was obtained by it in 1876, which would indicate that the lease purchased by it from the Mercantile Trust Company was in force only to the time of procuring its original lease in 1876. But, upon the other hand, relator received as consideration for the surrender of its lease not only the sum of $1,050,000, but also a lease for twenty-five years, the value of which the Comptroller did not take into consideration in fixing the amount of franchise tax. Possibly the value of each was difficult of determination, or it may have been thought advisable to offset one against the other. In any event, no evidence whatever was offered as to the value of either lease, and both were entirely disregarded by both parties, and hence are not to be considered by us upon this appeal.

We, therefore, conclude that the determination of the Comptroller should be confirmed.

All concurred.

Determination of the Comptroller unanimously confirmed, with fifty dollars costs and disbursements.  