
    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]
    
      On the Proofs
    
    
      Income taw; 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 Sgtterlee for the plaintiffs. Mr. Ediward A. Blames was on the briefs.
    
      Mr. Alexander H. MeOormAch, 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 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.]
    IY. 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 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.
    
      “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 after-wards 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:
    
      State oe Michigan — In the Circuit Court eor the County oe 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 casq 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. Kackham, 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 one-half 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 durjng the fiscal year ending July 81, 1917, which amount so to be declared as a dividend is nineteen million two hundred seventy-five thousand three hundred eighty-five and A&r dollars ($19,275,385.96).
    Second. The defendant, Ford Motor Company, shall pay the said sum of nineteen million two hundred seventy-five thousand three hundred eighty-five and ¶-g- dollars ($19,-275,385.96) to the stockholders of sa,id defendant, Ford Motor Company, pro rata to the number of shares of stock held by each, as a. special dividend out of the accumulated cash surplus on hand of said defendant, Ford Motor Company, at the close of the fiscal year ending July 31, 1916, which sum shall be paid at the times and in the manner hereinafter set forth and required.
    Third. The owning, holding, or operating by the defendant, Ford Motor Company, of and the using or appropriating or incurring obligations which might require or necessitate the using or appropriating of any funds or other property of said defendant, Ford Motor Company, for a smelting plant or blast furnace or furnaces of the kind or character which the proofs adduced herein show to be contemplated and now in course of construction on or near the Biver Bouge, and of any lands, buildings, machinery, or equipment therefor, and other incident thereof, is without authority of law and is permanently and absolutely restrained and enjoined.
    Fourth. The increase of the fixed capital assets of the defendant, Ford Motor Company, beyond those at the date of the entry hereof owned and held by the said corporation is without authority of law and is permanently and absolutely restrained and enjoined. The date of the entry hereof is taken, instead of the- date of the objections raised by pla,in-tiffs to any such increase, at the suggestion of plaintiffs, so that said corporation shall not be in anywise embarrassed through the wrongful acts of the individual defendants. The said fixed capital assets so owned and held at the date of the entry hereof shall be deemed to include such further investment as may be necessary to complete or to complement the same so as to be properly usable ,in the conduct of the regular business of the said corporation. The said fixed capital assets shall be deemed to be exclusive of those of the kind or character contemplated in the next preceding paragraph hereof.
    The holding of liquid assets (including accumulations of and from the earnings and profits of regular business operations from time to time) by the defendant, Ford Motor Company, ,in excess of such as may be reasonably required in the proper conduct and carrying on of the business and operations of said corporation in connection with and by the use of the fixed capital assets, limited as aforesaid, is- likewise without authority of law and is permanently and absolutely restrained and enjoined, and sa,id defendant corporation and its board of directors, the individual defendants herein and their respective successors in office, are directed and commanded to declare and distribute as dividends to the stockholders any such excess which may now exist or may accrue from time to time hereafter. The term “ liquid assets ” as used herein shall be deemed to include all assets other than fixed capital assets within the meaning generally understood in business of said last-mentioned term.
    The intent and purpose of this subdivision “ fourth ” of this decree is to fix a maximum limit for the aggregate assets of the defendant, Ford Motor Company, and if it be practicable to increase either class (fixed or liquid) of assets out of the other without affecting the aggregate, such increase shall be proper — the limit in this subdivision stated for each class haying been adopted as the most convenient manner of stating the limit of the aggregate.
    Fifth. The defendants, Henry Ford, Horace H. Rack-ham, and Frank L. Klingensmith, shall, within thirty days after the entry hereof, come to a full and true accounting of and for all sums used since the filing of the bill of complaint herein in and about the establishing of a smelting plant and the acquiring of lands, constructing of buildings, purchasing of machinery and equipment therefor, and any other incident thereof. The term “ sums used ” shall be deemed to include obligations or liabilities incurred which have not in fact been paid. Within thirty days after said accounting shall have been completed, said individual defendants in this paragraph named shall pay to the corporate defendant, Ford Motor. Company, in pursuance of the obligation of the undertaking executed by said individual defendants and filed in this cause on January 6,1917, the amount by such accounting found and determined to have been in fact paid out in and about the work aforesaid. Said individual defendants shall likewise pay all sums required to be paid on or in pursuance of any obligation or liability incurred as aforesaid as and when the same shall become due and payable, such payment to be made either to the corporate defendant or to the lawful holder of such obligation or liability and the receipt therefor filed with the corporate defendant or, in lieu of such payment, shall procure the discharge or release of said corporate defendant from all such obligation or liability. When .the said individual defendants shall have repaid to said defendant, Ford Motor Company, all sums in fact paid out for the purposes aforesaid, including any sums so. paid_ before the filing of the bill of complaint herein, and shall’ have secured the discharge or. release of said corporate defendant of and from all obligations and liabilities incurred as aforesaid, said corporate defendant shall make and deliver to said individual defendants good and sufficient instruments of conveyance and transfer, but without warranty, of all property of the kind and character in this paragraph mentioned or referred to.
    Sixth. The said- dividends so to be declared and paid shall be paid as follows: Five million dollars ($5,000,000) within thirty days after the date of entry hereof; the amount found due upon the accounting in the next preceding paragraph hereof provided for, forthwith, upon payment of such amount to said corporate defendant, as by said paragraph required; one-half of the balance on or before sixty days from the date of entry hereof, and the remainder on or before ninety days from the date of entry hereof.
    Seventh. Jurisdiction is retained by this court in this cause to be exercised on the petition or other application of any parties to this cause or interested in the subject of the controversy herein to make more definite and certain the meaning and intent of any of the provisions hereof; to modify any of the provisions hereof if found to be insufficient to accomplish the purpose intended or oppressive of the rights or interests of any such party.
    Eighth. The plaintiff shall recover of and from the individual answering defendants, Henry Ford, Edsel B. Ford, Frank L. Klingensmith, and Horace H. Backham, their costs to be taxed.
    Ninth. Plaintiffs shall have execution and all other writs and processes which may be requisite or proper for the enforement of any of the provisions hereof.
    Tenth. If an appeal shall be prosecuted herefrom, with stay of proceedings, then if payment of said dividends or any other act required hereby to be done shall be affirmed, unless the supreme court shall otherwise direct, all payments and other acts required by this decree to be made or done within a certain time after the entry hereof shall be made and done within the same number of days after the entry of the decree in the supreme court.
    VII. Before execution could issue upon said, decree the Ford Motor Company appealed the case to the Supreme Court of the State of Michigan, and filed a bond which had the legal effect to “ stay proceedings in said cause.”
    On December 2?, 1917, in said circuit court, the return was made to the supreme court of the record of this case on appeal, and thereafter no proceedings were had in said case in said circuit court except that the decree of the supreme court and the record therein were remitted to and filed in said circuit court on June 16, 1919.
    [Said case thereafter came on for hearing in the Supreme Court of Michigan upon said appeal, and on February 7, 1919, said supreme court rendered a decision in which it found:
    
      “When plaintiffs made their complaint and demand for further dividends, the Ford Motor Company had concluded its most prosperous year of business. The demand for its cars at the price of the preceding year continued. It could make and could market in the year beginning August 1,1916, more than 500,000 cars. Sales of parts and repairs would necessarily increase. The cost of material^ was likely to advance, and perhaps the price of labor; but it reasonably might have expected a profit for the year of upwards of $60,000,000. It had assets of more than $132,000,000, a surplus of almost $112,000,000, and its cash on hand and municipal bonds were nearly $54,000,000. Its total liabilities, including capital stock, was a little over $20,000,000. It had declared no special dividend during the business year except the October, 1915, dividend. It had been the practice, under similar circumstances, to declare larger dividends. Considering only these facts, a refusal to declare and pay further dividends appears to be not an exercise of discretion on the part of the directors, but an arbitrary refusal to do what the circumstances required to be done.
    “ Defendants say, and it is true, that a considerable ca,sh balance must be at all times carried by such a concern. But, as has been stated, there was a large daily, weekly, monthly receipt of cash. The output was practically continuous and was continuously, and within a few days turned into cash. Moreover, the contemplated expenditures were not to be immediately made. The large /sum appropriated for the smelter plant was payable over a considerable period of time. So that without going further it would appear that, accepting and approving the plan of the directors, it was their duty to distribute on or near the 1st of August, 1916, a very large sum of money to stockholders.
    
      % # * # ^
    “ The decree of the court below fixing and determining the specific amount to be distributed to stockholders is affirmed. In other respects, except a,s to the allowance of costs, the said decree is reversed. Plaintiffs will recover interest at 5 per cent per annum upon their proportional share of said dividend from the date of the decree of the lower court.”
    In a concurring opinion Moore, J., held:
    “ I agree with what is said by Justice Ostrander upon the subject of capitalization. I agree with what he says a,s to the smelting enterprise on the River Rogue. I do not agree with all that is said by him in his discussion of the question of dividends. I do’not agree with him in his conclusion that the accumulation of so large a surplus establishes the fact that there has been an arbitrary refusal to distribute funds that ought to have been distributed to the stockholders as dividends. I therefore agree with the conclusion reached by him upon that phase of the case.”]
    VIII. On June 10, 1919, said Supreme Court of the State of Michigan rendered its decree in said caupe as follows:
    “ John F. Dodge and Horace E. Dodge, plaintiffs, 28241, v. Ford Motor Company, a Michigan corporation, Henry Ford, Eclsel B. Ford, Horace H. Backham, and Frank L. Klingensmith, defendants and appellants, James Couzens, defendant, not appealing.
    “ This cause having been brought to this court by appeal of the defendants from the circuit court for the county of Wayne, in chancery, and having been argued by counsel, and due deliberation had thereon, 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, it ip ordered, adjusted, and decreed by this court as follows:
    “i. The decree of the circuit court for the county of Wayne, in chancery, here appealed from, is affirmed in so far as the terms and provisions thereof are incorporated herein, but in all other respects and particulars the said decree is reversed, vacated, and held for naught.
    “ii. The defendants, Henry Ford, Edsel B. Ford, Frank L. Klingensmith, Horace H. Backham, 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 one-half of, and payable out of the accumulated cash surplus of said defendant, Ford Motoi 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 seventy-five thousand three hundred eighty-five and dollars ($19,275,-385.96).
    “ iii. 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, Fold Motor Company, pro rata to the number of shares of stock held by each, as a special dividend out of the accumulated cash surplus on band of said defendant, Ford Motor Company, at the close of the fiscal' year ending July .31, 1916, which sum shall be paid within thirty days from the date of the entry hereof.
    “ iv. Upon the amount of such dividend payable to the plaintiffs there shall be paid to the plaintiffs, at the time of the payment thereof, interest at the rate ox five per cent (5%) per1 annum from the fifth day of December, 1917 — the date of the entry of the decree in this cause in the circuit court — to the date of such payment.
    
      “ v. The plaintiffs shall recover of and from the Ford Motor Company and the individual answering defendants, Henry Ford, Edsel B. Ford, Frank L. Klingensmith, and Horace H. Eackham, their costs of the circuit court to be taxed. The appellants shall recover of and from plaintiffs two-thirds of their costs of this court to be taxed.
    “ vi. Plaintiffs shall have execution for the enforcement of the provisions hereof.”
    IX. On July 10, 1919, at a meeting of the board of directors of the Ford Motor Company, the following action was taken:
    “ Upon motion being supported, it was unanimously voted that the following resolution be adopted :
    “Eesolved, that pursuant to and in compliance with the terms of the decree of the Supreme Court of Michigan in the case of John F. Dodge et al. v. Ford Motor Company et ah, a dividend of $19,275,385.96 be, and is hereby declared as of December 5, 1917, and that the same be paid forthwith to the stockholders of record on this date in proportion to their several holdings of said capital stock, and that the same be paid out of the accumulated cash surplus on hand August 1, 1916, together with an additional sum to each stockholder, representing interest at the rate of five per centum (5%) per annum from the said 5th day of December, 1917, on the amount receivable by them as a dividend, pursuant to the adoption of this Resolution, to the date of payment and distribution of this dividend.”
    X. In accordance with the decree of the court and said resolution, said Ford Motor Company, on July 10,1919, paid to said John F. Dodge his proportionate share of said sum of $19,275,385.96, such share being $963,769.29, and in addition paid to him interest thereon from the fifth day of December, 1917.
    XI. Said John F. Dodge did not include in his original income-tax return for the year 1916 said distribution of $963,769.29, as referred to in Finding X above, or any part thereof, but in the spring of 1920, contemporaneously with the filing of his return for 1919, an amended return for the year 1916 was filed by a special administratrix of his estate, he being then dead and no executor or general administrator of his estate having been appointed, in which said sum of $963,769.29 was accounted for as income of that year; and upon the filing of such amended return said special admin-istratrix paid an additional income tax of $92,888.65, being the difference between the tax paid upon his original return for the year 1916 and the amount called for by such amended return for 1916. To said amended return for 1916 was attached a statement of which the following is a copy:
    “ Statement accompanying amended return for 1916
    
    “ Throughout the year 1916 John F. Dodge was the owner of five per cent of the capital stock of the Ford Motor Company, a Michigan corporation. The net earnings of the Ford Motor Company for the fiscal year ending July 31, 1916, were approximately $60,000,000.00, and after deducting dividends actually disbursed exceeded by many millions of dollars the amount which could be lawfully retained for use in the business of the company. The shareholders accordingly became entitled to the distribution of such excess shortly after the said thirty-first day of July, 1916, and said John F. Dodge became entitled to his distributive share thereof as his separate property, although the officers and directors of said company unlawfully refused to make such distribution until compelled by the court. Notwithstanding the directors’ wrong, his share of the excess profits distributable as above described accrued to, was in effect set apart for, and became the property and income of John F'. Dodge in the fall of 1916. Until determined by the court this income was not sufficiently definite in amount to be reported in his return for 1916, and, the correct amount having since been judicially ascertained to be $963,769.29, an amended return is now filed accordingly, including such income, as well as the $186,601.44 of net income originally reported. For further facts and for further explanation and confirmation of the statements above made see Dodge v. Ford Motor Co., 204 Mich. 459; 170 N, W. 668.”
    The amount said John F. Dodge received as interest upon said sum of $963,769.29 was accounted for in the income-tax return filed by bis special administratrix for the year 1919 as income of that year.
    XII. On December 30,1920, Paul F. Meyers, Acting Commissioner of Internal Revenue, sent the following letter to the Ford Motor Company:
    “Acknowledgement is made of your letter of October 27, 1920, which is set forth below in full:
    “ ‘ In the case of Dodge vs. Ford there was entered in the lower court on December 5,1911, a decree requiring this company to distribute dividends amounting to' $19,215,385.96. The decision was affirmed by the supreme court on June 10, 1919, and a decree entered requiring payment of the dividend within thirty days with interest at the rate of 5% per annum from the date of the decree in the lower court. The dividend with interest, amounting to $1,536,749.89, was paid on July 10, 1919.
    “ ‘Will you please advise us as to whether or not the whole sum of $20,812,135.85, being the amount originally decreed by the lower court for dividends plus interest, in accordance with the decree of the supreme court, should have been treated as a dividend in our 1919 income-tax return or should the $1,536,749.89 have been treated as a payment of interest.’
    “ The decree of the trial court was a judicial determination that the defendant company owed the amount of the dividends to its stockholders, and established the relation of debtor and creditor. The affirmation of the decree by the appellate court fixed this relation as an incontrovertible fact, in recognition of which the court awarded interest on the amount of the debt during the period of its existence.
    “ The fact that the interest on the debt ran from December 5, 1917, to the date of its payment in 1919 does not require an application of the principle of accrual with respect to the payment or receipt of the interest. The fact that interest would be awarded, or the rate of the interest, was not known until the appellate court entered its decree, and accordingly there could have been no' accrual of the interest.
    “ It is held, therefore, that the interest on the amount of the dividends paid July 10, 1919, in accordance with the decree of a court of final jurisdiction, entered June 10, 1919, represented interest paid by the corporation, and is deductible from gross income for the year in which it was paid, in accordance with section 234 (a) (2) of the revenue act of 1918.”
    XIII. The Commissioner of Internal Revenue ruled that said sum of $963,769.29 was income to John F. Dodge for the year 1919, and on or shortly before the fifteenth day of April, 1921, made an additional assessment in respect thereof of $533,634.39, the difference between said tax of $92,888.65 paid on the filing of said amended return for the year 1916 and the tax in respect of said income computed at 1919 rates. A claim for abatement of said additional assessment having been denied by the Commissioner of Internal Eevenue, the collector of internal revenue for the first district of Michigan, under date of June 17, 1922, made a demand in writing for the payment of such additional assessment of $533,634.39 not later than June 27, 1922, under penalty of the addition of cost and the seizure and sale of property to collect such tax with cost if not paid on or before said June 27, 1922. Under duress of such threat of seizuré and sale, and solely to avoid such seizure and sale of property and the addition of costs, the plaintiffs on June 26, 1922, paid to said collector of internal revenue for the first district of Michigan the sum of $533,634.39, so demanded as additional income tax on account of the allocation by the Commissioner of Internal Eevenue of such income of $963,-769.29 to the year 1919, and accompanied such payment by a written letter of protest.
    XIY. The total sum of $533,634.39 so paid by the plaintiffs under protest to said collector was forthwith deposited by him in the Treasury of the United States, as in the usual course of his official business. The United States is now withholding from the plaintiffs without their consent and against their will the whole of said sum of $533,634.39.
    XV. On May 28, 1923, the plaintiffs duly filed with the Commissioner of Internal Eevenue, according to the provisions of law in that regard and the regulations of the Secretary of the Treasury established in pursuance thereof, a claim for the refund of said sum of $533,634.39 so paid under duress and protest, the ground of such claim for refund as stated therein being as follows:
    “ The tax for the refund of which this claim is filed was erroneously and illegally assessed and collected, although duly protested, in respect of a distribution of $963,769.29 made by the Ford Motor Company to John F. Dodge, the decedent, one of its stockholders. Such distribution was income of the decedent for 1916 or 1917 and was not income of the decedent for 1919. For further reasons why this application should be allowed reference is hereby made to the brief on behalf of the Dodge estate, dated November 4, 1921, heretofore filed with the committee on appeals and review of the Bureau of Internal Revenue, a copy of which accompanies this claim.”
    Prior to filing the petition herein more than six months had expired since the filing of said claim for refund and no decision thereon had been rendered by the Commissioner of Internal Revenue.
    XYI. Neither of the plaintiffs, nor any assignee from them or either of them, has pending in any other court any suit or process for or in respect to this claim against any person who, at the time when the cause of action alleged in such suit or process arose, was in respect thereto acting or professing to act, mediately or immediately, under the authority of the United States. No action has been had on this claim in Congress or by any of the departments of the United States Government,' except as herein above stated by the Bureau of Internal Revenue. The plaintiffs, as administrators with the will annexed of the estate of John F. Dodge, deceased, are and at all times since its inception have been the sole owners of said claim and solely interested therein, and became so interested at the time and upon the consideration herein above stated. No assignment or transfer of said claim or of any part thereof or interest therein has at any time been made. The plaintiffs are justly entitled to any amount found to be due from the United States as herein claimed after allowing all just credits and offsets. The plaintiffs are citizens of the United States, and each of them, as well as said John F. Dodge, has at all times borne true allegiance to the Government of the United States, and has not in any way voluntarily aided, abetted, or given encouragement to rebellion against the said Government.
    XVII. [The statutes of the State of Michigan, the rules of the supreme and circuit courts thereof, and the decisions of the supreme court thereof, to the extent that under the practice of the Court of Claims they are deemed matters of fact and not of law, are hereby incorporated by reference and may be cited and quoted from the official publications and reports in the briefs of counsel as though set out in full herein.]
    The foregoing findings have been amended in compliance with the request of the attorney for plaintiffs, the amendments being inclosed in brackets.
    The court decided that plaintiffs were not entitled to recover.
   Gjraham, Judge,

delivered the opinion of the court:

The Ford Motor Company, a Michigan corporation, had in its treasury at the close of the fiscal year ended July 31, 1916, a large cash surplus. Plaintiffs’ testator, a stockholder, demanded that a portion of this surplus be distributed as dividends in addition to the regular dividend. The directors refused the demand, and the plaintiffs brought equitable action to compel the distribution. The circuit and supreme courts of Michigan decided that the action of the directors in refusing to make the distribution was arbitrary and exceeded their discretion, and ordered them to make distribution of fifty per cent of said surplus, with interest from December 5, 1917, the date of the decree of the lower court. The directors on July 10, 1919, made the distribution as ordered, and a dividend was paid to and received by the plaintiffs’ testator on the same day.

The plaintiffs contend that while the dividend was actually received in cash on the date mentioned their testator had a right, because of the decision of the court, to receive it in 1916 or 1917; that constructively he received it in 1916 and that therefore it should be accounted for as income for that year and not 1919. The Commissioner of Internal Revenue held that it was received in and should be accounted for as income for 1919.

First let us consider whether the dividend received by plaintiffs’ testator could have been treated as income received in 1916 or 1917. It was not “ gains or profits ” actually received during those years, and therefore was not income for those years. Nor did the plaintiffs’ testator then claim that it was or return it as part of his gross income for either of those years. He could not at that time under the revenue statute applicable to 1916 and 1917 have been legally assessed for it as income received during either of those years.

Section 1211 of the revenue act of 1917, 40 Stat. 300, 338, is as follows:

“ Sec. 31 (b). Any distribution made to the shareholders or members of a corporation * * * shall constitute _ a part of the annual income of the distributee for the year in which received.”

It will be seen from the authorities hereafter cited that the word “ received ” as used in this act means actually received during the taxable year, and it must have been preceded by a distribution, i. e., action by the directors effecting a distribution.

During the years 1916 and 1917 there had been no distribution; on the contrary a suit was pending to compel it, and no dividend had then been actually or even constructively received. The whole matter was in the doubtful field of litigation. Not until the final decree of the supreme court of Michigan and the action of the directors in July, 1919. making the distribution of the dividend to the plaintiffs' testator, could the latter have been legally assessedAherefor. It was not known until the decision of the supreme court whether there would be a distribution. The court might have decided adversely to plaintiff’s petition to compel distribution. As the statute for the years mentioned applied only to cases where there had been an actual distribution and a receipt thereof during those years, no “ gains or profits ” which had beén distributed and received during subsequent years could be legally assessed as income for 1916 or 1917. This claim in 1916 and 1917, and until July, 1919, was a mere claim of a right to distribution. It would thus appear that the dividend was not income within the meaning of the applicable statute for the years 1916 and 1917, and was not “ gains or profits ” actually received during those years which could be assessed as part of the testator’s gross income. Was it then income assessable under the statute of 1919?

The interest which the plaintiffs’ testator had in 1916 as far as the undistributed surplus was concerned was the same as that of any other stockholder. Nothing had been set aside for him personally, and the stockholders, and no one of them in 1916 or 1917, had either a claim to any particular sum of money or a right to any particular portion of the assets until the directors concluded that a fund should be set aside for the purpose of paying the dividends. When paid in money or some other divisible property, and then only, does the stockholder realize “ gains or profits ” which become his own property. Eisner v. Macomber, 252 U. S. 189, 209. In Maryland Casualty Co. v. United States, 251 U. S. 342, 52 C. Cls. 201, both courts held that “ income ” used in revenue legislation has a well-settled legal meaning, and that the courts have uniformly construed it to include only what is “ received.”

What is taxed is the income “ received.” The courts have always endeavored to place a construction on the statutes which is in accord with the intent to reach the actual and not the potential income. The net income which is the measure of taxation means what has actually been received, not that which though due has not been received and its payment for some reason deferred. Mutual Benefit Life Insurance Co. v. Herold, 198 Fed. 199.

The plaintiffs ask the court to indulge in a fiction that their testator realized or received “ gains or profits ” in 1916 or 1917 when in fact he received same in 1919.

As to the testator’s interests in this fund before distribution' it should be borne in mind that the corporation must be regarded as a substantial entity separate from the stockholders, not only because such is a practical fact but because it is only by recognizing such separateness that a dividend, even when paid in money, may be regarded as the income of the stockholder. Eisner v. Macomber, supra, p. 214. Even Congress can not tax without apportionment a stockholder’s interest in accumulated earnings prior to declaration of dividend. Eisner v. Macomber, supra, p. 218, and authorities cited.

We are of opinion that the dividend involved, being actually received in the year 1919, was properly assessable as part of testator’s gross income for that year.

Section 213 (a) of the revenue act of 1918, 40 Stat. 1057, 1065, being in force in 1919, is as follows:

“The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period.”

This act is unambiguous. It makes receipts a part of the gross income “ for the taxable year in which received by the taxpayer.”

Plaintiffs can not claim that the dividend received in 1919 accrued in 1916 if testator kept his book not upon an accrued but a cash basis, as he did.

Congress was dealing with actualities, with income. It was not intended that the taxpayer should charge himself, as part of the gross income, with sums claimed but not received, and should only be allowed to deduct such sums as he had actually expended and not those for which they were claims against him. Undivided corporate profits are not income of the stockholder. It is of the essence of income that it should be realized. Potentiality is not enough. Income necessarily implies separation and realization. There is no income from an investment until there has been a separate realized gain. The profits of a corporation are its property, they belong to it. When a corporation distributes these profits in dividends then, and not till then, does the stockholder realize a gain, and this gain is income. Until there is a distribution there can be no income. It is only .income when it comes in, when it is received as a gain by the stockholder by reason of a distribution as dividends. The corporation would of course pay its income from .its profits, but there is no income to the stockholder until he receives it. Until then it is not “ gains or profits ” for which he must account under the statute as a part of his gross income.

There has been some contention that the fund in this case was impounded by the preliminary restraining order of the lower court of Michigan. That order did not set aside any fund for dividends but simply restrained the directors from proceeding with a plan to use the surplus or a part of it in building smelting works and other additions. The supreme court reversed the decree of the lower court, particularly as to the restraint put upon the directors by this order, and directed that only a portion of the fund be distributed, allowing the directors to use their discretion as to the balance.

Some stress has been laid upon the fact that the Supreme Court of Michigan in ordering a distribution fixed the same as of the 7th of December, 1917, w,ith interest from that date, being the date of the final decree of the lower court. In the view we take of this case, the fixing of the distribution date as December 7, 1917, is not important. The “ gains or profits ” were actually received in 1919, and no action of the Supreme Court of Michigan could change what we conclude to be the plain meaning of the revenue act of 1919.

The petition should be dismissed and it is so ordered.

Moss, Judge; Hat, Judge; Booth, Judge; and Campbell, Chief Justice, concur.  