
    Phila. Trust, Safe Deposit and Ins. Co.’s Appeal. [Turpin’s Estate.]
    Where a corporation distributes its 'surplus profits among the stockholders by 'issuing scrip or bonds convertible into stock, such scrip or bonds constitute dividends under another form, and, where stock of such corporation is held by a ■trust estate, the scrip or bonds, thus distributed, are income and not principal, and consequently belong to the life-tenant.
    
    Feb, 1, 1889.
    Appeal, No. 95, Jan. T. 1889, to review a decree .of O. C. Phila. Co., dismissing exceptions to adjudication of trust .account, at April T. 1881, No. 391.
    The facts appear in the adjudication of the auditing judge, as follows, .by Febguson, J.:
    “ The decedent died June 22, 1880, possessed, -inter alia,' of forty-three shares of the capital stock of the Elgin National Watch Co. of the par value of $1000 each. This stock was appraised in the inventory filed at $36,550, and, in the distribution of the estate, a year later, was valued at $53,750. These same forty-three shares aré to-day worth $86,000.
    
      “ By his will, the deceased left three-fourths of his estate in trust for the use of his three children, the income to them for life, with remainder in fee to their heirs, under the intestate laws, etc. In the distribution of his estate, thirty-three of the said forty-threé shares of stock were transferred to the trustee, under his will, eleven of them being the proportion of his daughter Emma S. Turpin and held by the trustee for her under the trust in the said will.
    
      “ Subsequently to the death of the testator, the affairs of this company became very prosperous. Besides paying ten per cent, cash dividends per annum to its stockholders, which this year has been increased to twenty per cent., it has declared and issued to them several stock dividends, to wit, thirteen per cent, in 1883, one hundred per cent, in 1884, and fifty per cent, in scrip in 1887. The said stock, scrip and cash dividends have not depreciated the real or market value of the original fortyffhree shares belonging to the estate. On the contrary their value has increased from $36,550 to $86,000. The question now raised is, whether these stock and scrip dividends are to be paid to the cestui que trust as income, or whether they are to be held by the trustee as a part of the corpus of the estate.
    “ The answer to this question depends altogether upon the question whether they were actual earnings of the corporation; because, if they were earnings, the form in which the dividend is declared, whether in cash, stock, or scrip, can make no difference ';- all are alike income of the principal, and, as such, belong to the legatee of the income or profits for life. Earp’s Ap.; Moss’s Ap. . . .
    “ The auditing judge has no difficulty in finding from the evidence submitted in this case that all three of the dividends above referred to were out of the earnings of the corporation, and upori this question there does not seem to be any controversy. . . .
    “It was contended that the scrip dividend was in the. form of an obligation or debt of the corporation to the persons holding the same; and that, as it would be liable to its creditors, before its stockholders, the cestui que trust taking this dividend as income was in a better position than the trustee. In case of the bankruptcy of the company, the stockholders might not get anything, while those who held its obligations might be paid in whole or in part. While such a contingency as that suggested might possibly happen, yet it is not very probable, under the circumstances of this particular case.
    “ This scrip dividend is held by the stockholders of the corporation. It was made out of the earnings to give them something to represent their interest in those earnings, which had accumulated and become a part of the surplus capital of the company. It would have been declared in stock,“but the company had reached its charter limit to the issue of more stock; so it declared this dividend in scrip, with the right to redeem it with stock when the necessary authority to increase its capital is obtained. There can be no danger of foreclosure, as the scrip can be redeemed by stock at any time when the corporation takes the necessary steps to increase its capital. It is practically a stock dividend, and the auditing judge, so regarding it, does not think that it is in any other or different position with relation to the parties interested in it than the other two dividends which were paid in stock. The auditing judge finds that the dividend of May 1st, 1882, of thirteen per cent, in stock, the dividend of May 1st, 1884, of one hundred- per cent, in stock, and the dividend' of fifty per cent., May 1st, 1887, in scrip, are income of the said trust estate, and -as such belong to the said Emma 8. Turpin, and they are awarded to her accordingly.”
    The appellant filed exceptions, alleging, inter alia, that-the auditing judge erred,- 3, in not reporting that this scrip represented an indebtedness due by said company on which a claim could be maintained against said company which’ would have priority over the stockholders, the said scrip being, as it is, in the nature of a coupon bond'; 4, in reporting that this scrip can be at any time converted into the stock of the company; it is admitted that no such conversion can be made until the company obtains the requisite statutory Authority to increase its stock; and it is entirely uncertain whether such authority can ever be obtained; 5, in reporting that this scrip represents income, and that the life tenant is entitled thereto; 6, in not reporting that this' stock and scrip is capital; Y, in not confirming the account as stated.
    Exceptions dismissed in an opinion, reported in 5 Pa. C. C. P. 288, by Penrose, J.
    
      The assignments of error specified the action of the court, 1-5, in dismissing the appellant’s exceptions, quoting them; 6, in directing the appellant to transfer the scrip to the life-tenant; and, Y, in confirming the adjudication.
    
      R. L. Ashhurst, for appellant.
    As to the first dividend, there is nothing to show that it was made from the surplus accumulated during the life of the testator, that is, prior to June, 1880, or from the earnings after that date. If from the earlier fund, it would be capital. Biddle’s Ap., 99 Pa. 525 ; Vinton’s Ap., Ib. 434.
    As to the other dividends : according to the English cases, the action of the corporation is everything, and the earlier cases adopted a rule that the only thing to be considered is whether the dividends are declared as ordinary and usual dividends, or as extraordinary and special distributions or bonuses. Brander v. Brander, 4 Ves. Jr. 801; Paris v. Paris, 10 Ves. Jr. 185; Barclay v. Wainewright, 14 Ves. Jr. 66; Barton’s Trust, L. R. 5 Eq. 243: Minot v. Paine, 99 Mass. 101.
    The rule, as established in Pennsylvania, is that the two elements to be taken into consideration ai’e the action of the corporation and the actual fact as to whether the earnings have accrued or not during the period covered by the life-tenancy. Under Moss’ Ap., 83 Pa. 264, nothing can be regarded as profits until it shall have been declared to be so by the corporation itself, acting by its board of managers. Here the thing undertaken to be distributed is neither stock nor cash, but indebtedness. The corporation has elected to keep its capital in its business. Almost the exact question has been ruled in favor of the appellant’s position in Clarkson v. Clarkson, 18 Barb. 646 and Gilkey v. Paine, Me., 14 Atl. R. 205.
    
      John Thompson Spence, for appellee.
    This case is ruled by Earp’s Ap., 28 Pa. 368, and Moss’ Ap., 83 Pa. 264. These eases make no distinction between stock and scrip dividends. A dividend, in the form of debenture bonds, but based upon actual surplus earnings, is none the less a distribution of profits.
    The present rule, in this and most of the States, is to treat all dividends, as income, which represent bona fide earnings or profits accruing during the life estate, providing the corpus is maintained intact.
    
      The case of Barclay v. Wainewright, supra, virtually overruled Brandner v. Brandner, supra, and Paris v. Paris, supra. In Clark-son v. Clarkson, supra, the court say that these cases are not now regarded as sound law in England and will never be followed in this country. The latter case favors the appellee. The bonds there were neither interest, dividend, nor proceeds, but took the place of old wiped out stock, which belonged to the corpus of the trust estate. In Barton’s Trust, supra, the company did not declare a dividend. So, also, in Gilkey v. Paine, supra, the transaction was merely a change in the form of a portion of the corpus. Miller v. Guerrand, 67 Ga. 284, as to debenture bonds, is on all fours with the case in hand.
    Feb. 11, 1889.
   Per Curiam,

The single question presented by this record is whether the stock and scrip dividends declared by the Elgin National Watch Company are to be distributed to the tenants-for life as profits or retained by the trustee as a portion of the capital or corpus of the trust estate. It is not denied that, under the will of Edward A. Turpin, the life-tenants are entitled to the income or profits of this particular stock, nor do I understand it to be disputed that the said dividends were declared out of profits earned by the company. Under these circumstances, the case would appear to come fairly within the rule laid down in Earp’s Ap., 28 Pa. 368, and Moss’ Ap., 83 lb. 264. It was said, in the case last cited: “ Where-a corporation, having actually made profits, proceeds to distribute-such profits among the stockholders, the tenant for life would be-entitled to receive them, and this without regard to the form of the transaction. Equity, which disregards form and grasps the substance, would award the thing distributed, whether stock or moneys, to whomsoever was entitled to the profits. It was urged, however, that the present case does not come within this rule for the reason that the scrip is in the form of an obligation, which might in the-future affect the value of the stock, and perhaps destroy it, and thus-annihilate the capital of the trust fund. I do not understand that the form in which the dividend is declared has any bearing upon the question of the title to such dividend. The scrip dividend is-convertible into stock as soon as the necessary authority to increase-the capital stock of the company can bé obtained, and, had such authority existed at the time, the dividend would doubtless have-been declared in stock. Every dividend, when declared, becomes a liability of the company as soon as it is payable. In this case, the-company distributes scrip and retains the money, or profits earned, which represents it. When converted into stock, if it ever should be, the issue of the new stock will not necessarily impair the value of the old, for the reason that it represents money, not water, and by this increase of cash capital enables the company further to extend its operations.

The decree is affirmed and the appeal dismissed at the costs of the appellants. J. C. S.  