Page:The Green Bag (1889–1914), Volume 24.pdf/34

 Taxation of Guaranteed Stock

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courts have uniformly insisted that there is an essential distinction between pro prietary duties and contractual obliga tions, and that it is important to pre serve this in denning the rights of stock holders.18 Preferred stock, it is submitted, con fers upon the holder rights differing only in degree, but not in nature, from the rights conferred by ownership of common stock. These rights of the holder, though implying certain duties on the part of the corporation, should not properly be regarded as the comple ment of an obligation of the corporation, in the sense of which that term is ordi narily used, any more than the duties of a trustee toward his beneficiary should be described as contractual. The Massachusetts court has been more careful than those of most other states to preserve this essential distinction.19 But, in any event, whether stock ownership involves a contractual obli gation or not, it has never been con tended that it does not involve a proprietary interest, and most of the rights of stockholders must be pro prietary in nature. Any contractual obli gation, therefore, is distinct from and additional to this proprietary right. And while, as has been previously shown, it is only the proprietary right which is exempt from taxation, the contractual obligation is the only one which can be guaranteed. Moreover, the guar-

anty in this case is necessarily greater in scope than the stock obligation, and therefore is an independent obligation and not properly a guaranty, and there fore is taxable.20 The Holding Company is not bound to pay dividends in all events, but to pay them if earned. The holder of the certificate has no right to bring an action at law against the cor poration for failure to pay dividends, even if he claims they were earned,21 though injunctions have been issued to prevent the payment of dividends on common shares until accrued preferred dividends were paid.22 When earnings properly applicable to preferred divi dends have been withheld, some Courts have granted relief on the theory of specific performance of an implied col lateral agreement,23 but generally the amount of working capital to be kept on hand is left to the discretion of the directors if they act in good faith toward the preferred shareholders.24 If the right of the preferred shareholder is a proprietary interest and not an obligation, or if his contract is not enforcible,25 or if the obligation of the so-called "guarantor" is greater in ex tent than that of the Holding Company,20 then the obligation of the New Haven Railroad is not properly a guaranty. In determining that a defendant's agree ment to indemnify one who had loaned money to his minor son was not a guar anty within the statute of frauds, Shaw,

"Chaffee v. Railroad, 65 Vt. 110. 129. State v. Thompson. 16 S. C. 524, 528. Crater v. Cavanaugh. 40 Ind. App. 340, 346. Bomblack v. Clipper Co., 148 Ill. App. 618. 621. "Williston v. Michigan Company, supra.

Thayer v. Wild, 107 Mass. 449, 452. "Field v. Lamson & Goodnow Co., 162 Mass. 388. 396.

"Stock in a corporation is not merely property. It also creates a personal relation analogous other wise than technically to a partnership. . . . We perceive no difficulty in the case, except the some what academic question whether the by-law accepted by Holmes when he accepted the certificate operates only by way of contract, and should be pledged as such, or whether it affects the character of the property itself as we have suggested." Barrett v. King, 181 Mass. 476, 479.

"Boardman v. Railroad, 84 N. Y. 157. 173.

"Hazelton v. R. R., 79 Me. 411, 416. And in one case an action at law was allowed. Bates v. Androscoggin Co., 49 Me. 491. 504. "Field v. Lamson & Goodnow Co., 162 Mass. 388' 396. If. Y., tic., R. R. v. Nickals, 119 U. S. 296. 304. Belfast Company v. Belfast, 77 Me. 446. 64. "Chopin v. Latham, 20 Pick. 467. 471. See also Stratum v. Hill, 134 Mass. 27, 30. See Merritt v. Hass, 129 N. W. 379 (Minn.)