fifteen shares of United States Steel Corporation 7% cumulative preferred stock owned by the estate?
2. Is the plaintiff entitled to a refund on account of the payment to Moorhead & Knox of the sum of $ 5,000 additional attorney fee for services rendered by said firm in connection with the administration of the estate, no deduction for which has been allowed?
The case was heard on a stipulation of facts, which, briefly summarized, are as follows:
Jacob Painter, Jr., died on February 16, 1937, a resident of the City of Pittsburgh. Letters testamentary on his estate were duly issued to the plaintiff, who, on May 7, 1938, filed its federal estate-tax return with the Collector at Pittsburgh and paid the tax of $ 457,168.60 shown to be due thereby. In said return, plaintiff elected to have the property in the estate valued as of one year after the date of death.
On December 12, 1939, plaintiff paid to the Collector at Pittsburgh a deficiency in estate taxes, determined by the Commissioner of Internal Revenue in the amount of $ 71,278.16, together with interest thereon in the sum of $ 6,707.95, being a total of $ 77,986.11.
On February 27, 1940, plaintiff duly filed a claim for refund of estate taxes so paid by it in respect of the dividends and other questions not here involved. Said claim also included demand for refund on account of additional attorney fees then estimated at $ 7,500.
The Commissioner of Internal Revenue denied the claim in respect of said dividends and said attorney fees. This suit was thereupon instituted.
Prior to the filing of the suit, towit, on February 11, 1943, plaintiff paid to Moorhead & Knox the additional attorney fees in the sum of $ 5,000, which are stipulated to have been reasonable for the services rendered.
The dividends in question were paid to the plaintiff in May, June, July, and August of 1937. They were all declared after the date of decedent's death. Plaintiff was required to, and did, pay income tax on the entire amount of said dividends. The earnings and profits of United States Steel Corporation earned after the death of decedent were sufficient to pay all of said dividends from said earnings and profits.
The certificate of incorporation of the United States Steel Corporation, as well as its by-laws, provides that the dividends on its preferred stock shall be cumulative, and shall be paid before any dividends on the common stock shall be paid or set apart; so that, if in any year dividends amounting to 7% shall not have been paid, the deficiency shall be payable before any dividend shall be paid or set apart for the common stock. It is further provided that, in the event of liquidation, the holders of said preferred stock are entitled to receive the par amount of their shares and all unpaid dividends accrued thereon before any distribution may be made on the common stock.
The applicable statutes are Section 302(j) of the Revenue Act of 1926 as added by Revenue Act of 1935, c. 829, 49 Stat. 1022, 26 U.S.C.A. Int.Rev.Acts, page 231.
It is our opinion that the dividends paid by the United States Steel Corporation during the year following the death of Jacob Painter, Jr., in payment of arrearages on nineteen hundred and fifteen shares of 7% cumulative preferred stock of that company owned by the estate, are not subject to tax, in view of the ruling by the United States Supreme Court in Maass, Executor v. Higgins, 312 U.S. 443, 61 S. Ct. 631, 85 L. Ed. 940, 132 A.L.R. 1035. See also Howard v. United States, D.C., 40 F.Supp. 697, 702; Stuart v. Hassett, D.C., 41 F.Supp. 905.
Then, too, defense counsel urges that the back dividends on the stock in question, which were paid within the year after decedent's death, were in the nature of a debt. This argument is not tenable. Back dividends never create a debtor-creditor relationship between the corporation and the stockholders. See Cook on Corporations, § 267, p. 765. No debt arises until the directors, in their discretion, declare a dividend. Nor does the amendment to Treasury Regulations, adopted after the opinion in Maass vs. United States, supra, change this situation. See Section 81.11 of Regulations 105.
The dividends here in question were earned after decedent's death and during the optional valuation period, and did not, at the date of decedent's death, represent a form of included property. Therefore, they are to be excluded.
As to the deduction of the sum of $ 5,000 attorney's fees in connection with the administration of this estate, we are of the opinion they are reasonable in amount, and should be allowed as a proper deduction. In fact, counsel for the United States have agreed this is a proper deduction.
We therefore hold the plaintiff is entitled to judgment in its favor. An order for judgment may be submitted accordingly on notice ot opposing counsel.