The above rule does not apply to coupons detached from bonds and negotiated, which, after being detached, become non-interest-bearing negotiable securities.8 If such coupons are detached and sold and then resold, they lose their character as interest and become capital. Since savings bank deposits must remain with the bank during an entire interest period to entitle them to interest, the inheritance tax assessors in some states do not apportion the interest but compute the tax as of the amount of the bank deposit up to the last "interest day" preceding the testator's death. This is done because there is no way of ascertaining that the deposit will remain in the bank until such "interest day" after the death of the testator, and secure interest which could be apportioned, as the executor might remove it before that time. The increment from deposits in savings banks which do not contract for any definite rate of interest at the beginning of the period, but which at the end of each fiscal period declare a dividend on the amount of deposits which have remained with them during the period, is a true dividend. Like any other dividend, this does not accrue from day to day and is not apportionable. There is some conflict in the law on these points, but the above is the general practice. § 308. The Status of Cash Dividends In the matter of dividends, there is usually in this country, an opportunity for legal argument. Remaindermen who will eventually receive the corpus of an estate which contains preferred or other stock entitled to a dividend at a fixed rate, like to claim that the "interest" accrued to the date of death is an asset belonging to the corpus, and in the case of cumulative dividends there may possibly be some logic in this point of view. Clark v. Iowa City, 20 Wall, (U. S.) 583. The courts have generally held that a dividend declared after death belongs to income, for the reason that the profits of a corporation are the property of the corporation until the directors in their discretion declare a dividend. On the other hand, a dividend declared before death belongs to the corpus, for the reason that, in law, a dividend is considered earned at the date it is declared, even though it may not be paid for some time afterwards. It is not possible to know exactly the time when profits are made by a corporation and as a general rule corporations keep back surplus profits, paying dividends only at regular intervals, and at times paying dividends from profits of previous years when there are no current profits. The federal rule is: Dividends, whether upon preferred or common stock, should In Pennsylvania and some other states the rule is to apportion income as of the time when it was earned, and to give the life tenant only so much as has been actually earned since the death of the testator. In the case of an unusual cash dividend (in Wall Street argot "cutting a melon"), a different rule may prevail, for which see the following section. § 309. Stock Dividends Stock dividends should usually be construed to be a part of the corpus, no matter when declared, and accountants who understand the true nature of a stock dividend are almost unanimous in agreeing that this is the correct view. There is no place in this work for a presentation of the arguments on this point, but it seems likely that the view given above will be even more generally followed as a result of the recent Article 15 of Regulations 37. supreme court decision in regard to the payment of income taxes, which stands forth as one of the most important of the decade.10 As things are, the title to a stock dividend payable to a trust estate with a life tenant and a remainderman very frequently furnishes material for a lawsuit. In regard to both stock dividends and unusual cash dividends, it has been the general rule in this country: . . . that if part of the value so apportioned accumulated before the life interest began, such part would be held to be principal and not income and would be reserved for those entitled to the remainder. The life tenant meanwhile would be entitled to any interest arising from this amount. That is, the court will inquire as to the time when the fund was earned or accumulated, and it will be divided according to whether it accumulated in the lifetime of the testator, in which event it goes to the remainderman, or after his death (the death of the testator) in which event it goes to the life tenant. In Massachusetts, Georgia, and Rhode Island, a different rule prevails, and all cash dividends whether large or small are regarded as income and belong to the tenant for life. Stock dividends on the contrary are regarded as principal and are held for those entitled to the remainder. The life tenant would, of course, have the income until the life estate terminated.“ § 310. Setting up Accruals on Books The accountant, in handling estate accounts when there is a life tenant and a remainderman, should, in so far as he is able, set up all accruals when opening the books, but he will probably have to make numerous adjustments to his records thereafter to correct entries made as a result of incorrect information and to pick up omissions. The further fact must be faced, that the line dividing corpus from income is not so plainly drawn as always to be readily apparent, and in many 10 Eisner v. MacComber, 252 U. S. 189. cases it requires the court's interpretation of the facts in the particular case to decide for the personal representative to which account credit should be given. In computing and setting up accruals, the general rule is that the expression "to the date of the death of the testator" means to and including that day, so that items earned and dividends declared at any hour on the day of death are a part of the corpus. In the case of the death of the life tenant, the decisions are not altogether unanimous, but it is usually safe to apply the same principle, considering all assets held, due, or earned to and including the date of the death of the life tenant, his property and consequently a part of his estate rather than a part of the residue of the original estate left to the remainderman. Of course it is just that the rule should work both ways. § 311. Rights to Subscribe to Stock Another question which not infrequently comes up in connection with corporation stocks is whether the right to subscribe to new issues of corporation stock is corpus or income. Corporations often allow their stockholders the privilege of absorbing among themselves increased issues which are to be floated, and these rights, being transferable, are often very valuable and may be sold. The rule is that the proceeds of the sale of such rights are corpus just as the new issue of stock itself would be corpus if the executor chose to avail himself of the right to subscribe and thus invest idle or less profitably invested funds of the estate. The representative should sell the right on the best terms possible. If a trustee, he should invest the amount so received, giving the life tenant the income from the investment and holding the principal for the remainderman. The right to subscribe for new shares at par upon an increase of the capital stock, which is an incident of the ownership of the stock, does not belong as a privilege to the § 312. Distinguishing Between Corpus and Income It is extremely difficult to give any brief and accurate summary of the conditions which determine whether a certain realization is corpus or income. Perhaps the best way to state it is to say that all the assets that would be included in a true and comprehensive balance sheet for the decedent at midnight following his death are corpus, and that all liabilities that would appear in the same balance sheet must be met out of corpus. To this there must be added the rule that funeral expenses (see § 266) and all the legitimate expenses of administration, from the expenses of probate to those of the final accounting, are chargeable against corpus. The court is the authority as to the propriety, reasonableness, and necessity of all items of expense. (See $341.) Losses of part of the corpus due to casualty and theft are also deductible from the corpus itself (see § 343), as is also a failure to realize the appraised value of an asset. The federal transfer tax is, broadly speaking, levied on the corpus of the estate, less certain deductions and certain exempt items. For this reason it seems advisable in this connection to call attention to Chapter XXXVIII, in which the deductions from corpus for purposes of this tax are treated at some length. If a piece of real estate would be listed among the assets of the estate, that piece of real estate is corpus. No matter at what amount it is appraised or for what amount it is sold, the 12 Cook on Corporations, Vol. II, § 559. |