the profits of the corporation until a dividend is declared by
its board of directors. Ill.Rev.Stat. 1959, c. 32, § 157.41;
DeKoven v. Alsop, 205 Ill. 309, 313, 68 N.E. 930, 63 L.R.A.
In the latter case, the court further said that the
capitalization of earnings by the declaration of a stock
dividend, or the declaration of a stock dividend upon the
increment to the value of the corporate assets, adds nothing
to either the capital of the corporation or that of the
shareholder. DeKoven v. Alsop, 205 Ill. at 315, 68 N.E. 930,
63 L.R.A. 587. The same asset value is represented by the
stock certificates regardless of the number of shares
In the instant case, the old corporation had capital assets,
including the undistributed surplus, of $222,558.18,
immediately before the reorganization. Immediately after the
reorganization, the corporation had capital assets of the same
amount. After reorganization, the shareholders' interest in
the corporation was evidenced by the preferred stock issue,
instead of by the 349 shares of old common stock.
Admittedly, there was a dramatic change in the shareholders'
rights which, by consent, they accepted. They gave up control
of the corporation and the right to the profits of the
corporation, if any, beyond their fixed dividends. In exchange
they received preferred capital shares of a value
representative of their proportionate interests in the old
corporation, having a fixed and limited dividend return. Their
right to participate in any distribution of the corporate
assets on dissolution is limited to the par value of their
shares. The Illinois Agricultural Cooperatives Act provides
that only the patrons, not the shareholders, of the
corporation may share in any distribution of net profits or
accumulated surpluses. Ill.Rev.Stat. 1959, Ch. 32, § 454.
It might be said that the shareholders accepted a
detrimental change in their relationship to the corporation
which could be called consideration, but it can hardly be said
that that detriment (if it be such), which the shareholders
accepted, conferred any corresponding benefit on the
corporation. The Act speaks of a limitation not to exceed 8
percent of the "value" of the consideration received, 26
U.S.C.A. § 521. Unless "consideration," as here used, be
limited to money consideration or other valuable property, no
standard for the Act's application could be devised. There must
be a dollar base against which to apply the percentage
limitation. Even if the benefit-detriment theory of
consideration could be developed, it does not follow that its
value equalled the corporate surplus here capitalized.
The issuance of the second preferred shares simply changed
the structure of the reorganized corporation's capital
account. There was no consideration for them, at least which
can be said to have determinable value.
We must conclude that no consideration was received by the
corporation, for which the preferred shares were issued,
beyond the amount of the shareholders' original investment.
The dividends paid in each of the taxable years admittedly
exceeded the allowable limit of 8 percent of the value of that
Accordingly, plaintiff's motion for summary judgment is
denied. Defendant's motion for summary judgment is allowed,
and judgment is entered dismissing the complaint, plaintiff to
pay the costs of suit.
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