TRUSTS-BEQUEST OF CORPORATE STOCK-EVIDENCE OF VALUE. - Where corporate stock is bequeathed in trust to pay the income to a beneficiary for life, with remainder over, the actual value of the stock as ascertained from the value of the corporate assets at the testator's death, and not the fluctuations of the stock market, must control in determining whether new stock issued subsequent thereto, in lieu of profits applied to the improvement of the corporate property prior thereto, represents capital or income. In such case, evidence of the market value of the stock is only admissible so far as it may aid in ascertaining the actual value.

George Tucker Bispham, for the appellant.

John Marshall Gest and Edwin Saunders Dixon, for the appellees.

CLARK, J. The question in this case arises upon the adjudication of the account of Alfred and Horace T. Smith, trustees under the will of Stephen Smith, deceased, who died in October, 1884. By his will the testator gave a portion of his estate, in trust, to pay the net income to his son Alonzo Smith, free from his debts, for life, with remainder over to his children, etc. Included in this part of his estate were fiftysix shares of the capital stock of the Frankford and Southwark Passenger Railway Company. The whole capital stock of the company was $750,000; that is to say, 15,000 shares, of the par value of $50 per share. On the 4th of December, 1888, however, it was agreed at a meeting of the stockholders to issue 5,000 additional shares, at the par value of $50 per share, the existing stockholders, as they were registered on the 2d of January, 1889, to have the right, at any time before the 2d of February thereafter, to subscribe one share for every three of their respective holdings on the day designated.

The trustees of Stephen Smith's estate exercised the privilege, and bought eighteen shares for $900, which, for the time, they borrowed from the income fund in their hands; but in their account they have made good the income, and havo treated this sum as so much taken from the capital. On the 18th of February, 1889, the directors declared a dividend of $11 per share on the whole 20,000 shares. This dividend was made exactly to cover the price of the extra shares, less the state and city taxes, as follows:

Subscription to 5,000 shares, at $50..
Less state and city taxes, about...

Dividend 20,000 shares, at $11..

.$250,000

30,000

$220,000

.$220,000

In the mean time, on the 12th of January, 1889, Alonzo Smith, the life tenant, died, leaving to survive him two children, Laura M. and Mary E. Smith, both of whom were minors. The appellant, Alfred Percival Smith, is the administrator of his estate, and the appellees are the guardians of his children. The dividend on the seventy-four shares yielded to the estate $814; it was declared after the decease of Alonzo Smith, and was applied to those entitled in remainder. Upon a sale of the eighteen shares, the profit realized was $3,870, and the trustees accounted for this as capital. To this method of accounting the administrator of Alonzo Smith's estate excepted, claiming that this sum must be treated as income, and, as such, that it constituted part of the assets of that estate. The auditing judge, as well as the orphans' court, held the $3,870 to be capital, and not income, and this is the error assigned.

The appellant's contention is, that accumulated profits, when distributed as dividends, belong to the holder of the stock at the time of the distribution, although they may have been earned during a prior ownership, a share-holder having no absolute right to such profits before a declaration of a dividend thereof. But it is well settled in this state that when the stock of a corporation is by the will of a decedent given in trust, the income thereof for the use of a beneficiary for life, with remainder over, the surplus profits, which have accumulated in the lifetime of the testator, but which are not divided until after his death, belong to the corpus of his estate; whilst the dividends of earnings made after his death are income, and are payable to the life tenant, no matter whether the dividend be in cash, or scrip, or stock.

The leading case in Pennsylvania is Earp's Appeal, 28 Pa. St. 368. The residuary estate of Robert Earp, who died in November, 1848, embraced stock in a manufacturing company upon which large surplus profits, over and above the current dividends, had accumulated both before and after his decease. In July, 1854, the capital stock was increased from $200,000 to $500,000, by creating 6,000 additional shares of $50 each, which were paid for out of the accumulations. At the testator's death, these surplus profits were near $300,000; when the stock issued, they had increased to $700,000. The market value of the stock at his death was $125 per share; when the new stock issued, its value was $80,

but the number of shares belonging to the estate was 1,350, instead of 540. As the new shares were therefore in part paid from the surplus existing at the death of Robert Earp, and partly from the accumulations after his death, they were properly apportioned between the life tenant and those entitled in remainder. It was held, -1. That the surplus profits accumulated at the death of the testator, as respects the estate, were essentially part of the stock itself, and were subject to the trusts in the will as so much principal; and 2. That the accumulations after his decease, when they come to be divided, are income in like manner as the current dividends, and therefore belong to the life tenant, no matter whether the division or distribution thereof be in cash, or scrip, or stock. "In the case before us," said the chief justice, "the testator has not made a bequest of the stock itself to the appellants; on the contrary, he has given them only the income of it for life. Their interests commence after the death of the testator. They have no right whatever to claim the income which had accumulated before his death. . . . . It is equally clear that the profits arising since the death of the testator are income, within the meaning of the will, and should be distributed among the appellants."

Moss's Appeal, 83 Pa. St. 264, 24 Am. Rep. 164, distinctly recognizes the doctrine and authority of Earp's Appeal, 28 Pa. St. 368; but as the facts were different, a somewhat different result ensued. Earp's Appeal, 28 Pa. St. 368, differs from Moss's Appeal, 83 Pa. St. 264, 24 Am. Rep. 164, in this: In the former, the new issue of stock was paid for entirely from the surplus profits. There was an actual distribution of profits, as profits, in the form of stock,-profits which had accumulated both before and after the testator's death; whilst in Moss's Appeal, 83 Pa. St. 264, 24 Am. Rep. 164, there was mérely a right to subscribe and pay for new shares at their per value, and it did not appear what, if any, portion of the existing surplus was accumulated after the death of Henry Lazarus, or that the value of the stock had advanced after that time until the new stock was issued. No profits were declared or distributed; the stock was purchased at a price, the object being, not to divide profits as such, but to increase the capital. The right to subscribe for shares was, we think, an interest attaching to the stock, and neither the amount received from the sale of that right, nor the stock purchased with the proceeds, can, under the facts of that case,

be considered as a product or profit for the life tenant. The par value of the stock, as we have said, was $100, but it had a market value of $240; it turned out, however, that the new issue of shares depreciated the shares to $170. It required the addition of the forty new shares to the old to maintain the integrity of the investment. One hundred shares at $240 were worth $24,000, whilst 140 shares at $170 were worth only $23,800; so that in fact there was no profit. Our brother Paxson, in the opinion, says: "It requires but a cursory examination of this transaction to show that no profit has been made, except upon paper. As before observed, the corporation had declared no profits, and distributed none. It merely allowed the holder of each share of the old stock to subscribe for a corresponding share of new stock and to pay the company the par value thereof. . . . . If the company had gone into liquidation the day before the issue of the new stock, the 100 shares of original stock would have realized $24,000; if it had gone into liquidation the day after, the 140 shares would have realized nearly the same sum. Where, then, was the profit?"

Biddle's Appeal, 99 Pa. St. 278, is in line with Moss's Appeal, 83 Pa. St. 264; 24 Am. Rep. 164. There was no division of surplus profits, or of earnings accumulated either before or after the death of the testatrix, Mary Condy, deceased; the transaction was simply an increase of stock to the stockholders, upon payment of the price at par, and ten dollars per share additional to go to the surplus fund. The market value of the old stock was not shown to have varied between the testatrix's death, on the 29th of June, 1880, and the issuing of the new stock, on the 15th of November, 1880, and but a very slight diminution took place after the issue; there was, however, a loss in the intrinsic value to the amount of seventy-five cents per share. Instead of subscribing for the new stock, the executor sold the privilege, and the question was, whether the sum realized should be treated as income or principal. In the opinion filed, this court said: "The entire value of the stock, with all its incidents, at the death of the testatrix constituted the principal of the estate. On this principal the appellant was entitled to the income. Whatever value beyond par the stock then had by reason of the large surplus fund of the company, or otherwise, attached to the stock and formed a part of the principal. The appellant was not given any part of this aggregate value of the stock; the income therefrom was all she

AM. ST. REP., VOL. XXIII. — 16

was entitled to receive. Whatever was capital must remain capital. . . . . It is not shown that the stock was of greater value on the 15th of November than on the day of the death of the testatrix, nor that the surplus fund had been increased in the mean time. . . . . The distinction between the surplus fund, existing at the time of the death of the testator, and a fund accumulated afterwards, is distinctly recognized in Earp's Appeal, 28 Pa. St. 368. That which had accumulated before the death of the testator was held to be part of the principal of the fund, and that which accumulated after his death to be income."

The same rule is recognized, with special reference to Earp's Appeal, 28 Pa. St. 368, as authority, in McKeen's Appeal, 42 Pa. St. 479; in Vinton's Appeal, 99 Pa. St. 434; 44 Am. Rep. 116; and in Philadelphia Trust Co.'s Appeal, 24 Week. Not. Cas. 137; 1 Mona. 230. The last case bearing upon this question is the very recent one of Oliver's Estate, 136 Pa. St. 43; 20 Am. St. Rep. 894. The contest there, as here, was between the life tenant and the remainderman, and the question whether the fund in the hands of the trustees was income or principal was settled in harmony with Earp's Appeal, 28 Pa. St. 368, which is referred to as establishing the rule in this state.

Wiltbank's Appeal, 64 Pa. St. 256, 3 Am. Rep. 585, in no way collides with the ruling in Earp's Appeal, 28 Pa. St. 368. It may perhaps be to some extent inconsistent with Moss's Appeal, 83 Pa. St. 264, 24 Am. Rep. 164, or Biddle's Appeal, 99 Pa. St. 278, but it is in full accord with the well-settled rule that the life tenant is entitled to the income accruing after the death of the testator, and that surplus profits accruing in his lifetime, when they come to be distributed, are principal, and not income. As the court said in Moss's Appeal, 83 Pa. St. 264, 24 Am. Rep. 164, that case must stand upon its own peculiar facts. It may be distinguished, if at all, from the cases mentioned, in this, that in the increase of the stock there was no impairment of either the actual or the market value of the shares.

From this hasty review of the cases it will be seen that the ruling in Earp's Appeal, 28 Pa. St. 368, has for more than the third of a century been steadily maintained without modification or change; in no subsequent case, we believe, has its authority been doubted, its practicability questioned, or the soundness of its doctrine impeached. It has not only been