him or may choose to hold any one of the promisors individually liable. A contract cannot be joint and several as to the promisees. The foregoing are the common law rules and have been greatly modified by statute in the various states. CORPORATIONS Answer both the following questions: 7. In what circumstances are directors of a corporation authorized to declare dividends, and what are the liabilities of directors for declaring an unauthorized dividend? Answer: The authority of the directors to declare dividends is subject to the provisions, if any, in the charter or by-laws of the corporation regulating this matter and is subject further to any existing statutory provisions. Subject to such provisions, and in any event, the directors may declare dividends only out of net profits or surplus. Ordinarily and in the absence of such restrictions as above indicated, the directors have a large discretionary power as to whether they will or will not declare dividends. If such discretionary power is exercised in good faith, the courts will only in the most exceptional cases compel a declaration of dividends at the request of the stockholders. If there are no profits or surplus, or if the corporation is insolvent, a declaration of dividends by the directors is illegal, and the directors would thereby render themselves personally liable to the creditors of the corporation to the extent to which the capital stock is thereby impaired. In some states, such action on the part of the directors would also render them guilty of a misdemeanor and subject to fine or imprisonment or both. 8. The X corporation owns certain personal property of which B has wrongfully taken possession. A owns all of the stock of the X corporation and brings in his own name an action to recover the property from B. Is A entitled to recover? Answer: A cannot recover in this action. The property wrongfully held by B belongs to the X corporation, not to A, and the fact that A owns all of the stock of the corporation does not vest A with the title to this property. A corporation is an artificial person, a legal entity, separate and distinct from the stockholders, and remains such even when all the stock is held by one person, as in this case. To effect a recovery of the property in question, the action must be brought in the name of the X corporation and no other. PARTNERSHIP Answer one of the following two questions: 9. A, B, and C form a partnership, each by mutual agreement contributing equally to the original capital. Later C furnishes various further sums to the partnership to prevent financial difficulties, the partnership finally being obliged to make an assignment for the benefit of its creditors. What are C's rights with regard to the additional sums furnished by him? Answer: Had the partnership remained solvent, the advances made by C would have been repaid to him in the ordinary course of events. Or, if the firm had been dissolved while some assets remained, C would have been entitled to the return of his advances, prior to any distribution of the original contributions to the three partners. In the case in point, however, C's advances, together with the original contributions, were all absorbed in losses or in payment of firm debts. C therefore paid more than his share of the partnership indebtedness to the extent of his advances. He is accordingly entitled to contribution from A and B. As the three partners shared in the profits or losses equally, having contributed equally to the original capital, and no mention appearing of any other basis of sharing profits or losses, A and B are each liable to C for one-third of the additional sums advanced by C. It should be added that, as a general rule, one partner cannot recover by way of contribution from his co-partners for advances or loans made by him to the partnership unless there has been a judicial accounting and settlement of the partnership affairs. 10. C is admitted as a partner in a partnership composed of A and B on contributing a certain amount to the partnership capital. Prior to C's admission, the partnership of A and B incurred a large obligation which subsequent to C's admission as a partner the partnership assets were insufficient to satisfy. A and B having no financial responsibility, X seeks to satisfy his claim out of the individual assets of C. Can he succeed? Answer: X cannot succeed. An incoming partner is not liable in the absence of an agreement to that effect, express or implied, for pre-existing partnership debts. The presumption is against such agreement. This is the common law rule. Section 17 of the uniform partnership act (now in force in Idaho, Illinois, Maryland, Michigan, New Jersey, New York, Pennsylvania, Tennessee, Wisconsin and Alaska) provides that “a person admitted as a partner into an existing partnership is liable for all the obligations of the partnership arising before his admission as though he had been a partner when such obligations were incurred, except that this liability shall be satisfied only out of partnership property." In the case given, however, X seeks to satisfy his claim out of C's individual assets. As above indicated, this cannot be done, either at the common law or under the statute. BANKRUPTCY Answer the following question: 11. On examining the books of the Y corporation you find a judgment in favor of the corporation against A for $1,000.00 recovered on December 10, 1919. You also find that on July 16, 1920, A filed a voluntary petition in bankruptcy showing assets (both real and personal property) amounting to several thousand dollars and liabilities consisting, in addition to the judgment, of amounts due on various promissory notes and open accounts. How would you treat the judgment in preparing a financial statement for the corporation? Answer: It is shown here that A's assets consist of both real and personal property. It is a general rule, and the statutes in the several states so provide, that a judgment shall be a lien on the judgment debtor's real estate from the time it is rendered. Section 67f of the bankruptcy act provides that judgment liens obtained or created within four months prior to the filing of a petition in bankruptcy by or against the judgment debtor are dissolved by the adjudication of such person to be a bankrupt. This is equivalent to a provision for the preservation of such liens obtained prior to the four months' period. The judgment secured by the Y corporation against A was rendered more than six months before A filed his petition. The lien of the X corporation on A's real estate is therefore not affected by the bankruptcy proceedings. The other indebtedness of A is shown to consist only of promissory notes and open accounts. These are unsecured claims, over which a judgment lien takes precedence. The judgment in question, therefore, to the extent that A's real property is worth up to $1,000, is a good asset and should be so shown on the financial statement of the Y corporation. FEDERAL INCOME TAX Answer the following question: 12. In 1909 A and B formed a corporation for the purpose of conducting the business then carried on by them under a partnership, each taking equally shares of the capital stock. B died on June 1, 1917, bequeathing his shares of stock to his son Z by will. Because of B's death the corporation ceased active business and began to liquidate. From time to time assets were disposed of and dividends were declared and paid from the moneys received. What is the status of such dividends for federal incometax purposes Answer: (1) as regards A? (1) As regards A, it would be first necessary to determine the value of his stock on March 1, 1913. To the extent that the liquidation dividends exceeded this value, the excess would be treated as taxable income for the taxable period in which the last of the liquidation dividends were received by A. If, on the other hand, these dividends fell below the value of the stock on March 1, 1913, the difference would constitute a valid deduction in A's favor. (2) As regards the status of the liquidation dividends received by Z for tax purposes, they would be treated in the same way as the proceeds received by Z would have been treated if he had sold his stock. That is, the value of the stock should be determined as of June 1, 1917, when it came into Z's possession as a legacy from his father B. If the total liquidation dividends received by Z exceeded the value of the stock as of June 1, 1917, the excess would be taxable income, returnable for the taxable period in which the final dividend was received. If the total liquidation dividends were less than the value of the stock on June 1, 1917, the difference could be shown as a deduction by A in his return. INCOME TAX AND EMPLOYEES' BONUS Editor, Students' Department: SIR: In preparing the final statements and the income-tax return of the business where I am employed, I am confronted by one of those difficult bonus questions. The business is an individual proprietorship; and at the beginning of 1920 the proprietor engaged a manager agreeing to pay him a stated salary and in addition a bonus based on the increase in the profits of 1920 over the profits of 1919. The profits of 1919 were $6,760.23 after there paying the income tax. This year the profits are $19,638.92 before deducting the bonus and before deducting the income-tax. The bonus is to be 10 per cent. of the increase in profits after considering both the tax and the bonus as expenses, and in computing the tax it will of course be necessary to deduct the bonus from the profits of $19,638.92 to find the taxable net profit. It is agreed between the proprietor and the manager that in computing the tax, which shall be treated as an expense in computing the bonus, no personal exemptions shall be allowed and income from other sources shall be ignored. Will you please explain how to compute the bonus and the tax? Chicago, Illinois. Yours truly, H. R. The method of computing the bonus and the tax will depend on whether or not the bonus is large enough to bring the taxable profits below $18,000.00, because if the profits after deducting the bonus are in excess of $18,000.00 there will be a surtax at 8% on the amount between $18,000.00 and $20,000.00, but if the taxable profits are less than $18,000.00, the highest surtax rate will be 7%. It can be determined by inspection that the profits after deducting the bonus will be in excess of $18,000.00. The profits for 1920 before deducting the bonus were... $19,638.92 Excess 6,760.23 $12,878.69 If this entire difference were subject to the 10% bonus, the bonus would be $1,287.87 and the taxable profits would be $19,638.92 minus $1,287.87, or $18,351.05. But as the bonus will be less than $1,287.87, the taxable profits will be more than $18,351.05. Having established the fact that there will be a surtax at the 8% rate, the solution can be performed as follows: The tax on $19,638.92 would be: The bonus will reduce the profits subject to the normal tax at the 8% rate and also the profits subject to the surtax at the 8% rate. If the bonus is represented by x, Since the bonus is 10% of the difference in profits ($12,878.69) minus the tax and minus the bonus, As pointed out in the beginning of this answer, the method of computing the taxable profits, the tax and the bonus will depend on whether the bonus is sufficiently large to reduce the taxable profits below $18,000.00 or not. If the profits had been reduced below $18,000.00, the solution would have been as follows, assuming these facts: Profits, 1920, before tax and bonus $18,500.00 6,500.00 $12,000.00 Difference Let x represent the amount by which the taxable profits are reduced below $18,000.00. |