Accounting advanced dividend liquidating
In deciding the specific question now under consideration no great weight can be attached to the general rules of law as to the powers of corporations generally, or banks in particular, with respect to the payment of dividends; for Federal reserve banks are sui generis, and they are governed by the mandatory provisions of Section 7 of the Federal Reserve Act which take away from the directors all discretionary power as to the disposition of any part of current earnings. It has been held specifically that dividends may be paid from surplus accumulated out of the profits of previous years, although there have been no actual profits for the year in which the dividends are paid. Corporations other than banks and banking institutions are not as a general rule required to set aside any part of the their earnings into special "surplus" funds distinct from "undivided profits", nor is it their practice to do so, and the surplus of a corporation other than a bank consists of the entire excess of assets over liabilities and capital stock. Unless, therefore, some prohibition is expressed in or implied from the charter of a bank or the statues to which it is subject, the bank may pay dividends out of surplus at the discretion of the directors.Nevertheless, I am of the opinion that a consideration of these general rules of law will serve in some slight measure to confirm the conclusion that a Federal reserve bank may use its surplus fund for the payment of dividends for a year in which its current earnings are insufficient for that purpose. It is also held generally that dividends may lawfully be declared out of any surplus of corporate assets over corporate debts and capital stock, that is to say, anything remaining after provision for the corporation's capital stock and liabilities is properly available for distribution to stockholders, although as seen above its actual disposition rests with the directors: , and cases there cited. On the other hand it is universally true, so far as I am aware, that banks in this country are required by their charter or the statutes under which they operate to set aside a certain proportion of their current earnings into a fund designated surplus, until such fund amounts to a certain percentage of the bank's capital, and in speaking of the surplus of a bank this specific fund is referred to, not including any undivided profits that may represent further excess of assets over liabilities and capital stock. Applying this rule to the case now under consideration, I am of the opinion that there is nothing in Section 7 or any other part of the Federal Reserve Act which can reasonably be construed as a prohibition against the payment of dividends out of the surplus of a Federal reserve bank, but on the contrary that, for the reasons stated in the early part of this opinion, in order to give a reasonable and consistent purpose to the express provisions of the law, it is necessary to conclude that the law authorizes the payment of dividends out of surplus.It is hardly reasonable to assume that Congress intended to prevent a Federal reserve bank from paying its current dividends while its surplus fund is far in excess of the amount of its subscribed capital.Under Section 7 as originally enacted, the argument that the surplus fund of a Federal reserve bank was intended solely as a protection to the bank against possible future losses could have been made with greater force.It is clear also that the payment of dividends out of surplus can result in no loss of revenue to the United States, for no franchise tax can become due until the six per cent cumulative dividends have been paid in full.If the surplus should not be used to pay dividends for a year in which the current earnings are insufficient for this purpose, the back dividends would have to be paid out of future earnings before the United States becomes entitled to any franchise tax.So the same arguments, except that which is based on the unlimited size of the surplus fund, could have been advanced in support of the right of a Federal reserve bank, under the terms of the original Section 7, to pay dividends out of surplus.In my judgment Congress in amending Section 7 so as to require the accumulation of a surplus fund of unlimited size must be considered to have recognized that under both the original section and the section as amended the surplus fund could be used for the payment of the cumulative dividends.
(3) For creating and adding to a surplus fund until such fund equals 100 per cent of subscribed capital.
It is to be noted in this connection, however, that under the present terms of Section 7 there is no limit to the size of the surplus fund that must be accumulated.