When the Supreme Court of the United States, in an opinion rendered March 8, 1920, in the case of Eisner vs. Masumer, decided that stock dividends, when declared by. corporations, were not taxable as income, the question was raised by bankers whether it was permissible for national banks to declare stock dividends.

Prior to the administration of Comptroller Crissinger it had been the uniform holding of the Comptroller's office that there was no authority in law for the declaration of stock dividends by national banks, that dividends could be lawfully declared and paid out of net profits only after deducting all losses and bad debts,, and that surplus earnings could be converted into capital stock only by the declaration of a dividend from net profits in the regular way, payable by checks, which, when properly indorsed, could be accepted in payment for new stock.

Following the decision of the Supreme Court above referred to, on account of the numerous inquiries received at the Comptroller's office on this subject, Comptroller Williams referred the question to the Solicitor of the Treasury for an opinion, and the Solicitor rendered an opinion sustaining the long-maintained position of the Comptroller's office, that stock dividends were not permissible by national banks. Not being fully satisfied with the Solicitor's opinion, Comptroller Williams referred the question to the Department of Justice, and the Acting Attorney General, in an opinion rendered in October, 1920, ruled that national banks cannot lawfully declare stock dividends. He said:

Section 5199 of the Revised Statutes authorizes directors, subject to certain restrictions, to "declare a dividend of so much of the net profits of the association as they shall judge expedient." Since, however, a stock dividend cannot be declared without increasing the capital stock, and since the Acts of Congress contain explicit provisions as to the manner in which the capital stock may be increased, a stock dividend cannot be lawfully declared unless the stock so issued may be provided for through an increase of the capital, in accordance with the terms of this Section.

The question then is, whether an increase of capital for the purpose of converting accumulated earnings into capital stock is permitted by the national banking laws. Congress has seen fit to prescribe, with considerable detail, the manner in which the capital stock of a national bank may be increased.

Section 5142 of the Revised Statutes provides that: "Any association formed under this title may, by its articles of association, provide for an increase of its capital from time to time, as may be deemed expedient, subject to the limitations of this title. But the maximum of such an increase to be provided in the articles of association shall be determined by the Comptroller of the Currency; and no increase of capital shall be valid until the whole amount of such increase is paid in, and notice thereof has been transmitted to the Comptroller of the Currency, and his certificate obtained, specifying the amount of such increase of capital stock, with his approval thereof, and that it has been duly paid in as part of the capital of such association."

It will be observed that this Section authorizes a bank, at the time of its organization, to provide in its articles of association for an increase in the future of its capital, fixing a limit to the amount of such increase, subject to the approval of the Comptroller of the Currency. It is then expressly provided that, in exercising the authority so provided for, no increase of capital shall be valid until the whole amount of such increase "is paid in," and that it must be certified to the Comptroller of the Currency that this amount "has been duly paid in as part of capital of such association." Apparently, it was thought that this Section did not authorize an increase of capital in any case in which such increase was not provided for in the articles of association, and to make provision for an increase in cases not provided for by the articles of association, the amendatory Act of May 1, 1866, was passed providing-

"That any national banking association may, with the approval of the Comptroller of the Currency, by the vote of shareholders owning two-thirds of the stock of such association, increase its capital stock, in accordance with existing laws, to any sum approved by the said Comptroller, notwithstanding the limit fixed in its original articles of association and determined by said Comptroller; and no increase of the capital stock of any national banking association either within or beyond the limit fixed in its original articles of association shall be made except in the manner herein provided."

It is thus enacted that no increase of capital stock shall be valid unless the amount "has been duly paid in as part of the capital of such association." And this is coupled with an expressed prohibition against the increase of capital in any other manner. The issuance of a stock dividend, it has been held, does not make the stockholder richer or the corporation poorer. It simply changes the evidence of the stockholders' title of what he already owned. * * * It would seem, therefore, that the mere conversion, by a corporation of earnings which it already owns, into capital stock, and thus keeping in its business permanently what it previously was at liberty to distribute among stockholders, is not equivalent to paying in an equal amount of money as a part of the capital of the corporation. No part of it has been paid in to the corporation. It has been earned by the corporation as a profit, and I cannot think that the conversion of it into capital stock will be an increase of capital in the manner provided by the Acts of Congress.

It may be said, of course, that so far as the corporation is concerned the result of declaring a stock dividend is not different from what is accomplished by declaring a cash dividend which is used by the stockholders to pay for additional stock, but I think Congress has expressed an intention that it shall be done in the one way and not in the other. A very good reason I think, which may have moved Congress, is that a stockholder in a national bank incurs a liability for the debts of the bank to the extent of the amount of his stock, and it may very well have been considered unwise to permit two-thirds of the stockholders to increase this liability of the minority by increasing the capital stock through the issuance of stock dividends.

While the Solicitor of the Treasury is the Statutory Counsel of the Comptroller of the Currency, his opinion and the opinion of the Attorney General concerning questions of this character are not binding on the Comptroller. The Comptroller of the Currency is free to follow his own judgment in such matters until overruled by a court of competent jurisdiction.

Exercising this prerogative, Mr. Crissinger, in disposing of this question on December 20, 1921, ruled as follows:

It has been my view that the National Bank Act should be liberally construed in all matters in which there is not a direct inhibition in the charter or in the law as enacted by Congress. Having that view, I find myself unable to agree with the distinguished solicitors in the conclusion they arrive at.

If any question of public policy could be involved in the authorization of stock dividends out of undivided profits, it would seem to me to be all in favor of granting such permission, for the reason that the stock does incur a double liability and to that extent offers further assurance of security and protection to creditors and people doing business with the bank. The right is inherent in the board of directors to declare a dividend to absorb all of the earnings of the bank outside of that which is required to be set aside for surplus purposes, and they also have the inherent right of carrying such earnings to surplus, and I am of the opinion that in the case of the profits being insufficient to pay dividends, that they have the inherent right to transfer the surplus back to undivided profits for the purpose of paying dividends. If I am correct in these conclusions, then the surplus or such portion of it as may be authorized by the board of directors may be returned to the undivided profits for the purpose of paying an annual dividend or for the purpose of distribution, either in cash or by a stock dividend. Before a stock dividend can be ordered it is necessary to have the articles of incorporation so amended as to increase the capitalization of the bank for that purpose. When that is done pursuant to law, the directors certainly could either sell the new stock, giving the stockholders their right as provided by statute of taking the stock, or the directors could pro rate it to the stockholders in proportion to their holdings before the increase and issue to the stockholders of a stock dividend from the surplus transferred to the undivided profits. It is my opinion that nobody has the right to complain of such transaction when the increased capitalization is legally authorized except a stockholder, and I have my very serious doubts whether such stockholder can object, but in the event of such objection it is purely a matter for the stockholders and the dissenting stockholder, and not one for this Bureau to control.

Having these views of the law I made the order which became necessary originally in order to protect certain banks that were in difficulty and in exercising my discretion to protect the banks so in difficulty, I found it necessary to give a liberal construction to those provisions of the National Bank Act in the matter of dividends instead of the strict and rigid construction heretofore given to statutes, which certainly in administrative matters should be liberally construed; especially so when the public interest is best conserved by so doing and when the interests of stockholders are not in any way put in jeopardy. It will be understood, therefore, that the decision to authorize stock dividends when complying with the requirements of the office in issuing them is of my own initiative and I take entire responsibility for the same.

Whether all the Comptrollers of the Currency from the establishment of the National Banking System to the date of this ruling were wrong in their position, and Comptroller Crissinger was right in reversing them, can be determined finally only by a court of competent jurisdiction.