Way out;

              30 HASKINS & SELLS April
A Way Out
AC E R T A I N New York corporation
having accumulated a deficit equal
to about forty per cent. of the capital stock
outstanding and feeling an urge to clean
house, as it were, sought the means through
a change in the form of capital stock from
common stock having a par value to
common stock without par value. The
procedure adopted was to file an amended
charter providing for a stated capital,
with which the corporation would carry
on business in the future, equal to the
number of shares outstanding, at $5.00 per
share, the minimum value permitted under
the New York statutes when the stated
capital is based on an amount per share.
Incident to the change in the form of
shares certain physical assets were written
down to their intrinsic value and reserves
were provided for possible losses resulting
from uncollectible accounts. These write­downs
would, if no change had occurred
in the capitalization of the corporation,
have resulted in an impairment of the
capital represented by the capital stock
with par value to the extent of about
seventy-five per cent. thereof, but after the
change in capitalization, with minimum
stated capital, a surplus appeared.
This case presents several interesting
questions, such as the legality of the
procedure, the income tax aspect, and the
position of creditors in the event that
dividends to the detriment of creditors
should be declared out of surplus without
further accretions thereto from earnings.
The procedure appears to be entirely legal
under the New York State law, which,
through alternative provision, makes it
possible, so long as the charter so specifies,
for the corporation to carry on business
with a stated capital equal to the number
of shares outstanding times an amount per
share not less than $5.00. The corporation,
therefore, was apparently within its legal
rights in reducing the capital, as was done.
The tax question is perhaps not so easily
answered, but there is probably no chance
that there would be income tax to pay,
since such surplus as was set up really
constituted capital designated as surplus,
and instead of having a profit of any
description the corporation in reality
sustained a loss.
It is also doubtful if creditors could
prevent the distribution of dividends out
of surplus, but it seems somewhat likely,
although it is a point which future cases
will probably have to decide, that the
corporation might be found in violation