CHAP. IX.] CORPORATION AND SHAREHOLDERS. [§ 565. and the distribution in dividends of the capital of Dividends the corporation may be enjoined by a shareholder. 1 ™ b e u ^} d "Net earnings," said Judge Blatchford, with refer- .profits, ence to a railroad company, " are, properly, the gross receipts, less the expenses of operating the road to earn such receipts. Interest on debts is paid out of what thus remains, that is, out of net earnings. Many other liabilities are paid out of net earnings. When all the liabilities are paid, either out of gross receipts or out of the net earnings, the remainder is the profit of the shareholders, to go towards dividends, which in that way are paid out of the net earnings." 2 Even i Carpenter v. N. Y. & N. H. Ry. Co., 5 Abb. Pr. (N. Y.) 277; Mac- dougall v. Jersey Imperial Hotel Co., 2 Hem. and M. 528; Bloxaniz?. Metro- politan Ry. Co., L. R. 3 Cb. 337. See Fawcett v. Laurie, 1 Dr. and Sra. 192; Carlisle v. So. Eastern R'y Co., 1 Mac. N. and G. 689; Browne v. Monmouthshire Ry. Co., 13 Beav. 32; Coates v. Nottingham Water- works Co., 30 Beav. 86. " By loss or misfortune or misconduct of the managing officers of a corporation, its capital stock may be reduced be- low tbe amount limited by its char- ter; but whatever property it has up to that limit must be regarded as its capital stock. When its property exceeds that limit, then the excess is surplus. Such surplus belongs to the corporation, and is a portion of its property, and, in a general sense, may be regarded as a portion of its capital, but in a strictly legal sense, it is not a portion of its capital, and is always regarded as surplus or profits. . . . The surplus may be in cash, and then it may be divided in cash; it may be in property, and if the property is so situated that a division thereof among the stock- holders is practicable, a dividend in property may be declared, and that may be distributed among stock- holders. " Williams v. W. U. Tel. Co. , 93 N. Y. 162, 188. Cf. Rose v. Bar- clay, 191 Pa. St. 594. A dividend may be paid out of current profits, though the capital of the company is impaired by depreciation of its property. Verner v. General, etc., Trust, L. R. Oh. Div. 1894, II. 239. (The company did not appear to be insolvent.) 2 St. John c. Erie R'y Co., 10 Blatchf. 271, 279; S. C.,22 Wall. 136. See Commonwealth y. Railroad, 164 Pa. St. 252; Mobile, etc., R. R. v. Tennessee, 153 U. S. 486. Compare Excelsior Water Co. v. Pierce, 90 Cal. 131. It does not necessarily follow that all debts of a floating character should be paid before a dividend is declared; only such need be paid as good judgment requires under the circumstances. Belfast & M. L. R. R. Co. v. Belfast, 77 Me. 445. See also as to payment of dividends when the corporation is indebted, Mills v. Northern R'y Co., L. R. 5 Ch. 631. In estimating j>rofits for purposes of Federal taxation, earnings are not to be included, unless they represent profits of the company in its business as a whole, i. e., the excess of the aggregate of gains from all sources over the aggregate of losses. The burden of proof is on the United States to show what is due. Little Miami, etc., R. R. Co. v. United 571
