Mercantile Bridge Co. v. Comm'r of Internal Revenue, Docket No. 105138.

• Citation: 2 T.C. 166
• Decision Date: 18 June 1943
• Docket Number: Docket No. 105138.
• Parties: MERCANTILE BRIDGE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

2 T.C. 166

MERCANTILE BRIDGE CO., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 105138.

Tax Court of the United States.

Promulgated June 18, 1943.

The petitioner's capital had, in earlier years, been impaired by distributions exceeding earnings and profits. Held, that earnings and profits accumulated thereafter may not be considered as replacing the capital impairment and diminishing earnings and profits, in determining whether, at the close of the years preceding the taxable years, the petitioner had a deficit in accumulated earnings and profits entitling it to a credit, within the meaning of section 501 of the Revenue Act of 1942, amending section 26(c)(3) of the Revenue Act of 1936. Kinley J. Tener (an officer), for the petitioner.

J. Harrison Miller, Esq., for the respondent.

OPINION.

DISNEY, Judge:

This cause was remanded to this Court for a rehearing, limited to a consideration of the applicability of section 501 of the Revenue Act of 1942. Pursuant to such mandate, the matter was set for further hearing and was heard on February 17, 1943. The question now presented is whether or not the petitioner is entitled for 1936 and 1937 to credits as a deficit corporation, under section 501 of the Revenue Act of 1942, amending section 26(c)(3) of the Revenue Act of 1936, and providing for a credit by the following language:

(3) DEFICIT CORPORATIONS.— In the case of a corporation having a deficit in accumulated earnings and profits as of the close of the preceding taxable year, the amount of such deficit, if the corporation is prohibited by a provision of a law or of an order of a public regulatory body from paying dividends during the existence of a deficit in accumulated earnings and profits, and if such provision was in effect prior to May 1, 1936.

There is essentially no difference between the parties as to the facts. On brief the petitioner says, ‘There is no issue of fact in this case.‘ The petitioner is a corporation organized in 1907, with a capital of $400,000. Prior to 1919 capital was intact. During the years 1919 to 1922, inclusive, capital was impaired by distribution to stockholders of $30,061.16 more than earnings and profits. Through 1923 and 1929 inclusive, earnings and profits, above dividends paid in those years, amounted to more than $30,061.16. During 1931 to 1934, inclusive, there was a total operating loss of $20,794.32. The corporate records, when corrected for a profit on bonds in 1935, showed in profit and loss a deficit of $24,632.51 on December 31, 1935, and a deficit of $22,373.70 on December 31, 1936, the figures being computed on the basis of the capital impairment being replaced out of subsequent earnings. Computed without such application of subsequent earnings to replacement of impaired capital, there were earnings accumulated on December 31, 1935, in the amount of $5,428.65, and on December 31, 1936, in the amount of $7,687.46.

Under the language of the section above quoted, the question is whether as of the close of the preceding taxable years, that is, as of the close of the years 1935 and 1936, the petitioner had a deficit ‘in accumulated earnings and profits.‘ The respondent does not deny that the corporation ‘is prohibited by a provision of a law or of an order of a public regulatory body from paying dividends during the existence of a deficit in accumulated earnings and profits.‘ Our inquiry, therefore, is merely whether there was the requisite deficit in accumulated earnings and...