Black Motor Co. v. Commissioner of Internal Revenue, 8743.
| Decision Date | 06 April 1942 |
| Docket Number | No. 8743.,8743. |
| Citation | 125 F.2d 977 |
| Parties | BLACK MOTOR CO., Inc., v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Helen Goodner, of Washington, D. C. (George E. H. Goodner, Helen Goodner, and Scott P. Crampton, all of Washington, D. C., on the brief), for petitioner.
Samuel H. Levy, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Arthur A. Armstrong, Sp. Assts. to Atty. Gen., on the brief), for respondent.
Before SIMONS, HAMILTON and MARTIN, Circuit Judges.
This is a proceeding by petitioner, Black Motor Company, Inc., to review a Board of Tax Appeals decision, redetermining petitioner's income, excess profits and undistributed profits taxes for the taxable year ending December 31, 1936.
Petitioner is a Kentucky corporation with its principal place of business at Harlan, Kentucky, and sells automobiles at retail. It duly filed its income, excess profits and undistributed profits tax return with the Collector of Internal Revenue for the year in question and disclosed income taxes payable of $765.82 and no excess profits or undistributed profits taxes. The Commissioner of Internal Revenue on audit and review of petitioner's return found a deficiency in each class of taxes, from which decision it timely appealed to the Board of Tax Appeals.
Petitioner claimed in its original return a dividends paid credit of $7,500, under Section 27, Revenue Act of 1936, c. 690, 49 Stat. 1648, 26 U.S.C.A. Int.Rev.Acts, p. 837.
On August 20, 1936, the directors of petitioner declared a 10 percent dividend on its capital stock payable in four equal monthly installments beginning October 15, 1936. On August 28, 1936, a general journal entry was made, taking out of surplus $7,500, the amount of the dividend and crediting dividends payable by that sum. The petitioner paid dividends and charged to dividends payable during the year, $4,515, which dividends were paid on the following dates and in the following amounts:
INSTALLMENTS AMOUNT AMOUNT
DATE DUE PAID
First 10-15-36 $1,875.00 $1,875.00
Second 11-15-36 1,875.00 1,667.50
Third 12-15-36 1,875.00 972.50
_________
$4,515.00
Petitioner also paid in 1936, $972.50 the installment due January 15, 1937, making the total paid during the year of 1936, $5,487.50. The first installment only was paid in full. The two principal stockholders received 100 percent of their pro rata share of the dividends, one stockholder received 25 percent and sixteen received 50 percent. The petitioner, in computing surtax on its undistributed profits, deducted $7,500 as dividends paid credit, all of which was disallowed by the Commissioner because not made pro rata and without preference to any share over any other share of stock of the same class in accordance with the provisions of Section 27(g) of the Revenue Act of 1936, which disallowance was sustained by the Board of Tax Appeals and on the same ground.
The case involves consideration of certain provisions of the Revenue Act of 1936, c. 690, 49 Stat. 1648, 26 U.S.C.A. Int.Rev. Acts, page 837. Section 27(a) of that Act provides that a corporation's credit for dividends paid before determining the tax under Section 14 of the Act, 26 U.S.C. A. Int.Rev.Acts, page 824, shall be "the amount of dividends paid during the taxable year." The provisions of this Section are explained and amplified by succeeding subsections and the one with which we are here concerned provides "no dividends paid credit shall be allowed with respect to any distribution unless the distribution is pro rata, equal in amount, and with no preference to any share of stock as compared with other shares of the same class."
In construing tax statutes, it is well to remember that such acts carry their own definitions and that the intention of the Congress is controlling. Such intention is to be ascertained, not by taking a word or clause from its setting and viewing it apart, but by considering it in connection with its context, general purpose of the statute, the occasion and circumstances of its use and other appropriate tests for the ascertainment of legislative will. Helvering v. Stockholms Enskilda Bank, 293 U. S. 84, 94, 55 S.Ct. 50, 79 L.Ed. 211.
The Revenue Act of 1936 introduced into the Internal Revenue laws a new method, but not a new system of corporate income taxation. The proposal incorporated in this Act provided for a tax rate determined by the amount of the undistributed net earnings, as had been done in previous Acts, except under the former Acts the tax did not become operative until the earnings of the corporation credited to surplus were in excess of what was reasonable or necessary for the corporate business. For many years the internal revenue acts had placed a penalty tax upon earnings of corporations accumulated for the purpose of avoiding surtax on their stockholders. The Ways and Means Committee of the House, in its report on the present Act, stated that its fundamental purpose was to stimulate the distribution of corporate profits to its stockholders. It was said in the report that under the existing system, "a corporation may retain all of its net income and the Government fails to receive the tax it should secure from the surtax on the stockholders of such corporations." Ways and Means Committee Report, No. 2475, 74th Congress, Second Session.
It has been recognized that the retention of corporation earnings was a favorite shield for the escape by corporate shareholders from the burdens of the surtax. The primary purpose of the present Act was to make available to the tax gatherer, a stream of tax wealth theretofore locked in corporate surpluses, and the purpose of levying the present tax on the corporation was to encourage, if not compel, the distribution of corporate earned surpluses to its shareholders so that the tax could be collected from the shareholder for the year of distribution.
Section 27(a) of the Revenue Act of 1936 allows a credit to a corporation in determining surtaxes of the dividends paid by it within the taxable year and each succeeding subsection of the Act undertakes to limit this credit to dividends which would be subject to tax in the hands of the corporate shareholders.
The purpose of Section 27(h) which concerns us is the so-called preferential distribution provision and its purpose was to prevent special dividends to stockholders in the lower income tax brackets, and in construing the present Section, it is well to bear in mind that dividends need not be proportionate to stockholdings. Lincoln National Bank, Ex'r, v. Burnet, 61 App.D.C. 354, 63 F.2d 131. This section provides no credit will be allowed for any distribution which is not strictly pro rata among shares of the same class. Mere declaration of a dividend pro rata does not constitute within the purview of the Act either a dividend or a distribution. Before a dividend becomes effective as such there must be a declaration of it by proper corporate officers and funds set aside for its payment. In the case at bar, the dividend was declared and petitioner charged its surplus and credited dividends payable with the amount declared, neither of which acts resulted in a distribution to its stockholders. The word "distribution" as used in the Act means the act of distributing or dispensing and distribution pro rata means a payment to all entitled to take and not a payment of the total amount due one and a part of that due another. Construing the statute in the light of its purpose and applying it to the facts here present, it is clear that petitioner did not make a pro rata distribution of the dividends which it claims as a credit, and that there was a preference. It therefore follows...
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