Budd International Corp. v. Commissioner of Int. Rev., 8071.
| Decision Date | 16 November 1943 |
| Docket Number | No. 8071.,8071. |
| Parties | BUDD INTERNATIONAL CORPORATION v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Third Circuit |
Henry S. Drinker, of Philadelphia, Pa. (Frederick E. S. Morrison and John W. Bodine, both of Philadelphia, Pa., on the brief), for petitioner.
J. Louis Monarch, of Washington, D. C. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, and S. Dee Hanson, Sp. Assts. to the Atty. Gen., on the brief), for respondent.
Before MARIS, JONES, and GOODRICH, Circuit Judges.
This is a petition to review a decision of the Board of Tax Appeals wherein the Board adjudged Budd International Corporation liable for deficiencies in its income and undistributed profits taxes for the years 1936 and 1937. The facts are stated in detail in the opinion of the Board of Tax Appeals, 45 B.T.A. 737. We set out herein only such of the facts as are necessary for an understanding of the issues raised by the petition.
The taxpayer was incorporated in 1930. By a series of exchanges more fully described later in this opinion the Edward G. Budd Manufacturing Company and J. Henry Schroder & Co., an English banking house, became the owners of all its outstanding shares of preferred and common stock, the Manufacturing Company acquiring a majority of the common and Schroder & Co. a majority of the preferred. In 1935 the taxpayer was called upon by the Manufacturing Company to procure some funds for it. The taxpayer owned shares of Pressed Steel Company of Great Britain, Limited, which had an immediate sales value. These shares were sold in February, 1936. The common shares were purchased by Schroder & Co. and the British Pacific Trust, Ltd. for $5,601,315.54 and the preference shares by Schroder & Co. for $503,303.93. Schroder & Co., which acted as the taxpayer's banker in this transaction, credited the taxpayer's account with $6,105,619.47. The taxpayer applied $3,908,604 of this credit to redeem its preferred shares owned by Schroder & Co. and to pay the dividends accrued on those shares. Schroder & Co. deducted $252,789.71 as its charge for expenses of the sale and gave the taxpayer credit for the remaining $1,922,386.34. The taxpayer applied these funds as follows:
Retirement of preferred stock
owned by the Manufacturing
Company and dividends
thereon ...................... $ 456,000.00
Reserve for federal and state
taxes ........................ 811,000.00
Dividends on common stock ...... 654,858.00
Cash remaining in the taxpayer's
treasury ..................... 528.34
_____________
Total ................... $1,922,386.34
The first question presented by the petition for review is whether the taxpayer in calculating its undistributed profits tax is entitled to the credits allowed by Subsection (c) (1) of Section 26 of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Acts, page 836, and by Subsection (g) which was added to Section 26 by Section 501 (a) (3) of the Revenue Act of 1942, 26 U.S.C.A. Int.Rev.Acts.
Subsection (c) (1) of Section 26 of the Revenue Act of 1936 permits a corporation which is subject to the surtax imposed upon corporate undistributed profits by Section 14 of that act, 26 U.S.C.A. Int. Rev.Acts, page 823, to compute its undistributed net income by taking credit for so much thereof as it is prohibited from paying to its stockholders in the form of dividends by "a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends." Before the Board of Tax Appeals the taxpayer argued that such a written contract prohibiting the payment of dividends to the holders of the common stock was embodied in its amended articles of incorporation and was set forth in the preferred stock certificates. The Board disposed of this argument by ruling that neither charter nor stock certificate could satisfy the statutory requirement of a written contract. This ruling is contrary to our decision in Lehigh Structural S. Co. v. Commissioner, 3 Cir., 1942, 127 F.2d 67, where the sole question was whether a stock certificate could be a contract within the meaning of Section 26 (c) (1) of the Revenue Act of 1936. We held that it could be.1
It was undisputed in the Lehigh Structural Steel Co. case that the charter and certificates were executed by the taxpayer in writing prior to May 1, 1936, and that the payment of dividends to the holders of the common stock was expressly prohibited until a certain portion of the taxpayer's net income had been paid into a preferred sinking fund. We held that the requirements of Section 26 (c) (1) were fully met and that the taxpayer was entitled to the claimed credit in computing its undistributed net income. In the present case it is undisputed that the amended articles of incorporation and the preferred stock certificates which included certain provisions of the amended articles were executed prior to May 1, 1936. There is, however, a controversy as to whether the provisions of the amended articles and preferred stock certificates are such as to be a direct prohibition against the payment by the taxpayer of dividends to the holders of the common stock.
Insofar as pertinent the amended articles of incorporation and preferred stock certificates provide that until all the preferred stock shall have been retired the taxpayer shall set aside as a sinking fund out of any earned surplus or net profits remaining after payment of dividends on the preferred stock a sum sufficient to purchase preferred stock equal to 3% of the largest number of shares of preferred ever issued and outstanding at any one time. It is then provided that "In no event so long as any of the preferred stock shall be outstanding shall any dividend whatever be paid or declared or any distribution made upon the common stock * * * until * * * full provision for the sinking fund, both current and accumulated, shall have been made."
The amended articles of incorporation and preferred stock certificates thus do embody a contract prohibiting the taxpayer from paying dividends to the holders of the common stock until the taxpayer has paid into a sinking fund each year an amount equal to 3% of the preferred stock. It follows that to the extent of the sinking fund payment the taxpayer was entitled to a credit in computing its undistributed net income and that the Board erred insofar as it ruled that Section 26 (c) (1) of the Revenue Act of 1936 did not entitle the taxpayer to such a credit.
In this court the taxpayer also urges that by virtue of Subsection (g), which was added to Section 26 of the Revenue Act of 1936 by Section 501 (a) (3) of the Revenue Act of 1942, it is entitled to credit in an amount equal to the profits from the sale of its Pressed Steel shares which it distributed in redemption of its preferred stock. To the extent that this distribution in redemption of the preferred stock satisfied the taxpayer's obligation to pay an amount equal to 3% of that stock into the sinking fund for its redemption, it was, as we have seen, allowable as a credit under Subsection (c) (1). The remainder of the distribution is allowable, if at all, only under Subsection (g). That subsection is by the express terms of Section 501(b) of the Revenue Act of 1942, 26 U.S.C.A. Int.Rev. Acts, made effective as of the date of the enactment of the Revenue Act of 1936. Subsection (g), however, was actually added to Section 26 after the decision by the Board in this case and consequently was not considered by the Board in arriving at its decision.
Section 26(g) provides:
To entitle the taxpayer to the credit allowed by Subsection (g) the distribution of the gain from the sale of the capital asset in redemption of the preferred stock had to be made prior to March 3, 1936 and pursuant to a contract. It is undisputed that negotiations for the sale of the Pressed Steel shares began November, 1935, and that the sale was made in January, 1936, and consummated in February, 1936, when the proceeds were distributed. The requirement that the distribution be before March 3, 1936 was thus fully met.
Was the distribution of the proceeds from the sale of the Pressed Steel shares made "pursuant to a contract" within the meaning of this subsection? It is undisputed that there was no written contract embodied in a single document expressly providing for such a distribution. The Commissioner argues that such a contract is required. We cannot agree. In contrast to Subsection (c) (1) of Section 26 which requires a "written contract" containing a provision which "expressly deals with the payment of dividends", Subsection (g) merely requires distribution "pursuant to a contract". We do not think that the two provisions are so far in pari materia as to require that the language of the one shall be read into the other. Such was clearly not the intention of Congress in enacting Subsection (g) as appears from its legislative history.
The problem to which that subsection is directed was brought to the attention of Congress by representatives of this taxpayer. They pointed out the inequity of imposing a tax by way of penalty upon a corporation for failure to distribute profits through...
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