Century Elec. Co. v. Comm'r of Internal Revenue
| Decision Date | 18 February 1944 |
| Docket Number | Docket No. 108667. |
| Citation | 3 T.C. 297 |
| Parties | CENTURY ELECTRIC COMPANY, A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
For the period from March 1, 1913, to December 31, 1935, the petitioner's earnings and profits were substantially in excess of the cash dividends Aid. On its books, such excess of earnings and profits were capitalized through the payment of stock dividends of common stock on common stock. Held, that the payment of the stock dividends did not effect a distribution of petitioner's earnings and profits, see section 115(h) of the Revenue Act of 1936, and that the petitioner at December 31, 1935, and at December 31, 1936, did not have a deficit in accumulated earnings and profits and is not entitled to a credit under section 26(c)(3) of the Revenue Act of 1936, as amended by section 501 of the Revenue Act of 1942, for the purpose of computing its undistributed profits tax for the years 1936 and 1937. Davis Haskin, Esq., for the petitioner.
W. Frank Gibbs, Esq., for the respondent.
SUPPLEMENTAL OPINION.
As originally presented, the only issue in this proceeding was whether, for the purpose of determining the surtax on its undistributed profits, the petitioner was entitled to certain credits under section 26(c)(2) of the Revenue Act of 1936, because of a contract restricting the payment of dividends. On November 30, 1942, this Court entered its memorandum opinion deciding the issue against the petitioner, and on December 1, 1942, entered its decision pursuant to the memorandum opinion. Thereafter on December 31, 1942, petitioner filed motions to vacate the decision and for leave to amend its petition to allege that it had ‘a deficit in accumulated earnings and profits ‘ as of December 31 of the years 1935 and 1936 and under section 26(c)(3) of the Revenue Act of 1936, added as an amendment to section 26 of the said act by section 501 of the Revenue Act of 1942, was entitled to a credit against adjusted net income equal to the amount of such deficit. Section 26(c)(3) having been inserted in the statute after the proceeding was submitted, the motions were granted, the decision previously entered was vacated, and the petition was amended as indicated. A hearing was had, at which all of the facts were submitted by written stipulation of the parties. Retrial of the issue previously decided was neither asked nor allowed and our conclusions thereon remained unchanged. Accordingly the only issue presented by the pleadings now remaining for determination is whether the petitioner is entitled to a credit under section 26(c)(3).
The facts are found as stipulated.
In section 26(c)(3), supra, it is provided that ‘a corporation having a deficit in accumulated earnings and profits as of the close of the preceding taxable year‘ is entitled to a credit in the amount of the deficit ‘if the corporation is prohibited by a provision of a law or of an order of a public regulator 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.‘ From the above language, it is apparent that the credit in question is allowable only to ‘a corporation having a deficit in accumulated earnings and profits as of the close of the preceding taxable year,‘ and then only if such corporation is prohibited by law or by an order of a public regulatory body from paying dividends during the existence of such deficit. If therefore the petitioner had no ‘deficit in accumulated earnings and profits ‘ within the meaning of section 26(c)(3) as of the close of the year preceding each of the taxable years, it is entitled to no credit under the said section and it becomes unnecessary to consider the various prohibitions appearing in the Missouri statutes against the payment of dividends.
According to its books petitioner had a credit balance in its surplus account at December 31, 1935, of $243,039.22. From March 1, 1913, to December 31, 1935, its net operating profits, less net operating losses for certain of the years, $5,818,743.29. During the same period patents were written up in the net amount of $180,000, while net premiums on the sale of petitioner's stock amounted to $399,246.26. These items constituted all of the credits to surplus during the period from March 1, 1913, to December 31, 1935, and with the credit balance appearing in the surplus account at March 1, 1913, of $358,153.06, totaled $6,756.61. The credit balance in the surplus account at March 1, 1913, represented earnings and profits of $321,943.06, write-up of patents, $10,000, and premiums on the sale of capital stock, $27,110. The charges against surplus from March 1, 1913, to December 31, 1935, which left the credit balance at the latter date of $243,039.22, were cash dividends $3,252,142.65, stock dividends $3,161,597, and net charges through profit and loss $99,363.74, or a total of charges for the period of $6,513,103.39. At December 31, 1936, the credit balance shown in the surplus account was $421,866.90, the increase over the balance at December 31, 1935, being attributed to 1936 earnings. Dividends were paid in 1936 in the amount of $181,207, and in 1937 in the amount of $158,693.50.
It is the claim of the petitioner that when certain items are eliminated from the surplus account which do not represent earnings and profits and when proper charges against earnings and profits in respect of other items are made, deficits ‘in accumulated earnings and profits‘ of $672,817.04 at December 31, 1935, and $481,489.36 at December 31, 1936, are indicated. The adjustments which petitioner claims should be made are the exclusion of $190,000 representing the net write-up of patents in prior years, and $426,356.26 representing premiums on the sale of its capital stock, and a charge which it is claimed must be made against earnings and profits in an amount equal to the par of its capital stock held as treasury stock at any given date, the amount of treasury stock at December 31, 1935, being $299,500, and at December 31, 1936, $287,000.
The parties agree on two points, namely, that net operating profits for the period from March 1, 1913, to December 31, 1935, amounted to $5,818,743.29, and that cash dividends paid during the period in the total amount of $3,252,142.65 are to be deducted in determining the amount of ‘accumulated earnings and profits‘ or the deficit therein, as the case may be. They are not in agreement, however, as to the effect of certain other of the above charges and credits. The largest of these is the item of stock dividends of the par value of $3,161,597. It is at once apparent that if the issuance of a stock dividend does not serve to reduce ‘accumulated earnings and profits‘ for the purpose of determining the credit under section 26(c)(3), supra, the respondent must prevail, since in that case the petitioner had accumulated earnings and profits at both ...
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