Crawford Drug Stores v. United States

• Decision Date: 15 March 1955
• Docket Number: No. 4975.,4975.
• Citation: 220 F.2d 292
• Parties: CRAWFORD DRUG STORES, Inc., Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

220 F.2d 292 (1955)

CRAWFORD DRUG STORES, Inc., Appellant, v. UNITED STATES of America, Appellee.

No. 4975.

United States Court of Appeals, Tenth Circuit.

March 15, 1955.

Henry L. Fist, Tulsa, Okl. (C. H. Rosenstein, Tulsa, Okl., was with him on the brief), for appellant.

Dudley J. Godfrey, Jr., Washington, D. C. (H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Robert N. Anderson, Edmund C. Grainger, Jr., Sp. Assts. to the Atty. Gen., and B. Hayden Crawford, U. S. Atty., Tulsa, Okl., were with him on the brief), for appellee.

Before PHILLIPS, Chief Judge, BRATTON, Circuit Judge, and VAUGHT, District Judge.

BRATTON, Circuit Judge.

The question presented for determination is whether certain sums paid by Crawford Drug Stores, Inc., constituted payment of dividends within the purview of section 115(a) of the Internal Revenue Code, 26 U.S.C.A. § 115(a), or payment of interest within the meaning of section 23(b) of such Code, 26 U.S.C.A. § 23(b). If the former, they were not deductible in computing net income. If the latter, they were deductible.

Crawford Drug Stores, Inc., is a corporation organized under the laws of Oklahoma. Prior to July 7, 1945, it had issued and outstanding 500 shares of common stock of the par value of $100 per share. At a special meeting of the stockholders held on July 7, 1945, a resolution was adopted increasing the capital stock of the corporation to $100,000, divided into 500 shares of preferred stock of the par value of $100 each, and 500 shares of common stock of the par value of $100 each. The action of the stockholders was set up on the books of the corporation as preferred stock authorized on the credit side and as preferred stock unissued on the debit side. A certificate of "Increase of Capital Stock" was filed in the office of the Secretary of State of Oklahoma. It was stated in the certificate that the capital stock, as increased, was $100,000, divided into 500 shares of preferred and 500 shares of common stock, each of the par value of $100. And annual franchise tax returns for the fiscal years 1947 and 1948 were filed with the State of Oklahoma in which it was reported that the outstanding capital stock of the corporation consisted of shares of common and first preferred stock. The certificates of shares issued pursuant to the action of the stockholders certified that the person named therein was the owner of the specified number of fully-paid and non-assessable shares of the preferred capital stock, transferable only on the books of the corporation by such owner in person or by his duly authorized attorney, upon surrender of the certificate properly endorsed. The certificates further certified that the total capital stock of the corporation was $100,000, divided into $50,000 of preferred stock and $50,000 of common stock, as provided in the articles of incorporation of the corporation. And they further certified that a statement of all the designations, preferences, privileges, and voting powers or restrictions or qualifications of the shares of preferred stock which the corporation was authorized to issue appeared on the back thereof. On the reverse side of the certificates, it was stated that the preferred stock was entitled to preference and priority over any subsequent issue of preferred stock and over the common stock to receive cumulative dividends of five per cent per annum; that upon dissolution of the corporation, after payment of all debts, the assets should be first applied to the payment of preferred stock at par with any unpaid accumulations thereon before any payment was made to the holders of any subsequent preferred stock or of common stock; that the corporation should not without the consent in writing of the stockholders of record of at least fifty-one per cent in amount of the outstanding preferred stock increase the amount of the preferred stock, change any voting powers of any class of capital stock, or create any issue of stock prior to or on a parity with the preferred stock; that the holders of the preferred stock should be entitled to receive dividends at the rate of five per cent per annum, payable semi-annually; that such dividends should be cumulative and should be payable out of the net earnings of the corporation so long as such preferred stock was outstanding; that the preferred stock was absolutely and unequivocably payable on July 15, 1965; that if the holder of any certificate thereof was not paid on such date, he should have the right to require the dissolution of the corporation and the application of its assets to the liabilities and thereafter to the preferred stock to the extent of par value thereof plus any accumulation of unpaid dividends thereon; and that in the event of dissolution, bankruptcy, or termination of the corporation, the par value of the preferred stock and all cumulative interest thereon should be paid in full before the common stock or any part thereof or any dividend thereon was paid. Shortly after the meeting of the stockholders, 300 shares of the authorized preferred stock were issued; and about six months later, the remaining 200 shares were issued. The three persons to whom such shares were issued owned common stock in the corporation. At the time of the meeting of the stockholders, the corporation was in need of $50,000 additional operating capital.

It was originally felt that the owners of common stock should make a direct loan to the corporation and take its notes therefor. In the course of the discussion at the meeting it was felt that the making of a direct loan and the taking of notes therefor would have the effect of weakening the credit of the corporation by increasing its current liabilities. Thereupon it was proposed that the parties advance to the corporation the necessary funds and accept as evidence thereof debentures of preferred stock. And the resolution authorizing an increase in the capital of the corporation was adopted under such circumstances.

In 1947, the corporation made payment of certain sums to the holders of the preferred stock. The payment constituted payment of dividends or of interest, depending upon whether the certificates were shares of preferred stock or evidence of indebtedness. A like payment was made in 1948. In its income tax returns for such years, the corporation did not claim any deduction for such payments. Thereafter, claims for refund were seasonably filed. The claims in presently pertinent part were predicated upon the asserted contention that the shares of preferred stock were only debentures or promissory notes and that the two sums paid to the holders thereof constituted payments...