Dynamics Corporation of America v. United States

• Decision Date: 15 March 1968
• Docket Number: No. 338-65.,338-65.
• Citation: 183 Ct. Cl. 101,392 F.2d 241
• Parties: DYNAMICS CORPORATION OF AMERICA (formerly Claude Neon, Inc.) v. The UNITED STATES.
• Court: U.S. Claims Court

183 Ct. Cl. 101, 392 F.2d 241 (1968)

DYNAMICS CORPORATION OF AMERICA (formerly Claude Neon, Inc.) v. The UNITED STATES.

No. 338-65.

United States Court of Claims.

March 15, 1968.

David E. Wasserstrom, Washington, D. C., attorney of record, for plaintiff. Goodwin, Rosenbaum, Meacham & White, Washington, D. C., of counsel.

Mildred L. Seidman, Washington, D. C., with whom was Asst. Atty. Gen. Mitchell Rogovin, for defendant. Philip Miller, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON, and NICHOLS, Judges.

ON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

COWEN, Chief Judge.

This is a suit for refund of 1953 corporate income taxes based on a loss carryback from 1954. The facts are as stipulated, and, since there is no dispute between the parties concerning them, the only issues to be resolved are legal questions raised by cross-motions for summary judgment. The plaintiff, Dynamics Corporation of America, is a successor through merger to Claude Neon, Inc. (hereafter Neon).

After plaintiff filed its claim for refund, the Commissioner of Internal Revenue Service conducted an audit of Neon's 1953 tax return and concluded that certain payments received in that year and not theretofore considered in computing the 1953 tax had been improperly omitted. The effect of this determination and recomputation was to increase taxpayer's 1953 income and, at the same time, reduce the 1954 carryback, the net result of all of which was to completely offset plaintiff's claim for refund. Specifically, the Commissioner concluded that certain payments made by a subsidiary corporation, Reeves-Ely Laboratories, Inc. (hereafter Reeves-Ely), to its parent, Neon, pursuant to an agreement under which Neon filed a consolidated tax return were to be regarded as dividends and therefore taxable in the year received, 1953.

Defendant asks us to sustain the Commissioner's determination. Plaintiff, on the other hand, argues that these payments represent income other than dividends, but that, in any event, under its accrual method of accounting, these payments are to be computed as part of its 1952 taxable income. If plaintiff is correct in its contention, its carryback to 1953 would be unimpaired and it would be entitled to refund. We conclude, however, that the payment was a dividend and taxable in 1953. We also hold that in computing the net operating loss deduction for 1953, the 85 percent dividend received credit from the payments in issue is available to offset the 1954 carryback loss. These determinations are dispositive of the case.

The nature of the payments can be understood from the following: During the years 1950 through 1952, Neon was the parent of an affiliated group of corporations as that term is defined in Section 141 of the 1939 Internal Revenue Code (26 U.S.C. § 141(d) (1952)). The affiliated group included Neon's three wholly owned subsidiaries, a 99.24 percent controlled subsidiary, Reeves-Ely, and Reeves-Ely's six wholly owned subsidiaries. All of these corporations used an accrual method of accounting.

A December 29, 1950 agreement provided that Neon and Reeves-Ely would file consolidated Federal tax returns whenever a consolidated filing was required, or whenever such a filing reduced the tax liability for the entire group below what would be the aggregate liability if each corporation filed separately. The agreement provided that Reeves-Ely would pay to Neon, as the former's "constructive tax liability", an amount equal to Reeves-Ely's minimum tax liability. Further, it was agreed that if Neon's actual consolidated tax liability for a taxable period was reduced by the Inclusion of Reeves-Ely and the latter's subsidiaries in a consolidated return, Neon would pay to Reeves-Ely as a capital contribution an amount equal to the reduction in tax liability resulting from the consolidated filing.

It is important to note that Section 141 of the 1939 Internal Revenue Code permitted the filing of consolidated returns only so long as a parent held 95 percent or more control of the subsidiary to be included in the consolidated return. Pursuant to the agreement, Neon filed a consolidated return which included Reeves-Ely and its subsidiaries for 1950, 1951, and part of 1952. After October 23, 1952, Reeves-Ely and its subsidiaries were no longer eligible for inclusion in the consolidated return of Neon, because on that date, as a result of the conversion of some of Reeves-Ely's preferred stock to common stock, Neon's holdings of Reeves-Ely stock fell to something just below the required 95 percent.

Customarily, Reeves-Ely made its constructive tax payments to Neon sometime after the period for which the taxes were due. Specifically, its constructive tax liability for 1950 was paid to Neon in part in 1950 and the remainder in 1951, and payment for its 1951 tax liability was made to Neon in 1952. Similarly, between March 13, 1953 and December 16, 1953, Reeves-Ely paid to Neon a total of $2,561,015 as its constructive tax liability for 1952. This amount was paid with the understanding of both companies that the December 29, 1950 agreement was valid and binding, and that there would be no restriction on Neon's use of any part of the payments. No part of the payment was made available to Neon prior to 1953. The Commissioner determined that the taxes allocable to Reeves-Ely and its subsidiaries for the year 1952 were only $1,680,614.30. Therefore, Neon received, in 1953, a total of $880,400.70 from Reeves-Ely in excess of the latter's tax liability. The Commissioner treated this excess amount as a dividend received in 1953, and we sustain that determination.

The effect of characterizing the $880,400.70 payment as a dividend received in 1953 was, of course, to require a recomputation of Neon's 1953 tax liability, for that amount had not earlier been considered in computing taxpayer's liability. After audit and despite consideration of the 1954 carryback loss, the Commissioner found that there remained a deficiency of $78,628.90; however, this deficiency cannot now be assessed because of the running of the statute of limitations.

I

Plaintiff has been steadfast in its contention, urged in pleadings and orally before this court, that the payments in issue were not dividends. However, plaintiff has presented no persuasive support for its argument and has failed to direct us to any section of the Internal Revenue Code or to any case law which shows that the payments should be treated other than as dividends.

The parties have stipulated that the payments in issue were made in 1953 and also that Reeves-Ely had on hand as of December 31, 1953, earnings and profits at least equal to the amount which the Commissioner has determined to be paid as dividends. We find, therefore, that those payments made by Reeves-Ely to Neon which were in excess of the former's allocable share of the consolidated tax liability constituted dividend distributions within the meaning of the 1939 Internal Revenue Code.

Section 115 of that Code defined a dividend as:

(a) * * * any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year) without regard to the amount of the earnings and profits at the time the distribution was made * * *. (26 U.S.C. § 115(a) (1952)). Emphasis added.

It is important to note also that subsection (b) of section 115 provided, in pertinent part, that:

(b) Source of Distributions. — For the purposes of this chapter every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings and profits * * *. (26 U.S.C. § 115(b) (1952)). Emphasis added.

We call attention to the italicized words "any" and "every" in the subsections (a) and (b) above and interpret those provisions, taken together, to mean that a distribution is presumed to be made out of earnings and profits and, to the extent thereof, constitutes a dividend, unless the distribution is specifically covered by some other section of the code. Adapting the language of subsection (a), therefore, we have here a distribution in the form of an excessive payment for constructive tax liability, made by a corporation, Reeves-Ely, to its shareholder, Neon, out of earnings and profits. Plaintiff has failed to call our attention to any other section of the code which would better apply to the payments, and we have found no other. We are satisfied that the payments constituted a dividend.

Parenthetically, it will be recalled that at the time Neon received the payments in 1953, it owned less than 95 percent of the outstanding Reeves-Ely common stock. However, the fact that Neon was the only shareholder to receive the payments now in issue does not deprive the payments of their classification as dividends. It is not necessary that a dividend be paid to all shareholders. Lincoln Nat'l Bank v. Burnet, 61 App. D.C. 354, 63 F.2d 131, 133 (1933).

We note that the case of Beneficial Corp. v. Comm'r, 18 T.C. 396 (1952), aff'd per curiam, 202 F.2d 150 (3d Cir. 1953), involved a question identical to the one we face here, to wit, in the language of the Tax Court, "whether amounts paid to petitioner in 1946 by its subsidiary corporations with whom it filed a consolidated return for 1945 constituted taxable dividends to the extent that they exceeded the tax liabilities properly allocable to the subsidiaries in the consolidated return." (18 T.C. at 397).

The taxpayer in Beneficial for the year 1945 filed a consolidated income and excess tax return in which it listed the operations of itself and five immediate subsidiaries. Each subsidiary consented to the filing...