Foley Securities Corp. v. Commissioner of Int. Rev.

• Decision Date: 11 October 1939
• Docket Number: No. 11458.,11458.
• Citation: 106 F.2d 731
• Parties: FOLEY SECURITIES CORPORATION v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

106 F.2d 731 (1939)

FOLEY SECURITIES CORPORATION v. COMMISSIONER OF INTERNAL REVENUE.

No. 11458.

Circuit Court of Appeals, Eighth Circuit.

October 11, 1939.

E. F. Hoeschen, of St. Paul, Minn. (C. C. Goodson, of St. Paul, Minn., on the brief), for petitioner.

Ellis N. Slack, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen. and Sewall Key and Harry Marselli, Sp. Assts. to Atty. Gen. on the brief), for respondent.

Before GARDNER, SANBORN, and WOODROUGH, Circuit Judges.

SANBORN, Circuit Judge.

The taxpayer, a Minnesota corporation organized in 1928 and a "personal holding company" within the meaning of Section 351 of the Revenue Act of 1934, c. 277, 48 Stat. 680, 751, 26 U.S.C.A. § 331 (which provides for a surtax upon the "undistributed adjusted net income" of such a corporation), has petitioned for a review of a decision of the Board of Tax Appeals (38 B.T.A. 1036) which sustained a deficiency of $4,100.59 in the surtaxes of the petitioner for the year 1934.

The facts are stipulated. The taxpayer at the beginning of 1934 had an operating deficit of $23,650.53. Its adjusted net income for the year 1934 was $49,909.52. It distributed to its stockholders $42,375.

Section 351(a) (1) provides for a surtax of 30 per cent upon the "undistributed adjusted net income" up to $100,000 of a personal holding company. Section 351 (b) (2) (A) provides that the term "undistributed adjusted net income" means the "adjusted net income" less a 20 per cent deduction (which the taxpayer was allowed) and (§ 351(b) (2) (C) less "dividends paid during the taxable year." Section 351(b) (4) reads: "The terms used in this section shall have the same meaning as when used in Title I Subchapters A-C of this chapter."

Title I, Section 115(a), 48 Stat. 711, 26 U.S.C.A. § 115(a), contains the following definition of "dividend": "The term `dividend' when used in this title chapter * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913."

Section 115(d) provides: "If any distribution (not in partial or complete liquidation) made by a corporation to its shareholders is not out of increase in value of property accrued before March 1, 1913, and is not out of earnings or profits, then the amount of such distribution shall be applied against and reduce the adjusted basis of the stock provided in section 113, and if in excess of such basis, such excess shall be taxable in the same manner as a gain from the sale or exchange of property."

The definition of "dividend" contained in Section 115(a) has been uniformly construed by the Board of Tax Appeals, and apparently almost without exception by the Commissioner, to mean a distribution made to shareholders out of earned surplus accumulated since February 28, 1913. Crystal Ice Co. v. Com'r, 14 B.T.A. 682, 688; Washburn v. Commissioner, 16 B.T.A. 1091, 1098; Shorb v. Commissioner, 22 B. T.A. 644, 645; Stifel v. Commissioner, 29 B.T.A. 1145, 1148-1150; Sale v. Commissioner, 35 B.T.A. 938, 939; Kinnear v. Commissioner, 36 B.T.A. 153, 155.¹

The taxpayer had, at the time it made the distribution of $42,375 to its shareholders, an earned surplus of $26,258.97 available for the payment of a "dividend". Therefore, when it distributed $42,375 to its shareholders, only $26,258.97 was a "dividend" under the ruling of the Board, and the balance was a distribution of capital not taxable to the shareholders, but which went to reduce the adjusted basis of their stock. The result was that, in computing the surtax liability of the taxpayer for the year 1934, the Commissioner deducted from its "adjusted net income" of $49,909.52 the 20 per cent deduction of $9,981.90 and $26,258.97 as a "dividend", or a total of $36,240.87, which left an "undistributed adjusted net income" of $13,668.65, upon which a surtax of 30 per cent was assessed, equalling $4,100.59. Had it not been for the existence of the operating deficit of $23,650.53, the taxpayer would have been liable for no surtax, since it had distributed to its shareholders more than 80 per cent of its "adjusted net income" for the year 1934.

The taxpayer contends that, in computing the surtax, the Commissioner should have deducted, as a dividend, from its "adjusted net income" the entire $42,375 which it had distributed to its shareholders. In support of this contention it cites Blair v. United States, 63 Ct.Cl. 193, certiorari denied 275 U.S. 546, 48 S.Ct. 84, 72 L.Ed. 418, which, in effect, held that a distribution to shareholders out of current earnings was a "dividend", although the capital of the corporation was impaired at the time the distribution was made. The Board of Tax Appeals has expressly refused to follow the Blair case (Washburn v. Commissioner, 16 B.T.A. 1091, 1098; Shorb v. Commissioner, 22 B.T.A. 644, 645), relying in part upon Willcuts v. Milton Dairy Co., 275 U.S. 215, at page 218, 48 S.Ct. 71, at page 72, 72 L.Ed. 247, in which the Supreme Court said: "But it is a prerequisite to the existence of `undivided profits' as well as a `surplus,' that the net assets of the corporation exceed the capital stock. Hence, where the capital is impaired, profits, though earned and remaining in the business, if insufficient to offset this impairment do not constitute `undivided profits.'" The Supreme Court also held in that case that the words "undivided profits", as commonly understood, describe such part of the excess in value of the corporate assets as consisted of profits which had neither been distributed as dividends nor carried to surplus account.

The taxpayer also cites Helvering v. Canfield, 291 U.S. 163, 54 S.Ct. 368, 78 L. Ed. 706. In that case the question was how much of a distribution made to shareholders in 1923 was tax exempt because derived from a surplus accumulated prior to March 1, 1913. It was held that losses of 1915 and 1916 should be charged against March 1, 1913, surplus, and did not have the effect of reducing profits earned in the years subsequent to 1916. We can find no suggestion in that opinion that a distribution made to shareholders by a corporation out of current earnings constitutes a "dividend" where, due to an impairment of capital, the corporation has no earned surplus.

It seems obvious to us that the ruling of the Board and of the Commissioner as to what constitutes a "dividend" under the definition of that term contained in Section 115(a) must be accepted as correct. It follows that the distribution which was made by the taxpayer to its shareholders in 1934 was a "dividend" only to the extent that it exceeded the operating deficit due to losses in prior years. It was deductible from the taxpayer's "adjusted net income" to the extent that it was such a "dividend", because Section 351(b) (2) (C) allowed a deduction for "dividends", and Section 351 (b) (4) expressly provided that the terms used in Section 351 should have the same meaning as in Title I, 26 U.S.C.A. § 1 et seq. Applying strictly the provisions of Section 351 to the taxpayer's situation, the taxpayer was entitled to have a credit, against its "adjusted net income", of only so much of the distribution to its shareholders in 1934 as equalled its earned surplus, which was $26,258.97.

It is apparent, therefore, that the rulings of the Commissioner and the Board to the effect that the taxpayer had an "undistributed adjusted net income" of $13,668.65 which was subject to the 30 per cent surtax, were in exact compliance with the letter of Section 351, and that the decision of the Board should be affirmed unless some other conclusion can reasonably be drawn from the language of Section 351 or unless that section violates some provision of the Constitution.

There can be no doubt that the purpose of Congress in enacting Section 351 was to compel each personal holding company to distribute its current earnings instead of accumulating them, so as to augment the income of its shareholders, thereby increasing the amount of their tax liability. There is nothing, aside from the letter of the statute, to indicate that Congress intended to impose a 30 per cent surtax upon the current earnings of such a corporation not available for "dividends" but actually distributed to its shareholders. We have no reason to suppose that the failure of Congress to provide that the word "dividends" as used in Section 351 (b) (2) (C) should include distributions to shareholders made from current earnings as well as those made from accumulated earnings, was anything more than an inadvertent omission which was subsequently corrected. See Section 109, Revenue Act of 1935, 49 Stat. 1014, 1020, and Section 115(a), Revenue Act of 1936, 49 Stat. 1648, 1687, 26 U.S.C. A. § 115 (a). This taxpayer, in distributing more than 80 per cent of its current earnings to its shareholders, fulfilled the intention of Congress when it enacted Section 351.

What we are in reality being asked to do, however, is to construe Section 351 as including language which Congress neglected to insert in it; to amend the section so as to provide that the term "dividends" shall be construed to mean not only distributions to shareholders out of accumulated earnings or profits, but also distributions made to them out of current earnings or profits. We have no power to make such an amendment, regardless of what we think the intent of Congress was.

It is true that courts have, not infrequently, departed from a too literal interpretation of a statute where the intention of the law makers was clear and a strict construction would defeat that intention or lead to absurd consequences. Oates v. First National Bank, 100 U.S. 239, 244, 25 L.Ed. 580; United States v. Kirby, 7 Wall. 482, 74 U.S. 482, 487, 19 L.Ed. 278; Heydenfeldt v. Daney Gold & S. M. Co., 93 U.S. 634, 638, 23 L.Ed. 995; Holy Trinity Church v. United States, 143 U.S. 457, 472, 12 S.Ct. 511, 36 L.Ed. 226; Lau Ow Bew v. United...