Harter v. Helvering, 378.
| Decision Date | 08 July 1935 |
| Docket Number | No. 378.,378. |
| Citation | 79 F.2d 12 |
| Parties | HARTER v. HELVERING, Com'r of Internal Revenue. CAREY v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Second Circuit |
Theodore B. Benson, of Washington, D. C., for appellants.
Frank J. Wideman, Asst. Atty. Gen., and Sewall Key and F. E. Youngman, Sp. Assts. to the Atty. Gen., for appellee.
Before L. HAND, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
These are appeals (petitions to review) from orders of the Board of Tax Appeals fixing deficiencies in the taxpayers' income taxes for the year 1927, during which, as shareholders in a company called the "Boxboard Products Company," they received a dividend on shares held by them. They defended on the ground that this dividend had in large part been paid out of earnings made before March 1, 1913, and was to that extent not taxable. This depends upon a distribution made in 1926, by which the Boxboard Company redeemed its preferred shares. If this distribution is to be allocated against earnings made after March 1, 1913, it exhausted them as of the date when it was made, and the larger part of the dividend paid in 1927 came out of exempt earnings. The solution requires a statement at some length, not only of the affairs of the Boxboard Products Company, but of its predecessors.
The Philadelphia Paper Manufacturing Company was a Pennsylvania company organized in 1896; on March 1, 1913, its capital stock was only $100,000, but it had accumulated a surplus of $2,221,546.45. Between then and the end of June, 1923, it had accumulated $1,973,787.99 more. The Fibre Container Company was organized in 1916; its capital at the end of June, 1923, was $350,000, and its surplus, $211,799.79. On June 30, 1923, a third company was organized, likewise called the "Philadelphia Paper Manufacturing Company," which to avoid confusion we shall speak of as the "New Company." Shareholders in the old Philadelphia company got fifty shares of the New Company stock for one; those of the Fibre Company, five for one; the two older companies were merged into the New Company and ceased to exist, though by exactly what legal steps does not appear. At the conclusion of the merger the New Company had therefore issued $3,164,750 of capital stock and had a surplus of $1,692,384. The Boxboard Company was organized in 1921; it was small and apparently unsuccessful, for its nonpar shares were entered on its books at $66,945, against which there was a deficit of $17,388.95, leaving a net worth of a little less than $50,000. In April, 1926, the Boxboard Company consolidated with the New Company, as follows: It received all the shares of the New Company and in exchange issued to that company's shareholders 63,295 shares of its own preferred 7 per cent. stock of a par of $50 and a like number of nonpar common shares. The assets of the New Company were not transferred, and in September, 1926, the New Company agreed to sell all of them to the Container Corporation of America; the price was $2,500,000 in cash and a like amount of 7 per cent. preferred shares of the Container Company. At the same time the Boxboard Company retired at a premium of $2.50 its whole issue of preferred shares; this required $3,322,987.50, which the Boxboard Company borrowed from the New Company by means of its note. The source of the money paid by the New Company does not appear; the cash payment of the Container Company was not enough by more than $800,000; apparently either cash to that extent was reserved out of the assets upon the sale to the Container Company, or the New Company sold some of its preferred shares of the Container Company received on the sale. On December 15, 1926, the Boxboard Company liquidated the New Company, taking over substantially all its assets and cancelling the note. The question is how to allocate the payment to the Boxboard preferred shareholders made out of the proceeds of this loan by the ...
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