Helvering v. Alworth Trust, 12517.

• Decision Date: 12 July 1943
• Docket Number: No. 12517.,12517.
• Citation: 136 F.2d 812
• Parties: HELVERING, Com'r of Internal Revenue, v. ALWORTH TRUST et al.
• Court: U.S. Court of Appeals — Eighth Circuit

136 F.2d 812 (1943)

HELVERING, Com'r of Internal Revenue, v. ALWORTH TRUST et al.

No. 12517.

Circuit Court of Appeals, Eighth Circuit.

July 12, 1943.

Warren F. Wattles, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and L. W. Post, Sp. Assts. to Atty. Gen., on the brief), for petitioner.

H. A. Dancer, of Duluth, Minn. (E. W. MacPherran and J. E. Montague, both of Duluth, Minn., on the brief), for respondent.

Before THOMAS and JOHNSEN, Circuit Judges, and VOGEL, District Judge.

THOMAS, Circuit Judge.

This case is presented on a petition of the Commissioner of Internal Revenue to review a decision of the United States Board of Tax Appeals, now the Tax Court, reversing the Commissioner's determination of a deficiency in respondent's income tax for 1937. 46 B.T.A. 1045.

The facts found by the Board giving rise to the controversy are not in dispute. The taxpayer, a testamentary trust, is a stockholder of the Royal Mineral Association, a Minnesota corporation, hereinafter referred to as the corporation. The Commissioner and the taxpayer do not agree as to what portion of the distributions made by the corporation to its stockholders during the taxable year 1937 constitutes taxable dividends within the meaning of the Revenue Act of 1936, c. 690, 49 Stat. 1648, 26 U.S.C.A. Int.Rev.Acts, page 813, and Treasury Regulations 94. The corporation has no interest in the controversy. The stockholder alone is interested as an income taxpayer.

The corporation owned certain mineral interests in the Mesaba Range in Minnesota. In each year of its existence it distributed to its stockholders all of its net earnings for the year and substantial amounts from depletion reserves. As a result no earned surplus was ever carried over from one year to the next. The record does not indicate, nor is it claimed, that the corporation's capital was impaired either at the beginning of or at any time during the taxable year.

The corporation's taxable net income for 1937 was $464,033.94, on which the income tax paid in 1938 was $92,552.88. In 1937 it paid an income tax in the amount of $30,606.76 on its income for 1936.

During 1937 the taxpayer received distributions from the corporation in the sum of $218,070. In its income tax return it computed that of this amount the sum of $111,444.24 comprised taxable dividends. The Commissioner determined that $130,028.60 of the $218,070 was made up of taxable dividends and increased the amount reported by the taxpayer from that source by $18,584.36 and thereby determined an income tax deficiency of $5,289.66.

The difference between the two methods of computation is that in determining the corporation's 1937 earnings or profits available for distribution as dividends to its stockholders the taxpayer deducted from the net income of the corporation for that year the federal income tax imposed upon the 1937 income, although payable and paid in 1938, while the Commissioner deducted the 1936 tax payable and paid by the corporation in 1937.

The corporation kept its books and filed its income tax returns on the cash receipts and disbursements basis; and in the petition on appeal to the Board it appears that the taxpayer kept its books and made its returns in the same way.

The decision of the Board sustained the method of computation used by the taxpayer on the theory that in determining earnings and profits available for distribution as dividends taxes on current income must be taken into account, regardless of the method by which the corporation keeps its books, because, since the corporation had no accumulated earnings or profits at the beginning of the year, such an outstanding liability is a charge on capital.

Section 22(a) of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Acts, page 825, provides that: "`Gross income' includes gains, profits, and income derived from * * * dividends * * *." Section 22(d) provides that "Distributions by corporations shall be taxable to the shareholders as provided in section 115." Section 115(a), 26 U.S.C.A. Int.Rev.Acts, page 868, reads, "The term `dividend' * * * means any distribution made by a corporation to its shareholders, * * * (2) out of the earnings or profits of the taxable year * * *."

Article 115 — 1 of Regulations 94 provides that: "A taxable distribution made by a corporation to its shareholders shall be included in the gross income of the distributees when the cash or other property is unqualifiedly made subject to their demands." Article 115 — 3 provides that: "In determining the amount of...