Helvering v. NO Nelson Co.
| Decision Date | 16 March 1943 |
| Docket Number | 12297,No. 12298,12298 |
| Citation | 133 F.2d 846 |
| Parties | HELVERING v. N. O. NELSON CO. N. O. NELSON CO. v. HELVERING. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Arnold Just, of St. Louis, Mo. (Abraham Lowenhaupt, Stanley S. Waite, H. M. Stolar, and Lowenhaupt, Waite & Stolar, all of St. Louis, Mo., on the brief), for N. O. Nelson Company.
S. Dee Hanson, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Helen R. Carloss, Sp. Assts. to Atty. Gen., on the brief), for Guy T. Helvering, Commissioner of Internal Revenue.
Before SANBORN, WOODROUGH and THOMAS, Circuit Judges.
In the two cases here presented cross-petitions were filed to review a decision of the United States Board of Tax Appeals, 45 B.T.A. 899. In No. 12,298 the taxpayer, N. O. Nelson Company, seeks reversal of that part of the decision holding that in computing income taxes for the years 1936 and 1937 the company is not entitled to the credit authorized by § 26(c) (1) of the Revenue Act of 1936, c. 690, 49 Stat. 1648, 26 U.S.C.A. Int.Rev.Acts, page 836, which grants a deduction from the tax imposed upon undistributed profits by § 14 of the Act, 26 U.S.C.A. Int.Rev.Acts, page 823. The Commissioner, in No. 12,297, seeks reversal of that part of the decision holding that the taxpayer is entitled to a credit in the amount of $87,500 under § 26(c) (2) of the Act in computing its surtax for the year 1937.
The facts are stipulated. The taxpayer, incorporated under the laws of Missouri in 1934, was organized by the N. O. Nelson Manufacturing Company to continue its business in accordance with the terms of an agreement dated December 3, 1934, between the taxpayer, the Manufacturing Company, and sundry creditors of the latter.
Under the terms of the agreement the Manufacturing Company transferred certain of its assets with a book value of $791,808.54 to the taxpayer in consideration of its entire capital stock and assumption of certain liabilities. The transaction became effective December 31, 1934, and the taxpayer commenced operations January 1, 1935, with a capital stock of $100,000 and a capital surplus of $691,808.54.
In accordance with the terms of the agreement, by March 1, 1936, cash and credit were advanced to the taxpayer by Spang, Chalfant & Company and the American Radiator & Standard Sanitary Corporation amounting to $120,000 each. This indebtedness was evidenced by the notes of the taxpayer endorsed by the Manufacturing Company. Fifty per cent of the capital stock of the taxpayer was deposited with each of these creditors as collateral to secure payment of credit extended for merchandise purchased.
A second agreement dated January 21, 1936, was entered into by the taxpayer with the Manufacturing Company, the two creditors named above, and the Mercantile-Commerce Bank and Trust Company, trustee under a mortgage given by the Manufacturing Company on May 5, 1933, for the benefit of creditors. On April 1, 1936, under the second agreement the taxpayer executed new notes of $120,000 each to its two above-named creditors. This agreement provided that payments on the principal of these notes would not be enforced prior to April 1, 1941.
On April 1, 1936, in consideration of cash loaned, the taxpayer gave the Manufacturing Company its note for $110,000, which note was endorsed by the payee and deposited as additional security with the trustee under the mortgage of May 5, 1933.
During 1936 no payments were made by the taxpayer on its outstanding notes, but in 1937 payments of $30,000 each were made on the two $120,000 notes and of $27,500 on the $110,000 note, so that the payments in 1937 on note obligations aggregated $87,500.
For the calendar year 1935 the taxpayer sustained a loss of $61,156, for the year 1936 it realized an income of $21,796.48, and in 1937 of $156,997.98, before provision for federal and state income taxes. No dividends were declared nor paid in 1936 and 1937.
The taxpayer claims a credit under § 26 (c) (1) of the Revenue Act of 1936 of its entire "adjusted net income" for the years 1936 and 1937 in computing its undistributed profits tax, on the ground that none of such net income could have been distributed in either year "as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends."
In the alternative the taxpayer claims that, in any event, in computing such tax for 1937, it is entitled to a credit for $87,500 under § 26(c) (2) of the Act, the amount actually paid on its note obligations in that year.
The Board denied the taxpayer's claim under § 26(c) (1) and granted the claimed credit for 1937 under § 26(c) (2).
The contract provisions relied upon by the taxpayer on both appeals are found in the two agreements referred to above. The agreement of December 3, 1934, after providing for the pledge of the taxpayer's stock to secure credit for merchandise, reads: "All dividends, if any, upon said stock so deposited as collateral shall be paid only out of current earnings to the respective pledgees thereof to be applied on account of any indebtedness owing to them at the time of such payment."
And the agreement of January 21, 1936, provides:
* * * * * *
Considering first the taxpayer's claimed credit under § 26(c) (1), it will be noted that the provision of the agreement of December 3, 1934, relied upon, is dated prior to May 1, 1936, and "expressly deals with the payment of dividends", and that the provisions of the contract of January 21, 1936, do not mention dividends. The Board found that the latter contract and the former deal with the same subject matter and that the latter is an amendment to the first; that the amended contract, which is controlling, eliminated the provision expressly referring to the payment of dividends in the original contract and required that "all surplus funds not required for carrying on its business", "which * * * included current earnings", be paid to creditors on the taxpayer's obligations. As so amended the contract did not "expressly" prohibit the payment of dividends.
The taxpayer contends that the two contracts must be read together; that so construed they "expressly" prohibit the payment of any dividends; that the only change effected by the amendment was to require the surplus funds, including current earnings, to be paid to three instead of to two creditors.
This contention is without merit. The provision of the second contract relied upon does not "expressly" prohibit the payment of dividends, and an implied prohibition is not available to the...
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