Mengel Co. v. Glenn

• Decision Date: 09 August 1943
• Docket Number: No. 471.,471.
• Citation: 50 F. Supp. 765
• Parties: MENGEL CO., Inc., v. GLENN, Collector of Internal Revenue.
• Court: U.S. District Court — Western District of Kentucky

50 F. Supp. 765

MENGEL CO., Inc., v. GLENN, Collector of Internal Revenue.

No. 471.

District Court, W. D. Kentucky, Louisville Division.

August 9, 1943.

Charles G. Middleton and Bullitt & Middleton, all of Louisville, Ky., for plaintiff.

Samuel O. Clark, Jr., Asst. Atty. Gen., Andrew D. Sharpe and Edward First, Sp. Assts. to Atty. Gen., and Eli H. Brown, III, U. S. Atty., of Louisville, Ky., for defendant.

MILLER, District Judge.

The Mengel Company, a New Jersey corporation with its principal office in Louisville, Kentucky, filed this action against the Collector of Internal Revenue for the District of Kentucky to recover $18,127.33 with interest which it claims was erroneously assessed against it and paid by it under protest as a deficiency surtax on undistributed profits for the calendar year 1936. Claim for refund was duly filed and denied before the bringing of this action. All of the facts have been stipulated by the parties.

Prior to May, 1932, the plaintiff had outstanding 320,000 shares of no par value common stock which was carried on its books at a stated value of $25 per share or a total of $8,000,000. On May 4, 1932, this stated capital was reduced from $25 per share to $1 per share and the difference of $24 per share, aggregating $7,680,000 was transferred from Capital to Surplus on the books of the Company. The certificate of amendment to the plaintiff's charter making this change provided that the transfer of this $7,680,000 from Capital to Surplus was "upon the condition and subject to the proviso that no part of said amount may be utilized for the payment of dividends on either the preferred or common stock of this Company so long as it has bonds outstanding, and that no part of said amount be utilized for the payment of dividends on the common stock of this Company so long as it has preferred stock outstanding; * * *." On May 23, 1932, the plaintiff's by-laws were amended by adding to Article X thereof, dealing with dividends on preferred and common stock the following paragraph:

"Subject to the condition and proviso, however, that no part of the sum of $7,680,000 transferred from Capital to Surplus, pursuant to Resolution duly adopted at the Stockholders' Meeting duly called and held on May 4th, 1932, amending the Certificate of Incorporation by changing the authorized Common Stock from No Par Value to the par value of One ($1.00) Dollar per share, and reducing the stated capital of the outstanding 320,000 shares of Common Stock from $25.00 per share on the books of the Company to One ($1.00) Dollar per share, may be utilized for the payment of dividends on either the Preferred or Common stock of this Company so long as it has bonds outstanding, and that no part of said amount may be utilized for the payment of dividends on the Common stock of this Company so long as the Company has Preferred stock outstanding."

In 1922 the plaintiff had issued bonds in the amount of $5,000,000 secured by an indenture dated March 1, 1922. These bonds were payable in specified annual installments with a balance of $3,000,000 principal amount falling due on March 1, 1934. In 1934 the plaintiff found it necessary to secure an extension of this maturity date for five years and accordingly requested the bondholders to agree to such extension. As consideration each bondholder was offered either an immediate 2% cash premium or an option to convert the bonds into common stock at specified times during the following five years at fixed conversion rates. A sufficient number of the bondholders agreed to the extension to make the plan operative and a supplemental indenture dated as of March 1, 1934, was executed securing the bonds as extended.

For the years 1932 to 1936 the plaintiff maintained two surplus accounts called Capital Surplus and Earned Surplus (deficit). The Capital Surplus account created in 1932 by the transfer of $7,680,000 from the capital account remained constant through these five years except for an increase of $471.50 in 1934, which arose out of a sale of stock over the stated value of $1.00 per share per value. The Earned Surplus (deficit) started in 1932 with a debit balance of $121,360.51, which deficit was increased in subsequent years by operating and other losses until December 31, 1935, when it totalled $4,294,671.50. In 1936 plaintiff had a net income of $271,067.56 which reduced earned surplus deficit to $4,023,603.94. No dividends were declared or paid by the plaintiff during the years 1932 to 1936 inclusive.

In computing its surtax on undistributed profits for the year ending December 31, 1936, the plaintiff claimed a credit for restriction on dividends of $72,207.94 under Section 26(c) (1) of the Revenue Act of 1936. This credit was thereafter disallowed and the deficiency assessment above referred to made and paid under protest.

In order to carry out the plan for extension of the bonded indebtedness it was necessary for the plaintiff to file three registration statements with the Federal Trade Commission. Two of these were filed on December 16, 1933 on Form A-1 and on Form D-1. The registration statement on Form A-1 was filed in connection with the increase of the amount of authorized common stock to be able to meet the conversion privilege offered to bondholders. The registration statement on Form D-1 was filed in connection with the issuance of certificates of deposit in pursuance with the deposit arrangement with the bondholders. The third registration statement was filed March 17, 1934, on Form D-2 in connection with the proposal to reissue the bonds with an extended maturity date. A prospectus dated January 1, 1934, in connection with the registration statement on Form A-1 was sent by the plaintiff to the holders of its common stock. A prospectus dated January 9, 1934, in connection with its registration statement on Form D-1 was sent by the plaintiff to the holders of its outstanding bonds. A prospectus dated April 6, 1934, following the registration statement on Form D-2, was sent by the plaintiff to the holders of its outstanding bonds. Each of the three registration statements and the three prospectuses carried as a footnote to the description of dividend rights of both preferred and common stock the following statement:

"The by-laws of the issuer by virtue of an amendment passed May 23, 1932 provide that no part of the sum of $7,680,000.00 transferred from Capital to Surplus, pursuant to Resolution duly adopted at the Stockholders' Meeting duly called and held on May 4th, 1932, amending the Certificate of Incorporation by changing the authorized Common Stock from No Par Value to the par value of One ($1.00) Dollar per share, and reducing the stated capital of the outstanding 320,000 shares of Common Stock from $25.00 per share on the books of the Company to One ($1.00) Dollar per share, may be utilized for the payment of dividends on either the Preferred or Common stock of this Issuer so long as it has bonds outstanding, and that no part of said amount may be utilized for the payment of dividends on the Common stock of this Issuer so long as the Issuer has Preferred stock outstanding."

With the prospectus of January 9, 1934, the plaintiff sent to the holders of its outstanding bonds two powers of attorney, one to be used by holders who desired the 2% premium and the other to be used by the holders who desired the convertible right. Each of these powers of attorney contained the following language:

"The undersigned delivers said bonds to you and executes this power of attorney in order to signify the consent of the undersigned to a certain plan for the extension of the present outstanding bonds of The Mengel Company, which said extension plan has been proposed and fully set forth to the undersigned in a letter from The Mengel Company and prospectuses of that Company, and to authorize you as his attorney in...