MH Alworth Trust v. Commissioner of Internal Revenue
| Decision Date | 05 May 1942 |
| Docket Number | Docket No. 101628. |
| Citation | 46 BTA 1045 |
| Parties | M. H. ALWORTH TRUST, M. W. ALWORTH AND R. D. ALWORTH, TRUSTEES, DULUTH, MINNESOTA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
H. A. Dancer, Esq., and Frank W. Wilson, C. P. A., for the petitioner.
Jonas Smith, Esq., for the respondent.
The Commissioner determined a deficiency of $5,289.66 in the petitioner's income tax for 1937. The only issue presented is whether the respondent erred in determining the taxable portion of corporate distributions made to the petitioner during the taxable year.
FINDINGS OF FACT.
The petitioner is a testamentary trust created under the will of M. H. Alworth deceased. At the time of his death M. H. Alworth was the owner of three-tenths of the outstanding stock of the Royal Mineral Association which pursuant to the terms of his will passed to the petitioner.
The Royal Mineral Association, a Minnesota corporation, sometimes hereinafter referred to as the Association, was organized about 1909 and was liquidated and dissolved near the end of 1939. Throughout its existence it owned certain mineral interests on 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 consequence it never from one year to the next had an earned surplus. In 1917 and each year thereafter net income less the amount of Federal income and excess profits taxes accruing for each such year was regarded as the portion of the distribution which constituted dividends, the remainder being regarded as a distribution of capital.
The Association's taxable net income was $464,033.94 for 1937. The income tax on that income was $92,552.88 and was paid in 1938. During 1937, however, the Association paid income tax in the amount of $30,606.76 on its income for 1936. In computing the amount of the Association's 1937 earnings or profits available for distribution, the Association and the petitioner, in accordance with their prior practice, deducted from the taxable net income of $464,033.94 the amount of $92,552.88 representing the income tax payable thereon and arrived at $371,481.06 as the amount available for distribution. In determining the deficiency herein the respondent deducted from the taxable net income of $464,033.94 the amount of $30,606.76 representing income tax paid during 1937 on 1936 income and thereby determined that $433,427.18 was available for distribution as dividends.
During 1937 the petitioner received distributions from the Association in the sum of $218,070. Under the method used by it in computing the amount of the Association's earnings or profits available for dividends, the petitioner ascertained that of said $218,070, the amount of $111,444.24 constituted taxable dividends and accordingly reported the latter amount as such in its income tax return for 1937. Under the method used by him the respondent determined that $130,028.60 of said $218,070 constituted taxable dividends and increased the amount reported by petitioner from that source by $18,584.36.
The Association always filed its income tax returns on the cash receipts and disbursements basis.
In so far as material to the conclusion we here reach, there is no dispute between the parties as to the facts. Due to its practice of distributing to its stockholders in each year an amount admittedly in excess of its earnings and profits, the Royal Mineral Association began the year and closed the year with no accumulated earnings or profits. In other words, it distributed the entire amount available for distribution as dividends, and a determination of the amount so available is a determination of the amount of dividends distributed. In arriving at the amount available in 1937 for distribution as dividends, both parties have started with taxable net income and the only question between them is whether taxable net income is to be reduced by the income tax accrued against said income but not paid until 1938, or by income tax paid in 1937, which tax had accrued in 1936 on earnings and profits realized and distributed in 1936. If the Royal Mineral Association had other liabilities or any receivables as of the close of 1937, no point is made by either party with respect thereto.
It is apparently the contention of the respondent that the earnings and profits available...
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Demmon v. United States
...quoted with approval, 238 F.2d 735, 739, (6th Cir., 1956), the language and reasoning of the Board of Tax Appeals in Alworth, quoting 46 BTA 1045, 1047. Subsequently, the Eighth Circuit considered a similar factual situation in Simon v. Commissioner of Internal Revenue, 248 F.2d 869 (8th Ci......