Vickers Petroleum Co. v. United States
| Decision Date | 04 March 1946 |
| Docket Number | No. 46013.,46013. |
| Parties | VICKERS PETROLEUM CO., Inc., v. UNITED STATES. |
| Court | U.S. Claims Court |
Phil D. Morelock, of Washington, D. C. (Morelock & Seay, of Washington, D. C., on the brief), for plaintiff.
H. S. Fessenden, of Washington, D. C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Fred K. Dyar, of Washington, D. C., on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
The principal question is whether plaintiff owed any amount as surtax on undistributed profits for 1936. Plaintiff says no such tax was due, inasmuch as the adjusted net income of $79,830.87, for the purpose of the surtax on undistributed profits for 1936, was less than the allowable credit of $82,400 made up of $60,000 for dividends paid from earnings for 1936 plus $22,400 set up on the books on December 31, 1936, under the terms of the contract with the trustee for bondholders restricting the payment of dividends. The decision of the question turns on the interpretation of the agreement of September 3, 1935, as extended to December 31, 1937 (findings 3 and 5), between The Vickers Petroleum Company, Inc., of Delaware, herein referred to as "plaintiff," and the trustee for its bondholders. The plaintiff, The Vickers Petroleum Company, Inc., by a reorganization on December 22, 1941, took over all assets and liabilities of the Delaware Company.
As set forth in finding 9, defendant disallowed the claimed deduction of the bond retirement fund reserve of $22,400 from the corrected adjusted net income for 1936 and thereby determined and collected a surtax of $2,179.55 on undistributed profits of $19,868 remaining after allowing a credit of $60,000 for dividends paid from earnings for 1936. Plaintiff computes its claimed overpayment of $2,186.11 as follows:
Tax Correct Refund
Paid Tax due
Income Tax .............. $12,092.15 $12,085.59 $ 6.56
Undistributed Profits
Tax .................... 2,179.55 None 2,179.55
__________ __________ __________
Total ................. 14,271.70 12,085.59 2,186.11
As shown by the findings and the agreement of September 3, 1935, quoted in finding 3, plaintiff had outstanding and unpaid on September 3, 1935, $54,800 of first mortgage 6½ percent Serial Gold Bonds issued in the aggregate amount of $500,000 on August 1, 1930, the final payment on such bonds of $140,000 having become due September 1, 1935. The agreement of September 3 extended the time for payment of the unredeemed bonds to December 31, 1936, and by a further agreement on December 23, 1936, the agreement of September 3 was extended without change to December 31, 1937. Plaintiff redeemed $18,500 of the bonds between September 3 and December 31, 1935, and $13,900 during 1936, leaving $22,400, principal amount of such bonds, outstanding and unpaid at December 31, 1936.
The pertinent part of the agreement of September 3, 1935, as extended to December 31, 1937, provided as follows:
The above-quoted agreement of September 3, 1935, was a contract with a creditor, i. e., the trustee for the bondholders, within the meaning of sec. 26(c) (1) and (2) of the Revenue Act of 1936, 49 Stat. 1648, 26 U.S.C.A. Int.Rev.Acts, page 836, and the rule announced in Hercules Gasoline Company, Inc., v. Commissioner of Internal Revenue, 326 U.S. ___, 66 S.Ct. 222, 223. In the Hercules case certain outstanding preferred stock was entitled to cumulative dividends of 8 percent per annum, and there was a charter provision made a part of the preferred shares to the effect that "there shall be no dividend on the common stock until all of the preferred stock has been retired, redeemed and discharged." In denying the taxpayer the right to a claimed credit under sec. 26(c) (1), supra, for undistributed profits tax purposes and by reason of this provision in the charter, and preferred stock, the Supreme Court in the Hercules case applied the rule stated in Helvering v. Northwest Steel Rolling Mills, Inc., 311 U.S. 46, 61 S.Ct. 109, 85 L.Ed. 29, "That this section referred to routine contracts dealing with ordinary debts * * *." and said:
* * *."
This case does not involve an intra-corporate contract but is governed by a contract with a creditor.
Plaintiff contends that the credit of $22,400 here claimed meets all the requirements of sec. 26(c) (2), in that (a) the agreement was executed prior to May 1, 1936; (b) it expressly deals with the disposition of earnings and profits for 1936 in that the extension of time thereunder for payment of the indebtedness was from September 1, 1935, to December 31, 1936, during which period plaintiff had the right to pay all of the unpaid outstanding bonds prior to the limitation period, providing its earnings enabled it to do so, but, in any event, if it had not done so, it was mandatory that there should be "created and set aside, out of its (plaintiff...
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