144 F.2d 776 | 3rd Cir. | 1944
The one question presented as these cases, consolidated for trial and argument, come to us, is whether the taxpayer is entitled to credit under § 26(c) (1) of the Revenue Act of 1936.
The language relied upon by the taxpayer is in a trust indenture executed by it. One paragraph provides: “That the company will not pay or declare any dividend, except dividends payable in shares of stock of the Company, or make any other distribution on its capital stock or to its stockholders, or purchase or retire or otherwise acquire for a consideration, any shares of its capital stock, except out of the proceeds of additional stock issues.”
The first step in deciding whether the taxpayer is entitled to a credit under the statute is to look to the contract under the terms of which it is claimed that dividends cannot be paid without violating the promise made. At the same time we bear in mind that the claim is in the nature of a specially permitted deduction in a “cautiously limited area.”
The taxpayer has made much of the point that the kind of dividend which precludes one from taking advantage of the exemption in question must be a taxable dividend. Comments made soon after the passage of the statute indicate that this' might be the case.
This careful consideration seems correct to us and to cover all the argued and arguable points. Even if it be assumed, therefore, that this taxpayer shows a contract which gets him to the position of contending that the possibility of a nontaxable dividend does not bring him without the exemption we conclude that the point must go against him on both principle and authority.
The decisions of the Tax Court are affirmed.
The relevant language is:
“(e) Contracts Restricting Payment of Dividends.
“(1) Prohibition on payment of dividends. An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable 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. * * * ” 26 U.S.C.A. Int.Rev.Acts, page 836.
Helvering v. Northwest Steel Mills, 1940, 311 U.S. 46, 51, 61 S.Ct. 109, 112, 85 L.Ed. 29, 34.
The United States Supreme Court has held that a dividend of common voting stock to holders of cumulative nonvoting preferred stock is income, Koshland v. Helvering, 1936, 298 U.S. 441, 56 S.Ct. 767, 80 L.Ed. 1268, 105 A.L.R. 756; that a dividend of preferred stock on common stock is taxable wliere preferred stock of the same class is outstanding, Helvering v. Gowran, 1937, 302 U.S. 238, 58 S.Ct. 154, 82 L.Ed. 224. The United States Board of Tax Appeals in Helms Bakeries v. Commissioner of Internal Revenue, 1942, 46 B.T.A. 308, has held where first and second preferred and common stock was outstanding, a distribution of first preferred stock -to first preferred stockholders and second preferred stock to second preferred stockholders, but none to common stockholders, was a dividend which constituted taxable income.
On February 18, 1936 the taxpayer acquired 9 shares of its own stock by purchase and on December 19, 1936 it acquired 15 shares by exchange.
A prohibition against cash dividend is not sufficient to bring a taxpayer within the exemption. Commissioner of Internal Revenue v. Columbia River Paper Mills, 9 Cir., 1942, 127 F.2d 558.
Cf. Commissioner of Internal Revenue v. E. C. Atkins & Co., 7 Cir., 1942, 127 F.2d 783, and comment thereon in Helvering v. Northwest Bancorporation, supra footnote 21, p. 962.
See (1936) 50 Harv.L.Rev. 332; (1936) 36 Col.L.Rev. 1321, 1346; Merten’s Law of Federal Income Taxation (1939 Supp.) § 32A.42. Merten’s adds, however, “It may be argued that the term ‘dividend’ includes nontaxable as well as taxable dividends.”