*2 DENMAN, STEPHENS, Before HEALY, Judges. Circuit DENMAN, Judge. Petitioner, corporation do- Delaware California, ing seeks review business in Appeals the Board of Tax of a decision of from its incomes denying deductions tax 1936 and 1937 calendar for the paid out and- (a) dividends declared during stockholders it to (b) for the discount at years; said sold, (c)for preferred stock was paid on premiums. the stock. 115, 26 to Act U.S.C.A. Int. Section payment Taxpayer’s (a) Rev.Acts, page 868. paid to them as declared
stockholders dividends. Treasury Regulations 94 for the Reve- *3 pre- dividends on nue Act of 1936 treats moneys upon which the The securities interest, not ferred stock as as follows: taxpayer Cu- paid the out * So- (b)-l. “Art. Interest.— preferred issued Preferred Serial Stock mulative stock, called is in on taxpayer’s certificate provisions of under thereon, cannot reality a dividend They in incorporation. were drawn of computing income. be in net deducted customary establishing such a form the » * ^ relationship stockholder and between a required They corporation. Act, 1938, The next Revenue of § period of end of a fixed redeemed at the 1055, Int.Rev.Acts, page 115, 26 U.S.C.A. any par value and for years unpaid their $100 definition of dividend contains the same un- dividends. The accumulated 94, pertinent Regulations here. so far as They interest. paid did not bear for (b)-l. Interest the act Art. payable provided quarterly dividend out pre provision treating the same the has profits annual aggregate in the amount of reg interest. The ferred dividend as not for one serial issue and of of law. Com the force ulation has thus for another. Co., Laguna Land & Water missioner v. 113; 112, Helvering v. profit not made 9 In the event that 45, 83, Winmill, 79, paid, S.Ct. the 305 U.S. quarterly the dividend not and 52; Reynolds shares, Helvering R. preferred who v. oth- L.Ed. holders of the J. 110, 116, Co., rights, acquired S.Ct. voting all Tobacco U.S. no erwise had 423, 536. rights 83 L.Ed. voting of the stockholders the of control the cor- and could assume the claiming a deduc taxpayer A ordinary through the cor- and poration paid moneys so declared and as a tion the compel the declaration porate processes “showing burden the dividend has pre- payment of dividend. the clearly falls within some deduction the controlling the cor- stockholders so ferred the provision of act.” deduction quarter- power pay the poration States, 281, 305 U.S. v. White United by this than cor- ly otherwise L.Ed. 59 S.Ct. process of thereof from porate declaration attempts Taxpayer to maintain this bur- power existing. This profits then preferred the serial a claim den all of the dividends invoked and never preferred stock fact not at question in stock in years paid in tax of an indebted- pro- a mere corporate all but evidence paid in usual declared and provision on claim this It bases board ness. action of the of di- cedure incorporation and of certificate of its rectors. pursuant to it issued the stock appear maturity period would thus of the that the div that at the event It paid idends so fall provisions corporation within stock, when process Revenue Act of of re- 1936 which are to exercise controlling years redeem, question. the two the stock- demption, it fails That act right gen- defines a of a corpo dividend of a has the holder thereafter principal ration to abe sue for the value “distribution” “out eral of its any accumulated earnings profits un- stock or of the accumulated after Feb paid dividend.1 ruary (2) or out of the earnings profits year.” or of the taxable general right Revenue creditor’s This after fail- together The provision is as follows: with thereon, premi- dends “In the event the corporation shall he if on such um, any, paid redemp- io„ to redeem said preferred stock at any same unconditional tion,
fail against time and place herein in said res- or debt claim and/or rights olution herein authorized, payment holders of thereof upon of the preferred said stock shall have the thereof stockholders holders this payment value par corporation shall cease determine enforce agreed preferred said stock so stock preferred ap- be re- said so shall be together deemed, with the upon amount of cancelled any propriately the books of unpaid, accrued, and said stock corporation accumulated shall divi- this (Emphasis supplied.) reissued.” redemption corporate proc- ship ure of stockholder to the arose, for, stated, ess the that taxpayer' never all is not entitled to de- quarterly paid' for each duct dividends were them from its income. quarter outstanding pre- the- and all of taxpayer claims this was not by- ferred stock was redeemed its intent creating stock. two tax in the But evidence shows the exact con question. trary. In the to the subscribers circulars taxpayer all claims that stock issue were advised of quarter in the pursuance at each taxpayer’s purpose by intent and corporate process, and *4 following opinion statement: “In of quarterly so the dividends could Counsel, exempt from normal Federal In only paid quarterly by have process, that exempt come Tax and from Personal ordinary gen- become could Property Tax in California.” only years by eral creditor’s debts later At the time this declaration of intent n corporate process the of of the purpose was made to stock- delayed period redemption, during which holders were exempt from the normal interest, nevertheless, be- bore — tax, federal income paid whereas interest cause, the to stockholder’s in addition exempt them was not from such tax. rights corporate process under which all 25, 1928, Section Revenue Act of 26 U. him, money paid he had in the the Int.Rev.Acts, page S.C.A. process that the failure of event of Taxpayer by relies on cases two decided creditor, security general the as a sue court, Shop, this Commissioner v. Proctor promissory more than a was in effect no Cir., F.2d and Commission note or debenture. Palmer, Stacy-Merrill, Inc., er v. 111 F. are unable to follow this rea We 809, 2d 810. In both cases we held these taxpayer may arrange soning. A his by pay that the securities issued the tax they may may transactions so or business “merely ing by held the phraseology the not be taxable under of security,” creditor as and that “dividends arranged in taxing act. If so a form the are, paid according to the intent the of taxable, argu it is not is no which fact parties, in interest.” Commissioner exemption against a tax ment for or Cir., Shop, 792, v. Proctor 82 F.2d 794.2 arranged in might some it have been oth Shop In the Proctor case the instru Kolb, Cir., way. v. Commissioner er n was called ment Debenture Preference 920, 926, 927. 100 F.2d Palmer, Stacy-Merrill the Stock in arranged taxpayer the business Here case In Preferred Stock. the latter case pay obligated quarterly so it subsidiary findings we held that certain only by distribution a to the Appeals the Board of Tax of showed holders, a dividend declared “out -of parties that “the intended the certificates profits or net of the surplus business be certificates of indebtedness.” [111 corporation.” exactly This is what of the petitioning Here the taxpay F.2d 810.] Regu- Act of 1936 and the Revenue itself its intent declared that the divi quoted corporate define as a above lations preferred stock dends on not to cannot be deducted in dividend indebtedness but stock deemed divi income as computing net inter- “so-called subject dends not to the “normal Federal preferred stock.” est Tax.” Income taxpayer opinion' the In our has not by claimed taxpayer “clear- cases deductions Other cited shown are provision distinguishable. deduction clearly within some
ly falls bonds in contrary, act.” On v. Holding Co., it Commissioner O. P. P. of clearly appears Cir., moneys “interest,” speci us bore called, fically paid payments the tax declared and so in held dividend the usual relation- deductible made not a dividend “ * * * designation paid are, this the On “that dividends tablishes accord- ing parties issued the intent the instrument foot ignored, interest, conclusive, not to be is not while the stock on which the divi- par- merely The real *. of the are held dends intention sought security, is to he and in order ties to estab- it makes no differ- paying lish it evidence aliunde the what the reason wak for contract ence it ’ ” * * * (Emphasis supplied.) admissible. If evidence form.” es-
§19 Stock payment. In Cumulative Preferred Serial ordinary but as corporate plus premi- face for the value thereof only by case the instant $182,025.00” “During declaring a profit and um and that making petitioner year redeemed and retired payments made. dividend were the outstanding all of des- its then securities dividends” “guaranteed anomalous ignated Cumulative Preferred Se- Richmond, R. Helvering F. & P. v. plus rial Stock for the face value thereof resem- Co., bear no F.2d premium $20,000.00.” a total declared, and dividends here blance to the redemptions guaranteed divi- earnings. The These were made out of process, earned or payable thirty day usual here a dends were redemption given there What determined notice of mail to not. amount, publication a divi- declared as stockholders of record and that an perform dend, paid deposit the contract mon- “guaranteed eys place redemption. so-called at noticed the amount dividend,” deductible was interest and paid pur Since the such. corporate process suant and not Co., Bray N. v. Commissioner *5 upon arising J. an indebtedness from the bearing Cir., the “interest” F.2d redeem, pre failure we hold that gave hold- Stock Debenture Preferred upon miums with- “cumulative .(cid:127)er a corporation, obligation corpo payments declaration.” out directors’ stockholder, ration, stock its be made out not held made were premiums holder, and that cannot be they did not fall within profits. Hence discharge as if in the deemed of the Act of of dividends the definition promissory bond note or certificate of question here to be decided and the indebtedness. passed upon. not was Ap- decision of Board Tax moneys paid out hold that We peals of the claimed that none deductions Cu- and taxpayer on its 6%% permitted under the is act af- were div- Serial Stock Preferred mulative firmed. its from not deductible and idends Affirmed. income. stipulated It expense. (b) Discount HEALY, Judge (concurring). desig- petitioner’s securities that herein principle, am not able to On I distin Preferred Serial Cumulative nated 5%% guish this case from Commissioner v. discount sold at a and were issued Stock Inc., Cir., Palmer, Stacy-Merrill, deductible discount if said that and distributions there F.2d 809. The held to $31,- and allocable to $1,833.26 was deductible interest were be made to 1937. allocable 275.39 “corporate process” through the of de held, security Since, as above profits. I claring out of con intended to taxpayer doubtfully sold that somewhat deci curred stock, preferred fact a ground that this court was sion on they redeemed since Commissioner v. Proctor committed redemption, and hence of call Inc., Shop, the view to the debtor- precedent condition actualities of situation were arising in the event relationship determining be looked to in never redeem call and distributions, called, corporate,, of a whatever on the discounts arose, we hold they or whether were true preferred were for securities issue of interest on and there in fact indebtedness bond, or certifi note expense. stocks as an fore deductible indebtedness. cate in the two cases securities men par val- Redemption at (c) case, hybrids. 105% of tioned, in this are If the stock. ue denominated “bonds” they ra stocks, apprehend I preferred stated, the Cumula- ther than As 514% nobody contend that would Stock were re- Preferred Serial tive debt or that question. evidences re It not true in the tax deemed anything other year paid thereon stipulated “during the turns Cf. Commissioner v. Co and retired all interest. redeemed than petitioner Mills, Cir., Paper F. River securities outstanding designated lumbia then However, corporate taxpay 2d 1009. complain good reason to if is has sues are which it calls stock purposes for tax treated as such where, here, Commissioner, particularly customari the ly theretofore has payments as dividends treated the income; making returns of its taxable that, investors and where it has advised counsel, opinion the returns in the ex therefrom and therefore are dividends such empt circumstances from tax. having deliberately made bed, may propriety with to lie in it.
ADAMS et al. v. UNITED STATES.
No. 10158. Appeals,
Circuit Court Fifth Circuit. June 1942.
Rehearing July 20, Denied Mallet, Jackson, B. Ga., ap- Joel
pellant. Davis, Hoyt T. Atty., U. S. and T. Reese Watkins, Atty., Asst. U. S. both Macon, Ga., appelleé. SIBLEY, Before HOLMES, and Mc- CORD, Judges.