William F. and Gwendolyn WRIGHT, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
No. 72-1562.
United States Court of Appeals, Eighth Circuit.
Submitted April 10, 1973. Decided July 26, 1973.
Raymond R. Morris, Little Rock, Ark., for appellee.
Before GIBSON, BRIGHT and ROSS, Circuit Judges.
GIBSON, Circuit Judge.
The question presented on this appeal is whether or not “boot“, in the form of a promissory note, received in connection with a corporate consolidation and reorganization is taxable as an ordinary dividend under
Initially, the plaintiffs2 contended that the consolidation and reorganization of the involved corporations resulted in an exchange of stock for stock and securities that qualified under the nonrecognition of gain provisions of
The “boot” consisted of a promissory note in the amount of $102,002 received by taxpayer as a result of the reorganization of two closely held corporations in 1963 into a single new corporation. Prior to the reorganization in 1963, the taxpayer and Leonard Dunn, a field superintendent employed by the taxpayer, controlled and operated Danco Construction Company (Danco), an Arkansas corporation in the business of laying waterlines, sewers, and utility cables. From 1959 until 1963, Danco‘s 151 shares of stock were owned by the taxpayer (108 shares or 71.5 per cent), Dunn (42 shares or 27.9 per cent), and John Thurman, Sr., one of the taxpayer‘s attorneys (one share or .6 per cent).
The taxpayer also had controlling interest in F & G Construction Company (F & G), also an Arkansas corporation engaged in construction. From 1957 until 1963, F & G‘s 240 shares were owned by the taxpayer (238 shares or 99.2 per cent), the taxpayer‘s wife (one share or .4 per cent), and John Thurman, Sr. (one share or .4 per cent).
In addition to Danco and F & G, the taxpayer controlled a third corporation, World Wide, Inc. (World Wide), originally organized to engage in the automobile business but by 1963 limited to leasing equipment to Danco. In 1963, World Wide‘s 1,077 shares were owned by the taxpayer (603 shares or 56 per cent), Dunn (323 shares or 30 per cent), Mrs. W. F. Wright, Sr., the taxpayer‘s mother (150 shares or 13.9 per cent), and John Thurman, Jr., also an attorney for the taxpayer (one share or about .0009 per cent).
In late 1962 and early 1963, the taxpayer was considering a consolidation of F & G and World Wide in order to diversify and expand the business of the two corporations. The taxpayer and Dunn wanted the new corporation, eventually named Omni Corporation (Omni), to be owned in approximately the same proportionate basis as Danco, which was owned 71.5 per cent by the taxpayer and 27.9 per cent by Dunn. By simply consolidating F & G and World Wide with the shareholders of both corporations exchanging their shares solely for Omni shares, the taxpayer would have owned approximately 85 per cent of Omni and Dunn would have owned approximately 10 per cent. Such a reorganization would have been tax-free,3 however it would not have accomplished the desired percentage ownership in the new corporation contemplated by the taxpayer and Dunn. On April 1, 1963, F & G‘s capital stock was worth $24,000 and its earned surplus was $101,802. At the same time World Wide‘s capital stock was worth $21,540 and its earned surplus was $38,365. The taxpayer and Dunn did not want a consolidation that would simply exchange shares of the two previous corporations solely for shares of Omni, for that would not result in the percentage ownership desired by the taxpayer and Dunn.
| Class “A” | Class “B” | Total Shares | Par Value | |
| W. F. Wright, Jr. (taxpayer) | 223 | 1,999 | 2,222 | $55,550 |
| Leonard Dunn | 100 | 900 | 1,000 | 25,000 |
| Mrs. W. F. Wright, Sr. | 33 | 301 | 334 | 8,350 |
| Mrs. W. F. Wright, Jr. | 2 | 19 | 21 | 525 |
| John Thurman, Sr. | 2 | 21 | 23 | 575 |
| 360 | 3,240 | 3,600 | $90,000 |
This Plan left the taxpayer with a 61.7 per cent ownership in Omni and Dunn with a 27.8 per cent interest.
The disputed issue is whether the taxpayer‘s receipt of the $102,002 note from Omni constituted “boot” to the taxpayer that should be treated as an ordinary dividend under
The Commissioner determined that the note should be considered a dividend under
The District Court concluded that the note was “‘boot’ under § 356, with its fair market value to be recognized as gain to the taxpayer.” However, the District Court in interpreting § 356(a)(2) held that the distribution of the note to the taxpayer did not have the effect of a dividend, because “Wright‘s interest in the corporation emerging from the consolidation was substantially reduced, from about 85 per
The history of taxation of “boot” distributions in relation to what has become known as the “automatic dividend” rule has been mixed with confusion, shifting positions by the Commissioner, and much unfavorable commentary. The discontentment is traceable to Commissioner of Internal Revenue v. Bedford, 325 U.S. 283, 65 S.Ct. 1157, 89 L.Ed. 1611 (1945), which commentators generally agree was assumed to say that “§ 356(a)(2) automatically converted any recognized gain into dividend income, to the extent of the distributing corporation‘s earnings and profits, where the taxpayer continued as a shareholder after the exchange.” B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders § 14.34 (1971) (footnote omitted) (hereinafter Bittker & Eustice). The Bedford rule is generally known as the “automatic dividend” rule.
The Commissioner has vacillated in arguing for the adoption of the “automatic dividend” rule in different cases.7 Commentators have strongly criticized the “automatic dividend” rule supposedly announced by Bedford.8 In the District Court, the Commissioner argued that the “automatic dividend” rule should be applied, but on appeal agrees that the “District Court in this case was correct in rejecting the ‘automatic dividend’ reading of the Bedford opinion.”
The crucial issue then becomes whether this “boot” distribution has “the effect of a distribution of a dividend” under § 356(a)(2). The answer is not without difficulty since the distribution has some but not all the characteristics of either a sale or a dividend. The Commissioner admits this, but contends that the dividend characteristics predominate in this factual situation. We do not agree.
A dividend is generally defined as a “distribution of earnings and profits which effects no change in basic relationships between the shareholder and either the corporation or the other shareholders.” Himmel v. C. I. R., 338 F.2d 815, 817 (2d Cir. 1964). Basically, a dividend is a “pro rata distribution out of corporate earnings and profits.” Hawkinson v. Commissioner of Internal Revenue, 235 F.2d at 751. A redemption of corporate shares ordinarily would result in a sale, i.e. a retiring stockholder, but a pro rata redemption of corporate shares is viewed as a dividend. United States v. Davis, 397 U.S. 301, 90 S.Ct. 1041, 25 L.Ed.2d 323 (1970). Such redemptions need not be
The Commissioner argues that in defining the “effect of the distribution of a dividend” under § 356(a)(2), the redemption provisions of § 302 should be applied.9 In making this contention, the Commissioner inferentially concludes that the definition of a dividend under
In order to evaluate the Commissioner‘s casting of the consolidation of the corporations and distribution of the note as a redemption of F & G stock, it is necessary to examine § 302. Redemptions of stock are treated as distributions in part or full payment for exchange for stock under § 302(a), if the exchange meets the requirements of § 302(b). Section 302(b)(2) obviously does not apply here as the taxpayer would have greater than 50 per cent of the voting power of all classes of stock after redemption.12 However, § 302(b)(1) provides that “Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend.” Therefore, even if an exchange does not qualify as a “safe harbor” under § 302(b)(2), it is still possible for the exchange to be a redemption or sale for tax purposes if it is “not essentially equivalent to a dividend” under § 302(b)(1).13
In testing dividend equivalence under § 302(b)(1), Treas.Reg. § 1.302-2(b) (1955) states that “[t]he question whether a distribution in redemption of stock of a shareholder is not essentially equivalent to a dividend under section 302(b)(1) depends upon the facts and circumstances of each case.” Courts agree that the determination is ultimately factual. United States v. Carey, 289 F.2d 531, 537 (8th Cir. 1961) (and therein cited cases); United States v. Fewell, 255 F.2d 496, 499 (5th Cir. 1958).
In deciding whether the exchange under the facts of this case was a redemption qualifying as an exchange under § 302, it is necessary to determine what stock was redeemed for the note and what factors are relevant to defining “essentially equivalent to a dividend” under § 302.
First, a threshold question is what stock did the taxpayer exchange for the $102,002 note. As indicated previously, the Commissioner argues in his brief on appeal that the taxpayer exchanged a portion of his F & G stock for the note prior to the consolidation of the corporation. During the oral argument, counsel
In analyzing this exchange, the Commissioner in his brief and during oral argument has mistakenly applied an artificial analysis in determining which corporation‘s stock was redeemed for the note. We agree with the Commissioner that “it is not material whether the distribution is actually made by the corporation entering the reorganization or by the corporation resulting from the reorganization.” Courts and the Commissioner have said that it is irrelevant whether the earnings and profits were distributed before or after consolidation. Ross v. United States, 173 F.Supp. at 797. However, we are here confronted with the factual circumstance that there were two corporations, F & G and World Wide, before reorganization and one after reorganization, Omni. Theoretically and in addition to the Commissioner‘s oral suggestion, we could look to F & G alone, World Wide alone, or F & G and World Wide together (in effect Omni at the time of consolidation, April 1, 1963) as the distributing corporation.
We think that it is artificial for the Commissioner to contend that the note was issued by F & G alone or that the note was issued partially by F & G and partially by World Wide. The issuance of the note was part of an entire corporate reorganization based on the capital accounts of both F & G and World Wide. The corporations involved did not exist separately but were owned and controlled by the same shareholders but in different proportions. We think that the note was issued by Omni in exchange for a portion of Omni stock that the taxpayer would have received if he had taken Omni stock entirely instead of receiving Omni stock and a note issued to him by Omni. In percentages and according to the Commissioner‘s figures, the taxpayer reduced his ownership in Omni from 85 per cent to 61.7 per cent, or in other words the taxpayer exchanged 23.3 per cent of his Omni stock for the note that was issued to him by Omni.14
Another reason exists for holding that the note was issued by Omni. The entire concept of a redemption contemplates a change in ownership between an ongoing corporation and a newly formed corporation or within an ongoing corporation itself. For example, underlying the “safe harbor” provision, § 302(b)(2), is the rationale that a substantially disproportionate redemption of stock leads to the conclusion that the exchange is a redemption. The percentage requirements, e. g. the 50 per cent rule, refers to the necessity of having 50 per cent of the total voting stock after redemption. This rule and other redemption provisions make sense only in relation to a corporation that will continue to exist. If a substantially disproportionate redemption of stock has occurred the distribution clearly can be said to be a sale rather than a dividend because the stockholder has relinquished valuable rights in the future business. Further, the rights of stock ownership—to vote, to participate in earnings, and to share in net assets on liquidation—are all affected by a redemption. But these rights and the effect of a redemption only make sense in relation to a corporation that will be engaged in doing busi-
Viewing the distribution of the note as an exchange for Omni stock, the taxpayer‘s redemption does not fall within the “safe harbor” of § 302(b)(2), since he owned approximately 61.7 per cent of the stock of Omni after the redemption.15 However, the exchange may still qualify as a redemption under § 302(b)(1) if it is “not essentially equivalent to a dividend.”16
United States v. Carey, supra, typically represents the method of analysis that courts used in determining the factual question of dividend equivalence under § 302 before United States v. Davis, 397 U.S. 301, 90 S.Ct. 1041, 25 L.Ed.2d 323 (1970). The Eighth Circuit said in that case:
“Among these criteria are: The presence or absence of a bona fide corporate business purpose; whether the action was initiated by the corporation or by the shareholders; did the corporation adopt any plan or policy of contraction, or did the transaction result in a contraction of the corporation‘s business; did the corporation continue to operate at a profit; whether the transaction resulted in any substantial change in the proportionate ownership of stock held by the shareholders; what were the amounts, frequency, and significance of dividends paid in the past; was there a sufficient accumulation of earned surplus to cover the distribution, or was it partly from capital.” United States v. Carey, 289 F.2d at 537, quoting Heman v. Commissioner of Internal Revenue, 32 T.C. 479 (1959), aff‘d, 283 F.2d 227 (8th Cir. 1960) (citations omitted).
See also Annot., 170 A.L.R. 1392 (1947) for a discussion of relevant factors for analyzing redemptions as of 1947.
This Court has since recognized, however, that Davis has changed the law in this area and that a business purpose is no longer a relevant inquiry. Johnson v. United States, 434 F.2d 340, 343 (8th Cir. 1970); accord, Title Insurance and Trust Co. v. United States, 326 F.Supp. 617, 620 (C.D.Calif.1971). In fact, the language in Davis broadly states that the “explanation [contained in the legislative history of § 302(b)(1)] gives no indication that the purpose behind the redemption should affect the result.” United States v. Davis, supra, 397 U.S. at 310-311, 90 S.Ct. at 1047 (footnote omitted). Rather the Court specifically said that to qualify under § 302(b)(1) “a redemption must result in a meaningful reduction of the shareholder‘s proportionate interest in the corporation.”
We think that if a distribution is not to have the “net effect” of a dividend, there must have occurred a meaningful reduction of the redeeming shareholder‘s proportionate interest or in other words a meaningful change in the relative economic interests or rights of the shareholder after the redemption. United States v. Davis, supra, 397 U.S. at 313, 90 S.Ct. 1041; Brown v. United States, supra, 345 F.Supp. at 244. We further think that it is improper to refer to the “net effect” standard as the “net economic test,” as in Brown v. United States,17 since a meaningful change in shareholders’ voting power18 is a relevant inquiry. Also “net effect” can no longer be said to include the business purpose or motive of a corporation in making the distribution as was the case in United States v. Fewell, supra, 255 F.2d at 499-500.
The Commissioner argues that Hawkinson v. Commissioner of Internal Revenue, supra, provides a close parallel to this case and supports his analysis that the distribution of the note had the effect of a dividend. In Hawkinson, the taxpayer and other members of the Whitney family owned shares in Whitney Chain Manufacturing Company (Whitney Chain) that was consolidated with Hanson-Whitney Machine Company to form Whitney-Hanson Industries. After the redemption, the Whitneys received 5.7 per cent less stock in Whitney Chain because Whitney Chain canceled an indebtedness owed to it by some of the Whitneys. The court held that this cancellation of indebtedness as part of a plan of consolidation had the effect of a dividend since the whole transaction was “in reality a preservation of the economic status quo by a realistic alignment of ownership in the new corporation to reflect its productive assets.” Hawkinson v. Commissioner of Internal Revenue, 235 F.2d at 751.
Arthur H. Squier, 35 T.C. 950 (1961), is more closely analogous to this case and distinguishable from Hawkinson. In Arthur H. Squier, the taxpayer owned, directly and constructively, 63.3 per cent of stock before the redemption and 56.82 per cent after the redemption. Also after the redemption, the taxpayer, an estate, had less than 50 per cent direct ownership, and a dissident minority interest increased from 36.7 per cent to 43.18 per cent. The Tax Court focused on a significant change in control and held that this 6.48 per cent reduction in shareholder interest due to the redemption caused the exchange to not have the effect of a dividend.
Apparently no change in voting power was present in Hawkinson after the redemption. However, in this case, the taxpayer reduced his interest in Omni from 85 per cent to 61.7 per cent after the redemption. Under Arkansas law, two-thirds vote is required for amending the articles of incorporation (
The redemption here has created a meaningful change in the voting power of the taxpayer under Arkansas law. Also, viewing the transaction as a realistic whole, the taxpayer has reduced his holding in one corporation, F & G, from almost complete ownership in F & G to 61.7 per cent ownership in Omni. In contrast, his ownership in World Wide was 56 per cent in relation to his 61.7
Further, although there is no per se rule on what percentage reduction of ownership is required to assure that a redemption does not have the effect of a dividend,19 the taxpayer in this case has a 23.3 per cent less of a right to dividends and to assets upon liquidation, which in itself is of considerable significance.
We think it appropriate to note at this point that Judge Bright in his dissent focuses on the applicability of the constructive ownership provisions to this case. We feel in connection therewith that an issue not raised at trial or on appeal does not provide a proper predicate for a decision.
The dissent basically reasons that the constructive ownership provisions do apply, which would make the taxpayer‘s ownership interest 72 per cent after the redemption, instead of 61.7 per cent. The dissent, further, is inclined to agree that Arthur H. Squier might be applicable to this case “[i]f the record in the present case revealed the exceptional situation where the interest of family-member shareholders . . . were in fact adverse to the taxpayer. . . .”
However, the Commissioner at trial, in his brief, and during oral argument employed the 62 per cent figure as the proper percentage ownership of the taxpayer after redemption. He has never mentioned the possible applicability of
This Court has recently held that the Commissioner‘s failure to raise, before or at trial, the theories, Code sections, and regulations upon which he relies, deprives the taxpayer of fair notice and opportunity to defend against presumptively correct deficiency assessments. Commissioner of Internal Revenue v. Transport Manufacturing and Equipment Co., 478 F.2d 731, 736 (8th Cir. 1973). Although the facts as to ownership by family members were stipulated, the failure of the Commissioner to raise the issue at all makes an opportunity by the taxpayer to respond impossible. If the issue had been raised at the appropriate time, it could have been articulated and explicitly briefed. We offer no view on whether § 318 would apply under the facts of this case and only conclude that the failure of the Commissioner to raise this issue at all precludes its consideration by this Court.
The factual circumstances in this case lead us to the conclusion that the “boot” distribution of the promissory note of $102,002 was “not essentially equivalent to a dividend” under § 302(b)(1) nor had “the effect of a distribution of a dividend” under § 356(a)(2).
The judgment of the District Court is affirmed.
BRIGHT, Circuit Judge (dissenting).
I respectfully dissent. My difference with the majority lies not in its statement of the applicable law but in its application of that law to the total factual situation. This record discloses that the taxpayer, William F. Wright, owned all of F & G Construction Company (99.2 percent), except for one share held by his wife and one share held by his attorney, and that immediately prior to consolidation, this corporation‘s earned surplus amounted to $101,802. The amount of the earned surplus was only $200 less than the amount of the note that the taxpayer received upon consolidation. As noted by the majority, the taxpayer owned 56 percent of the shares of a sec-
The taxpayer has stipulated that in consolidating F & G and World Wide into Omni, he, as well as Dunn, desired to attain equity ownership in Omni of the same proportionate percentage as their ownership in Danco Construction Company, a third corporation owned 71.5 percent by taxpayer, 27.9 percent by Dunn, and .6 percent by taxpayer‘s attorney.
Interestingly enough, following the consolidation of World Wide and F & G into Omni and after the payment of “boot” to taxpayer and the contribution of new capital by Dunn, the shareholdings show Dunn possessed of the almost identical percentage interest in Omni (27.8 percent) as his percentage of stock in Danco (27.9 percent). Taxpayer, however, was left with only 61.7 percent of Omni. Thus, in order for taxpayer to attain the same approximate percentage equity ownership in Omni as he had in Danco, the stipulation1 of the parties would require counting shares owned by Mrs. W. F. Wright, Sr. (taxpayer‘s mother), Mrs. W. F. Wright, Jr. (taxpayer‘s wife), and John Thurman, Sr. (taxpayer‘s lawyer) as equitably owned and controlled by taxpayer.
Moreover, as the majority aptly observes in n. 14 of the opinion, the constructive ownership rules of
The majority enunciates the following test for determining whether a stock redemption was “not essentially equivalent to a dividend:”
We think that if a distribution is not to have the “net effect” of a dividend, there must have occurred a meaningful reduction of the redeeming shareholder‘s proportionate interest or in other words a meaningful change in the relative economic interests or rights of the shareholder after the redemption. [Majority opinion at 609 (citations omitted).]
In finding such a “meaningful change,” the majority emphasizes the reduction of the taxpayer‘s voting power in Omni whereby he no longer directly retained the two-thirds interest necessary to amend the articles of incorporation or to force a merger, consolidation, or liquidation of Omni under Arkansas law.
I find this analysis flawed because the taxpayer by stipulation asserted that his intended “equity ownership” in Omni was to be the same as that in Danco, i. e., approximately 72 percent. Practical considerations, as well as the rules of attribution, indicate that the taxpayer has retained an interest in Omni which closely approximates the intended percentage of equity ownership. Of course this percentage is well over the two-thirds figure necessary for the taxpayer to exercise every power he possessed in the merging corporation, F & G.2
However, even if the rules of attribution are applied to the factual situation in Squier to reach the ownership percentages cited by the majority,3 the present factual situation is not analogous. Contrary to the majority‘s assertion that the “dissident minority” interest was the 43.18 percent shareholder, the “dissident” shareholders in Squier were actually family members whose stock the Tax Court attributed to the taxpayer4 under the rules of 318, i. e., taxpayer‘s wife and grandchild.5 These family members had had a severe disagreement with the taxpayer (the executor of the estate) over the selection of a new president upon the death of Mr. Squier.6 The Tax Court found that as a result of the executor‘s failure to appoint decedent‘s son-in-law as the new president, there was “considerable friction and strained relations” between the taxpayer-executor and the decedent‘s family. Thus the Tax Court concluded:
[T]he record herein reveals a sharp cleavage between the executor and members of the Squier family, and in spite of the attribution rules as to stock “ownership,” the redemptions herein in fact resulted in a crucial reduction of the estate‘s control over the corporation. [Emphasis on “control” in original.] Accordingly, notwithstanding the attribution rules, the redemptions in this case did result in a substantial dislocation of relative stockholdings in the corporation and also in fact brought about a significant change in control. [Id. at 956 (emphasis added).]
If the record in the present case revealed the exceptional situation where the interest of family-member shareholders (whose shares were attributable to the taxpayer) were in fact adverse to the taxpayer, I would be inclined to agree that the Squier case would be applicable here, and under its holding the taxpayer would have made a meaningful change in his interest through the redemption. However, the record before us provides no basis for assuming that shares attributable to the taxpayer are held by shareholders with interests adverse to the taxpayer.
Therefore, I conclude that the majority has ignored the taxpayer‘s own argument that “the type of treatment to be accorded distributions in connection with reorganizations is to be determined from all the facts pertaining to a given case.” Appellee‘s Br. at 3. Instead, the majority has focused only on an artificial change in the taxpayer‘s interest, which, when closely scrutinized, reveals that the taxpayer has recovered all of the earned surplus of F & G corporation without surrendering any meaningful control in the new corporate entity (Omni). Whether or not we apply the
Notes
[T]hey [taxpayer and Dunn] wished to pool the assets of World Wide Motors, Inc. and F & G Construction Company into a single corporate operation with the equity ownership of said new corporation as between Wright and Dunn to be approximately the same as that of Danco Construction Company.
“(a) Gain on Exchanges.—
* * * * *
“(2) Treatment as Dividend.—If an exchange is described in paragraph (1) but has the effect of the distribution of a dividend, then there shall be treated as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be treated as gain from the exchange of property.”
The grandchild‘s shares were held in trust by the decedent‘s daughter.“Sec. 302. Distribution in Redemption of Stock.
“(a) General rule.—If a corporation redeems its stock (within the meaning of section 317(b)), and if paragraph (1), (2), (3), or (4) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock.
“(b) Redemptions treated as exchanges.—
“(1) Redemptions Not Equivalent to Dividends.—Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend.
“(2) Substantially Disproportionate Redemption of Stock.—
“(A) In general.—Subsection (a) shall apply if the distribution is substantially disproportionate with respect to the shareholder.
“(B) Limitation.—This paragraph shall not apply unless immediately after the redemption the shareholder owns less than 50 percent of the total combined voting power of all classes of stock entitled to vote.
“(C) Definitions.—For purposes of this paragraph, the distribution is substantially disproportionate if—
“(i) the ratio which the voting stock of the corporation owned by the shareholder immediately after the redemption bears to all of the voting stock of the corporation at such time, is less than 80 percent of—
“(ii) the ratio which the voting stock of the corporation owned by the shareholder immediately before the redemption bears to all of the voting stock of the corporation at such time.
“For purposes of this paragraph, no distribution shall be treated as substantially disproportionate unless the shareholder‘s ownership of the common stock of the corporation (whether voting or nonvoting) after and before redemption also meets the 80 percent requirement of the preceding sentence. For purposes of the preceding sentence, if there is more than one class of common stock, the determinations shall be made by reference to fair market value.”
“Sec. 316. Dividend Defined.
“(a) General rule.—For purposes of this subtitle the term ‘dividend’ means any distribution of property made by a corporation to its shareholders—
“(1) out of its earnings and profits accumulated after February 28, 1913, or
“(2) out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.
“Except as otherwise provided in this subtitle, every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and profits. To the extent that any distribution is, under any provision of this subchapter, treated as a distribution of property to which section 301 applies, such distribution shall be treated as a distribution of property for purposes of this subsection.”