Little Gem Coal Co. v. Commissioner

LITTLE GEM COAL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Little Gem Coal Co. v. Commissioner Docket No. 101112. United States Board of Tax Appeals 44 B.T.A. 755; 1941 BTA LEXIS 1279; June 18, 1941, Promulgated *1279 The petitioner owned all the stock of another corporation and borrowed $15,000 from that subsidiary. In 1936, when a plan of merger was under consideration, the subsidiary declared a dividend of $15,000, which was paid by cancellation of the parent's debt. The subsidiary was then merged into the parent. Held, that a $15,000 dividends paid credit is allowable. Credit Alliance Corporation,42 B.T.A. 1020, followed. William B. White, Esq., for the petitioner. Frank M. Thompson, Esq., for the respondent. KERN *756 This proceeding involves a deficiency determined by the Commissioner in income tax for the calendar year 1936 in the amount of $3,827.70, of which $3,771.76 is in controversy. The sole issue is whether the Commissioner erred in disallowing the original Little Gem Co. a dividends paid credit in the amount of $15,000, by reason of the provisions of section 27(h) of the Revenue Act of 1936. FINDINGS OF FACT. The parties hereto have filed a stipulation of facts, and we find the facts to be as stipulated. In substance, they are as follows: The petitioner is a corporation duly organized under the laws of the*1280 State of Alabama on June 4, 1917, with its principal place of business in Birmingham, Alabama. On December 14, 1936, an Alabama corporation whose corporate name was Little Gem Coal Co. (hereinafter referred to as the "original Little Gem Co."), was merged into the Aetna Coal Co., an Alabama corporation (hereinafter referred to as "Aetna"), pursuant to the provisions of the laws of the State of Alabama (Code of Alabama of 1923, secs. 7037 to 7044, incl.), under the corporate mane for the merged corporation of Little Gem Coal Co. (hereinafter referred to as "petitioner"). This merged corporation is the corporation against which the deficiency is proposed to be assessed. The original Little Gem Co. was organized under the laws of Alabama on June 14, 1918. Up to and including December 14, 1936, the date of merger, the original Little Gem Co. was an Alabama corporation, all of whose capital stock was owned by Aetna. Both Aetna and the original Little Gem Co. were engaged in coal mining in Alabama. On February 10, May 7, and July 13, 1936, the original Little Gem Co. made separate advances of $5,000 each to Aetna. These advances were until December 14, 1936, carried on the books*1281 of the original Little Gem Co. as loans to Aetna, and on Aetna's books as loans from the original Little Gem Co. On February 12, May 2, and July 13, 1936, respectively, Aetna declared and paid to its stockholders cash dividends in the amount of $9,000 on each date. At the respective dates of the advances by the original Little Gem Co. to Aetna and just prior to those advances, Aetna's cash position was as follows: February 10, 1936, cash overdaft of $404.28 May 7, 1936, cash balance 886.34 July 13, 1936, cash balance 1,665.63 On December 14, 1936, at a directors' meeting of the original Little Gem Co., a plan was submitted for the reorganization of the original *757 Little Gem Co. and Aetna, in conformity with which the original Little Gem Co. would be merged into Aetna prior to December 31, 1936, under the corporate name of Little Gem Coal Co. for the merged company. It was then proposed that: * * * Prior to the execution or adoption of the merger agreement, and without regard to the consummation of the plan of reorganization, Little Gem Coal Company is to declare and pay to Aetna Coal Company a dividend of thirty per cent (30%) upon the capital*1282 stock of Little Gem Coal Company payable by cancellation of the present inter-company advance of Fifteen Thousand Dollars ($15,000.00) from Little Gem Coal Company to Aetna Coal Company. A resolution pursuant to this proposal was adopted and immediately thereafter the original Little Gem Co.'s board of directors approved the proposed agreement of merger with Aetna. Immediately following the adjournment of this meeting, a stockholders' meeting was called, whereat the merger agreement was approved. The aforementioned dividend was declared and credited as such to Aetna on the original Little Gem Co.'s books on December 14, 1936. On the corporate income tax return of petitioner for the calendar year 1936, petitioner reported the $15,000 dividend as a dividend of a domestic corporation received by it during 1936, and the dividend was properly included to the extent taxable in the computation of petitioner's corporate income and excess profits tax for 1936. By virtue of the aforementioned agreement of merger, the original Little Gem Co. was merged into Aetna under the corporate name of Little Gem Coal Co. for the merged company, pursuant to the Alabama statutes. The agreement*1283 was executed and delivered on December 14, 1936, and shortly thereafter and before January 1, 1937, it was filed as required by the laws of Alabama in the office of the Secretary of State of Alabama. Including the aforementioned cash dividends of Aetna to its stockholders in the amount of $27,000 during 1936, petitioner paid total cash dividends to its stockholders in the amount of $60,000. Petitioner's net income for 1936 reflected on its return, including the $15,000 dividend from the original Little Gem Co. to Aetna, was $35,667.25. In its income tax return for the year 1936 (January 1 to December 14, the date of the merger), the original Little Gem Coal Co. claimed the disputed credit. When the Commissioner determined the deficiency, that original corporation was no longer in existence, and, consequently, the notice of deficiency was sent to the petitioner herein. *758 OPINION. KERN: The question presented by this proceeding is whether under the facts above stated the original Little Gem Co. is entitled to a dividends paid credit, under section 27 of the Revenue Act of 1936, in the amount of $15,000 representing a dividend declared by one of the corporations*1284 merged in petitioner in favor of its sole stockholder, a corporation which was the other party to the merger, the declaration being made at the time of the merger and the form of payment being the cancellation of indebtedness arising by reason of advances made during the taxable year by the corporation declaring the dividend to its sole stockholder. Respondent contends that the distribution in question must be considered as one in liquidation and nontaxable and, by reading section 27(h) as a limitation on section 27(f), concludes that no dividends paid credit should be allowed therefor. We have recently ruled adversely to respondent's ultimate contention in . On the authority of that case we decide the issue in favor of petitioner. The case of , is not in point and does not impose any limitation on the rule laid down in , in so far as the latter is applicable to this proceeding. In *1285 , there was a distribution by a corporation to its stockholders of stock in another corporation. Section 115(h) of the Revenue Act of 1936 provided that such a distribution should "not be considered a distribution of earnings or profits." We held that that section, entitled "Effect on Earnings and Profits of Distribution of Stock," should be read in connection with section 27(f) in determining whether a distribution is chargeable to earnings or profits accumulated after February 28, 1913. Since the distribution here in issue was not a distribution of stock, it is apparent that section 115(h) has no application; and the Reed Drug Co. case, which is in no way concerned with section 27(h), can not be considered as impairing the authority of , for the proposition that section 27(h) will not be read as a limitation on section 27(f). It is, therefore, unnecessary to consider petitioner's arguments to the effect that the dividend in question was, in reality, distributed at the time the advances were made which were later canceled; that the dividend, in any event, was an ordinary dividend taxable*1286 to the stockholder as distinguishable from a liquidating dividend; and that under the law of Alabama the merger was not a liquidation. Decision will be entered for the petitioner.