Schinebro, Inc. v. Commissioner

SCHINEBRO, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Schinebro, Inc. v. Commissioner Docket No. 101545. United States Board of Tax Appeals 45 B.T.A. 580; 1941 BTA LEXIS 1103; November 5, 1941, Promulgated *1103 For the purpose of procuring a dividends paid credit in computing its surtax on undistributed profits under section 14 of the Revenue Act of 1936, the directors of petitioner, a personal holding company, on August 15, 1936, adopted a resolution declaring a dividend of $15,000, to be paid in the stock of another corporation and a sufficient amount of cash previously paid to its stockholders to bring the total to the amount of the dividend declared. Book entries later made showed a dividend paid of $14,754.39, of which $13,393.50 represented stock shown as distributed, while the remainder was covered by charges to the accounts of the stockholders, who were then and prior to the declaration of the dividends had been dreditors of the company on open account. The stock so shown as distributed was not in fact distributed, but remained with petitioner's brokers as security on its brokerage account, and when sold in 1937 income tax effect was given thereto by the petitioner in its 1937 return. Held: (1) The petitioner is not entitled, under section 27 of the Revenue Act of 1936, to a dividends paid credit for the purpose of computing its surtax on undistributed profits imposed by*1104 section 14 of the act. (2) The surtax imposed by section 14 of the Revenue Act of 1936 is separate and distinct from the tax imposed by section 351 of that act and the former tax applies despite the election of all the shareholders under section 351(d) to include in their gross income their pro rata share of the net income of the corporation. john E. Hughes, Esq., for the petitioner. walt Mandry, Esq., for the respondent. TURNER *580 The Commissioner determined a deficiency of $2,345.83 in the petitioner's surtax on undistributed profits for 1936. The issues involved are (1) whether the petitioner's action with respect to an alleged dividend in the amount of $14,754.39 amounted to a dividend paid within the meaning of section 27 of the Revenue Act of 1936 *581 so as to entitle the petitioner to a deduction of that amount in computing its undistributed net income for the purpose of the surtax imposed by section 14 of said act, and (2) whether the petitioner, being a personal holding company and subject to the provisions of section 351, which imposes a surtax on personal holding companies, is subject to the surtax imposed by section*1105 14. FINDINGS OF FACT. The petitioner, a personal holding company, is a New York corporation organized in 1927 and has its principal office in Gloversville, New York. It filed its income tax return for 1936 with the collector of internal revenue for the fourteenth district of New York. Throughout 1936 the capital stock of petitioner consisted of 200 shares, all of which were owned by two brothers, 130 shares being owned by J. M. Schine and 70 shares being owned by Louis W. Schine. It was a constant practice for J. M. Schine and Louis W. Schine to use their individual funds to pay bills of the petitioner. As a result of such payments on the part of the Schines the petitioner was indebted to J. M. Schine in the amount of $12,500 on January 27, 1936, and to Louis W. Schine in the amount of $29,630.91 on February 14, 1936. On January 27, 1936, the petitioner, by check paid J. M. Schine $2,000, which it charged to his account, describing this amount as an "advance." On or about February 14, 1936, Louis W. Schine arranged for the petitioner to obtain on its note a bank loan in the amount of $15,000. Of the $15,000 the petitioner on February 14, 1936, paid $1,606.50 to Louis*1106 W. Schine, charging his account on its books with that amount. On the same date the petitioner purchased 1,000 shares of stock in the Taxas & Pacific Coal & Oil Co., sometimes hereinafter referred to as the Texas Co., at a cost of $13,393.50, payment therefor being made with the remaining proceeds of the said loan. The petitioner carried the amount of the loan as a liability on its books and from the time of its purchase carried the stock on its books as one of its assets. Under date of June 23, 1936, the petitioner's accountant, Forrest E. Ferguson, wrote the petitioner as follows: According to my records, it will soon be time for your Directors to hold their annual meeting and I want to call your attention to a new provision of the 1936 Revenue Act which was approved June 22, 1936. Your company has been filing under Section 351 which is similar to the treatment of a partnership, that is, the stockholders pick up and report to tax their pro rata shares of income even though not paid to them. The new law contains an undistributed profits tax section and it is not clear to me just how this will be interpreted in connection with a co-filing under Section 351. *582 *1107 It is my advice that you be on the safe side and actually pay this year a dividend large enough to cover your 1936 profits. This dividend may be paid by cash or if cash is not available, by property. As practically all of your income is from dividend, it is estimated your profits for the year will be approximately $15,000. Thereafter, on August 15, 1936, the petitioner's board of directors adopted the following resolution: In view of the letter recently received from Forrest E. Ferguson with reference to the new income tax law, it was thereupon resolved that a dividend be paid for 1936 of $15,000, same to be paid as follows: By distribution of 1,000 shares of stock owned in the Texas & Pacific Coal & Oil Co. to our stockholders on a pro rata basis and a sufficient amount of the cash paid to L. W. Schine on February 14, 1936, and the cash paid to J. M. Schine, January 27, 1936, be hereby designated as a dividend in order to equal the dividend of $15,000. The balance of the cash payments shall be considered as loans. Further, the officers of the corporation are hereby directed to properly endorse and deliver the 1,000 shares of the Texas & Pacific Coal & Oil Co. to the*1108 stockholders as payment of the aforesaid earnings as dividend and the date of the dividend and said transfer to be as of August 15, 1936. Pursuant to the foregoing resolution the following journal entry was made on the petitioner's books as of December 31, 1936: Dividend surplus $14,754.39 Stock 1,000 shares Texas & Pacific Coal & Oil Co $13,393.50 J. M. Schine 884.58 L. W. Schine 476.31 Although the resolution specified a dividend of $15,000, that amount was not set up on the books as of the end of 1936 for the reason that the total of the petitioner's income for the year, $14,754.39, and its existing surplus of only about $98 was less than $15,000. On December 31, 1936, the petitioner's cash amounted to $2,838.94. The Texas Co. stock was listed on the New York Stock Exchange and on August 15, 1936, sold at prices ranging from $11 to $11 3/8 per The petitioner had a marginal trading account with J. S. Bache & The petitioner had a marginal trading account with J. S. Bache& Co., stock brokers, and some time prior to August 15, 1936, had endorsed and delivered the certificates for the 1,000 shares of stock in the Texas Co., together with*1109 other securities, to said stock brokers as collateral for the trading account. On August 15, 1936, the petitioner's equity in the trading account amounted to approximately $25,000. Despite the above quoted resolution of the petitioner's board of directors, the 1,000 shares of stock in the Texas Co. were never withdrawn from Bache & Co. and transferred to the Schines but continued to remain with Bache & Co. as collateral for the petitioner's trading account until sold in 1937, 500 shares being sold on March 11, 1937, for $7,670.33 and 500 shares being sold on October 19, 1937, for *583 $2,632.94, or for a total of $10,303.27. During 1937 dividends in the amount of $200 were paid on said stock. In its income tax return for 1937 the petitioner reported as income these dividends of $200 and deducted and was allowed as a loss on the sale of the stock the amount of $3,090.23 representing the difference between the cost of the stock, $13,393.50, and its selling price of $10,303.27. On March 13, 1937, the petitioner filed its income and excess profits tax return for 1936, on which it reported a net income of $14,754.39. In computing, on that return, its surtax on undistributed*1110 profits the petitioner claimed on line 29 $14,754.39 as a credit for dividends paid, the time of the payment, whichever is the lower, no liability for surtax on undistributed profits. On schedule M of the return, "Reconciliation Of Net Income And Analysis Of Changes In Surplus", the petitioner entered the amount of $14,754.39 as dividends paid during the taxable year but entered no date or dates of payment nor showed whether such dividends were paid in cash or other property, as required by the return. In June 1938 the petitioner filed its personal holding company return for 1936 showing an adjusted net income of $14,754.39. No tax was computed on the return but in the space thereon for entering the amount of undistributed adjusted net income the petitioner typed "Tax paid by all stockholders on pro rata shares as per instructions 11." J. M. Schine and Louis W. Schine, the two stockholders of the petitioner, reported in their individual income tax returns for 1936 their pro rata shares of the petitioner's net income of $14,754.39 as reported by the petitioner for 1936. In determining the deficiency in issue the respondent determined that the petitioner's taxable net income was*1111 $14,870.38, that no credit was allowable for dividends paid, and that the $14,870.38 constituted undistributed profits subject to the surtax imposed by section 14 of the Revenue Act of 1936. OPINION. TURNER: The petitioner makes two major contentions: First, that under the facts and circumstances of this case it must be held that a dividend in the amount of $14,754.39 was paid within the meaning of section 27 of the Revenue Act of 1936, 1 and, second, being a personal *584 holding company and subject to tax under section 351 of the act, it is not subject to the tax imposed by section 14. (a) DIVIDENDS PAID CREDIT IN GENERAL. - For the purposes of this title, the dividends paid credit shall be the amount of dividends paid during the taxable year. * * * (c) DIVIDENDS IN KIND. - If a dividend is paid in property other than money (including stock of the corporation if held by the corporation as an investment) the dividends paid credit with respect thereto shall be the adjusted basis of the property in the hands of the corporation at the time of the payment, or the fair market value of the property at the time*1112 of the payment, whichever is the lower. In support of the contention that a dividend was paid petitioner relies on , and in that connection also argues that, since the dividend was payable in part in the stock of the Texas Co. and corporate stock being intangible, declaration of the dividend was sufficient to vest ownership of the stock in the stockholders and transfer thereof was not required to effect payment or distribution. In , dividends were declared and credited on the corporate books to the accounts of the shareholders but were not actually withdrawn during the corporate taxable year. We held that "the corporation continued to hold the funds wholly subject to the shareholders' unrestricted demand and control" and that it was entitled to a dividends paid credit under section 27, supra. Clearly no such situation existed in the instant case. Furthermore, it may not be said on the facts that the adoption of the dividend resolution vested ownership of the 1,000 shares of Texas Co. stock in the petitioner's stockholders. The action taken did not spring from any desire*1113 to distribute the corporate profits to the stockholders but from the desire to avoid the undistributed profits tax, and the thought apparently was that that purpose could be accomplished by adoption of the resolution and without distribution. The shares of Texas Co. were on deposit with Bache & Co. as collateral for the petitioner's marginal account. The account was closed in 1937 at a loss to the petitioner of approximately $67,000. The loss sustained on the sale of the 1,000 shares of Texas Co. stock amounted to $3,090.23 and was claimed by the petitioner as a deduction on its return for 1937. The petitioner also received in 1937 and reported as its own a $200 dividend on the stock in question. The petitioner makes no attempt to reconcile its treatment of those items with its present claim that its stockholders were the owners of the Texas Co. stock. At the hearing petitioner's accountant, Forrest E. Ferguson, who prepared the 1937 return, testified that in preparing the return he had made some adjustment therein which would reduce the amount of the loss deduction by the difference between the cost of the stock to the petitioner in February 1936 and its fair market value on*1114 August 15, 1936, the date of the dividend resolution, but on examining the return was unable to state what, if any, item or schedule reflected such an adjustment. It is accordingly our conclusion that the stock of the Texas Co. was not distributed by the petitioner to its stockholders in payment of the alleged dividend. *585 The dividend resolution provided that after distribution of the 1,000 shares of Texas Co. stock "a sufficient amount of the cash paid to L. W. Schine on February 14, 1936 and the cash paid to J. M. Schine January 27, 1936" should be designated as a dividend in order to equal a total dividend of $15,000. In making the credit on the books of the corporation the Texas Co. shares were carried over to the accounts of the two stockholders at their cost, namely, $13,393.50, and sufficient of the cash payments made to L. W. Schine and J. M. Schine on February 14 and January 27, respectively, were set up as dividends to bring the total dividend credits to $14,754.39, the amount of the petitioner's earnings for the year. The cash credits so made as in payment of the dividend were $884.58 to J. M. Schine and $476.31 to L. W. Schine. The facts indicate that the*1115 petitioner had received advances from its two stockholders from time to time and that on January 27, 1936, when petitioner paid $2,000 to J. M. Schine, it was indebted to him in the amount of $12,500, and on February 14, 1936, when petitioner paid $1,606.50 to L. W. Schine, it was indebted to him in the amount of $29,630.91. The individual accounts of the stockholders were charged with the cash payments made on January 27 and February 14. Neither of the Schines was offered as a witness and aside from the foregoing we know nothing of the circumstances under which the said amounts were paid to them. We are of the opinion therefore that these payments may not be regarded as anything other than payments on indebtedness owing to the Schines by the petitioner. They were not available for use in payment of the alleged dividend on August 16, when the dividend resolution was adopted, nor on December 31, when the dividend credits were made to the accounts of the stockholders. It is also noted that the fair market value of the Texas Co. stock at August 16, 1936, when the dividend resolution was adopted, was less than its cost and, even though payment of the dividend had been effected, the*1116 petitioner would not be entitled to a dividends paid credit in the full amount claimed. Sec. 27(c), Revenue Act of 1936. The petitioner makes further claim, relying on section 351(d) of the Revenue Act of 1936, that a dividend must be regarded as having been paid because the petitioner's shareholders reported the amount thereof in their individual income tax returns as dividends received. Section 351(d) provides that the tax imposed by section 351 shall not apply "if (1) all the shareholders of the corporation include (at the time of filing their returns) in their gross income their entire pro rata shares, whether distributed or not, of the adjusted net income of the corporation for such year." It is argued that the purpose of *586 section 14 "was to force corporations to declare dividends in order that shareholders might be forced to report and pay tax on such dividends and not avoid surtax by accumulating money in corporations", and that, since that purpose has been accomplished by the reporting of the dividend by the stockholders in their individual returns, the purpose of the statute has been served and the dividend must therefore be regarded as having been paid within*1117 the meaning of section 27, supra.That Congress did have the purpose stated in mind is indicted by the report of the Committee on Ways and Means reporting the bill which became the Revenue Act of 1936, but a statement of a particular purpose for legislation in a committee report or in the debates with respect to pending legislation in no way limits the statute when enacted to the purpose stated where the said statute by clear and unambiguous wording is broader in scope. In such case it is certainly not within the province of this Board to say that Congress did not have other purposes in mind and that it did not mean what it expressly and clearly stated. , affirming . The tax imposed by section 14 is broadly stated and reaches "the net income of every corporation." Subsection (b). 2 In subsection (a), 3 however, it is provided that in determining the undistributed net income, the income subject to tax, a dividends paid credit shall be allowed as provided in section 27 and in section 27 it is stated that "the dividends paid credit shall be the amount of dividends paid during the taxable year." There is*1118 no provision which permits a dividends paid credit in the absence of payment. The dividend in the instant case was not paid and the petitioner is not entitled to the dividends paid credit claimed, even though the stockholders did report in their individual income tax returns the 1936 earnings of the corporation. ; . *1119 *587 The final contention of the petitioner is that, being a personal holding company and subject to tax under section 351, it is not subject to the tax imposed by section 14. Petitioner's argument is vague and somewhat difficult to follow. It seems to be based, however, on the language of subsection (f) of section 14, which reads: "TAX ON PERSONAL HOLDING COMPANIES. - For surtax on personal holding companies, see section 351." The effect of the argument is that Congress, by the insertion of subsection (f), intended to and did except personal holding companies from the tax imposed by section 14. One difficulty with the petitioner's position is that by section 14(b) the surtax on undistributed profits is broadly imposed "upon the net income of every corporation" and the language of subsection (f) is that of cross-reference and does not state an exception to the tax imposed under subsection (b). Furthermore, in imposing the tax under section 351, Congress expressly stated that the tax so imposed is "in addition to the taxes imposed by Title I", in which section 14 appears. That the language of subsection (f) was intended merely as an informatory cross-reference and not*1120 as an excepting clause is further borne out by subsection (g) of section 14. There Congress by substantially similar language referred to the surtax on corporations imposed by section 102. By petitioner's argument it would follow that all corporations subject to tax under section 102 would not be subject to tax under section 14. Obviously such an argument could not be sustained. In section 102, as in section 351, it is stated that the tax there imposed is in addition to other taxes imposed by Title I and further, to show that Congress in making that statement had the tax imposed by section 14 in mind, the rates under section 102 were varied in the case of corporations also subject to tax under section 14. To apply the reasoning of the petitioner would make the provisions of section 102(a)(2) meaningless. We find no merit to the petitioner's contention that, since it is subject to the surtax on personal holding companies imposed by section 351, it is not liable to tax under section 14. The claim is accordingly denied. Reviewed by the Board. Decision will be entered for the respondent. VAN FOSSAN VAN FOSSAN, dissenting: Believing that the facts in this*1121 case bring it within our holding in Valley Tractor & Equipment Co.,42 B.T.A. 311, and that the credit claimed is accordingly allowable, I respectfully dissent. ARUNDELL and OPPER agree with this dissent. Footnotes 1. SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID. ↩ 2. SEC. 14. SURTAX ON UNDISTRIBUTED PROFITS. * * * (b) IMPOSITION OF TAX. - There shall be levied, collected, and paid for each taxable year upon the net income of every corporation a surtax equal to the sum of the following, subject to the application of the specific credit as provided in subsection (c): 7 per centum of the portion of the undistributed net income which is not in excess of 10 per centum of the adjusted net income. * * * 27 per centum of the portion of the undistributed net income which is in excess of 60 per centum of the adjusted net income. ↩ 3. (a) DEFINITIONS. - As used in this title - (1) The term "adjusted net income" means the net income minus the sum of - * * * (2) The term "undistributed net income" means the adjusted net income minus the sum of the dividends paid credit provided in section 27 and the credit provided in section 26(c), relating to contracts restricting dividends. ↩