Nemours Corp. v. United States

LEAHY, Chief Judge. If it is determined the taxpayer is entitled to any credit against the undistributed profits surtax paid, the parties agree they will compute the effect of such credit upon the plaintiff’s undistributed profits surtax in order to arrive at the precise amount of any judgment which may be rendered.2 The facts raise three questions: (1) Was the claim for refund filed under § 26 (f) of the Revenue Act of 1936, as added by Revenue Acts 1942, § 501(a) (3), 26 U. S.C.A.Int.Rev.Acts, page 344, sufficient to entitle taxpayer to a refund under § 26(c) (3), as amended by Revenue Act 1942, § 501, 26 U.S.C.A.Int.Rev.Acts page 344, if it is otherwise entitled to it under § 26(c) (3) ? (2) Is the taxpayer in any event entitled to a credit under § 26(c) (3) of the Revenue Act of 1936 ? (3) If the taxpayer is entitled to relief under § 26(c) (3), whether it may receive the benefit of certain payments not claimed as deductions when the 1936 income tax return was filed. These questions will be considered in order, but first a statement will be made more fully discussing the arguments and apposite statutes relating to the second issue. As the stipulation on the facts shows, plaintiff, for the years 1925-28 made money, and during such years declared and paid stock dividends. It recorded such transactions on its books by transferring from its surplus account to its capital account a sum in excess of $2,000,000. Plaintiff sustained substantial losses in the years 1933-34. On the critical date, December 31, 1935, the accumulated earnings and profits amounted to $501,467.93 if the stock dividends did not reduce its earnings and profits. But if such stock dividends are effective to reduce its earnings and profits, it had no accumulated earnings and profits but instead a deficit in the sum of $1,726,-632.07, and with the exception of minor deductions, plaintiff would be entitled to the refund here sought. The purpose of the 1942 amendment, c. 619, 56 Stat. 798, § 5017 26 U.S.C.A.Int.Rev. Acts, page 344, was to relieve corporations which in 1936 were “caught in a trap”. In short, many companies found their financial condition to be such that they were prohibited under the law of the state of their incorporation from paying dividends- and yet required under the terms of the Revenue Act of 1936, 49 Stat. 1648, §§ 14, 26, 27, 26 U.S.C.A.Int.Rev.Acts, pages 823, 835, 837, to pay dividends or be taxable for their nonpayment. Plaintiff argues that under § 14 of the Delaware Corporation Law, Revised Code of Delaware 1915, § 1928, c. 65, § 14; Laws of Delaware 1925, Vol. 35, c. 85, § 8, its earnings for the years 1925-28 were duly transferred to its capital account and became a part of plaintiff’s capital and were not available for distribution as earnings and profits in 1936, and that under § 34 of the Delaware Corporation Law, Revised Code of Delaware 1935, § 2066, c. 65, § 34; Laws of Delaware 1929, Vol. 36, c. 135, § 16, plaintiff could pay dividends in 1936 on its stock only out of (a) its net assets in excess of its capital, or (b) if there be no excess, out of its net profits for the year 1936 plus any net profits for the year 1935 that were not distributed by plaintiff in 1935. Since the facts show that plaintiff’s capital exceeded its assets in 1936, plaintiff could pay dividends in 1936 only out of its net profits for that year plus any remaining undistributed profits for the year 1935. I think it is unnecessary to quote the sections of the Delaware Corporation Law already referred to because not only has plaintiff correctly interpreted them but de [863] fendant does not dispute the interpretation. Defendant, while not disputing plaintiff’s interpretation of those sections of the Delaware Corporation Law, argues, however, that it could have reversed its practice of the years 1925-28 and in 1936 reduced its capital under § 28 of the Delaware Corporation Law, Revised Code of Delaware 1935, § 2060, c. 65, § 28;' Laws of Delaware 1929, Vol. 36, c. 135, § 15; and since it had this right — a right which does not require approval of the state — and did not exercise it, it was not “caught in a trap” and is not entitled to the relief provisions of § 501 of the Revenue Act of 1942. I think the form of the claim for refund is sufficient to entitle plaintiff to relief. It is true that in terms the credit or refund was claimed under an erroneous section, i. e., that the claim for refund is based on § 26(f) of the Revenue Act of 1936, as added by § 501(a) (3) of the Revenue Act of 1942,3 whereas it should have been filed under § 26(c) (3) of the same Act.4 It is further true that under regulations of the Treasury Department, which it is authorized to make, the claim for refund must fairly apprise a Commissioner of the grounds and circumstances surrounding the claim for refund. I am not unmindful that the Court in Angelus Milling Co. v. Commissioner, 325 U.S. 293, 299, 65 S.Ct. 1162, 1165, 89 L.Ed. 1619, in connection with this problem, said: “ * * * but it is not enough that somewhere under the Commissioner’s roof is the information which might enable him to pass on a claim for refund.” I think, however, it is possible to agree with the Court’s statement and still think the form of the claim for refund in the case at bar is sufficient. Here, the claim is made for relief under the provisions of § 501 of the Revenue Act of 1942; all the facts are available in the refund claim. That one section of the Act was mentioned rather than another seems unimportant if the basic issue is predicated on the conclusion that the refund should be allowed. The additional burden — if such there was — imposed on the Commissioner seems, at most, a very trivial one. Plaintiff, under authority of Ogilvie Hardware Co. v. United States, 330 U.S. 709, 67 S.Ct. 997, 91 L.Ed. 1192, and United States v. Byron Sash and Door Co., 6 Cir., 150 F.2d 44, is entitled to relief unless precluded by its failure to exercise its rights to reduce capital under § 28 of the Delaware Corporation Law. In the last case above, which involved a Kentucky corporation, the factual situation was comparable to that here. In that case, as here, there would have been no deficit in earnings and profits on December 31, 1935, if plaintiff had not distributed stock dividends in prior years. In that case, as here, there were subsequent operating losses. Nevertheless, the Court held that the corporation was entitled to tax relief. Under the Ken [864] tucky law, however, unlike the Delaware law, there was nothing the corporation could have done to have avoided the tax in 1936. There was no provision comparable to § 28 of the Delaware Corporation Law. The issue here, then, is a narrow one, viz., does the existence of § 28 of the Delaware Corporation, Law preclude the plaintiff from his refund? I conclude not. The arguments that, plaintiff can not ■claim the refund unless .it reduced its capital under § 28 of the Delaware Corporation Law do not persuade me. I find nothing in: the Revenue Act of 1942 enforcing the ■conclusion that the Court must consider not only the actual situation but also the situation as it might have been. I think the Revenue Act of 1942 dealt only with an actual situation and did not make it obligatory on corporations to change their capital structures in order to qualify under the Act. Alteration of capital structure is an act of independent legal significance. There may be many reasons ex tax considerations why a company would not wish to change its capital structure. Since the remedial Act dealt with the actual condition and since the capital of plaintiff company was not, in fact, reduced, it is entitled to a refund. United States v. Byron Sash and Door Co., 6 Cir., 150 F.2d 44. There were items of minor deductions. These are certain items of depreciation and expense of the property of plaintiff not claimed as deductions when the return was filed in 1936. The argument of the defendant is that since they were not claimed as deductions at the time the return was filed, they are not deductible now. The plaintiff simply takes the opposite position. I think clearly these items may be considered in connection with the relief provisions of the Revenue Act of 1942. It would be pure fiction to say that such deductions were earnings and available as dividends. Whether the deductions were claimed is irrelevant. The plain fact is that the money has been spent and obviously is not available for any purpose. In accordance with the last paragraph •of the stipulation, I am simply making a finding in favor of. plaintiff, and the .amounts may be arrived at when the order is settled. Footnotes [2] The complaint claims $30,385.87 with interest. This is, however, a token claim, as the stipulation on the amount to be received by plaintiff is controlled by the stipulation. [3] This section provides as follows: “(f) Deficit Credit. The amount by which the adjusted net income exceeds the sum of (1) the earnings and profits accumulated after February 28, 1913, as of the beginning of the taxable year, and (2) the 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). For the purposes of this subsection, earnings and profits of the taxable year shall be computed without diminution by the amount of the tax imposed under section 14, 102, 103, or 351 for such taxable year; and earnings and profits accumulated after February 28, 1913, as of the beginning of the taxable year, shall be diminished on account of the tax under section 14, 102, 103, or 351 for any previous taxable year only by the amount of such tax as com- ■ puted under the amendments made by section 501 of the Revenue Act of 1942.” [4] This section provides as follows: “ ‘(c) Restrictions on payment of dividends — ’ sis * Si! * * * “(3) Deficit corporations. In the case of a corporation having a deficit in accumulated earnings and profits as of the close of the preceding taxable year, the amount of such deficit, if the corporation is prohibited by a provision of a law or of an order of a public regulatory body from paying dividends during the existence of a deficit in accumulated earnings and profits, and if such provision was in effect prior to May 1, 1936. * * *»