#### FRED M. KIRBY v. THE UNITED STATES1

[No. D-378.

Decided January 17, 1927]

*On the Proofs*

*Income tax; sec. 1M1, revenue act of 1917; distribution of dividends; “ Most recently accumulated undivided profits*”. — Where plaintiff received dividends from a corporation March 1, April 1, and June 1, 1917, which had been declared January 10, February 14, and April 11, 1917, respectively, and there were sufficient profits accumulated during the year 1917 at the respective dates of payment from which to make the distribution, the said dividends will be deemed to have been made from “ accumulated undivided profits ” for the year 1917, and in the hands of the recipient are subject to the income tax rates for 1917. See *Edwards*v. *Douglas,*269 U. S. 204.

*The Reporter's*statement of the case:

*Mr. Martin A. Schenck*for the plaintiff. *Mr. Edward Cornell*was on the brief.

*Mr. Alexander H.*McCormick, with whom was *Mr. Assistant Attorney General Herman J. Galloway,*for the defendant.

The court made special findings of fact, as follows :

I. Plaintiff, Fred M. Kirby, is now, and was at the times hereinafter mentioned, a citizen of the United States, and asserts the claim herein in his own right and has made no assignment of the same, and no person other than plaintiff in his own interest owns any interest in said claim.

II. Plaintiff, Fred M. Kirby, made and filed with the collector of internal revenue of the second district of New York a return of his annual net income for. the calendar year 1917 and paid a tax thereon of $130,541.18. In said return he set forth receipts by him as stockholder from the F. *W.*Woolworth Company, a New York corporation, of corporate dividends in the amount of $215,477.50, and paid a tax on said dividends at the rate of tax fixed for the year 1916.

*707III. Said dividends were declared in the State of New York by the board of directors of the F. W. Woolworth Company- on the following dates and thereafter paid plaintiff, as follows:

$100,016 declared at the meeting of January 10,1917; payable and paid plaintiff March 1, 1917.

$15,445.50 declared at the meeting of February 14, 1917; payable and paid plaintiff April 1, 1917.

$100,016 declared at the meeting of April 11,1917; payable and paid plaintiff June 1, 1917.

There was a surplus existing at each of the above periods when dividends were declared from business done by the F. W. Woolworth Company in 1916. There were earnings of the company during the periods covered by the payments set forth above each and every month. Dividends were not paid when declared, but at a future date, and the dates payable on the common stock were March 1, June 1, September 1, and December 1, and on the preferred stock January 1, April 1, July 1, and November 1. There were before the directors at the aforesaid meetings no facts or figures showing or any knowledge of the existence of' surplus profits for the year 1917, but the directors did have before them at the meeting of February 14, 1917, a summary of sales for January, but no statement of liabilities, and at the meeting of April 11, 1917, they had before them a similar list, showing a summary of sales for the three months ending April 1, but no statement of liabilities. The business always operated at a profit during each year.

IV. On or about April 16, 1921, the Commissioner of Internal Revenue assessed an additional tax liability for the year 1917 against plaintiff in the sum of $67,453.15. On or about October 22, 1921, plaintiff filed a claim for abatement; and on July 31, 1923, instructions were issued of an over-assessment of $49,925.36. Plaintiff was then notified to pay the tax of $17,527.79 and interest of $1,840.42, and on September 12, 1923, paid $19,368.21 under protest.

V. On or about October 10, 1923, plaintiff filed a claim for refund of $67,453.15 of his income and profits tax. No part of the claim has been paid.

*708VI. On January 10, 1917, February 14, 1917, and April 11, 1917, when the dividends were declared, the directors of the F. W. Woolworth Company had no knowledge of any undistributed earnings of 1917 to pay such dividends. The F. W. Woolworth Company did not make an approximate ascertainment of profits monthly and had not at the time of said declarations of dividends made any such approximate ascertainment of profits.

VII. The business from the accumulated profits of which the dividends in question were declared and paid consisted in keeping and operating about one thousand separate stores scattered throughout the United States and Canada. The managers of these different stores would throughout the year order goods direct from various manufacturers from lists sent out by the F. W. Woolworth Company buyers. Inventories were taken at the end of the year. No intermediate inventories of the corporate business were taken, but occasionally an inventory was taken in some one particular store. The business of the corporation was at its lowest ebb during the first part of each year, increased around Easter, and reached its full volume in the late fall and during the Christmas holidays. The heavy expenses of the business, such as store managers’ commissions, taxes, light, and heating, were not determinable until the end of the year.

The net income of the F. W. Woolworth Company for 1917 amounted to $8,188,579.08.

If, under the law, the earnings for 1917 may be apportioned by the month, the net income of said company for the period from January 1, 1917, to March 1, 1917 — the same representing two-twelfths of the year — amounted to $1,364,763.18. The dividends declared on January 10, 1917, and paid on March 1, 1917, amounted to $1,000,000. Deducting this amount from the sum of $1,364,763.18 leaves undistributed earnings for January and February, after the payment of said dividends, in the sum of $364,763.18. On this same basis the net earnings from March 1, 1917, to April 1, 1917, amounted to $682,381.59, which, added to $364,763.18, shows that there was on hand earned and un*709distributed from January 1, 1917, to April 1, 1917, $1,047,-144.77. The dividend declared February 14, 1917, and paid on April 1, 1917, amounted to $227,500. After the declaration of the dividend there was left undistributed the sum of $819,644.77, to which should be added the earnings from April 1 to June 1, 1917, the date the dividend of $1,000,000, declared April 11, 1917, was paid. Said earnings amounted to $1,364,763.18, making a total of $2,184,407.95, out of which to pay the dividend of $1,000,000.

The court decided that plaintiff was not entitled to recover.

1

 Writ of certiorari granted.

Booth, Judge,

delivered the opinion of the court:

This is an income-tax case. Plaintiff asserts that the tax upon that part of his income derived from dividends paid to him by the F. W. Woolworth Company, a New York corporation, in March, April, and June of 1917 should have been computed at the rate fixed in the revenue act of 1916 instead of the revenue act of 1917.

Defendant, in opposition, relies upon the case of *Edwards*v. Douglas, 269 U. S. 204.

We think it unnecessary to enter upon a review or a statement of the facts. The commissioner’s findings are conceded by the parties to be correct.

Plaintiff’s brief and arguments are directed toward an effort to bring this case within an exception to the opinion of the Supreme Court in the above case; that is, while not challenging the construction given to the statute by the Supreme Court, a contention is made that the facts in this case present a right of recovery under that decision. With this contention we disagree. In our opinion the decision of the Supreme Court in *Edwards*v. *Douglas*precludes recovery herein, and the petition will be dismissed. It is so ordered.

Moss, *Judge;*Graham, *Judge;*Hay, *Judge;*and Camp-beuti, *Chief*Justice, concur.