#### ALBERT FARWELL BEMIS, ALICE B. TAYLOR, AND MAUDE B. PARSONS v. THE UNITED STATES

[No. E-432.

Decided January 16, 1928]

*On the Proofs*

*Income tax; dividends paid m 1911 out of earnmgs for prior years; • “most recently accumulated" profits; proof of date of earnings.*— Where net earnings of a corporation in the year 1917 prior to a distribution of dividends are shown to be sufficient to pay part of them, the income-tax rate for 1917 applies against the distributee to the proportion that could have been so paid from net earnings for 1917, notwithstanding the dividends are actually paid, in accordance with a resolution of the corporation duly made, out of earnings of prior years. Compare *Eorst*v. *United States, ante,*p. 433.

*The Reporter’s*statement of the case:

*Mr. Fred T. Field*for the plaintiffs. *Mr. Henry R. Brigham*was on the brief.

*Mr. Alexander H. McCormick,*with whom was *Mr. Assistant Attorney General Hermcm J.*Galloway, for the defendant. *Mr. Fred K. Dyar*was on the brief.

The court made special findings of fact, as follows:

I. For some time prior to the year 1917 and until April 6, 1921, Judson M. Bemis was a citizen of the United States and a resident of Colorado Springs, Colorado, having his principal place of business in S.t. Louis, Missouri. Said Judson M. Bemis died April 6, 1921, intestate. The plaintiffs were at the date of the death of said Judson M. Bemis, and are now, his only heirs at law and next of kin.

II. Judson M. Bemis duly filed with the collector of internal revenue for the district of Missouri a return of his income and excess profits for the year ended December 31, 1917, on April 1,1918, as required by the revenue act of 1916 as amended by the revenue act of 1917. Said Judson M. Bemis kept his books' of account on a cash receipts and disbursements basis as distinguished from an accrual basis, and the return for the year 1917 was filed on that basis.

*458III. Judson M. Bemis included in said return for the year 1917 a cash dividend of $20 per share (being 20% on a par value of $100) on the 1,458 shares of common stock owned by him of the Bemis Bro. Bag Company, a corporation duly organized under the laws of the State of Missouri. This dividend was declared by the directors of said corporation at a duly constituted meeting on January 12, 1917, the following resolution being then adopted:

“ *Dividend.*— It was unanimously resolved to declare a dividend of 20% on ,the common stock of the company, payable February 1, 1917, to the stockholders of record at the close of business on that day. The treasurer is hereby authorized to pay this dividend in accordance with this resolution.”

The dividend was paid on February 1, 1917, pursuant to said resolution. The amount of said dividend paid to Judson M. Bemis was $29,060. This amount was included by him in his return for the year. 1917 in block “ F ” as taxable at the rates prescribed by law for the year 1916.

IY. The total net earnings or profits of said Bemis Bro. Bag Company for .the year 1917, according to the books of said corporation as later determined, were $5,523,555.85'and the total cash payments in 19*17 of all dividends were' as follows:

Dividend on common stock declared January 12, 1917, paid February 1, 1917_$1,280, 000.00

Dividend on common stock declared August 1, 1917, paid August 15,1917_ 639, 610.00

Dividend on preferred stock paid December 1, 1917_ 80, 000. 00

Cask dividend in lieu of fractional shares, paid September 28, 1917_ 1,137. 50

Y. The Commissioner of Internal Revenue claims that

said dividend of Bemis Bro. Bag Company declared January 12, 1917, which was payable to the decedent on February *1,*1917, to wit, the sum of $29,060, should be taxed at the rates prescribed by law for the year 1917.

YI. During the year 1916 the corporation accumulated sufficient surplus and undivided profits out of which to pay in full the dividend declared January 12, 1917, and paid February 1, 1917.

*459During tbe year 1917 the corporation accumulated sufficient surplus and undivided profits out of which to pay in full the dividend declared January 12, 1917, and paid February 1, 1917.

Between January 1, 1917, and January 12, 1917, the corporation accumulated ¡surplus and undivided profits sufficient to pay to decedent the sum of $3,694.65 as his share of the dividend declared on January 12, 1917, and a similar proportion to the other stockholders of the corporation.

Between January 1, 1917, and February 1, 1917, the corporation accumulated surplus and undivided profits sufficient to pay to decedent the sum of $10,412.20 as his share of the dividend declared on January 12,1917, and a similar proportion to the other stockholders of the corporation.

VII. The decedent also included in his return for the year 1917 a ca,sh dividend of $10 per share on said common stock of said Bemis Bro. Bag Company owned by him. This dividend was declared by the directors of said corporation at a duly constituted meeting on August 1,1917, the following resolution being then adopted:

“ It was unanimously resolved to declare a dividend of 10% on the common stock of the company, payable on August 15, 1917, to stockholders of record at the close of business on that day, out of the. surplus accumulated prior to March 1, 1913. The treasurer is hereby authorized to pay this dividend in accordance with this resolution.”

Said dividend was paid on August 15, 1917, pursuant to said resolution. The amount of said dividend received by the decedent on August 15, 1917, was $14,530, and was included by him in said return for the year 1917 in block “ F ” as taxable at the rates prescribed by law for the year 1917. In said return after block “ F ” the decedent included the following statement:

“ I return under protest the item of dividend received by me from the Bemis Bro. Bag Co. on August 15, 1917, which dividend was declared August 1, 1917, and was paid out of surplus of the said company accumulated prior to March 1, 1913, on the ground that the said income is not taxable under the terms of said act of September 8,1916, or the amendment thereof of October 3, 1917.”

*460VIII. The Commissioner of Internal Revenue determined that said dividend should be taxed at the rates prescribed bylaw for the year 1917.

IX. On August 1, 1917, and on August 15, 1917, the corporation had on hand sufficient surplus and undivided profits accumulated prior to March 1, 1913, out of which to pay in full the dividend declared August 1, 1917, and paid August 15, 1917.

On August 1, 1917, and on August 15, 1917, the corporation had on hand surplus and undivided profits accumulated after January 1, 1917, sufficient to pay in full the dividend declared August 1, 1917, and paid August 15, 1917.

X. The decedent also included in said return a cash dividend of 6% on 11,425 shares of the preferred (st,ock owned by him of the Angus Jute Company, Ltd., a foreign corporation organized under the Indian companies’ act (1882) and doing business in India, and a cash dividend of 6% per annum for ten months on 1,175 other shares of said preferred stock that had been owned by him since March 1,1916. Said dividends were paid February 15, 1917. The amount of said dividends received by decedent on February 15, 1917, was $24,808.33 and was included in said return in block “ H ” entitled “ Other income,” under the item “ Interest on bonds of foreign countries and corporations and dividends on stock of foreign corpprations ” as taxable at the rates prescribed by law for the year 1916.

XI. The Commissioner of Internal Revenue determined that said dividend should be taxed at the rates prescribed by law for the year 1917.

XII. During the year 1916 the corporation accumulated sufficient surplus and undivided profits out of which to pay in full the dividend paid February 15, 1917, and declared February 27, 1917.

During the year 1917 the corporation accumulated sufficient surplus and undivided profits out of which to pay in .full the dividend paid February 15, 1917, and declared February 27, 1917.

On February 15, 1917, the corporation had on hand surplus ' and undivided profits accumulated after January 1, *4611917, sufficient to pay in full the dividend declared February 27, 1917, and paid February 15, 1917.

XIII. The decedent also included in said return a cash dividend of 25% on 8,324 shares of the stock owned by him of the Angus Jute Company, Ltd., and a cash dividend of 25% per annum for ten months on 2,081 other shares of said ordinary stock that had been owned by him since March 1,

1916. Sa.id dividends were paid February 15, 1917. The amount of said dividends received by the decedent on February 15, 1917, was $84,974.17, and was included in said return in block “ H,” entitled “ Other income,” under the item “Interest on bonds of foreign countries and corporations and dividends on stock of foreign corporations ” as*taxable at the rates prescribed by law for the year 1916.

XIY. In accordance with the articles of association, at the ordinary meeting of the corporation held February 27,

1917, the directors laid before the corporation a profit- and-loss account and a balance sheet containing a summary of the property and liabilities of the corporation made up to December 81, 1916, and such balance sheet was accompanied by a report of the directors as to the state and condition of the corporation and as to the amount which they recommended to be- paid out of the profits by way of dividends to the members. This report was adopted by the directors at a meeting held on February 23, 1917, and the dividends were confirmed by the stockholders at said meeting held February 27, 1917.

XV. The total net earnings or profits of said Angus Jute Company, Ltd., for the entire year 1917 were $685,894.29, and the cash payments in 1917 of dividends were as follows:

Preferred dividend paid February 15, 1917, and declared

February 27, 1917_$69, 340. 50

Ordinary dividend paid February 15, 1917, and declared

February 27, 1917- 292,426.14

XVI. The Commissioner of Internal Revenue determined that said dividend was taxable at the rates prescribed by law for the year 1917.

XVII. During the year 1916 the corporation accumulated sufficient surplus and undivided profits out of which to pay *462in lull the dividend declared February 27, 1917, and paid February 15, 1917.

During the year 1917 the corporation accumulated sufficient surplus and undivided profits out of which to pay in full the dividend declared February 27, 1917, and paid February 15, 1917.

Between January 1, 1917,' and February 15, 1917, the corporation accumulated surplus and undivided profits sufficient to pay fco decedent the sum of $4,276.91 as his share of the dividend declared on February 27, 1917, and a similar proportion to the other stockholders of the corporation.

Between January 1, 1917, and February 27, 1917, the corporation accumulated surplus and undivided profits sufficient to pay to decedent the sum of $27,545.11 as his share of the dividend declared on February 27, 1917, and a similar proportion to the other stockholder's of the corporation.

XVIII. The Angus Jute Company, Ltd., a foreign corporation, was not engaged in business in the United States and derived no part of its income or profits for the year 1917 or other years from any sources within the United States, and it paid no income tax to the United States and filed no returns of income in the United States, and it was not taxable upon its net income under' the internal-revenue laws of the United States.

XIX. In the year" 1918 the Commissioner of Internal Bevenue claiming to act pursuant to the revenue act of 1916, as amended by the revenue act of 1917, assessed upon said Judson M. Bemis income and excess-profits taxes for the year ended December 31, 1917, amounting to $40,012.18, and in June of said year 1918 the Collector of Internal Bevenue for the First District of Missouri, by notice and demand, demanded from said Judson M. Bemis the payment of said income and excess-profits taxes in accordance with the assessment made by said commissioner. Thereafter, on June 12, 1918, said Judson M. Bemis paid to said collector under duress and compulsion and solely for the purpose of avoiding the imposition of the penalties and interest specified in said notice and demand, and provided for in said acts for cases of failure to pay income and excess-profits taxes, the sum of $40,012.18.

*463XX. An administrator of the estate of said Judson M. Bemis was duly appointed in the State of Missouri, who administered the estate, paying all debts and distributing assets, and was duly discharged as such administrator on or about January 8, 1923, and thereafter had no authority to act for said estate. No other administrator has ever been appointed for said estate.

XXI. On or about February 16, 1923, the plaintiffs duly filed with the Commissioner of Internal Bevenue a claim for refund or credit for $13,681.04, or such greater amount as is legally refundable, and interest thereon from June 12, 1918. On July 20, 1923, the Commissioner of Internal Bevenue disallowed said claim for refund filed on or about February 16, 1923.

XXTT. A true and correct summary of decedent’s total income received from all sources during the calendar1 year 1917, with allowable deductions for computing net taxable income is as follows:

Block D. Kents_ $1, 530. 99

Block F. Dividends, domestic corporations (including those

herein referred to)-'-114, 437.16

Block G. Interest on tax-free covenants- 1, 676.64

Block H. Interest on bonds, etc- 88, 842.37

Foreign dividends--- 109, 782. 50

Block J. Deductions: General- 2, 374.19

Block N. Charitable contributions- 44,904. 82

XXIII. If all the dividends in question in this case were taxable at 1917 rates, the correct computation of tax would be as follows:

Block D. Rents_ $1, 530. 99

Block F. Dividends, domestic corporations- 114, 437.16

Block G. Interest on tax-free covenants_ 1, 676. 64

Block H. Interest on bonds, etc- 88, 842.37

Foreign dividends--- 109, 782. 50

Total 1917 income_ 316,269. 66

Block J. Deductions: General-$2, 374.19

Block N. Charitable contributions-- 44, 904. 82

- 47, 279. 01

Net taxable income_ 268, 990.65

Less : Domestic dividends-$114, 437.16

Exemption- 1, 000. 00

- 115’ 437~16

Income subject to normal tax_,_ 153, 553.49

*464Normal tax at 2% on $153,553.49, 1917_. $3,071.07

Normal tax at 2% on $151,553.49, 1916_ 3, 031. 07

Surtax, 1917 income_ 67, 776.07

Total tax_ 73, 878.21

Tax withheld at source_ 35. 53

Total tax_ 73, 842. 68

The amount of tax paid was___ 40, *012.18*

Graham, Judge,

delivered the opinion of the court:

This is a suit for the recovery.of income and excess-profits taxes claimed to have been illegally exacted. The defendant counterclaims for a sum in excess of the amount assessed and collected.

The principles applicable to this case have been passed upon in *Edwards*v. Douglas; 269 U. S. 204; *Mason*v. *Rout*zahn, decided by the Supreme Court on November 21, 1927, 275 U. S. 175; and in the *Horst*cases, decided to-day by this court. *Ante,*pp. 433, 449.

The court said in the *Mason case :*

> “ The Government admits that no profits were earned in 1917 prior to the payment of the dividends here in question,” and that the 1917 rate did not apply for the reason “ that the most recently accumulated net profits were those earned in the year 1916, which were more than sufficient to pay the dividend.”

In that case it appeared that there had been *no earnings*prior to the payment of the dividends. The Circuit Court of Appeals held that even though this did appear, the tax, under the decision in the *Edwards*case, should be prorated against the year’s earnings for the period prior to the payment of the dividend.

The Supreme Court held that this was error for the reason that where it affirmatively appeared that there had been no earnings prior to the payment of the dividend the tax for 1917 was not applicable, but it also held:

That where it did not appear what the earnings were for the antecedent period, the earnings for the whole year should be prorated to that period and the amount so shown was taxable at the 1917 rate;

*465That where the earnings for the antecedent period affirmatively appeared, the taxpayer was only liable at the 1917 rate to the extent of the amount of such proved earnings.

The court further said in the *Mason case:*

> “ That the amount actually available for payment of dividends out of the current year’s earnings prior to the date of payment may always be shown; that such had been the practice of the Treasury Department from the time the revenue act of 1917 took effect until the date of the court of appeals’ decision; and that this rule was embodied in its regulations.

> “We see no good reason for disturbing the long-settled practice of the Treasury Department. Its contemporary interpretation is consistent with the language of the act and its practice was, in substance, embodied in the revenue act of 1918, February 24,1919, c. 18, sec. 201 (e), 40 Stat. 1057,1060. We conclude that the Circuit Court of Appeals placed an erroneous construction on, sec. 31 (b).” [Section added to revenue act of 1916 by revenue act of 1917, c. 63, Title XII, 40 Stat. 300, 338.]

The part' of the act of February 24,1919, above cited, is as follows:

> “Any distribution made during the first sixty days of any taxable year shall be deemed to have been made from earnings or profits accumulated during preceding taxable years; but any distribution made during the remainder of the taxable year shall be deemed to have been made from earnings or profits accumulated between the close of the preceding taxable year and the date of distribution, to the extent of such earcfings or profits, and if the books of the corporation do not show the amount of such earnings or profits, the earnings or profits for the accounting period within which the distribution was made shall be deemed to have been accumulated ratably during such period.” .

Judson M. Bemis, then a citizen of Missouri, on the 1st of April, 1918, filed a return of his income and excess profits for the year ending December 31, 1917. He kept his books of account on a cash receipts and disbursements basis as distinguished from an accrual basis, and his return was filed on that basis. He died on April 1, 1921, intestate. An administrator of his estate was duly appointed, who administered the estate, paying all debts and distributing the assets, *466and was discharged on January 8, 1923. No other administrator has since been appointed. The plaintiffs are the heirs at law and next of kin of said Bemis.

In the year 1918 the Commissioner of Internal Revenue assessed upon said Judson M. Bemis income and excess-profits taxes for the year ending December 31, 1917, in the amount of $40,012.18, which was paid by said Bemis on June 12, 1918.

On or about February 16,1923, the plaintiffs filed with the commissioner a claim for refund or credit of $13,681.04, or such greater amount as was legally refundable, with interest from June 12, 1918, which claim was disallowed on or about July 20, 1923.

Speaking generally, the matters in dispute concern certain dividends which were paid to and received by plaintiff during 1917. The earnings for 1917 of the companies from which the decedent received these dividends were sufficient to pay the dividends declared by them during that year. With the exception of the dividend paid on February 1,1917, by the Bemis Bro. Bag Co., of which the decedent received as his share $29,060 (Finding III), and the dividend of the Angus Jute Co., Ltd., paid February 15, 1917 (Finding XIII), of which plaintiff received $84,974.17, the corporation paying the dividend in each case had accumulated between January 1, 1917, and the date of payment of the dividend surplus and undivided profits sufficient to pay the dividend. So that, under the decisions and the law as heretofore stated, these dividends were taxable at the 1917 rate.

As to the dividend of $29,060, the Bemis Bro. Bag Co., between January 1, 1917, and the date of payment of the dividend, had accumulated surplus and undivided profits sufficient to pay to decedent, Judson M. Bemis, $10,412.20 as his share of the dividend declared and a similar proportion to the other stockholders of the company. Under the law as stated, the decedent was subject to tax only on $10,-412.20. As he was taxed by the commissioner on the whole sum received, plaintiffs are entitled to a refund of the tax on $18,647.80, the difference between these two sums.

As to the dividend of $84,974.17, the Angus Jute Co., Ltd., between January 1, 1917, and the date of payment of the *467dividend, February 15, 1917, 'bad accumulated surplus and undivided profits sufficient to pay decedent $4,276.91 (Finding XVII). As decedent was subject to tax only on $4,276.91 and the commissioner taxed him at the 1917 rate on the whole dividend received, the plaintiffs are entitled to a refund of the tax on the difference between the two sums, $80,697.26.

It is not for the court to calculate the tax on these two sums, namely, $18,647.80 and $80,697.26, to which the plaintiffs are entitled to a refund; nor has it been possible to do so from the facts. An opportunity wil) be afforded the parties to stipulate the amount of said tax in accordance with the foregoing conclusions, and to submit an agreement covering the amount of judgment to be entered in favor of the plaintiffs. For this purpose further consideration of the case is deferred for thirty (30) days.

Moss, Judge, and Booth, Judge, concur.

On February 6, 1928, on motion made therefor, and it appearing from a stipulation, duly filed in conformity to the order of the court, that recalculation of the tax developed no overpayment, the petition was dismissed.