#### GEORGE D. HORST v. THE UNITED STATES

[No. E-89.

Decided January 16, 1928]

*On the Proofs*

*Income tax; dividends paid in 1911 out of earnings for prior years; “most recently accumulated” profits; failure to show date of earnings.*— Where the total net earnings of a corporation in the year 1917 were not less than the dividends distributed in that year, and it is not shown what amounts were available for distribution out of 1917 earnings prior to the date of d.s-tribution, the dividends so distributed are to be deemed paid out of 1917 earnings to the extent of a per diem allocation of 1917 earnings to the period preceding distribution, and in the hands of the distributees are to that extent subject to the income-tax rates for 1917, nothwithstanding the said dividends were ordered by the corporation to be paid and were in fact paid out of net earnings for prior years. Compare *Semis et a.l.*v. *United States, post,*p. 457.

*Same;*“ *tax-free covenant ” bonds.*— A tax paid by the obligor on interest on “ tax-free covenant ” bonds is hot gain or profit within the meaning of the income-tax laws, is not received by the obligee, and is not subject to the income tax.

*The Reporter's*statement of the case:

*Mr. H. F. Kantner*for the plaintiff.

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

The court made special findings of fact, as follows:

I. George D. Horst is now and at all times hereinafter mentioned was a citizen of the United States and resides at Reading, Berks' County, Pennsylvania.

*434II. Under .the revenue act of *1916,*as amended by the revenue act of 1917, on official form No. 1040, furnished to him by the Commissioner of Internal Revenue, plaintiff prepared his income-tax return for the calendar year 1917, reporting his total net income as $64,671.75.

III. Plaintiff therein reported dividends received by him on the dates and from the corporations hereinafter named:

1917

Jan. 22. Nolde & Horst Company-'-$100, 000. 00

Mar. 3. Nolde & Horst Company_ 50, 000.00

Apr. 17. Nolde & Horst Company_ 50, 000. 00

Feb. 12. E. Richard Meinig Company- 12, 000.00

Mar. 2. E. Richard Meinig Company_ 12,000.00

Mar. 19. E. Richard Meinig Company_ 12, 000.00

Mar. 31. E. Richard Meinig Company- 12, 000.00

May 4. E. Richard Meinig Company_ 12, 000. 00

May 16. E. Richard Meinig Company_ 12, 000. 00

June 18. E. Richard Meinig Company_ 12,000.00

The Nolde & Horst Company dividends were declared on January 13 and March 3, 1917, respectively, of 100% each; the dividend of E. Richard Meinig Company was for 700%, was declared on January 8, 1917, and paid in seven installments on the foregoing da|es. This 700% dividend was declared by a resolution of the Board of Directors payable out of the net earnings for the year 1916, and it was paid in installments on the dates aforesaid out of the earnings of the corporation actually accumulated during the year 1916. The dividends received by the plaintiff from the Nolde & Horst Company were declared by the Board of Directors on January 13 and March 3, 1917, respectively, of 100% each. The first dividend was paid on January 22, 1917; the second, in two equal installments, on March 3 and April 17, 1917, respectively, and the dividends were declared by the Board of Directors payable from the net earnings of the corporation for the year 1916 and were paid out of earnings actually accumulated by the corporation during the year 1916. Plaintiff included the said dividends in his return as aforesaid and computed-his tax liability by applying to said dividends the rates of tax prescribed by law for the year 1916. Said return was duly filed by the plaintiff on June 7, 1918, with the United States collector of internal revenue at Philadelphia, Pennsylvania, and $26,509.78 tax shown thereon paid.

*435IV. On January 15, 1923, the Commissioner of Internal Revenue notified the plaintiff that an additional assessment of income tax for the calendar year 1917 amounting to $17,506.73 would be listed against him. The Commissioner of Internal Revenue determined that $19,116.43 of the dividend of $84,000 received by the plaintiff from E. Richard Meinig Company and $71,066.94 of the dividends of $200,000 received by him from Nolde & Horst Company during the year 1917, as heretofore stated, were taxable at 1917 rates.

V. The Commissioner of Internal Revenue also included in and as part of plaintiff’s net income for the year 1917 the sum of $755.86 for taxes paid by corporations on “ tax-free covenant ” bonds thereof held by plaintiff. The plaintiff in making his return returned under paragraph G, “ Interest on tax-free covenant bonds (on which one normal tax of 2% was withheld at source),” the sum of $37,793.11. This was included in his return as part of the amount subject to the normal tax of 2%, and under item 31 of his return, “ Less tax withheld on tax-free convenant bonds (2% of net total of item G),” $755.86 was deducted from his tax. The Commissioner of Internal Revenue held that the amount paid by the corporation obligor for the bondholder pursuant to a tax-free covenant clause contained in the bond was in the nature of additional income -to the bondholder and disallowed the last-named sum. The amount of tax assessed by the commissioner on the said sum of $755.86 is not proved.

VI. By reason of the addition by the commissioner of said sums of $19,116.43, $71,066.94, and $755.86 to plaintiff’s net income reported as aforesaid, the same was increased from $64,671.75 to $155,610.98; and the computation of the tax thereon for a part of the dividends received at 1917 rates and the balance at 1916 rates by the commissioner resulted in the assessment of a total tax of $44,016.51, upon which plaintiff was credited with the sum of $26,509.78 for tax previously assessed and paid, making the additional tax of $17,506.73 assessed as aforesaid.

VII. Plaintiff thereupon, on January 23,1923, excepted to the action of the Commissioner of Internal Revenue and filed his appeal therefrom with the committee on appeals *436and review, before which an oral hearing was held on May 22, 1923. On October 13, 1923, said committee on appeals, and review sustained the action of the Income Tax Unit.

VIII. Following such notice and on December 20, 1923,. the Commissioner of Internal Revenue, through the collector of internal revenue at Philadelphia, Pa., made demand upon plaintiff for the payment of $17,506.73 as additional income, tax for the year ending December 31, 1917. On December 26,1923, the plaintiff under threat by the collector of seizure and sale of his property if he failed to make such payment,, and in the belief that such threat would be carried out, paid to the said collector of internal revenue at Philadelphia, Pa.,, the said sum of $17,506.73. Said payment was made under duress and protest, and at the time of making such payment, the plaintiff filed with the said collector of internal revenue-a written protest against such additional assessment and against the payment thereof. The said sum of $17,506.73. so paid by plaintiff under protest to. the said collector of internal revenue was thereafter by the latter' turned over and deposited into the Treasury of the United States of-America in the usual course of his official, business. On February 13, 1924, plaintiff filed with the said collector a. claim for refund, which on June 17, 1924, was rejected in full.

IX. During 1917, as ascertained at the end of the year,, the Nolde & Horst Company had net profits of $1,133,450.90.. It distributed dividends on the basis above stated of $250,000,, January 22, $125,000, March 3, and $125,000, April 17, 1917, a total of $500,000. During the year 1917 the net profits of the E. Richard Meinig Company amounted to $277,818.82,. ascertained at the end of the year, and it distributed in dividends $350,000 on the dates aforesaid in equal installments of $50,000. There is no proof as to the months of the' year 1917 in which the above-mentioned profits were earned, by either company.

X. Under the Revenue act of 1918, on official form No.. 1040 furnished to him by the Commissioner of Internal Revenue, plaintiff prepared and filed his income-tax return, for the calendar year 1919, and reported his net income as. $76,459.60.

*437XI. Plaintiff received during 1919 of Nolde & Horst Company a cash dividend of $200,000 and of Reading Brewing Company, a corporation, a cash dividend of $90,000, but none of the first and only $37,881 of the second dividend was included in plaintiff’s return for that year. Plaintiff paid $15,278.80 in payment of the tax shown due upon his return.

XII. On January 18, 1923, the Commissioner of Internal Revenue notified the plaintiff that an additional assessment for income tax for the calendar year 1919 amounting to $132,836.24 would be assessed against him, which additional tax was based upon the receipt by plaintiff of cash dividends during said year, as hereinafter stated.

XIII. On February 21, 1919, the Nolde & Horst Company declared a stock dividend of 900% on its capital of $250,000, payable from earnings March 1, 1913, to February 21,1919, and said corporation thereupon issued an additional $2,250,000 of stock, which was distributed pro rata among the holders of its shares on said date. Plaintiff received 9,000 shares thereof, of the par value of $100 per share, as his pro rata share of said distribution.

XIY. On February 28,1919, the board of directors of said Nolde *&*Horst Company declared and ordered to be distributed March 6, 1919, payable from profits accumulated prior to March 1, 1913, a dividend of 20% on its then capital of $2,500,000, payable in cash, or a dividend of $500,000. Plaintiff received $200,000 in cash as his portion of said dividend on March 6, 1919.

XY. During 1919, on what dates does not appear, the Reading Brewing Company declared and paid nine dividends, aggregating 100% of the total capital of $600,000, of which plaintiff received $90,000 as his portion of said dividends.

XVI. On December 20, 1923, the Commissioner of Internal Revenue, through the collector of internal revenue at Philadelphia, Pa., made demand upon plaintiff for the payment of $132,836.24 as additional income tax for the year ending December 31, 1919. On December 26, 1923, the plaintiff, under threat by the said collector of seizure and sale of his property if he failed to make such payment, and in the belief that such threat would be carried out, paid to the said *438collector of internal revenue at Philadelphia, Pa., the said sum of $132,836.24. Said payment was made under duress and protest, and at the time of making such payment the plaintiff filed with the said collector of internal revenue a. written protest against such additional assessment and against the payment thereof. The said sum of $132,836.24 so paid by plaintiff under protest to the said collector of internal revenue was thereafter by the latter turned over and deposited into the Treasury of the United States of America in the usual course of his official business.

xyil. On February 13, 1924, the plaintiff duly filed with .the said collector of internal revenue a claim for refund of $127,705.25 of said payment. On December 15, 1924, such claim for refund was rejected in full by the Commissioner of Internal Revenue.

XVIII. In declaring the said stock dividend of $2,250,000 February 21, 1919 (Finding XIII), the No.lde & Horst Company transferred on its books to capital account $2,250,-000 of the company’s surplus of $1,100,000 appealing thereon, as accumulated prior to January 1, 1913, and $1,652,845.27 appearing as accumulated thereafter to the end of February, 1919, a total surplus of $2,752,845.27. In arriving at the said surplus of $1,652,845.27 accumulated after January 1, 1913, the said company deducted from its gross surplus $1,100,000 as a reserve for 1918 taxes, and added to said gross surplus $250,000 as an estimate of its profits for January and February, 1919.

If the estimate of $250,000 for January and February, 1919, profits be deducted from the aforesaid surplus of $1,652,845.27, the net surplus would appear as $1,402,845.27 for the years 1913 to 1918, inclusive, which, added to $1,100,-000 accumulated prior thereto, makes a net surplus at the-beginning of the year 1919 available for transfer, to capital account of $2,502,845.27.

The accumulated surplus and undivided profits of the Nolde & Horst Company at the end of the year 1918 were $3,602,845.27, of which $1,100,000 was on February 21, 1919, set aside by the company as aforesaid -as a reserve to pay taxes on the net earnings for 1918, making the net amount of said surplus and profits $2,502,845.27.

*439After the stock dividend of February 21, 1919, the capital stock of the Nolde & Horst Company was $2,500,000 and its surplus, including the estimated profits of $250,000 for January and February, 1919, $502,845.27.

XIX. At the end of the year 1918 the Nolde & Horst Company had an undistributed gain or profit of $1,759,-255.30, of which it set aside as a reserve for the payment of 1918 taxes $1,100,000 (see Finding XVIII), making the net gain or profit $659,255.30.

The gross profits of Nolde & Horst Company for 1919 amounted to $2,689,326.29 and the total general expenses $646,157.46, a net gain of $2,043,168.83. The reserve, if any, set aside for taxes does not appear.

XX. There is no proof in this case upon what basis the Commissioner of Internal Revenue assessed the tax on plaintiff’s dividend of $90,000 received from the said Reading Brewing Co.; that is to say, what proportion thereof the commissioner allocated to the period subsequent to March 1, 1913, and what amount prior thereto.

The court decided that plaintiff was not entitled to recover.

Graham, Judge,

delivered the opinion of the court:

The plaintiff made his returns for income taxes for the years 1917 and 1919, and paid the same according to the taxable amounts shown therein. The Commissioner of Internal Revenue after a review of the returns increased plaintiff’s assessment in certain instances and demanded and received from him payment of additional taxes. The plaintiff claimed that the additional assessment was illegal, paid it under protest, and petitioned for a refund, which was denied. Thereupon he brought this suit.

The questions in the case are whether the dividends declared and received by the plaintiff in 1917 and 1919 were assessable at rates for the years in which they were received or at rates for other years, or whether they were assessable at all.

There is also involved the question whether the tax on “ tax-free covenant ” bonds paid by the obligor at the source was income for which plaintiff as holder of the bonds was liable.

*440The rate of taxation for the year 1917 and subsequent years was higher than for the years which preceded 1917. The purpose of the statutes for the year 1917 and following was to make war profits pay higher war taxes. Thus, a tax' assessed under the statute controlling the year 1916 would be less than the tax for the year 1917.

Ás we view this case all of the questions involved, except the one relating to “ tax-free covenant ” bonds, are ruled by the case of *Edwards*v. Douglas, 269 U. S. 204, decided November 23,1925. Among other things it was held in that case that the special aim of the act of 1917 was to make war-profits pay high war taxes and “to make a dividend, in whatever year paid, bear the tax rate of the year in which the profits, of which it was a distribution, had been earned, and for this purpose to treat as a unit the profits of the whole taxable year.” ' The *Edwairds case*was reviewed in the case of *Mason*v. Routzahn, decided by the Supreme Court November 21, 1927, 275 U. S. 175. In the. latter case the Circuit Court of Appeals held that if the net profits of the whole year prove sufficient to meet all dividends paid within it, these must be deemed to have been paid from such profits, even if. it affirmatively appears that none had been earned before the date when the latest dividend was paid. This holding was reversed by the Supreme Court in the case just cited, the court saying:

> “ The Solicitor General concedes that *Edwards*v. *Douglas*does not so decide; that the case is authority only for the proposition that a pro rata share of the entire year’s earnings may be treated as approximating the actual earnings for the fraction of the year prior to the payment of the dividend in the absence of circumstances showing that there were no earnings actually accumulated during the fractional period; 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 *441its practice was, in susbtanee, 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).”

The *Edwards case*also held that in determining the applicable tax rate the court would neither accept any declaration of the corporation as to the profits of what year were being distributed, nor adopt the earliest year (since March, 1913) of which there were accumulated profits available for distribution. The applicable provision of the statute is section 31 (b) of the revenue act of 1917, 40 Stat. 300, 338, which was an addition to the act of 1916 and provides as follows:

> “Any distribution made to the shareholders * * * of a corporation * * * in the year nineteen hundred and seventeen, or subsequent tax years, shall be deemed to have been made from the most recently accumulated undivided profits or sui'plus, and shall constitute a part of the annual income of the distributee for the year in which received, and shall be taxed to the distributee at the rates prescribed by law for the years in which such profits or surplus were accumulated by the corporation, * * * but nothing herein shall be construed as taxing any earnings or profits accrued prior to March first, nineteen hundred and thirteen * *

Construing this act in the *Edwards case*the court held that the language “ most recently accumulated undivided profits ” applies to current earnings, and that the dividends must be deemed to have been paid from the net profits that appear to have been earned prior to the date of the payment of the dividend, or if not so appearing, a pro rata part of such earnings on a.per diem basis for the number of days preceding the payment of the dividend, and are subject to the income-tax rates of that year, although when the distribution was made there were other funds adequate for the purpose carried in the surplus account of the corporation as made up to the end of the preceding fiscal year. It also defines the term “ surplus ” as employed in corporate finance and accounting as an account on the books representing the net assets of the corporation in excess of all liabilities, including capital stock, and states that the word “ surplus ” as *442used in the above-quoted provision of the act means that part of the surplus which was derived from profits which at the close of earlier annual accounting periods were carried into the surplus account as undistributed profits.

It does not seem necessary to review the facts in detail. They are fully set out in the findings. Suffice it to say that from one corporation, the E. Richard Meinig Co., plaintiff received a dividend of $84,000, declared on January 8, 1911, and paid to and received by him in seven equal installments on February 12, March 2, March 19, March 31, May 4, May 16, and June 18, 1917. This dividend was for 700 per cent and was ordered by the corporation to be paid “ out of the net earnings shown for the year 1916,” and the plaintiff contends that it was actually paid out of the net earnings accumulated by said corporation in 1916. The plaintiff in making his tax return accounted for this dividend at the rate of taxation applicable to the year 1916. The Treasury Department decided that he was taxable on this dividend at the rate fixed for the year 1917. Plaintiff filed a claim for refund in connection with the assessment on this dividend, that of the Nolde & Hor'st Company about to be discussed, and on tax-free covenant bonds which on June 17, 1924, was refused. The Commissioner of Internal Revenue determined that $19,116.43 of said dividend of $84,000 on a pro rata per diem basis, was earned by the said corporation in the year 1917 and taxable at the 1917 rate and the balance at the 1916 rate. The facts as found show that the income of the corporation for the year 1917 was $277,818.82, and that it paid out in dividends $350,000, of which plaintiff received $84,000. Of this latter1 sum, by prorating, $30,872.24 was earned prior to the time the dividend was paid, and under the decision in the case of *Mason*v. *Boutzahn,*supra, should be allocated to the year 1917 and taxed according to the rate of that year. As only $19,116.43 was taxed at that rate, plaintiff was not overassessed and is not entitled to a refund.

In the case of the 1917 dividend from the Nolde & Horst Company the Commissioner of Internal Revenue assessed the plaintiff on $71,066.94 of the $200,000 dividends received by plaintiff in 1917, at the 1917 rate, and assessed him on *443the balance at the 1916 rate. As found by the court (Finding IX), the earnings of the Nolde & Horst Company for 1911 were $1,133,450.90, and it distributed in dividends during that year, including the dividends to the plaintiff, $500,000; so that the earnings for 1917 were more than sufficient to pay the dividends, and under the above ruling in the case of *Mason*v. Routzahn, the pro rata part of the plaintiff’s dividend earned prior to the payment of the same amounted to $127,012.68, which was subject to assessment on the basis of the 1917 rate, and as only $71,066.94 was taxed at that rate by the commissioner, plaintiff was not overassessed and is entitled as to this item to no refund.

The plaintiff in making his return returned under paragraph G, “ Interest on tax-free covenant bonds (on which one normal tax of 2% was withheld at source),” the sum of $37,793.11. This was included in his return as part of the amount, subject to the normal tax of 2%, and under item 31 of his return, “Less tax withheld on tax-free covenant bonds (2% of net total of Item G),” $755.86 was deducted from his tax. The Commissioner of Internal Kevenue held that the amount paid by the corporation obligor for the bondholder pursuant to a “ tax-free covenant ” clause contained in the bond was in the nature of additional income to the bondholder and disallowed the last-named sum. The plaintiff is here asking for a refund of the tax on said sum of $755.86.

We are of opinion that this tax paid by the obligor corporation was not “ gain ” or “ profit ” from sources named in the statute and was not “ received ” by the taxpayer. *Eisner*v. Macomber, 252 U. S. 189, 207. It is not property and the holder of the bond could not recover it in an action at law against the obligor. Nor is it payable to the holder. See *Dufy*v. Pitney, 2 Fed. (2d ser.) 230, where the question is very fully and satisfactorily discussed.

As to this item the plaintiff is entitled to a refund of the tax levied on the said sum of $755.86.

We come now to the second branch of this case, which involves assessments in connection with the plaintiff’s income for the year 1919. It may be stated that the rates of *444taxation under the revenue acts of 1918 and 1919 are the same. This branch of the case involves two separate dividends received by the plaintiff during 1919 from the Nolde & Horst Company and from the Heading Brewing Company, corporations.

Taking up the Nolde & Horst Company dividend first, the facts are, briefly, as follows: On February 21, 1919, the Nolde & Horst Company declared a stock dividend (Finding XIII) of 900% on its capital stock of $250,000 and issued thereon additional' stock in the sum of $2,250,000, which was distributed pro rata among the stockholders on that date. The plaintiff received 9,000 shares thereof, being his pro rata share of the distribution. Having thus increased its capital to the sum of $2,500,000 the said company on February 28, 1919, declared and ordered paid as of March 6, 1919, on which date it was paid, a dividend of 20%, or $500,000, on its new capital of $2,500,000 (Finding XIV). Plaintiff received on March 6, 1919, $200,000 in cash as his part of the dividend.

It is unnecessary to go into a discussion of the plaintiff’s claims further than to state that the directors of the company in declaring the 20% cash dividend declared it to be payable from surplus or undivided profits accumulated during certain years prior to March 1, 1913, and as earnings prior to that date were, under the act, nontaxable, claimed this dividend was tax free. The directors also declared the above stock dividend of 900% to be payable out of the earnings from March 1,1913, to the date of declaration, February 21, 1919. The *Edwards case*has held that the directors of a corporation can not regulate out of what earnings a tax shall be paid. The findings show (Finding XVIII) that on February 21, 1919, after the payment of the stock dividend, there was an available surplus of $502,845.27, including the estimated profits for January and February, 1919. Adopting the principle of the *Edwards case*and treating this as a distribution “ deemed to have been made from the most .recently accumulated undivided profits or surplus,” as the statute provides, the “ distribution made ” being taken to have been made when the dividend was paid, March 6, 1919 *(Mason*v. Routzahn, *supra),*there appears h> have been *445enough surplus for the year 1919 and the years immediately preceding it out of which said dividend of $500,000 must be taken to have been paid, and consequently the rates of taxation for 1918 and 1919 are applicable. The plaintiff was assessed on this basis by the commissioner. It thus appears that as to this dividend the plaintiff was properly assessed and is not entitled to a refund.

We shall now consider the Reading Brewing Company dividend. During 1919 plaintiff received from that company a cash dividend of $90,000. The record is quite unsatisfactory as to this dividend. The defendant closed its case without introducing any evidence on any of the items here involved, and the findings requested are inadequate.

The plaintiff’s contention seems to be that the $90,000 received by him as his share of the dividend in this case should have been allocated approximately as follows: 55% as paid out of dividends accumulated by the corporation subsequent to the 1st of March, 1913, and 45% to earnings accumulated prior to that date, and that the latter under the statute is exempt from taxation. He claims that more than 55% was allocated to the earnings accumulated after March 1, 1913, under the assessment of the Commissioner of Internal Revenue and subjected to taxation, and to the extent that this assessment exceeded 55% he is entitled to a refund. There is no proof of what amount was allocated to the earnings of each of these periods by the commissioner, and we stop here and conclude that the plaintiff having failed to show any illegal act by the commissioner is not entitled to recover. As the basis for the commissioner’s calculation has not been proved, his action in levying the additional assessment as far as it affected this dividend must be sustained, and as to it we hold the plaintiff is not entitled to a refund. It may be well briefly to .sum up our conclusions.

As to the reassessment on plaintiff’s return for 1919 he is mot entitled to a refund; as to the reassessment on his return for 1917 he is only entitled to a refund on the tax levied upon $755.86 (Finding Y), the amount paid by the obligor corporation and withheld at the source from the interest due the plaintiff on tax-free covenant bonds owned by him, *446which the commissioner held was in the nature of additional income. As it does not appear what amount was assessed on this sum and paid by the plaintiff, it is not possible to render a judgment for any sum.

The petition should be dismissed, and it is so ordered.

■Moss, *Judge,*and Booth, Judge, concur.

Campbell, *Chief*Justice,

dissenting:

I dissent from so much of the conclusion of the court as denies plaintiff’s right to recover the additional assessment imposed on the dividends declared in January and March, 1917, which were actually received by the plaintiff early in that year. The facts show that the Nolde &. Horst Company declared dividends on January 13 of 100% and on March 3, 1917, a dividend of 100%. These dividends were payable, according to the resolution of the-directors, from the net earnings of the corporation for the year 1916 and were paid out of earnings actually accumulated by the corporation during the year 1916. The 100% dividend declared on January 13 was actually received by the plaintiff on January 22, 1917, and the second dividend was declared on March 3, 1917, payable in two equal installments and actually received by the plaintiff on March 3 and April 17, 1917. The dividend by the other company mentioned in the findings of 700% was declared on January 8, 1917, payable Out of the net earnings for the year 1916 and was received by the plaintiff in seven equal installments between February 12 and June 18. The findings show that all of the dividends of the two companies were paid out of earnings actually accumulated during the year 1916. The findings show that there were net profits of the Nolde & Horst Company during 1917, as ascertained at the end of the year, sufficient in amount to have paid the dividends that were distributed during 1917, and that during the year 1917 the other company mentioned had net profits ascertained at the end of the year, but not sufficient to have covered all of the dividends distributed by the latter company during 1917; but there is no proof as to the months of the year 1917 in which these net profits were' earned by either company.

*447It seems to me that these dividends were taxable at the 1916 rate and not at the 1917 rate. See *F. H. Mason*v. *C. F.*Routzahn, decided November 21,1927, by the Supreme Court, 275 U. S. 175. In *Edwards*v. Douglas, 269 U. S. 204, 216, it is said, speaking of section 31 (b) of the revenue act of 1917, that “ its general aim was clearly to make the dividend in whatever year paid bear the tax rate of the year in which the profits of which it was a distribution had been earned; and for this purpose to treat as a unit the profits of the whole tax year.” There can be no question in this case that the dividends declared in January were paid out of the earnings of 1916. The findings of fact establish this. In *Mason*v. *Routzahn*it appeared that three of the dividends were declared in January, 1917, and two of them in the year 1916, and that Mason received all five of them prior to July 3,1917. A similar situation appears in the instant case. There was an admission by the Government “ that no profits were earned in 1917 prior to the payment of the dividends ” in *Mason*v. *Routzahn.*There is no admission by the Government in the instant case, but the finding of fact is that the companies had earnings, ascertained at the end of the year 1917. This difference, it seems to me, i,s not sufficient to affect the rights of parties where it affirmatively appears that the earnings which were distributed were from the net profits of the year 1916. Because in *Mason*v. *Routzahn*the Supreme Court says: “ The district court held that despite the fact that the profits for 1917 were in excess of all dividends paid in that year, the distribution must be deemed to have been made out of profit^ accumulated in 1916.” It was the contention of Mason, upheld in the district court and the Supreme Court, that since the corporation had not earned any net profits in 1917 prior to the dates of the several dividend payments, the most recently accumulated net profits were those earned in 1916. There is no proof in the instant case that there were earnings prior to these payments in 1917 put of which distributions could have been made. The statute in question was enacted in October, 1917, about nine months after the larger part of the dividends was received by the plaintiff, and there is no suggestion of *448any attempt to evade the act that was enacted long after-wards. It is suggested in *Edwards*v. *Douglas*that Congress had a special aim of making the war profits pay the high war taxes, and the instant case illustrates how that aim can be attained without imposing upon the taxpayer a liability that was not in existence when he received the dividends, because we have in one phase of this case a claim for a refund of, taxes imposed on dividends declared in February, 1919. Clearly the dividends accumulated in 1917 could be made to bear the proper rate if paid out subsequent to 1917. In other words, it appears in this case that the plaintiff received dividends from the same two companies, already mentioned, in 1919 that were declared to be payable from earnings accrued between March 1, 1918, and February 21, 1919. Full effect can therefore be given to the act of October, 1917, without making it apply to dividends declared and received before the statute was enacted, especially in the absence of positive proof that any net earnings were accumulated during the period 1917 here involved. As already said, there is ample proof that there were accumulated profits for 1916 out of which the payments were actually made. In *Mason*v. *Routzafm*it is said: “As there were no earnings in 1917 prior to the dates of payment, and as there were confessedly ample accumulated earnings of 1916 prior to the declaration of the several dividends, we have no occasion to consider other matters which were argued.” To say that the mere failure to show that there were no net earnings in 1917 of the two companies prior to the dates of payment sufficient to pay the dividends (declared and paid, as already stated) is sufficient to impose upon plaintiff a tax laid months afterwards, seems to me to lead to an untenable refinement of the meaning of the statute.

For these reasons I think the plaintiff is entitled to recover the amount of the additional tax imposed upon dividends received in the early part of 1917, but I agree that the plaintiff can not recover on account of dividends declared and received in 1919.