Source: https://caselaw.findlaw.com/us-supreme-court/326/425.html
Timestamp: 2019-04-20 17:27:07+00:00

Document:
HERCULES GASOLINE CO. v. COMMISSIONER OF INT. REV.
See 326 U.S. 812 , 66 S.Ct. 471.
Petitioner, a Delaware Corporation, admits liability as transferee of the assets of the Hercules Gasoline Company, Inc., a Louisiana Corporation, which was dissolved in 1939. Article V of the original charter of the transferor authorized the issuance of non-par common stock, and of preferred stock at $50 par value. The preferred stock was entitled 'to cumulative dividends at the rate of 8% per annum ... in preference and priority to any payment of any dividend on the common stock for such year.' The charter further provided that 'there shall be no dividend on the common stock until all of the preferred stock [326 U.S. 425, 428] has been retired, redeemed and discharged.' All certificates of preferred stock contained the following provision: 'For Rights and Voting Powers of Preferred Stock See Article V of Charter.' The petitioner contends that these preferred stock certificates constituted contracts executed by the corporation which expressly prohibited the payment of dividends while these shares were outstanding and that petitioner is therefore entitled to the credit allowed under Subdivision (c)(1).
'That the language used in section 26(c)(1) does not authorize a credit for statutorily prohibited dividends is further supported by a consideration of section 26(c)(2). By this section, a credit is allowed to corporations contractually obligated to set earnings aside for the payment of debts. That this section referred to routine contracts dealing with ordinary debts and not to statutory obligations is obvious-yet the words used to indicate that the section had reference only to a 'written contract executed by the corporation' are identical with those used in section 26(c)(1). There is no reason to believe that Congress intended that a broader meaning be attached to these words as used in section 26(c)( 1) than attached to them under the necessary limitations of 26(c)(2).' 311 U.S. 46 , at pages 49, 50, 61 S.Ct. 109, at page 112. (Italics supplied.) [326 U.S. 425, 429] We thus held that 26(c)(1) is limited to contracts involving ordinary obligations to creditors and since preferred stockholders are not creditors, Warren v. King, 108 U.S. 389, 399 , 2 S.Ct. 789, 798, 26(c)(1) does not apply here.
Petitioner contends, however, that our construction of 26(c)(1) was erroneous but for reasons given in the Northwest Steel case we think it was correct and adhere to it. Our construction finds further support in 26(c)(3) which, in order to prevent 'Double credit,' provides that in the event both Subdivisions (c)(1) and (c)(2) apply, 'the one of such paragraphs which allows the greater credit shall be applied; and, if the credit allowable under each paragraph is the same, only one of such paragraphs shall be applied.' Congress having thus made the relief obtainable under (c)(1) and (c)(2) mutually exclusive has indicated that it considered the two subdivisions as interdependent. Congress therefore intended to cover the same type of contract, namely a contract with creditors, in both subsections and not to extend subdivision (c)(1) to intra-corporate contracts while subdivision (c)(2) was to cover contracts with creditors only. Moreover statements made in the course of the Congressional debate3 refer to 26(c) as a whole, as providing for the relief of corporations prevented from paying dividends by contracts involving the payment of debts. No other view of the Section would be in keeping with the policy behind the undistributed profits tax. That tax was designed to reach profits held by the corporation which as a consequence could not be taxed as dividends in the hands of stockholders. An intracorporate agreement is simply one way of keeping profits in the corporation's treasury so that the tax collector cannot reach [326 U.S. 425, 430] them. 4 To hold that such an agreement entitled the corporation to tax credit would defeat the very purpose of the undistributed profits tax. 5 The rejection of petitioner's claim for tax credit was proper.
Accepting Helvering v. Northwest Steel Rolling Mills, 311 U.S. 46 , 61 S.Ct. 109, completely, I am unable to agree that this contract with preferred stockholders was other than a 'routine contract dealing with ordinary debts.' Certainly this is not an instance of a 'statutory obligation,' which are the words used in the Northwest case to describe the antithesis of the contract covered. 'Routine' and 'ordinary,' as [326 U.S. 425, 431] used in Northwest, do not imply to me anything more than an express contract, executed in accordance with Section 26(c)(1).
[ Footnote 1 ] 'Sec. 26. Credits of Corporations.
'(2) Disposition of profits of taxable year. An amount equal to the portion of the earnings and profits of the taxable year which is required ( by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. For the purposes of this paragraph, a requirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits. As used in this paragraph, the word 'debt' does not include a debt incurred after April 30, 1936.
[ Footnote 2 ] Lehigh Structural Steel Co. v. Commissioner, 3 Cir., 127 F.2d 67; Philadelphia Record Co. v. Commissioner, 3 Cir., 145 F.2d 613.
[ Footnote 3 ] See for illustration the statement by the Hon. Samuel B. Hill, 80 Cong.Rec. 6004.
[ Footnote 4 ] See Warren Telephone Co. v. Commissioner, 6 Cir., 128 F.2d 503, 506. Here there was nothing in the agreement that absolutely prohibited the payment of dividends. During 1937 and 1938 transferor had outstanding 1, 294 shares of preferred stock of a total par value of $64,700. These shares were all retired in 1939. Had they been redeemed in 1937 there would have been nothing in the agreement preventing the distribution of earnings. Consequently it does not clearly appear that there was any provision in the agreements absolutely prohibiting the payment of dividends. Cf. Dr. Pepper Bottling Co. v. Commissioner, 45 B.T.A. 540; A. E. Staley Manufacturing Co. v. Commissioner, 46 B.T.A. 199, 205.
[ Footnote 5 ] The Board of Tax Appeals and later the Tax Court have consistently held that 26(c)(1) does not cover the type of agreement here involved. Thibaut & Walker Co. v. Commissioner, 42 B.T.A. 29; Eljer Co. v. Commissioner, 45 B.T.A. 1160, decided Dec. 4, 1941; Budd International Corp. v. Commissioner, 45 B.T.A. 737; Bishop & Babcock Manufacturing Co. v. Commissioner, 45 B.T.A. 776; Philadelphia Record v. Commissioner, 1 T.C. 1215, decided January 23, 1943.
[ Footnote 1 ] See in accord, Lehigh Structural Steel Co. v. Commissioner, 3 Cir., 127 F.2d 67; Budd International Corp. v. Commissioner, 3 Cir., 143 F.2d 784; Philadelphia Record Co. v. Commissioner, 3 Cir., 145 F.2d 613; Rex- Hanover Mills Co. v. United States, Ct.Cl., 53 F.Supp. 235. See Eljer Co. v. Commissioner, 3 Cir., 134 F.2d 251, $x.

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