Source: https://supreme.justia.com/cases/federal/us/317/102/
Timestamp: 2019-04-21 04:20:34+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 317 › Helvering v. Ohio Leather Co.
Helvering v. Ohio Leather Co.
1. A corporation claiming a credit under § 26(c)(2) of the Revenue Act of 1936 in the computation of the tax imposed by that Act on undistributed profits has the burden of showing compliance with the exact terms of the Section. P. 317 U. S. 106.
indebtedness was only that payment should be made on or before a certain date subsequent to the close of the taxable year, and a credit in computing the tax on undistributed profits was not allowable under § 26(c)(2) of the Revenue Act of 1936, since the contract did not require the specified portion of earnings "to be paid within the taxable year" or "to be irrevocably set aside within the taxable year" within the meaning of the Section. P. 317 U. S. 107.
3. That a taxpayer with such a contract might be constrained by prudent business judgment or by the possibility of fiduciary liability to refrain from using the portion of earnings involved or actually to set it aside is immaterial. Nor is it material that anticipatory payment were in fact made within the taxable year. P. 317 U. S. 107.
4. Section 43 of the Revenue Act of 1936 is inapplicable here, since the question is not whether the taxpayers made payment, either on a cash or on an accrual basis, within the taxable year, but whether their contracts required them to pay or to "irrevocably set aside" within the taxable year. P. 317 U. S. 108.
5. That the interpretation of a tax deduction statute in accordance with its plain meaning produces harsh results is a matter for Congress, and not the courts. P. 317 U. S. 110.
6. The legislative history of § 26(c)(2) does not support the contention that the Section embraces the contracts involved here. P. 317 U. S. 110.
124 F.2d 360, 397, reversed.
Certiorari, 316 U.S. 651, to review the affirmance of decisions of the Board of Tax Appeals (No. 41, 41 B.T.A. 1273) redetermining tax deficiencies.
Since § 26(c)(2) grants a special credit in the nature of a deduction, the taxpayer must sustain the burden of showing compliance with its exact terms. Helvering v. Northwest Steel Rolling Mills, 311 U. S. 46, 311 U. S. 49; White v. United States, 305 U. S. 281, 305 U. S. 292; New Colonial Ice Co. v. Helvering, 292 U. S. 435, 292 U. S. 440. We agree with the Commissioner that taxpayers have not carried that burden.
prior to May 1, 1936; (2) this contract must contain a provision expressly dealing with the disposition of earnings and profits of the taxable year; and, (3) this contract must contain a provision requiring that a portion of such earnings and profits either (a) "be paid within the taxable year in discharge of a debt" or (b) "be irrevocably set aside within the taxable year for the discharge of a debt." A taxpayer whose contract satisfies each of these three requirements is entitled to a credit to the extent of the amount which has been so paid or irrevocably set aside.
taxpayers to refrain from using these percentages and actually to set them aside is immaterial; such setting aside was not required by the terms of the written contracts, and therefore did not satisfy § 26(c)(2). Cf. Helvering v. Northwest Steel Rolling Mills, 311 U. S. 46, 311 U. S. 52. Likewise, the fact that taxpayers actually irrevocably set the funds aside by anticipatory payments within the taxable year is of no moment, because these payments were voluntary, and not pursuant to the command of the agreements.
That Congress did not intend that the statutory condition of an irrevocable setting aside would be satisfied by a contract which, without more, merely requires that a percentage of earnings of the taxable year be paid in some future year for the discharge of a debt is evident because such a construction reduces the alternative condition of § 26(c)(2) relating to actual payment within the taxable year to a meaningless superfluity. The date specified for payment would become immaterial for all purposes if the mere requirement by contract of future payment out of earnings in a given year automatically entails an "irrevocable setting aside" within that year.
Taxpayers here place great emphasis upon the different prepositions used in the alternative phrases -- "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 show that payment may be made after the taxable year compatibly with § 26(c)(2). True enough, payment can be postponed to a future year and a credit allowed if, but only if, the contract directing such future payments requires in terms the irrevocable setting aside within the taxable year of those future payments. The instant contracts do not so provide.
credit by virtue of § 43, [Footnote 7] which states that it is to be disregarded in computing the credit provided by § 27, and makes no statement with regard to § 26. The contention is without merit, because principles of accrual accounting have no bearing on the question of whether a contract in terms requires a payment or an irrevocable setting aside within the taxable year. The question here is not whether taxpayers made payment, either on a cash or an accrual basis, within the taxable year, but whether their contracts required them to pay or irrevocably set aside within the taxable year.
"expended or applied during the taxable year for the liquidation, payment, or reduction of the principal of any bona fide indebtedness outstanding at the date of enactment of this Act"
We conclude that the judgments below were erroneous. Accordingly, they are reversed, and the causes remanded with directions to uphold the determination of the Commissioner.
* Together with No. 41, Helvering, Commissioner of Internal Revenue v. Strong Mfg. Co., and No. 42, Helvering, Commissioner of Internal Revenue v. Warren Tool Corp., also on writs of certiorari, 316 U.S. 651, to the Circuit Court of Appeals for the Sixth Circuit.
Taxpayer in No. 42 is also claiming a credit for the 1937 taxable year.
"SEC 26. CREDITS OF CORPORATIONS."
"In the case of a corporation, the following credits shall be allowed to the extent provided in the various sections imposing tax --"
"(c) Contracts Restricting Payment of Dividends."
"(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."
"on or before the next succeeding first day of April, pay an amount equal to ten percent (10%) of the net earnings earned by the Company during the fiscal year ending on the thirty-first day of the next preceding December, as such net earnings are defined hereinafter in the Article, which sums and amounts shall by held by the Trustee for the security of all outstanding Debentures until paid out as hereinafter provided."
"The Company covenants and agrees that, until the principal and interest of the note hereby secured shall have been fully paid and beginning on January 1st, One Thousand nine hundred thirty four, the Company will apply forty percentum (40%) per annum of its net earnings for any calendar year in payment of the interest accruing and becoming payable upon such note in such year, and the balance of the principal amount of such note unpaid prior to April 15th in such year; provided, however, that the covenant herein made shall not be construed to relieve the Company from the payment on April 15th in such year of the installment specified for payment by the terms of said note nor of the regular interest payments in such year, likewise as specified in said note."
"Settlement for all amounts becoming payable under this provision in excess of the principal and interest payments absolutely required in the calendar year as of which such net earnings are determined shall be made by the Company to the Bank not later than April 15th of the succeeding year."
"on or before the 1st day of April of each year thereafter to and including April 1, 1942, a sum of money equal to Twenty-five Per Cent (25%) of its net earnings for the calendar year next preceding."
An opinion was written only in Commissioner v. Strong Mfg. Co., 124 F.2d 360. The other two cases were per curiam affirmances on the authority of that opinion. 124 F.2d 397.
Compare Helvering v. Moloney Electric Co., 120 F.2d 617, 621.
This holding makes it unnecessary to consider the Commissioner's contention that The Strong Manufacturing Company did not meet the second requirement as to $5,000 of the $46,500 paid in 1936, because it was obligated to pay that sum by April 15, 1937, even in the event that there were no earnings in 1936.
"SEC. 43. PERIOD FOR WHICH DEDUCTIONS AND CREDITS TAKEN."
"The deductions and credits (other than the dividends paid credit provided in section 27) provided for in this title shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred,' dependent upon the method of accounting upon the basis of which the net income is computed. . . ."
The original House bill (H.R. 12395, 74th Cong., 2d Sess., introduced at 80 Cong.Rec. 5978) provided for the use of the "dividend year" in computing undistributed net income under § 13 and dividend credit under § 15. Section 27 defined "dividend year" as the period beginning on the 15th day of the third month after the day before the beginning of the taxable year and ending on the 14th day of the third month after the close of the taxable year. Thus, where the calendar year and the taxable year coincided, the "dividend year" would cover the period from March 15 of the taxable year to March 14 of the following year. Congressman Hill, chairman of the subcommittee of the House Ways and Means Committee, explained that the "dividend year" was designed to allow corporations time to cast up their accounts after the close of the taxable year and then determine what dividends should be distributed. 80 Cong.Rec. 6005. Nevertheless, Congressman Hill later offered, and the House adopted, a committee amendment substituting the "taxable year" for the "dividend year." 80 Cong.Rec. 6308. See also 80 Cong.Rec. 10265.
Appeals to Congress because of the limited scope of § 26(c)(2) were successful in 1938. Section 27(a)(4) of the Revenue Act of 1938 allows a credit without reference to the particular terms or requirements of the indebtedness. See H.Rep. No. 1860, 75th Cong., 3d Sess., p. 4.
This legislative history is discussed in Helvering v. Northwest Steel Rolling Mills, 311 U. S. 46, 311 U. S. 50.
80 Cong.Rec. 9055, 9070, 74th Cong., 2d Sess.
80 Cong.Rec. 8071, 74th Cong.2d Sess.

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