Court Opinion

ID: 4607216
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:40:09.065248+00
Date Added: 2024-06-11T07:53:30.057832
License: Public Domain

HASKELITE MANUFACTURING CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Haskelite Mfg. Corp. v. CommissionerDocket No. 100271.United States Board of Tax Appeals44 B.T.A. 636; 1941 BTA LEXIS 1294; June 5, 1941, Promulgated *1294  In 1934 petitioner applied to a private loan company for a loan.  The loan company obtained from R.F.C. a loan to be reloaned to petitioner.  R.F.C. required that petitioner agree in writing not to pay dividends until the loan should be repaid in full.  R.F.C. took the note, mortgage, and dividend agreement to secure its loan to the intermediate borrower.  Petitioner defaulted in payment.  At the end of 1936 R.F.C. took over absolutely petitioner's note and mortgage upon dissolution of the intermediate borrower and in the beginning of 1937 petitioner gave R.F.C. a new note and mortgage in the amount of the original note.  At all times from 1934 through 1937 petitioner was indebted on the original loan and was prohibited from paying dividends.  The giving of the new note in 1937 did not have the effect of lifting even momentarily that prohibition.  Held, that the original loan and loan agreement was extended by the R.F.C. and in 1937 petitioner was prohibited from paying dividends by a written contract executed prior to May 1, 1936, and was therefore entitled to a credit under section 26(c)(1) of the Revenue Act of 1936.  John Harrington, Esq., for the petitioner.  *1295 John D. Kiley, Esq., for the respondent.  HARRON *637  The Commissioner determined a deficiency in income tax for the year 1937 in the amount of $13,188.48.  The petitioner took a credit in its return under section 26(c)(1) of the Revenue Act of 1936 in the amount of $64,333.98, upon the ground that it was prohibited from making payments of dividends under a written contract executed prior to May 1, 1936.  The respondent disallowed the credit for purposes of computing surtax on undistributed profits under section 14, thereby determining a deficiency in income tax.  The question is whether or not a written contract prohibiting the payment of dividends, which was executed in 1934, continued through the taxable year 1937.  If that question is affirmatively answered, petitioner is entitled to a credit under section 26(c)(1).  The facts have been stipulated.  FINDINGS OF FACT.  Petitioner is a New York corporation and it maintained its principal place of business during the taxable year in Chicago.  At some time before 1937 petitioner was located at Grand Rapids, Michigan.  Petitioner filed its income tax return for 1937 at Chicago with the collector for the*1296  first district of Illinois.  In the following loan transactions there are three participants, the Reconstruction Finance Corporation, a Federal loan agency, which is referred to as R.F.C.; a private loan agency, the Industrial Recovery Loan Co., a Michigan corporation, which is referred to as Industrial; and petitioner, referred to as Haskelite.  In October of 1933 Haskelite applied to Industrial for a loan, and Industrial applied to R.F.C. for a loan to be reloaned to Haskelite.  R.F.C. granted the loan in the amount of $200,000 and it required, among other things, that Haskelite should execute a written agreement not to declare or pay dividends on its capital stock until the debt of $200,000 should be paid in full, that the written dividend agreement should be delivered to a custodian of R.F.C., and that the note and mortgage of Haskelite should be delivered to the custodian.  On March 23, 1934, Haskelite executed a note for $200,000, *638  payable on June 12, 1934, to Industrial, a mortgage, and assignment of patents and copyrights, and the agreement prohibiting the payment of dividends.  The note, mortgage, assignments, and dividend agreement were delivered to the R. *1297  F.C. custodian, the mortgage and assignments being assigned by Industrial to R.F.C.  Industrial gave its note to R.F.C. and delivery of the above to the R.F.C. custodian was to secure Industrial's note.  At the same time Haskelite executed an agreement to subscribe to stock of Industrial.  Thereafter Industrial received $200,000 from R.F.C., and it paid to Haskelite $180,000, retaining $20,000 in payment for its stock.  The written agreement executed in March of 1934, prohibiting payment of dividends, provided as follows: In consideration of the Industrial Recovery Loan Company, of Grand Rapids, Michigan, loaning to the undersigned the sum of Two Hundred Thousand ($200,000.00) Dollars, such sum to be advanced to the undersigned in three monthly installments, the first installment to be in the principal amount of $75,000.00, the second installment to be in the principal amount of $75,000, and the third installment to be in the principal amount of $50,000, the undersigned hereby agrees that no dividends or other distribution will be declared or made by it upon its capital stock until full payment of the said Two Hundred Thousand ($200,000.00) Dollar Loan.  Haskelite defaulted on*1298  its note in 1934, when it became due, and continued in default throughout 1935 and 1936.  Industrial had obtained similar loans from R.F.C. for reloaning to other subborrowers.  In June of 1936 all these loans, aggregating $944,000, were in default and R.F.C. took steps to take over all the loans from Industrial, it being agreed that Industrial should be dissolved forthwith.  All of the stock of Industrial was held by the various subborrowers and they requested that the notes of Industrial to R.F.C. should be canceled in consideration of absolute assignment of the notes and mortgages and other collateral of the subborrowers to R.F.C.  Meanwhile, there was pending before R.F.C. an application of Haskelite dated February 15, 1936, for a new loan, which was apparently made for the purpose of extending the original loan or enabling petitioner to pay the original loan.  No final action was taken on this application by R.F.C. until steps had been worked out to dissolve Industrial.  On June 8, 1936, R.F.C. adopted a resolution to cancel the notes of Industrial to it, to take over absolutely the notes of the subborrowers, and to provide for the dissolution of Industrial.  R.F.C. thereafter*1299  took over absolutely all cash of Industrial to be disbursed in liquidation, and Haskelite's original note, mortgage, and assignments, as well as the notes and mortgages of other subborrowers.  Haskelite having paid to Industrial $20,000 for its stock, which in 1936 had accumulations, Haskelite was entitled to receive $22,119.45 in some fashion upon the dissolution of Industrial.  That amount was credited to Haskelite's debt of $200,000 upon dissolution of Industrial.  *639  On November 13, 1936, R.F.C. adopted a resolution authorizing a loan to Haskelite of $200,000 for 3 years.  The resolution referred to the prior resolution of December 12, 1933, as amended, whereby R.F.C. had authorized a loan of $200,000 to Industrial for reloan to Haskelite and stated that the unpaid balance due was $177,880.55, and also stated that the loan was made to enable payment of the earlier loan.  On January 21, 1937, Haskelite executed a new note to R.F.C. in the amount of $200,000, a new mortgage, and new assignments of patents and copyrights.  The mortgage and assignments covered the same property, plus any new property, which the earlier mortgage and assignments covered.  R.F.C. did not pay*1300  $200,000 to Haskelite, but returned to Haskelite the $20,000 plus accruals which Industrial had retained in the first instance - a total of $22,119.45.  R.F.C. retained the difference between that amount and $200,000, or $177,880.55.  At the end of 1937 petitioner owed R.F.C. $175,000.  In the February 1936 application of Haskelite to R.F.C., Haskelite agreed not to declare or pay any dividends on its capital stock until all indebtedness to R.F.C. should be paid in full.  On November 12, 1937, Haskelite requested the consent of R.F.C. to its paying a dividend in the amount of its net earnings for the year 1937, which it estimated would be about $89,900.  On November 26, 1937, R.F.C. declined to give consent.  At all times from March of 1934 through 1937 Haskelite was in reality indebted to R.F.C. and it was prohibited from declaring or paying dividends on its capital stock.  That prohibition against paying dividends was an R.F.C. requirement evidenced since March of 1934 by a written agreement of Haskelite, which agreement was at all times held by R.F.C.  When Haskelite gave R.F.C. a new note for $200,000 in 1937 that act did not operate to terminate the written dividend agreement*1301  made in March of 1934, but the original agreement thereby was continued in operation and effect.  Also, the giving of the new note operated in effect to extend the time of payment of the original indebtedness to R.F.C.  In 1937 petitioner was prohibited from declaring or paying dividends on its capital stock because of the terms of a written agreement relating to dividend payments executed prior to May 1, 1936.  OPINION.  HARRON: Petitioner was prohibited from paying dividends until an indebtedness of $200,000 contracted in 1934 was fully paid, under the written agreement which it executed in March of 1934.  The question is whether the March 1934 agreement continued after May 1, 1936, and throughout 1937, or whether that agreement was terminated and a new agreement was made in January of 1937 when petitioner *640  gave a new note for $200,000 to R.F.C.  To obtain the credit claimed under section 26(c)(1) the agreement which prohibited petitioner from paying dividends must be a written agreement executed prior to May 1, 1936. 1*1302  Industrial appears to have had no other business than acting as an intermediary between R.F.C. and subborrowers at a time when R.F.C. made loans to private loan agencies for relending to individual concerns.  When R.F.C. was enabled to make loans direct to such borrowers as petitioner, the intermediate loan corporation was dissolved and the obligations of the subborrowers were taken over absolutely by R.F.C.  Industrial was dissolved in 1936 and R.F.C. took over petitioner's note, mortgages, and agreements absolutely, having, however, held them as collateral for Industrial's note at all times.  When Industrial was dissolved, all that the subborrowers agreed was that the notes of Industrial to R.F.C. should be canceled.  But neither the subborrowers nor R.F.C. agreed or intended that the obligations of the subborrowers should be canceled.  Petitioner owed $200,000 on its 1934 note at the time Industrial was dissolved, which apparently was after June 8, 1936, and it had agreed in 1934 that it would not declare or pay any dividends until its indebtedness of $200,000 was paid in full.  After Industrial was dissolved petitioner owed directly to R.F.C. $200,000 instead of owing it indirectly. *1303  For all practical purposes the indebtedness at all times was owing to R.F.C. for Industrial was no more than an intermediary.  R.F.C. could have extended the 1934 note of petitioner instead of taking a new note in the same amount upon the same conditions in January of 1937.  The dissolution of Industrial and the steps taken by R.F.C. were outside of petitioner's control.  At no time, even momentarily, in spite of the dissolution of Industrial and the giving of a new note to R.F.C., was petitioner relieved from the agreement it made in 1934 not to declare or pay dividends until its indebtedness of $200,000 was fully paid.  Under such circumstances the substance of the steps taken in November of 1936 and January of 1937 should control here, and, in substance, the original loan to petitioner was extended in November of 1936 by R.F.C. in the same amount and upon the same *641  terms.  The fact that petitioner executed an application for a new loan and gave a new note in the same amount did not, in our opinion, operate to cut off the obligation upon petitioner not to pay dividends which it made in 1934.  Rather, that obligation continued throughout.  There is no showing that the*1304  1934 dividend restriction agreement was returned to petitioner or in any way terminated in 1936.  It is held, accordingly, that in 1937 petitioner was prohibited from declaring or paying dividends by a written contract which expressly dealt with the payment of dividends which was executed prior to May 1, 1936, and, accordingly, petitioner is entitled to a credit under section 26(c)(1) of the Revenue Act of 1936.  See . Decision will be entered for the petitioner.Footnotes1. 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. - (1) PROHIBITION ON PAYMENT OF DIVIDENDS - An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends.  If a corporation would be entitled to a credit under this paragraph because of a contract provision and also to one or more credits because of other contract provisions, only the largest of such credits shall be allowed, and for such purpose if two or more credits are equal in amount only one shall be taken into account. ↩