Court Opinion

ID: 6901786
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:55:40.653285+00
Date Added: 2024-06-11T16:06:11.793494
License: Public Domain

CLARK, Circuit Judge
(dissenting).
Petitioner’s contention here — accepted by my brethren — seems to me to prove altogether too much; I think it can be demonstrated to lead to the conclusion that every promise to pay dividends out of earnings, i. e., to do what the law- requires, is an- adequate basis for the statutory credit. And this is contrary to the original and leading case of Helvering v. Northwest *175Steel Rolling Mills, 311 U.S. 46, 61 S.Ct. 109, 85 L.Ed. 29, and the precedents following it.
The contract here involved, upon scrutiny, appears to come to this, that no dividends shall be paid except out of net earnings, as found and approved by the corporation’s appointee. The significance of this last is not, of course, to be found in any suggestion that this auditing firm would not exercise an honest judgment; such a judgment we may well assume would be equally forthcoming from the corporation’s own treasurer, had decision been left to him, or from its own board of directors in the ordinary course of voting upon dividends. Its significance is rather in the control which the taxpayer had over the time of certification. This corporation, as must be usual in the business world, knew from its own balance sheets that it was making a profit for the year; no one can doubt that had speed been requisite it could have arranged for a report from the auditors immediately at the close of business on the crucial day. Hence for our present purposes I do not see how the required certificate was anything more than another check beyond the judgment of the directors — a check valuable to the creditor because of its being in addition to that vote, but not otherwise changing the situation. For, if the existence of net earnings cannot be determined until the taxable year is already over, then the directors cannot act even in ordinary course until that time and all dividends therefore are within the contractual prohibition and the statutory credit.
In other words, the real force of the agreement is that no dividends be paid except out of earnings; if that is insufficient to justify the credit, I do not see how the additional requirement — which could be satisfied as promptly as a vote of the directors could be obtained — can be held to add more. For the additional provision is but another administrative safeguard, to be procured by the corporation, to make sure that the dividends have been legally declared out of earnings. It is at most in the nature of confirmation; it is subsequent, rather than precedent, in character. Notice, for example, the continued use of the word “approved” with respect to the action to be taken by the auditors.
I put it, therefore, that a promise not to pay dividends except out of earnings— however those earnings are to be proved or confirmed — cannot be that additional restriction against paying dividends which the statute contemplates. The statutory exemption must be strictly construed, the burden is on the taxpayer to show that he comes within it, and a restriction set by law is insufficient. Helvering v. Northwest Steel Rolling Mills, supra. So a restriction which would make it unwise and unlikely that a corporation should declare a dividend, but which falls short of a prohibition in terms, is insufficient to satisfy the statute. Railway Express Agency v. C. I. R., 2 Cir., 169 F.2d 193. Other pertinent illustrative cases are Hobbs-Western Co. v. C. I. R., 8 Cir., 133 F.2d 165, where the contract with the lender was that the dividends should be paid only from surplus profits and that, if declared, a like amount should be paid on the loan, and C. I. R. v. John A. Wathen Distillery Co., 6 Cir., 147 F.2d 998, certiorari denied John A. Wathen Distillery Co. v. C. I. R., 325 U.S. 883, 65 S.Ct. 1577, 89 L.Ed. 1998, where the contract was that dividends should not be declared without first “consulting” the officers of the bank who had made the loan. The cases relied on for the opposite view each have a difference from ours so striking as, I believe, to point the moral here, namely, that in the contracts there found adequate, it was expressly agreed that dividends should not be paid without the creditor’s consent. Thus in Cotton States Fertilizer Co. v. C. I. R., 47 B. T. A. 748, 750, the written contract provided that the taxpayer would not declare or pay any dividend “without the prior written consent of R. F. C.” (the creditor). To the same effect is Glenn v. Chess & Wymond, Inc., 6 Cir., 132 F.2d 621, where the letters forming the contract with the bank are set forth in the decision below, Chess & Wymond, Inc., v. Glenn, D.C.W.D. Ky., 40 F.Supp. 666, 668. The control did not, as here, rest with the corporation once the existence of profits appeared. The ease with which the statutory requirement can be fulfilled under the terms of the present decision is in marked *176contrast to the universally strict construction heretofore given. See cases cited in Railway Express Agency v. C. I. R., supra.