Court Opinion

ID: 6886733
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:30:24.320208+00
Date Added: 2024-06-11T16:05:44.030407
License: Public Domain

SIBLEY, Circuit Judge
(dissenting).
The case turns on the construction of a contract between the Warreq Company and Trust Company of Georgia, trustee. The Secretary and Treasurer of the former and the trust officer of the latter, who have had the administration of the contract in hand, both testify that it includes among current liabilities of the Warren Company the contingent liabilities on transferred paper, that they considered its application to dividends in the tax years, and because of it no dividends were declared. The Board of Tax Appeals and this Court, by a labored construction, decide otherwise. It is remarkable that strangers should know better what a contract was intended to mean than do the parties to it.
It is suggested that such a contract could delay distribution of profits indefinitely by not paying a single bond. I do not think so. When the bonds fall due a profit-earning concern would have to pay them, and if it did not, the contract could not longer *686be used to shield it from this tax. But if it were otherwise, no matter how long the contract not to pay dividends may run, Congress has said it is to protect against this special tax. In this case the suggestion of abuse is most inapt. It appears that in the tax year 1937 there were $105,-000.00 of bonds unpaid; in the tax year 1938, only $26,000.00. $79,000.00 of bonds had been paid in one year. It also appears that the last bond fell due in 1940. It was doubtless paid, and the distributable profits then distributed. We judicially know that the dividends in 1940 were taxed to the shareholders at a higher rate than if they had been distributed .in 1937 and 1938. The Government taxed all the profits in 1937 and 1938 as income of the Warren Company. These profits have been taxed again as dividends at high rates. There is no occasion to be astute to sharpen the fiscal knife to cut out a third and larger slice because they were not distributed a little sooner.
The construction given the words in the contract which define “current liabilities” as “accounts payable; trade acceptances; bills current and notes current, and any other liabilities other than these bonds”, seems to me very unnatural. The definition says very plainly that all liabilities are included except the bonds. But if you take it to pieces, it amounts only to a proper definition of what “current liabilities” really are. A liability, in the vocabulary of accounting, is anything which you will or may have to pay. If you will certainly have to pay it, it is an absolute liability. If you may or may not have to pay it, it is contingent. Thus as respects the quality of certainty, all liabilities are divided into absolute and contingent liabilities. From another standpoint all liabilities are divided into “current” and “fixed” liabilities. Current means literally “running”, “flowing”. Current liabilities are those which are in the run or flow of the business, changing as business is done. Fixed liabilities are those which do not so change. Bonds and plant mortgages are fixed liabilities. All others, arising out of the business done, are current liabilities, just as this contract says.
That a liability is contingent has no bearing on whether it is current or not. The classification as current has nothing to do with the classification as contingent. The liability before loss on every insurance policy is a contingent liability but it is a current liability. The guaranty of a friend’s conduct or account outside of the course of your business would be a contingent liability, but if running over a long period it might be a fixed rather than a current liability. The Warren Company had no fixed liability except these bonds. All its other liabilities, whether absolute or contingent, were current liabilities, by definition and in fact.
Were the obligations with respect to the transferred notes for its goods, which in the flow or current of its business it regularly discounts with C. I. T., current liabilities? Undoubtedly. Cochran v. United States, 157 U.S. 286, 296, 15 S.Ct. 628, 39 L.Ed. 704. They were all indorsed. The payment of each was expressly warranted, in addition to the specific agreement to take it up on tender if not paid. The Warren Company’s liability was precisely that of an indorser of negotiable paper. The liability was contingent, of course, but it was current.
In balancing the assets, which also are divided into current and fixed, against the current liabilities, it is true, as the Court points out, that the liability to pay these transferred notes carries with it the ireacquisition of the value of the notes and their security, and this contingent increase of current assets must be considered in deciding whether a dividend could be declared. The Board'did not find what this increase would be. The entire evidence before it is not in this record. It appears that the Warren Company kept a detailed record of the. transferred notes and the C. I. T. reported collections from time to time. Uncollected balances would be considered good unless it appeared otherwise. There is thus no impossibility of ascertaining anything that is necessary. The Board should find the facts as to offsetting contingent assets if necessary. But since current assets must be twice current liabilities in order to declare dividends, and since these off-setting assets could never more than equal the contingent liabilities, I think the Board was correct in saying that in each tax year no dividends could have been declared if the contingent liabilities were current liabilities. But the Board was wrong on the controlling question of construing the contract. The case should be sent back to it to reexamine the facts, if need be, as to the balance between current assets, absolute and contingent, and current liabilities, absolute and contingent.