Court Opinion

ID: 4626544
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:59:26.68982+00
Date Added: 2024-06-11T07:56:54.206310
License: Public Domain

INTERSTATE TRANSIT LINES, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Interstate Transit Lines v. CommissionerDocket No. 101693.United States Board of Tax Appeals44 B.T.A. 994; 1941 BTA LEXIS 1246; July 15, 1941, Promulgated *1246  X corporation, all of whose stock was owned by Y corporation, contracted with its sole stockholder to pay over to it all of its net earnings in each year.  Y collected and held at all times all of the revenue derived by X from operations.  Held:(1) The credit to Y by X on its books of its entire net earnings, on which it had paid tax, and the entry by Y on its books of these earnings as received from X constituted payment by X of the amount of the credit, in the year in which such earnings were determined and the several book entries made.  (2) The payment effected by credit was one of earnings as such and to the sole stockholder of X and constituted a payment of dividends entitling X to a "dividends paid credit" in computing its undistributed profits surtax for the year of such payment.  Henry W. Clark, Esq., and Joseph F. Mann, Esq., for the petitioner.  Henry C. Clark, Esq., for the respondent.  LEECH*994  Respondent determined a deficiency in income tax of petitioner for the calendar year 1936 in the sum of $3,934.21.  This amount represents surtax on undistributed profits resulting from the disallowance of a dividends paid credit*1247  of $24,510.66, taken by petitioner on its return.  The only issue is whether payments effected by credit and debit entries upon the books of petitioner and its stockholder of its *995  entire profit from operations, constituted payment of dividends entitling it to a dividends paid credit under section 27(a) of the Revenue Act of 1936.  FINDINGS OF FACT.  Petitioner is an Illinois corporation, engaged in the transportation of passengers by bus within the State of Illinois.  The Interstate Transit Lines, a Nebraska corporation, hereinafter called the Nebraska company, had since prior to 1930 operated interstate bus lines between Chicago, Illinois, and Los Angeles, California.  In addition to its interstate business, this company had acquired the right to handle intrastate business in the States of Iowa, Nebraska, Kansas, Colorado, Wyoming, Utah, and Nevada, but could not acquire the right to do local business in Illinois, due to the fact that the Illinois Commerce Commission Act limited the grant of local public utility franchises to domestic corporations.  The Nebraska company, desiring to secure intrastate business in Illinois, caused to be organized the petitioner corporation, *1248  all of whose stock was issued to it.  Petitioner in 1932 acquired a license from the Illinois Commerce Commission to conduct intrastate bus operations in that state.  Thereupon, the Nebraska company and petitioner entered into an agreement on February 7, 1932, reciting that petitioner was a wholly owned subsidiary of the Nebraska company and maintained as an operating subsidiary conducted solely for the benefit of that company.  This contract provided that petitioner should operate busses on such routes and schedules as might be directed by the Nebraska company, which, on its part, agreed to assume and reimburse petitioner for any deficits incurred by petitioner in its operation, and petitioner agreed to pay over to the Nebraska company at the end of each year any profit resulting from its operations.  Petitioner and the Nebraska company also entered into another agreement on the same date, providing for the conducting by petitioner, in addition to its local business in Illinois, of all the operations theretofore performed by the Nebraska company in that state.  This agreement provided that the busses of the Nebraska company, when entering Illinois, should pass into the custody and*1249  possession of petitioner and be subject to a specified charge per mile as rental and that the drivers of the busses should be employed solely by, and their wages paid by, the company having custody and possession of the busses.  Thereafter, under the provisions of the operating agreement, the Illinois part of the interstate business of the Nebraska company was treated as conducted by petitioner.  In so far as traffic between points of origin and destination in Illinois, that local business was treated as handled by petitioner.  Both companies had the same office and the *996  same corporate officers.  The same individuals executed for each contracting party the two contracts mentioned above.  In practice there was no change in the way in which the business was conducted, except that through busses were available to Illinois passengers for travel between local points.  The same busses were operated with the same drivers and on the same schedules as theretofore.  The two agreements aforesaid have at all times governed the accounting of both companies and have been strictly observed.  The accounts of both companies were kept under the supervision of the auditor of the Nebraska*1250  company, who was also auditor for petitioner.  The latter had no bank account.  All revenues from operations by petitioner were collected by the Nebraska company, and all of its bills were paid by the latter company, being charged on its books.  Monthly, petitioner apportioned on the books of the respective companies the revenues of those companies on the basis of passenger and traffic miles, compared to the aggregate of the same.  Likewise, the expenses were apportioned except those, such as taxes, which were charged to the company liable therefor.  These credits of apportioned revenues and charges of apportioned expenses were made in an account with petitioner which was an open account of cash items.  A corresponding open account of cash items was kept on petitioner's books.  On the books of each company there was kept another account, termed a "clearing account", which was used exclusively for an entry at the end of each year to record the taking over by Nebraska of net profits of operation by petitioner in case there were such, and payments by Nebraska of deficits from operations by petitioner.  For the year 1935 petitioner realized a profit of $56,224.24, and as of December 31, 1935, in*1251  its clearing account with the Nebraska company the amount of said profit was credited to the Nebraska company and the amount was at the same time on the books of the Nebraska company charged to petitioner.  These entries were actually made the latter part of January 1936, when petitioner's profits from operations for the year were finally determined.  For the year 1936 petitioner realized a profit of $24,510.66 and as of December 31, 1936, in its clearing account with the Nebraska company this amount was credited to that company and on the latter's books was charged to petitioner.  These entries were actually made in the latter part of January 1937, when petitioner's earnings for the prior year were finally determined.  Petitioner in making its Federal income tax return for 1936 reported a net income of $24,792.99 subject to tax, in arriving at which it did not deduct from gross income any amount as representing profits of any year which it had credited on its books to the Nebraska company.  On that return petitioner, in the computation of the surtax on undistributed *997  profits, claimed as a dividends paid credit the amount of $24,510.66, being that company's net profit*1252  for the year which it had credited as aforesaid to the Nebraska company.  This credit respondent in determining the deficiency disallowed.  The accounts of both petitioner and the Nebraska company have at all times been kept on an accrual basis.  OPINION.  LEECH: The questions are (1) whether the credits of its net income entered by petitioner on its books as transferred to the Nebraska company, coupled with the recording of such transfer on the books of the latter company, which held all the funds of the petitioner, constituted a payment by petitioner to the Nebraska company and, if so, (2) whether that payment was one of dividends within the purview of section 27(a) of the Revenue Act of 1936 and so entitling the petitioner to a dividends paid credit in the computation of its undistributed profits tax under section 14 of that act.  Respondent does not question the recognition here of petitioner and the Nebraska company as separate corporate entities.  The disputed tax was imposed upon that premise.  In our opinion, both these companies must be considered here as separate taxable entities.  *1253 ; . Both companies were upon an accrual basis.  In , we said: "When a book credit is unrestricted and thoroughly subject to the demand and control of the shareholder, it is the equivalent of cash and does constitute payment of the dividend for the purpose of the dividends paid credit." This contested credit by petitioner to the Nebraska company was unrestricted and subject to the control of the latter company.  We therefore think it is evident that the acknowledgment of immediate liability by petitioner to the Nebraska company in the transfer upon petitioner's books by the credit of the amount of that liability, and the acceptance and entry of such credit by the Nebraska company, which held the funds of petitioner, constituted a payment of the amount so credited.  ; affd., ; certiorari denied, ; *1254 ;; ; affd., . Did this payment constitute a dividend payment within the meaning of section 27(a) of the Revenue Act of 1936?  This question, in our opinion, must be answered affirmatively.  Section 115(a) of the Revenue Acts of 1934 and 1936 defines dividends as "any distribution made by a corporation to its shareholders, *998  whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913." Clearly, we think, the payment here comes squarely within that definition of dividends.  It can not be seriously contradicted that it was a payment of the earnings of petitioner for the current year.   Actually, it was all of those earnings.  They were paid by petitioner to the Nebraska company as its sole stockholder.  The existence of a contract with the stockholder requiring that payment does not make it other than a dividend. *1255 ; . No declaration of dividends is essential to its characterization as such for income tax purposes.  ; The amount of the credit to which petitioner is entitled for 1936 on account of dividends paid in that year, remains to be determined.  On its return petitioner deducted the sum of $24,510.66 as the profit for that year paid to its stockholder in dividends.  It asks, however, that, in the event it be held that such payment was not made within the year 1936 because the amount of the earnings for that year was not determined and the credit entries not made until the year 1937, it be allowed the deduction of its earnings for 1935 in the sum of $56,224.24, the amount of which was determined in January 1936 and credited to the stockholder in that year.  In , we held that, where a taxpayer corporation on the accrual basis declared a dividend of annual net profits in December, but, though credited on its books to stockholders*1256  at that time, found it impossible to determine the amount of the profits until the 8th or 9th of the following January, such credit did not constitute payment of the dividend in the year in which declared.  This decision concludes petitioner as to the credit claimed upon its return for the deduction of its net profits for 1936 in the sum of $24,510.66.  On the other hand, however, it sustains petitioner in its request for allowance of a dividends paid credit in the sum of $56,224.24, which was the amount of its 1935 profits, determined in 1936 and credited to its stockholder in that year.  We hold that petitioner is entitled to a dividends paid credit of $56,224.24 in the computation of its undistributed profits surtax for 1936.  Decision will be entered under Rule 50.