Court Opinion

ID: 6885466
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:27:20.043694+00
Date Added: 2024-06-11T16:05:42.231154
License: Public Domain

RIDDICK, Circuit Judge
(dissenting).
I think the facts in this case establish the right of petitioner to the exemption claimed. The letter of the corporation’s creditor, agreeing to lend the corporation funds needed to take care of going requirements on condition that no dividends should be declared or paid until the sums advanced by the creditor were repaid, and on the further condition that the minutes of the next meeting of the corporation should confirm acceptance by the corporation of the terms of the letter, followed by the required confirmation at the next meeting of the corporation and the spreading of the resolution to that effect, signed by all directors, upon the corporation’s books, constitute a written contract within the terms of the pertinent section of the Revenue Act of 1936.
In dealing with this exemption, the Congress was convinced of the injustice of the undistributed profits tax, both to corporations and their creditors, in cases where, before the imposition of the tax, the creditor had advanced money to the corporation in reliance upon its contract not to pay dividends until its advances had been repaid. And while the Congress thought it wise, in the interest of certainty and in aid of an efficient administration of the law, and in guarding the public revenues from the possibility of fraud, to confine the permitted exemptions to cases of written contracts, executed by the corporation and expressly prohibiting the distribution of dividends, it was, nevertheless, primarily interested in the fact of the contract and not in its form. It certainly did not intend that the right to the exemption, based upon actions of the taxpayer taken before the tax was imposed and, therefore, not taken with intent to avoid the tax, should depend upon the precise observance of technical formalities. On the other hand, the Congress was satisfied to close the door against uncertainty in administration and on the possibility of fraud upon the public revenue by limiting the exemption to cases in which the fact of the required contract and its terms could be established with certainty by written evidence. A contrary conclusion seems to me to emphasize form at the expense of substance.
The rule requiring a strict construction of a grant of an exemption from taxation does not, in my opinion, compel a different conclusion. I think the decision of the Board of Tax Appeals should be reversed.