Court Opinion

ID: 4498854
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:16:09.942812+00
Date Added: 2024-06-11T14:54:09.568976
License: Public Domain

Disney,
dissenting: I must disagree with the conclusion to which majority come, in allowing the petitioner credit for the amount actually paid its creditors during 1937 from earnings and profits. I find in the contract relied upon no provision which in my opinion satisfies section 26 (c) (2) of the Bevenue Act of 1936. The contractual provision upon which the majority opinion in this respect is based is that “all surplus funds not required for carrying on the business of *904N. O. Nelson Co. [petitioner] will be paid ratably to [petitioner’s creditors] * * The statutory requisite is that a written contract expressly dealing with disposition of earnings and profits of the taxable year shall require earnings and profits to be paid in discharge of, or irrevocably set aside for the discharge of, a debt. In my opinion the above quoted language contains no such requirement. It seems to me plain that the petitioner was, by the above quoted contractual provision, in no wise required either to pay or to set aside for payment any earnings and profits; but that on the contrary it was allowed to use all of such earnings and profits and other funds to carry on its business. Only above the amount required for business purposes is there any provision as to payment. This leaves the matter discretionary with the petitioner. It may or may not pay upon its debt, for the amount it may use for carrying on business is not limited. I do not think that it is within the intendment of section 26 (c) (2) that such discretion be left in the applicant for credit. My conception of that section is that the taxpayer must either distribute the earnings and profits, rendering them taxable to its stockholders, or retain them and pay the tax, or show that it is prevented by a contract from paying out such funds — in other words, that its creditors, and not the -corporation, control the situation. Otherwise no reason appears for granting the credit. The mere fact that debts are paid, out of earnings and profits, does not give credit under section 26 (c) (2). Congress limited the credit to debts paid under the sanction of a contract, and a contract executed prior to a certain date. Only the impact of the contract, taking from the taxpayer its control over the earnings and profits, is sufficient foundation for the credit. Here the taxpayer was completely in control, for it could use all of its funds in carrying on its business. It will not do, I think, to say that only some reasonable amount might be used to carry on business and that the remainder was so subject to the demand of creditors as to be within the purview of section 26 .(c) (2). In the first place, the contract does not so limit the matter, does not say “reasonably required for carrying on the business”; and in the second place, in the absence of a contractual provision limiting the amount used to carry on business, to a reasonable amount of earnings and profits, I can not subscribe to any theory that a court at the behest of creditors would so far interfere with the internal affairs of a corporation as to limit the amount of business it might carry on. Courts both hesitate to interfere in internal corporate affairs, and refuse to make contracts for those who do not see fit to make them for themselves. To say that the petitioner could be prevented by the creditors from spending-more than some reasonable amount in carrying on business would be to say to a large degree that its business must remain static and could *905not be expanded because of the indefinite contractual provision above quoted, which, does not even contain the words “reasonably required.” By what criterion shall we say (or could a court say in a suit by the creditors) that the petitioner’s business activities shall be limited so that the surplus above its expenses, in such activities is subject to section 26 (c) (2) ? Surely it could not be said that the petitioner could do no further business than it did the year before. New circumstances, new opportunities to make money might so open up that the corporate officials would be derelict in their duty to the stockholders if they did not devote all of the earnings and profits and other funds to the carrying on and expense of business. Current history in many industries serves amply to demonstrate the thought. I find it impossible to believe that the creditors could prevail upon any court to limit the activities of the corporation and its use of its earnings and profits, under the above quoted contractual provision, in the face of a contention by the corporation that it was actually using the funds in business, within the judgment and discretion of the corporate officers. Yet control by the creditors seems to me to be the test.
The majority opinion seems to hold that the contract, within the purview of section 26 (c) (2), does control and “require” the payment because the corporation made a determination, by paying the amount of $87,500, that that amount was “surplus funds.” This seems to me <o beg the question. The contract did not require the corporate officers to make any such determination, but left the matter as above discussed within their discretion. Thus we discern that it was not the contract and its impelling force which caused the payment of the $87,500 and any determination latent therein that .that amount was “surplus funds”, but that such result merely arises from the discretion and control left in the corporation. That control as I see it must be outside of the corporation and lodged in'the creditors. Otherwise we have a situation where the corporation can at its will control the matter of the credit it shall receive under section 26 (c) (2). This I conceive to be directly inimical to the intendment of that section. As above discussed, the mere fact of payment of the debt by no means entitles the corporation to credit under section 26 (c) (2); yet the majority conclusion is in effect merely that payment, voluntary and discretionary, satisfies the statute. The contract did not require it and, in my opinion, the credit is therefore not properly allowed. In Dr. Pepper Bottling Co. of Memphis, Inc. 45 B. T. A. 540, we said in a matter in principle analogous to this:
* * * Thus it appears that it is not the contract, hut the manner in which the petitioner transacted the matter of its discharge hy the use of income, that prevents the distribution of dividends to the extent of the §29,924.38 here involved only because it was in fact paid from the petitioner’s only income. * * *
*906I regard it as contrary to the objectives of section 26 (c) (2) to allow the discretion of the .corporate officers as to payment of its earnings and profits to control as to whether credit shall be .obtained in the taxable year. I therefore respectfully dissent.
Murdock and Hill agree with this dissent.