Court Opinion

ID: 9458233
Source: CourtListenerOpinion
Date Created: 2023-08-04 20:46:00.464339+00
Date Added: 2024-06-11T17:35:40.990002
License: Public Domain

BRIGHT, Circuit Judge
(concurring):
I agree with an affirmance in this case and, generally, Judge Gibson’s analysis. I am reluctant, however, to suggest that redemptive distributions may not be charged against current earnings and profits for tax accounting purposes under § 312(a).1 I am satisfied to rest an affirmance on the theory that redemptive distributions which are not taxable under § 301 are not taken into consideration in determining a corporation’s current earnings and profits available for dividends under § 316(a).
Section 316(a) 2 provides that a dividend is a distribution of property made: 1) out of “earnings and profits accumulated after February 28, 1913” (earnings and profits which are not relevant here); or 2) out of “earnings and profits of the taxable year.”
Under § 316(a) (2), earnings and profits of the taxable year are computed at the close of the taxable year “without diminution by reason of any distributions made during the taxable year” and “without regard to the amount of * * earnings and profits at the time the distribution was made.” Accordingly, to determine whether an ordinary distribution, such as the distribution in question here, is taxable as a dividend or as a return of capital, the recipient must look to the corporation’s year-end earnings and profits fund. If that fund, computed “without diminution by reason of any distributions made during the taxable year,” is sufficient to cover ordinary distributions, the ordinary distribution received is taxable as a dividend.*
Section 316(a) sets out a hypothetical, year-end accounting method for determining the taxability of an ordinary distribution. Section 312(a) provides a day-to-day accounting procedure for calculating the current status of the earnings and profits account; it speaks in terms of the effect on earnings and profits “on the distribution.” A distribution of property by a corporation, whether ordinary or redemptive, serves to decrease the corporation’s earnings and profits account under the accounting procedure set forth in § 312(a). This decrease, however, has no effect upon the taxability of an ordinary distribution made during the same tax year by a corporation which had no accumulated earnings and profits. Under § 316(a), the recipient of an ordinary distribution, in calculating the corporation’s year-end earnings and profits fund available for distribution as dividends, must disregard any decrease caused by ordinary or redemptive distributions. As a corollary to this express accounting directive, the total of all ordinary distributions must then be compared with this hypothetical fund in order to determine the percent*844age of ordinary distributions which will be deemed dividends.
Redemptive distributions which are not taxable under § 301 are not taken into account in this comparison because the last part of § 316(a) provides:
Except as otherwise provided in this subtitle, every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and profits. To the extent that any distribution is, under any provision of this subchapter, treated as a distribution of property to which section 301 applies, such distribution shall be treated as a distribution of property for purposes of this subsection.
I interpret this last section to mean that § 316(a) does not encompass distributions which do not fall within § 301. The redemptive distributions here do not fall within § 301; they qualify as § 302 distributions. See Judge Gibson’s opinion ante, n. 1.
Construing § 316(a) in this way, I find no conflict between its provisions and the provisions of § 312(a). The sections set out separate accounting concepts which are relevant to the separate purposes served by each section. In the case of a corporation with no accumulated earnings, ordinary or redemptive distributions may be charged against current earnings and profits “on the distribution” under § 312(a), but distributions which do not fall within § 301 are not taken into consideration in determining the year-end earnings and profits fund available for dividends under § 316 (a), In short, since the redemptive distributions in this case are not taxable as dividends, these distributions do not diminish the current earnings fund available for dividends.

. Section 312(a) reads as follows:
Except as otherwise provided in this section, on the distribution of property by a corporation with respect to its stock, the earnings and profits of the corporation (to the extent thereof) shall be decreased by the sum of — ■
(1) the amount of money,
(2) the principal amount of the obligations of such corporation, and
(3) the adjusted basis of the other property, so distributed.

. Section 316(a) reads as follows:
For purposes of this subtitle, the term “dividend” means any distribution of property made by a corporation to its shareholders—
(1) out of its earnings and profits accumulated after February 28, 1913, or
(2) out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made. Except as otherwise provided in this subtitle, every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and profits. To the extent that any distribution is, under any provision of this subchapter, treated as a distribution of property to which section 301 applies, such distribution shall be treated as a distribution of property for purposes of this subsection.