Court Opinion

ID: 6887201
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:31:46.281364+00
Date Added: 2024-06-11T16:05:44.599069
License: Public Domain

AUGUSTUS N. HAND, Circuit Judge
(dissenting in part).
I cannot agree to the conclusion in the opinion of Judge L. HAND that the deficiency computed was wrong only as to the $14,560 note. I think it was also wrong as to the note for $65,125.51. It appears from the stipulation that on September 4, 1933, the taxpayer was indebted to Sam Katz in the sum of $65,125.51 for money loaned since the organization of the corporation. He wrote to the corporation that it was his desire that it execute and deliver to him as evidence of this indebtedness its promissory note payable on or before three years from date with interest at the rate of 6% per annum and that the corporation further deliver to him adequate collateral to secure the payment of such note. Thereupon at a meeting of the board of directors of the taxpayer at which Sam Katz, who was one of the directors, was present, this letter was presented, spread upon the minutes, and the board of directors adopted a resolution reciting the letter which Katz had addressed to the corporation and resolving that the corporation execute and deliver to Sam Katz its promissory note payable to him on or before three years from the date thereof, with interest at 6% per annum payable quarterly, in the amount of $65,125.51, and that the board would not declare any dividends on the capital stock of the company so long as the corporate liabilities should exceed the sum of $1,000. It was further resolved that the treasurer be authorized and directed to deliver, endorsed in blank, to Sam Katz as collateral security for the payment of its entire indebtedness to him in the sum of $65,125.51, 200 shares of common stock in the Akron Palace Theatres Corp., 200 shares of common stock in the Public Square Theatre Corp., and 100 shares of common stock in the Indianapolis Theatre Management Associates, Inc. This resolution was signed by the assistant secretary and by the directors, including Sam Katz. Thereafter, the note' referred to in the resolution was delivered to and accepted by Sam Katz.
At the time Katz wrote his letter to the corporation asking for the note and collateral, the company made a counter-offer. Whether the corporation made the counteroffer containing the dividend restriction because it was not willing or able to furnish as much collateral security as Katz desired, or for some other reason, does not appear in the record, but the fact is that the company offered a three-year note in place of an indebtedness to Katz that was already due and payable forthwith, an agreement that the board of directors would not declare dividends so long as the corporate liabilities should exceed $1,000, and an agreement to deliver specified collateral. Katz on his part accepted this arrangement by giving up his right to immediate collection of the $65,125.51 indebtedness and taking in its place a note for that amount payable in three years. In other words, the corporation made an offer which was accepted by Katz, the latter furnishing the consideration of forbearance to demand immediate payment of his claim. This, I think, amounted to a contract which was reduced to writing and executed by the board of directors and was binding on the *592corporation in respect to the provision limiting the power to declare dividends. The agreement between the corporation and its creditor was executed with at least the formality required by the statute and to me it seems plain that Congress never intended the deduction to be unavailable to corporations situated as this one was.
In view of the fact that the income of the corporation during the years 1936 and 1937 was insufficient to enable it to relieve itself of the limitation on its right to declare dividends contained in the agreement respecting the debt of $65,125.51, it is unnecessary to consider whether the later loans may also be within Section 26(c) (1).