Court Opinion

ID: 4491329
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:02:49.78139+00
Date Added: 2024-06-11T07:59:16.398449
License: Public Domain

Van Foss an,
dissenting: The question presented by these cases is whether the repayment to the several stockholders of the amounts previously contributed by them to the corporation, chiefly by transfer of accumulated credits, and carried on the corporate books as “ contributed surplus ” constituted a payment of dividends.
*1289The prevailing opinion concedes that if what the petitioners receive was a return of an investment, there was no income. This is the theory on which the petitioners tried their cases. The stipulated facts lead me to the conclusion that the return of the contributed amounts was either such a return of an investment or the repayment of a loan, neither of which is taxable.
I can not agree with the statement made in the prevailing opinion that there is no basis for considering these payments as the repayment of loans.
Though the precise legal question presented in these cases is different from that in Southport Mill, Ltd., 6 B. T. A. 1073, affd., 26 Fed. (2d) 17, the facts are strikingly similar in essential respects and the principles therein discussed have direct application here. In that case, as here, the corporation needed additional working capital and had only a limited borrowing capacity at the banks. On April 12, 1916, the principal stockholders entered into a written agreement that subsequently declared dividends should be left in the treasury of the corporation, as though no dividend had been declared. Large dividends were subsequently declared and credited to the stockholders on the books. On the same day the accounts of the stockholders (members of the agreement) were debited in the exact amount of the dividend and the same sum was credited to “paid-in surplus special.”
Subsequently the president of the corporation, on behalf of himself and certain other stockholders, paid to the corporation in cash the two amounts of $65,000 and $35,000. Each amount was immediately credited to “ paid-in surplus special.” No written agreement was entered into in relation to the repayment of these sums, but it was intended the money should be paid back to the president and that interest should be paid on it in the form of a special dividend.
On May 15,1919, by resolution, the corporation declared the “ paid-in surplus special ” no longer necessary in its business and on June 1, 1919, paid $197,000 back to the stockholders, parties to the agreement, by debiting “paid-in surplus special” and crediting the accounts of the stockholders. On June 2, 1919, the corporation “ refunded to the original depositors ” the $100,000 cash ($65,000 plus $35,000), said sum being debited to “ paid-in surplus special ” and credited to the president in the same amount. No interest was paid and no extra dividend in lieu thereof declared.
The question before us in the Southport Mill, Ltd., case was whether or not the account carried as “ paid-in surplus special ” could be included in invested capital. We decided that all of the funds involved, whether original cash or transferred credits, represented loans or borrowed capital and, therefore, could not be included in statutory invested capital.
*1290In Wm. H. Davidow Sons Co., 1 B. T. A. 1215, we hold that where a dividend has been duly declared and is permitted by the stockholders to remain in the business, the sum constitutes borrowed capital.
I believe these decisions and many others to the same effect that might be cited are controlling in the instant cases. In the cases before us the greater part of the contributed sums was merely transferred by appropriate entries from credits to the stockholders standing on the books of the corporation to the special fund denominated “ contributed surplus.” These credits had arisen from distributions to stockholders out of earnings and profits of previous years. Whether the stockholders had paid tax on the same does not appear, but this I deem immaterial in the present application. They were already debts of the corporation and represented, as to it, borrowed money. The transfer from one account to the other did not wipe out the debt. Whether they were later paid in cash or merely by credits to accounts does not appear. We only know that the “ amount of $100,000 known and called on the books of the corporation ‘contributed surplus’ was in January, 1922, by special and separate resolution, returned to the contributing stockholders in the exact sums originally contributed and the account was closed on the books of the corporation.” The fact that the corporation called the fund “ contributed surplus ” is no more conclusive of its real character than it was in Southport Mill, Ltd., where they called the contributed fund “ paid-in surplus special.” The terminology employed by taxpayer in his books must always yield to a correct legal interpretation and definition of the entry.
The language of the stipulated facts in the cases before us, which must be presumed to have been carefully chosen, is strongly corroborative of the above conclusion. We note that the funds were con-' tributed with an understanding among the stockholders that “ the contributed sum would be returned to the contributors.” This language directly suggests a loan. The further statement that the sums were “ returned to the contributing stockholders in the exact sums originally contributed * * * ” is even more strongly suggestive of a loan. A plain, obvious interpretation is always to be preferred to a strained, artificial one. Here the plain, obvious interpretation is as indicated above. To hold the payments to be dividends seems to us to require a disregarding of the plain language of the stipulated facts. Dividends are neither contributed to a corporation by the stockholders nor are they returned to the stockholders by the corporation.
*1291I am of the opinion that the payments to the stockholders were not dividends under the law and gave rise to no income.
Teussell agrees with this dissent.