Court Opinion

ID: 4625661
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:57:39.098889+00
Date Added: 2024-06-11T07:56:44.851973
License: Public Domain

CAROLINE MILLS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Caroline Mills v. CommissionerDocket No. 100343.United States Board of Tax Appeals44 B.T.A. 379; 1941 BTA LEXIS 1340; May 1, 1941, Promulgated *1340  Committees representing bondholders and shareholders of petitioner entered into an oral agreement that the bondholders would not foreclose on a deed of trust and that the shareholders would not pay dividends until past due bond interest had been paid.  At a shareholders' meeting a resolution in which the agreement was recited was adopted.  The minutes of the shareholders' meeting were approved by the board of directors of petitioner.  Held, the minutes of the meeting of the shareholders did not constitute a "written contract executed by the corporation" and petitioner is not entitled to a credit under section 26(c)(1) of the Revenue Act of 1936.  W. A. Sutherland, Esq., and B. F. Boykin, Esq, for the petitioner.  J. Marvin Kelley, Esq., for the respondent.  VAN FOSSAN *379  Respondent determined a deficiency in petitioner's income tax for the fiscal year ended June 30, 1937, in the sum of $2,839.74.  The sole issue before the Board is whether or not petitioner is entitled to a credit under section 26(c)(1) of the Revenue Act of 1936.  FINDINGS OF FACT.  Petitioner is a corporation, organized and existing under the laws of the State*1341  of Georgia, and is engaged in the operation of a cotton mill.  Its principal office is located at Carrollton, Georgia.  Under date of May 1, 1928, petitioner entered into an indenture with the Trust Co. of Georgia whereby petitioner executed a deed of trust covering all of petitioner's real property, improvements thereon, machinery, equipment, rights, franchises, and patents to secure the issue of $50,000 first mortgage bonds.  During the fiscal year ended June 30, 1937, and for some time prior thereto, bonds of petitioner secured by the deed of trust of May 1, 1928, were outstanding in the principal amount of $43,800.  At the end of the taxable year interest in the sum of $12,648.86 had accrued on these bonds.  During the period from 1928 through the fiscal year ended June 30, 1936, petitioner had a net operating deficit of $39,266.71.  At the end of the taxable year the operating deficit of petitioner had been reduced to $22,201.20.  There was no change in petitioner's outstanding capital stock during the period in which there was a net operating deficit.  Due to adverse business conditions petitioner's mill ceased operation for several months in 1933.  Petitioner was unable*1342  to pay interest on the bonds outstanding and was continually pressed by the bondholders for payment.  *380  On March 22, 1933, the bondholders of petitioner held a meeting for the consideration of petitioner's financial condition and for discussion of the advisability of payment by petitioner of bond interest due May 1, 1933.  After discussion the bondholders appointed a bondholders' committee with full power to act for their protection and for the best interests of petitioner's shareholders and bondholders.  At a called meeting of petitioner's board of directors held May 22, 1933, the board voted to incorporate the minutes of the bondholders' meeting of March 22, 1933, into the regular minutes of the board of directors.  The board voted to accept a report of the bondholders' committee in which it was stated that the committee had secured authority from the bondholders to withhold requests for bond interest due May 1, 1933.  The committee reported that it had been decided that the bondholders request the Trust Co. of Georgin to resign as trustee under the deed of trust of May 1, 1928, so that a local trustee or trustees might be appointed to work out petitioner's affairs*1343  to the best interests of the community.  The report also stated that all of the bondholders of petitioner, with the exception of owners of approximately $2,000 of bonds, had acceded to the plan.  The board of directors voted to join with the bondholders in requesting that the Trust Co. of Georgia resign as trustee.  On August 18, 1933, the Trust Co. of Georgia resigned as trustee under the deed of trust of May 1, 1928, "in order to cooperate fully with certain plans the bondholders have worked out in conjunction with the Caroline mills, Inc. * * *." At a meeting of the stockholders of petitioner, held January 19, 1934, at which a majority of the outstanding shares was represented, E. T. Steed, L. J. Brock, and S. C. Boykin were elected trustees in lieu of the Trust Co. of Georgia, with all the powers set forth in the deed of trust dated May 1, 1928.  A resolution was carried that the trustees: * * * be further empowered to carry out the agreement made with the stockholders and the bondholders, between the Committee representing the bondholders and the Committee representing the stockholders, to-wit: That the bondholders agree that a deed may be executed to these Trustees, creating*1344  them Trustees for the bondholders.  The bondholders agree that these Trustees not push at the present time for the interest due on said bonds, nor to foreclose the same on the mill until further order to do so by a majority of the bondholders, in writing, given to these Trustees named above.  The stockholders agree with these Trustees and the bondholders, that in consideration of this agreement made by the bondholders to them, that neither the stockholders nor the directors of the mill will pay out any dividends, nor employ any additional officers, at any salary, until authorized to do so by the Trustees, and that in no event shall any dividends be paid in any manner, until the past due interest on the bonds has been fully paid.  These minutes were signed, "E. T. Steed, Chairman" (of the meeting) and "P. L. Shaefer, Secretary." Contracts entered into by *381  petitioner are usually signed by both the president and secretary of petitioner.  The agreement referred to in the resolution quoted above was oral.  On January 19, 1934, Steed, Brock, and Boykin entered into a written agreement with petitioner whereby petitioner conveyed, transferred, and assigned to them as trustees*1345  all the powers, rights, privileges, and title to the property held by the original trustee under the deed of trust of May 1, 1928.  This agreement was signed in behalf of petitioner by "B. F. Boykin, President" and "P. L. Shaefer. Secretary." At a regular monthly meeting of the board of directors of petitioner, held February 8, 1934, the minutes of the stockholders' meeting of January 19, 1934, were read and approved by the directors.  Respondent determined petitioner's adjusted net income and undistributed net income for the taxable year to be in the amount of $17,065.51.  After allowance of the specific credit granted by section 14(c) of the Revenue Act of 1936, respondent determined that petitioner's undistributed net income subject to surtax was in the sum of $13,772.06.  On its return for the taxable year petitioner claimed a credit on account of an alleged contract restricting payment of dividends in the sum of $17,065.51.  Respondent disallowed the credit.  At the date of hearing the bondholders and stockholders had not violated the terms of the agreement set forth in the resolution adopted by the shareholders on January 19, 1934.  OPINION.  VAN FOSSAN: The only issue*1346  for our determination is whether or not petitioner is entitled to a credit under section 26(c)(1) of the Revenue Act of 1936 1 for purposes of the surtax on undistributed profits.  Petitioner contends that it was restricted in payment of dividends in the taxable year because of limitations imposed by its charter and by the agreement set forth in the minutes of the shareholders' meeting held January 19, 1934.  It maintains that the shareholders' resolution was a written contract executed by petitioner within the purview of the statute.  Respondent's position is that the minutes of the shareholders' meeting indicate a mere authorization to the elected trustees to carry into effect the oral agreement which *382  had been reached by the committee representing the bondholders and the shareholders.  *1347 Since the date of hearing of this proceeding the Supreme Court handed down its decisions in , and . In those cases the Supreme Court held that a corporate charter was not a contract within the meaning of section 26(c)(1) of the Revenue Act of 1936.  Petitioner's charter, therefore, is not a contract restricting payment of dividends and does not entitle petitioner to the credit granted by the statute.  It thus becomes necessary that we consider petitioner's contention that the resolution adopted by the shareholders on January 19, 1934, was a written contract executed by petitioner.  In , we held that a corporate bylaw is not a "written contract executed by the corporation" within the meaning of section 26(c)(1).  We reiterated our position in that case in . Recently, we held that an agreement between preferred and common stockholders which was recorded in the minutes of a shareholders' meeting was not a contract executed by the*1348  corporation. . We are of the opinion that the agreement among stockholders, bondholders, and trustees which is recited in the corporate minutes of the shareholders' meeting of January 19, 1934, is not a written contract executed by petitioner.  It does not appear that there was any intention that a contract be executed by petitioner at that time.  The embodiment of the agreement in the minutes seems a mere recitation for the purpose of corporate records.  Moreover, although petitioner's contracts were customarily signed by its president and secretary, these minutes were signed by the secretary and by the chairman of the meeting.  Nor does the fact that petitioner's board of directors, on February 8, 1934, approved the minutes of the shareholders' meeting of January 19, 1934, make the agreement a written contract executed by petitioner.  The directors approved the minutes of the meeting which included the resolution here under consideration, but that approval can not transmute an oral agreement into a written one.  The agreement among the bondholders, shareholders, and trustees was not a written contract.  We hold that the*1349  facts do not show a written contract executed by petitioner which restricted payment of dividends in the taxable year.  Reviewed by the Board.  Decision will be entered for the respondent.TYSON *383  TYSON, dissenting: I agree with the majority opinion in its holding that petitioner's charter is not a contract restricting the payment of dividends within the purview of section 26(c)(1) of the Revenue Act of 1936.  However, I disagree with the holding in that opinion that the resolution adopted at the stockholders' meeting and thereafter approved by the board of directors did not constitute a written contract executed by petitioner restricting the payment of dividends under the cited section.  The majority opinion predicates its latter holding primarily upon the conclusion that the agreement between the petitioner and its bondholders was oral and that the embodiment of that oral agreement in the resolution set out in the minutes of the stockholders' meeting was a mere recitation for the purpose of corporate records; and the opinion seems also to imply that the latter holding might also be additionally based upon the fact that the minutes of the stockholders' *1350  meeting at which the resolution was adopted were signed by the chairman of that meeting rather than by the president of the corporation.  In my opinion, the embodiment in the resolution of the only oral agreement shown by the record, i.e., that between the bondholders' committee and the stockholders' committee, was not a mere recitation for the purpose of the corporate records, but constituted the only contract between the parties after its adoption; and I do not think that at the time of the adoption of the resolution it is correct to state, as is done in the majority opinion, that "it does not appear that there was any intention that a contract be executed by petitioner at that time." The undisputed evidence, not all of which is shown in the majority opinion, discloses: That the bondholders' committee, with full authority to act for the bondholders, and a committee of the stockholders met together and made an oral agreement containing the same terms and provisions as are set out in the resolution in question; that after this oral agreement was made the bondholders' committee appeared in person at the meeting of the stockholders on January 19, 1934, for the purposes of making*1351  a report of the petitioner's defaults in payment of interest on its bonds and of requesting the stockholders to confirm the oral agreement made by the two committees for the protection of the bondholders; and that after the report of the bondholders' committee to the stockholders' meeting, and while that committee was present, the resolution in question was adopted in response to the request of that committee.  Under the facts as above stated it seems clear that at the time of the adoption of the resolution it was the intention of the bondholders' committee and the stockholders to execute the contract here in question and it seems equally clear that the contract was so executed by incorporating in the written resolution the terms of the precedent oral *384  agreement between the bondholders' committee and the stockholders' committee.  From all the facts and attendant circumstances, I can reach no conclusion other than that the oral agreement previously made by the two committees became merged in the written resolution under the elementary principle stated in 17 Corpus Juris Secundum, p. 872, § 381, as follows: "* * * in the absence of fraud, a written contract merges all*1352  prior and contemporaneous negotiations on the subject, together with all prior oral contracts * * *." In concluding that the oral agreement made by the two committees was merged in like provisions of the resolution, I do so by applying the principle that a resolution embracing the terms of an oral request or proposal made by the other party to an agreement, or embracing terms orally accepted by or acquiesced in by such other party, constitutes a binding obligation and a written contract of the corporation when adopted by it and spread in writing upon its minutes.  This principle is established by the following authorities:  (Md.);  (Mass.);  (Iowa);  (Pa.);  (Pa.);  (Ala.); cf. *1353 , (Va.);  (Mass.);  (Colo.).  The implication in the majority opinion that its holding might be additionally based upon the fact that the minutes of the meeting of the stockholders were signed by "E. T. Steed, Chairman" of that meeting rather than by the president of the corporation is, in my opinion, unsound.  The minutes show that Steed was duly selected as chairman thereof and in signing the minutes with the secretary was properly performing the functions of such a position.  The minutes were binding on the corporation, under the controlling principle as stated in 18 Corpus Juris Secundum, pp. 1233, 1234, § 545: "While provision is frequently made that the president shall preside at stockholders' meetings, where no provision is made, a chairman may be selected by the stockholders." In my opinion the resolution in question constituted a written contract executed by the petitioner*1354  corporation which restricted payment by it of dividends in the taxable year.  ARUNDELL, MURDOCK, BLACK, LEECH, and HARRON agree with this dissent.  Footnotes1. SEC. 26.  CREDITS OF CORPORATIONS.  In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax - * * * (c) CONTRACTS RESTRICTING PAYMENT OF DIVIDENDS. - (1) PROHIBITION ON PAYMENT OF DIVIDENDS. - An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends.  * * * ↩