Court Opinion

ID: 4634358
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:15:50.610873+00
Date Added: 2024-06-11T07:59:56.233495
License: Public Domain

PALMER, STACY-MERRILL, INC., A DELAWARE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Palmer, Stacy-Merrill, Inc. v. CommissionerDocket No. 87997.United States Board of Tax Appeals39 B.T.A. 636; 1939 BTA LEXIS 1001; March 22, 1939, Promulgated *1001  The petitioner issued its preferred stock to the vendors of assets acquired at the time of organization.  Essential conditions in the purchase agreements, without which the vendors would not have sold, bound petitioner to pay quarterly dividends on the shares so issued, and to redeem all shares for cash at par, in fixed numbers at specified dates.  Held, preferred stock shares issued in these circumstances constituted evidences of debt, and the so-called dividends paid or accrued under these terms amounted to interest on indebtedness within section 23(b), Revenue Act of 1934.  Commissioner v. Proctor Shop, Inc., 82 Fed.(2d) 792, affirming 30 B.T.A. 721">30 B.T.A. 721. Tom S. Patterson, Esq., for the petitioner.  B. M. Coon, Esq., for the respondent.  ARUNDELL*636  This proceeding involves a deficiency in income tax for the year 1934 in the amount of $4,615.88 and a 5 percent penalty in the amount of $230.79.  The issue presented is whether payments made in the taxable year to holders of the petitioner's preferred stock are deductible as interest on indebtedness or whether they are dividends on preferred stock as determined*1002  by the respondent.  On March 25, 1938, the Board promulgated a report in this proceeding, which is published at . Thereafter counsel for the respondent moved for a modification of the findings of fact and reconsideration of the opinion.  This motion is directed largely to the findings of fact wherein we found that the petitioner was bound to pay dividends on its preferred stock whether earned or not, and that for the year 1932 the petitioner paid dividends on the stock although it operated at a loss in that year.  Upon consideration of the respondent's motion, the parties were given leave to file supplemental briefs directing our attention to the evidence dealing with the fact questions raised by the motion and also to discuss further the questions of law involved in the case.  Supplemental briefs were duly filed by both parties.  Upon consideration thereof, and upon reexamination of the evidence, the following findings of fact are made.  FINDINGS OF FACT.  The petitioner was incorporated some time in 1932 by the General Fruit Corporation, hereinafter called the Fruit Co., to serve a purpose in the latter's plans as hereinafter shown.  Prior to, and*1003  at the time of, the petitioner's incorporation the Fruit Co. was engaged in marketing fresh fruit, vegetables, and other food commodities in *637  a territory which covered a number of the northwestern states of the United States and some provinces in British Columbia and eastern Canada.  During the year 1931 the Fruit Co. agreed with several of its business competitors, operating in the same trade territory, to buy their businesses, trade names, good will, and essential assets, under certain terms and conditions.  In the proposed purchase and sale, the economic situations of both buyer and sellers played an important part in the forms adopted to carry out the transactions.  The situations of the sellers were such that, whereas they desired to sell, it was only because their principal owners were elderly men who desired to retire completely from business and be relieved from business worries.  These owners therefore desired cash, or its equivalent, for their holdings.  The Fruit Co. could not command sufficient cash to purchase the properties, nor was its credit sufficiently strong, according to the judgment of its officers, to risk trying to raise outside capital through flotation*1004  of its bonds, notes, or other forms of debentures.  The sellers were unwilling to accept payment for their assets in any form of capital stock without a guarantee of dividends and redemption.  They finally consented to accept preferred stock of a new corporation to which the assets were to be transferred, provided the Fruit Co. would cause such new corporation to agree to retire the preferred stock and further that the Fruit Co. would guarantee the retirement and the payment of dividends.  These conditions were agreed to by the Fruit Co.  Accordingly, contracts were executed between the selling corporations and the Fruit Co. wherein the Fruit Co. agreed to cause the new corporation to enter into an agreement to retire its preferred stock in the amount of 5 percent thereof per year so that all of the preferred stock would be retired in twenty years.  In all of the three contracts in evidence the Fruit Co. "hereby guarantees that the said preferred stock shall be retired within said period * * *." All of the contracts contain a provision that "it is understood and agreed that dividends on the preferred stock to be issued hereunder shall be paid quarterly * * *." In two of the three contracts*1005  there is a further provision that "said payment of dividends is guaranteed by the second party" - the Fruit Co.  Pursuant to these agreements the Fruit Co. caused the petitioner to be incorporated under the laws of the State of Delaware, with authorized capital stock consisting of 10,000 shares of no par common, and 10,000 shares of 6 percent cumulative preferred of a par value of $100 each.  Charter provisions made the preferred stock dividends payable quarterly, beginning March 31, 1932, out of the corporation's earnings and surplus, and gave the corporation's board of directors authority to prescribe the time, manner, and amount in which the preferred stock might be redeemed.  *638  Transfers of the assets acquired under the aforesaid contracts were made to the petitioner in 1932.  On April 21, 1932, its stockholders and directors held their first corporate meetings.  At these meetings petitioner's stockholders and directors formally ratified and adopted all contracts made by the Fruit Co. in the acquisition of assets, and authorized payment therefor to the sellers by issuance to them of shares of its preferred stock.  At the same meeting resolutions were adopted which approved*1006 the Fruit Co.'s guarantee of payment of dividends on the preferred stock and redemption of the shares at times designated, with specific provision that such guarantee be evidenced by the Fruit Co.'s endorsement on the face of each certificate.  According to a schedule included in the resolution, 20 preferred stock certificates, numbered 1 to 20, inclusive, each for 180 shares, were issued to Stacy Brothers & Merrill Co., and 20, numbered 21 to 40, inclusive, each for 95 shares, to S. G. Palmer, trustee.  All of these shares, beginning with certificate Nos. 1 and 21 and following in that order, were made redeemable, two each year, on December 31 of each year beginning with 1932 and ending with 1951.  Petitioner's operations for 1932 resulted in loss, but dividends on its preferred stock for that year were paid.  In 1933 the petitioner transferred all of its assets to subsidiary corporations in consideration for the latter's 6 percent serial promissory notes, equal to its outstanding preferred stock.  All interest and principal payments on the notes were timed to mature in amounts equal to and simultaneously with the amounts and dates of dividends and redemptions of the petitioner's*1007  preferred stock.  Thereafter, to and including the taxable year, the petitioner has conducted no business except that of collecting interest and principal on its notes and paying dividends on and redeeming its preferred stock.  The petitioner reports its income upon an accrual basis.  In 1934 the petitioner collected $33,570 interest on notes, all of which it paid and/or accrued in discharge of dividends on preferred stock.  In its income tax return for that year the petitioner treated the aforesaid sums as "interests" accrued on indebtedness, within the meaning of section 23(b) of the Revenue Act of 1934, and deducted them from its gross income.  The respondent's rejection of such deduction resulted in the deficiency and penalty here in issue.  OPINION.  ARUNDELL: In the report on this case published at , we found as a fact that the petitioner agreed to pay dividends on its preferred stock "whether earned or not." Respondent, after publication of the report, objected to this finding on the ground that it is *639  not supported by the documentary evidence.  He concedes that counsel for the petitioner stated at the hearing that dividends were to be*1008  paid whether earned or not.  One of petitioner's witnesses also testified to the same effect.  Counsel for the respondent made no objection to such statements and testimony at the hearing and made no mention of them in the letter he subsequently filed in lieu of a brief. Upon reexamination of the record we find that counsel for the respondent is correct in his contention that the written contracts do not specifically provide for payment of dividends whether earned or not.  We have changed the findings of fact accordingly.  However, we are of the opinion that such change does not require a reversal of the result reached in our prior report.  We have, in this class of cases, consistently taken the view, as expressed in , that "The intention of the parties must be accorded great weight." And in our prior report on this case we pointed out that "corporation stock certificates are no exception to the general rule of construction of written instruments, which places intent of the parties above mere form." The evidence in this case establishes that the vendors of the assets acquired by the petitioner did not intend to become*1009  investors in the petitioner.  They wanted to be sure of receiving the selling price, with interest, regardless of whether the petitioner's operations were profitable or not.  Cf. ; affd., . The petitioner, equally with the vendors, intended to pay the holders of its securities sums certain on definite dates without regard to earnings.  As set out in the findings of fact, the three sales contracts provided specifically that dividends "shall be paid quarterly", and all of the stock was to be retired within a definite period, with no expressed restriction to earnings.  We regard the evidence of intent of the parties too clear to be overcome by formal recitations in the stock certificates.  The facts here make a stronger case for the petitioner than did the facts in the Schmoll Fils Associated case, supra. In that case the payments to security holders were to be made only out of profits, and there was no definite maturity date.  In ; affd., *1010 , the security issued had no specified maturity date.  In both cases the securities were held to be evidences of debt and the periodic disbursements to holders were allowed as interest deductions.  In the latter case the court's opinion reads in part: The fact that the principal of the guaranteed stock is not demandable by the stockholder in the absence of default in the payment of the guaranteed dividends is not conclusive of a stock investment.  In the light of the other attributes of the stock, this indicates rather a debt as to which there is a right of renewal so long as the interest is paid when due.  There is nothing in the fact that the *640  debt evidenced by the preferred stock is not payable at a fixed time which throws upon the holders thereof any of the risks with respect to the corporate enterprise which are characteristic of the position of the stockholder.  In the present case, as we have shown, there was a definite agreement to pay 7 percent quarterly and a definite promise to pay the principal at specified maturity dates.  Applying the reasoning of the cited cases to the facts here, we hold, as in our prior report, that the disbursements*1011  in the taxable year amounted to interest on petitioner's indebtedness and are deductible as such.  Cf. ; affd., ; . Decision will be entered for the petitioner.