Court Opinion

ID: 9458234
Source: CourtListenerOpinion
Date Created: 2023-08-04 20:46:00.470644+00
Date Added: 2024-06-11T17:35:40.995320
License: Public Domain

LAY, Circuit Judge
(concurring in part and dissenting in part).
I join the per curiam analysis that the words “any distribution” within the parenthetical clause of § 316(a) (2) include redemptive distributions but I cannot agree that this interpretation accords a priority in the reduction of current earnings and profits for ordinary dividends. I cannot accept the positions taken by Judge Gibson and Judge Bright which for differing reasons accord a priority to dividends in reducing current earnings and profits.
Judge Gibson reasons that § 312(a) “has no application to the problem before us.” Thus, he limits the focus of his opinion to the interplay of § 312(e) and § 316(a) (2). By contrast, Judge Bright finds that § 312(a) does govern the charges which are to be made against earnings for both dividends and redemptions, but he reasons that § 316(a) (2) presents a wholly separate and independent accounting calculation which governs the instant problem without relationship to the operation of § 312(a).
These separate holdings basically overlook that Subchapter C of the Internal Revenue Code presents a comprehensive statutory scheme for the taxation of corporate distributions and that each of the three above-mentioned sections were intended to play some operative part in the treatment to be given the dividend and redemptive distributions made in the year in question. By giving effect to all of the words of each statute and thus achieving harmony between these sections, I conclude that dividends can claim no priority in the reduction of current earnings and that each distribution (whether redemptive or dividend in nature) must play some part in reducing current earnings in a year when those earnings are insufficient to cover all distributions.

Section 312(a)

Judge Gibson holds that § 312(a) has no application to the instant case. He reasons that by enacting subsection (e) of § 312, Congress removed redemptions entirely from the purview of (a). I cannot agree. This interpretation lacks *845authoritative support,1 is not ascribed to by the government, the taxpayers or Judge Bright, and is at variance with the very manner in which § 312 was drafted. Congress has expressly recognized that adjustments to earnings for redemption distributions are to be made under subsection (a). In 1969 Congress amended subsection (c) of § 312 to provide that the gain now recognized on certain redemption distributions is to be taken into account in adjusting earnings for such a transaction. As the amended statute specifically states, this gain is to be taken into account “in making the adjustments to the earnings . . . under subsection (a) . . ..”2 If, as Judge Gibson contends, subsection (e) controlled the\ adjustments which are made to earnings for redemption distributions, the above quoted language would have necessarily made reference to (e) instead of (a).
It is true that subsection (a) has application only to distributions made by a corporation “with respect to its stock” as Judge Gibson points out. However, this phrase necessarily includes redemption distributions because the regulations under § 311 define the phrase in this manner and because such a distribution is made by reason of the corporation-shareholder relationship.3 Judge Gibson would limit the definition contained in the regulations under § 311 *846to that section only, and, urging that the regulation cannot enlarge the meaning of the statute, he questions the regulation’s validity in including redemptions within the meaning of this phrase. I disagree. Section 311 exists as part of a comprehensive statutory scheme, each section of which deals with the same overall subject — corporate distributions. These statutes must be construed in pari materia. Thus, words used consistently throughout this statutory pattern must carry the same meaning within each section, and if they are to take on a special meaning within any one statute, that meaning should be established by a statutory definition. Mercantile-Commerce Bank & Trust Co. v. Commissioner of Internal Revenue, 165 F.2d 307, 310 (8 Cir. 1948), cert. denied, 333 U.S. 868, 68 S.Ct. 791, 92 L.Ed. 1146 [a phrase in one section of a tax statute must be construed with reference to other portions of the Act]; Davant v. Commissioner of Internal Revenue, 366 F.2d 874, 879 (5 Cir. 1966), cert. denied, 386 U.S. 1022, 87 S.Ct. 1370, 18 L.Ed.2d 460 (1967) [the dividend liquidation and reorganization sections of the Internal Revenue Code must be viewed as a functional whole]; United States v. Sheahan, 323 F.2d 383, 385 (5 Cir. 1963) [words of a tax statute must be construed in harmony with statute as organic whole]. In the absence of a statutory definition, the definition contained in the regulations under § 311 must be deemed to interpret the phrase as it is used throughout the entire statutory scheme.4
I view § 312(a) as playing a significant role in the resolution of the problem at hand. By enacting § 312 in 1954, Congress for the first time provided comprehensive rules governing the adjustments to be made to earnings and profits because of distributions coming from that account.5 Subsection (a) of that section, entitled “General rule,” provides that to the extent earnings exist they must be decreased upon the distribution of property by a corporation with respect to its stock.6 This general rule applies “[e]xcept as otherwise provided in this section.”7 Contained within the general rule of § 312(a) are a “time rule” which requires earnings to be reduced “on the distribution” and an “amount rule” which governs the amount of the reduction.
The government recognizes the direct applicability of § 312(a) but argues that that section does not encompass a time rule. It construes the words “on the distribution” to mean that earnings are affected by distributions but that they are not necessarily reduced on the date of the distribution. It becomes apparent that the reason the government urges this interpretation is in order to pre*847vent the otherwise clear conflict which would be created between this section and its priorities argument under § 316 (a) (2). For, if the words “on the distribution” do designate the moment in time when a distribution reduces earnings, then it cannot be seriously contended that dividends distributed subsequent to redemptions must have the prior opportunity to reduce earnings. Nor, can it be soundly argued that § 316 (a) (2) provides an exception to the “time rule” of § 312(a) since, by its own terms, § 312(a) limits exceptions to its general rule to those which appear “in this section.” I interpret the words “on the distribution” as indicating that point in time when a distribution that is chargeable to earnings actually reduces that account, because (1) the legislative history of § 312(a) indicates that Congress was concerned with timing in drafting this provision,8 (2) the government has adopted this interpretation in its tax manuals,9 and (3) the rules regarding the time at which the recipient of a distribution must report its receipt are related to the date of distribution.10 This interpretation leaves no room for preferential treatment of any distribution.
Nor does § 312(a) contain special rules requiring one method for reducing current earnings and another for reducing accumulated earnings. Both earnings sources receive similar treatment under this section. The parties are in agreement that corporate distributions (whether dividend or redemptive) reduce accumulated earnings at the time of their distribution and in order of their distribution without priority for either. Although the government is unwilling to admit that this result flows from the application of § 312(a) it can point to no other section of the Code which prescribes this result. It seems clear that § 312(a) commands this treatment, and in the absence of language to the contrary, the same result obtains in the reduction of current earnings as the parties admit occurs in the reduction of accumulated earnings. Hence, no priorities can be claimed.
I conclude therefore, that § 312(a) does have direct application to both dividend distributions and the earnings portion of redemption distributions, and that by reason of this section and this section alone, earnings are reduced to the extent available at the time either type of distribution is made.

Section 312(e)

Section 312(e) plays the limited role of removing from the earnings adjustment under (a) that portion of a redemption distribution which is properly chargeable to capital. This, of course, requires that some allocation of the distribution be made before any charge is made to earnings. The authorities are in dispute as to the manner of making *848this allocation.11 However, that dispute does not concern us here since the parties have stipulated as to the proper allocation of the redemption distributions involved. Thus, we have no need to consider § 312(e) on this appeal except to note that it has been complied with. It seems clear that once the allocation is made under subsection (e), that provision has no further operation and the rules of (a) thereafter govern the allocated earnings portion of a redemption distribution.
Judge Gibson, however, reads more into subsection (e) than a mere rule of allocation. Prior to 1936 the forerunner of § 312(e) [the third sentence of § 115(c)] stated that the capital portion of a redemption distribution was not to be considered a distribution of earnings “for the purpose of determine ing the taxability of subsequent distributions by the corporation.” In 1936 Congress deleted the above quoted language and at the same time enacted the forerunner of § 316(a) (2). Judge Gibson asserts that in enacting § 316(a) (2), Congress intended to give dividends a priority in absorbing current earnings and it thus made dates of distribution irrelevant in determining available earnings. Hence, he concludes that the above quoted language was deleted because it too became irrelevant in that redemptions made prior in time to other distributions were no longer intended to affect the taxability of those subsequent distributions.
Neither case law nor the Treasury regulations are in agreement with this analysis. The regulations promulgated by the Treasury under § 312(e) contain the very language which Judge Gibson deems to be now irrelevant.12 The retention of these words in the regulation after their deletion from the statute is highly significant. As was stated in Central & South West Corporation v. Brown, 249 F.Supp. 787, 796-799 (D.Del. 1965):
“Notwithstanding the elimination of th[ese] words . . . from 115(c) of the 1936 Revenue Act and the 1939 Code, the Treasury, by its Regulations under both statutes has interpreted the sentence to have the limited purpose originally stated in section 201(c) of the Revenue Act of 1924, that is to determine the taxability of subsequent distributions by the corporation. . . The fact that the Treasury’s interpretation of section 115(c) has remained constant since 1936 and that in the interim the law has never been changed, is entitled to great weight in evaluating the significance of the 1936 amendment . . . (citing cases) . and is an indication of a legislative intention that the third sentence of 115(c) of the 1939 Code shall have the meaning which the Treasury ascribed to it.
“. . . The purpose of the third sentence of section 115(c) of the 1939 Code was to make clear that a liquidating distribution which was properly chargeable to the capital account should not be considered a distribution of earnings or profits insofar as subsequent distributions were concerned. There is no reason to suppose that when the sentence in question was reenacted as section 312(e) of the 1954 Code it was intended that it should have any different effect than that which it had ever since 1924.”
I am in agreement with this analysis. Hence, since the earnings portion of a redemption distribution is intended to have an effect on the taxability of “subsequent” distributions, it must do so by reducing earnings before the subsequent distribution is made. This, of course, occurs by reason of the application of the “time rule” of § 312(a) which causes earnings to be reduced at the time of *849distribution. I cannot accept Judge Gibson’s interpretation that this language was deleted in recognition of a legislated priority for dividends.

Section 316(a) (2)

I am in respectful disagreement with the analysis of Judge Gibson and Judge Bright that the language of the parenthetical clause of § 316(a) (2) 13 is intended to mean that these earnings are so computed for the purpose of making them first available for dividends.14 If this interpretation is correct then the obvious result is a complete negation of the operations of § 312(a) and § 312 (e). Clearly, if redemptions which are made earlier in time than dividend distributions are forced to wait in abeyance until the subsequent dividends have been given the first opportunity to absorb earnings, then the redemptions cannot affect the taxability of subsequent distributions as § 312(e) indicates, nor can they decrease earnings at the time of their distribution as § 312(a) indicates. I do not believe that Congress intended § 316(a) (2) to be interpreted in a manner which would create such a manifest disharmony between these statutes.15
The operative effect of § 316 is to define those distributions which shall be considered to be “dividends.” The title of this section explicitly states that purpose. The manner of definition is one which is important to the resolution of our problem. Dividends are there defined as “any distribution” which comes “out of” earnings (current or accumulated). Thus, the dividend label attaches only after it is found that a distribution has reduced the earnings account. Nothing in § 316 governs the actual reduction of earnings. In fact § 316 does not become operative until the earnings account has been reduced. Hence, the rules of § 312(a) must be first applied before § 316’s definition of a dividend can function. As a result I fail to grasp the approach suggested by Judge Bright that § 312(a) and § 316(a) (2) provide independent accounting methods for a corporate taxpayer — one for purposes of corporate bookkeeping and the other for purposes of determining taxation. This *850suggestion seems patently inconsistent with the realities and purposes of tax legislation. What possible purpose could Congress have had in prescribing within § 312(a) of the Internal Revenue Code a bookkeeping procedure to account for the reduction of corporate earnings caused by distributions if such a procedure is to have no relevancy in the determination of the taxability of such distributions? Even the Treasury regulations indicate that there must be some relationship between the methods used in maintaining the earnings account on the corporate books and the accounting method used for determining earnings available for taxable distributions. See Treas.Reg. 1.312-6(a). Clearly, the operations of § 312(a) and § 316(a) are interlocking steps in the statutory scheme of taxing corporate distributions.16
In my view every distribution, whether redemptive or dividend, reduces earnings (to the extent available) at the time of distribution. This occurs under § 312 (a). Of course, in order to determine the “extent” of the earnings available on each distribution date some computation of earnings must be made.17 The parenthetical clause of § 316(a) (2), in my judgment, merely sets forth the manner of computing current earnings when those earnings are a source of dividend distributions. The legislative history of § 316(a) (2) bears this out.
Prior to the enactment of this section in 1936 “accumulated earnings” were the only available source of dividend distributions. Current earnings, however, could also serve as a source for dividends provided they qualified as “accumulated” —i. e., any existing deficit had to be first absorbed before any part of current earnings could be considered “accumulated.” Unlike “true” accumulated earnings whose actual balance could be readily determined at any point during the year, practical difficulties inhibited the accurate computation of the actual amount of current earnings existing at any one point during the year.18 This information, of course, was necessary so that it could be known by how much a distribution reduced earnings on the date it was distributed. As a result a *851special method of accounting was devised by the Treasury which was intended to facilitate the computation of available current earnings so that the amount “accumulated” as of any one day during the year would be known. Under this procedure, if it was not possible to show the actual amount existing in the current earnings account on a distribution date, then earnings were to be computed as of the end of the year in toto (without regard to the effect of any distribution therefrom made during the year). These earnings were then deemed to have accumulated ratably over the 365 days of the year. See Edwards v. Douglas, 269 U.S. 204, 46 S.Ct. 85, 70 L.Ed. 235 (1925) and Mason v. Routzahn, 275 U.S. 175, 48 S.Ct. 50, 72 L.Ed. 223 (1927).19
In 1936 Congress for the first time made current earnings a dividend source in its own right by the enactment of the forerunner of § 316(a) (2). The result of this enactment was to free current earnings from the necessity of qualifying as “accumulated.” As part of this change the Treasury redesigned its earnings computation rules. The new statute (§ 115(a) (2) Rev.Act of 1936) enacted that part of the former computation which required current earnings to be computed as of the end of the year. The Treasury, through its regulations, added the innovation that these earnings, so computed, were to be allocated on a proportionate basis among the various distribution dates of the year rather than ratably to each and every day of the year.20 The purpose of such a change was obviously to remove the undesirable result of having part of a distribution charged to capital in a year when the total current earnings were sufficient to absorb the entire charge. As with the prior computation, the earnings so computed are available for both dividends and redemptions. There is no authority for concluding that the result of making current earnings an independent source for dividend distributions was to preclude other distributions from also being charged against this source. The computation made under § 316(a) (2) cannot control which distributions reduce earnings on their distribution dates.
The government argues that by these changes Congress removed the significance of both the dates of distribution and the order of distributions, and thus reserved current earnings for first reduction by dividends. According to the government the example contained in Treasury Reg. 1.316-2(c) which shows how to prorate earnings proportionately among dividend distributions demonstrates that only dividend distributions are to be treated as reducing earnings (in a year when total current earnings are insufficient to cover all distributions of the year). It is true this method of computation eliminates the significance of dates as they were used in making a daily computation of earnings. However, the regulation did not change the rule of § 312(a) (which applies to both dividends and redemptions) which requires a reduction of earnings on the date of each distribution. The computations under § 316(a) (2) and the regulation that prorates current earnings among the actual distribution dates are a clear indication that these dates are still significant as the points in time when earnings are reduced as § 312(a) demands. Thus, if a distribution reduces current earnings on the date when made, the only purpose of the year-*852end computation is to facilitate a determination of the “extent” of the earnings existing on the distribution date. In a year when both dividends and redemptions are distributed, a year-end computation is necessary to determine how much of each distribution came “out of” earnings. Nor, can one reasonably infer that by means of this computation and the example contained in the regulations, earnings must be considered available on dividend distribution dates but nonexistent on redemption distribution dates. Under this strained interpretation a redemption which may have preceded a dividend distribution by only one day would have to be charged to capital because no earnings would be deemed to be in the current earnings account on the date of the redemption distribution, even though on the very next day a sufficient amount of earnings would be considered to be in the account to cover the dividend. I cannot believe that Congress intended such an artificial conceptualization of when earnings become earned and available.21 Nor do the regulations require such a result since they exemplify a year wherein only dividend distributions were made. Nothing in the regulations governs the computations to be made in a year when both dividends and redemptions (or other non-dividend distributions) are distributed.
The taxpayers’ argument which results in priority treatment for redemptive distributions must be similarly rejected. The taxpayers contend that the effect which the redemption distributions had on earnings on each date of distribution should be determined by the daily computation of earnings formula. In making their computations the taxpayers have considered that l/365th of the total current earnings entered the account each day. However, taxpayers reduce these earnings for each redemption distribution on its distribution date without giving effect to the reductions which would have occurred on the interim dividend dates. Their contention is, of course, that the dividends did not reduce earnings on their distribution dates because the year-end computation of § 316(a) (2) suspends their effect on earnings until that time. Meanwhile, they contend the redemptions were diminishing the earnings account. This position is as contradictory of the “time rule” of § 312(a) as the government’s argument of priority for dividends.22
In my judgment the daily computation formula cannot be used in a year when both dividend and redemption distributions are made and current earnings are insufficient to cover both types. The regulations obviously require the proportionate prorata formula be used in such circumstances for dividends. Use of this formula for dividends while at the same time using another method of computing available earnings for redemptions (daily proration) results in a negation of the meaning of the parenthetical clause of § 316(a) (2). There would be no purpose in computing earnings without regard to the diminutions caused by all distributions from the account during the year, if thereafter in determining the amount available for dividends the redemption distributions *853are treated as having already diminished the account. Hence, in a year when both types of distributions are made from current earnings and these earnings are insufficient to cover all distributions of the year, the only reasonable conclusion is that the total current earnings computed at the end of the year without regard to the diminishing effect of any distribution made during the year are to be prorated among all distributions (both dividend and redemption).
I conclude, therefore, that the parenthetical clause of § 316(a) (2) merely provides a method of computing the total extent of available current earnings without preempting those earnings for dividends only. Thus, each distribution (dividend and redemption alike) has the effect of decreasing earnings “on the distribution” to the “extent” of that source as § 312(a) requires. The requirements of § 312(e) and the regulations thereunder are thereby given effect since the portion of the redemption which is allocable to earnings will diminish the earnings available for later distributions and thereby have an effect in “determining the taxability of subsequent distributions.” And, § 316(a) (2)’s method of computing current earnings without regard to “any distribution” made therefrom during the year will be given literal application. Only in this way can harmony be achieved among these statutes.
The principle of Foster v. United States, 303 U.S. 118, 58 S.Ct. 424, 82 L.Ed. 700 (1937), does not conflict with this result. Foster relates to redemptions which were free of tax consequences, whereas the redemptions here are subject to tax although at a preferred rate. In construing statutes levying a tax it is not our duty to impose the greatest tax possible, especially is this so when an apparent ambiguity exists. It is well settled “[I]f doubt exists as to the construction of a taxing statute, the doubt should be resolved in favor of the taxpayer.” Hassett v. Welch, 303 U.S. 303, 314, 58 S.Ct. 559, 565, 82 L.Ed. 858 (1938); Gould v. Gould, 245 U.S. 151, 153, 38 S.Ct. 53, 62 L.Ed. 211 (1917).
For these reasons I would reverse and allow plaintiffs to recover a partial refund of tax paid.

. The statement of Mertens that § 312 (a) governs the reduction of earnings caused by “non-liquidating” distributions does not support Judge Gibson’s contention that subsection (a) has no application to redemptions, for, as Mertens also points out, redemption distributions can be either non-liquidating or liquidating in nature. In the instant case the redemptions were non-liquidating distributions, thus according to Mertens they would be governed by subsection (a). See 1 Mertens, Law of Federal Income Taxation § 9.02, Chap. 9, p. 6. Prior to 1954 redemptions were treated the same as liquidating distributions. See Rabkin & Johnson, Federal Income, Gift and Estate Taxation, Vol. 2, § 22.08(4) and 1 Mertens, supra, at § 9.98. See also McCarthy v. Conley, 229 F.Supp. 517, 526 (D.Conn.1964) which explains:
“Every redemption of stock is not necessarily a partial liquidation of the corporate entity. Unless it is accomplished by a genuine contraction of the corporate working assets, it does not accomplish a partial constriction or liquidation of the corporation.”
The fact that Mertens describes the various subsections of § 312 as involving “entirely unrelated items” does not mean that a single distribution cannot be- subjected to the provisions of more than one subsection. If this were true, there would have been no need to promulgate a specific regulation under subsection (b) exempting redemption distributions from its operation. Treas.Reg. 1.312-2. The need to expressly exempt this type of distribution from the rules of (b) is a clear indication that otherwise a redemption made by distributing inventory assets would be governed by that section also.
Reliance on the law review article by Professors Edelstein and Korbel is misplaced. This article deals only with the problem of how to allocate a redemption distribution between earnings and capital as required by § 312(e). The article does not state that (a) has no subsequent application to the allocated earnings portion. In addition it should be noted that the authors propose that that part of a redemption distribution which is chargeable to earnings in one year but carried over to the next should have priority over the dividends of the latter year in the absorption of current earnings. This is directly opposed to Judge Gibson’s position. See Edelstein & Korbel, The Impact of Redemption and Liquidation Distributions on Earnings and Profits: Tax Accounting Aberrations Under Section 312 (e), 20 Tax L.Rev. 479, 522 (1965).

. Section 312(c) as amended now reads:
“In making the adjustments to the earnings and profits of a corporation under subsection (a) or (b), proper adjustment shall be made for—
(3) any gain to the corporation recognized under subsection (b), (c), or (d) of section 311, under section 341(f), or under section 617(d) (1), 1245(a), 1250 (a), 1251(e), or 1252(a).”

. See Treas.Reg. 1.311-1 (e) (1) which explains that distributions with respect to stock which are covered by § 311 are those which “are made by reason of the corporation-stockholder relationship” and not those where the fact that the recipient is also a shareholder is merely incidental to the transaction.

. That this definition is a correct interpretation cannot be doubted in light of the legislative history of new § 311(d) wherein Congress noted the necessity of amending § 311 so that gains realized on certain redemption distributions would no longer be exempted from tax consequences by operation of that section. See Sen.Rep. 552, 2 U.S.Code Cong. & Adm.News, 91 Cong. 1st Sess. pp. 2316-2317 (1969). Obviously, if the regulation bad invalidly included redemptions within the operation of § 311, there would have been no need for this amendment.

. See 1 Mertens, Law of Federal Income Taxation § 9.44 (1969 Rev.).

. Section 312(a) provides:
“(a) General rule. — 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.”

. The remaining subsections merely provide exceptions to the general rule. In particular, subsection (e), which will be discussed further below, excepts that “part” of a redemjjtion distribution which is “properly chargeable to capital” from the treatment which is ordinarily given to every distribution under (a). Of course, the effect of this is to leave the remaining part of the redemption distribution subject to the dictates of subsection (a).

. House Report No. 1337, 83d Cong. 2d Sess., p. A 94, U.S.Code Cong. & Admin. News, p. 4232 (1954) contains the following example which demonstrates that both timing and the reduction of earnings were intended to be governed by § 312 (a) :
“Thus, in the preceding example, if the fair market value of property at the time of distribution was $150, and the earnings and profits of the distributing corporation, immediately prior to the distribution were $120, the amount taxable ns a dividend under section 301 and 312 (a) would be $120. ...... * The remainder of the distribution would be applied against basis under section 301 (b) (2). The earnings and profits of the distributor immediately after the distribzition would be $20 ($120 minus $100, the adjusted basis of the property.)” (My emphasis.)

. Internal Revenue Service, Income Tax Law Training, Vol. 3 (1-67) states at § 1.0241:
“Section 312(a) provides only that the adjustment of earnings and profits, to the extent of the cash dividend, shall be made ‘on the distribution.’
“Fairly early in income tax history, this was interpreted as the date of payment, without regard to the corporation’s method of accounting.”

. See Treas.Reg. 1.301(b).

. See Edelstein & Korbel, supra n. 1. See also Rev.Rule 70-531, 1970-2 Cum.Bull. 76.

. Treas.Reg. 1.312-5.

. This clause requires that earnings be computed at the end of the year “without diminution by reason of any distributions made during the taxable year.”

. I am unable to give any weight to Judge Gibson’s argument that Congress in legislating the forerunner of § 316(a) (2) intended that those distributions which qualified for the dividend-paid credit should be the first to reduce current earnings. First, there is no legislative history which supports this conclusion and, second, the reference to § 27(h) of the 1939 Code [formerly § 27(g)] as evidence that nonprorata liquidating distributions (as in this case) would not qualify for the credit is wholly misplaced. Section 27(h) governed the requirements which dividend distributions must meet to obtain the credit. Section 27 (g) of the 1939 Code [formerly § 27(f)] governed the credit for liquidating distributions and contained no prorata requirements for such distributions. Under the rules in effect at the time the forerunner of § 316(a) (2) was drafted, the present redemptions would have qualified for the dividend-paid credit since the current earnings of Kiewit would be treated as “accumulated” as § 27(g) of the 1939 Code required. See Rev.Rul. 54-71, 1954-1 Cum.Bull. 71. Moreover, it must be recognized that § 316(a) (2) was drafted in language that governs both deficit and nondeficit corporations alike. If Congress bad intended earnings to be first reduced by those distributions which qualified for the credit, it would necessarily have had to also consider the types of qualifying distributions which non-deficit corporations could make. These clearly would include liquidating distributions. Thus, there would have been no reason to prefer dividends.

. It is a well recognized rule that:
“A section of a statute . . . should not be read in isolation from the context of the entire act. In interpreting the rules, a court must not be guided by a single sentence or word or phrase in a sentence, but should look to provisions of the whole law and to its object and policy.” United States v. Gray, 438 F.2d 1160, 1162 (9 Cir. 1971) citing Richards v. United States, 369 U.S. 1, 10-11, 82 S.Ct. 585, 7 L.Ed.2d 492 (1962).

. Nor can I agree with Judge Bright’s conclusion that § 316(a) presents an independent accounting method which under the last sentence of that subsection creates a priority for distributions qualifying as § 301 distributions. If Congress had intended a priority for any particular type of distribution, this intent would, of necessity, have been expressed in the section which governs the reduction of earnings, § 312. The thrust of Judge Bright’s interpretation is that redemptions cannot be charged against current earnings because they do not qualify as § 301 distributions as he construes the last sentence of § 316 (a) to require. In my judgment the only purpose of this sentence is to bring within the dividend definition all those types of non-dividend distributions which do not qualify for specialized treatment under other provisions of the Code. For instance, redemption distributions which do not qualify for exchange treatment under § 302(a) are treated as § 301 distributions because of the dictates of § 302 (d). In such a case the third sentence of § 316 brings these non-qualifying redemptions within the scope of the dividend definition. This is the sole function and purpose of that clause for without this sentence non-qualifying redemption distributions could not be taxed as ordinary income. This results because § 301(c) (1) prescribes such treatment only for “dividend” distributions. Thus, the last sentence of § 316(a) (2) does not function to designate those distributions which have the exclusive capability of reducing current earnings. It merely insures that certain non-dividend earnings distributions will be taxed as “dividends.”

. It is important to ascertain the “extent” of the earnings since a deficit cannot be created in earnings by charging a distribution thereto which exceeds the balance of the account. See Bertram Meyer v. Commissioner, 7 T.C. 1381, 1383 (1946); Mercantile Bridge Co. v. Commissioner, 2 T.C. 166 (1943); Emil Stein v. Commissioner, 46 B.T.A. 135, 139 (1942); F. W. Henninger v. Commissioner, 21 B.T.A. 1235, 1238 (1931).

. See e. g., Donahue v. United States, 58 F.2d 463, 74 Ct.Cl. 512 (1932); Commissioner of Internal Revenue v. James, 49 F.2d 707 (2 Cir. 1931).

. Hence, in a year when a total of $365,-000 was earned, earnings were deemed to accumulate at the rate of $1,000 per day. This system, however, caused the loss of some revenue for if a distribution of $10,000 were made on the second day of such a year (and there were no true accumulated earnings available), only $2,000 could be charged to earnings ($1,-000 X 2 days) and the balance was charged to capital even though there was $363,000 of other earnings which accumulated later during the year.

. See Treas.Reg. 1.316-2 (b) and (c) (1954 Code) formerly Reg. 94, article 115-2. See also Young v. Commissioner, 5 T.C. 1251 (1945), deficiency recomputed, 6 T.C. 357 (1946).

. In the fiscal year in question a total of $1,553,636.34 was earned and fifteen redemption distributions were made before the date of the first dividend distribution on December 31, 1960.

. According to the taxpayers’ computations, $545,977.26 of current earnings were available in the account on the date of the first dividend distribution which totaled $899,362.75; and another $524,270.24 was available in the account when the second dividend distribution totaling $980,-817.00 was made. However, instead of considering these amounts of earnings ($1,070,247.50) as absorbed by these dividends, the taxpayers carry them forward to the next redemption date. Even if the daily computation formula were to be used, as the taxpayers suggest, in order to comply with § 312(a) the dividends must be considered to have absorbed these earnings and the $1,070,247.-50 along with the $59,077.21 of earnings which were in the account at the end of the year would have to be allocated among the dividend distributions on a proportionate basis.