Court Opinion

ID: 4483552
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:10.334053+00
Date Added: 2024-06-11T15:04:27.335575
License: Public Domain

Murdock, /., dissenting: The first issue arises under section 721 (a) (2) (F), which deals with dividends of a foreign corporation but does not define “dividends.” Section 115 (a) and (b) provides that a dividend is from the most recently accumulated earnings to the extent of the earnings of the year of declaration computed as of the end of that year, regardless of the earnings of that year up to the date of the declaration. That is a part of the definition of a dividend for the purposes of chapter I and has been the law since 1936. Congress, in imposing the excess profits tax in 1939, provided in section 729 that the provisions of chapter I were to apply in respect of the excess profits tax except where they were inconsistent with the new provisions of subchapter E. Thus, section 115 was made applicable under 721 if it was not inconsistent with 721. Section 721 (b) provides that net abnormal income is to be attributed to previous years under regulations prescribed by the Commissioner. The Commissioner specifically dealt with the allocation of dividends of a foreign corporation in section 30.721-11 of Regulations 109. He there provided that “The earnings and profits out of which any distribution is made [by a foreign corporation] are, as provided in section 115, the most recently accumulated earnings and profits.” This means that section 115 must be followed in determining the source of any dividend by a foreign corporation. Its effect, as stated above, is that any dividend by a foreign corporation is from earnings of the year of declaration to the extent of such earnings at the end of that year rather than at the date of declaration. That rule can work for as well as against taxpayers. It is arbitrary in a sense, but has reason too. It is in nowise inconsistent with any provision of subchapter E. Thus, the Commissioner made a valid regulation and followed it in this case. We make a great mistake in this early case under section 721 by invalidating his regulation. I think we make a further mistake in holding on the last issue that all interest on business loans is of the same class regardless of the nature or purpose of the borrowing. Nor is it any answer to say that there is no abnormality of class because some relief comes due to abnormality in amount. Interest on this loan to retire preferred stock was so different from all other interest paid by this taxpayer as to require its disallowance in toto in determining normal earnings of those base period years. The prevailing opinion thwarts the obvious purpose of the relief provision. Disney, Harron, and Opper, //., agree with this dissent.