Court Opinion

ID: 4591399
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:05:43.480542+00
Date Added: 2024-06-11T07:50:39.519243
License: Public Domain

SANDURA COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Sandura Co. v. CommissionerDocket No. 104015.United States Board of Tax Appeals45 B.T.A. 491; 1941 BTA LEXIS 1109; October 28, 1941, Promulgated 1941 BTA LEXIS 1109">*1109  Petitioner was indebted on certain promissory notes executed prior to May 1, 1936.  The notes were silent as to whether amounts to be set aside to meet maturities and payments of the current maturities were to be made out of current earnings and profits for the taxable year.  Held, a showing by parol evidence that it was the intent of the parties that amounts should be set aside and payments should be made out of current earnings and profits for the taxable year does not satisfy the requirement of section 26(c)(2) of the Revenue Act of 1936 that the contract under which a credit for purposes of the surtax on undistributed profits is claimed expressly deal with the earnings and profits of the taxable year.  Helvering v. Moloney Electric Co., 120 Fed.(2d) 617, followed.  Fred L. Rosenbloom, Esq., for the petitioner.  Paul E. Waring, Esq., for the respondent.  VAN FOSSAN 45 B.T.A. 491">*491  The respondnet determined deficiencies in petitioner's income tax for the calendar years 1936 and 1937 of $9,307.86 and $10,459.60, respectively.  Petitioner contends that respondent erred in refusing to permit in each year a credit under section1941 BTA LEXIS 1109">*1110  26(c)(2) of the Revenue Act of 1936 in determining the amount of petitioner's liability for surtax on undistributed profits.  FINDINGS OF FACT.  The facts are stipulated and we adopt them as our findings of fact.  In so far as they are material to the issue they may be summarized as follows: Petitioner is a corporation organized under the laws of Delaware under the name of Acme Floorings, Inc.  On August 2, 1935, its 45 B.T.A. 491">*492  corporate name was duly changed to "Sandura Company, Inc." Petitioner is engaged in the business of selling, at wholesale, linoleum and similar floor coverings.  During the taxable years 1936 and 1937 its principal office was located at 100 West Tenth Street, Wilmington, Delaware.  Petitioner filed its income and excess profits tax returns for the calendar years 1936 and 1937 on an accrual basis of accounting with the collector of internal revenue for the district of Delaware at Wilmington, Delaware.  On August 1, 1935, the petitioner, under the name of Acme Floorings, Inc., borrowed $200,000 from Bird & Son of Walpole, Massachusetts, giving as evidence of its indebtedness its promissory notes aggregating $200,000.  Tne notes were divided into five1941 BTA LEXIS 1109">*1111  series, denominated series A to E, inclusive.  Each series consisted of eight notes of $5,000 each, executed in the following form: FOR VALUE RECEIVED, ACME FLOORINGS, INC. (hereinafter called the Corporation) promises to pay to the order of BIRD & SON, INC., on the first day of February 1938, at the office of Bird & Son, Inc. in the Town of Walpole, Massachusetts, Five Thousand Dollars in lawful currency of the United States of America, and also to pay interest thereon from the first day of August, 1935, semi-annually, on the first day of February and the first day of August in each year, at the rate of six per cent. per annum until payment of the principal amount in full.  The Corporation reserves the right to pay to the holder, on any interest date before the stated maturity hereof, the principal amount of this note with interest then due, and thereupon this note shall be surrendered and cancelled; but unless so paid and cancelled, it shall remain payable according to the tenor hereof.  The corporation agrees that, so long as any notes of this issue are outstanding, it will in each year set aside an amount equivalent to 50% of the net earnings of the Corporation for that year1941 BTA LEXIS 1109">*1112  after deduction of current maturities of these notes and the dividends for that year on outstanding Preferred Stock, and that it will apply such amount, in multiples of $5,000. plus interest, to the payment by way of anticipation of later maturities of these notes and interest thereon, any portion of such amount not so applied to be held and added to such sum as may become available in the succeeding years for such payments by way of anticipation.  This note is one of an issue of Six Per Cent.  Serial Notes of the Corporation aggregating Two Hundred Thousand Dollars ($200,000.) in principal amount, of which $40,000. (Series A) are payable February 1, 1937; $40,000. (Series B) are payable February 1, 1938; $40,000. (Series C) are payable February 1, 1939; $40,000.  (Series D) are payable February 1, 1940; and $40,000.  (Series E) are payable February 1, 1941.  These notes are in all other respects of like tenor and effect and of even date herewith.  In the event that the corporation shall have failed to pay the principal and/or interest of any of these notes when due, the principal of this note shall, if any whenever the holder shall so elect, before the stated maturity, forthwith1941 BTA LEXIS 1109">*1113  become due and payable.  IN WITNESS WHEREOF ACME FLOORINGS, INC. has caused this note to be signed in its name and on its behalf by its President and its Treasurer as of this first day of August, 1935.  45 B.T.A. 491">*493  On December 21, 1936, petitioner wrote a letter to Bird & Son, stating: Having in mind the undistributed profits tax, we propose to pay a dividend of $3.00 per share on account of accrued dividends on the preferred stock, and estimate that we can do this without prejudice to the payment from current earnings of current maturities, which, according to our understanding and the requirements of the serial notes, must be provided for out of current earnings before such earnings can be otherwise distributed.  On December 23, 1936, Bird & Son replied to the above letter as follows: The program outlined in your letter of December 21st is unobjectionable to us, so long as it recognizes the right of our Company to have current earnings applied, set aside or reserved for the payment of current obligations represented by your Serial Notes which we hold, before such earnings are applied, set aside or reserved for payment of any dividends.  The above mentioned letters constitute1941 BTA LEXIS 1109">*1114  the sole exchange of correspondence between petitioner and its creditor relative to the matter discussed.  No amounts were irrevocably set aside by petitioner during the taxable years 1936 and 1937 for the payment, by way of anticipation, of later maturities of the notes or interest thereon.  On January 29, 1937, petitioner paid off the $40,000 of notes constituting series A and on January 31, 1938, paid off the $40,000 of notes constituting series B.  During all times herein involved petitioner had outstanding $600,000 par value of its 6 percent preferred capital stock.  Dividends thereon were paid in the amount of $18,000 during the taxable year 1936 and in the amount of $12,000 during the taxable year 1937.  These sums were allowed by the respondent as dividends paid credits in the respective years.  OPINION.  VAN FOSSAN: The sole question before the Board is whether petitioner is entitled in each of the years 1936 and 1937 to a credit under section 26(c)(2) of the Revenue Act of 1936. 11941 BTA LEXIS 1109">*1115 45 B.T.A. 491">*494  The several conditions of the statute must be concurrently met.  The amount must be paid within the taxable year in discharge of a debt as required by a contract antedating May 1, 1936, expressly dealing with the disposition of current earnings and profits, or it must be irrevocably set aside within the taxable year for the discharge of a debt pursuant to a contract of similar tenor.  In our opinion the facts before us fair to bring petitioner within either of the above situations.  On brief petitioner concedes that the provisions of the promissory notes do not meet the statutory requirement that there be a "provision [which] expressly deals with the disposition of earnings and profits of the taxable year." It contends that that lack is satisfied by the exchange of letters between the parties.  Inasmuch as the exchange of letters took place after May 1, 1936, the letters can not themselves constitute a contract for purposes of section 26(c)(2).  They could only be used as parol evidence to show that the parties intended the notes to be paid out of earnings for the current year.  But the introduction of parol evidence to show the intent of the parties that the payments1941 BTA LEXIS 1109">*1116  should be out of current earnings does not meet the statutory requirement that the contract expressly deal with the disposition of earnings and profits for the taxable year.  . The contract here in question thus fails to meet the statutory test.  The finding of such a contract is a requisite to either of the two situations entitling a taxpayer to credit.  Petitioner also argues that the introduction of parol evidence is proper in this case because the contract is ambiguous.  The ambiguity is said to arise from the sentence in the notes which reads as follows: * * * The Corporation agrees that, so long as any notes of this issue are outstanding, it will in each year set aside an amount equivalent to 50% of the net earnings of the Corporation for that year after deduction of current maturities of these notes and the dividends for that year on outstanding Preferred Stock, and that it will apply such amount, in multiples of $5,000.  Plus interest, to the payment by way of anticipation of later maturities of these notes and interest thereon, any portion of such amount not so applied to be held and added to such1941 BTA LEXIS 1109">*1117  sum as may become available in the succeeding years for such payments by way of anticipation.  No claim for credit is made upon the basis of the sentence quoted above.  It is stipulated that no amounts were irrevocably set aside during 1936 or 1937 by way of anticipation of later maturities which is what the quoted sentence deals with.  That sentence is not concerned with the payment, or setting aside funds for the payment, of current maturities, which is the basis of petitioner's claim for credit in the case at bar.  Petitioner contends, however, that the fact that it is specified that payments by way of anticipation of later maturities are to be 45 B.T.A. 491">*495  out of current earnings while it is not specified from what source payments of current maturities are to be made, constitutes an ambiguity which may be resolved by showing the intent of the parties.  We do not agree that the difference in treatment makes the note ambiguous so as to require explanation.  The claim of ambiguity must fail.  It is claimed also that the payment of $40,000 on January 29, 1937, entitles petitioner to the credit in question for 1936, it being contended the amount was irrevocably set aside in that1941 BTA LEXIS 1109">*1118  year.  We have found that the contract in question does not meet the statute.  There is, moreover, no stipulation of fact nor evidence that the $40,000 was irrevocably set aside in 1936 for the payment of notes maturing in 1937.  We do not know the source of the payments.  The same observations apply as to the payment of $40,000 in 1938.  There is no statutory contract nor is it stipulated that there was an irrevocable setting aside in the taxable year 1937.  We know only that the sum of $40,000 was paid in 1938.  We do not know its source or antecedent history.  The statute is not satisfied.  Reviewed by the Board.  Decision will be entered for the respondent.LEECH concurs only in the result.  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. - * * * (2) DISPOSITION OF PROFITS OF TAXABLE YEAR. - An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside.  For the purposes of this paragraph, a requirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits.  As used in this paragraph the word "debt" does not include a debt incurred after April 30, 1936. ↩