Roquemore Gravel & Slag Co. v. Commissioner

*641 The Commissioner determined deficiencies in income and excess profits taxes for the year 1936 in the amounts of $8,888.85 and $2,524.20, respectively. Petitioner admits liability for the entire excess profits tax deficiency as well*1296 as for $2,276.42 of the income tax liability. The balance, $6,612.43, representing surtax on undistributed profits, is contested.

The sole question presented is whether a certain agreement of September 9, 1935, between petitioner and the Montgomery Gravel Co. constitutes a written contract executed prior to May 1, 1936, a provision of which expressly deals with the payment of dividends, within the meaning of section 26(c)(1) of the Revenue Act of 1936.

*642 FINDINGS OF FACT.

The Roquemore Gravel & Slag Co., the petitioner herein, is a corporation organized in 1933 under and by virtue of the laws of the State of Alabama. Its principal office and place of business is at Montgomery, Alabama. Its Federal income tax return for 1936 was filed with the collector of internal revenue at Birmingham, Alabama.

Petitioner was formed for the purpose of acquiring properties formerly owned by the Roquemore Gravel Co., which properties had been foreclosed and bid in by a committee representing the holders of bonds issued by the Roquemore gravel co.

Prior to the organization of petitioner in 1933, John D. Roquemore had entered into an agreement with the committee representing*1297 bondholders of the old company that he would purchase from them on behalf of the petitioner the gravel deposits owned by the old company and, in connection with such purchase, the new company (petitioner) would assume and pay in addition to the purchase price an indebtedness of approximately $23,000 representing court expenses, receivers' and lawyers' fees incurred in the receivership proceeding against the Roquemore Gravel Co. Petitioner was unable to finance the purchase alone, and on September 9, 1935, entered into a written agreement with the Montgomery Gravel Co., the material provisions of which were as follows:

1. Roquemore Gravel & Slag Company shall be the operating company, * * *

3. Certain capital stocks of said corporations have this day been exchanged between the stockholders thereof, and this contract shall be effective from and after this date, and the possession of the properties of the Montgomery Gravel Company are hereby delivered to the Roquemore Gravel & Slag Company for the effectuation of the purposes of this contract, and subject to the terms thereof.

4. The term of this contract shall be for a period of one (1) year from this date, except that in*1298 the event the loan from the Reconstruction Finance Corporation hereinafter provided for or some other source is procured, the term of this contract shall be from the date hereof until said loan or any renewal or extension thereof shall have been paid in full.

5. It is contemplated that efforts will be made by the two corporations to procure a joint loan in the sum of SEVENTY THOUSAND ($70,000.00) DOLLARS, or so much thereof as may be obtained from the Reconstruction Finance Corporation, or such other source as may be available, the repayment of which is to be secured by mortgage of all the assets of both corporations, and both of said corporations, * * * bind and obligate themselves to execute any and all papers and documents, and take any and all steps and proceedings that may be necessary to the end of procuring such loan, * * *. In the event this loan is obtained, it is understood and agreed that from the proceeds of each and every order filled there shall be set aside and deposited in a sinking fund for the retirement of said loan, the sum of five (5??) per ton, for each ton of sand and/or gravel sold and shipped, and it is further understood and agreed that all profit after*1299 payment of current operating expenses and of the carrying charges of Montgomery Gravel Company, as hereinabove *643 provided for, shall be applied in liquidation of said indebtedness, and for no other purpose; and it is further understood and agreed that no dividends shall be declared or paid by either of said companies until such time as said indebtedness shall have been discharged in full. The assent of the stockholders of said corporations is evidenced by their signatures hereinafter affixed.

It was also set forth in the agreement that the proceeds of any loan obtained would be applied to pay off the debt to bondholders of the former company, and the balance due on expenses of the receivership proceeding against the former company.

At the time the agreement was signed, an application was made to the Reconstruction Finance Corporation for a loan. The terms specified by the Reconstruction Finance Corporation, under which the loan would be granted, were deemed unacceptable by petitioner and a new source of capital was sought. In the meantime, operations on the properties were carried on.

On August 28, 1936, the loan was obtained from another source and with the proceeds*1300 petitioner paid off the indebtedness incurred by the purchase of the properties from the Roquemore Gravel Co. The title to the properties then passed to the petitioner, which continued to operate them for the Montgomery Gravel Co. and Roquemore. The loan was not paid off until some time during the year 1937.

In the taxable year petitioner neither declared nor paid any dividends, although it had a net income in the amount of $33,833.06 available therefor.

OPINION.

KERN: Petitioner contends that it executed prior to May 1, 1936, a written contract, a provision of which expressly dealt with the payment of dividends, and that, without violating that contract, it could not distribute any dividends in the taxable year. Respondent contends, however, that the contract did not prohibit petitioner from paying dividends until and unless the desired loan was obtained. We agree with respondent's interpretation of the contract, and come to the conclusion that the written contract did not prohibit petitioner from distributing dividends until August 28, 1936. Prior to that date petitioner could have distributed dividends at will without violating any provision of the written contract*1301 here in evidence. See .

Petitioner's single witness spoke of a prior agreement between John D. Roquemore and a committee representing bondholders of the old company which provided that the petitioner, when formed, should issue no dividends as long as it operated the old company's property until the purchase price should be fully paid by petitioner. This agreement was not offered in evidence nor is there any indication *644 that it was a written agreement. One thing, moreover, is certain; it was not executed by petitioner. Therefore, any such agreement is immaterial to our present discussion.

Having determined that the contract did not forbid the distribution of dividends until August 28, 1936, the day the loan was procured, there still remains for us the problem of whether petitioner is entitled to a credit for any part of the undistributed profits. Had it been shown that on August 28, 1936, petitioner had no earnings from which dividends could have been declared, it would be clear that any 1936 dividends would have to have been declared out of earnings of the petitioner acquired after the date of the loan. A distribution*1302 of these earnings was strictly forbidden by the contract here in evidence.

Such is not the case presented by the record before us, however, for petitioner has not raised this issue nor has it introduced any evidence tending to shed light on petitioner's financial status at the date of the loan; and it is a well established rule that the determination of the Commissioner is entitled to a presumption of correctness. . An application of that rule to our instant situation necessitates the presumption that petitioner's undistributed profits as of August 28, 1936, amounted to no less a figure than at the end of that year, and that a distribution of dividends on August 27, 1936, could have been made in the full amount of $33,833.06, without violating a provision of any written contract exected by petitioner. Since the burden of coming forward with the proof rests with the petitioner in matters of this sort, , we must follow the above reasoning and sustain the respondent's determination.

Decision will be entered for the respondent.