Sharples Solvents Corp. v. Commissioner

*841 The respondent determined deficiencies for 1936 and 1937 in the respective amounts of $19,647.20 and $42,051.58, consequent on his disallowance of claims for credit under section 26(c) of the Revenue Act of 1936.

The facts were stipulated substantially as follows:

FINDINGS OF FACT.

The petitioner is a corporation organized and existing under the laws of the State of Delaware, with principal office at 23d and Westmoreland Streets, Philadelphia, Pennsylvania.

*842 The taxes herein in controversy are income*1060 taxes for the calendar years 1936 and 1937 asserted under section 14 of the Revenue Act of 1936 as surtaxes on undistributed profits and amount to $19,647.20 for 1936 and $42,051.58 for 1937.

The taxpayer's returns for the years herein involved were filed with the collector of internal revenue for the first district of Pennsylvania.

The deficiencies in the foregoing amounts, which are in issue herein for the years 1936 and 1937, result entirely from a denial to the petitioner by the respondent of a credit claimed by petitioner in its returns for the years in question under section 26(c)(1) and (2) of the Revenue Act of 1936.

On January 1, 1936, the petitioner had a deficit from operations amounting to $1,073.629.16.

During the entire calendar year 1936 this deficit from operations exceeded the invested capital of the petitioner paid in by its shareholders, which invested capital amounted throughout the year to $642,681.

In the calendar year 1936 the petitioner had a net taxable income of $111,388.24.

On December 31, 1936 (and on January 1, 1937), the petitioner had a deficit from operations amounting to $977,593.67.

During the entire calendar year of 1937 this*1061 deficit from operations exceeded the invested capital of the petitioner paid in by its stockholders, holders, which invested capital amounted throughout the year to $642,681.

During the calendar year of 1937 the petitioner had a net taxable income of $242,075.90.

On December 31, 1937, petitioner had a deficit from operations amounting to $782,673.36.

Throughout the years 1936 and 1937 petitioner had no surplus of any nature. (A schedule showing petitioner's balance sheets as of January 1, 1936, January 1, 1937, and December 31, 1937, was attached to the stipulation.)

Throughout the calendar years 1936 and 1937 petitioner had outstanding 6,412 shares of 7 percent cumulative preferred stock of $100 pay value per share, with a total stated and paid-in value of $641,200. In such years petitioner had outstanding 11,343 shares of common stock of no par value, with a stated and paid-in value of $1,481. The preferred stock was preferred as to the payment of dividends and as to the distribution of assets upon liquidation. The sole voting power was vested in the common stock.

At the beginning of the calendar year 1936, the Sharples Specialty Co. had outstanding a total of 3,109*1062 shares of preferred stock and 15,000 shares of common stock, or an aggregate of 18,309 shares, *843 each share of $100 par value, all of which were issued to and owned by P. T. Sharples. In January 1936, 750 shares of the company's preferred stock were transferred by P. T. Sharples to the Wilmington Trust Co., trustee. In November 1936 said company purchased these 750 shares of preferred stock from the Wilmington Trust Co., trustee, making them treasury stock, and reducing the amount of outstanding preferred stock to 2,359 shares, all held by P. T. Sharples. Throughout the calendar year 1937 the Sharples Specialty Co. had outstanding 2,359 shares of preferred stock and 15,000 shares of common stock, all owned by P. T. Sharples.

The Sharples Specialty Co. made loans to the petitioner over a period, January 21, 1928, to January 28, 1933, aggregating $590,000, all of which were due and unpaid throughout the years 1936 and 1937. Throughout said period and at all times since the Sharples Specialty Co. was an operating company engaged in manufacturing.

Throughout the entire calendar years 1936 and 1937, the petitioner had outstanding 6,412 shares of preferred stock and 11,343*1063 shares of common stock. Of this, P. T. Sharples owned at all times during such years, 2,115 preferred and 6,453 common shares. At no time during the calendar years 1936 and 1937 did either the petitioner or the Sharples Specialty Co. own any of the capital stock of the other.

The petitioner's books for the years 1936 and 1937 were kept on a calendar year basis and its Federal income tax returns for those years were made upon such basis.

OPINION.

VAN FOSSAN: The respondent held there was no contract restricting the payment of dividends by petitioner and, hence, that the credit was not allowable under section 26(c) of the Revenue Act of 1936.

Petitioner makes four contentions:

1. It was legally impossible for petitioner to have paid dividends during 1936 and 1937 because of the corporation law Delaware, the State of its incorporation;

2. It accumulated deficit and bad financial position prevented any distributions as a matter of fact;

3. Taxation of petitioner under section 14 violates the spirit and purpose of that statute;

4. Such taxation results in confiscation of petitioner's property in violation of the Fifth Amendment to the Federal Constitution.

*1064 Petitioner's arguments are all specifically answered by the opinion of the Supreme Court in Helvering v. Northwest Steel Rolling Mills, Inc.,311 U.S. 46, in which case, under comparable facts, the claim for credit was denied.

Decision will be entered for the respondent.