Cotton States Fertilizer Co. v. Commissioner

47 B.T.A. 748, 1942 BTA LEXIS 651

• Court: United States Board of Tax Appeals
• Decided: September 23, 1942
• Docket: Docket No. 105397.
• Status: Published

Opinions

OPINION.

Kern:

The first question presented in this proceeding is whether petitioner is entitled to the credit provided by section 26 (c) (1)- of the Revenue Act of 1936.¹ In order to be so entitled, petitioner must show (1) a written contract; (2) executed by it before May 1,1936, (3) expressly dealing with the payment of dividends, (4) which would be violated by- its distribution during the taxable year of amounts as dividends. The written contract executed by petitioner in 1934 provided that “applicant will not',' without the prior'written consent of B,. F. C. * * * declare or pay any dividend or make any distribution upon- its capital stock.” Petitioner did not ask for the consent of B. F. C. to the payment of dividends; none was granted; and petitioner paid no such’dividends during the taxable year. The precise issue, therefore, is whether, under the facts shown, the distribution of dividends by petitioner during the taxable year would have been in violation of the quoted provision of the contract.

It seems to us obvious that it would have been. A distribution of dividends by petitioner would not have been a violation of such contract only if consented to in writing by the other party to the contract. Such a consent would have been in the nature of a waiver or modification of an obligation by. the obligee of a contract, which is always possible even though not expressly provided for, but until the obligation is waived or modified, it is in full force and can not be violated with immunity. That such consent might have been granted by K. F. C. if requested by petitioner seems to us immaterial. It was not granted and no request was made. Moreover, we can not assume that B. F. C. would have given its consent. Sutcliffe Co., 41 B. T. A. 1009, 1014.

In Kilty Steel Co., 41 B. T. A. 1237, we held that a similar contractual provision effectively prohibited the payment of dividends. It is true that in that case it was stipulated that a request for permission from the obligee to pay dividends would have been refused, that the payment of dividends by the taxpayer would not have been sanctioned by sound business practice, and that the taxpayer knew that any request to pay dividends would have been refused. These facts, however, were not essential to our holding. The essential fact is pointed out in one sentence: “It [taxpayer] did not request * * * permission from either of the banks to pay a dividend nor was such permission granted.”

The situation here presented is the legal converse of that considered by us in Atlantic Co., 45 B. T. A. 657. There the taxpayer corporation could declare a dividend without violating a contract, but if it did, then the creditor could take certain steps. Here the petitioner could not make a dividend distribution without violating a contract, but if the creditor consented, then and only on that condition could such a distribution be made.

On.this issue we decide in favor of petitioner.

The second issue has to do with the right of petitioner in the taxable year to deduct officers’ salaries in amounts in excess of those authorized by its contract with the Reconstruction Finance Corporation. The salary items in question consisted of certain increases in the salaries of the president and treasurer of petitioner which were made by petitioner’s board of directors in the taxable year, “subject to the approval of the Reconstruction Finance Corporation during the time their loan to the company is in effect, and any part thereof not approved by said Reconstruction Finance Corporation shall be cumulative and subordinated to the Reconstruction Finance Corporation loan.” The Reconstruction Finance Corporation in the following taxable year approved only a part of such increases and petitioner in the latter year paid to the officers in question only that part of the increases so approved. The stipulations of fact do not disclose whether petitioner is on the accrual basis of accounting and do not disclose how petitioner treated the amounts, paid and unpaid, of such salary increases on its books during the taxable year. Petitioner’s tax returns for the taxable year were not introduced in evidence.

Even if we assumed in petitioner’s favor that it was on the accrual basis during the taxable year, we are still not of the opinion that the salary increases provided for in the quoted resolution are items properly subject to being accrued, because of the contingency of petitioner’s obligation to pay them. Commissioner v. Brooklyn Radio Service Corporation, 79 Fed. (2d) 833; Ames Reliable Products Co., 44 B. T. A. 176.

On this issue we decide in favor of respondent.

Reviewed by the Board.

Decision will be entered pursuant to Rule 50.

1 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—

(1) Prohibition on Payment of Dividends. — An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. * * *