OPINION.
Opper:
This proceeding involves a deficiency in income tax of $1,707.36 for the year 1936. Petitioner is a corporation incorporated in 1903 under the laws of the State of North Dakota. Among other facts, all of which are found, it is stipulated that “as of January 1, 1936 the petitioner had a deficit of at least $21,251.40” and that “the records prior to January 1, 1929 are not susceptible to analysis to [1356]*1356definitely show whether this deficit occurred from operating losses or capital distributions in excess of earnings or was affected by other adjustments.” Its “net income for income tax computation for the year 1936 is $13,450.16.” No distributions to stockholders were made during the taxable year. Petitioner claims to be entitled to a credit in the amount of its entire current income against the surtax on undistributed profits imposed by section 14 of the Revenue Act of 1936, which would free it from that surtax. The credit provision claimed to apply is section 26 (c) (1), respecting contracts restricting the payment of dividends. It allows credit for:
An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can he 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. * * *
Petitioner argues that nothing could be distributed by it because of section 4543 N. D. Compiled Laws of 1913, which prohibits the payment of dividends by corporations except out of surplus. It claims that its charter constitutes in law a contract with the State (Dartmouth College case, 4 Wheat. 518) which contract includes all statutes of the state applicable to corporations.
Whether or not under other circumstances the corporate charter and statutes of the state could be said to be a written contract “executed by the corporation,” any ambiguity in the provision now under consideration is dispelled by reference to its legislative history. As it passed the House of Representatives the Revenue Bill of 1936 contained three distinct relief provisions imposing in lieu of the graduated undistributed profits tax flat rates of tax irrespective of whether dividends were paid. As explained in detail in the Ways and Means Subcommittee and Committee Reports1 the provisions were designed respectively for the relief of corporations having deficits (section 14), corporations having outstanding contracts not to pay dividends (section 15), and corporations having outstanding indebtedness (section 16). The provision for corporations having deficits 2 would clearly have applied to the petitioner.3
[1357]*1357The Senate changed, the undistributed profits tax into a flat rate surtax. It simultaneously struck out sections 14, 15, and 16 4 but retained the principle of relief for corporations under contract not to pay dividends (section 15 of the House Bill) by allowing them a credit against the undistributed profits surtax.5 Sec. 26 (c) (1). A floor amendment6 restored the relief for corporations under contract to pay indebtedness, by inserting a similar credit for them. Sec. 26 (c) (2). But no relief provision was restored for deficit corporations generally. By changing the definition of dividends a “dividends paid” credit was allowed to deficit corporations which distribute current earnings,7 but no credit was allowed for those which do not distribute.8
It does not appear that this omission was unintentional. On the contrary the Finance Committee’s explanation9 of the change in the dividend definition indicates that the reason for the omission may [1358]*1358Rave been the difficulty of determining the existence of accumulated earnings and profits; that is, whether or not there is a true deficit. Precisely that difficulty is illustrated by the present case. Although it is stipulated that a deficit exists, the facts also show that the stipulated deficit reflects only the present book condition and that it can not be shown whether this represents an actual deficit or merely book adjustments prior to 1929, which may or may not have been artificial or improper. The underlying plan of this surtax is to allow credit only for actual distributions. The petitioner, having failed to bring itself clearly within any of the exceptions to that plan, must be governed by the general principle. New Colonial Ice Co. v. Helvering, 292 U. S. 435.
Petitioner contends further that at least if construed to apply to the present circumstances the undistributed profits surtax is beyond the constitutional power of Congress. We are thus unavoidably required to give a limited consideration to its validity. Rita O'Shaughnessy, Executrix, 21 B. T. A. 1046.
Constitutionality of the measure is attacked on three grounds. First, petitioner claims that it is not a tax on incomes within the Sixteenth Amendment and therefore is unconstitutional because not apportioned among the states according to population as required by Article I, section 2, of the Constitution. What was said by the Supreme Court in Helvering v. National Grocery Co., 304 U. S. 282, we believe to be equally applicable here and to be conclusive of the question:
It is said that the statute is unconstitutional because the liability imposed is not a tax upon income, but a penalty designed to force corporations to distribute earnings in order to create a basis for taxation against the stockholders. If the business had been carried on by Kohl individually all the year’s profits would have been taxable to him. If, having a partner, the business had been carried on as a partnership, all the year’s profits would have been taxable to the partners individually, although these had been retained by the partnership undistributed. See Heiner v. Mellon, Nos. 144 and 145, decided May 16, 1938. Kohl, the sole owner of the business, could not by conducting it as a corporation, prevent Congress, if it chose to do so, from laying on him, individually the tax on the year’s profits. If it preferred, Congress could lay the tax upon the corporation, as was done by section 104.
Second, petitioner claims that this surtax violates the Tenth Amendment in that “it attempts to regulate the internal affairs of the state in its relation to its corporations by imposing a surtax for failure to distribute”, thus disturbing “the whole economic policy of the corporation”, “by attempting to state what are dividends and what would be a return of capital contrary to the laws of the state of incorporation”, and by offering an inducement for the declaration of dividends in violation of state law which would subject the directors and the corporation to penalties. A similar argument was also advanced and [1359]*1359rejected in Helvering v. National Grocery Co., supra. The statute before us is not invalid “because it interferes with the power to declare or to withhold dividends — a power which the State conferred upon the corporation.
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OPINION.
Opper:
This proceeding involves a deficiency in income tax of $1,707.36 for the year 1936. Petitioner is a corporation incorporated in 1903 under the laws of the State of North Dakota. Among other facts, all of which are found, it is stipulated that “as of January 1, 1936 the petitioner had a deficit of at least $21,251.40” and that “the records prior to January 1, 1929 are not susceptible to analysis to [1356]*1356definitely show whether this deficit occurred from operating losses or capital distributions in excess of earnings or was affected by other adjustments.” Its “net income for income tax computation for the year 1936 is $13,450.16.” No distributions to stockholders were made during the taxable year. Petitioner claims to be entitled to a credit in the amount of its entire current income against the surtax on undistributed profits imposed by section 14 of the Revenue Act of 1936, which would free it from that surtax. The credit provision claimed to apply is section 26 (c) (1), respecting contracts restricting the payment of dividends. It allows credit for:
An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can he 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. * * *
Petitioner argues that nothing could be distributed by it because of section 4543 N. D. Compiled Laws of 1913, which prohibits the payment of dividends by corporations except out of surplus. It claims that its charter constitutes in law a contract with the State (Dartmouth College case, 4 Wheat. 518) which contract includes all statutes of the state applicable to corporations.
Whether or not under other circumstances the corporate charter and statutes of the state could be said to be a written contract “executed by the corporation,” any ambiguity in the provision now under consideration is dispelled by reference to its legislative history. As it passed the House of Representatives the Revenue Bill of 1936 contained three distinct relief provisions imposing in lieu of the graduated undistributed profits tax flat rates of tax irrespective of whether dividends were paid. As explained in detail in the Ways and Means Subcommittee and Committee Reports1 the provisions were designed respectively for the relief of corporations having deficits (section 14), corporations having outstanding contracts not to pay dividends (section 15), and corporations having outstanding indebtedness (section 16). The provision for corporations having deficits 2 would clearly have applied to the petitioner.3
[1357]*1357The Senate changed, the undistributed profits tax into a flat rate surtax. It simultaneously struck out sections 14, 15, and 16 4 but retained the principle of relief for corporations under contract not to pay dividends (section 15 of the House Bill) by allowing them a credit against the undistributed profits surtax.5 Sec. 26 (c) (1). A floor amendment6 restored the relief for corporations under contract to pay indebtedness, by inserting a similar credit for them. Sec. 26 (c) (2). But no relief provision was restored for deficit corporations generally. By changing the definition of dividends a “dividends paid” credit was allowed to deficit corporations which distribute current earnings,7 but no credit was allowed for those which do not distribute.8
It does not appear that this omission was unintentional. On the contrary the Finance Committee’s explanation9 of the change in the dividend definition indicates that the reason for the omission may [1358]*1358Rave been the difficulty of determining the existence of accumulated earnings and profits; that is, whether or not there is a true deficit. Precisely that difficulty is illustrated by the present case. Although it is stipulated that a deficit exists, the facts also show that the stipulated deficit reflects only the present book condition and that it can not be shown whether this represents an actual deficit or merely book adjustments prior to 1929, which may or may not have been artificial or improper. The underlying plan of this surtax is to allow credit only for actual distributions. The petitioner, having failed to bring itself clearly within any of the exceptions to that plan, must be governed by the general principle. New Colonial Ice Co. v. Helvering, 292 U. S. 435.
Petitioner contends further that at least if construed to apply to the present circumstances the undistributed profits surtax is beyond the constitutional power of Congress. We are thus unavoidably required to give a limited consideration to its validity. Rita O'Shaughnessy, Executrix, 21 B. T. A. 1046.
Constitutionality of the measure is attacked on three grounds. First, petitioner claims that it is not a tax on incomes within the Sixteenth Amendment and therefore is unconstitutional because not apportioned among the states according to population as required by Article I, section 2, of the Constitution. What was said by the Supreme Court in Helvering v. National Grocery Co., 304 U. S. 282, we believe to be equally applicable here and to be conclusive of the question:
It is said that the statute is unconstitutional because the liability imposed is not a tax upon income, but a penalty designed to force corporations to distribute earnings in order to create a basis for taxation against the stockholders. If the business had been carried on by Kohl individually all the year’s profits would have been taxable to him. If, having a partner, the business had been carried on as a partnership, all the year’s profits would have been taxable to the partners individually, although these had been retained by the partnership undistributed. See Heiner v. Mellon, Nos. 144 and 145, decided May 16, 1938. Kohl, the sole owner of the business, could not by conducting it as a corporation, prevent Congress, if it chose to do so, from laying on him, individually the tax on the year’s profits. If it preferred, Congress could lay the tax upon the corporation, as was done by section 104.
Second, petitioner claims that this surtax violates the Tenth Amendment in that “it attempts to regulate the internal affairs of the state in its relation to its corporations by imposing a surtax for failure to distribute”, thus disturbing “the whole economic policy of the corporation”, “by attempting to state what are dividends and what would be a return of capital contrary to the laws of the state of incorporation”, and by offering an inducement for the declaration of dividends in violation of state law which would subject the directors and the corporation to penalties. A similar argument was also advanced and [1359]*1359rejected in Helvering v. National Grocery Co., supra. The statute before us is not invalid “because it interferes with the power to declare or to withhold dividends — a power which the State conferred upon the corporation. The statute in no way limits the powers of the corporation”, as Mr. Justice Brandéis said in that case. Any corporation not distributing its profits prevents the imposition of the individual surtax thereon. An obstruction to Federal taxation is thus created. “ ‘Congress in raising revenue has incidental power to defeat obstructions to that incidence of taxes which it chooses to impose.’ United Business Corporation v. Commissioner, 62 F. (2d) 754, 756.” Helvering v. National Grocery Co., supra.
Third, petitioner alleges that our interpretation of section 26 (c) makes this surtax violative of the due process requirement of the Fifth Amendment. The crux of this contention as stated in petitioner’s reply brief is that:
It discriminates unfairly between corporations of the same class by allowing a dividend paid credit under Section 26 (e) to corporations having written contracts of a particular type, but not allowing a similar credit to other corporations with the same legal obligations differently evidenced. It discriminates unfairly against the weaker corporation not permitted under state law to pay dividends and in favor of the stronger corporation in a position to legally pay dividends and thus escape tax liability.10
Congress undeniably has the power to levy a tax, graduated or otherwise, on the current income of all corporations, including those having deficits. Foley Securities Corporation, 38 B. T. A. 1036; Long Beach Improvement Co., 5 B. T. A. 590; see Willcuts v. Milton Dairy Co., 275 U. S. 215, 219; Brushaber v. Union Pacific Railroad Co., 240 U. S. 1. Petitioner has not been singled out for special taxation. It comes within the general ambit of the tax. Bather it is in reality complaining of the failure to include it in specific exceptions granted to corporations situated in some respects like itself but in other respects differently. Thus it is doubtful whether the petitioner is in a position to raise the constitutional question since [1360]*1360the burden of a tax deduction allowed to others falls in too remote and indefinite a way upon the remaining taxpayers. See Frothingham v. Mellon, 262 U. S. 447, 486. But, in any event, deductions of ibis type are a matter of legislative grace within the sound discretion of Congress. New Colonial Ice Co. v. Helvering, supra; Davis v. United States, 87 Fed. (2d) 323. Petitioner can not complain if this grace did not extend to cover it.
The due process limitations on the taxing power are that the means be “appropriate to the end”, Helvering v. City Bank Farmers Trust Co., 296 U. S. 85; and that the end be taxation rather than confiscation, Brushaber v. Union Pacific Railroad. Co., supra. See also Stella S. Housman, 38 B. T. A. 1007. The objective of the present statute, like the personal holding corporation provisions involved in Foley Securities Corf oration, sufra, is to subject the income of the corporations concerned “to surtax either in the hands of the stockholders or in the hands of the corporations themselves.”11 In this case, as in the Foley case, that end is accomplished by means which we. can not say are inappropriate. Since the income is not taxable to the stockholders it is taxed to the corporation.
The fact that in certain instances corporations unable for other reasons to distribute their income are expressly exempted or are allowed deductions having a similar effect, does not make the tax confiscatory as to the petitioner. Congress in those instances sacrificed its general objective to make what it considered desirable exceptions. There are many other conceivable situations where distribution of income is difficult or impossible, for which Congress did not think it necessary to provide. Whenever deductions or exemptions are allowed there are necessarily taxpayers in closely related situations who remain subject to the general rule. “The difficulty of adjusting any system of taxation so as to render it precisely equal in its bearing is proverbial and such nicety is not even required of the states under the equal protection clause, much less of Congress under the more general requirement of the due process of law in taxation.” La Belle Iron Works v. United States, 256 U. S. 377. The question is whether the concept underlying the statutory treatment “is one that an enlightened legislator might act upon without affront to justice.” Burnet v. Wells, 289 U. S. 670.
The failure of Congress to except deficit corporations generally from the underlying concept of the undistributed profits surtax may be justified on several grounds. Among these are the ease with which a deficit cap be created by mere bookkeeping changes;12 the administrative difficulties of investigating the actual as distinguished from the [1361]*1361apparent condition and value of the corporate assets, and the extent of the liabilities, both subject to constant fluctuations;13 and, particularly pertinent in this case, the fact that the deficit may not be an operating item, as shown by the stipulation of facts, but may have arisen from the- management’s own improper action in making distributions out of capital. With these possible bases for its action in mind, we can not conclude that Congress acted unreasonably in withholding from deficit corporations the deductions it allowed to certain others, if indeed our determination of that question is required. Certainly there is no discrimination greater than those complained of in the Brushaber case, supra, and none which may reasonably be said to amount to confiscation.
Reviewed by the Board.
Decision will be entered for the respondent.