JOSEPH C. HUTCHESON, Chief Judge.
Decided in the Tax 'Court
adversely to petitioners, and consolidated for briefing, hearing, argument, and decision here upon one transcript of record, these petitions for review present two questions for our decision.
This is the first question: “Do the distributions from the Cummer Company to its parent corporation, Cummer Sons Cypress Company, from realized pre-1913 appreciation in value of its timberlands constitute 'earnings and profits’ of the latter Company ?”
The petitioners contend that they do not, even though in excess of the cost basis of the Cummer Company stock, and that distributions by the Cypress Company of this pre-1913 appreciation, after all earnings and profits accrued prior and subsequent to March 1, 1913, have been distributed, are tax-free. The respondent, on the other hand, contends that such distributions do become a part of the earnings and profits of the recipient corporation, because the same are in excess of the cost basis of such stock.
The facts were fully stipulated. Those controlling on the first question are set out below.
This is the second question: Were payments to its stockholders made in 1943 to 1945 by Cummer Lime Co., pursuant to a resolution adopted in 1926 by its predeces
sor company, taxable to them, as dividends received in those years, as the commissioner contended and the tax court held, or were they, as the taxpayers contend, merely payments made on debts due them since 1926, when a dividend was declared and according to the taxpayers actually or constructively paid in that year ?
Because, in its reported opinion, answering the questions in accordance with the commissioner’s determination, the tax court has set out the stipulated facts, it will not be necessary for us, other than, as shown in the notes,
supra,
to state them. Neither will it be necessary to extend this opinion by setting out here in detail, as the tax court does in its opinion, the contentions and arguments of the parties. We shall content ourselves with merely stating wherein and why we agree with, or differ from the tax court in its conclusions.
Upon the first question we find ourselves in agreement with the answer given by the tax court and with the reasons assigned therefor. It is quite plain, we think, that in order to escape liability for the payment of taxes on the distributions in question, taxpajmrs must point to some statutory provision rendering the distribution nontaxable.
Indeed, we do not understand them to contend otherwise. Quite to the contrary, they point to Sec. 115(2) 26 U.S.’C. A.
as according the necessary exemption, and to Sec. 115(b)
as contrasted with Sec. 115(d),
as showing that this is so. If we could agree with this construction of these statutes, we should, of course, agree that petitioner did not receive taxable distributions.
We cannot, however, agree for we think it plain, as pointed out by the tax court and by the commissioner in his brief, that while section 115 (2) is of force to protect the distributions in the hands of the receiving corporation, it is not effective to extend this exemption
to distributions made by it to its stockholders to the extent that these distributions are in excess of the distributing corporation’s cost basis.
It is quite plain that here lies the crux of the difference between taxpayers and the tax court. It is equally plain, we think, that the tax court was right, the taxpayers wrong in respect of this contention.
Upon the second point, while we recognize that it is not without difficulty, we agree with the taxpayers that the 1943 and 1945 payments were not dividend distributions paid out of the earnings of those years, but, as had been the case with payments made on that account in other years, debts paid “as cash is available”, as directed in the 1926 resolution.
The Tax Court, pointing out that during the years 1943 and 1945, the years pertinent to this issue, Cummer Lime had more than adequate income to cover the payments, concluded: “ * * * respondent’s position that they constituted taxable dividends under I.R.C. Sec. 115(b) on its face is well taken.”
Of taxpayers’ position that the 1926 declaration of a dividend, which by 1943 and 1945 was still in part unpaid, was in such unequivocal terms as to create a debtor-creditor relationship which the 1943 and 1945 payments satisfied, the Tax Court stated: “This position gains seeming support from Samuel Goldwyn, 9 T.C. 510, affirmed [9 Cir.,] 175 F.2d 641.”
Going on, however, to declare that the support was only seeming because that case was distinguishable, it concluded: “Moreover, the Goldwyn case found it necessary to conclude that there had been a constructive receipt of the dividend declared at the earlier period, while in the case at bar there is no comparable showing, and we do not understand petitioner to so contend.”
In so stating, we think the Tax Court erred. It is of the essence of the taxpayers’ claim, as stated by them, that a debtor-creditor relationship was created and that there had been constructive receipt at the earlier period. The evidence, in our opinion, supports that claim.
The commissioner, stating that whether the corporation was indebted to its stockholders in 1926 is not at all material, the only important consideration is whether the income was unqualifiedly subject to their demand in that year, argues that the evidence affords no basis for the claim of taxpayers that it was, none for their claim that the matter was essentially the same as though the corporation had paid the dividend with the stockholders lending the amount thereof back to the corporation.
The commissioner, also relying strongly on Sec. 115(a), “Definition of dividend”; (b) “Source of distributions”, insists that the provision in Sec. (b) : “For the purposes of this chapter every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits.” settles the issue against taxpayers.
This latter position begs the whole question. What the commissioner calls a distribution under Secs. 115(a) and (b), the taxpayers call a payment on a debt. If the commissioner is right in his assumption that these payments were a distribution within the meaning of this section, he would certainly be right in his conclusion that they were taxable. The taxpayers, however, take strong and vigorous issue with this assumption, and we agree with the taxpayers.
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JOSEPH C. HUTCHESON, Chief Judge.
Decided in the Tax 'Court
adversely to petitioners, and consolidated for briefing, hearing, argument, and decision here upon one transcript of record, these petitions for review present two questions for our decision.
This is the first question: “Do the distributions from the Cummer Company to its parent corporation, Cummer Sons Cypress Company, from realized pre-1913 appreciation in value of its timberlands constitute 'earnings and profits’ of the latter Company ?”
The petitioners contend that they do not, even though in excess of the cost basis of the Cummer Company stock, and that distributions by the Cypress Company of this pre-1913 appreciation, after all earnings and profits accrued prior and subsequent to March 1, 1913, have been distributed, are tax-free. The respondent, on the other hand, contends that such distributions do become a part of the earnings and profits of the recipient corporation, because the same are in excess of the cost basis of such stock.
The facts were fully stipulated. Those controlling on the first question are set out below.
This is the second question: Were payments to its stockholders made in 1943 to 1945 by Cummer Lime Co., pursuant to a resolution adopted in 1926 by its predeces
sor company, taxable to them, as dividends received in those years, as the commissioner contended and the tax court held, or were they, as the taxpayers contend, merely payments made on debts due them since 1926, when a dividend was declared and according to the taxpayers actually or constructively paid in that year ?
Because, in its reported opinion, answering the questions in accordance with the commissioner’s determination, the tax court has set out the stipulated facts, it will not be necessary for us, other than, as shown in the notes,
supra,
to state them. Neither will it be necessary to extend this opinion by setting out here in detail, as the tax court does in its opinion, the contentions and arguments of the parties. We shall content ourselves with merely stating wherein and why we agree with, or differ from the tax court in its conclusions.
Upon the first question we find ourselves in agreement with the answer given by the tax court and with the reasons assigned therefor. It is quite plain, we think, that in order to escape liability for the payment of taxes on the distributions in question, taxpajmrs must point to some statutory provision rendering the distribution nontaxable.
Indeed, we do not understand them to contend otherwise. Quite to the contrary, they point to Sec. 115(2) 26 U.S.’C. A.
as according the necessary exemption, and to Sec. 115(b)
as contrasted with Sec. 115(d),
as showing that this is so. If we could agree with this construction of these statutes, we should, of course, agree that petitioner did not receive taxable distributions.
We cannot, however, agree for we think it plain, as pointed out by the tax court and by the commissioner in his brief, that while section 115 (2) is of force to protect the distributions in the hands of the receiving corporation, it is not effective to extend this exemption
to distributions made by it to its stockholders to the extent that these distributions are in excess of the distributing corporation’s cost basis.
It is quite plain that here lies the crux of the difference between taxpayers and the tax court. It is equally plain, we think, that the tax court was right, the taxpayers wrong in respect of this contention.
Upon the second point, while we recognize that it is not without difficulty, we agree with the taxpayers that the 1943 and 1945 payments were not dividend distributions paid out of the earnings of those years, but, as had been the case with payments made on that account in other years, debts paid “as cash is available”, as directed in the 1926 resolution.
The Tax Court, pointing out that during the years 1943 and 1945, the years pertinent to this issue, Cummer Lime had more than adequate income to cover the payments, concluded: “ * * * respondent’s position that they constituted taxable dividends under I.R.C. Sec. 115(b) on its face is well taken.”
Of taxpayers’ position that the 1926 declaration of a dividend, which by 1943 and 1945 was still in part unpaid, was in such unequivocal terms as to create a debtor-creditor relationship which the 1943 and 1945 payments satisfied, the Tax Court stated: “This position gains seeming support from Samuel Goldwyn, 9 T.C. 510, affirmed [9 Cir.,] 175 F.2d 641.”
Going on, however, to declare that the support was only seeming because that case was distinguishable, it concluded: “Moreover, the Goldwyn case found it necessary to conclude that there had been a constructive receipt of the dividend declared at the earlier period, while in the case at bar there is no comparable showing, and we do not understand petitioner to so contend.”
In so stating, we think the Tax Court erred. It is of the essence of the taxpayers’ claim, as stated by them, that a debtor-creditor relationship was created and that there had been constructive receipt at the earlier period. The evidence, in our opinion, supports that claim.
The commissioner, stating that whether the corporation was indebted to its stockholders in 1926 is not at all material, the only important consideration is whether the income was unqualifiedly subject to their demand in that year, argues that the evidence affords no basis for the claim of taxpayers that it was, none for their claim that the matter was essentially the same as though the corporation had paid the dividend with the stockholders lending the amount thereof back to the corporation.
The commissioner, also relying strongly on Sec. 115(a), “Definition of dividend”; (b) “Source of distributions”, insists that the provision in Sec. (b) : “For the purposes of this chapter every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits.” settles the issue against taxpayers.
This latter position begs the whole question. What the commissioner calls a distribution under Secs. 115(a) and (b), the taxpayers call a payment on a debt. If the commissioner is right in his assumption that these payments were a distribution within the meaning of this section, he would certainly be right in his conclusion that they were taxable. The taxpayers, however, take strong and vigorous issue with this assumption, and we agree with the taxpayers.
If the matter were of first impression with us, we could not agree with the views of the commissioner and the Tax Court. But it is not such a matter. This court has been for too long, by its decisions in other and similar situations, cemmitted to the common sense view put forward by taxpayers to depart from it for reasons as little convincing as those the opinion of the Tax Court and brief of the commissioner offer.
Among the decisions
which the taxpayers marshalled in support of their view: that, by the declaration of the dividends, the earnings of the company to the extent declared were separated from the property of the corporation and were appropriated by that action to the then stockholders who became creditors of the corporation to the amount of the dividend and the relation then created was that of debtor and creditor; are many from this court.
In A. D. Saenger, Inc., v. Commissioner of Internal Revenue, 5 Cir., 84 F.2d 23, 25, we held that there was constructive receipt of a dividend by reason of the dividend declaration and credit to the stockholders’ accounts, even though the corporation did not carry cash on hand sufficient to pay the same. “It could on demand”, says the court, “have borrowed it or raised it by sale of some of its investments”.
In Commissioner of Internal Revenue v. T. R. Miller Mill Co., 5 Cir., 102 F.2d 599, a corporation voted that $500,000 of the company’s surplus be distributed to its stockholders in amounts proportionate to their stock in the company. At the same meeting the president and secretary were authorized to borrow from the stockholders the amount so distributed to them, and the corporation executed a note to trustees for the stockholders in that amount. The corporation made annual payments of interest on the notes and took a deduction for them. This deduction was allowed by the commissioner for the years prior to 1932 but was disallowed by him for the years 1932 and 1933, on the ground that the payments were not interest but dividends.
The Board of Tax Appeals reversed the commissioner, and this court affirmed, saying: “The company had legally declared a dividend. The stockholders authorized their trustees to receive the dividend. The $500,000 note given to the trustees in payment of the dividend was binding on the company and created the relationship of debtor and creditor.”
The fact that in the case at bar the resolution directed the treasurer to pay the dividends “as cash was available” and the further fact that the stockholders acquiesced in this manner of payment of the debt to them, does not at all change the legal situation which resulted from the declaration of the dividend and the crediting to each stockholder of his portion thereof. This resulted, we think, as completely as the arrangements made in the cases cited did, in creating the legal relationship of debtor and creditor, so that payments made in satisfaction of this debt must be treated as such and not as taxable distributions.
The judgment of the Tax Court on the first issue is Affirmed; on the second it is Reversed.