Centennial Oil Co. v. Thomas , 109 F.2d 359 ( 1940 )

SIBLEY, Circuit Judge.

Centennial Oil Company, after doing business for two and a half years, had accumulated profits of $42,525 but had declared no dividends. In April, 1937, it surrendered its charter and dissolved, delivering all its assets to Amtex Petroleum Corporation, the owner of all its stock. A surtax on the undivided profits was assessed under the Revenue Act of 1936, 49 Stat. 1648 et seq., and paid to the Collector. Refund not being granted, the officers of the dissolved Corporation in its name sued the Collector of Internal Revenue, asserting that the tax was unlawfully assessed and collected because the payment of the profits to its stockholder in liquidation is to be treated as a credit for dividends paid under Section 27 of the Revenue Act of 1936, 49 Stat. 1665. Judgment was given for the Collector and this appeal followed. The only question is whether the dividends paid credit ought to be allowed.

The appellant relies on these portions of Section 27: “(a) For the purposes of this title, the dividends paid credit shall be the amount of dividends paid during the taxable year.” “(f) Distributions in Liquidation. — In the case of amounts distributed in liquidation the part of such distribution which is properly chargeable to the earnings or profits accumulated after February 28, 1913, shall, for the purposes of computing the dividends paid credit under this section, be treated as a taxable dividend paid.” The profits here involved were all accumulated after Feb. 28, 1913. If the quoted words were the whole applicable law appellant should have been allowed the credit. The philosophy of Sub-section (f) is that in ordinary liquidations where there are accumulated profits the profits could be first declared as a dividend and afterwards the remaining assets distributed in liquidation; and when both things are done in one transaction the same results shall be allowed to follow. The purpose of the undistributed profits surtax is to force distribution of profits to the stockholders so they may be taxed as dividends in the stockholders' hands. This a distribution in liquidation usually accomplishes.

But there are transfers and distributions of corporate assets to other corporations, which for tax purposes are considered mergers, reorganizations, or the like., and not to make any such real change in ownership as to generate taxes. Among them is the case mentioned in Section 112 (b) (6), 49 Stat. 1678. “No gain or loss shall be recognized upon the receipt by a corporation of property distributed in complete liquidation of another corporation.” It is considered that the assets concerned stand in the hands of the receiving corporation just as they did before transfer, and hot until the receiving corporation makes a disposition of them do the tax consequences accrue. See especially Section 115 (a) and (h). Compare Murchison’s Estate v. Commissioner, 5 Cir., 76 F.2d 641; Fain v. Commissioner, 5 Cir., 76 F.2d 1008; Baker v. Commissioner, 2 Cir., 80 F.2d 813. This is what happened between Centennial Oil Company and Amtex Petroleum Company. The latter, owning all the stock of the former, took over all its property and assumed its liabilities. There was really an untaxed merger, and it was so treated in the tax returns of both parties. Amtex declared no dividends during the tax period, and its stockholders got none of the transferred assets. They stood for taxing purposes as if still in the hands of Centennial. Such a transaction does not accomplish the purposes of the undistributed profits tax, so Section 27(h) was enacted, covering all distributions to stockholders, whether in liquidation or not, in which the apparent dividend does not really become taxable. It declares: “If any part of a distribution (including stock dividends and stock rights) is not a taxable dividend in the hands of such of the shareholders as are subject to taxation under this title for the period in which the distribution is made, no dividends paid credit shall be allowed with respect to such part.” Now the present distribution — all of it — went to one stockholder, Amtex, and Amtex was subject to income taxation under this title, and the distribution — all of it — was not a taxable dividend in the hands of Amtex or its stockholders for the period in which the distribution was made — the fiscal year of Centennial ending Sept. 30, 1937. The consequence is “no dividends paid credit shall be allowed with respect to such part” —here the whole. Subsection (h) modifies Subsection (f), as it does Subsections (a), (c), (d), and (e), by way of exception. Although as a general rule a distribution of profits accumulated since Feb. 28, 1913, made in liquidation, will be treated as though" it were an ordinary taxable dividend, entitling to a dividends paid credit; this will not’be true if in whole or part it fails to be a taxable dividend in the hands of a stockholder who is subject to taxation. This interpretation accords with the statement in Regulation 94, Art. 27(h): “The effect of subsections (g) and (h) of Section 27 is that no dividends paid credit is allowed with respect to any distribution unless each ^* of the shareholders of that class, who are subject to taxation under Title I for the period in which distribution is made, receives a taxable dividend as a result of the distribution.” The District Court correctly held that Centennial was not entitled to a credit by reason of this distribution.

Affirmed.

* Subsection (g) demands equality without preference in a distribution to entitle to a dividends paid credit.