DocketNumber: Docket No. 94235
Citation Numbers: 41 B.T.A. 1009
Judges: Aenold
Filed Date: 5/1/1940
Status: Precedential
Modified Date: 10/17/2022
Petitioner contends that the application for a loan executed February 25,1936, constituted a written agreement or contract, which prohibited the payment of dividends during the year 1936, and therefore it is entitled to the credit provided under the provisions of section 26 (c) (1) of the Kevenue Act of 1936.
Respondent contends that petitioner entered into a new agreement or contract with the bank on September 2, 1936, regarding the payment of dividends, which was in substitution for that entered into on February 25, 1936, and that the agreement or contract of September 2, 1936, fails to meet the requirements of the statute. He further contends that in any event the agreement or contract entered into on February 25, 1936, was subject to modification by mutual consent and it is, therefore, not one which falls within the terms of section 26 (c) (1) of said act.
Section 26 (c) (1) of the Revenue Act of 1936, so far as applicable, is as follows:
SEC. 26. CREDITS OE CORPORATIONS.
In the case of a corporation tlie following credits shall be allowed to the extent provided in the various sections imposing tax—
* * * * * sis *
(c) Contracts Restricting Payment oe Dividends.—
(1) Prohibition on payment oe 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. * * *
The terms and conditions of the instrument of February 25, 1936, were binding on petitioner until its obligation to the bank was satisfied, unless it was abrogated or supplemented by the September 2, 1936, agreement to the extent it was rendered ineffective as an agreement or contract prohibiting or restricting the payment of dividends during the taxable year.
Petitioner produced two executives of the bank who were personally familiar with the circumstances under which the loan was made. Each of them testified in detail about the circumstances under which the bank made the loan, and that the bank preferred short term maturities because of the adverse feeling of commercial banks generally for long term obligations, and because, in case of a breach of any of the conditions under which the loan was made, a short term note afforded the bank an opportunity to demand payment. Both executives testified that the bank contemplated a loan for the purpose of providing, the petitioner with working capital for a period of years, and that the conditions, including restriction on the payment of dividends and other restrictions, would continue throughout the term of the loan. Each testified that the bank emphasized these restrictions in the various conferences held with officials of the petitioner, and we find their testimony very persuasive.
As to the respondent’s contention that, since the agreement of February 25, 1936, was subject to modification by mutual consent, it is not one which falls within the terms of section 26 (c) (1) of the act, it may be said that, if this were so, no contract could be
Reviewed by the Board.
Decision will be entered under Ride 50.