Strong Manufacturing Co. v. Commissioner

OPINION.

OppeR :

The present issue calls for the application to the foregoing facts of the provisions of section 26 (c) (2) of Revenue Act of 1936¹ entitling a corporation to a “credit” against the “undistributed profits tax” if it complies with certain requirements.

On this record, compliance with these conditions is questionable only in one respect. There was a written' contract executed prior to May 1, 1936, containing a provision expressly dealing with the disposition of earnings and profits for the taxable year. The credit claimed is for an amount equal to the portion of such earnings and profits required to be paid in discharge of a debt, and this amount was paid in the taxable year. The sole remaining condition is that such portion of the earnings and profits be required by the contract to be paid or irrevocably set aside within the taxable year. We are of the opinion that the “application” to the indebtedness of the designated portion of the earnings may, for present purposes, be considered to be called for by the contract “as of” the taxable year, Michigan Silica Co., 41 B. T. A. 511, 515, and therefore to constitute the irrevocable setting aside contemplated by the statute. The credit should have been allowed and respondent’s determination to the contrary is overruled.

Repair and replacement expenses may be deducted as stipulated.

Reviewed by the Board.

Decision will be entered under Rule 50.

1 SEC. 26. CREDITS OE CORPORATIONS.

In tlie case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—

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(c) Contracts Restricting Payment of Dividends.—

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(2) Disposition of profits of taxable year. — An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. Eor the purposes of this paragraph, a requirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits. As useci in this paragraph, the word “debt” does not include a debt incurred after April 30, 1936.