C. A. Roberts Co. v. Commissioner

C. A. ROBERTS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

C. A. Roberts Co. v. Commissioner

Docket No. 102438.

United States Board of Tax Appeals

44 B.T.A. 605; 1941 BTA LEXIS 1302;

May 29, 1941, Promulgated

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">*1302 CREDIT - PROFITS REQUIRED TO DISCHARGE DEBT. - A provision in a note that the current installment and one additional installment on the principal of the note be paid before any dividends are paid in any year from surplus or net profits, does not entitle the debtor to a credit under section 26(c)(2) of the Revenue Act of 1936, since it does not require that any portion of the earnings and profits of the taxable year be paid in discharge of a debt.

H. A. Mihills, C.P.A., and Lee J. Skoner, C.P.A., for the petitioner.

E. G. Sievers, Esq., for the respondent.

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MURDOCK

">*605 The commissioner determined the following deficiendies:

	Income tax	Excess profits tax
1936	$4,563.47
1937	4,802.60	$95.00

The issue for decision is whether or not the Commissioner erred in disallowing a credit of $16,000 for each year under section 26(c)(2) of the Revenue Act of 1936.

FINDINGS OF FAC.

The petitioner is an Illinois corporation which filed its returns for the years here involved with the collector of internal revenue ">*606 for the first district of Illinois. It is engaged in the business of distributing steel tubing.

">*1303 The petitioner entered into an oral agreement for the purchase by the petitioner of shares of its own stock from Continental Illinois Bank & Trust Co., trustee for Agnes E. Wolff. The petitioner, pursuant to these contracts, executed two notes each dated November 1, 1929. The one note was for $84,300 and the other note was for $135,700. Annual installments were payable on each note on or before November 1 of each year. The notes bore interest at 7 1/2 percent per annum. The principal of each note became due in its entirety upon default. Any balance due in case of liquidation of the petitioner was subordinate to the payment of accounts payable and bank loans.

The smaller note contained the following provision:

It is further expressly agreed that before any dividends in any year are paid from the surplus or net profits of the C. A. Roberts Co. on the common stock of said company a payment shall be made on account of this note "No. 1" of the installment on account of the principal of this note falling due during that year, together with an additional sum on account of the principal of this note of Two Thousand Five Hundred Seventy-two Dollars ($2572.00), which additional">*1304 sum of Two Thousand Five Hundred Seventy-two Dollars ($2572.00) so paid shall be applied on the last maturing installment of this note "No. 1".

The other note contained a provision which was similar except that the amount mentioned was $5,428.

The petitioner was not in default with respect to payments on the notes at any time material hereto. The petitioner made payments on the principal of the two notes of $16,000 in each of the taxable years. The additional cash payments of $8,000 made in each year were made in order to permit the petitioner to declare dividends on its capital stock in each year and dividends were paid on the capital stock in each year in the amount of $24,090. The payments of $16,000 in each of the taxable years were made from receipts of those years.

The surplus of the petitioner from accumulated earnings was not less than the amounts shown below at the dates mentioned:

January 1, 1936	$118,499.17
January 1, 1937	180,601.94
January 1, 1938	313,790.15

The petitioner claimed a credit of $16,000 for each year under section 26(c)(2) of the Revenue Act of 1936. The Commissioner disallowed the credit for each year.

OPINION.

">*1305 MURDOCK: The petitioner claims credits under section 26(c)(2) of the Revenue Act of 1936. That provision, which is headed, "Disposition POSITION ">*607 OF PROFITS OF TAXABLE YEAR", allows a credit of "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 * * * to the extent that such amount has been so paid * * *." The petitioner claims that the provision of the notes quoted in the findings of fact brings this case withing section 26(c)(2). The notes require that payments of $16,000 be made annually on account of principal before any dividends are paid on the common stock from surplus or net profits. We shall pass the question of whether or not the restriction on the payment of dividends might properly be described as one which "expressly deals with the disposition of earnings and profits of the taxable year" because it restricts distributions from those earnings just as it restricts distributions">*1306 from prior earnings. The claim for credit must fail in any event, since the provisions of the notes do not require that any portion of the earnings and profits of the taxable year be paid in discharge of a debt. Payments will comply with the provisions of the notes regardless of the source from which the payments are made. Thus, the petitioner could have made payments on the notes from any source whatsoever and could have distributed all of its earnings of the taxable years without in any way violating provisions of the notes. "The basic intent of Congress seems to have been to include in the provision only contracts which inevitably require in their performance a drawing on current earnings, thus removing current earnings as a source of dividend payments." . Since the facts in the case of this taxpayer do not meet the precise provisions of the statute, no credit is allowable. Cf. ; ; ">*1307 ; .

Decision will be entered for the respondent