The opinion of the court was delivered by: WELSH
This suit was brought to secure a refund of undistributed profit taxes paid by the plaintiff for the years 1936 and 1937. The facts as set forth in a stipulation of the parties are adopted as the findings of the Court. Those essential to a determination of the cause are restated briefly as follows:
1. The Philadelphia Carpet Company is a Pennsylvania corporation organized in 1904 with an authorized capital of $ 100,000.
2. On November 1, 1912 the outstanding capital stock was $ 65,000 and the accumulated earnings and profits, $ 94,941.63 at which time the Board of Directors declared a stock dividend of 200 shares at $ 100 par.
4. On October 31, 1922 the capital stock was $ 100,000, and the accumulated earnings and profits, $ 617,247.24; and on that date the authorized capital was increased from $ 100,000 to $ 500,000 in the manner provided by the state laws.
5. On the same date the Board of Directors declared a stock dividend of 4,000 shares at $ 100 par and a cash dividend of $ 25,000.
6. The stock dividend so declared and distributed was not taxed as income nor recognized as gain to the distributees.
7. Following the declaration of the stock dividend, the outstanding capital was $ 500,000 and the accumulated earnings and profits, $ 192,247.24.
8. In the years between October 31, 1922 and December 31, 1937 the company's earnings and losses from operations were credited or charged, less dividends, to its accumulated earnings and profits account, or surplus account. Operating losses in said period wiped out the surplus of $ 192,247.24 existing after the stock dividend of October 31, 1922 and resulted in a deficit of $ 54,911.99 on December 31, 1935. Profits earned in 1936 were not distributed but were credited to capital and the net deficit on December 31, 1936 was $ 14,594.71. The deficit on December 31, 1937 was $ 36,513.36.
9. In 1936 the corporation had taxable income of $ 47,097.92 which it did not distribute, and on which it paid corporate income taxes of $ 14,403.37, of which $ 8,397.60 represented taxes on undistributed profits.
10. In 1937 the corporation had taxable income of $ 2,727.11, which it did not distribute, and on which it paid corporate income taxes in the amount of $ 332.77, of which $ 111.50 represented taxes on undistributed profits.
11. The corporation claimed credit for its operating deficits in the years 1936 and 1937, and October 21, 1943 filed its claims for refunds of the amount of the taxes paid for the years 1936 and 1937 on undistributed profits in accordance with the provisions of Section 501(C) of the Revenue Act of 1942, 26 U.S.C.A.Int.Rev.Acts, page 345.
12. The Commissioner of Internal Revenue denied the claims for refund.
13. Section 701 of the Business Corporation Law of the State of Pennsylvania, approved May 5, 1933, Act of May 5, 1933, P.L. 364, 15 P.S. § 2852-701, prohibits the payment of dividends by corporations 'except from the surplus of the aggregate of its assets over the aggregate of its liabilities, including in the latter the amount of its stated capital.' Section 703 of the said Act, 15 P.S. § 2852-703, provides: 'If a dividend is declared payable in shares having a par value, such shares shall be issued at the par value thereof, and there shall be transferred to stated ...