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Nemours Corp. v. United States.

decided: April 19, 1951.


Author: Goodrich

Before GOODRICH, McLAUGHLIN and STALEY, Circuit Judges.

GOODRICH, Circuit Judge.

This case involves the application of the 1942 tax statute upon an application for refund brought by the taxpayer to get back undistributed profits surtaxes paid by it for the taxable year 1936. The taxpayer's claim for refund was refused by the Commissioner and it successfully sued for the amount claimed in the District Court of Delaware.*fn1 The Government appeals. The factual questions are all settled by a stipulation between the parties.

The taxpayer has been, since its incorporation in 1924, a personal holding company. During the years 1925-1928, inclusive, it made money and distributed nontaxable stock dividends of something more than $2,000,000. These distributions were reflected on taxpayer's books by an entry which transferred that amount from the company's surplus to its capital account. During 1933 and 1934 this taxpayer, like many others, sustained substantial losses.If stock dividends are deemed to have reduced the taxpayer's accumulated earnings and profits, it had none as of December 31, 1935, but had, instead, a deficit of more than $1,700,000. If the stock dividends are not to be taken to have reduced its accumulated earnings and profits it had about $500,000 in earnings and profits as of the date mentioned. The manner in which the amount represented by these stock dividends is to be treated will largely determine the result of the case.

The undistributed profits tax was imposed by Section 14 of the Revenue Act of 1936, 26 U.S.C.A. Int. Rev. Acts, page 823.That it raised some hard problems for courts is a matter of common knowledge to members of the federal judiciary since that time. That it created some hard situations for taxpayers was evidently the view of Congress. In 1938 the statute was repealed. In the Revenue Act of 1942 Congress made provision for refunds in certain cases and, in addition, made the refund provision retroactive and gave other relief with regard to the bar of the statute of limitations.

The taxpayer sought to avail itself of the legislative help thus given. On May 7, 1943, it filed its claim for refund under that portion of Section 501 of the 1942 Act which added Section 26(f)

the Revenue Act of 1936.*fn2 The claim states that it is filed under Section 501 of the Revenue Act of 1942 and in an attached statement claims a "'deficit credit,' Section 26(f) as added by Section 501 Revenue Act of 1942."

After the taxpayer's claim for refund had been filed and after the Commissioner had rejected it, and also after the statutory period available to taxpayer for filing refund claims had passed, the Supreme Court decided the case of United States v. Ogilvie Hardware Co., Inc., 1947, 330 U.S. 709, 67 S. Ct. 997, 91 L. Ed. 1192. That decision gave aid and encouragement to taxpayers under Section 26(c)(3) of the same statute.*fn3 It encouraged, among others, this taxpayer who raised, for the first time in the District Court, the applicability of Section 26(c)(3) to its financial situation in 1936. For the first time the provisions of this Section, which it will be noted are quite different from that of Section 26(f), were included by the taxpayer in its demand for refund, over government objection. The District Court thought that the taxpayer had not presented a claim for refund good under Section 26(f), but concluded in view of the Ogilvie decision that it had a good claim under Section 26(c)(3) and gave judgment accordingly. The court said that it seemed unimportant that one Section of the Act was mentioned rather than another and that "The additional burden - if such there was - imposed on the Commissioner seems, at most, a very trivial one." [91 F. Supp. 863.]

We, therefore, have two questions. The first is whether the taxpayer has set out a claim on which it is entitled to refund under Section 26(f) of the statute. The second question is whether if there is to be no recovery under Section 26(f) there can be recovery under Section 26(c)(3).

The court below gave little discussion to the first question because, as above indicated, it thought there could be recovery under Section 26(c)(3). We think the taxpayer is not entitled to prevail under Section 26(f) upon which the original claim for refund was made.

The question is whether in computing "earnings and profits accumulated after February 28, 1913" under Section 26(f) the amounts transferred to capital upon issuance of the non-taxable stock dividends are to be included. The phrase "earnings and profits" has come to have an established meaning under federal tax law, and according to that meaning amounts of profits transferred to capital upon issuance of non-taxable stock dividends remain part of earnings and profits for tax purposes.*fn4 We see no reason to believe that Congress intended to give the phrase any other meaning in Section 26(f).

United States v. Ogilvie Hardware Co., 1947, 330 U.S. 709, 67 S. Ct. 997, 999, 91 L. Ed. 1192, is not an authority to the contrary. There the Court held that "accumulated earnings and profits" in Section 26 (c)(3) of the Revenue Act of 1936, also added by Section 501(a) of the Revenue Act of 1942, was used in the state law sense and not in the usual federal tax sense. The Court there dealt with a limited hardship situation. Many corporations, because of an accumulated deficit in surplus, were prevented by state law from declaring dividends, yet were required to pay an undistributed profits tax under the 1936 Act. Section 26(c)(3) was passed to give relief in this situation. The Court reasoned that since reference was to be had under Section 26(c)(3) to state law to determine whether the corporation could legally declare dividends, reference must also be made to that law rather than to federal tax law to determine when the corporation had a "deficit in accumulated earnings."

The Ogilvie case does not by any means govern the interpretation of Section 26(f). It is true that Sections 26(c)(3) and 26(f) of the Revenue Act of 1936 were both special relief provisions added by Section 501 of the Revenue Act of 1942, and both provided retroactive relief from inequities which resulted from the undistributed profits tax of 1936. But there the similarity ends. Section 26(c)(3) was intended to permit the refunding of taxes imposed upon a corporation for not distributing profits which the corporation was prohibited by law from distributing. Section 26(f) was intended to permit refunding of undistributed profits taxes paid when the corporation could not have avoided the tax even if it had distributed the profits.*fn5

The principal evil to be remedied by Section 26(f) was that resulting from the inconsistent treatment of capital losses in computing the corporate net income and in determining allowable credits against that income for undistributed profits tax purposes. This produced a result, taxwise, which Congress undoubtedly never intended. But the thing which produced it was federal tax law entirely. And in remedying the situation by 26(f) Congress used language with long-standing federal tax meaning.A refund or credit under 26(f) does not depend in any way upon state law. We conclude that the ...

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