Before EVANS, MAJOR, and MINTON, Circuit Judges.
The Commissioner assessed, and the Tax Court sustained, a deficiency income tax of $1,895.83, against petitioner for the year 1939. From such adjudication, this appeal is prosecuted.
The controversy turns upon the status and effect of a $240,456 stock dividend made by petitioner, December 31, 1920.
The facts: The facts are stipulated, and as stipulated, were found by the Tax Court.
After February 28, 1913, and before December 31, 1920, petitioner, an Indiana corporation, accumulated surplus funds in excess of $240,456. All its stock was common. It declared a stock dividend in December, 1920, payable in common stock. The tax return involved is for the year 1938. Dispute arises from taxpayer's financial statement as of the close of 1938.On this date, its books showed a deficit of $136,192.18 in its earned surplus account. It was stipulated that this deficit was directly caused by the charge to the earned surplus account of the $240,456 stock dividend of 1920.
Legal Question: "Did the declaration and distribution of the stock dividend on December 31, 1920 constitute a distribution of accumulated earnings and profits for purpose of determining a dividends paid credit upon petitioner's 1939 corporate income tax return?"
If this dividend is one of the kind for which the applicable Revenue Act permitted a dividends paid credit, amounting to $3,718.46, the taxpayer was not liable for the deficiency tax here assailed. If it be found on the other hand, that due to the fact that the dividend was what is called a "true stock dividend," it is then entitled to no dividends paid credit on its earned surplus account, and is liable for the deficiency tax.
The Tax Court held that inasmuch as "a stock dividend, tax-free under rule of Eisner v. Macomber, 252 U.S. 189, 40 S. Ct. 189, 64 L. Ed. 521, 9 A.L.R. 1570, did not serve to reduce corporate earnings and profits available for future distribution * * * it must follow that such a stock dividend can not be considered as causing or contributing to the cause of a deficit in corporate earnings and profits."
The outcome of this appeal turns upon the statutes and their proper construction.
Set forth is the substance of Section 201 of the Revenue Act of 1918, 40 Stat. 1059. It is upon this section petitioner must rely.
"Sec. 201. (a) That the term 'dividend' * * * means (1) any distribution made by a corporation, * * * whether in cash or in other property or in stock of the corporation, out of its earnings or profits accumulated since February 28, 1913, * * *.
"(b) Any distribution shall be deemed to have been made from earnings or profits unless all earnings and profits have first been distributed. Any distribution made in the year 1918 or any year thereafter shall be deemed to have been made from earnings or profits accumulated since February 28, 1913, * * *.
"(c) A dividend paid in stock of the corporation shall be considered income to the amount of the earnings ...