The Revenue Act of 1921, § 201(a)(b), provides that any
distribution made by a corporation to its shareholders out of
profits accumulated since February 28, 1913, is taxable, and, for
the purposes of the Act, every distribution is regarded as made
from the most recently accumulated profits to the extent that they
have accumulated since that date; but profits accumulated prior to
March 1, 1913 may be distributed exempt from tax after profits
accumulated since February 28, 1913, have been distributed. A
corporation with a surplus on March 1, 1913, made a distribution
after ensuing years in the earlier of which it suffered losses and
in the later of which it made profits.
Held that, to
determine the amount exempt under the statute, the losses should be
deducted from the surplus of March 1, 1913, not be charged against
the subsequent profits. P.
291 U. S. 166.
62 F.2d 751 reversed.
65 F.2d 234 affirmed.
Page 291 U. S. 164
Certiorari, 290 U.S. 611, to review two judgments rendered upon
appeals taken by two stockholders of the same corporation, in
different circuits, from a decision of the Board of Tax Appeals, 24
B.T.A, 480.
MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.
These cases present the question of the construction of the
following provisions of § 201 of the Revenue Act of 1921, 42 Stat.
228:
"Sec. 201. (a) That the term 'dividend' when used in this title
. . . means any distribution made by a corporation to its
shareholders or members, whether, in cash or in other property, out
of its earnings or profits accumulated since February 28, 1913. . .
."
"(b) For the purposes of this Act, every distribution is made
out of earnings or profits, and from the most recently accumulated
earnings or profits, to the extent of such earnings or profits
accumulated since February 28, 1913, but any earnings or profits
accumulated or increase in value of property accrued prior to March
1, 1913, may be distributed exempt from the tax, after the earnings
and profits accumulated since February 28, 1913, have been
distributed. . . ."
The respondent in No. 158 and the petitioner in No. 212 are
stockholders of the West Side Lumber Company, a California
corporation. The question is as to the amount
Page 291 U. S. 165
properly taxable against them as their respective shares of a
dividend of $5,100,000 paid by that company on April 14, 1923.
The findings of fact state that, in addition to its original
capital of $1,500,000, the company had a surplus on March 1, 1913,
of $4,332,684.78. Its profits and losses in the following years,
ending on February 28 in each year, were as follows: 1914, a profit
of $4,594.62; 1915, a loss of $193,139.67; 1916, a loss of
$211,707.32; 1917 to 1923, inclusive, and from February 28, 1923,
to April 14, 1923, profits aggregating $2,450,688.30. Prior to the
dividend here involved, and for the years 1918 to 1923, the company
had paid dividends amounting to $1,290,000.
The question is as to the proper treatment of the losses of 1915
and 1916. If these losses, over the profits of 1914, are not
treated as reducing the surplus of March 1, 1913, but are charged
against the subsequent profits, the entire amount of that surplus,
or $4,332,684.78, was distributable exempt from the tax after the
profits subsequent to February 28, 1913, had been distributed. On
this basis, for which the taxpayers contend, the profits
accumulated after February 28, 1913, would be deemed to amount to
$2,050,435.93, leaving subject to the tax, after deducting prior
dividends, the sum of $760,435.93.
If the losses of 1915 and 1916, over the profits of 1914, are
treated as reducing the surplus of March 1, 1913, there remained of
that surplus, on February 28, 1916, the sum of $3,932,432.41, which
was distributable exempt from the tax after the subsequent profits
had been distributed. With this application of the losses of 1915
and 1916, the subsequent profits subject to tax, after deducting
prior dividends, amounted to $1,160,688.30.
The Board of Tax Appeals adopted the latter view and directed
the determination of deficiencies accordingly. 24
Page 291 U. S. 166
B.T.A. 480. That decision was overruled by the Circuit Court of
Appeals for the Seventh Circuit as to the respondent Canfield in
No. 158, 62 F.2d 751, and was sustained by the Circuit Court of
Appeals for the Ninth Circuit as to the petitioner Thorsen in No.
212, 65 F.2d 234. The cases come here on certiorari.
In deciding between these conflicting views, the outstanding,
and we think the controlling, fact is that, on February 28, 1916,
the surplus of March 1, 1913, had actually been diminished by
losses. The company continued in business after March 1, 1913, and
exposed its accumulated profits to the hazard of that business. On
February 28, 1914, the company still had those profits and an
additional profit of $4,594.62. But, in the next two years, the
company lost $404,846.99, so that the surplus of March 1, 1913, was
invaded. It is inaccurate to say that this was merely a matter of
bookkeeping. Under the findings of fact, the losses must be deemed
to have been actual losses, not mere bookkeeping entries. Hence,
the decrease of the preexisting surplus was actual -- as real as
the preexisting surplus itself, as real as the subsequent profits.
The surplus of March 1, 1913, was the amount of net assets over
liabilities including capital stock. [
Footnote 1] When the losses of 1915 and 1916 were
suffered, the net assets of March 1, 1913, shrunk accordingly.
In the presence of that inescapable fact, the question is not
whether the company could distribute, as being surplus of March 1,
1913, what no longer remained of that surplus -- a manifest
impossibility -- but whether the statute entitled the company to
treat subsequent profits as restoring what had been lost of the
surplus of March 1, 1913, so that, to the extent of that
replacement, the subsequent profits could be distributed to
stockholders free
Page 291 U. S. 167
of tax. That the question is one of such a replacement would be
strikingly evident if the whole of the surplus of March 1, 1913,
had been lost and an attempt had been made to treat later profits
as restoring it. The fact that only a part of the surplus was lost
does not alter the question as related to that part.
The argument that the surplus of March 1, 1913, constituted
capital is unavailing. We are not here concerned with capital in
the sense of fixed or paid-in capital, which is not to be impaired,
or with the restoration of such capital where there has been
impairment. [
Footnote 2] No
case of impairment of capital is presented. We are dealing with a
distribution of accumulated profits. Nor is it important that the
accumulated profits as they stood on March 1, 1913, constituted
capital of the company, as distinguished from the gains or income
which the company subsequently realized. [
Footnote 3] When a corporation continued in business
after March 1, 1913, the dividends it later declared and paid to
its stockholders, whether out of current earnings or from profits
accumulated prior to that date, constituted income to the
stockholders, and not capital, and were taxable as income if the
Congress saw fit to impose the tax.
Lynch v. Hornby,
247 U. S. 339. The
provision of the act of Congress under consideration was a
"concession to the equity of stockholders" with respect to receipts
as to which they had no constitutional immunity. There is no
question here of the receipt of "capital."
The fundamental contention of the taxpayers is that the statute
created two distinct periods for tax purposes; that the
accumulations for each period constituted "a
Page 291 U. S. 168
fixed and static amount, not to be changed by happenings after
the end of the period." That the statute does relate to two
periods, the dividing line being March 1, 1913, and that the
periods are distinct, is obvious. But it does not follow because
there are two distinct periods that the accumulations for each
period constitute "a fixed and static amount," and are to remain
unaffected despite the vicissitudes of business. To attribute to
the accumulated profits or surplus of March 1, 1913, embarked in a
continued business, such a static condition is to ignore the course
of business and to impute to the Congress an intention to consider,
for tax purposes, the existence of that surplus as still continued
notwithstanding its actual diminution or exhaustion. Such an
intention to disregard realities so as to afford immunity from a
tax is not lightly to be ascribed to the taxing authority. The
"equity of stockholders" which we said in
Lynch v. Hornby,
supra, the Congress probably had in view might reasonably
require freedom from taxation on receiving a distribution of the
accumulated profits of March 1, 1913, where those profits remained
intact, but that equity is not apparent when those profits had been
lost in whole or in part, and immunity is sought from the taxation
of an equivalent amount of profits subsequently earned.
Paragraphs (2) and (b) of § 201 disclose a single purpose, and
are to be construed in harmony with each other. They show that the
Congress was careful to arrange its plan so that the right to
receive, free of tax, a distribution of surplus accumulated prior
to March 1, 1913, should not be exercised in such a fashion as to
permit profits accumulated after that date to escape taxation. To
that end, the Congress provided that
"every distribution is made out of earnings or profits, and from
the most recently accumulated earnings or profits, to the extent of
such earnings or profits accumulated since February 28, 1913."
Then follows the exemption which is strictly limited to a
Page 291 U. S. 169
distribution of profits accumulated prior to March 1, 1913.
Nothing is said as to a restoration of those profits out of
subsequent earnings if the former have been lost.
The argument for the stockholders stresses the word
"accumulated." We think that the expression is made to carry too
heavy a burden. The argument is substantially the same as that
which is based on what seems to us to be an artificial conception
of the two periods. What had been "accumulated" prior to March 1,
1913, was obviously not immune from the risk of loss. It is urged
that the same rule should be applied whether the losses in the
subsequent years preceded or succeeded the making of profits. But
the actual course of events is not to be ignored. If there had been
profits immediately after March 1, 1913, sufficient in amount to
absorb later losses incurred before the time of distribution, it is
manifest that the profits accumulated prior to March 1, 1913, would
have remained intact. The case is different where, in the absence
of such profits, losses necessarily diminish the prior
accumulations. Thus, in the instant case, there were no profits
accumulated after March 1, 1913, and prior to February 28, 1916,
except the small amount in 1914 which was wiped out by the losses
of the two succeeding years. The profits from February 28, 1916, to
February 28, 1919, amounted to $327,134.45. If there had been a
distribution of these profits on February 28, 1919, it could not
have been maintained that they constituted part of the surplus
existing on March 1, 1913, or that they should escape taxation on
the theory that they made good prior losses which had actually
reduced that surplus. And the same is true of the profits
subsequently made. Administrative practice appears to have been in
accord with this view.
See A.R.M. 82, 3 Cumulative
Bulletin 36 (1920).
Our conclusion is that the judgment of the Circuit Court of
Appeals for the Seventh Circuit in No. 158 should be reversed, and
that of the Circuit Court of Appeals for the Ninth Circuit in No.
212 should be affirmed.
It is so ordered.
* Together with No. 212,
Thorsen v. Helvering, Commissioner
of Internal Revenue, certiorari to the Circuit Court of
Appeals for the Ninth Circuit.
[
Footnote 1]
Edwards v. Douglas, 269 U. S. 204,
269 U. S. 214;
Willcuts v. Milton Dairy Co., 275 U.
S. 215,
275 U. S.
218.
[
Footnote 2]
Compare Hadden v. Commissioner, 49 F.2d 709.
[
Footnote 3]
Southern Pacific Co. v. Lowe, 247 U.
S. 330;
Gulf Oil Corp. v. Lewellyn,
248 U. S. 71;
Lucas v. Alexander, 279 U. S. 573;
Old Colony Railroad Co. v. Commissioner, 284 U.
S. 552.