1. Provisions of tax statutes granting exemptions are to be
strictly construed. P.
311 U. S.
49.
2. Section 26(c)(1) of the Revenue Act of 1936 allows, in the
computation of the tax imposed by § 14 on undistributed profits, a
credit for such undistributed earnings as the corporation could not
distribute without violating "a provision of a written contract
executed by the corporation . . . which provision expressly deals
with the payment of dividends."
Held that, where the
restriction on distribution by the corporation was the result of a
prohibition by state law, the credit was not allowable. P.
311 U. S.
49.
3. The corporation's charter, taken together with the state law,
does not in such case constitute, within the meaning of §
26(c)(1),
Page 311 U. S. 47
"a written contract executed by the corporation" which
"expressly deals with the payment of dividends." P.
311 U. S.
51.
4. The conclusion that § 26(c)(1) does not authorize a credit
when the distribution of profits is prohibited by state law is
further supported by consideration of § 26(c)(2) of the Act and by
the legislative history of the section. P.
311 U. S.
49.
5. As here construed and applied, the taxing Act does not
violate the Fifth Amendment, (a) by discriminating, in the
allowance of a credit, between corporations which are barred from
distributing dividends by "written" contracts and those which are
restrained by oral contracts or by state law; or (b) by imposing a
tax on undistributed "income" of a corporation which has an
existing deficit. P.
311 U. S.
52.
6. Nor does it violate the Tenth Amendment, since the reserved
powers of the States over corporations -- to prescribe their powers
and condition the exercise thereof -- are not infringed. P.
311 U. S.
53.
7. The tax is authorized by the Sixteenth Amendment. Although
imposed on the income only if not distributed, the tax nevertheless
is on income, and not on capital, it being imposed on profits
earned during a definite period -- the tax year. P.
311 U. S.
53.
110 F.2d 286 reversed.
Certiorari,
post, p. 629, to review the reversal of a
decision of the Board of Tax Appeals which sustained the
Commissioner's determination of a tax deficiency.
MR. JUSTICE BLACK delivered the opinion of the Court.
Respondent corporation, because of a previously existing
deficit, was prohibited by state law [
Footnote 1] from distributing
Page 311 U. S. 48
as dividends its profits earned in 1936. Notwithstanding this
state prohibition, the Commissioner held respondent liable under
the 1936 Revenue Act [
Footnote
2] for surtax on undistributed profits. The Board of Tax
Appeals sustained the Commissioner; [
Footnote 3] the Circuit Court of Appeals reversed.
[
Footnote 4] On a similar state
of facts, the Court of Appeals for the Eighth Circuit held
undistributed profits taxable. [
Footnote 5] We granted certiorari in both cases to resolve
this conflict. [
Footnote 6]
Section 14 of the 1936 Act imposed a general surtax on corporate
profits earned but not distributed as dividends during the tax
year. Section 26(c)(1) of the Act relieved from such surtax all
undistributed profits which the corporation could not distribute as
dividends
"without violating a provision of a written contract executed by
the corporation prior to May 1, 1936, which provision expressly
deals with the payment of dividends."
The only "written contract executed by the corporation" upon
which respondent relies for its claimed exemption is its corporate
charter, granted by the state of Washington. Upon the premises that
respondent's Washington charter was a written contract, and that
the Washington laws prohibiting dividends payments were, by
operation of law, a part of that contract, the court below
concluded that the taxpayer had satisfied the requirements of
section 26(c)(1).
We must therefore decide whether section 26(c)(1) authorized a
credit or deduction to corporations prohibited by
Page 311 U. S. 49
state law from distributing dividends. And respondent strongly
urges that the act, if construed to deny such credit, is
unconstitutional.
First. It is material that we are dealing here with a
generally imposed surtax upon the undistributed net income of
corporations, and that respondent's claim is for a credit in the
nature of a specially permitted deduction. It has been said many
times that provisions granting special tax exemptions are to be
strictly construed. [
Footnote
7]
Measured by this sound standard, it is probably not necessary to
go beyond the plain words of section 26(c)(1) in search of the
legislative meaning. Certainly, at first blush, few would suppose
that, when Congress granted a special exemption to corporations
whose dividend payments were prohibited by executed written
contracts, it thereby intended to grant an exemption to
corporations whose dividend payments were prohibited by state law.
The natural impression conveyed by the words "written contract
executed by the corporation" is that an explicit understanding has
been reached, reduced to writing, signed, and delivered. True,
obligations not set out at length in a written contract may be
incorporated by specific reference, or even by implication. But
Congress indicated that any exempted prohibition against dividend
payments must be expressly written in the executed contract. It did
this by adding a precautionary clause that the granted credit can
only result from a provision which "expressly deals with the
payment of dividends."
That the language used in section 26(c)(1) does not authorize a
credit for statutorily prohibited dividends is further supported by
a consideration of section 26(c)(2). By this section, a credit is
allowed to corporations contractually
Page 311 U. S. 50
obligated to set earnings aside for the payment of debts.
[
Footnote 8] That this section
referred to routine contracts dealing with ordinary debts, and not
to statutory obligations, is obvious -- yet the words used to
indicate that the section had reference only to a "written contract
executed by the corporation" are identical with those used in
section 26(c)(1). There is no reason to believe that Congress
intended that a broader meaning be attached to these words as used
in section 26(c)(1) than attached to them under the necessary
limitations of 26(c)(2).
Respondent urges that the legislative history of section
26(c)(1) supports its contention. But, on the contrary, that
history points in the other direction. The original House Bill
contained separate relief provisions (1) for deficit corporations
such as respondent; (2) for corporations contractually obligated to
pay debts, and (3) for corporations contractually prohibited from
paying dividends. [
Footnote 9]
The Senate Finance Committee struck out all three of these House
provisions, but substituted an equivalent for the third. [
Footnote 10] An amendment from the
Senate floor restored an equivalent of the second. [
Footnote 11] But the bill as finally passed
contained no express relief provision relating to deficit
corporations.
It is true, as respondent contends, that a charter has been
judicially considered to be a contract insofar as it
Page 311 U. S. 51
grants rights, properties, privileges, and franchises. [
Footnote 12] To this extent, it has
been said that an act of incorporation is a contract between the
state and the stockholders. [
Footnote 13] But it does not follow that Congress
intended to include corporate charters and related state laws in
the cautiously limited area permissible for tax credits and
deductions under this section. Nor have the courts considered that
all the provisions of laws providing for the grant of corporate
franchises are necessarily contractual in their nature. The same
legislative act is a law as well as a grant, and this court has
held that the same legislative enactment may be both a contract --
which cannot be impaired -- and a law, subject to repeal,
modification, alteration, or amendment within the general
legislative powers. [
Footnote
14] Respondent's chief reliance is upon that charter provision
which required that it conform to the existing and future laws of
Washington. But that provision is not a grant, and is not a
contract. With or without such a charter provision, it was the duty
of the corporation to conform to valid Washington statutes. The
corporation was subject to the law of Washington; it could not rise
above it. A corporate charter to operate a particular business in a
particular manner does not deprive the state of its inherent power
of legislation touching corporate activities. And the grant of a
franchise does not exempt the corporation from the requirement that
it obey state legislation validly adopted in the interests of the
public welfare. [
Footnote
15] It cannot be said, therefore, that the charter provision
that the corporation should obey Washington law, including the
statutory prohibition
Page 311 U. S. 52
against distributing dividends, was a provision of a written
contract executed by respondent. More, the Constitution of the
State of Washington under which the general corporation laws were
enacted provides that
"All laws relating to corporations may be altered, amended, or
repealed by the legislature at any time, and all corporations doing
business in this state may, as to such business, be regulated,
limited, or restrained by law. [
Footnote 16]"
It is clear, therefore, that what prohibited respondent from
distributing dividends was not the provision of an executed written
contract expressly dealing with the payment of dividends. On the
contrary, what prohibited respondent from paying dividends was a
valid law of the Washington. [
Footnote 17]
Second. Respondent contends that the tax statute, as
construed, offends the Fifth, Tenth, and Sixteenth Amendments. None
of those contentions is valid. [
Footnote 18]
It is argued that the act offends the due process clause of the
Fifth Amendment because it permits credits or deductions in the
case of corporations restrained from a distribution of dividends
under a given type of written contract, while not permitting any
credit or deduction to corporations restrained from distribution by
oral contracts or by the laws of a state. This contention is
without merit. It is not necessary to point out the many obvious
reasons that might underlie the distinctions here drawn in granting
special deductions from a generally imposed tax.
Respondent also urges that the tax, as applied to it, amounts to
a confiscation of its property without due process of law because
the tax is imposed not on income,
Page 311 U. S. 53
but only on undistributed income, and that there can be no
undistributed income so long as the corporation has an existing
deficit. But the surtax here is imposed upon the undistributed net
income of the corporation "for each taxable year." It is true that
the surtax is imposed upon the annual income only if it is not
distributed, but this does not serve to make it anything other than
a true tax on income within the meaning of the Sixteenth Amendment.
Nor is it true, as respondent urges, that, because there might be
an impairment of the capital stock, the tax on the current annual
profit would be the equivalent of a tax upon capital. Whether there
was an impairment of the capital stock or not, the tax here under
consideration was imposed on profits earned during a definite
period -- a tax year -- and therefore on profits constituting
income within the meaning of the Sixteenth Amendment.
It is contended that the statute, as here applied, violates the
Tenth Amendment because it interferes with the authority of the
states to prescribe the powers of corporations and the conditions
under which their powers may be exercised. But the statute in no
way limits the powers of the corporation. It imposes a tax as
authorized by the Sixteenth Amendment, and does not infringe upon
the powers reserved to the state by the Tenth Amendment. [
Footnote 19] The court below was in
error; its judgment is reversed, and the cause is remanded with
directions to affirm the judgment of the Board of Tax Appeals.
[
Footnote 1]
"No corporation shall pay dividends . . . except from the
surplus of the aggregate of its assets over the aggregate of its
liabilities. . . ." Wash.Rev.Stat.Ann. (Remington, 1932) tit. 25,
section 3803-24.
[
Footnote 2]
49 Stat. 1648, 1655.
[
Footnote 3]
The memorandum opinion of the Board is not officially reported;
the Board relied on its earlier opinion in Crane Johnson Co. v.
Commissioner, 38 B.T.A. 1355.
[
Footnote 4]
110 F.2d 286.
[
Footnote 5]
Crane-Johnson Co. v. Commissioner, 105 F.2d 740.
[
Footnote 6]
309 U.S. 692;
post, p. 629.
[
Footnote 7]
E.g., Deputy v. Du Pont, 308 U.
S. 488,
308 U. S. 493;
White v. United States, 305 U. S. 281,
305 U. S. 292;
New Colonial Ice Co., Inc. v. Helvering, 292 U.
S. 435,
292 U. S.
440.
[
Footnote 8]
49 Stat. 1664. The credit allowed is
"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, or to be irrevocably set aside within the
taxable year for the discharge of a debt; to the extent that such
amount has been so paid or set aside."
[
Footnote 9]
H.R. 12395, 74th Cong., 2d Sess., sections 14, 15, and 16;
see H.Rep. No. 2475, 74th Cong., 2d Sess., pp. 8-9.
[
Footnote 10]
See S.Rep. No. 2156, 74th Cong., 2d Sess., pp. 12-13,
15-16.
[
Footnote 11]
80 Cong.Rec. 9071, 74th Cong., 2d Sess.
[
Footnote 12]
Trustees of Dartmouth College
v. Woodward, 4 Wheat. 518;
Home Building &
Loan Assn. v. Blaisdell, 290 U. S. 398,
290 U. S.
429.
[
Footnote 13]
Chenango Bridge Co. v.
Binghamton Bridge Co., 3 Wall. 51,
70 U. S. 73.
[
Footnote 14]
Oregon & California Railroad Co. v. United States,
238 U. S. 393,
238 U. S.
427.
[
Footnote 15]
Hammond Packing Co. v. Arkansas, 212 U.
S. 322,
212 U. S.
345.
[
Footnote 16]
Washington Constitution, Article 12, § 1.
[
Footnote 17]
Respondent contended that the stock certificates satisfied the
statutory requisites even if the charter did not; but what we have
here said with respect to the charter applies equally to the
certificates.
[
Footnote 18]
Cf. Helvering v. National Grocery Co., 304 U.
S. 282.
[
Footnote 19]
Helvering v. National Grocery Co., supra, at
304 U. S.
286-287.
And cf. Florida v. Mellon,
273 U. S. 12,
273 U. S.
17:
"Congress cannot accommodate its legislation to the conflicting
or dissimilar laws of the several states, nor control the diverse
conditions to be found in the various states, which necessarily
work unlike results from the enforcement of the same tax."