A corporation, organized with a paid-in capital of $100,000,
increased its capitalization in 1924 to $200,000 by declaration of
a $100,000 stock dividend out of past earnings. Thereafter,
operating losses created a deficit in total capitalization, the
deficit being about $71,000 in 1937, but being reduced to about
61,000 by 1938. With this deficit, the corporation was forbidden by
state law to pay any dividends, and it refrained from doing so. The
Commissioner of Internal Revenue assessed, and the Company paid,
undistributed profits taxes under § 14 of the Revenue Act of 1936
for its fiscal years ending in 1937 and 1938. The corporation sued
for a refund of these taxes under § 26(c)(3) of the Revenue Act of
1936, as added by § 501(a)(3) of the Revenue Act of 1942, claiming
to be a corporation having "a deficit in accumulated earnings and
profits" within the meaning of that section.
Held: the corporation is entitled to the refund. Pp.
330 U. S.
713-719.
Page 330 U. S. 710
(a) The 1942 amendment was deigned to grant corporations a
refund on account of payments of undistributed profits taxes for
tax years in which they had an accumulated deficit, and where, for
that reason, state law, federal law, or public regulatory orders of
either prohibited distribution of dividends. P.
330 U. S.
713.
(b) It was an extraordinary relief measure, and its language,
the circumstances which prompted its passage, and the very
mechanics of the amendment itself require that determination of
rights to refund under it be based on consideration of something
other than the established meaning under federal tax law of the
word "deficit" and the phrase "accumulated earnings and profits."
Pp.
330 U. S.
714-719.
(c) Congress at least intended to refund taxes imposed on
corporations which had failed to distribute dividends when
distribution, in violation of state law, would have impaired long
existing state-approved corporate capitalizations. P.
330 U. S.
719.
155 F.2d 577 affirmed.
A District Court awarded a judgment under § 501(a)(3) of the
Revenue Act of 1942, 56 Stat. 798, to a corporation for refund of
undistributed profits taxes paid while the corporation's capital
was impaired, although half the capital had resulted from a stock
dividend paid out of past earnings. 62 F. Supp. 338. The Circuit
Court of Appeals affirmed. 155 F.2d 577. This Court granted
certiorari. 329 U.S. 699.
Affirmed, p.
330 U. S.
719.
Page 330 U. S. 711
MR. JUSTICE BLACK delivered the opinion of the Court.
This is a suit for tax refund which the District Court allowed.
62 F. Supp. 338. The Circuit Court of Appeals affirmed. 155 F.2d
577. We granted certiorari because of an apparent conflict with
Century Electric Co. v. Commissioner, 144 F.2d 983.
The respondent, Ogilvie Hardware Co. Inc., was incorporated in
Louisiana in 1907 with a paid in capital of $100,000. In 1924, it
increased its capitalization to $200,000 by declaration of a
$100,000 stock dividend out of past earnings. Depressed business
conditions during the 1930's brought heavy operating losses, so
that, by 1937, the company's assets were about $71,000 less than
the $200,000 capitalization. The company books accordingly showed a
deficit in this amount. By 1938, this deficit was reduced to about
$61,000. In this financial posture, the corporation could not
declare dividends without impairing its then capital structure
(which included capitalization of the $100,000 stock dividend) and
Louisiana law prohibited payment of a dividend under such
circumstances. [
Footnote 1]
Section 14 of the governing Revenue
Page 330 U. S. 712
Act of 1936 imposed a surtax on certain corporate net income
earned during the tax year but not distributed as dividends.
[
Footnote 2] It provided no
exemption from that surtax because a corporation had an accumulated
deficit at the beginning of the tax year or because state law
prohibited payments of dividends.
Acting under this 1936 law, the Commissioner, on examination of
respondent's 1937 and 1938 tax returns, determined that respondent
was subject to the undistributed profits tax despite the deficit
and the state prohibition against payment of dividends. The
Commissioner's interpretation and application of the 1936 Act was
in accord with our holding in
Helvering v. Northwest Steel
Rolling Mills, 311 U. S. 46, and
Crane-Johnson Co. v. Helvering, 311 U. S.
54. The taxpayers in those cases claimed exemption from
the surtax on the ground that they could not distribute
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."
Section 26(c)(1) of the 1936 Act relieved corporations from the
tax if such contracts existed. 49 Stat. 1648, 1664. The question we
had to decide in those cases was whether a state constitution,
corporate charter, or state statute, which prohibited payment of
dividends, was a "written contract" within the meaning of the §
26(c)(1) exemption provision. We held that we could not so expand
the provision's language, relying in part upon previous statements
of this Court "that provisions granting special tax exemptions are
to be strictly construed."
Helvering v. Northwest Steel Rolling
Mills, supra, 311 U. S. 49.
Since the respondent here had no "written contract"
Page 330 U. S. 713
against payment of dividends, it had no exemption from the
surtax imposed by the original 1936 Act.
But this suit is not brought to determine the company's tax
liability under the 1936 Act as it stood in the taxable years 1937
and 1938. It is an action for a refund under a 1942 relief
amendment to the 1936 Act specifically designed to authorize
corporations to obtain repayments of taxes they had been forced to
pay under the 1936 Act as we had interpreted it. That amendment, as
enacted, provided for complete or partial retroactive immunity from
the 1936 undistributed profits tax under the following
circumstances:
"DEFICIT CORPORATIONS. In the case of a corporation having a
deficit in accumulated earnings and profits as of the close of the
preceding taxable year, the amount of such deficit, if the
corporation is prohibited by a provision of a law or of an order of
a public regulatory body from paying dividends during the existence
of a deficit in accumulated earnings and profits, and if such
provision was in effect prior to May 1, 1936."
§ 501(a)(2), Revenue Act of 1942, 56 Stat. 798, 954.
This amendment was designed to grant corporations a refund on
account of payments of undistributed profits taxes for tax years in
which they had an accumulated deficit, and where, for that reason,
state law, federal law, or public regulatory orders of either
prohibited distribution of dividends. It therefore authorized
refunds to the very taxpayers who had been lawfully required to pay
taxes by the 1936 Act as we had interpreted it in the two cases
cited above. Furthermore, in order to make sure that taxpayers who
had paid under our interpretation might recover refunds, § 501(c)
of the same amendment specifically authorized claims for repayment
to be filed within one year after its passage, without regard
to
Page 330 U. S. 714
any statute of limitations or other designated statutory bars.
56 Stat. 798, 955.
The Government's contention is that we should construe the word
"deficit" and the phrase "accumulated earnings and profits"
according to their established meaning under federal tax law; that,
so construed, the $100,000 allotted for stock dividends remained a
part of earnings and profits for tax purposes; therefore, there was
no deficit in the federal tax sense, and consequently the tax
payments should not have been refunded here despite the state
prohibition against distribution. We may assume that the Government
is correct in contending that, if Congress intended in the 1942
amendment to use the words "deficit" and "earnings and profits" in
this federal tax sense, the stock dividend did not reduce
"earnings," there was no "deficit," and the refund should be
denied.
See § 115, Revenue Act of 1936, 49 Stat. 1648,
1687-1689;
Commissioner v. Bedford, 325 U.
S. 283,
325 U. S. 292.
This construction would greatly limit the scope of the relief
granted by the 1942 amendment. To determine whether Congress
intended so to limit the relief it granted, we must look to the
whole 1942 amendment in its relationship to the 1936 Act and the
legislative and judicial history intervening between the two.
The 1936 undistributed profits tax law was a novelty in the
field of federal taxation. Its chief novel feature was that it was
designed to compel corporations to distribute current earnings to
shareholders by imposing a surtax on corporations which failed to
make such distributions. It had detailed provisions for defining
the net income which would be reached by this tax. Its application
therefore raised new and sometimes wholly unexpected problems.
Widespread opposition developed to the tax. Since 1938, only a
token of it has survived.
See Revenue Act of 1938, 52
Stat. 447. But, even after the 1936 undistributed profits tax was
no longer in effect, complaints about its prior
Page 330 U. S. 715
application from corporations which had been required to pay an
undistributed profits tax continued to reach and to concern
Congress. Representatives of these corporations appeared before the
House and Senate Committees in 1942, and Congress responded to
their complaints by enacting the several provisions of § 501 -- the
retroactive relief legislation now under consideration.
One subject of complaint was that, under the income tax
definitions, only a fraction of capital losses were deductible from
taxable net income. Corporations which had suffered large capital
losses in a given year were required to pay undistributed profits
taxes in that year as though they had made a profit. The 1942
amendment, as reported by the House Committee, met this complaint
by recommending that refunds be authorized for corporations who had
paid under this 1936 definition of net income. [
Footnote 3] This authorization, subsequently
approved by the Senate Committee, [
Footnote 4] clearly shows that Congress intended to
provide for this phase of the refund without regard to tax
definitions, and did not intend its authorized refund to be
restricted by the application of established tax terminology.
When the bill reached the Senate Committee, insistent complaints
related to the fact that corporations with deficits
Page 330 U. S. 716
in accumulated earnings and profits had been compelled to pay
taxes for nondistribution of dividends although state or federal
law prohibited dividend payments. A deficit railroad corporation
had been taxed over its objection that payment of dividends would
have rendered its officers subject to punishment for a misdemeanor
under federal law and a money penalty under state law. The Board of
Tax Appeals had overruled objections on these grounds, relying on
our decisions in the
Crane-Johnson and
Northwest Steel
cases, supra. Paris & Mt. Pleasant R. Co. v. Comm'r, 47
B.T.A. 439. [
Footnote 5] The
counsel who had represented Crane-Johnson before this Court also
appeared on their behalf before the Senate Committee, and made a
plea for relief for deficit corporations which had been compelled
to pay the undistributed profits tax. [
Footnote 6] He
Page 330 U. S. 717
urged that such corporations had been "caught in a trap," and
that they were justly entitled to have a refund for that reason. It
was apparently in response to the foregoing complaints that the
relief provision before us, not part of the House bill as it came
to the Senate, [
Footnote 7] was
introduced by the Senate Committee. [
Footnote 8] We think Congress was moved to relieve those
corporations which it considered to be "caught in a trap" whereby
they were taxed by the Federal Government if they did not pay
dividends, and subject to prosecution and penalties by the Federal
Government or the states if they did.
Some of the language Congress used, considered tax-wise only,
provides plausible support for the interpretation urged by the
Government which would give the relief amendment more limited
scope. But the provision before us is not a general tax exemption
to be interpreted in the framework of a currently operating general
revenue law. It is a special retroactive relief measure to
authorize repayment of taxes collected in previous years under a
revenue law which had already been substantially abandoned. The
language of this extraordinary relief measure and the circumstances
which prompted its passage convince us that Congress intended to
provide refunds to corporate taxpayers, with possible minor
exception, who had paid undistributed profits taxes as a choice
between conflicting state and federal compulsions.
Furthermore, the very mechanics of the 1942 amendment require
that determination of rights to refund under it be based on
consideration of something other than the tax meaning of the 1936
Act or other tax terminology. The right to recovery in every case
depends ultimately upon whether federal law or federal regulatory
bodies, or
Page 330 U. S. 718
state law or state regulatory bodies, prohibit payments of
dividends. In this case, the ultimate right to refund depends upon
state law.
Cf. Lyeth v. Hoey, 305 U.
S. 188,
305 U. S. 193.
Before that right can be finally established, courts must examine
state law at least to the extent of determining (1) what is a
"deficit;" (2) what are "accumulated earnings and profits;" (3)
what was the state law on these questions prior to May 1, 1936; (4)
whether payments of dividends under these circumstances were
prohibited by state law. Acceptance of the Government's contention
would mean that courts administering the 1942 Act must first
determine whether a deficit exists under federal law; if such a
federal deficit exists, they must then turn to state law to decide
whether, under it, a deficit exists such as prohibits the payment
of dividends. We do not think that Congress intended the courts so
to administer the 1942 amendment. The Government's argument that it
does relies heavily upon the Senate Committee Report.
We think the Senate Committee Report, as a whole, leans toward
the view we have taken of the purpose of the law. [
Footnote 9] But, in one of the six
illustrative examples of application of the new tax relief
provisions of the amendment,
Page 330 U. S. 719
and, in the subsequent Treasury Regulations, it was indicated
that no tax credit should be allowed where a tax deficit resulted
from "prior capitalization of surplus in the course of a nontaxable
reorganization." [
Footnote
10] Aside from the fact that corporate reorganizations and
simple stock dividends are quite different things, we find this one
illustrative example insufficient to outweigh the considerations
which have governed our interpretation of the 1942 amendment.
We are persuaded that Congress at least intended by the
amendment to refund taxes imposed on corporations which had failed
to distribute dividends when distribution, in violation of state
law, would have impaired long existing state approved corporate
capitalizations.
See United States v. Byron Sash & Door
Co., 150 F.2d 44, 46. In order that this purpose may be
effected, the judgment of the Circuit Court of Appeals is
Affirmed.
[
Footnote 1]
"I. No corporation shall pay dividends in cash or property (a)
except from the surplus of the aggregate of its assets over the
aggregate of its liabilities, plus the amount of its capital stock;
or (b) out of any surplus due or arising from (1) any profit on
treasury shares before resale; or (2) any unrealized appreciation
in value or revaluation of fixed assets; or (3) any unrealized
appreciation in value or revaluation of inventories before sale; or
(4) the unaccrued portion of unrealized profit on notes, bonds or
obligations for the payment of money, purchased or otherwise
acquired, unless such notes, bonds or obligations are readily
marketable, in which case they may be taken at their actual market
value; or (5) the unaccrued or unearned portion of any unrealized
profit in any form whatever, whether, in the form of notes, bonds,
obligations for the payment of money, installment sales, credits,
or otherwise, except as provided in the preceding sub-paragraph
(4)."
"
* * * *"
"III. No corporation shall pay dividends in shares of the
corporation, except from the surplus of the aggregate of its assets
. . . over the aggregate of its liabilities, plus the amount of its
capital stock."
La. Acts 1928, No. 250, § 26, I, III, 1 La.Gen.Stat. § 1106.
[
Footnote 2]
49 Stat. 1648, 1655-1657.
[
Footnote 3]
The House Ways and Means Committee reported that § 501 of the
1942 Act allowed corporations to deduct capital losses from their
capital assets for purposes of the undistributed profits tax even
though only $2,000 of such capital loss was deductible from gross
income for other purposes.
Another amendment provided a stock redemption credit deductible
from gross income taxable for undistributed profits tax
purposes.
And the breadth of the refund provision is illustrated by the
provisions making the amendment effective as of the date the 1936
Act was enacted, and extending the Statute of Limitations to permit
refunds for all overpayments since that date. H.R.Rep. 2333, 77th
Cong., 2d Sess., 170 (1942).
[
Footnote 4]
Sen.Rep. No.1631, 77th Cong., 2d Sess., 244, 245 (1942).
[
Footnote 5]
Hearings before Senate Committee on Finance on Revenue Act of
1942, 77th Cong., 2d Sess., 2343-2345 (1942). Counsel for another
deficit railroad corporation pointed out that, under governing
state law, that railroad's officers would have been liable for a
penalty of double the damages to anyone harmed.
Id. at
1422.
[
Footnote 6]
Statement of Mr. John E. Hughes:
"Next, I have a statement on behalf of Crane Johnson Co. that
section 501 of the House bill should be simplified. That point is
this: if a corporation was forbidden by State law to declare a
dividend because its capital stock was impaired, it could not avoid
the undistributed profits tax enacted in 1936, and was caught in a
trap. A rich corporation could. It could declare a dividend, and
avoid it. Surely you would not discriminate against a poor
one."
"Furthermore, if it had an impairment of capital stock and was
organized under the laws of about one-third of the States where
corporations in such condition are allowed to declare dividends, a
dividend would be a return of capital to the shareholder, and no
credit for the undistributed profits tax would be given."
"There is no reason for granting relief retroactively in the
limited cases which may be held to be covered by the vague and
ambiguous language of section 501 of the House bill without
granting relief in these cases also."
"The language of section 501 is vague and ambiguous, and ought
to be simplified. In 1938, relief was granted as soon as this
situation was brought to the attention of Congress, but
unfortunately was not made retroactive to 1936. The House bill in
section 501 properly makes it retroactive to 1936, but is not
phrased in simple enough language."
Hearings,
supra, 1022.
See also id. at
1306-1308.
[
Footnote 7]
See H.R.Rep.,
note
3 supra.
[
Footnote 8]
See Sen.Rep.,
note
4 supra.
[
Footnote 9]
Sen.Rep. 1631,
note 4
supra, outlining § 501 of the proposed Revenue Act of
1942, stated:
". . . [A] new paragraph . . . has been added, providing for an
additional credit in cases of corporations having a deficit in
accumulated earnings and profits and prohibited by law from paying
dividends and . . . a new subsection has been added providing for a
stock redemption credit."
"Section 501 . . . grants relief from the undistributed profits
tax for taxable years beginning after December 31, 1935, and prior
to January 1, 1938, by allowing as an additional credit in
computing undistributed net income the portion of the adjusted net
income which, in certain instances, could not be distributed as
taxable dividends. . . ."
"Under § 14 of the Revenue Act of 1936, corporations in general
were subject to surtax at various rates from 7 to 27 percent of
their undistributed net income. In some instances, State law or an
order of a public regulatory body prohibited payment of dividends
during the existence of a deficit, even though the corporation had
current earnings and profits which would constitute undistributed
net income under the definition thereof in § 14(a)(2). Such
corporations were therefore subject to undistributed profits surtax
even though they were prohibited by law from paying dividends. The
addition of the new paragraph 3 to subsection (c) of section 26 to
provide an additional credit in the amount of the deficit in
accumulated earnings and profits as of the close of the preceding
taxable year is intended to give relief in certain of these
cases."
"Also, under § 14 of the Revenue Act of 1936, it was possible
that the undistributed net income of a corporation might exceed
accumulated and current earnings and profits. In such case, the tax
could not be avoided even if distributions were made to
shareholders."
The amendment was to provide relief in this situation also.
[
Footnote 10]
Id. at 246.
MR. JUSTICE FRANKFURTER, with whom MR. JUSTICE REED joins,
dissenting.
The Revenue Act of 1936 imposed a surtax on undistributed
corporate profits. Section 26(c)(1) gave relief
Page 330 U. S. 720
from this surtax under defined circumstances. [
Footnote 2/1] In
Helvering v. Northwest Steel
Mills, 311 U. S. 46, it
was held that, although a restriction on the distribution of
corporate profits was imposed by State law, a credit for such
withheld profits was not authorized by § 26(c)(1). In reaching this
conclusion, the Court took into account that it "has been said many
times that provisions granting special tax exemptions are to be
strictly construed."
Helvering v. Northwest Steel Mills,
supra, at
311 U. S. 49. By
way of relaxing the restricted scope which this Court gave to
exemption from the undistributed profits tax, Congress, by the
Revenue Act of 1942, substituted a new subdivision (3) to § 26(c)
of the Revenue Act of 1936. This section did not undo the
Northwest Steel Mills doctrine. It did not allow a
deduction for profits forbidden to be distributed by State law, as
it had, in § 26(c)(1), allowed credit for profits undistributed
because of a "written contract." Congress gave relief for earnings
forbidden to be distributed by State law only "[i]n the case of a
corporation having a deficit in accumulated earnings and profits as
of the close of the preceding taxable year. . . ." [
Footnote 2/2]
Page 330 U. S. 721
This is tax language and should be read in its tax sense. We
must not disregard the illumination of an authoritative tax lexicon
in reading tax legislation. The language of the 1942 amendment
carries with it tax usage, tax practice, and the gloss of
authoritative legislative history. All combine to make the
condition under which State law prohibiting distribution of profits
comes into play, that which Congress, in words of art, said was the
condition -- namely, the existence of "a deficit in accumulated
earnings and profits." Here, there was no deficit in the
controlling sense of the term. And nothing warrants the attribution
of a nontechnical meaning to so settled a technical term. Nothing,
that is, except the suggestion that to give the 1942 amendment this
established meaning might not afford the relief that, as a matter
of abstract justice, should be afforded. But this is merely an
attempt to invoke what has been called the "equity" of a statute. I
am no friend of artificial canons of construction, and I would not
strain language in order to construe tax exemptions strictly. On
the other hand, Revenue Acts are not the kind of legislation which
should be loosely construed in order to grant exemptions.
The legislative history of this enactment and the administrative
practice only reenforce what seems to me to be the compelling
requirement, to render technical terms used by Congress with their
technical meaning. If it be suggested that counsel for taxpayers at
a Congressional hearing urged the fairness of the construction
which the Court now places upon what Congress has expressed, it
would not be the first time that the final legislation of Congress
did not satisfy the desire of some of its proponents. In
Page 330 U. S. 722
any event, I do not think the argument of counsel for a taxpayer
urging relief should carry more weight than the use by Congress of
settled tax language, carrying a meaning which excludes that result
-- a meaning which is reenforced by the legislative, judicial, and
administrative history that led up to and followed the enactment.
See Century Electric Co. v. Commissioner, 144 F.2d 983,
aff'g the Tax Court, 3 T.C. 297; S.Rep. No. 1631, 77th
Cong.2nd Sess., pp. 244-46; Treasury Regulations, 94 and 101, Art.
115-11; Treasury Regulations 103, § 19.115-11; Treasury Regulations
111, § 29.115-11. The short of the matter is that, even though
corporate profits here were withheld because Louisiana forbade
their distribution, there can be no credit allowed for a deficit
because, in a federal tax sense, there was no deficit.
No doubt Congress, to some extent, desired to relieve from the
undistributed profits tax corporations forbidden by State law from
declaring dividends. But neither what Congress enacted nor its
legislative history indicates a purpose to disregard the limiting
provisions of § 115(h) of the Revenue Act of 1936. [
Footnote 2/3] This section, which embodies the
analysis of
Commissioner v. Sansome, 60 F.2d 931,
Page 330 U. S. 723
see S.Rep. 2156, 74th Cong., 2d Sess., p. 19, requires
that, in respect to federal taxes, assets be treated as available
for distribution as earnings regardless of stock dividends which
capitalize earnings and profits. H.Rep. No.2894, 76th Cong., 3rd
Sess., p. 41, cited in
Commissioner v. Wheeler,
324 U. S. 542,
324 U. S. 546.
The specific example cited by the Senate Committee Report on § 501
of the Revenue Act of 1942 shows that Congress intended to limit
the relief afforded by the amendment to cases where the deficit in
question had not resulted from the capitalization of accumulated
earnings and profits. [
Footnote
2/4] The majority finds a difference between capitalization of
earnings in a nontaxable reorganization and capitalization of
earnings by a simple stock dividend. The circumstances are
different, but the difference is not significant for the legal
effect of the stock dividend on earnings and profits. The example
given is concerned with the effect of capitalizing earnings and
profits, not with the method. If Congress meant to relieve
undistributed earnings and profits even though those earnings and
profits were considered available under § 115(h), it should have
said so.
We think the judgment of the Circuit Court of Appeals should be
reversed.
[
Footnote 2/1]
49 Stat. 1648, 1664.
"In the case of a corporation the following credits shall be
allowed to the extent provided in the various sections imposing tax
--"
"
* * * *"
"(1) PROHIBITION OF PAYMENT OF DIVIDENDS. An amount equal to the
excess of the adjusted net income over the aggregate of the amounts
which can be distributed within the taxable year 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. If a corporation would be entitled
to a credit under this paragraph because of a contract provision
and also to one or more credits because of other contract
provisions, only the largest of such credits shall be allowed, and,
for such purpose, if two or more credits are equal in amount, only
one shall be taken into account."
[
Footnote 2/2]
Section 501(a)(2), Revenue Act of 1942, 56 Stat. 798, 954.
"(3) DEFICIT CORPORATIONS. -- In the case of a corporation
having a deficit in accumulated earnings and profits as of the
close of the preceding taxable year, the amount of such deficit, if
the corporation is prohibited by a provision of a law or of an
order of a public regulatory body from paying dividends during the
existence of a deficit in accumulated earnings and profits, and if
such provision was in effect prior to May 1, 1936."
[
Footnote 2/3]
49 Stat. 1648, 1688, 1689. § 115(h):
"EFFECT ON EARNINGS AND PROFITS OF DISTRIBUTIONS OF STOCK. --
The distribution (whether before January 1, 1936, or on or after
such date) to a distributee by or on behalf of a corporation of its
stock or securities or stock or securities in another corporation
shall not be considered a distribution of earnings or profits of
any corporation --"
"(1) if no gain to such distributee from the receipt of such
stock or securities was recognized by law, or"
"(2) if the distribution was not subject to tax in the hands of
such distributee because it did not constitute income to him within
the meaning of the Sixteenth Amendment to the Constitution or
because exempt to him under section 115(f) of the Revenue Act of
1934 or a corresponding provision of a prior Revenue Act. As used
in this subsection, the term 'stock or securities' includes rights
to acquire stock or securities."
[
Footnote 2/4]
S.Rep. No.1631, 77th Cong., 2d Sess., pp. 245, 246:
"(1) The X corporation for the calendar year 1936 had an
adjusted net income of $200,000 . . ."
"(2) Assume in the above example that the deficit in accumulated
earnings and profits is $20,000 for income tax purposes, but the
deficit in accumulated earnings and profits on the corporation's
books by reason of a prior capitalization of surplus in the course
of a nontaxable reorganization amounts to $250,000. In this case,
although the State law would probably prohibit payment of any
dividends, the credit allowed under the amendment to section 26(c)
is limited to $20,000, which is the deficit in accumulated earnings
and profits for income tax purposes. X corporation therefore will
be liable for undistributed profits surtax on $180,000 of its
adjusted net income."