Black Motor Co. v. Commissioner
41 B.T.A. 300; 1940 BTA LEXIS 1199 (1940)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under the Revenue Act of 1936, a corporation is not entitled to any portion of the dividends paid credit for a distribution unless that distribution is made pro rata, equal in amount, and without preference to any shareholder of the same class. A preferential distribution to even one shareholder disqualifies the entire dividend distribution for the credit.
Facts:
- The Petitioner's board of directors declared a dividend to be paid to its stockholders.
- The dividend plan stipulated four monthly installment payments of 2.5% each, starting on October 15 of the taxable year.
- During the taxable year, Petitioner made dividend distributions that did not follow the declared plan.
- Petitioner paid the two majority stockholders the full amount of their declared dividends.
- In contrast, other minority stockholders received only 25% or 50% of the dividends to which they were entitled.
- A corporate resolution authorizing a $1,500 salary for the company's manager had been adopted prior to the taxable year and was not rescinded, but this amount was not accrued on the company's books or deducted on its tax return.
Procedural Posture:
- The Respondent, the Commissioner of Internal Revenue, audited the Petitioner's tax return for the 1936 taxable year.
- Following the audit, the Respondent issued a notice of deficiency, disallowing, among other things, the entire dividends paid credit claimed by the Petitioner.
- Petitioner challenged the Respondent's determination by filing a petition with the Board of Tax Appeals, which served as the court of first instance for tax disputes.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a corporate dividend distribution that is not paid pro rata and gives preference to certain shareholders of the same class qualify for the dividends paid credit under Section 27(g) of the Revenue Act of 1936?
Opinions:
Majority - Arnold
No, a corporate dividend distribution that is not paid pro rata and gives preference to certain shareholders of the same class does not qualify for the dividends paid credit. Section 27(a) of the Revenue Act of 1936 provides a credit for 'dividends paid,' but this is strictly limited by Section 27(g), which denies the credit entirely for any distribution that is not pro rata, equal in amount, and without preference among shareholders of the same class. The court found that the Petitioner's distributions were plainly preferential, as the two majority stockholders were paid in full while minority stockholders were not. This inequality and preference destroys the right to the credit for the entire distribution. The court rejected Petitioner's arguments for a partial credit, stating the statutory requirement is absolute and does not permit apportionment. The court also dismissed the argument that the mere declaration of the dividend constituted payment, holding that the statute requires an actual, non-preferential distribution of funds. On a separate issue, the court found the petitioner was entitled to deduct an additional $1,500 for its manager's salary because the liability was fixed by a prior, unrescinded resolution, even though it was not accrued on the books.
Analysis:
This decision establishes a strict, all-or-nothing interpretation of the pro rata distribution requirement for the dividends paid credit. It clarifies that 'dividends paid' means an actual and equitable distribution, not merely the creation of a corporate liability upon declaration. The ruling serves as a stark warning to corporations that any preferential treatment of shareholders, intentional or not, will result in the complete disallowance of the associated tax credit. The precedent forecloses any arguments for a partial credit, holding that a single instance of preference taints the entire dividend distribution for tax credit purposes.
Unlock the full brief for Black Motor Co. v. Commissioner