dissenting: The tax with which we are here concerned is an “undistributed adjusted net income” tax. It is a tax in the nature of a penalty imposed upon a corporation for failing to distribute to its stockholders amounts which it could distribute. In the Ways and Means Committee Report, 73d Gong., 2d sess., Rept. 704, it was said of section 351 of the Revenue Act of 1934:
*455* * * Thus, a corporation which falls within this section because of the nature of its business and the number of its stockholders can always escape this tax by distributing to its stockholders at least 90 percent of its adjusted net income.
In Foley Securities Corporation v. Commissioner (C. C. A., 8th Cir.), 106 Fed. (2d) 731, affirming 38 B. T. A. 1036, the court said:
There can be no doubt that the purpose of Congress in enacting Section 351 was to compel each personal holding company to distribute its current earnings instead of accumulating them, so as to augment the income of its shareholders, thereby increasing the amount of their tax liability. There is nothing, aside from the letter of the statute, to indicate that Congress intended to impose a 30 percent surtax upon the current earnings of such a corporation not available for “dividends” but actually distributed to its shareholders. * * *
The petitioner was not able to distribute to its stockholders as dividends in 1934 $86,431.67 of its earnings for 1933 by reason of its contract which it had entered into with the English company on June 23,1930. Those earnings had to be used pursuant,to its contract in the redemption of its preferred stock. The amount was required to be set aside in a sinking fund for the redemption of those preferred shares. Of the amount thus placed in its sinking fund $86,400 was used in 1934 in the redemption of a like amount of preferred stock.
It seems to me that at the end of 1933 the petitioner was obligated to pay $86,451.67 into its sinking fund for the redemption of the preferred shares. It had a debt of that amount at the end of' 1933. The obligation was incurred prior to 1934. I think that the obligation constituted indebtedness incurred prior to January 1, 1934. See Peir v. Commissioner (C. C. A., 9th Cir.), 96 Fed. (2d) 642, 651.
If this is not so, it seems to me that the purpose of' Congress in imposing this tax only upon undistributed adjusted net income in many cases which might be visualized is frustrated. Assume that a corporation purchased an oil lease in 1933 for a cash consideration of $100,000 and that it undertook on its part to pay, in addition thereto, one-fourth of its profits from the lease for the next five years. Assume that it has profits of $100,000 from the lease in 1934, the payment of $25,000 to the vendor of the oil lease in 1934 or 1935 is additional cost to the corporation of the oil lease. The $25,000 which it must pay to the vendor corporation is not a legal deduction from gross income as an ordinary and necessary expense. Can it be denied, however, that concurrently with the earning of $100,000 in 1934 it has an indebtedness to the vendor of the oil lease of $25,000. I think not. I can perceive no difference in substance between such a case and the proceeding at bar. At the end of 1933 the petitioner was obligated, to set aside $86,451.67 in its sinking fund for the redemption of its preferred shares. It seems to me that this indebtedness was incurred prior to January 1, 1934.
*456I agree with the majority opinion that the outstanding preferred shares of the petitioner did not constitute an indebtedness of the petitioner considered apart from its contract with the English company dated June 23, 1930. The petitioner contends, however, that by reason of its contract with the English company it was indebted to the English company at the end of 1933 in the amount of $86,451.67. I think that contention is sound.
Mellott and HaeRON agree with this dissent.