*1515 For the purposes of the credit provided by section 26(c)(1) of the Revenue Act of 1936, a corporate bylaw, as such, is not a "written contract executed by the corporation." Davision-Joseph Campau Realty Co.,41 B.T.A. 675, followed.
*324 This is a proceeding to redetermine a deficiency in income tax of $7,619.95 for the calendar year 1936. The only issue is whether petitioner is entitled to a credit by reason of a contract restricting the payment of dividends under section 26(c)(1) of the Revenue Act of 1936.
FINDINGS OF FACT.
Petitioner is a corporation, organized in 1909 and existing under the laws of the State of Oklahoma, with its principal office in Muskogee, Oklahoma.
The facts are found as stipulated. The material parts of that stipulation follow:
The following is an extract from the minutes (signed by two officers) of the first meeting of the stockholders of the Atlas Supply Company held on July 20, 1909:
"The Chairman then stated that the charter of the Company had been received*1516 from the Secretary of the State on the 10th day of July, 1909.
"Upon motion duly made and carried, said charter was ordered received, the Directors named therein were recognized as the Directors of the Company and the Secretary was instructed to file said charter with the Company records.
*325 "The Chairman then presented a form of by-laws prepared by counsel of the Company, which was read article by article and as a whole unanimously adopted as the by-laws of the company and ordered entered in the Minute Book immediately succeeding the Certificate of Incorporation."
One of petitioner's By-Laws as the same appears in the minute book preceding the minutes of the said first meeting, which by-law has not since been amended or repealed, reads as follows:
"Article 5. Dividends shall be declared only from the surplus profits at such times as the Board of Directors shall direct, and no dividend shall be declared which will impair the capital of the Company."
The petitioner on January 1, 1936, had a deficit (impairment of capital) of to wit $45,413.09. For the calendar year 1936, petitioner's net icome was $90,433.31, its normal tax was $12,405.00, and its adjusted net*1517 income was $78,028.31 (each of said four items was so reported in petitioner's return for 1936 and so determined by the Commissioner).
On December 26, 1936, the petitioner paid a dividend of $30,464.00 in cash and said sum has been allowed by the Commissioner as a dividends paid credit in his final determination.
An analysis of the changes in petitioner's Surplus (Deficit) for the calendar year 1936 is as follows:
| (Deficit) January 1, 1936 (per books) | $ (45,413.09) | ||
| Add: Taxable net income for 1936 | 90,433.31 | ||
| Subtotal | $45,020.22 | ||
| Deduct: | |||
| Cash dividend Dec. 26, 1936 | $30,464.00 | ||
| Income taxes for 1936 (as accrued by petitioner): | |||
| Normal tax | $12,405.00 | ||
| Surtax | 150.58 | 12,555.58 | |
| Subtotal | 43,019.58 | ||
| Surplus Dec. 31, 1936 (per books) | $2,000.64 |
The petitioner received no non-taxable income or earnings or profits during the calendar year 1936 other than its taxable net income (as previously set out in paragraph 4 hereof).
OPINION.
LEECH: Petitioner contends that it is entitled to the credit under section 26(c)(1) of the Revenue Act of 1936 because its duly executed bylaw prevents it from declaring dividends if its capital would*1518 thereby be impaired.
In , the Board held that a bylaw does not constitute "a written contract executed by the corporation" within the meaning of the statutory provision. The rationale of that opinion appears from the following quotation therefrom:
The shareholders may thus be bound in their relations with the corporation and with each other by a reliance upon the existence of that law or declared *326 policies of the corporation. But a bylaw seems to us to lack the essence of a formal contract in that it is "adopted" and not "executed." There is only one party, the corporation acting through its stockholders, to the adoption of the law and the declaration of its policy. It thus becomes a part of the fundamental law of the corporation. Commissioner v. Vandegrift, supra.
In the Crane-Johnson case, 1supra, the Circuit Court, in affirming , said:
We are here considering a tax law, and the question is not whether for any purpose a charter or a state law may be treated as a contract, but rather whether they together may be considered a written contract executed*1519 by the corporation within the meaning of section 26(c)(1) of the Revenue Act of 1936. * * * Clearly, this provision relates to a corporate undertaking to discharge a certain obligation out of earnings, and not to any statutory provisions. [Emphasis supplied.]
We think that any contract existing here by virtue of the bylaw was in the nature of an implied contract, which arose, not from any statutory obligation, it is true, but from a similar obligation imposed by the "law" of the corporation. But, there was no "written contract executed by the corporation" within the meaning of the cited section preventing the payment of dividends.
This reasoning finds support in , and the legislative history of the cited controlling statutory provision. 2
*1520 It does not appear that any written contract with the corporation was executed by anybody relying on the bylaw involved here. See ; . So, it would seem, the corporation could have changed this bylaw at will.
The petitioner concedes that our decision in , concludes it here, but cogently argues on brief that our decision in that case was wrong. However, after careful consideration, we reaffirm our position as taken in that case, and hold that the bylaw, as such, upon which the decision of the issue here rests, is not "a written contract executed by the corporation", petitioner, within the meaning of section 26(c)(1) of the Revenue Act of 1936.
Reviewed by the Board.
Decision will be entered for the respondent.
Footnotes
1. The Crane-Johnson↩ case was affirmed, .
2. Seidman, Legislative History of Federal Income Tax Laws, p. 218.
Discussion on floor of House (80 Cong.Rec. 10265):
"MR. SAMUEL B. HILL. * * * If a corporation as of March 3, 1936, finds itself in a position, by reason of a contract entered into with its creditors,↩ not to pay dividends until it has paid its creditor his debt or has established a sinking fund, or otherwise provided means of paying the obligation, if it is under that handicap by reason of a written contract, then we allow a 22 1/2 per cent flat rate on that portion of the net income which it is unable to pay out, by reason of this contract, in dividends. * * *" [Emphasis supplied.]