*873 1. Securities issued under the name of income bonds held to be, in substance, shares of preferred stock and the amounts payable thereunder denominated interest held to be dividends on preferred stock.
2. Held, that the instruments do not constitute written contracts entitling petitioner to the benefits of subsections (1) and (2) of section 26(c) of the Revenue Act of 1936.
3. A portion of the dividends on the preferred stock was paid by the Ticker Publishing Co., a New York corporation, to a Delaware corporation, owner of the stock. Held, that the provisions of sections 26(b) and 27(h) of the Revenue Act of 1936 do not limit the dividends paid credit, authorized by section 27(a), to 15 percent of the amount of the dividend.
4. The deficiency was determined against, and a petition based thereon was filed by, the Ticker Publishing Co. within the time allowed by statute. At the hearing held after the running of the three-year period allowed by section 275(a) of the Revenue Act of 1936 for the making of assessment, the respondent amended his answers, alleging that the amounts paid on the so-called income bonds were not deductible as interest, but represented*874 dividends on preferred stock, and claiming increased deficiencies on account of his error. Held, that the claims for increased deficiencies were timely. Commissioner v. Rieck, 104 Fed.(2d) 294, distinguished.
*399 These proceedings were consolidated for hearing and involve the redetermination of income taxes, surtaxes, and a penalty, as follows:
| Docket No. | Year | Tax | Amount | Penalty | |
| Ticker Publishing Co | 101252 | 1936 | Income | $1,318.50 | $329.63 |
| Do | 101606 | 1937 | Income | 14,767.23 | |
| C. G. Wyckoff, Inc | 101280 | 1937 | Income | 426,16 | |
| Do | 101280 | 1937 | Personal holding | ||
| co. surtax | 151.16 |
The respondent admits error in determining the delinquency penalty in Docket No. 101252 and disallowing ordinary and necessary business expenses in the amount of $1,660.50 in Docket No. 101606. In Docket No. 101280 the petitioner withdrew its allegation of error respecting a deduction for capital stock tax and the respondent admits error in *400 disallowing a deduction of $2,500 for officers' compensation. *875 The principal issue common to both proceedings is whether certain moneys paid on so-called income bonds issued by the Ticker Publishing Co. constitute interest on bonds or dividends on preferred stock. Other questions are in the alternative. The respondent claimed increased deficiencies against the Ticker Publishing Co. upon the ground that the amounts payable under the income bonds constitute dividends on preferred stock, and not, as alleged by petitioners, interest on bonds. The return of C. G. Wyckoff, Inc., for 1937 was filed with the collector for the district of Delaware, and the returns of Ticker Publishing Co. for 1936 and 1937 were filed with the collector for the second district of New York. The facts embodied in a stipulation of facts filed by the parties are found as stipulated. Material parts thereof will be set forth in connection with facts found from other evidence of record.
FINDINGS OF FACT.
C. G. Wyckoff, Inc., petitioner in Docket No. 101280, is a Delaware corporation. The Ticker Publishing Co., hereinafter referred to as Ticker, the other petitioner, is a New York corporation engaged in the business of publishing The Magazine of Wall Street and giving*876 various financial services. Ticker kept its books and filed its returns on the accrual basis. Its return for 1936 was filed on May 15, 1937.
At the time of the organization of Ticker in 1912, 750 of its 1,000 shares of capital stock were issued to Richard D. Wyckoff, who died March 7, 1934, and the remaining shares were issued to his wife, Cecelia G. Wyckoff. Thereafter Cecelia G. Wyckoff acquired additional shares of stock from her husband by gifts and purchases. On May 26, 1926, she owned 990 shares of the stock and the remaining 10 shares were owned by her husband. Prior to October 28, 1926, Cecelia G. Wyckoff was secretary and treasurer and a director of Ticker. Since then she has been president of the corporation.
During the early part of 1926 there was a difference of opinion between Richard D. Wyckoff and his wife concerning the ownership of stock of Ticker, and they were having serious family and matrimonial difficulties. The husband felt that since he had founded the corporation his wife should give him the stock outstanding in her name. He desired a lump sum for his interest in the corporation. As the result of negotiations on the subject, Cecelia G. Wyckoff*877 concluded that she and her husband should each receive $500,000 from Ticker over a long period of time, payable out of earnings of the corporation.
On May 20, 1926, Ticker and Richard D. Wyckoff and Cecelia G. Wyckoff entered into an agreement providing, among other things, that:
(a) Within 30 days thereafter the Wyckoffs as sole stockholders of Ticker would vote to issue income bonds of Ticker in the sum of *401 $1,000,000, equally divided between class A and class B bonds, the bonds to bear cumulative interest at the rate of 7 percent per annum payable only out of net profits of the corporation after setting up a reserve for unexpired subscriptions, and, in event of liquidation, both classes to share equally in a division of assets of the corporation. The class A bonds were to be preferred over the class B bonds as to the payment of interest, and provision was made for the redemption of both classes of bonds upon certain conditions.
(b) Richard D. Wyckoff was to receive all of the class A bonds and his wife all of the class B bonds. Upon receipt of the bonds Richard D. Wyckoff was to assign and deliver to his wife the ten shares of common stock held by him, and any*878 and all claims against and interest in Ticker. The agreement recited: "the said Bonds (or stock) shall be received by him in full payment of his interest in the said Common stock and in said claims."
(c) Ticker was to redeem at least $50,000 par value of the class A bonds each year out of its net profits after (a) establishing a reserve for unpaid subscriptions; (b) payment of interest on the class A and class B bonds; and (c) creating a surplus of $75,000, before redeeming any of the class B bonds and in the event the net profits in any one year were insufficient to redeem $50,000 of the class A bonds, so much thereof should be redeemed as the profits permitted, the remainder to be redeemed in the following year, subject to the existence of sufficient profits for that purpose. All the class A bonds were to be redeemed within a period not exceeding ten years, provided the profits of the corporation were sufficient for that purpose.
(d) Cecelia G. Wyckoff agreed that she would vote and cause the directors of Ticker to vote for the payment of interest and for the redemption of the bonds as provided for in the agreement. The bonds were to bear notation that they were subject to*879 the terms of the agreement.
(e) Should designated counsel agree that Richard D. Wyckoff would be subject to the payment of a Federal income tax upon the sum of $500,000, upon the issuance and delivery to him of the class A bonds, then the Wyckoffs would in lieu of the issuance to them of income bonds vote to increase the capital stock of the corporation by $1,000,000, to be divided into $500,000 class A preferred stock and $500,000 of class B preferred stock, each class consisting of 5,000 shares each with the par value of $100, this stock to be paid out as a stock dividend from surplus created by capitalizing good will of Ticker at $1,000,000. Upon receipt of the class A preferred stock Richard D. Wyckoff was to assign and transfer to his wife the ten shares of common stock held by him and his interest in any claims against and interest in Ticker, the preferred stock to be received by him in full payment of his interest in said common stock and said claims.
*402 (f) Both classes of preferred stock were to share equally as to assets, and to provide for 7 percent cumulative dividends payable semiannually, the preferred class A stock, however, to be preferred over the preferred*880 class B stock as to dividends. Both classes of preferred stock were redeemable at par plus accrued dividends, with a right on the part of Ticker to redeem all or any part of the preferred class A stock upon 30 days' notice.
(g) In the event preferred stock was issued instead of income bonds, each covenant in the agreement with respect to the payment of interest and redemption of class A and class B bonds would apply with the same force and effect to the payment of dividends and the redemption of the class A and class B preferred stock, respectively.
Other provisions of the contract relate to the payment of salary and/or bonus by Ticker to Cecelia G. Wyckoff, the retention of Richard D. Wyckoff as editor of the Wall Street Magazine, the use and occupancy and title to certain real and personal property until the granting of a divorce or legal separation, and other adjustments relating to the domestic affairs of the Wyckoffs.
Thereafter in 1926 necessary action was taken by Ticker and its stockholders and directors to make effective the provisions of the agreement of May 20, 1926. Resolutions adopted by the stockholders and directors of Ticker on July 15, 1926, and Octobrer 1, 1926, respectively, *881 provided for the exchange, at the option of the stockholders, of preferred stock for income bonds, share for bond. A resolution adopted by the directors on October 1, 1926, and ratified by the stockholders of Ticker on October 14, 1926, provided that the bonds were to bear a notation that they were subject to the agreement of May 20, 1926.
Ticker valued its good will at $1,000,000 and out of the surplus created thereby, declared and paid a dividend of that amount, payable in preferred stock at the rate of ten shares of preferred for each share of common.
On October 9, 1926, certificates for 9,900 shares of preferred stock were issued by Ticker To Cecelia G. Wyckoff as a stock dividend and a certificate for 100 shares to Richard D. Wyckoff. On October 28, 1926, Cecelia G. Wyckoff transferred to her husband the certificate issued to her for 4,900 shares.
On October 28, 1926, Cecilia G. Wyckoff and her husband each notified Ticker of their election to exchange their preferred stock for its income bonds as provided by the resolutions of stockholders and directors on July 15, 1926, and October 1, 1926, and on the same date the requests were honored by the issuance of $500,000*882 par value of class A bonds to Richard D. Wyckoff and $500,000 par value of class B bonds to Cecelia G. Wyckoff. These bonds were issued in *403 accordance with resolutions previously adopted by Ticker's board of directors and stockholders, and were duly recorded in a bond register maintained by Ticker.
The class A bonds read as follows:
TICKER PUBLISHING COMPANY, a corporation of the State of New York, hereinafter called the "Company," for value received, hereby promises to pay to Richard D. Wyckoff, or registered assigns, the sum of TEN THOUSAND DOLLARS ($10,000), and interest on the said principal amount from the date hereof at the rate of seven (7%) per cent per annum, as, in the manner, and to the extent provided in a certain agreement dated May 20th, 1926, between RICHARD D. WYCKOFF, CECELIA G. WYCKOFF, and the Company, this bond being subject to the terms thereof.
The principal and interest of this bond shall be payable only out of the net profits of the Company as defined and provided in the said agreement and if and to the extent that said net profits shall suffice for such payment and shall be declared by the Board of Directors to be then payable. Interest*883 on the said principal amount will be paid on the 1st day of January, 1927, and semiannually thereafter on the 1st days of January and July of each year, until the redemption of this bond. Interest shall be cumulative, but accumulations of interest shall not bear interest. Payment of the principal and interest of this bond will be made at the office of the Company in the City and State of New York, in gold coin of the United States of America of the present standard of weight and fineness.
This bond is one of a duly authorized issue of income bonds of the Company, limited to the sum of One Million ($1,000,000) Dollars, of which Five Hundred Thousand ($500,000) Dollars are Class "A" Income bonds and Five Hundred Thousand ($500,000) Dollars are Class "B" Income Bonds, which may be issued out of the treasury of the Company only when, as and if the holders of the Preferred Stock of the Company exercise their option to exchange the said Preferred Stock for these income bonds and upon the due and sufficient delivery of the Preferred Stock of the Company for exchange.
In the event of liquidation of the Company, whether voluntary or involuntary, this bond shall mature and become due*884 and payable, and in the same event both classes of bonds shall share equally in a division of the essets of the Company.
The Class "A" Bonds are preferred as to the payment of interest over the Class "B" Bonds, so that the holders of Class "A" Bonds shall be entitled to receive the fixed interest of seven (7%) per cent per annum before any interest shall be paid to the holders of Class "B" Bonds.
The Company may, at its option, redeem all or any part of the Class "A" Income Bonds at any time, upon thirty (30) days' prior notice to the owners and holders thereof at par, together with all unpaid cumulative accrued interest to the date of redemption.
The Company shall redeem the income bonds of both classes at par plus cumulative accrued interest in the following order and manner, and upon the following conditions, to wit:
If there shall remain out of the profits of the Company in any year a surplus of not less than Seventy-five Thousand ($75,000) Dollars, after setting up a reserve for the unexpired subscriptions to the Magazine of Wall Street, as authorized by the Board of Directors, and after the payment of interest on the Class "A" and Class "B" Income Bonds, as herein*885 provided, *404 then the amount of the net profits remaining over and above such surplus shall be used to redeem these income bonds in the following order:
FIRST, to redeem not less than Fifty Thousand ($50,000) Dollars par value of the Class "A" Bonds each year, commencing and including the year 1926, before any Class "B" Income Bonds are redeemed as hereinafter provided. Should the net profits available for such redemption, however, be insufficient to redeem Fifty Thousand ($50,000) Dollars of the Class "A" Bonds in any year, so much thereof shall be redeemed as the sum available therefor, as herein provided, will permit, and the balance thereof shall be redeemed in the following year if the profits of such year are sufficient for that purpose. The right of redemption of the Class "A" Bonds shall be cumulative so that the said Five Hundred Thousand ($500,000) Dollars Class "A" Income Bonds shall be redeemed in a period not exceeding ten (10) years, provided the aforesaid net profits of the Corporation are sufficient to redeem the same within such period. Class "A" Income Bonds which shall have been redeemed by the Corporation shall not thereafter be reissued until all*886 of the Class "A" Bonds shall have been redeemed.
SECOND, to redeem Class "B" Income Bonds in each year in an amount equal to the redemption of the Class "A" Bonds for such year.
These bonds, in the order and amount herein provided, shall be called for redemption each year, but the Board of Directors shall not be required to call them for redemption prior to December 31st in the year in which they are redeemed.
The bonds of either class shall not, however, at any time be redeemed to an amount which would reduce the surplus below the amount set aside as a reserve for the unexpired subscriptions plus the sum of Seventy-five Thousand ($75,000) Dollars, as hereinabove provided.
No recourse shall be had for the payment of the principal or interest of this bond, or any part thereof, or for any claim based thereon, or otherwise in respect thereof, or of the indebtedness represented thereby, against any officer, director or stockholder as such, past, present or future, of the Company, either directly or through the Company, by virtue of any statute or constitutional provision or by enforcement of any assessment or otherwise, all such liability being, by the acceptance hereof, expressly*887 waived and released.
This bond is not transferable except in accordance with the terms of the aforementioned agreement, dated May 20th, 1926, between RICHARD D. WYCKOFF, CECELIA G. WYCKOFF and the Company, reference to which is hereby made, by the registered owner in person or by duly authorized attorney at the office of the Company in the Borough of Manhattan, City of New York, upon surrender and cancellation hereof.
The terms of the class B bonds were identical, except that the last paragraph read as follows:
This bond is transferable by the registered owner in person or by duly authorized attorney at the office of the Company, in the Borough of Manhattan, City of New York, upon surrender and cancellation hereof, subject at all times, however, to the terms of the aforementioned agreement dated May 20th, 1926, between RICHARD D. WYCKOFF, CECELIA G. WYCKOFF and the Company, reference to which is hereby made.
Entries were made on the books of Ticker as of October 30, 1926, to record good will in the amount of $1,000,000, special surplus arising *405 therefrom, the issuance of the preferred stock as a stock dividend, and exchange of the preferred stock for the income*888 bonds.
At the time of issuance of the preferred stock and income bonds, Ticker was not indebted to Richard D. Wyckoff or his wife.
At a meeting held December 31, 1926, the directors of Ticker authorized the redemption of $50,000 par value of class A bonds and a like amount of class B bonds and directed that the interest be paid on all of the outstanding bonds. On June 22, 1927, the directors authorized the payment of interest due June 30, 1927, on the outstanding income bonds in the face amount of $450,000 each. There are no minutes of Ticker respecting interest on the bonds thereafter to June 30, 1931.
On June 30, 1931, the board of directors of Ticker authorized the redemption of $90,000 of the $50,000 of class B bonds redeemable in each of the years 1929 and 1930, approved past payments of interest and redemptions of bonds, and gave Cecelia G. Wyckoff authority to redeem, and pay interest on, bonds in the future in accordance with the agreement of May 20, 1926. Ticker had sufficient net profits in 1929 and 1930 to redeem the bonds redeemable in those years, but did not wish to reduce its cash position.
At a meeting of the board of directors held on December 30, 1936, authority*889 was given to pay $50,000 as interest on the class A bonds, the amount to be applied on the most recently accrued interest; also to pay an additional amount if profits for the year when accurately determined were sufficient.
The books of Ticker reflect net profits and losses for the years 1926 to 1937, inclusive, before deducting the amounts shown as interest on the income bonds and the amount of interest deducted, as follows:
| Year | Net profit (loss) before deducting "interest" | "Interest" deducted |
| 1926 | $189,784.68 | $70,000.00 |
| 1927 | 129,913.61 | 63,000.00 |
| 1928 | 293,152.11 | 56,000.00 |
| 1929 | 239,318.43 | 51,916.67 |
| 1930 | 131,964.20 | 45,500.00 |
| 1931 | (26,845.42) | |
| 1932 | ($30,967.43) | |
| 1933 | 34,156.63 | $34,156.63 |
| 1934 | 2,681.75 | 2,681.75 |
| 1935 | (3,141.32) | 0 |
| 1936 | 44,939.10 | 44,939.10 |
| 1937 | 66,347.35 | 66,347.35 |
The amounts set forth as interest were credited on Ticker's books to "interest payable" and "dividends on preferred stock" in 1926, one-half to each; to "interest payable on bonds" in 1927 and 1928, except that the interest for the first half of 1927 was credited to an account entitled "accrued interest on bonds"; to "accruals payable-bond interest" in*890 1929 and 1930; to "accrued bond interest payable" in 1933 and 1934; to "cash" and "notes payable" in 1936; and to "Accrual Payable-Accrued *406 Interest on Bonds" and "Accounts Receivable" and "Notes Payable" in 1937. No entries were made on the books of Ticker in 1931, 1932 and 1935 for bond interest.
In each of the years 1927 to 1931, inclusive, Ticker redeemed $50,000, a total of $250,000, of the class A bonds issued to Richard D. Wyckoff. The remainder of the class A bonds issued to him was purchased by Cecelia G. Wyckoff on May 27, 1936, from the estate of Richard D. Wyckoff for $100,000. Of the $500,000 par value of class B bonds issued to Cecelia G. Wyckoff, $50,000 was redeemed in each of the years 1927 and 1928 and the remainder of $400,000 was transferred to C. G. Wyckoff, Inc., which was owned by Cecelia G. Wyckoff, on July 25, 1929. Of the bonds transferred to C. G. Wyckoff, Inc., Ticker redeemed $50,000 in 1929 and $90,000 in 1931.
On December 31, 1936 and 1937, class A bonds in the face amount of $250,000 were owned by Cecelia G. Wyckoff and class B bonds in the principal amount of $260,000 by C. G. Wyckoff, Inc.
The books of Ticker show liability*891 for bonds and unpaid interest thereon at the close of each year from 1926 to 1937, inclusive, as follows:
| Year | Liability for "Bonds" | Liability for unpaid "Interest" |
| 1926 | $1,000,000 | $35,000.00 |
| 1927 | 900,000 | 24,000.00 |
| 1928 | 800,000 | 28,000.00 |
| 1929 | 700,000 | 12,250.00 |
| 1930 | 650,000 | 10,500.00 |
| 1931 | 510,000 | |
| 1932 | $510,000 | |
| 1933 | 510,000 | $34,156.63 |
| 1934 | 510,000 | 36,838.38 |
| 1935 | 510,000 | 36,838.38 |
| 1936 | 510,000 | 36,838.38 |
| 1937 | 510,000 | 78,185.73 |
The amounts previously credited to "interest payable" in 1926, "accrued interest on bonds" in 1927, "interest payable on bonds" in 1927 and 1928, and "accruals payable-bond interest" in 1929 and 1930, were paid as follows:
| Year | Richard D. Wyckoff | Cecelia G. Wyckoff | C. G. Wyckoff, Inc. |
| 1926 | $17,500 | $17,500 | |
| 1927 | 31,500 | 31,500 | |
| 1928 | 28,000 | 28,000 | |
| 1929 | 24,500 | 14,000 | $13,416.67 |
| 1930 | 21,000 | 24,500.00 |
The amount of $44,939.10 credited in 1936 was paid on December 30, 1936, by a cash payment of $20,000 and the issuance of a note to Cecelia G. Wyckoff for $30,000 against which an adjustment in the amount of $5,060.90 was made on December 31, 1936. The interest on the income*892 bonds for 1937 was declared by the directors of Ticker *407 at a meeting held on December 30, 1937. The interest of $40,722.52 for 1937 on the class A bonds was credited to Cecelia G. Wyckoff on the books of Ticker on December 31, 1937, payable March 7, 1938, and was paid March 7, 1938, and of the interest of $25,624.83 on the class B bonds, $25,000 was paid on December 31, 1937, to C. G. Wyckoff, Inc., by a note and a credit, and the remainder of $624.83 was credited to C. G. Wyckoff, Inc., on the same day and paid in 1938.
The amounts paid to Cecelia G. Wyckoff and C. G. Wyckoff, Inc., by Ticker as interest on the bonds were reported by them as income from interest in their income tax returns for the respective years.
In its returns for the years 1926 to 1935, inclusive, Ticker deducted the following amounts as interest on its class A and class B bonds:
| 1926 | $70,000.00 |
| 1927 | 63,000.00 |
| 1928 | 56,000.00 |
| 1929 | 51,916.67 |
| 1930 | 45,500.00 |
| 1931 | |
| 1932 | |
| 1933 | $34,156.63 |
| 1934 | 2,681.75 |
| 1935 |
In its income tax returns for 1936 and 1937 Ticker deducted as interest on bonds the sums of $44,939.10 and $66,347.35, respectively. Of the amounts so deducted the*893 respondent, in determining the deficiencies, disallowed $9,239.10 in 1936 and $30,647.35 in 1937 upon the ground that the amounts disallowed did not accrue in the respective taxable years. The notice of deficiency for 1936 was mailed on November 8, 1939, and a petition based thereon was filed on January 23, 1940. Amended answers were filed February 12, 1941, making claim for increased deficiencies, alleging that the "interest" constituted dividends. Ticker filed "second amended petitions" at the hearing held herein on May 16, 1941. The respondent, by amended answers thereto, filed the same day, alleged as error his failure to disallow the entire amount deducted each year as interest upon the ground that the so-called interest constituted a declaration or distribution of a dividend, and claimed increased deficiencies because of such error. In determining deficiencies against Ticker for the years 1926 to 1929, inclusive, and against Cecelia G. Wyckoff for the years 1926 to 1928, inclusive, the Commissioner, among other adjustments, disallowed the amounts claimed in its returns as interest on bonds upon the ground that the amounts constituted dividends. Appeals were filed for each*894 year with this Board. On January 2, 1933, the proceedings were settled by stipulation. The stipulations did not disclose how the deficiencies were computed. The amount of the deficiency each year was agreed upon. This Board entered a decision in each case in accordance with the stipulation. Appropriate amendments were made by the respondent in his answer to the petition of C. G. Wyckoff, Inc., to provide for inclusion of the amount of $25,624.83 received by it in *408 income for 1937 as a dividend in the event we hold that the payment was a dividend and not interest.
The so-called income bonds were in substance preferred stock and the amounts payable semiannually thereunder are taxable to the owners thereof as dividends on preferred stock, and are not deductible by Ticker as interest on indebtedness.
In its return for 1937 Ticker claimed the sum of $742.79 as a deduction for New York State franchise tax. In his determination of the deficiency the respondent disallowed $25 of the deduction upon the ground that the amount was paid by Ticker for another corporation.
OPINION.
DISNEY: The primary question is whether the so-called income bonds are evidence of indebtedness*895 entitling Ticker to deductions for interest accrued thereon during the taxable year or, in substance, certificates of stock, with no right to deductions for amounts paid or accrued thereunder.
The respondent's contention here is that the so-called income bonds issued by Ticker were not more than preferred stock issued as a stock dividend without consideration. The petitioners contend that Ticker was indebted to the bondholders under the agreement of May 20, 1926, and that the securities were issued under a debtor and creditor relationship.
As proof of the consideration running from Ticker to the Wyckoffs for the issuance of the income bonds, petitioners rely upon paragraphs 2 and 17 of the agreement of May 20, 1926. The second paragraph of the agreement is in substance that $500,000 class A and class B bonds would be issued to Richard D. Wyckoff and his wife, respectively; that upon receipt of the class A bonds or preferred stock Richard D. Wyckoff would assign to his wife his interest in common stock in, and claims against, Ticker, and that the bonds or preferred stock would be received by him in full payment of his interest in the common stock and in the claims. The seventeenth*896 paragraph contained an acknowledgment of Cecelia G. Wyckoff that she had no claim against her husband for an interest in stock owned by her husband except the ten shares of Ticker which he had agreed to transfer to her, and that she had and made no claims against "any of the Corporations issuing such stocks, except the TICKER PUBLISHING COMPANY." It also provided for a general release by Richard D. Wyckoff in favor of his wife and Ticker and a general release from Ticker in favor of Richard D. Wyckoff, excepting in each case obligations to be performed under the contract and an obligation of Richard D. Wyckoff to pay accounts known as the "Richard D. Wyckoff Analytical Staff Inc. Accounts."
*409 The preamble of the agreement recites that "the parties hereto are each possessed of certain property, and differences have arisen between them and claims made in respect to their ownership of and their interest in said properties, * * *." No specific claims of either Richard D. Wyckoff or his wife against Ticker are set forth in the agreement and at the hearing there was no proof of the existence of such claims. Cecelia G. Wyckoff testified upon cross-examination, in response to*897 a question as to the indebtedness of Ticker to her and her husband in 1926, that "Mr. Wyckoff claimed that in view of the fact we had spent about $2,000,000 in building up this company, that he either wanted it outright or wanted the Ticker Publishing Co. to give him money. Finally he agreed to take half a million dollars." She further testified that this was the debt her husband "claimed Ticker owed him." Other provisions of the agreement disclose that the Wyckoffs were having domestic difficulties and that the agreement was in the nature of a property settlement in anticipation of a divorce. Upon brief petitioners admit that the matrimonial disputes led to the claims of Richard D. Wyckoff against Ticker and differences as to ownership of its stock. That the agreement was one to settle disputes between Richard D. Wyckoff and his wife is clearly shown by paragraph twenty-first of the agreement, reading as follows:
In consideration of the settling of the disputes between Mr. and Mrs. Wyckoff and the benefits to be derived by the Corporation by reason thereof, the Corporation joins in this agreement to the extent that the provisions thereof are or may be applicable to it.
This*898 language, in our opinion, clearly shows that the only connection the corporation had with the Wyckoffs was as stockholders, and not as creditors. No proof was made of the expenditure of any sum by the Wyckoffs or either of them "in building up the company" for which Ticker was liable. The plan had as its purpose the settlement of differences between the Wyckoffs and they, as sole stockholders of Ticker, used it to compromise their personal disputes. We conclude from all of the evidence that the Ticker Publishing Co. was not indebted to either of the Wyckoffs at the time the preferred stock and income bonds were issued.
If there were proof that Ticker was indebted to the Wyckoffs at the time of issuance of the income bonds and that the securities were issued in satisfaction of the debts, such facts would not control the issue, for obviously there would still be the question of whether the securities issued were in fact bonds, evidence of indebtedness, payable with interest, or preferred stock, on which only dividends were payable.
The reports contain numerous cases involving questions like the one before us. They do not lay down a definite rule to follow in *410 determining*899 the answer. Each case turns largely upon its own peculiar facts. , affirming ; , reversing ; ; affd., . The fact that the securities were called income bonds by Ticker and that the payments to be made semiannually thereunder were classified as interest is not decisive. .
In , the court held that the most significant, if not the essential, feature of a debtor and creditor relationship is the existence of a fixed maturity date with a right to enforce payment in the event of default. In , the court said:
* * * The fact that ultimately he [holder of debenture bonds] must be paid a definite sum at a fixed time marks his relationship to the corporation as that of creditor*900 rather than shareholder. The final criterion between creditor and shareholder we believe to be the contingency of payment. * * *
To the same effect are , and . In , the court held that the absence of a maturity date, the obligation to pay income from net earnings, and the giving to bank creditors rights over holders of the debentures made the payments more like dividends than interest, and the securities like preferred stock rather than bonds. In , the Court emphasized the fact that certificate holders had to look to net earnings for income, as grounds for holding that no debtor and creditor relationship existed.
Though the income bonds were a liability of the corporation, there may be liability without debt. . Here the parties were very careful to provide that the so-called interest on the bonds was payable only out of net profits computed after creating a reserve for*901 unexpired subscriptions. Thus they were like preferred stock, which does not give the holder any right to income except out of earnings or to his capital on a specified maturity date. Petitioners contend that the liability of Ticker to pay principal and interest to the extent of earnings gave the bonds a maturity date, and fixed the liability to pay. This was not a definite maturity date or a liability to pay regardless of net profits. The distinction is one which the courts in the cited cases point to as strong indication of intent to issue preferred stock rather than evidence of indebtedness. The bondholders did not, except upon liquidation of Ticker, have a right to have their claims for interest paid out of anything other than net profits. Creditors have a right to enforce their claims *411 against the assets of the debtor. That right did not exist here as to income on or the principal of the securities, prior to liquidation.
The fact that the bonds did not carry voting rights does not overcome other more material factors. Preferred stock is frequently issued without such rights. It is worthy of note that in addition to the requirement that "interest" be paid*902 only from net profits, payment could be made under the terms of the "income bonds" only if the directors declared it to be then payable. Such a provision is not in harmony with the idea of a debt payable at all events, except as to net profits, but on the contrary is similar to the usual necessity of declaration of a dividend on preferred stock.
Petitioners argue that an opinion of the New York Supreme Court, affirmed by the Appellate Division, in an action instituted by executors of the estate of Richard D. Wyckoff against Ticker and a recognition in stipulations involving income tax liability for prior years, during which amounts were paid under the bonds as interest, is res adjudicata on the question.
The opinion relied upon was rendered in connection with a motion filed by the plaintiff in an action to inspect the books of Ticker. Neither the record here nor the opinion discloses the issue involved in the proceeding. Mere reference by the court to the owners of the securities as bondholders has no binding force. They were so designated in the certificates, but, as we have seen, a certificate may be something other than the name assigned to it by the issuing corporation.
*903 Petitioners' reply to respondent's amended answers alleges that in settling the proceedings before this Board for prior years amounts paid out under the bonds were allowed as interest. There is no proof of that fact. The stipulation here is that the amounts were held to be dividends by the respondent in determining the deficiencies. There is no proof of recognition by the Commissioner in those cases that the amounts represented interest, not dividends. In short, we do not know how the parties arrived at the stipulated deficiencies; moreover, there were no decisions on the merits. Clearly, upon the facts before us, res adjudicata may not be applied here. ; affd., ; certiorari denied, .
We conclude and hold that the so-called income bonds were, in substance, preferred stock and the amounts in controversy constitute dividends on preferred stock, not interest, as originally determined by respondent.
Ticker contends, in the alternative, that in case it is held that the "income bonds" interest constitutes dividends on stock, then it is entitled to a credit of $9,362.36*904 in 1936 and a credit of $48,587.04 in *412 1937 on account of alleged prohibitions in the agreement of May 20, 1926, and the income bonds, on the payment of dividends. The provisions of section 26(c)(1) and (2) of the Revenue Act of 1936, 1 and , and , are relied upon.
*905 In the Joell Co. case the taxpayer was required by a written contract to apply the income realized from real estate to discharge the mortgage indebtedness on the property at the time of its acquisition by the taxpayer. We regarded the mortgage as a debt, although it was not assumed in the purchase of the property. In the G. B. R. Oil Corporation case the taxpayer was required to turn over to a bank all of the proceeds of oil leases for credit on indebtedness to the bank for loans to develop the leases. In each case we held that section 26(c)(2), supra, entitled the taxpayer to the credit provided for therein.
The cases relied upon by Ticker are not controlling. In those cases earnings and profits of the taxable year were required by written contracts to be paid in discharge of a debt.
The statutory provisions granting the credit must be strictly complied with. ; . Section 26(c)(1) relates to contracts under the provisions of which no dividends can be distributed without violating its terms and section 26(c)(2) deals with agreements requiring the payment*906 or setting aside of earnings for the discharge of debts. Since we have above held that no corporate debt was involved in the "income bonds", it follows that section 26(c)(2) does not here apply and we hold, therefore, that the petitioner is not entitled to the dividend credit claimed under that subsection. Of course, petitioner is entitled to credit, under section 27(a), for the amounts paid which, *413 under the respondent's concession, cover all of the adjusted net income for 1936, and $25,624.83 for 1937. The question arises then whether the balance of adjusted net income for 1937, $40,722.52, is basis for a claim of credit under section 26(c)(1). Section 26(c)(1) does not apply, for though existence of debt is not a prerequisite to its application, there must be a contract restricting payment of dividends, and here there was no such restriction. The contract indeed provided for, and not against, the payment of dividends, and the petitioners could have paid them without violation of any provision of the contract, but in compliance therewith. The adjusted net income could all have been devoted to payment of dividends. In fact, the entire amount was within the*907 taxable year declared payable, and payment followed in March 1938.
Ticker also contends that it is entitled to dividends paid credits in computing surtax on any resulting undistributed net income for 1936 and 1937, and that it is also entitled to a dividend carry-over credit of $5,000 in computing surtax on undistributed profits for 1937.
The respondent concedes that Ticker is entitled to a dividends paid credit of $44,939.10 for 1936 and a dividend carry-over credit to 1937 as a result thereof. The parties agree that the amount should be determined under Rule 50. As to the year 1937, the respondent contends that as no part of the amount of $40,722.52 credited to Cecelia G. Wyckoff as interest on the class A bonds was paid in 1937, Ticker is not entitled to any credit in respect thereto. Concerning the class B bonds he concedes that the credits totaling $25,624.83 to C. G. Wyckoff, Inc., constituted the payment of a dividend, but that the amount of the dividends paid credit is limited to 15 percent thereof, or $3,843.72, by the provisions of sections 26(b) and 27(h) of the Revenue Act of 1936. 2
*908 We agree with respondent on the dividends paid on the class A bonds. They were declared on December 30, 1937, credited the next day, but were not payable or paid until March 7, 1938. The crediting under the circumstances did not constitute payment under section 27(a) of the Revenue Act of 1936.3 There must be payment to obtain the *414 benefits of the statute. . , and , are clearly distinguishable. The stipulation relied upon by Ticker to show that the amount was reported by Cecelia G. Wyckoff as income in 1937 relates to "interest" paid by Ticker, not "interest" declared by it.
The respondent cites no authority other than sections 26(b) and 27(h), supra, to support his contention that the dividends paid credit on the distribution made to C. G. Wyckoff, Inc., is limited to 15 percent of the amount*909 thereof. We find no decided cases on the question.
The gist of the contention of respondent seems to be that as 85 percent of the dividend paid on the class B bonds escaped tax by reason of the credit allowed to corporations under section 26(b) for dividends received from domestic corporations, to the extent the payment was a nontaxable distribution of Ticker.
Dividends are expressly includible in gross income by the provisions of section 22(a) of the Revenue Act of 1936. Definitions of gross income in prior statutes contained a similar provision. Sec. 22(a), Revenue Acts of 1928, 1932, 1934; sec. 213(a), Revenue Acts of 1918, 1921, 1924, 1926. These revenue acts granted, in general, deductions to corporations for amounts received as dividends from domestic corporations. Sec. 234(a)(6), Revenue Acts of 1918, 1921, 1924, 1926; sec. 23(p), Revenue Acts of 1928, 1932, 1934. By amendement to the 1934 Act, the Revenue Act of 1935 restricted the deduction to 90 percent of the amount received. Sec. 102(h).
The Revenue Act of 1936 did not permit a deduction from gross income for dividends received by corporations from domestic corporations, but allowed as a deduction from *910 net income, for normal tax purposes, the credit allowed by section 26(b), which is 85 percent of the amount of dividends received from a domestic corporation. Sec. 13(a)(2). This change in the 1936 Act did not alter the necessity of including in gross income, as before, dividends from domestic corporations. It merely provided for a deduction from net income for normal tax purposes instead of, as theretofore, a deduction from gross income. Thus there was clear provision recognizing the distribution as a taxable dividend and we do not think it was otherwise because Congress, by another provision, allowed a portion thereof to escape normal tax by a credit against net income.
Aside from the taxability of the dividend for normal tax purposes, the whole of the amount is subject to surtax on undistributed profits and personal holding company surtax. Secs. 14 and 351.
We hold that Ticker is entitled to a dividends paid credit for the entire amount of the dividends paid to C. G. Wyckoff, Inc.
The next contention of Ticker is that, since the respondent's claim *415 for an increased deficiency for 1936 was not filed in the proceeding within the three-year period allowed*911 by section 275(a) of the Revenue Act of 1936 4 for assessment, the request was not timely.
On November 8, 1939, well within the three-year period allowed for assessment, respondent mailed a notice of deficiency and within the 90 days allowed by section 272(a) Ticker petitioned this Board for a redetermination of the deficiency. The provisions of section 277 suspended the running of the statute of limitations until the decision of the Board becomes final and for 60 days thereafter. Before the hearing herein, while the statutory period of limitations was under suspension, the respondent, by an amended answer, on February 12, 1941, asserted a claim for an increased deficiency as permitted by section 272(e), claiming that amounts allowed by him as interest were dividends on preferred stock. Petitioner filed*912 an amended petition at the hearing, and the respondent filed answer thereto and again asked for increased deficiency.
The petitioner cites ; certiorari denied, ; reversing . In that case the court declined to permit an amendment to the petition of a taxpayer claiming refund of an overpayment because it constituted a new cause of action and was filed after the expiration of the period of time allowed by statute for the filing of claims for refund. In that case the taxpayer did not have the benefit of a statute authorizing him to make claim for a refund at any time before or at the hearing before this Board. Respondent had such right here. This statutory right serves to distinguish the two proceedings. The claim was filed within the time allowed by the statute and respondent is entitled to any increased deficiency redetermined under Rule 50. ; affd., ; *913 .
Ticker contends that in the event we hold that the payments made by it under the income bonds constitute dividends for 1936, and not interest, then it is entitled to an additional deduction of $2,000 in 1937 for New York State franchise tax.
At the hearing counsel for respondent made no reply to the statement of counsel for Ticker that the amount of New York State franchise tax would be determined under Rule 50. Upon brief he does not contest the allowance of any additional amount properly accruable, but argues that, as the burden of proof was upon petitioner and the record does not show the amount of taxes claimed as a deduction and *416 if there is additional liability for the taxes it can not be ascertained until the decision herein is rendered, we should not allow any amount.
Ticker claimed in its return for 1937 the sum of $742.79 as a deduction for New York State franchise tax, all of which the respondent allowed except $25 paid for another corporation. The earnings of Ticker as recorded in its books were stipulated and no claim is being made by the respondent that the books do not reflect its true profits, except*914 for adjustments made necessary by our holdings herein. The rate of tax on these earnings is a matter of state statute, of which this Board takes judicial notice. In an early decision we held that New York State franchise tax accrues on November 1 each year. . The New York State franchise tax accruable as a deduction for 1937 depends upon income for 1936. After the amount of income for 1936 is determined in accordance with this opinion, the parties should have no difficulty in arriving at the amount of New York State franchise tax properly deductible for 1937. However, if they are unable to agree upon this item in their computations under Rule 50, a further motion in respect thereto can be made.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 26. CREDITS OF CORPORATIONS.
In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax -
* * *
(c) CONTRACTS RESTRICTING PAYMENT OF DIVIDENDS. -
(1) PROHIBITION ON 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.
(2) DISPOSITION OF PROFITS OF TAXABLE YEAR. - 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. For the purposes of this parafgraph, a requirement to pay or set asid an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits. At used in this paragraph, the word "debt" does not include a debt incurred after April 30, 1936. ↩
2. SEC. 26. CREDITS OF CORPORATIONS.
In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax -
* * *
(b) DIVIDENDS RECEIVED. - 85 per centum of the amount received as dividends from a domestic corporation which is subject to taxation under this title. * * *
SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID.
* * *
(h) NONTAXABLE DISTRIBUTIONS. - If any part of a distribution (including stock dividends and stock rights) is not a taxable dividend in the hands of such of the shareholders as are subject to taxation under this title for the period in which the distribution is made, no dividends paid credit shall be allowed with respect to such part. ↩
3. SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID.
(a) DIVIDENDS PAID CREDIT IN GENERAL. - For the purposes of this title, the dividends paid credit shall be the amount of dividends paid during the taxable year. ↩
4. SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.
Except as provided in section 276 - .
(a) GENERAL RULE. - The amount of income taxes imposed by this title shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. ↩