*1456 A Missouri corporation's charter expired in 1935. Prior to the lapse there existed a written contract executed by that corporation expressly restricting the payment of dividends. After the lapse there was a reincorporation in Missouri, and by agreement, not in writing, the new corporation agreed to assume the obligations of the predecessor corporation as to the payment of dividends as restricted by the contract. The corporate name of the taxpayer is the same as that of its predecessor. The assets, liabilities, business and place of business are all the same. Held, the taxpayer may not claim a credit under section 26(c)(1) of the Revenue Act of 1936, since it did not execute any written contract expressly restricting the payment of dividends.
*804 The respondent has determined a deficiency in income tax in the amount of $6,192.49 for the taxable year 1936. The sole question presented in this proceeding is whether petitioner is entitled to a credit because of a contract restricting the payment of dividends under section 26(c)(1) of the Revenue*1457 Act of 1936, relating to the surtax on undistributed profits.
FINDINGS OF FACT.
The facts in this proceeding have been, for the most part, stipulated; and, as stipulated, are adopted as findings. In addition to the stipulation the testimony of one witness was heard.
The Boeckeler Lumber Co. was originally incorporated on April 8, 1895, under the laws of the State of Missouri for a period of 25 years. On February 2, 1915, the State of Missouri extended its corporate existence for a period of 20 years from April 8, 1915, that is, to April 8, 1935. The company's capital stock, after it was increased on April 6, 1911, was $250,000, divided into 1,000 shares of *805 7 percent cumulative preferred stock of the par value of $100 a share, and 1,500 shares of common stock of the par value of $100 a share, all fully paid. Thereafter, the stock of the Boeckeler Lumber Co. remained unchanged.
The charter of the corporation expired by lapse of time on April 8, 1935. The same business was continued under the same name until August 5, 1935, at which time a new charter was issued by the State of Missouri to the petitioner herein pursuant to the provisions of sections 4933, *1458 4934, and 4935 of the 1929 Revised Statutes of Missouri. For convenience of reference, the Boeckeler Lumber Co. existing under the charter of 1895, as amended in 1915, is herein called the predecessor company; the Boeckeler Lumber Co. doing business from April 8 to August 5, 1935, is herein called the de facto company; and the Boeckeler Lumber Co. existing under the 1935 charter is called petitioner.
Petitioner on August 5, 1935, had the same name, the same shareholders, the same officers, the same employees, the same business and place of business, the same assets, the same issues of stock in the same terms, and with the same provisions and the same continuing books of account as those of the predecessor company and of the de facto company. The business of petitioner, the predecessor company, and the de facto company has been operated continuously and without interruption since 1895.
During the year 1930 the predecessor company executed a deed of trust to the Mississippi Valley Trust Co., as trustee, dated January 1, 1930, to secure an issue of $150,000 first mortgage 6 percent gold bonds issued by the predecessor company. This deed of trust was also executed*1459 by the Mississippi Valley Trust Co. This deed of trust, which was in effect during all of the year 1936, contains the following provision:
Article sixteen: The company, its successor of assigns, shall pay no dividend on its preferred stock unless the net earnings for the current year shall be equal to or exceed twice the interest charges for that year upon the bonds hereby secured and outstanding. The terms "net earnings" shall beconstrued as meaning the amount of earnings remaining after deduction of all (1) operating expenses; (2) taxes and license fees of every kind and nature; (3) repairs and replacements necessary to prevent substantial depreciation of improvements now or hereafter erected or placed upon the land above described; (4) for insurance on said improvements; (5) interest becoming due on the bonded indebtedness secured by this indenture; (6) interest becoming due on the all other indebtedness (of whatever nature) of the company; (7) all other costs, expense charges and reservations incident to the conduct of the business of the company, including reasonable depreciation. No dividend whatever is to be paid by the company on its common stock without the consent*1460 of the Trustee under this indenture, which consent may be given or withheld at the sole discretion of said Trustee.
*806 The company referred to in article sixteen is the predecessor company. At no time on or after August 5, 1935, did the petitioner, in writing, assume, or, in writing, agree to pay or be bound by the provisions of the aforementioned deed of turst, except as hereinafter shown. Petitioner, since August 5, 1935, has fulfilled all the terms of the deed of trust, has paid interest and principal on the bonds secured by the deed of trust according to the terms of the latter, and has in all respects acted as if it was bound by the deed of trust. The last of the aforementioned bonds was retired by payment made by petitioner on June 26, 1939. In 1935 petitioner, through its attorney, orally represented to the trustee under the trust deed that, pursuant to the provisions thereof, it would pay no dividends.
Both the common and preferred stock certificates issued by petitioner and the predecessor company contain the following provision:
The holders of the preferred stock shall be entitled in preference and priority over the common stock of this company to cumulative*1461 preferential dividends at the rate of seven per centum per annum from and after April 1st, 1911, payable quarterly on the 1st day of July, October, January and April in each year, and, in case of the liquidation or dissolution of the company, they shall be preferred also to the extent of the par value thereof, together with any dividend or dividends accrued and unpaid, before any payments shall be made to the holders of the common stock, but they shall not be entitled to participate further in dividends or in the distribution of the assets of the company.
At a directors' meeting held December 30, 1932, it was resolved to declare a dividend of 7 percent on the preferred stock, to be paid when the profits of the company should warrant it, and when such payment would not conflict with the provisions of the bond indenture covering the company's issue of first mortgage bonds. Similar resolutions were adopted at meetings of the board held on December 29, 1930, and December 30, 1931.
At a meeting of the stockholders of the predecessor company held on March 30, 1933, it was resolved to rescind dividends declared and unpaid in the amount of $21,000 because, the resolution read, it appeared*1462 that it would be impossible for the company to pay the accumulated dividends previously declared "because of certain restrictions." The amount was carried back to the surplus account.
At the beginning of 1936 and throughout that year there were outstanding and unpaid $60,000 face value of the bonds mentioned, supra, on which the annual interest charges were $3,600. Petitioner had outstanding during 1936 1,000 shares of 7 percent cumulative preferred stock of the par value of $100 each, a total par value of $100,000, on which the dividend requirements were $7,000 per year, and 1,500 shares of common stock of the par value of $100 each, a total par value of $150,000.
*807 The Hill-Behan Lumber Co., a corporation, owns all of the stock of petitioner and owned all of its stock throughout the year 1936, and for many years prior thereto owned all of the stock of the predecessor company.
On October 1, 1933, the Hill-Behan Lumber Co. entered into a supplemental contract with the Boatmen's National Bank in order to secure an extension of time for the payment of certain bonds of the Hill-Behan Lumber Co. then outstanding. This contract, which was in effect during all of*1463 1936, contained the following provision:
4. That the limitation now placed upon the payment of dividends on stocks and officers' salaries until $300,000 par value of these bonds have been retired be eliminated, and in lieu thereof, that no dividends be paid on stock and/or bonuses or salaries and/or advances to Messrs. Hill and Behan by this company or any of its subsidiaries or affiliated companies be limited to $7,500 per annum for each one until this debt is retired.
The bonds referred to are those issued by the Hill-Behan Lumber Co. On December 31, 1936, $300,000 worth of these bonds had not been retired.
At a meeting of the stockholders of the predecessor company held January 18, 1934, it was resolved "to make note of the fact that this company can pay no dividends on its stock because of contract entered into by the Hill-Behan Lumber Co. with its Bondholders."
During the year 1936 petitioner's taxable net income, as adjusted, was $32,841.32; its net earnings (as defined in article sixteen of the trust deed, supra ), were in excess of $7,200 - i.e., in excess of twice the interest charges for 1936 upon the bonds secured by the deed of trust. Petitioner paid no*1464 dividends of any kind on preferred or common stock during 1936.
Petitioner did not execute prior to May 1, 1936, a written contract expressly restricting the payment of dividends.
OPINION.
KERN: The predecessor corporation in 1930 executed a written contract expressly dealing with the payment of dividends. The charter of the predecessor corporation expired April 8, 1935, and, there having been no further extension of the charter granted, the existence of the Boeckeler Lumber Co., petitioner's predecessor, that day ceased. Cf. ; ; ; . On August 5, 1935, when a charter for the petitioner corporation was granted by the Secretary of State of the State of Missouri, a new corporation came into existence; while this new corporation was free to assume any obligations of its predecessor, it was, nevertheless, a new and distinct legal entity.
*808 To be eligible for a credit created for the benefit of taxpayers, strict compliance with the terms of the section granting*1465 the credit must be shown. Cf. .
Petitioner seeks to avail itself of the provision of section 26(c)(1) of the Revenue Act of 1936. 1 In order to prevail, petitioner must establish the fact that there did exist in the taxable year a written contract executed by itself, a provision of which expressly restricts the payment of dividends. The only such written contract which petitioner has disclosed was never executed by itself. It was executed by petitioner's predecessor. When that predecessor ceased to exist and petitioner was incorporated with the same name, the contract did not ipso facto become executed by petitioner. The evidence indicates that petitioner did assume its predecessor's liabilities under that contract. But it did not do this by a similar contract to which it affixed its corporate signature. Rather, this was done orally or by implication from its course of conduct and the written evidence thereof is not found in a written contract. Certainly it can not be correctly thought that this is compliance with the terms of section 26(c)(1). The essentials of a formal written contract*1466 are lacking. See .
We do not consider the question of whether the petitioner could have made distribution of dividends in the taxable year notwithstanding the fact that it assumed the liabilities of the predecessor*1467 corporation. Because of our disposition of the first question involved, such inquiry is unnecessary. Petitioner is not entitled to the credit.
Reviewed by the Board.
Decision will be entered under Rule 50.
HARRON dissents.
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. ↩