*162 Decision will be entered for the respondent.
The petitioner was restricted by contract executed prior to May 1, 1936, from paying dividends, other than stock dividends, on its common stock, and was required to pay in cash or bonds on November 1 following the close of its taxable year, which ended on July 31, an amount equal to 20 percent of its sinking fund earnings during the taxable year. Held, on the facts, that the petitioner is not entitled to credit under section 26 (c) (1) or (c) (2), Revenue Act of 1936.
*1115 This proceeding involves the redetermination (to the extent of $ 38,449.01) of a deficiency of $ 40,376.27 in income tax for the fiscal year ended July 31, 1937. The issue is whether respondent erred in disallowing the amount of $ 188,923.02 as a credit for contracts restricting dividend payments. Petitioner alleges in the alternative that respondent erred in disallowing a credit of $ 74,927.96 for current earnings of the taxable year required to be paid or set aside within that*163 year to discharge indebtedness. Other issues raised by the petitioner in its petition were abandoned at the hearing. The stipulation of facts filed by the parties is incorporated herein by reference as part of our findings of fact. Material parts thereof will be set forth in connection with findings of fact made from other evidence.
FINDINGS OF FACT.
Petitioner is an Illinois corporation, with its principal place of business in Sterling, Illinois. It filed its income tax return for the taxable year with the collector for the first district of Illinois, on November 10, 1937. The return and the notice of deficiency herein were prepared on the accrual basis of accounting. At all times important it was engaged in the business of producing steel wire rods which it fabricated into wire products, such as barb wire, field fencing, poultry netting, nails, and allied wire products.
Prior to 1935 petitioner purchased its requirements of wire rods. In 1935 it decided to construct a rod mill. Funds for the construction of the mill were obtained from the sale to a group of underwriters, in September 1935, of $ 1,250,000 face amount of 5 1/2 percent first mortgage sinking fund bonds dated*164 August 1, 1935, maturing 10 years thereafter, and stock purchase warrants providing for the purchase, at fixed prices from time to time, of 40,000 shares of petitioner's common stock. For the bonds and stock rights the petitioner received $ 1,187,500. Of this amount $ 350,000 was used to pay an obligation to the American Steel & Wire Co. and the remainder was used in the construction of the rod mill. The rod mill was completed in the spring of 1936 at a total cost, including equipment, of about $ 1,930,000. There was no segregation of the selling price as between the bonds and the warrants.
The underwriters retained 15,000 of the stock purchase warrants as part consideration for their services. They sold the remaining warrants and the bonds to the public at the unit price of 102 percent of the principal amount of the bonds. The warrants entitled the holders thereof to purchase 10 shares of common stock of petitioner for each $ 500 principal amount of bonds. The number of warrants to be retained, the number to be sold with the bonds, and the unit selling price of 102 were fixed by the underwriters.
The amount of stock purchase warrants to be retained by the underwriters and *165 not sold by them with the bonds and the amount to be sold *1116 with the bonds were set forth in a prospectus issued by the petitioner on September 6, 1935, filed with the Securities and Exchange Commission prior to August 15, 1935, in advance of the sale, and circulated. The prospectus contained the following provision: "Warrants sold separately from the Bonds calling for 15,000 shares of Common Stock of the Company may be sold in varying denominations." The underwriters had no right to change the terms of the prospectus.
On September 6, 1935, the petitioner executed an agreement as of August 1, 1935, with the Harris Trust & Savings Bank, known as "Stock Purchase Warrant Agreement." The agreement recites that it was for the common benefit of all present and future holders of petitioner's stock purchase warrants and that there were being issued thereunder stock purchase warrants for the purchase of not in excess of 40,000 shares of petitioner's common stock. The agreement contained, among others, provisions reading as follows:
Whereas, in order to better enable the Company to market and sell said bonds to be issued as aforesaid, it has been arranged and agreed, and the Company*166 has determined, that there shall be issued and delivered stock purchase warrants as hereinafter provided; * * *
* * * *
Article IV.
* * * *
Sec. 4. In case the Company shall determine to declare any stock dividend upon any of its outstanding common stock, or to make any distribution to its common stockholders other than a cash dividend of income, or in case the Company shall determine to authorize and offer for subscription to its common stockholders any additional stock, then the Company shall give to the Trustee and to the holders of the stock purchase warrants outstanding hereunder previous notice of the date on which the books close for, or of the date as of which the stockholders of record will be entitled to participate in, such stock dividend, distribution or subscription right, * * * to the end that during such period of thirty days the holders of stock purchase warrants outstanding hereunder may purchase stock in accordance with such warrants and be entitled in respect of the stock so purchased to exercise such subscription rights or to receive such stock dividend or other distribution, as the case may be.
* * * *
Sec. 9. * * * So long as any stock purchase warrant is outstanding*167 under this Agreement, the Company will not issue any common stock except out of its present authorized issue of common stock and/or any lawful increase thereof, nor will it create or issue any preferred or other stock having a preference over or participating with such common stock; Provided, that the Company may (in addition to 394 shares of its present authorized preferred stock now outstanding) issue shares of its present authorized preferred stock and/or any lawful increase thereof and/or may create and issue any new preferred stock upon the following conditions:
(a) The consideration received for any such preferred stock shall not be less than eighty per centum of its liquidation value, being the amount, other than for accrued dividends, which the holder of such stock shall be entitled by the terms of such stock to receive upon the involuntary liquidation or dissolution of the Company; and
*1117 (b) The dividends on such preferred stock shall be limited to not more than eight per centum per annum of such liquidation value; and
(c) No such preferred stock shall be entitled to receive upon its redemption, or under any sinking fund established for its benefit, more*168 than one hundred and ten per centum of such liquidation value plus any unpaid dividends accrued thereon; and
(d) No such preferred stock shall in respect of the election of Directors possess any greater voting right per share than the common stock of the Company.
Sec. 10. In case at any time the Company shall sell or exchange its property and business as an entirety, or substantially so, or shall consolidate or merge with any other corporation, in such way or manner as to result in the holders of its outstanding common stock receiving shares of stock, securities, money and/or property in place of their shares of common stock in the Company, the Company covenants and agrees that it will make or cause to be made such arrangements with the Trustee (satisfactory to counsel for the Trustee) (1) as will effectively enable the holder of any stock purchase warrant then outstanding hereunder at any time on or prior to August 1, 1945, upon surrender of such warrant and payment of a sum equal to the aggregate purchase price at the current stipulated price of the specific number of shares mentioned in such warrant, to receive in lieu of the number of shares which would have been deliverable*169 if such surrender and payment had been made just prior to such sale, exchange, consolidation or merger the same securities and/or other consideration arising from such sale, exchange, consolidation or merger as the holders of the issued and outstanding common stock of the Company received in respect of a like number of shares of such outstanding stock, and (2) as will suitably protect such new purchase rights against contingencies analogous to those set forth in this Section and in Sections 2 and 8 of this Article.
Other provisions of the agreement protected the selling price of stock purchasable under the stock purchase warrants in the event petitioner increased or decreased, by amendment to its charter, the number of shares of common stock outstanding prior to the amendment, without any payment by petitioner because of such reduction, and permitted petitioner to grant to the holders of outstanding stock purchase warrants the right to purchase stock on terms more favorable than those then prevailing under the stock purchase warrants.
The stock purchase warrants provided that the holders thereof were entitled to purchase petitioner's common stock at the price of $ 30 per share to *170 and including August 1, 1937, $ 35 per share thereafter to and including August 1, 1940, and $ 40 per share thereafter to and including August 1, 1945.
On September 6, 1935, petitioner and the Harris Trust & Savings Bank executed an agreement, known as "Trust Indenture," as of August 1, 1935, in which petitioner conveyed to the bank, in trust, certain property described therein as security for the payment of prinipal and interest on the bonds. Interest on the bonds was payable semiannually on February 1 and August 1. Section 12 of article III of the trust indenture reads, in part, as follows:
Sec. 12. The Company covenants, that it will not declare or pay any dividends (other than stock dividends) on any of the common stock of the Company at *1118 any time outstanding except out of earnings resulting from operations subsequent to July 31, 1935, remaining on hand after deducting all operating and other expenses and fixed and other charges, including in such operating expenses, taxes, insurance, damages, rentals and reasonable expenditures for repairs and maintenance, and including in such fixed charges requirements in respect of the Sinking Fund hereinafter mentioned in Section*171 2 of Article IV hereof, nor then if after the payment of such dividends the net current assets of the Company shall be less than $ 901,474.74, all computed in accordance with standard accounting practice.
The authorized capital stock of petitioner at the close of the taxable year consisted of 200,000 shares of common stock, par value $ 5 per share, and 750 shares of preferred stock, par value $ 100 per share. The petitioner was obligated by a provision of the stock purchase warrant agreement to reserve at all times a sufficient number of shares of its common stock to redeem all warrants outstanding. The number of issued and outstanding shares of preferred and common stock of petitioner at the beginning and end of the taxable year was as follows:
| Preferred | Common | |
| Beginning of year | 611 | 160,014 |
| End of year | 662 | 161,917 |
The number of stock purchase warrants outstanding at the beginning and end of the taxable year was 39,986 and 38,083, respectively. Petitioner's common and preferred stock and stock purchase warrants were not listed or traded in on any exchange.
The amount of $ 901,474.74 referred to in section 12 of article III of the trust indenture was determined*172 by subtracting from current assets in the amount of $ 1,564,726.52, as shown in a balance sheet of petitioner as at July 31, 1935, incorporated in the prospectus, current liabilities of $ 663,251.78 shown therein. The amount of $ 901,474.74 was stated in the prospectus to be the net current assets of the petitioner as of July 31, 1935. The petitioner did not receive a deficiency letter from the Securities & Exchange Commission in regard to its net current assets as disclosed in the prospectus.
Petitioner's net current assets at the close of the taxable year, as shown by an audit report made from its books, were $ 707,226.32. The books of petitioner, as disclosed by a statement prepared therefrom, reflect that at the beginning and end of each month during the taxable year the net current assets of petitioner were never in excess of $ 734,516.60, except on June 30, 1937, when they were $ 785,476.42. Petitioner had no business transactions within any of the 30-day intervals which would have caused the books, as kept, to reflect net current assets in excess of $ 901,000.
*1119 The petitioner's balance sheets on July 31, 1935, and July 31, 1937, listed as a noncurrent asset a *173 note in the amount of $ 280,000 executed by P. W. Dillon, petitioner's president and owner of all of its stock prior to the issuance of stock under the stock purchase warrants. This note was acquired under the following circumstances: In 1927 petitioner decided to acquire ownership of the Parrish-Alford Fence & Machine Co., an Indiana corporation, hereinafter referred to as Parrish, in order to afford it an additional outlet for certain of its products, and that the acquisition should be made in such a manner as not to disclose that it was being purchased by petitioner. Dillon purchased the stock of Parrish in 1928 from the proceeds of a $ 280,000 noninterest-bearing loan made to him by petitioner for that purpose. Dillon supervised the activities of Parrish, but for business reasons he was not at any time shown as an officer thereof. The petitioner and the Parrish corporation were operated as two entities. In 1935 about 25 percent, and in the taxable year about 16 percent, of the sales of petitioner were made to Parrish. Parrish was referred to in the prospectus as an affiliated company. Petitioner also said in the prospectus that it had no subsidiaries.
The petitioner and *174 Dillon entered into an agreement on August 15, 1935, in regard to the loan of $ 280,000 and the stock of Parrish. The agreement recited that Dillon owned all of the issued and outstanding stock of petitioner and Parrish, that the outstanding stock of Parrish consisted of 27,000 shares of class B common stock, par value $ 10 per share, and 6,900 shares of preferred stock, par value $ 100 per share, that Dillon had acquired the stock of Parrish in 1928 by the use of the proceeds of a noninterest-bearlng loan of $ 280,000 made to him by petitioner, and that the underwriters were willing to purchase the bonds and stock purchase warrants of petitioner if this particular contract were entered into. The contract then provided, together with other things not material, that:
(1) Dillon would during the life of the contract cause all dividends on the class B stock to be paid to petitioner and that all earnings of Parrish for the payment of dividends upon the class B stock would be declared and paid thereon, after deducting, with the consent of petitioner, an amount to provide for adequate working capital and other contingencies.
(2) Dillon would, concurrently with the execution of the agreement, *175 execute and deliver to petitioner a demand collateral noninterest-bearing promissory note in the amount of $ 280,000 to evidence his indebtedness to petitioner on account of the loan, pledging as collateral security for the payment thereof the class B stock of Parrish, Dillon, however, notwithstanding the terms thereof, to have the right at any time during the life of the agreement to deliver the stock to petitioner in full payment of the note.
*1120 (3) Dillon would not during the life of the agreement sell or otherwise dispose of the class B stock except subject to the terms of the agreement and he would not vote the stock to authorize the issuance of any additional class B stock or class A common stock unless he deposited the additional stock in deliverable form under and subject to the terms of the agreement.
(4) Dillon agreed that in case of his default under the agreement the petitioner would have the right to terminate the agreement, take over the class B stock in full payment of the note, or otherwise enforce its rights under the agreement, no such action, however, to be taken in these respects without the written consent of a representative of the underwriters.
(5) Petitioner*176 would have the right with the written consent of a representative of the underwriters upon not less than 90 days' notice in writing to Dillon to terminate the agreement, during which 90-day period Dillon had the right to turn in the class B stock in full payment of the note, and, in the event of the termination of the contract under this or the preceding paragraph, petitioner would be free to enforce against Dillon payment of the note and to exercise its rights against the class B stock pledged thereunder.
The note in the amount of $ 280,000 referred to in the agreement of August 15, 1935, was executed by Dillon on September 6, 1935, and the 27,000 shares of class B common stock of Parrish were deposited with the Harris Trust & Savings Bank, as escrow agent, as security for the payment thereof. The note provided that if Dillon should after demand by petitioner default in the payment of the principal of the note, the petitioner might upon not less than 10 days' written notice to Dillon sell the collateral or any part thereof free from any right of redemption and, after deducting legal or other expenses, the petitioner might apply the remainder to the payment of the note, returning*177 any excess to Dillon.
A provision of the trust indenture obligated petitioner to keep and perform all of the terms of the contract entered into with Dillon on August 15, 1935.
No payment has ever been made upon the $ 280,000 note.
In 1937 Dillon's assets consisted of his holdings in petitioner's stock, his home, an equity in his father's or mother's estate, upon which nothing has as yet been realized, $ 78,024.67 due from petitioner, and an undisclosed amount of another item carried on petitioner's books as advances from employees. Aside from the $ 280,000 note, he had no liabilities except a small mortgage on his home.
Petitioner was obligated by a provision of the trust indenture to file with the trustee on or before November 1 each year an audit of its books and accounts showing its financial condition as of July *1121 31 next preceding, specifically disclosing for such twelve calendar months the sinking fund earnings, as defined in section 2 of article IV of the trust indenture.
Petitioner agreed in the trust indenture to pay to the trustee on the first day of November each year "as a sinking fund a sum of money equal to twenty per cent of the 'sinking fund earnings,' as*178 hereinafter defined, for the twelve calendar months ending on the next preceding July 31st, as disclosed by the annual audit to be filed with the Trustee" (not later than November 1). The term "sinking fund earnings" was defined in the trust indenture as consisting of:
* * * the earnings of the Company from all sources in excess of (i) operating expenses, including in such operating expenses, insurance, rentals, damages, license fees and reasonable expenditures for or allowances to provide for repairs and maintenance (but no deduction shall be made for depreciation or obsolescence or amortization of securities discount), (ii) all interest, including interest on the bonds outstanding hereunder, and (iii) all taxes, including income or other like taxes payable in respect of earnings remaining after all interest charges. Reserves once set aside shall be restored to surplus and/or earnings when no longer needed, and for the purpose of computing sinking fund earnings shall be considered as earnings for the year in which such restoration is made.
The trustee was obligated by provisions of the trust indenture to apply moneys in the sinking fund to the purchase of bonds outstanding under*179 the indenture and the petitioner had the right to present bonds to the trustee for cancellation and receive credit therefor in connection with the amount payable into the sinking fund. No bonds were to be issued to replace bonds canceled under provisions of the trust indenture.
As required by the trust indenture, the petitioner caused an audit to be made of its books for the taxable year from which it determined that the amount of $ 74,927.96 was a sum equal to 20 percent of its sinking fund earnings for that year. This amount was paid to the trustee on October 30, 1937, and consisted of $ 30,315.34 cash, and bonds, plus accrued interest thereon, purchased by petitioner during October 1937 at a cost of $ 44,612.62.
On several occasions prior to, in, and subsequent to the taxable year, petitioner requested the underwriters above mentioned to sell, or underwrite, a new issue of its preferred stock. The corporation at all times declined to do either, because it believed petitioner's preferred stock would not be salable on account of its balance sheet and earnings. At the close of the taxable year petitioner had outstanding bank loans in the amount of $ 369,808.64 secured by its accounts*180 receivable and raw materials' inventory. In July 1938 some of petitioner's creditors granted extensions of two years on the *1122 amounts due them. In August 1938 the Commercial Credit Co. loaned petitioner $ 930,000 at 9 percent interest, secured by petitioner's accounts receivable and inventories.
On January 2, 1937, petitioner paid a dividend of $ 4,311.03 on its preferred stock. The preferred stock was not at any time in 1937 in arrears as to dividends.
The capital position of petitioner as of July 31, 1936, and July 31, 1937, was as follows:
| July 31, 1936 | July 31, 1937 | Increase | |
| 7% cumulative preferred stock | $ 61,100.00 | $ 66,200.00 | $ 5,100.00 |
| $ 5 par value common stock | 800,070.00 | 809,585.00 | 9,515.00 |
| Paid-in surplus | 125,150.00 | 172,725.00 | 47,575.00 |
| Earned surplus | 1,618,013.54 | 1,840,251.96 | 222,238.42 |
| Total | 2,604,333.54 | 2,888,761.96 | 284,428.42 |
During 1937, 51 shares of petitioner's preferred stock were sold at par, of which Dillon purchased 50 shares in one block.
The petitioner deducted in its return for the taxable year, and the Commissioner denied, the amount of $ 178,001.88 as a credit for contracts restricting dividend payments under*181 the provision of section 26 (c) (1) of the Revenue Act of 1936.
OPINION.
The principal contention for our determination here is whether the petitioner is entitled to a credit on account of a contract restricting payment of dividends under the provisions of section 26 (c) (1), Revenue Act of 1936. 1 The petitioner relies upon, as *1123 one contract, the provisions of a trust indenture and a stock purchase warrant agreement. In substance, the trust indenture provided that the petitioner would not declare or pay any dividends "(other than stock dividends) on any of the common stock of the company" except out of earnings from operations subsequent to July 31, 1935, and then not if after payment of such dividends the net current assets of the company shall be less than $ 901,474.74, computed in accordance with standard accounting practice. The stock purchase warrant agreement in effect provided that in case the company should determine to declare any stock dividend upon outstanding common stock, or to make any distribution to any common stockholders, other than cash dividends, or to offer for subscription to common stockholders any additional stock, the company should give the*182 trustee and the holders of the stock purchase warrants previous notice of the date to the end that the holders of stock purchase warrants might purchase stock in accordance with their warrants and be entitled, in respect of the stock so purchased, to receive such stock dividend or other distribution; also, that so long as stock purchase warrants were outstanding, common stock would not be issued except out of presently authorized common stock and/or any lawful increase thereof, that stock would not be issued with a preference over, or participating with, common stock, except that preferred stock might be issued out of presently authorized issue and/or increase thereof, or out of a new issue, provided that 80 percent of liquidation value be received for such preferred stock, that dividends thereon be limited to 8 percent, and that it carry no greater voting right than common stock. The petitioner contends, in substance, that at no time during the taxable year did the net current assets of the company exceed $ 901,474.74, and that in fact they were much less, and that therefore it could not declare or pay a dividend and is entitled to the credit under section 26 (c) (1). Included *183 among the assets of petitioner was a note from its president in the amount of $ 280,000, and whether the net current assets during the taxable year exceeded $ 901,474.74 depends upon whether said note is to be considered among net current assets under standard rules of accounting. The respondent upon brief conceded some merit in the petitioner's position that the note was not so to be included among net current assets and states that he does not press the argument to the contrary further than merely to point out that the respondent's determination is presumptively correct and that there is some conflict in the testimony on the point. Considering such view, together with the fact that the $ 280,000 indebtedness was in existence prior to July 1, 1935, but as of that date was not included in computation of current assets covered by article III, section 12, of the trust indenture, and the conclusion to which we have come in this proceeding, *1124 we assume, without deciding, that the $ 280,000 was not a current asset within the meaning of that section. Therefore during the current year the petitioner was subject to a contract restricting it from paying dividends "other than stock*184 dividends" upon common stock.
*185 This does not, however, dispose of the entire question, for the respondent points out that stock dividends could have been paid and quotes our language in (969), in effect approving his contention that a restriction upon payment of cash dividends did not restrict payment of stock dividends. To the same effect is , reversing , upon which the petitioner relies. We followed the decision of the Circuit Court of Appeals in .
The petitioner contends, however, that stock dividends could not, under the circumstances here, be paid for the reason that the only possibility was of stock distributions in common stock upon common stock, that such would not constitute a taxable dividend, that a nontaxable dividend would not affect the question, and that the small quantity of preferred stock authorized, but unissued, could not be issued as a stock dividend because it could only be issued for a consideration equal to 80 percent *186 of its liquidation value; that for all such reasons no taxable stock dividend could be issued; that, therefore, the petitioner is entitled to the credit here involved.
To that contention the respondent answers, in part, that the stock purchase warrant agreement was a separate contract from that of the trust indenture relative to restrictions upon payment of dividends, that although the bonds to be issued under the trust agreement and the stock purchase warrants were issued in units, they could as such units be divided and therefore can not be looked at as issued under one indivisible contract; and particularly that even under the language of the stock purchase warrant agreement there was no restriction upon issuance of stock dividends, but rather a recognition that stock dividends could be issued, since it was therein provided that in case the company should determine to declare a stock dividend upon any of its outstanding common stock or to make any distribution to common stockholders other than cash dividend, the holders of the stock purchase warrants should have notice so that they could purchase stock in accordance with their warrants and participate in such dividend or distribution; *187 but that in any event the petitioner is in error in contending that the stock purchase warrants outstanding were sufficient to take up, and therefore restricted, all the common stock, for the reason that the stock purchase warrant agreement provided that the term common stock means the present common stock "and any lawful increase thereof" and that it was specifically provided, *1125 not as the petitioner contends, that the company would not issue common stock as long as stock purchase warrants were outstanding, but that so long as the warrants were outstanding "the company will not issue any common stock except out of its present authorized issue of common stock and/or any lawful increase thereof," and that, therefore, since the company was free to increase its common stock, it was free to issue stock dividends out of such lawfully increased capital stock; also that petitioner was not prevented from increasing its authorized preferred stock and that the requirement that preferred stock could not be issued for a consideration less than 80 percent of liquidation did not prevent issuance thereof as a stock dividend.
The statute here under consideration must be strictly construed, *188 since it provides for a credit. ; . The petitioner, faced with the fact that section 12 of the bond indenture permits stock dividends on either common stock or preferred stock, is in the position of attempting to incorporate into such contract the provisions of the contract with reference to stock purchase warrants, which contain language relied upon to prohibit issuance of stock, therefore, the petitioner contends, preventing stock dividends. The bond indenture was a contract with the holders thereof; the stock purchase agreement was one with the purchasers of bonds, who also received warrants entitling them to purchase 25,000 shares of stock; also, with others not holding bonds, but holding certificates entitling them to purchase 15,000 shares of stock. "Generally, several instruments executed at the same time and relating to the same subject matter can not be construed together as one contract unless they are between the same parties." ; 13 C. *189 J. 530. In , there was involved an attempt to connect two contracts as one as a defense to a suit for failure to purchase corporate stock as agreed. One contract, the contract signed by the defendant, was an "Underwriting Syndicate Agreement" under which he could purchase preferred stock at $ 100 a share, including two shares of common stock. This syndicate agreement was referred to in an agreement to incorporate the corporation, the stock of which the defendant agreed to purchase, and certain statements in the agreement to incorporate were relied upon as a defense on the theory that the two agreements were upon the same subject matter and should be construed together. The parties to the agreement to incorporate appear to have been different from those signing the syndicate agreement. The court held that the contracts were separate and in the course of the opinion said:
* * * Several instruments between the same parties, executed at the same time, and dealing with the same subject-matter, are read as one; but the absence of one or more of such elements of identity may make clear that the *1126 *190 instruments are independent of each other. For instance where the parties to the instrument are different, they do not constitute one agreement (; ). * * *
17 Corpus Juris Secundum § 58, p. 408, says:
An agreement may be collected from several different writings which, when connected, show the parties, subject matter, terms, and consideration, as in the case of contracts entered into by correspondence, considered in § 52 supra, but the rule, that where a written contract is in several parts and all are executed at the same time it is but one contract, cannot be applied to separate and distinct papers executed and signed by different parties and imposing different obligations on the parties executing them. * * *
We do not think that the two contracts here should be read as one, for the purpose of the statute here being considered. That statute requires, for the credit claimed by*191 the petitioner, that the petitioner be prohibited from payment of dividends by a provision of a written contract expressly dealing with the payment of dividends. The contract with reference to stock purchase certificates contains no express provision restricting the payment of dividends. Section 9 of article IV provides against issuance of common stock except out of "present authorized issue * * * and/or any lawful increase thereof." Other language thereof, though contradictory of itself, permits issuance of preferred stock, particularly if certain conditions are observed. Section 4 of the same article provides merely for thirty days notice to holders of stock purchase warrants before declaration of any stock dividend upon common stock "to the end that * * * the holders * * * may purchase stock * * * or * * * receive such dividend * * *." All this adds nothing in that respect to the contract necessarily primarily relied upon by the petitioner, that is, the language of the bond indenture, which, as already seen, does not prohibit stock dividends. The stock purchase agreement was made by the petitioner with a different purpose from that in the issuance of bonds, and in a very*192 large measure with different people, for, out of the 40,000 shares of stock which could be purchased under the stock purchase agreement, certificates entitling the holders to purchase 15,000 shares were not purchased by the purchasers of bonds, but the purchase warrants of the bonds were kept by the underwriters as their fee and could be sold to anyone.
In addition, the record does not indicate that the stock purchase agreements were not assignable separately from the bonds. It thus appears that there is no real connection between the bonds and the purchase of the stock, except the mere fact that originally a purchaser of bonds received a sort of bonus, a stock purchase privilege, or, more accurately, purchased such a privilege together with the purchase of *1127 his bond. The record does not disclose whether such stock certificates in the taxable year are still in the hands of the holders of the bonds. Though in fact the stock purchase rights were still extant in the taxable year, yet they might have been at an end, exercised and merged into stock ownership, prior thereto; while the rights of the bondholders, of course, would remain alive and effective so long as the bonds*193 were outstanding. The purpose of the restriction upon payment of dividends was obviously for the benefit of the bondholders and their security, and of no interest to the holders of stock purchase warrants. Of course as potential stockholders, they would hold subject to the bonds. The rights of holders of the stock purchase warrants, on the other hand, were for their protection and of no interest to the holders of the bonds, whose rights were superior to those of stockholders. The bond indenture does not refer to the stock purchase agreement, and the stock purchase agreement refers only to the fact of issuance of $ 1,250,000 bonds being issued under the bond trust indenture and that the stock purchase warrants were to be issued "in order better to enable the Company to market and sell said bonds." In other words, the only connection between stock purchase warrants and bonds was that the stock purchase agreement served to stimulate the sale of the bonds. They were separate contracts, separately issued. Only in so far as warrants authorizing purchase of 25,000 shares (out of the warrants for 40,000 shares) were sold with the bonds, and only during such sale, were the bonds and *194 stock purchase warrants treated together.
From all of these considerations of the reason for, and specific requirements of the statute, and the difference in character of the two agreements, we hold that the stock purchase agreement should not be considered as a part of the contract restricting dividends.
However, even if the two contracts are read together and considered as one, in our opinion the provisions of section 26 (c) (1) are still not satisfied nor the credit allowable. That statute provides, in most particular terms, that to obtain the credit, the taxpayer must point, not merely to a contract, but to a provision of a contract, and a provision expressly dealing with the payment of dividends. Moreover, the provision must prohibit payment of dividends, for the statute provides that the credit is given only if the provision is violated. The reason is plain: Congress allowed the credit for a dividend paid; and it permitted use of a substitute for payment, in the form of an express contractual provision prohibiting payment. But such substitute must be gathered, not from inference, not from general contractual expression, but from a written provision express, *195 and express upon the subject of dividend payments. Nothing less, we think, was intended to be substituted for payment of a dividend. The burden of showing that the corporation could not pay dividends was intentionally made heavy and exacting.
*1128 Here, the only provision in the bond indenture expressly dealing with payment of dividends does not preclude stock dividends. Petitioner would, therefore, import a provision from elsewhere. However, even when so imported, it does not expressly and prohibitively deal with payment of dividends. Section 9 of article IV, above referred to, nowhere mentions dividends. It deals with stock issues, but even there, when taken altogether, is found to permit issuance of both common and preferred stock. Section 4 of article IV does expressly mention stock dividends, but upon common stock only, and contains no prohibition of issuance of stock dividends, but only provides for notice to holders of stock warrants prior to declaration of dividends. Obviously this constitutes nothing preventing petitioner from issuing stock dividends even upon common stock, and it leaves the issuance of dividends on preferred stock entirely free. It*196 is to be noted also, that the section shows the expectation that stock dividends could be issued. We think it was not Congressional intent that the credit be based upon a provision so devoid of the element of express dealing with prevention of payment of dividends. Indeed, since the language from the stock purchase warrant agreement is found, after all, to permit issuance of stock, either common or preferred, in the taxable year, it is to be seen that the petitioner, in relying upon the cases for its thesis that a taxable distribution of a stock dividend could not be made, is thus relying, not even upon the language imported from the stock purchase agreement, but upon general law (as to taxable or nontaxable dividends) affecting stock dividends. Such position is far removed from the necessary express restrictive provision dealing, not only with dividends, but their payment.
In addition, we are of the opinion that the provisions of the stock purchase agreement do not so affect the prohibition on issuance of stock as to give the effect for which the petitioner contends; for it is there provided that the company may issue preferred stock either out of its present authorized preferred*197 stock or any lawful increase thereof, or may create and issue new preferred stock, upon certain conditions which, so far as pertinent here, are that the consideration received therefor shall not be less than 80 percent of liquidation value. If stock could have been issued during the taxable year, under this provision it is plain that so far as the record here shows such stock so issued might have constituted a taxable dividend, for such stock might have been issued as dividends upon both common and preferred stock or upon either, thus effecting a difference in proportional interests in the corporation. Helvering v. Sprouse; . Therefore petitioner's further argument, that a common stock dividend upon common stock would not be taxable, would be rendered immaterial. The petitioner's answer *1129 to this contention is, in effect, that a stock dividend upon the preferred stock could not have been issued because a consideration of 80 percent of liquidation value must be received therefor; and, further, that the Illinois corporation law provides that no dividend payable in shares shall be paid in shares*198 having a privilege as to dividends over the shares upon which such dividend is paid, unless the payment is authorized by the articles of incorporation, and that petitioner's preferred stock was preferred as to dividends over its common and such payment of dividends was not authorized by petitioner's articles of incorporation.
We can not agree with these contentions. We fail to discern that the issuance of a stock dividend precludes the idea that it is issued for a consideration. For example, had a stock dividend in preferred upon the preferred stock been issued, as provided by section 9 of article IV of the stock purchase warrant agreement, it is entirely possible that more than 80 percent of its liquidation value might have been transferred from the earned surplus account to the capital stock account. In our opinion, this would constitute consideration for the preferred stock dividend. It would be the same, in effect, as if the earned surplus had been distributed to the stockholder and had been paid for the preferred stock issued. We hold that the provision as to the 80 percent consideration does not preclude a stock dividend. Nor do we think that the provision of the Illinois*199 law can be given the effect desired. The state statute can not serve as contract. Moreover, in substance, it merely provides that the articles of incorporation govern as to dividends paid in shares having a preference as to dividends over the shares upon which paid. The articles of incorporation are thus seen to be relied upon as assisting to constitute a contract within the meaning of section 26 (c) (1). Such articles do not form a part of the contract contemplated by the statute. ; ; . Moreover, the articles of incorporation were subject to change. We find nothing in such statutory provision nor in the 80 percent consideration requirement for preferred stock which constitutes an agreement within the intendment of section 26 (c) (1) entered into prior to May 1, 1936, effective to prevent the issuance of stock dividends during the taxable year.
After careful*200 consideration of the conflicting views of parties upon this whole question, we conclude and hold that no contract entered into prior to May 1, 1936, restricted the payment of taxable stock dividends by the petitioner during the taxable year, and that therefore the credit desired was properly disallowed under the provisions of section 26 (c) (1).
*1130 In the alternative, the petitioner argues that it is entitled to credit under section 26 (c) (2), Revenue Act of 1936, in the amount of $ 74,927.96. That section grants credit when the contract requires either payment, or irrevocable setting aside, within the taxable year, of earnings and profits of such taxable year. No contention is made that payment was made within the taxable year, since in fact the taxable year ended on July 31, 1937, and the payment was made on October 30, 1937. Dependence is placed on irrevocable setting aside within the taxable year. The provision of the trust indenture was, so far as here concerned, that the petitioner covenanted to pay to the trustee on November 1, 1937, "as a sinking fund a sum of money equal to twenty per cent of the 'sinking fund earnings,' as hereinafter defined, for the twelve*201 calendar months ending on the next preceding July 31st, as disclosed by the annual audit to be filed with the Trustee" (on or before the first day of November, showing financial condition as of July 31st next preceding). Considering the conclusion to which we have come upon this point, we assume (without so deciding) that "sinking fund earnings" as defined in the trust agreement, constitute "earnings and profits" within the language of section 26 (c) (2). The respondent argues that no irrevocable setting aside within the taxable year was required, within the ambit of section 26 (c) (2), and relies largely upon , while the petitioner views that case as distinguishable and in the main points to . In our opinion, there was not the necessary irrevocable setting aside within the taxable year, and the Moloney Electric Co. case is in point. There, very much as herein, payment was required, after the taxable year, of 20 percent of net earnings for the next preceding year (in excess of a certain amount). *202 The court held that no irrevocable setting aside was required to be made in the taxable year, or earlier than April 1 of the succeeding year (the latest date for filing the audit, at which time the amount was required to be set aside in a separate fund). Similarly, in the instant case, the audit was not required to be filed with the trustee until November 1, following the close of the taxable year; and nothing is said as to when the 20 percent shall be set aside. We find nothing in the Moloney Electric Co. case to indicate that the court did not clearly deny the credit because of failure to show irrevocable setting aside within the taxable year, and we think that situation is equally present here. The distinguishing elements which the petitioner finds in that opinion are particularly labeled a reason additional to the grounds of decision applied therein and by us herein. Moreover, , was reversed by the Supreme Court in , and it was there held *1131 that the taxpayer was not entitled to the credit provided*203 under section 26 (c) (2) of the Revenue Act of 1936, where, although payment of a percentage of net earnings upon indebtedness was actually made within the taxable year, there was no contract requiring it to be made until a later year. We likewise herein find no such requirement of payment or setting aside of earnings, within the taxable year. The petitioner was merely obligated to pay, after the taxable year, an amount to be determined according to facts not earlier determined (the amount of "sinking fund profits"), and the creditor could not, merely relying upon the trust provision or contract, during or at the end of the taxable year, have sustained an equitable right to have the amount frozen in the hands of the petitioner, which could very conceivably have earned, after July 31 and before November 1, amounts sufficient to meet the payment. Moreover, the petitioner herein had the option of paying cash into the sinking fund or turning in its own bonds for cancellation and receiving credit therefor in connection with the amount payable into the sinking fund. We held in , under facts essentially the same as those*204 here involved in this respect, that petitioner was not entitled to credit under section 26 (c) (2). We conclude and hold that petitioner is not entitled to credit under section 26 (c) (2), Revenue Act of 1936. We find no error in denial of the credits claimed under either subdivision of section 26 (c).
Decision will be entered for the respondent.
Footnotes
1. [We set forth here not only section 26 (c) (1), but section 26 (c) (2), hereinafter to be considered.]
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 paragraph, a requirement to pay or set aside 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. As used in this paragraph, the word "debt" does not include a debt incurred after April 30, 1936.↩