*1303 Petitioner's common stock was owned by X corporation. The latter's common stock was owned by Y corporation, which also, together with an individual and Z corporation, owned all of X's preferred stock. Y, Z, and the Individual, as owners of X's pre ferred stock, entered into a contract which provided, among other things, that no dividend should be declared by X or any of its subsidiaries until their indebtedness should be paid. By custom Y acted in contractual matters for petitioner, which acquiesced in such action. Held, that the contract was not executed by petitioner within the meaning of section 26 of the Revenue Act of 1936.
*608 Respondent, by his deficiency letter dated May 29, 1939, determined certain deficiencies in petitioner's income tax and excess profits tax liability for the years 1935, 1936, and 1937, as follows:
| 1935 | 1936 | 1937 | |
| Excess profits tax | $125.66 | $842.84 | $690.85 |
| Income tax | 1,660.84 | 1,128.86 | 1,154.32 |
He also determined an overassessment in petitioner's undistributed*1304 profits tax liability for the year 1936 in the amount of $1,148.38.
In Docket No. 99820 petitioner asked for a redetermination of its various tax liabilities determined by respondent as above set forth. Respondent moved to dismiss the proceeding in so far as it pertained to the normal (income) tax and undistributed profits tax liability for 1936, inasmuch as a consideration of respondent's determination with regard to these two taxes would show an overassessment and not a deficiency. On January 23, 1940, we sustained this motion. Thereupon, respondent filed an answer alleging error with regard to his determination for 1937, and claiming an increased deficiency in petitioner's undistributed profits tax liability for that year, which respondent now determines to be in the sum of $6,280.96.
On February 19, 1940, respondent determined a deficiency in petitioner's income tax liability for the year 1936 in the amount of $1,128.86, and in undistributed profits surtax for the same year of $4,466.43. In Docket No. 102494 petitioner seeks a redetermination of these deficiencies determined for 1936.
Respondent has conceded that there is no excess profits tax liability for the year*1305 1935. The petitioner has withdrawn its assignment of error applying to excess profits taxes for the years 1936 and 1937, and normal taxes for the years 1935, 1936, and 1937.
These two cases were consolidated. The sole issue now presented is whether the petitioner is entitled to a credit in the years 1936 and 1937 for computing surtax on undistributed profits by reason of the application of section 26(c)(1) and (2) of the Revenue Act of 1936.
*609 FINDINGS OF FACT.
The parties to this controversy have filed a stipulation of facts and we find the facts to be as stipulated. In addition thereto petitioner introduced the oral testimony of one witness. The material facts are as follows:
Petitioner is a corporation organized under the laws of the State of Indiana, with its principal office at Greenfield, Indiana.
Prior to 1936 the petitioner borrowed certain sums of money from the United Telephone Investment Corporation, United Telephone & Electric Co., and the Attica Telephone Co. On January 1, 1936, January 1, 1937, and December 31, 1937, the balances due on these loans were as follows:
| Creditor | 1/1/36 | 1/1/37 | 12/31/37 |
| United Telephone Investment corporation | $67,232.63 | $57,232.63 | $57,232.63 |
| United Telephone Electric Co | 39,000.00 | 38,133.50 | 15,456.00 |
| Attica Telephone Co | 4,175.79 | 4,175.79 | none |
*1306 On January 22, 1935, petitioner's outstanding capital structure consisted solely of 15,254 shares of no par common stock, of which 15,078 shares were owned by the United Telephone Investment Corporation and the balance of 176 shares was owned by the Central Indiana Telephone Co. On that date the latter company's common stock was all owned by the United Telephone Investment Corporation, which corporation's common stock was all owned by the United Telephone & Telegraph Corporation. At the same time the United Telephone Investment Corporation had outstanding 9,181 shares of preferred stock, owned as follows:
| John T. Detchon | 7,569 shares |
| United Telephone & Telegraph Corporation | 500 shares |
| United Telephone & Electric Co | 1,112 shares |
A written contract was entered into on January 22, 1935, by and between John T. Detchon, the United Telephone & Telegraph Corporation, and the United Telephone & Electric Co., which provided, inter alia, following:
* * *
WHEREAS all the parties hereto are holders of the preferred stock and in the aggregate hold all of the preferred stock issued and outstanding of The United Telephone Investment Corporation, * * *
* * *
*1307 IT IS UNDERSTOOD AND AGREED
* * *
2. *610 That the corporate structure of The United Telephone Investment Corporation and of each of its subsidiaries is to remain as it now stands unless there has first been obtained the written consent of all parties hereto to any change;
3. That all of the new indebtedness as shown by the books and the records of The United Telephone Investment Corporation and its subsidiaries shall be recognized as good and valid obligations of The United Telephone Investment Corporation and its subsidiaries and the parties hereto hereby agree that they will not contest the validity of said indebtedness as shown by the books of said corporation;
4. It is further understood and agreed that the earnings of The United Telephone Investment Corporation and its subsidiaries shall be first applied to the payment of the now general creditors of the particular corporation, and second, to payment of indebtedness due United Telephone and Telegraph Corporation and The United Telephone and Electric Company;
* * *
7. The United Telephone and Telegraph Corporation and The United Telephone and Electric Company agree to permit the preferred stockholders of*1308 The United Telephone Investment Corporation to take over the operations of that company and its subsidiaries at the stockholders meeting heretofore referred to without objection on their part;
* * *
10. All parties agree that there will be no dividends declared or paid on stock of The United Telephone Investment Corporation or any particular subsidiary corporation until the now indebtedness of the United Telephone Investment Corporation and/or any particular subsidiary corporation shall be paid in full and that thereafter dividends shall be declared only from earnings as the circumstances permit;
* * *
IN WITNESS WHEREOF the parties hereunto have affixed their hands and caused this agreement to be executed by the president of each corporation herein involved and attested by the secretary and the seal of the corporation affixed by such officers acting with full authority so to do.
[Signed] JOHN T. DETCHON
UNITED TELEPHONE AND TELEGRAPH CORPORATION
By C. L. Brown, president
(SEAL)
Attest:
[Signed]
M. C. BEAMER, Secretary
THE UNITED TELEPHONE AND ELECTRIC COMPANY
[Signed] By C. L. BROWN, President
(SEAL)
Attest:
[Signed]
V. R. PRATHER, *1309 Secretary
At the time this contract was executed, C. L. Brown was president and John S. Powell was vice president of the Union Telephone Co. (petitioner), United Telephone Investment Corporation, and United Telephone & Telegraph Corporation.
On November 9, 1935, a supplemental agreement was drawn up between *611 the same parties. This supplemental agreement provided, inter alia:
WHEREAS Sections 4 and 10 of the agreement of January 22nd, 1935 preclude the payment of certain dividends until certain indebtedness shall have been paid in full; and
WHEREAS it is now desired to modify said Sections 4 and 10 in part in order to permit Central Indiana Telephone Company of Sheridan, Indiana, to pay one year's dividends on its outstanding preferred stock;
IN CONSIDERATION of the benefits derived by the parties hereto:
IN IS UNDERSTOOD AND AGREED
1. That the parties hereto will permit Central Indiana Telephone Company of Sheridan, Indiana, to pay one year's dividends on its outstanding preferred stock;
2. That this agreement does not modify the agreement of January 22nd, 1935 in any other particular * * *
IN WITNESS WHEREOF the parties hereunto have affixed*1310 their hands and caused this agreement to be executed by the president or vice-president of each corporation herein involved and attested by the secretary or assistant secretary and the seal of the corporation affixed by such officers acting with full authority to so do.
[Signed] JOHN T. DETCHON
John T. Detchon
UNITED TELEPHONE AND TELEGRAPH CORPORATION
By A. J. ROBERTS
President
(SEAL)
Attest:
[Signed] M. C. BEAMER,
Secretary
THE UNITED TELEPHONE AND ELECTRIC COMPANY
By CAMERON L. BAER
Vice-President
(SEAL)
Attest:
[Signed] V. R. PRATHER
Secretary
The petitioner in these proceedings was one corporation in a rather involved network. The United Telephone & Telegraph Corporation was known as the top Indiana Holding Co. Under that company there were two other holding companies and two other operating groups. One of the holding companies was the United Telephone groups. One of the holding companies and two other operating Investment Corporation, which is the holding company which owned the common stock of Union Telephone Co., the petitioner herein. It was the custom among all these corporations for the United Telephone & Telegraph*1311 Corporation to enter into agreements for the group as a whole. In such instances the top holding company entered into agreements which applied to, and were allocated by it among, the subsidiaries, both holding and operating companies. In tax matters the United Telephone & Electric Co., considered the national holding company for the United organizations, generally made consolidated returns for itself and all its subsidiaries, including petitioner. The petitioner recognized its obligations under agreements made by the parent corporation. The petitioner complied with and followed out *612 the terms of the contract executed January 22, 1935, as supplemented by the agreement of November 9, 1935.
OPINION.
KERN: To be eligible for a credit created for the benefit of taxpayers, strict compliance with the terms of the section granting the credit must be shown. ; ; .
In the instant proceeding petitioner claims the benefit of section 26(c)(1) and (2) of the Revenue Act of 1936. *1312 Both subsections (1) and (2) have several essential requirements in common - i.e., there must exist a written contract executed by the corporation prior to May 1, 1936, a provision of whcih expressly deals with the payment of dividends and the disposition of earnings and profits of the taxable year.
Here we have a written contract executed prior to May 1, 1936, expressly dealing with dividends and earnings. Two questions then arise, however: First, whether this contract dealt expressly with petitioner's dividends and earnings, and, second, whether the contract was executed by petitioner. If either of these elements is found to be lacking in our present situation, then the taxpayer is ineligible to claim the credit offered by section 26.
Neither the contract of January 22, 1935, nor the supplemental agreement was executed by petitioner. On each there were but three executing parties: Detchon, the United Telephone & Telegraph Corporation, and the United Telephone & Electric Co. Petitioner asserts that, notwithstanding the fact that the written contract was not executed formally by petitioner, nevertheless, it was executed on behalf of the petitioner by the United Telephone*1313 & Telegraph Corporation and, therefore, was binding on petitioner as if petitioner had formally executed the instrument.
Evidence was introduced by petitioner to show that it was a customary practice for United Telephone & Telegraph Corporation to enter into agreements for the whole group of United corporations; but it appears that there never was any written power of attorney executed by the subsidiaries or any other formal agency agreement. Furthermore, no agency is disclosed in the contract. On the contrary, the contract itself states that all the parties thereto were holders of the preferred stock of the United Telephone Investment Corporation, and it appears that they executed the contract as such and not as agents for any corporation. Petitioner was not a holder of any of this preferred stock.
*613 We must conclude that the contract was not executed by the petitioner, within the meaning of section 26. There is no written instrument executed by petitioner granting authority to any other corporation to act as its agent and in no contract in writing does the petitioner appear as a party to be bound. The evidence merely discloses a custom on the part of the United*1314 Telephone & Telegraph Corporation to act in contractual matters on behalf of its subsidiaries which acquiesced in such action.
This customary course of conduct may be explained by reason of the fact that United Telephone & Telegraph Corporation owned all of the common stock of the corporation which owned practically all the common stock of petitioner. However, a contract signed even by a corporation's immediate stockholders is not a contract of the corporation binding upon it. . It has even been held that a contract executed by a corporation's directors restricting the payment of dividends does not come within the purview of the pertinent section of the act. . The testimony to the effect that an officer of petitioner who was also an officer of the several holding companies considered that petitioner was bound by the contract to which it was not a party, is in no way controlling.
Petitioner has failed to show strict compliance with the terms of section 26(c)(1) or (2), and we, therefore, uphold the validity of respondent's determination.
Decision will*1315 be entered under Rule 50.