*1524 1. A bond indenture obligated the petitioner to reserve out of earnings $5,000 per year to discharge bonds maturing in the taxable year. This was not done in previous years, but in the taxable year petitioner received from dividends, and paid on the bonds approximately $20,000. Held, on the facts, that the Commissioner properly allowed credit under section 26(c)(2), Revenue Act of 1936, on only $5,000.
2. Held, that a capital stock tax return can not be amended after termination of filing period (William B. Scaife & Sons Co.,41 B.T.A. 278">41 B.T.A. 278, followed); held, further, section 105, Revenue Act of 1935, is not shown to be violative of the Fifth Amendment to the Constitution of the United States.
*267 This proceeding involves income tax of $185.31 and excess profits tax of $4,336.19, for the taxable year ended June 30, 1937; also income tax of $1,782.45 and excess profits tax of $1,908.73, for the period from July 1 to August 31, 1937.
All facts have been stipulated, and are found by us as stipulated. They may, so*1525 far as necessary to consideration of the issues presented, be summarized as follows:
The petitioner is a corporation of the State of New York, but is authorized to do business in Pennsylvania. Federal income tax returns for the taxable years were filed with the collector of the twenty-third district of Pennsylvania, at Pittsburgh, Pennsylvania.
On June 15, 1927, the petitioner (then known as Brockway Machine Bottle Co.) issued first mortgage bonds in the amount of $110,000, payable $10,000 each year, beginning June 15, 1931, until June 15, 1937, when the remaining $50,000 was payable. The bond indenture provided in part:
[ARTICLE II.] Item 9. The grantor will each year, until all of said bonds are paid, reserve out of its earnings and not distribute by dividend, five thousand dollars ($5,000.00) for the purpose of providing a resource sufficient to meet the payment of fifty thousand dollars ($50,000.00) of bonds last maturing.
* * *
ARTICLE V. In case grantor shall make default hereunder, or breach any covenant in this instrument contained, whether for the payment of money or otherwise, then, and in every such case, the Trustee (a) may, and if thereunto requested*1526 in writing by the holders of twenty-five (25) per centum in interest of the said bonds then outstanding, shall declare the principal of all the bonds hereby secured then outstanding to be, and the same shall thereupon become immediately due and payable, anything contained in said bonds or *268 herein to the contrary notwithstanding; (b) may enter upon and take possession of the mortgaged property, or any part thereof, collect and receive all rents, issues, income and profits therefrom and operate and conduct the business of the grantor insofar as it pertains to the property covered hereby to the same extent and in the same manner as the grantor might do; (c) may cause this mortgage to be foreclosed and the mortgaged property or any part thereof, to be sold; (d) may proceed to protect and enforce the rights of the Trustee and the bondholders hereunder, whether for specific performance of any covenant, condition or agreement herein contained, or in aid of the execution of any power herein granted or for the enforcement of any other appropriate legal or equitable remedy as may, in the opinion of counsel, be most effectual to protect and enforce the rights aforesaid.
The bonds*1527 were retired annually as follows:
| Year ended | Amount retired |
| June 30, 1931 | $10,000.00 |
| June 30, 1932 | 10,000.00 |
| June 30, 1933 | 10,000.00 |
| June 30, 1934 | $2,500.00 |
| June 30, 1935 | 22,000.00 |
| June 30, 1936 | 12,000.00 |
On June 30, 1936, the petitioner had a cash balance in banks in "First Mortgage Bond Trust Accounts" of $20,339.69. This had been deposited monthly in various amounts, but the $5,000 per year had not been reserved out of earnings as required by the bond indenture. On June 30, 1936, bonds were outstanding in the amount of $43,500, due June 15, 1937.
On November 6, 1936, the Exchange National Bank of Olean, New York, as trustee under said bond indenture, by letter requested petitioner to reserve out of earnings during the year ended June 30, 1937, the sum of $23,160.31, to make up the total sum needed to retire the remaining $43,500 worth of bonds on June 15, 1937.
The letter from the trustee stated in part:
Item nine, page eighteen, of said Trust Indenture, provides as follows:
"The grantor will, each year, until all of said bonds are paid, reserve out of its earnings and not distribute by dividends, $5,000.00 for the purpose of providing*1528 a resource sufficient to meet the payment of $50,000.00 of bonds last maturing."
Inasmuch as you have failed to reserve $5,000.00 out of your earnings each year, as provided by the Trust Indenture, we must require that you reserve out of your earnings this year the difference between $20,339.69 the amount on hand in said bond reserve as of July 1, 1936, and $43,500.00 the full amount of bonds to be paid, or a total of $23,160.31.
Please advise us that this amount of your earnings will be set aside prior to the payment of any dividends so that the bond issue can be paid in full at maturity on June 15, 1937.
On November 6, 1936, the trustee's letter was discussed at a meeting of the petitioner's board of directors and motion was carried that the trustee's requirement be carried out. The sum of $23,160.31 was set aside out of petitioner's earnings during the year ended June 30, 1937, and the balance of the bonds in the sum of $43,500 was paid off on or prior to June 15, 1937.
*269 On July 31, 1936, petitioner filed Form 707, 1936 return of capital stock tax, for the year ended June 30, 1936, with a declared value of $750,000.
On April 3, 1937, petitioner transmitted*1529 Form 707, 1936 return on capital stock tax, for the year ended June 30, 1936, with a declared value of $1,250,000, which return was subsequently returned by the Commissioner on or about June 28, 1937, advising petitioner that the said amended return was not acceptable; additional amount of the tax plus penalty and interest which was paid with said return was also returned by the Commissioner to the petitioner.
Petitioner's time to file capital stock tax return for the period July 1, to August 31, 1937, was extended to September 15, 1937, by letter from the office of the collector of internal revenue, Pittsburgh, Pennsylvania, dated June 20, 1937, and on September 15, 1937, petitioner filed capital stock tax return for the year ended June 30, 1937, showing adjusted declared value of entire capital stock as $1,394,024.43, and paid tax thereon. On or about August 30, 1938, petitioner received a letter from the Commissioner advising that the original declared value of its capital stock was established at $750,000 by the return filed on July 31, 1936, and the adjusted declared value of petitioner's capital stock for the taxable year ended June 30, 1937, had been determined by the Commissioner's*1530 office to be $894,024.43 instead of $1,394,024.43, and that petitioner was privileged to file claim for refund for the overpayment of the tax.
OPINION.
DISNEY: The parties present for consideration two question: (1) Whether the petitioner is entitled to credit, under section 26(c)(2) of the Revenue Act of 1936, 1 in the amount of $23,160.31, instead of $5,000 allowed by the Commissioner; (2) whether capital stock value declared in an original return can be increased in amended return for error alleged in the value first declared. We shall consider the issues separately, in that order.
*1531 *270 1. Was the petitioner entitled to credit for more than the $5,000 allowed by the respondent, under the language of the trust indenture and the terms of the above statute?
The statute involves a credit; it is, therefore, to be strictly construed. Helvering v. Northwest Steel Rolling Mills, Inc.,311 U.S. 46">311 U.S. 46. Under it the petitioner is entitled to credit for an amount equal to earnings and profits of the taxable year which is required to be paid within the taxable year in discharge of a debt "to the extent that such amount has been so paid." The requirement, however, must be "by a provision of a written contract * * * which provision expressly deals with the disposition of earnings and profits of the taxable year." (Italics supplied.) The petitioner contends, and the respondent denies, that above the $5,000 allowed by the Commissioner earnings and profits of the taxable year were required to be paid, and that this requirement was by a provision which expressly deals with the disposition of such earnings and profits of the year. The question seems to be one of first impression. Respondent cites no authority and petitioner*1532 none, except general authority on statutory construction.
The indenture provided that the petitioner would each year reserve out of earnings and not distribute by dividend $5,000 for the purpose of providing a reserve sufficient to meet the payment of $50,000 of bonds last maturing. The petitioner stresses this purpose, and argues that under section 27(a)(4) of the Revenue Act of 1938 there would be no doubt about the allowance of credit, since therein credit is given for "Amounts used or irrevocably set aside to pay or to retire indebtedness of any kind, if such amounts are reasonable with respect to the size and terms of such indebtedness", and that the provision of the 1938 Act simply expresses the intent which we should impute to section 26(c)(2) of the Revenue Act of 1936. We are not impressed by that argument. The language of section 27(a)(4) of the Revenue Act of 1938 is in this respect the same as in section 351(b)(2)(B) of the Revenue Act of 1936 (as amended by section 355(b) of the Revenue Act of 1937). The Act of 1936 applied to personal holding companies. Petitioner is not shown to be such. The presence of the language in section 351 of the 1936 Act indicates, *1533 we think, that only a personal holding company was given the privilege of a credit for "Amounts used or set aside to retire indebtedness" and not limited to an amount covered by a contractual provision expressly dealing with the earnings and profits of the taxable year. We think the language of the 1938 Act does not help the petitioner. We find nothing in the committee reports thereon to indicate mere clarification of the intention of section 26(c)(2) of the Revenue Act of 1936. Nor do we think that the purpose of the bond indenture to provide moneys with which to pay the last $50,000 of bonds is materially helpful here. The question is, in sum, whether *271 the contract required more than $5,000 of the earnings and profits of the taxable year to be paid on the bonds. The petitioner points out the power of the trustee to take action to protect the bondholders, and the letter it wrote demanding, in effect, the reservation from earnings of the taxable year the amount of $23,160.31, the amount for which credit is asked. It is obviously true that the trustee could have foreclosed because of the plain default of the petitioner in failing to reserve $5,000 per year out*1534 of its earnings. But could it, under the indenture, have Required the petitioner to reserve more than $5,000 earnings in the taxable year? After careful consideration of the contract and the statute, we think it could not have done so. The contract, as to any one year, requires a reservation of $5,000 only. There is here involved only one year. The trustee might conceivably have enjoined the payment of dividends of $5,000 in each of the earlier years. But this was not done. We think it could not enjoin payment of dividends above $5,000 in the taxable year, any more than it could have done so in one of the earlier years. The contract, in other words, did not require reservation of earnings, by a provision expressly dealing with the disposition of earnings or profits, above $5,000 per year. No paragraph or provision of the contract, save "Item 9" - as to the $5,000 per year - can be said to deal expressly with disposition of earnings and profits. The other provisions of the bond indenture are general, such as are not unusually found, and no express control over disposition of earnings or profits is bestowed upon the trustee. The provision requiring payment of the bonds*1535 in the taxable year did not expressly deal with the disposition of earnings and profits. In G.B.R. Oil Corporation,40 B.T.A. 738">40 B.T.A. 738, 744, construing the section here examined, we said:
The general purpose of section 26(c)(2), it seems to us, is to give a credit where a dividend paid credit cannot be secured. In other words, the basic intent of Congress seems to have been to include in the provision only contracts which inevitably require in their performance a drawing on current earnings, thus removing current earnings as a source of dividend payments. * * *
We think the petitioner was not, by the contract here relied upon, prevented from paying dividends above $5,000 in the taxable year, and therefore not deprived of dividends paid credit. We conclude and hold that the respondent did not err in limiting credit to $5,000 under section 26(c)(2).
2. Was the petitioner bound by its declaration of value on its capital stock tax return, or may it amend the declaration as to value after time for filing has expired? The first filing was on July 31, 1936, the value declared $750,000; the second was on April 3, 1937, the declared value $1,250,000. The latter return, *1536 with additional amount of tax and penalty and interest remitted therewith, was *272 returned by the Commissioner about June 28, 1937, with the advice that the amended return was not acceptable. Petitioner's time to file capital stock tax return for the period July 1, 1937, to August 31, 1937, was extended to September 15, 1937, on June 20, 1937, and on September 15, 1937, the petitioner filed a capital stock tax return for the year ended June 30, 1937, declaring a value of $1,394,024.43 and paid the tax. About August 30, 1938, the Commissioner informed petitioner that the value was established at $750,000 by the return filed July 1, 1936, and the value for the year ended June 30, 1937, had been determined to be $894,024.43.
The petitioner's contention on this issue is, in effect, that its first return was grossly erroneous, that the amended return was its first return as required by section 105 of the Revenue Act of 1935, and that the act, if applied to petitioner herein, is contrary to the Fifth Amendment to the Constitution of the United States. The principal authority relied upon is *1537 Haggar Co. v. Helvering,308 U.S. 389">308 U.S. 389. The Supreme Court in Riley Investment Co. v. Commissioner,311 U.S. 55">311 U.S. 55, involving amendment of a return with reference to depletion under section 114(b)(4) of the Revenue Act of 1934, distinguished the case from the Haggar Co. case, supra, and held that the return was not a "first return" because it was filed after the expiration of the statutory period for filing the original return. In William B. Scaife & Sons Co.,41 B.T.A. 278">41 B.T.A. 278, we pointed out that the Haggar Co. case, supra, involved and emphasized the fact of amendment of capital stock tax return prior to expiration of time for filing the return, and concluded that, since in the Scaife case the amendment was submitted after expiration of the period for filing, the valuation could not be changed. We held the same in Maine Central Transportation Co.,42 B.T.A. 350">42 B.T.A. 350, following the Scaife case. We find nothing in the present record to justify a different conclusion. The element of error in the first return was considered in the Scaife case. The contention that the statute is unconstitutional*1538 has been variously rejected. The cases so holding include Allied Agents, Inc. v. United States,88 Ct.Cls. 315; 26 Fed.Supp. 98; Chicago Telephone Supply Co. v. United States,87 Ct.Cls. 425; 23 Fed.Supp. 471; certiorari denied, 305 U.S. 628">305 U.S. 628; Scaife & Sons Co. v. Driscoll, 94 Fed.(2d) 664. We conclude that the act is not shown to be unconstitutional, and that petitioner has not shown error by the Commissioner in the determination of excess profits tax liability.
Decision will be entered for the respondent.
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. -
* * *
(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 dischange 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. ↩