*800 1. Petitioner, a manufacturer, sold its product through agents under installment conditional sales agreements. Petitioner quoted a "net price" to the agent, who had authority to fix the "selling price," subject to approval by petitioner. The purchaser agreed to pay the selling price to petitioner, and petitioner agreed to pay the agent as his commission the difference between the selling price and the net price. Payment of a certain part of the agent's commission was to be deferred until collection from the customer was made in full. Petitioner kept its books on the accrual system. Held, petitioner should accrue as gross income the entire selling price of its merchandise and is entitled to accrue in the same taxable year, as deductible expenses of selling its goods, the entire amount of agent's commissions on the articles sold. Air-Way Electric Appliance Corporation v. Guitteau, 123 Fed.(2d) 20, followed. Reuben H. Donnelley Corporation,22 B.T.A. 175">22 B.T.A. 175, and Swain & Myers, Inc.,42 B.T.A. 306">42 B.T.A. 306, distinguished.
2. On March 1, 1928, petitioner executed a trust indenture, wherein it agreed, among other things, not to*801 pay any dividends "unless its current assets will equal at least twice the amount of its current liabilities, after the payment of any dividends" and wherein current liabilities were defined as "Accounts payable; trade acceptances; bills current and notes current, and any other liabilities other than these bonds." Held, certain contingent liabilities are not "current liabilities" as that term is defined in the trust indenture, and, since petitioner could have paid dividends in excess of its adjusted net income at the close of every month, except the last month, during each of the fiscal years in question without violating the trust indenture, it is not entitled to any credit under section 26(c)(1) of the Revenue Act of 1936.
*898 The respondent determined deficiencies against petitioner in income and excess profits taxes as follows:
| Docket No. | Fiscal year ended | Income tax | Excess profits tax |
| 9-30-1935 | $1,833.14 | none | |
| 104373 | 9-30-1936 | 6,088.61 | $1,776.89 |
| 9-30-1937 | 45,167.59 | 12,862.00 | |
| 104477 | 9-30-1938 | 13,080.79 | none |
*802 Petitioner contested all of the above deficiencies except $133.46 of the deficiency in income tax for the fiscal year ending September 30, 1936, and $1,245.83 of the deficiency in excess profits tax for the fiscal year ending September 30, 1937, and in addition alleged that it had overpaid its income tax for the fiscal years ending September 30, 1937, and September 30, 1938, in the amounts of $10,985.86 and $6,459.53, respectively.
Among the several adjustments which the respondent made to petitioner's net income for the four years in question were the following:
| Unallowable Deductions and Additional Income | ||||
| 1935 | 1936 | 1937 | 1938 | |
| (1) Increase in agent's reserve | $8,347.67 | $28,310.18 | $73,932.13 | $20,888.87 |
| (2) Excessive officer's salaries | 5,000.00 | 15,000.00 | 32,500.00 | 15,000.00 |
| (3) Auditor's fee (unallowable deduction) | 1,000.00 | |||
| (4) Auditor's fee (additional deduction) | 1,000.00 |
*899 Petitioner, by appropriate assignments of error, contested all of the above adjustments, and in addition thereto assigned an error which is paraphrased as follows:
(5) For the fiscal years ending September 30, 1937 and 1938, respectively, *803 the Commissioner erroneously refused to allow any credit under Section 26(c) of the 1936 Revenue Act, whereas petitioner is entitled under said Section to a credit in the full amount of petitioner's adjusted net income, or in the alternative, to a credit equal to 15% of the petitioner's net profits for the fiscal years ending September 30, 1937 and 1938, respectively.
As to adjustment (1) above, petitioner's assignment of error for each of the years in question is the same, except for the amounts and the particular year involved. The assignment for the year 1935 is as follows:
For the fiscal year ending September 30, 1935, the Commissioner erroneously added to the petitioner's net taxable income the sum of $8,347.67, as follows: Under the petitioner's plan of selling its products, the petitioner's sales agents are entitled on sales made by them to receive a specified portion of the sales price, which portion is to be paid over to the sales agents as and when collected by the petitioner from the customer. The Commissioner includes in the petitioner's income in the year of sale, in full, the portion of the sales price to which the sales agent is entitled, but allows the petitioner*804 to deduct as selling expense only such part thereof as is actually collected from the customer and paid to the sales agent during such tax year. The difference of $8,347.67, which the Commissioner seeks to tax as income to the petitioner, cannot properly be taxed as income to the petitioner because under no circumstances can the petitioner ever collect and retain as its own any part of such $8,347.67.
As to adjustment (2) above, the parties have entered into certain stipulations the effect of which is that this adjustment for the several years should now read as follows:
| 1935 | 1936 | 1937 | 1938 | |
| (2) Excessive officer's salaries | $5,000.00 | $10,000.00 | $22,500.00 | $5,000.00 |
As to adjustments (3) and (4) above, petitioner now concedes that the respondent is correct.
As to the assignment of error paraphrased above as (5), petitioner in its reply brief abandons its claim for credit under section 26(c)(2) of the Revenue Act of 1936, and states that "the only credit Petitioner is claiming is under Section 26(c)(1)."
This leaves for our consideration only two issues, namely, (1) whether the respondent erred in making adjustment (1) above, *805 and (2) whether, in determining petitioner's "undistributed net income" *900 under section 14(a)(2) of the Revenue Act of 1936 for the fiscal years ending September 30, 1937, and September 30, 1938, respectively, petitioner is entitled to a credit under section 26(c)(1), relating to contracts restricting dividends.
The proceedings were consolidated.
FINDINGS OF FACT.
Petitioner is a Georgia corporation, with its principal office and place of business at Atlanta, Georgia. The returns for the taxable years were filed with the collector for the district of Georgia.
Within less than three years prior to the filing of the petition in Docket No. 104373, petitioner paid $31,215.25 in income tax for the fiscal year ending September 30, 1937, and within less than three years prior to the filing of the petition in Docket No. 104477, petitioner paid $12,177.41 in income tax for the fiscal year ending September 30, 1938.
The agents' commission issue. - During the tax years here involved, petitioner was engaged in the manufacture and sale of commercial refrigerators, display cases and similar equipment. Petitioner's sales of refrigerators and other equipment manufactured*806 by it were made largely on credit, the purchaser making a down payment and agreeing to pay the balance of the purchase price to petitioner in specified monthly installments over a period of 12 to 36 months. All of such sales were made under the terms and conditions of a standard conditional sales contract signed by petitioner, as seller, and the purchaser, and witnessed by the sales agent who made the sale in those cases where the sale was made by a sales agent. A typical conditional sales contract, in so far as the provisions thereof are material here, illustrating a typical sale, is as follows:
CONDITIONAL SALES CONTRACT
County Bibb
City Macon State Georgia Date 9-25-37
TO THE WARREN COMPANY, Incorporated, 905 Memorial Drive, S. E., Atlanta, Ga.
I, or we, residing at * * * purchased from you the following described chattel:
| Serial No. | Description of Articles | Price |
| Box 9999 | One Warren Service Bar Beverage Cooler | $800.00 |
| Finance charges | 108.00 | |
| $908.00 |
For which I or we agree to pay you or your assigns $908.00 (Full Contract Price) of which $200.00 (Down Payment) is to be paid in hand and $708.00 as balance*807 of purchase price payable in 36 equal successive monthly installments of $19.67 each, on the 1 day of November and the same date of each month thereafter until paid, with *901 interest from maturity at the rate of 6% per annum, as evidenced by promissory note of equal date, detachment of which is hereby authorized.
Title and ownership of said chattel and any and all replacements thereof and additions thereto shall remain in you and your assigns irrespective of any retaking and redelivery thereof to me or us until said indebtedness shall have been fully paid, in money, at which time ownership shall pass to me or us. * * *
Petitioner's sales were largely made through sales agents and all of such sales were made pursuant and subject to the provisions of standard sales agency agreements which existed between petitioner and its sales agents. Paragraphs 4, 5, 6, and 10 of the standard "Sales Agency Agreement", wherein petitioner is known as the "COMPANY" and the sales agent as the "AGENT" are, in so far as is material, as follows:
4. * * * AGENT agrees to sell according to the terms specified by the COMPANY. All cash payments and deposits made to the AGENT*808 are to be forwarded to the COMPANY, along with the sales contracts. It is understood by AGENT and COMPANY that no merchandise will be shipped until the contract and cash payment have been received at the office of the COMPANY and approved by an officer of the COMPANY.
5. The COMPANY agrees to furnish AGENT net prices F.O.B. Atlanta, Georgia, on equipment manufactured by the COMPANY. AGENT shall receive as his commission the difference between the selling price and the COMPANY's net price. Twenty-five (25%) per cent of this overage, or commission, is to be set up in reserve on the books of the COMPANY until the account is paid in full. The remaining seventy-five (75%) per cent of the commission, or overage, is to be paid to the AGENT as current commission, provided the cash with the order and delivery payments total as much as seventy-five (75%) per cent of the overage, or commission.
6. In case the cash received with the order and the delivery payment shall be less than the AGENT'S current commission, or overage, then that difference shall be set up on the books of the COMPANY in a special reserve account to be paid to the AGENT monthly as the customer's monthly notes are*809 paid. * * *
10. AGENT agrees to assist the COMPANY in the collection of any accounts in the AGENT'S territory and to repossess and resell any merchandise covered by the COMPANY'S contracts, should the COMPANY request it. Any overage rising from the resale of the merchandise repossessed shall be credited to the AGENT'S current commission account, provided the cash accompanying the resale order is sufficient to cover said overages. Any expenses incurred in transferring the equipment from the original purchaser to the new purchaser shall be deducted from the AGENT'S overage, or commission on the sale. When repossession of merchandise sold by the AGENT becomes necessary, commissions shall be charged back to the agent at the same ratio on the balance owing at repossession as the commissions were to the sales price at the time of the sale.
Pursuant to paragraphs 5 and 6 of the agreement, petitioner furnished each sales agent with a "net price" for each piece of equipment manufactured by petitioner. Petitioner also placed various pieces of equipment on consignment with each sales agent, rendering to the sales agent at the time of consignment a memorandum consignment invoice setting*810 forth, inter alia, the "net price" referred to above and the statement "Merchandise entered on this invoice shipped on consignment. *902 Not sold." In those cases where petitioner placed equipment on consignment with a sales agent it entered into a "Supplementary Sales Agency Agreement For Consigned Merchandise" with such agent, the provisions of which need not be set out herein. The sales agent was free to make sales of equipment to customers at any selling price in excess of the "net price" furnished by petitioner, provided the contract price due petitioner on the conditional sales contract was sufficient to cover the "net price" and a reserve for the sales agent. As hereinafter used, the term "net price" refers to the net price furnished to the sales agent by petitioner, and the term "selling price" refers to the actual sale price agreed upon between the sales agent and the purchaser. When a sales agent succeeded in making a sale, the purchaser signed the standard conditional sales contract, agreeing to pay to petitioner in specific installments the selling price together with certain finance charges, and such contract was accepted and signed by petitioner*811 as seller.
Whenever a sale was made through a sales agent, petitioner, pursuant to paragraphs 5 and 6 of the standard "Sales Agency Agreement" computed the commission to be received by the sales agent, which consisted of an amount equal to the excess of the selling price over the net price. Twenty-five percent of this overage or commission was set up by petitioner on its books in an account designated "Agents' Regular Reserve" (a separate account being kept by petitioner for each sales agent) until the indebtedness of the purchaser on the conditional sales contract was paid in full, whereupon petitioner paid the sales agent such 25 percent. The remaining 75 percent of the commission or overage was paid to the agent at the time of sale as current commission, provided the down payment was as much as 75 percent of the overage, or commission. In case the down payment was less than such 75 percent, that is, was less than the sales agent's current commission or overage, then an amount equal to the entire down payment was paid to the sales agent at the time of sale and the difference between such down payment and 75 percent of the agent's total commission was set up by petitioner*812 on its books in an account designated "Agents' Special Reserve" (a separate account being kept by petitioner for each sales agent). Thereafter, as petitioner collected the monthly payments from the purchaser as provided for in the conditional sales contract, an amount equal to one-half such monthly payments was paid to the sales agent until such time as the "Agents' Special Reserve" applicable to the particular contract was exhausted. As petitioner made each such monthly payment to the sales agent, petitioner reduced by the same amount the balance in the "Agents' Special Reserve" account for the sale in question.
Petitioner keeps its books of account and makes its income tax returns upon the accrual method of accounting and does not use the *903 installment method of accounting. In its books of account and in its income tax returns for each tax year here involved, petitioner included in its income the entire net price on all sales made by petitioner during such tax year. Petitioner has not included in its income for any tax year, either in its books of account or in its income tax returns, the excess of the selling price over the net price, or any part of*813 such excess. Petitioner has not deducted from its income for any tax year, either in its books of account or in its income tax returns, the excess of the selling price over the net price, or any part thereof, either as sales agents' commissions or otherwise.
If a purchaser defaulted in paying the selling price and petitioner concluded that it could not collect the balance due from such purchaser, then petitioner repossessed the equipment involved, taking such equipment back from the purchaser under the terms of the conditional sales contract. Pursuant to paragraph 10 of the standard sales agency agreement, petitioner in the event of repossession, charged back to the sales agent his commissions on the sale at the same ratio on the balance owing, exclusive of finance charges, at the time of repossession as the commissions were to the selling price at the time of the sale. A typical example of a repossession from a purchaser, embracing computation of the commissions charged back to the sales agent and journal entries to record the entire transaction on petitioner's books of account, is as follows, assuming that in the typical sale as set forth in the specimen conditional*814 sales contract above the purchaser defaulted on the first monthly payment, due on November 1, 1937, at which time the unpaid balance of the indebtedness, exclusive of finance charges, was $600, and that petitioner repossessed the equipment on December 1, 1937:
| COMPUTATION OF COMMISSIONS CHARGED BACK | |
| Balance owing on contract | $708.00 |
| Less: Finance charges | 108.00 |
| Balance on SELLING PRICE owing | $600.00 |
$320.00 (Commissions)/$800.00 (selling price), $600x.00 (Balance owing) = $240
The amount of the charge-back accordingly is $240.
Journal entry December 1, 1937:
| 1 | ||
| Debit | Credit | |
| Returns and allowances | $360.00 | |
| Matured reserve account - W. O. Doe | 120.00 | |
| Special reserve account - W. O. Doe | 40.00 | |
| Regular reserve account - W. O. Doe | 80.00 | |
| Finance charges | 108.00 | |
| Notes receivable | $708.00 |
*904 In the above typical example of a repossession from a purchaser, petitioner would not refund to the purchaser any part of the down payment of $200, all of which had been paid to the agent. Petitioner would permit the agent to retain $80 of such down payment, and would charge him with $120 which petitioner would keep for itself. *815 Petitioner would then quote the agent a new net price of $360 on the repossessed article instead of the original net price $480of. The net price for sale of repossessed equipment was always determined in this manner. The amount realized by petitioner from the disposition of such repossessed equipment was sometimes less than the net price, but it was never more than the net price. In no case, whether the equipment was repossessed or not, did petitioner ever get to keep for itself more than the net price.
Petitioner often sustained losses by reason of the repossession of equipment, and all of such losses wre borne entirely by petitioner. Such losses were reflected in petitioner's books of account and in its income tax returns as reductions in gross income for each tax year here involved. Such losses, as sustained by petitioner and as reflected in petitioner's books of account and in its income tax returns, never included any part of the excess of the selling price over the net price, which petitioner had excluded from its income as described above.
Petitioner has kept its books of account and made its tax returns with respect to the agents' regular*816 reserves and agents' special reserves in the manner described above since 1932. Respondent, in his deficiency notices herein, has added to petitioner's taxable income for each tax year here involved the net increase between the beginning and end of such tax year in the total amount of all the outstanding agents' regular reserve and agents' special reserve accounts hereinabove described, such increases being in the following amounts:
| Net increase during tax year in total outstanding agents' reserve accounts | |||
| Tax year | Special reserve | Regular reserve | Total |
| Fiscal year ended 9/30/35 | $3,780.25 | $4,567.42 | $8,347.67 |
| Fiscal year ended 9/30/36 | 10,899.91 | 17,410.27 | 28,310.18 |
| Fiscal year ended 9/30/37 | 27,906.76 | 46,025.37 | 73,932.13 |
| Fiscal year ended 9/30/38 | (6,102.76) | 26,991.63 | 20,888.87 |
The credit under section 26(c)(1) issue. - On March 1, 1928, a written contract was entered into between petitioner (therein called the Company) and the Trust Co. of Georgia (therein called the Trustee), said contract being a trust indenture to secure $300,000 of bonds issued by petitioner on or about March 1, 1928. This contract continued in force and effect*817 throughout petitioner's fiscal years ending *905 September 30, 1937, and September 30, 1938. Article V of the turst indenture provided in part as follows:
Section 13: The Company covenants and agrees that it will not pay any dividends on its outstanding capital stock as long as any of the bonds issued hereunder are outstanding and unpaid, unless its current assets will equal at least twice the amount of its current liabilities, after the payment of any dividends; and that it will not pay any dividend except out of current earnings, or out of any undistributed earnings of previous years. In case of any default on the payment of interest, or otherwise, no dividend shall in any event be paid to the Company's stockholders.
Section 14: The Company covenants and grees that as long as any bonds issued hereunder are outstanding and unpaid that it will maintain net current assets which, at their actual value, shall always be at least twice the actual value of all current liabilities. For the purpose of determining net current assets under the provisions of this section, and for the purpose of the preceding sections, current assets and current liabilities are defined as follows:
*818 CURRENT ASSETS
(a) Cash on hand and in bank;
(b) Inventories of products (value to be taken at cost or market, whichever is lower) and materials and supplies, both manufactured and in process of manufacture;
(c) Account receivable after proper deduction for doubtful accounts;
(d) Bills receivable after proper deduction for doubtful bills;
(e) United States Government Bonds and other marketable securities.
CURRENT LIABILITIES
Accounts payable; trade acceptances; bills current and notes current, and any other liabilities other than these bonds.
At all times during petitioner's fiscal year ending September 30, 1937, there were outstanding and unpaid not less than $105,000 of the bonds secured by the said trust indenture; and at all times during petitioner's fiscal year ending September 30, 1938, there were outstanding and unpaid not less than $26,000 of such bonds.
Petitioner's Exhibit 15 is incorporated herein by reference as representing merely petitioner's contentions as to what its total "current assets" and its total "current liabilities" were at the close of each month from September 30, 1936, to September 30, 1938, inclusive, as those terms are used in the*819 said trust indenture. If certain alleged contingent liabilities in the amounts contended for by petitioner in its Exhibit 15 in favor of the Commercial Investment Trust Inc. of New York, New York (herein sometimes referred to as "C.I.T.") are "current liabilities" of petitioner as that term is used in the above trust indenture, then petitioner's "current assets", as that term is used in the above trust indenture and in the total amount admitted by petitioner in its Exhibit 15, did not, at the close of any month during the fiscal years ending September 30, 1937, and September 30, 1938, equal twice the total amount of its "current liabilities" as contended *906 for by petitioner in its Exhibit 15. If, however, the said alleged contingent liabilities in favor of C.I.T. are not current liabilities of petitioner, then petitioner's said current assets at the close of every month during the fiscal years ending September 30, 1937, and September 30, 1938, except the month of September 1938, were in excess of twice the amount of its said current liabilities; and this excess, with the exception of the month of September 1937, was greater than petitioner's adjusted net income*820 for the fiscal years ended September 30, 1937, and September 30, 1938, respectively, as the term "adjusted net income" is used in section 14(a)(1) of the Revenue Act of 1936.
The names of the current assets and current liabilities listed by petitioner on petitioner's Exhibit 15, supra, are as follows:
| Line No. | Assets Assumed to be Current |
| 1. | Cash on Hand and in Banks |
| 2. | Notes Receivable - Net (Less Deferred Crs.) |
| 3. | Accounts Receivable - Customers |
| 4. | Accounts Receivable - Agents & Jobbers |
| 5. | Accounts Receivable - Officers & Employees |
| 6. | Mdse. Inventory |
| 7. | Total Assets Assumed to be Current |
| 8. | Accounts Payable - Trade Creditors |
| 9. | Accounts Payable - Agents & Jobbers |
| 10. | Accounts Payable - Officers & Employees |
| 11. | Accounts Payable - Customers Deposits |
| 12. | Notes Payable |
| 13. | Accrued Expense |
| 14. | Contingent Liability - C.I.T. |
| 15. | Total Liabilities Assumed to be Current |
On August 20, 1931, petitioner and C.I.T. entered into a written agreement wherein C.I.T. agreed to purchase from petitioner from time to time deferred payment paper received by petitioner in the disposal of its merchandise. C.I.T. was to purchase such*821 paper at the charges specified in the agreement, which charges were on a graduated scale and ran from 2 percent of the unpaid face of paper on paper maturing in eight or less equal monthly payments to as high as 6 percent of the unpaid face of paper on paper maturing in 23 to 24 equal monthly payments. Added to these charges were 50 cents per month for each installment of an amount less than $25 each. All paper was to bear interest at the rate of 6 percent per annum. C.I.T. was to pay petitioner at the time it purchased the paper from petitioner 90 percent of the unmatured installments (referred to in the agreement as "your investment") less the charges above mentioned, and was to pay petitioner the remaining 10 percent when all the installments had been paid in full by the maker of the paper. The agreement (wherein petitioner is referred to in the first *907 person and C.I.T. is referred to in the second person) also provided as follows:
* * * We warrant compliance with all filing or recording requirements, that all statements in paper which we sell to you are true and agree that you may audit our books and records relating to said paper; and warrant that each installment*822 thereof (whether evidenced by a single or by separtate obligations) will be paid at or before its maturity but if there shall be default in the payment of any installment or otherwise we agree on request without any tender of paper being required to repurchase from you the paper or the entire series of paper on which such default has occurred at the remaining amount of your investment therein. If we fail to repurchase as above agreed within thirty days after request, or if we should become insolvent, cease doing business as a going concern, make an assignment for the benefit of creditors, or if a petition for a receiver or in bankruptcy is filed by or against us, we shall without any tender of paper being required repurchase all of the paper which may have been sold to you at the remaining amount of your investment therein, failing which within ten days you may evaluate the paper at public sale after mailing us at least five days notice, at which sale you may purchase for your own protection. The remaining amount of your investment shall mean the amount of your investment as above defined, including accrued interest and all expenses of collection incurred by you after a default and*823 in connection with the enforcement of our agreements herein contained, less all principal sums paid you thereon. You shall at all times have the right to collect all installments on all paper in your possession but until any default shall occur you shall collect at your own cost and expense. All paper shall be duly endorsed or assigned by us to you but should we omit so to do, you and your representatives may place the necessary or appropriate endorsement or assignment thereon.
On May 20, 1932, the Warren Commercial Refrigerator Sales Corporation and C.I.T. entered into a written agreement which was identical in terms with the preceding agreement between petitioner and C.I.T. Both petitioner and the Bureau of Internal Revenue have treated the Warren Commercial Refrigerator Sales Corporation, later called Warren Refrigerators, Inc. (herein sometimes referred to as "the New York corporation"), as being simply a department or branch of petitioner. All of the activities of the New York corporation were included in the books of account and in the income tax returns of petitioner.
On February 15, 1938, petitioner, and on June 8, 1938, the New York corporation, respectively, entered*824 into written agreements with C.I.T. similar to the agreements of August 20, 1931, and May 20, 1932, respectively, except for changes in the rate of charges to be made by C.I.T. and certain other minor changes not material here. The provision that "All paper shall bear interest at the rate of 6% per annum" did not appear in the 1938 contracts, and the charges agreed upon in the 1938 contracts were "based on unpaid face of paper, for noninterest-bearing paper payable in equal successive monthly installments."
*908 The Warren Refrigerator Co. of Beaumont, Texas (herein sometimes referred to as "the Beaumont company"), is a separate and distinct company from the petitioner. It keeps its books of account and makes its tax returns entirely separate and distinct from petitioner and is unlike the New York corporation in that respect.
On May 20, 1935, the Beaumont company and the C.I.T. Corporation of Chicago, Illinois (herein sometimes referred to as "C.I.T. Corporation") entered into two separate written agreements similar to the agreement of August 20, 1931, between petitioner and C.I.T. One of the May 20, 1935, agreements provided that "All paper shall bear interest at the*825 rate of 8% per annum" and the "charges" in this agreement ran from 1.60 percent of the unpaid face of paper on paper maturing in 6 equal monthly payments to 4.25 percent of the unpaid face of paper on paper maturing in 22, 23, and 24 equal monthly payments. The other May 20, 1935, agreement provided that "All paper shall bear interest at the rate or 6 percent per annum" and the "charges" in this agreement ran from 3.40 percent of the unpaid face of paper on paper maturing in 6 equal monthly payments to 11.25 percent of the unpaid face of paper on paper maturing on 22, 23, and 24 equal monthly payments. Both of the May 20, 1935, agreements provided for a minimum finance charge of $25.
On May 11, 1936, the Beaumont company and C.I.T. Corporation agreed upon a rider to the May 20, 1935, agreements whereby the charges for purchasing both interest bearing and noninterest bearing paper were greatly reduced.
On April 7, 1938, the Beaumont company and C.I.T. Corporation entered into a new agreement similar to the agreements of May 20, 1935, except for changes in the rate of charges to be made by C.I.T. Corporation and certain other minor changes not material here.
On June 3, 1935, petitioner*826 wrote C.I.T. a letter the body of which is as follows:
Warren Refrigerating Company, Inc., of Beaumont, Texas, is one of our selling agents and distributors for refrigeration equipment and accessories manufactured by us. In order to induce you (which pronoun shall include your associated, subsidiary and affiliated companies and your and their successors and assigns) to consummate an agreement with the said Warren Refrigerating Company, Inc., whereby you will purchase from it such deferred payment paper as shall be acceptable to you from time to time, we hereby unconditionally and primarily guarantee to you that the said Warren Refrigerating Company, Inc. will promptly pay and discharge each, any and all of its obligations to you, and we agree without your first having to proceed against the said Warren Refrigerating Company, Inc., and without your liquidating any promissory notes or evidences of indebtedness or security held by you, to pay on demand any and all sums as they become due, together with all loss, costs and expenses which may be suffered by you by reason of any default of Warren Refrigerating Company, Inc.
*909 This guarantee shall apply to all notes and contracts*827 and/or chattel, mortgages and/or other evidences of indebtedness and extensions thereof. This guarantee is effective immediately and shall continue until all sums due or to become due you from the said Warren Refrigerating Company, Inc. shall have been paid to you in full in cash.
We hereby waive notice of the acceptance of this guarantee and of notice of non-payment, demand, or protest of any note or draft or other evidence of indebtedness, signed, accepted or indorsed by said Warren Refrigerating Company, Inc., and any other notices required by law, and you may renew or extend or compromise any of the same and/or collect upon or otherwise liquidate any paper and security held by you in any manner that you may deem advisable without affecting our liability.
This guarantee is predicated on the fact that we will benefit materially through your financing transactions for our dealer and distributor, Warren Refrigerating Company, Inc., inasmuch as your financing will assist in enhancing our volume of sales.
This agreement was in force and effect throughout the fiscal years ending September 30, 1937, and September 30, 1938.
At the close of each month during the fiscal years*828 ending September 30, 1937, and September 30, 1938, on the deferred payment paper sold by petitioner and the New York corporation to C.I.T. and on the deferred payment paper sold by the Beaumont company to C.I.T. Corporation, there remained outstanding and unpaid by the maker of the deferred payment paper so sold certain amounts which are in the record and are incorporated herein by reference without setting them out in detail in these findings of fact.
The amounts appearing in the "Total Amount Outstanding" column of the schedules incorporated herein by reference represent the alleged contingent liabilities contained in line 14 of petitioner's above mentioned Exhibit 15 as representing a part of its "current liabilities" as contended for by petitioner.
The remaining "investment" of C.I.T. in the paper sold by petitioner and the New York corporation and the remaining "investment" of C.I.T. Corporation in the paper sold by the Beaumont company at the close of each month during the fiscal years ending September 30, 1937, and September 30, 1938, respectively, together with the totals thereof, are set out in the record and are incorporated herein by reference.
Line 2 of petitioner's*829 Exhibit 15 should be adjusted by adding to the amounts shown thereon at the close of each month for the 12-month period ending August 31, 1937, the amount of $26,224.03 at the close of each respective month during that period. Line 2 should also be adjusted by adding to the amounts shown thereon at the close of each month for the 12-month period ending August 31, 1938, the amount of $1,265.74 at the close of each respective month during that period. The amounts of $26,224.03 and $1,265.74 represented finance charges not yet earned on notes which matured in *910 future tax years. Although included in the face of the notes receivable held by petitioner, these amounts were deducted by petitioner in arriving at the amounts which petitioner listed on line 2 of its Exhibit 15.
The amounts shown in the stipulation as representing the "Total remaining 'Investment'" of C.I.T. in paper sold by petitioner and the New York corporation and of C.I.T. Corporation in paper tioner as that term is defined and used in the above mentioned trust indenture, and the entire line 14 should be eliminated from petitioner's Exhibit 15.
With the exception of line 2, as above corrected, and the*830 elimination of line 14 as a current liability, we find petitioner's "current assets" and "current liabilities", as those terms are defined and used in the trust indenture, to be as listed by petitioner in its Exhibit g the fiscal years ending September 30, 1937, and September 30, 1938, together with the excess of the total current assets over twice the total current liabilities, are as follows:
| Date | Total current assets | Total current liabilities | Excess of total current assets over twice the total current liabilities |
| Sept. 30, 1936 | $635,743.81 | $230,461.53 | $174,820.75 |
| Oct. 31, 1936 | 617,741.07 | 187,807.12 | 242,126.83 |
| Nov. 30, 1936 | 632,210.69 | 182,358.21 | 267,494.27 |
| Dec. 31, 1936 | 665,160.47 | 197,068.29 | 271,023.89 |
| Jan. 31, 1937 | 666,228.13 | 183,938.27 | 298,351.59 |
| Feb. 28, 1937 | 664,959.77 | 173,514.94 | 317,929.89 |
| Mar. 31, 1937 | 707,918.08 | 201,844.97 | 304.228.14 |
| Apr. 30, 1937 | 724,433.52 | 191,505.87 | 341,421.78 |
| May 31, 1937 | 749,769.30 | 201,844.97 | 346,079.36 |
| June 30, 1937 | 810,245.55 | 205,478.87 | 399,287.81 |
| July 31, 1937 | 832,692.49 | 217,017.32 | 398,657.85 |
| Aug. 31, 1937 | 823,229.76 | 201,564.34 | 420,101.08 |
| Sept. 30, 1937 | 909,497.29 | 411,136.19 | 87,224.91 |
| Oct. 31, 1937 | 838,735.23 | 313,160.11 | 212,415.01 |
| Nov. 30, 1937 | 818,736.23 | 297,173.69 | 224,388.85 |
| Dec. 31, 1937 | 776,057.21 | 248,414.27 | 279,228.67 |
| Jan. 31, 1938 | 779,997.12 | 235,682.63 | 308,631.86 |
| Feb. 28, 1938 | 735,017.48 | 214,802.09 | 305,413.30 |
| Mar. 31, 1938 | 756,579.61 | 211,412.77 | 333,754.07 |
| Apr. 30, 1938 | 788,000.42 | 272,419.41 | 243,161.60 |
| May 31, 1938 | 838,381.27 | 251,755.38 | 334,870.51 |
| June 30, 1938 | 937,777.39 | 351,357.62 | 235,062.15 |
| July 31, 1938 | 991,215.90 | 396,750.77 | 197,714.36 |
| Aug. 31, 1938 | 1,046,452.42 | 387,474.55 | 271,503.32 |
| Sept. 30, 1938 | 1,031,941.14 | 551,669.15 | (71,397.16) |
*831 As shown in the preceding schedule the total current assets were in excess of twice the total current liabilites for every month except the month of September 1938. This excess, with thr exception of the month of September 1937, was greater than petitioner's adjusted net income for the fiscal years ending September 30, 1937, and September 30, 1938, respectively, as the term "adjusted net income" is used in section 14(a)(1) of the Revenue Act of 1936.
*911 The respondent in determining petitioner's surtax on undistributed profits for the fiscal years ending September 30, 1937, and September 30, 1938, respectively, under section 14 of the Revenue Act of 1936, did not, under section 14(a)(2) thereof, allow petitioner any "credit provided in section 26(c), relating to contracts restricting dividends."
OPINION.
BLACK: Two issues remain for our decision: (1) Whether the respondent erred in increasing petitioner's income by the excess of the selling price over the net price on all sales made by petitioner's agents during the taxable years and allowing petitioner as a deduction therefrom only the sales agents' commissions actually paid during the year, thereby disallowing*832 as a deduction during the respective current taxable year that part of the agents' commissions which remained unpaid at the end of the year; and (2) whether petitioner is entitled to a credit under section 26(c)(1) of the Revenue Act of 1936 by reason of a contract restricting the payment of dividends.
1. The facts relative to the first issue are fully set forth in our findings. Briefly, petitioner sold its product chiefly through agents to whom petitioner quoted a "net price" and permitted the agents to establish the "selling price" with the understanding that the excess of the selling price over the net price was to be paid to the agents as their commissions. In no case was petitioner entitled to keep for itself more than the net price. It was agreed by petitioner and its selling agents that the purchaser would pay petitioner the entire selling price; that the difference between the selling price and the net price would represent the agent's total commission; that 25 percent of this commission would be credited to a regular reserve account and not paid to the agent until the entire selling price had been paid to petitioner; that 75 percent of this total commission, called*833 the current commission, would be paid to the agent immediately, provided the down payment made by the purchaser equaled 75 percent of the total commission; that in case the down payment did not equal 75 percent of the total commission, the entire down payment was to be paid to the agent and the balance of the current commission would be credited to a special reserve account and paid to the agent on the basis of 50 percent of the monthly collections from the purchaser until the current commission was fully paid. Petitioner accrued and reported as income only the net price. it claimed no deductions for commissions. The respondent determined that petitioner should accrue and report as gross income the entire selling price and then deduct from the selling price only the commissions actually "paid" to the agents during the taxable year. Although *912 petitioner kept its books and reported according to the accrual method of accounting as distinguished from the cash receipts and disbursements method, the respondent determined and contends that the portion of the agents' commissions contained in the regular and special reserve accounts did not accrue as a liability for the reason*834 that the payment of these amounts to the agents was contingent upon collection being made by petitioner from the purchasers. In support of this contention the respondent cites Reuben H. Donnelley Corporation,22 B.T.A. 175">22 B.T.A. 175, as a case on all fours with the present case; and Air-Way Electric Appliance Corporation v. Guitteau,29 Fed.Supp. 379.
Petitioner contends that it should either be sustained in accruing as income only the net price and not deducting therefrom any agents' commissions, or, if required to accrue as gross income the selling price, then it should be permitted to deduct the entire amounts of the agents' selling commissions whether collected in the taxable year or not; and that, to the extent the respondent's argument finds support in the Donnelley case and the Air-Way Electric Appliance Corporation case, those decisions are unsound and should not be followed by the Board in the instant case.
Since the briefs in the present proceedings were filed the Sixth Circuit has reversed the District Court in Air-Way Electric Appliance Corporation v. Guitteau, supra. See *835 123 Fed.(2d) 20. In that case the taxpayer was a manufacturer of vacuum cleaners. Its marketing system consisted of the appointment of distributors who in turn entered into arrangements with retail dealers who sold to the public generally on installment conditional sales contracts which were assigned by the dealer to the distributor and by the distributor to the taxpayer. The taxpayer charged the distributor for merchandise delivered to him. Upon assignment of the sales contracts to the taxpayer, the latter would credit the distributor with the face amount of the contract and debit accounts receivable for the same amount. At the same time the taxpayer would charge the distributor's current account with 10 percent of the face of the contract and credit the distributor's deferred account which was captioned "Reserve for Contingent Collection Expense" with a like amount. The deferred credits were payable to the distributor from month to month as the installments were paid by the purchaser of the vacuum cleaner. As the deferred credits were paid to a distributor, the amounts so paid were charged to the reserve for contingent collection expense account. During the taxable*836 years involved, the credits to this reserve exceeded the debits by $112,183.38 in 1927 and $138,494.40 in 1928. The Commissioner included in the taxpayer's gross income the face value of the conditional sales contracts but refused to allow as deductions *913 the amounts of $112,183.38 and $138,494.40, respectively, on the ground that such amounts were not properly chargeable to expense during the tax years because prospective. The District Court sustained the Commissioner, citing as authority the Donnelley case. The Sixth Circuit in reversing the District Court, among other things, said:
The Collector relies upon the rule that reserves are not deductible if they are set up merely to cover contingent liabilities. [Citations] If the obligation to pay is, in a true sense, based upon a contingency in the sense that that term is used in the cited cases, the judgment should stand. But analysis discloses that it is not. True, the purchasers might never pay up their contracts and be uncollectible, but upon the installments being paid the obligation to pay them over to the distributor is absolute and not contingent and the obligation accrued when the right to collect accrued*837 during the tax years. In this respect that portion of the installment contracts represented by the 10% reserve stands on no different basis than that portion represented by the 90% net credit, for both are subject to the possibility that the purchaser might default, and to defer the liability to pay with respect to the one until the money is received, and to credit the other in advance of payment as accrued, is to divide the transaction and to place part of it upon an accrual basis and part of it on a cash basis, and this does not reflect true income. * **
We think the Sixth Circuit correctly decided in favor of the taxpayer in the Air-Way Electric Appliance Corporation case, and that the same reasoning used by the court in that case is applicable to the instant case and brings about a decision in petitioner's favor.
It seems clear to us that when petitioner made sales of its equipment through its agents to customers and received their installment notes secured by the retention of title to the equipment, it should accrue the entire sales price as gross income. Cf. *838 George Hyatt,36 B.T.A. 121">36 B.T.A. 121. There were no conditions as to payments which would make these notes in any sense contingent assets. True, some of them might never be paid, but that fact has nothing to do with their accrual as income unless they were of the class that their collection was so improbable as to make their accrual as income unnecessary under a well known line of Board and court decisions. But there is no evidence in the instant case that any of the notes and accounts were of that nature and there is no such contention.
It seems equally clear that petitioner should have the right to accrue against the above mentioned income items its liability to pay the agents' commissions thereon. The contract which petitioner had with its agents definitely provided that the company would pay the agent as his selling commission "the difference between the selling price and the Company's net price." True, it is that certain portions of this commission were not to be paid to the agent until collections were made from the customers but the liability to pay these commissions was just as certain as payment of the notes was certain, no more and no less. If payment of these*839 notes receivable was sufficiently *914 certain to justify their accrual as gross income, and we have held it was, we think the obligation of petitioner to pay agents' commissions was sufficiently certain to justify their accrual as liabilities.
To treat petitioner's income and deductions in the manner we have just suggested is simply to treat both sides of the ledger in the same way. Cf. American National Co. v. United States,274 U.S. 99">274 U.S. 99; Bonded Mortgage Co. v. Commissioner, 70 Fed.(2d) 341.
The fact that some of the commissions which petitioner definitely agreed to pay its agents were not payable until the notes which had been given for the equipment had been paid in full did not change the liability of petitioner into a contingent liability. Cf. Shoemaker-Nash, Inc.,41 B.T.A. 417">41 B.T.A. 417. See also G.C.M. 9571, X-2 C.B. 153.
We think Reuben H. Donnelley Corporation, supra, upon which respondent so strongly relies, is distinguishable on its facts. In that case we found, among other things, that "The contracts for advertising or extra listings were obtained by soliciting agents or salesmen*840 who were paid on a commission basis against which they had drawing accounts. This commission was not payable until the charge for the advertising was collected from the customer." On those facts we held that no liability to pay agent's commissions accrued until the taxpayer collected the accounts from its customers. In so holding we said: "In the instant case the petitioner did not charge on its books as an expense incurred, the unpaid commissions to these salesmen nor did it credit to the accounts of such salesmen the commissions on contracts for which payment had not been made. On the contrary it was distinctly understood that no salesman was entitled to a credit to his commission account for any particular contract until payment had been made in settlement of that contract." (Italics supplied.)
For reasons which we have already pointed out herein, we think the contract which petitioner had with its sales agents was one under which, by its very terms, commissions accrued to the sales agents immediately when sales were made, although only a part of the commissions was then payable and the balance was to be paid later when collections were made. These facts, we think, make*841 the instant case distinguishable from the Reuben H. Donnelley Corporation case.
We also think that Swain & Myers, Inc.,42 B.T.A. 306">42 B.T.A. 306, is distinguishable on its facts. In that case the sales tax levied by the State of Illinois was not on gross sales, but upon "gross receipts from sales," as we pointed out. In other words if a merchant sold his goods on a credit, no tax accrued against him until collections were made. This latter event had to occur before there was any accrual of the tax. Under those circumstances we held that the taxpayer in that case was not entitled to accrue as a liability in the *915 taxable year $1,497.61 taxes as due the State of Illinois, based on sales which the taxpayer had completed but upon which no collections had been made in the taxable year. We see no conflict in our holding in the Swain & Myers, Inc., case with our holding in the instant case.
2. In determining petitioner's "undistributed net income" as that term is defined in section 14(a)(2) of the Revenue Act of 1936, is petitioner entitled for the fiscal years ending September 30, 1937, and September 30, 1938, respectively, to a credit under section 26(c)(1) *842 of the same act, relating to contracts restricting dividends? The material provisions of this section are in the margin. 1
Petitioner contends that it could not during the fiscal years involved distribute any amount as dividends without violating section 13 of article V of the trust indenture executed by petitioner on March 1, 1928. The material provisions of section 13 are as follows:
The Company covenants and agrees that it will not pay any dividends on its outstanding capital stock * * * unless its current assets will equal at least twice the amount of its current liabilities, *843 after the payment of any dividends * * *.
Section 14 of article V of the trust indenture defines the terms "current assets" and "current liabilities," the definition of the latter term being as follows: "Accounts payable; trade acceptances; bills current and notes current, and any other liabilities, other than these bonds." (Italics supplied.)
Petitioner contends that the amounts embodied in the stipulation as representing the amounts at the close of each month during the fiscal years involved remaining outstanding and unpaid by the maker of the deferred payment paper sold by petitioner and the New York corporation to C.I.T. and by the Beaumont company to C.I.T. Corporation, respectively, represent "contingent liabilities" of petitioner and as such must be considered as "any other liabilities" in applying the definition of "current liabilities" as used in the trust indenture.
The respondent contends that the phrase "and any other liabilities other than these bonds" contained in the definition of "current liabilities" as defined in the trust indenture "must be read in parimateria with the section from which its is clear that the current assets and current liabilities*844 therein referred to are fixed, known, or ascertainable *916 current assets and liabilities - not contingent current assets and liabilities." The respondent further contends that "under the ejusdem generis rule, it is obvious that this phrase is intended to refer to any other current liabilities other than these bonds which are fixed current liabilities." The respondent further contends that in any event the amounts remaining outstanding and unpaid on paper sold by the Beaumont company should be excluded as a current liability for the reason that as to such paper petitioner was merely an accommodation endorser in violation of its charter and the corporation laws of the State of Georgia. The remaining contentions of the respondent relate to certain other minor objections to the list of current assets and current liabilities introduced in evidence as petitioner's Exhibit 15 referred to in our findings.
At the outset it should be noted that petitioner has overstated the amount of its alleged contingent liability at the close of each month during the fiscal years involved by the 10 percent holdback, which the amount that would be paid to petitioner (including the New*845 York corporation) or the Beaumont company upon payment in full of the discounted paper by the maker thereof. Petitioner was not liable to C.I.T. for the 10 percent holdback, contingently or otherwise. Petitioner (including the New York corporation) and the Beaumont company, respectively, merely agreed that, if there should be default, "we agree on request without any tender of paper being required to repurchase from you the paper or the entire series of paper on which such default has occurred at the remaining amount of your investment therein."
Are these remaining amounts, exclusive of the 10 percent holdback, "current liabilities" as that term is used in the trust indenture? Before answering this question we think that the respondent is in error in contending that in any event the remaining investment of the C.I.T. Corporation in paper sold by the Beaumont company should be excluded as an alleged contingent liability of petitioner. We hold that the contract dated June 3, 1935, between petitioner and C.I.T. (set out in our findings) was not a violation of petitioner's charter or the corporation laws of the State of Georgia. We will now consider the preceding question.
In*846 approaching the question it might be well to bear in mind that accounting authorities generally classify liabilities that appear in the balance sheet proper as either fixed or current; that although arbitrary it is customary to regard liabilities as fixed if more than one year intervenes before they fall due; that bonded indebtedness is generally regarded as a fixed liability as distinguished from current; and that contingent liabilities "are those which become definite liabilities in the future only in case of occurrences which may or may *917 not transpire, as, contingent liability on notes receivable discounted, and on securities of other companies guaranteed as to principal or interest, or both." Accountants' Handbook, by E. A. Saliers, pp. 337, 338. From an accounting standpoint, it has been said, there are four methods of showing contingent liabilities on the balance sheet. These are set out in the margin. 2 Of course, the parties to the trust indenture could define "current liabilities" in any manner that they chose. They could even have agreed that no dividends whatever would be declared or paid while any of the bonds were outstanding. But it was their intention*847 to permit dividends whenever the "current assets" exceeded twice the "current liabilities" and they defined the latter term as meaning: "Accounts payable; trade acceptances; bills current and notes current, and any other liabilities other than these bonds."
*848 If we were to construe the broad term "liabilities" as used in the above definition alone and apart from the remainder of the definition, it is our opinion that the so-called remaining amounts of "Investment" would have to be considered as coming within the broad term. First National Bank of Redlands v. Consolidated Lumber Co.,16 Cal. App. 267">16 Cal.App. 267; 116 Pac. 680. Cf. Cochran and Sayre v. United States,157 U.S. 286">157 U.S. 286, 295, 296. But we think the term must be restricted in accordance with the rule of ejusdem generis. 25 R.C.L. 997 states this rule in part as follows:
* * * In accordance with the rule of ejusdem generis, such terms as "other," "other thing," "others," or "any other," when preceded by a specific enumeration, are commonly given a restricted meaning, and limited to articles of the same nature as those previously described.
Under this rule the general words "any other liabilities" must be assimilated to the particular words "Accounts payable; trade acceptances; bills current and notes current" and restricted to liabilities of the same kind. Cf. *849 Helvering v. Stockholms Enskilda Bank,293 U.S. 84">293 U.S. 84. We have not overlooked the fact that the general words "any other liabilities" are qualified by the exception "other than these *918 bonds." By reason of this exception it might be argued upon behalf of petitioner that the parties to the trust indenture attached to the general words a larger meaning than they would have if limited to things ejusdem generis as those specifically enumerated. But when it is remembered that the parties to the trust indenture were defining a term which had already come to have a generally understood meaning, it is believed that the phrase "other than these bonds" had been introduced only for greater caution. Otherwise, the particular words "Accounts payable; trade acceptances; bills current and notes current" would all be superfluous and it would have been sufficient to have defined "current liabilities" simply as "all liabilities other than these bonds."
After a careful consideration of all the facts and argument of the parties, we are of the opinion that the contingent liabilities in question are not "current liabilities" as that term is used in the trust indenture, *850 and we have made our finding accordingly.
Among the current assets listed in petitioner's Exhibit 15 were "Notes Receivable - Net (Less Deferred Crs.)." The deferred credits thus deducted consisted of finance charges not yet earned on notes which matured in future tax years and also the 10 percent held back by C.I.T. on notes purchased by C.I.T., and amounted to $47,521.27 ($21,297.24 of which represented the 10 percent holdback) for each month during the 12-month period ending August 31, 1937, and $65,461.80 ($64,196.06 of which represented the 10 percent holdback) for each month during the 12-month period ending August 31, 1938. The respondent contends that these amounts should be added to petitioner's current assets. Petitioner admits that these charges have been included in the face of the notes receivable. The trust indenture defines current assets in part as meaning "(d) Bills receivable after proper deduction for doubtful bills." Since the amounts representing the 10 percent holdback concerned notes which petitioner had sold to C.I.T., we do not think those amounts should be considered as a part of petitioner's "current assets" as that term is defined in the trust indenture. *851 The balance of the said amounts of $47,521.27 and $65,461.80, respectively, represented charges on notes which apparently were still held by petitioner. We hold that these charges in the amounts of $26,224.03 and $1,265.74, respectively, being a part of the bills receivable, come within the definition and should be included in petitioner's current assets.
In our findings we have found the total current assets and the total current liabilities at the close of every month for the fiscal years ending September 30, 1937, and September 30, 1938. At the close of each month for the first eleven months of the fiscal year ending September 30, 1937, and at the close of each month for the first *919 eleven months of the fiscal year ending September 30, 1938, petitioner could have paid dividends in excess of its adjusted net income for the respective fiscal year without violating a provision of a written contract executed by petitioner prior to May 1, 1936.
Article 26-2 of Regulations 94 provides in part as follows:
(b) Prohibition on payment of dividends. - The credit provided in section 26(c)(1) is allowable only with respect to a written contract executed by the corporation*852 prior to May 1, 1936, which expressly deals with the payment of dividends and operates as a legal restriction upon the corporation as to the amounts which it can distribute within the taxable year as dividends. If an amount can be distributed within the taxable year as a dividend -
* * *
(2) at one time (as, for example, during the last half of the taxable year) without violating the provisions of a contract, but can not be distributed as a dividend at another time within the taxable year (as, for example, during the first half of the taxable year) without violating such provision -
then the amount is one which, under section 26(c)(1), can be distributed within the taxable year as a dividend without violating such provisions.
We hold that the above regulations are reasonable and correctly interpret the statute. Cf. Honokaa Sugar Co.,43 B.T.A. 151">43 B.T.A. 151, 157; Henry Mill & Timber Co.,43 B.T.A. 1073">43 B.T.A. 1073, 1077. The statute (see footnote 1) allows a credit of 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*853 contract executed by the corporation prior to May 1, 1936. Since petitioner could have distributed amounts in excess of its adjusted net income for each fiscal year at the close of any month during the first eleven months of each fiscal year without violating a provision of the trust indenture, we hold that it is not entitled to any credit under section 26(c)(1) of the Revenue Act of 1936. The respondent's determination as to this issue is sustained.
Reviewed by the Board.
Decisions will be entered under Rule 50.
MELLOTT, concurring: While I concur in the holding of the majority, I do not believe that the distinction of the Reuben H. Donnelley Corporation case is sound. In so far as it is contrary to the conclusion reached upon the first point, I think it should be overruled.
LEECH and DISNEY agree with the above.
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. * * * ↩
2. CONTINGENT LIABILITIES. - From an accounting standpoint there are four different ways of showing contingent liabilities on the balance sheet. Method one, which is the best where practical, is to show the contingent liability as a contra item to the corresponding contingent asset. For instance, when notes receivable are discounted, a corresponding amount of cash (less discount) is received. Instead of omitting mention of the notes receivable, they should be retained upon the balance sheet as a contra item to notes receivable discounted upon the liability side, both amounts affecting the balance. A second method is to show gross amount of the notes receivable and deduct from them the amounts which have been discounted, showing the net amount on the assets side of the balance sheet. A third method is to omit mention of the notes receivable which have been discounted but to indicate the notes receivable discounted as a contingent liability on the liability side, and write the amount short to indicate that they have not been included in the total. A fourth method,↩ probably the simplest and most useful of all, is to asterisk the notes receivable and call attention in a footnote that a certain proportion of notes receivable (stating the exact amount) have been discounted. Auditing Theory and Practice, Montgomery, Vol. 1, p. 371.