*2224 A corporation had at the beginning of the year 1924 a deficit, or impairment of capital, caused by making distributions in prior years in amounts greater than its then accumulated earnings or profits. It also had at the beginning of 1924 earnings or profits made since February 28, 1913, computed without deduction for the deficit or impairment of capital. Held, that in determining the amount available for the payment of "dividends," such earnings or profits should not be reduced by the amount of the deficit, or impairment of capital.
*1235 This proceeding is for the redetermination of deficiencies in income tax asserted by the respondent in the amounts of $4,628.11 for the year 1924, and $3,641.23 for the year 1925. The petitioner alleges that the respondent erred in including in the petitioner's income, money received by him in 1924 and 1925, representing his portion of distributions made in those years by the Kennywood Park Corporation, the Kennywood Scenic Railway Co., the Kennywood Toboggan Co., and the Kennywood Racing Coaster Co.
FINDINGS*2225 OF FACT.
The petitioner is an individual residing in Pittsburgh, Pa. During the years 1924 and 1925 he was a stockholder, and the secretary and treasurer of the Kennywood Park Corporation, which operated an amusement park in Pittsburgh. The corporation was organized in 1916 with a capital stock of $100,000, divided into 1,000 shares of *1236 common stock of the par value of $100 each, all of which was issued for the assets of the value of $100,000 belonging to a limited partnership which had theretofore conducted said park. The members of the partnership became the stockholders of the corporation. The petitioner owned 435 shares of said stock during the year 1924 and 485 shares during the year 1925. During the years 1924 and 1925 the petitioner was also a stockholder of the following corporations: The Kennywood Scenic Railway Co., the Kennywood Toboggan Co., and the Kennywood Racing Coaster Co.
During the years 1917 to 1920, inclusive, the Kennywood Park Corporation paid dividends in excess of its net earnings, thus creating a capital deficit in the amount of $75,090.86. At the close of the year 1923 the corporation had accumulated earnings in the amount of $74,902.13*2226 without deduction for the capital deficit of $75,090.86.
The corporation filed income-tax returns for the years 1924 and 1925 showing a net income of $55,161.97 for 1924 and $99,133.40 for 1925. The respondent, upon audit of the returns, disallowed certain deductions taken by the corporation and increased the net income for 1924 to $87,297.08 and the net income for 1925 to $108,417.08.
Prior to the year 1924 the Kennywood Toboggan Co. paid dividends in excess of its earnings, thus creating a capital deficit at the end of the year 1923 in the amount of $24,152.33. The corporation's net earnings for 1924 were $5,012.48 and for 1925 were $4,787.26.
Prior to the year 1924 the Kennywood Scenic Railway Co. paid dividends in excess of its earnings, thus creating a capital deficit of $18,246.95 at the end of the year 1923. The corporation had no net earnings in 1924. In the year 1925 its net earnings were $10,737.06.
Prior to the year 1924 the Kennywood Racing Coaster Co. paid dividends in excess of its earnings, thus creating a capital deficit at the end of the year 1923 in the amount of $48,923.33. In the years 1924 and 1925 te accumulated earnings of the corporation, without*2227 deduction for the accumulated capital deficit, amounted to $23,760.51 and $19,571.43, respectively.
In the years 1924 and 1925 distributions were made to their stockholders by the Kennywood Park Corporation, the Kennywood Scenic Railway Co., the Kennywood Toboggan Co., and the Kennywood Racing Coaster Co., of which the petitioner received his proportionate share. The petitioner in his returns for 1924 and 1925 reported that part of the amounts so received by him was taxable income and that the remainder was return of capital. The respondent determined that the portion of said distributions constituting taxable income to the petitioner was larger than reported by him, and he increased the petitioner's income accordingly. The amounts of said *1237 distributions, the amounts received by the petitioner, the amounts reported by him as taxable income and return of capital, respectively, and the adjustments made by the respondent, are as follows:
| Year | Amount of dividend | Petitioner's share | |
| Kennywood Park Corporation | 1924 | $80,000 | $34,800 |
| 1925 | 80,000 | 38,800 | |
| Kennywood Scenic Railway | 1924 | None. | None. |
| 1925 | 15,000 | 6,360 | |
| Kennywood Toboggan Co | 1924 | 10,000 | 4,440 |
| 1925 | 15,000 | 6,660 | |
| Kennywood Racing Coaster Co | 1924 | 17,000 | 4,560 |
| 1925 | 12,750 | 3,420 |
*2228 Upon the basis of said adjustments in petitioner's income for 1924 and 1925, the respondent determined deficiencies in tax as above set forth.
OPINION.
MARQUETTE: It is the contention of the petitioner that at the beginning of the year 1924, each of the four corporations named in the findings of fact had a capital deficit, or impairment of capital, greater in amount than its earnings for 1924 and 1925; that, therefore, they had no accumulated earnings or profits available for the payment of dividends in those years, and that the distributions of which the petitioner received a part, and which constitute the receipts on which the deficiencies herein are predicated, represented a return of capital and not taxable income. Stated in another way, his contention is that the accumulated and current earnings of each of the corporations must first be applied to wipe out its deficit, or impairment of capital, before there can be any earnings available for the payment of dividends, even though the deficit, or impairment of capital, resulted from the making of distributions in prior years in amounts greater than the then accumulated earnings or profits.
The statute applicable here*2229 is section 201(a) and (b) of the Revenue Act of 1924, which provides that:
SEC. 201. (a) The term "dividend" when used in this title (except in paragraph (9) of subdivision (a) of section 234 and paragraph (4) of subdivision (a) of section 245) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.
(b) For the purposes of this Act every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. Any earnings or profits accumulated, or increase in value of property accrued, before March 1, 1913, may be distributed exempt from tax, *1238 after the earnings and profits accumulated after February 28, 1913, have been distributed, but any such tax-free distribution shall be applied against and reduce the basis of the stock provided in section 204.
The contention of the petitioner is not sound. To hold that before a corporation can have accumulated earnings or profits it must first make good an impairment, or reduction of capital caused by distributing to its stockholders amounts in excess*2230 of its prior earnings, would do violence to both the letter and spirit of the law, and would enable any corporation constantly to pay nontaxable dividends to its stockholders by the simple expedient of making distributions out of capital, subsequently restoring the capital from earnings, and repeating the process. In the instant case the corporations mentioned had their capital intact, except the part that had been returned to their stockholders through distributions in prior years, and at the time the distributions in question were made they also had earnings or profits accumulated since February 28, 1913.
It is our opinion that the distributions must be deemed to have been made from those earnings or profits to the extent thereof, and that they answer to that extent all the requirements of a "dividend."
The petitioner also urges that the respondent erred in adjusting and increasing the net income of the Kennywood Park Corporation for 1924 and 1925. However, in view of our holding above, it follows that, accepting the returns of the corporation as reflecting its true income for those years, its accumulated earnings or profits at the beginning of 1924 and its admitted income*2231 for 1924 and 1925 were ample for the payment of the distributions declared and made by it in 1924 and 1925. The contention of the petitioner, therefore, becomes immaterial and it need not be discussed.
Counsel for the respondent admitted at the hearing that the petitioner's income for 1924 as determined by the respondent and set forth in the deficiency letter should be reduced by $4,560, and adjustment will be made accordingly.
Reviewed by the Board.
Judgment will be entered under Rule 50.