1 T.C. 1110">*1110 The Commissioner determined deficiencies of $ 13,113.35 for 1936 and $ 6,758.26 for 1937 in income and undistributed profits tax.

The petitioner contests the disallowance of credits claimed under section 26 (c) of the Revenue Act of 1936, and now also claims the credit under section 26 (f) of that act, as amended by the Revenue Act of 1942.

FINDINGS OF FACT.

The taxpayer (sometimes referred to as B. I. M. C.) is a Delaware corporation with an office at 630 Fifth Avenue, New York, New York. It filed its income tax returns in Delaware.

Boltin, Inc., during 1934 and 1935, was a Delaware corporation the shareholders of which were: 1 T.C. 1110">*1111

1943 U.S. Tax Ct. LEXIS 161">*162 In 1935 Boltin, Inc., owed the following note indebtedness to shareholders:

It was not indebted to Hubert E. Rogers and had no other indebtedness except negligible amounts for current operating expenses. It owned all the capital stock of the taxpayer. The officers of petitioner in 1935 were Bonbright, president; Perry, vice president; Ericson, secretary; and Dibbs, treasurer. In 1934 Rogers, Bonbright, and Perry began discussing a merger of Boltin, Inc., into the taxpayer. Easley was present at many of the discussions. Rogers objected to any merger plan which provided for paying off the note indebtedness before payment of any dividends to shareholders. October 14, 1935, Bonbright, in Rogers' presence, wrote the following letter to Perry in San Francisco:

My dear Perry:

This morning I am in receipt of your letter of the 10th October; also, of a letter from Rogers in which he accepts, without qualification, the proposed compromise conditions named in my letter to him of the 11th October, a copy of which was sent to you by air mail on that day, together with the original of his letter to me 1943 U.S. Tax Ct. LEXIS 161">*163 of the 10th October.

* * * *

Under the plan as now agreed to, subject to your approval, funds of the Company as made available through the setting aside of depletion reserve, etc., to the extent of $ 150,000, per year, will be used toward retirement of the new notes; interest at the rate of 3 1/2 per cent, per annum on said notes will then be paid, and, if additional funds are available, twelve cents per share per annum will be declared in dividends on the approximately 160,000 shares of B. I. M. C. stock. Any funds available in any year, after provision of the items named above, to go toward the further retirement of the notes.

You are correct in your assumption as to what I meant in my letter to Mr. Rogers about "elimination of any stock not required for immediate purposes of the merger." There will be no stock beyond what is required to satisfy the proposed deliveries to Boltin shareholders and the amount required to be held in the treasury for possible conversion of notes.

Before this letter reaches you, you will doubtless have received the correspondence above referred to, namely, Mr. Rogers' letter of October 10th, and copy of my reply of October 11th. And I hope after reading1943 U.S. Tax Ct. LEXIS 161">*164 those letters and this one, you will have a clear picture in your mind.

1 T.C. 1110">*1112 To make sure that all of our minds have met with regard to the points I have covered in this letter, I am sending a copy to Mr. Rogers, and one to Mr. Armitage, and if you do not hear to the contrary by wire, you will know that all here are in agreement. And, in that case, I will be glad to have you wire your approval in order that Mr. Armitage may proceed without further delay, in the preparation of the final papers.

With kindest regards,

Yours very truly,

Irving W. Bonbright.

Perry, on October 16, 1935, wired Bonbright:

Your letter October fourteenth regarding Boltin BIMCO merger stop I approve plan to which your letter refers

O B Perry

At the time Bonbright's letter was written he had received the following letter dated October 11, 1935, from Rogers:

I have just received your letter of this date.

Your suggested amendments to the plan, as well as to the matter of compensation which you propose, are entirely satisfactory to me.

On December 24, 1935, a formal agreement of merger between Boltin, Inc., and petitioner, dated December 12, 1935, was executed by the corporations and by a majority of their1943 U.S. Tax Ct. LEXIS 161">*165 respective boards of directors, constituting practically all the stockholders and creditors. In this agreement was the following:

Seventh: All rights of creditors and all liens upon the property of either of said corporations shall be preserved unimpaired, and all debts, liabilities and duties of Boltin, Inc., shall thenceforth attach to said Bolivian International Mining Corporation, the continuing corporation, and may be enforced against it to the same extent as if the said debts, liabilities and duties had been incurred or contracted by it.

On August 14, 1936, the taxpayer's directors adopted the following resolution:

Resolved that in accordance with the terms of the agreement of merger and consolidation of Boltin, Inc. and Bolivian International Mining Corporation, the escrow agreement dated the 10th day of March, 1936, and the stockholders' agreement of October 14, 1935, that a dividend of 12 cents per share be paid on this Corporation's outstanding shares of stock (excluding 100,294 shares of stock deposited with the escrow agent pursuant to the terms of escrow agreement), and that the officers of the Corporation be and they hereby are directed to pay such dividend on the 21st1943 U.S. Tax Ct. LEXIS 161">*166 day of August, 1936 to the registered holders of the shares of the Corporation as of the 19th day of August, 1936.

Taxpayer redeemed notes in 1936 and 1937 in the amounts of $ 103,838 and $ 299,100, respectively, and paid 12 cents per share in both years. No dividends have thereafter been paid in excess of that amount.

The taxpayer did not execute a written contract prior to May 1, 1936, which expressly restricted the payment of dividends.

On January 1, 1936, taxpayer had a "deficit in earnings and profits" of $ 55,305.77. For the year 1936, its adjusted net income was $ 75,946.41. 1 T.C. 1110">*1113 Its 1936 earnings and profits as adjusted in respondent's deficiency notice were $ 87,984.01.

OPINION.

The question is whether the petitioner is entitled to a credit in the computation of undistributed profits surtax. Petitioner first claims under section 26 (c) (1), Revenue Act of 1936, under which the credit is dependent upon whether a distribution of dividends within the taxable year would have violated a provision of a written contract executed by the petitioner prior to May 1, 1936, which provision expressly deals with the payment of dividends. We can not find from the evidence that1943 U.S. Tax Ct. LEXIS 161">*167 there was such a contract. There was correspondence between individuals in 1935 and a merger agreement in December 1935, but no written agreement of the corporation expressly dealing with the payment of dividends was executed by it before May 1, 1936. The merger agreement contained no such express provision; and if the shares had come into the hands of new people who were not individually bound by the Bonbright-Perry-Rogers correspondence, a dividend in excess of 12 cents a share would not have violated any express written contractual obligation of the corporation. It must be held, therefore, under section 26 (c) (1), that the credit was properly denied. ; see ; ; .

A decision has just come down from the Circuit Court of Appeals for the Sixth Circuit, , to which the 1943 U.S. Tax Ct. LEXIS 161">*168 taxpayer calls attention; but that case is not in point, for it involved the question whether the preliminary promise by the corporation itself as to a restriction on dividends was to be regarded as among the terms of its agreement. In this case, as we have said, the corporation itself did not make such a promise, and the understanding among the shareholders and creditors can not be imputed to it for purpose of the tax credit.

The taxpayer, under subdivision 26 (f), ¹ which was added by the Revenue Act of 1942, section 501, subdivision (a) (3), now claims a "deficit credit" of $ 43,268.17, being the difference between the adjusted 1 T.C. 1110">*1114 net income, $ 75,946.41, and the net amount, $ 32,678.24, of remaining earnings and profits, $ 87,984.01, as reduced by the deficit $ 55,305.77 of prior years. This claim under the new statute is, however, not in accordance with its terms, and we find no room for interpretation in accordance with the taxpayer's view. According to the letter of the section, the credit is expressly defined without reference to a possible accumulated deficit instead of actual earnings for the prior period. It deals only with positive earnings and profits. 1943 U.S. Tax Ct. LEXIS 161">*169 It does not contemplate a minus or red figure in lieu of accumulated earnings. This language must dominate the section, rather than a colloquial meaning of the heading "deficit credit." Apparently the amendment of the statute was intended, for example, to mitigate a hardship for the class of taxpayers whose adjusted net income took no account, under the earlier statute, of capital losses in excess of the amounts deductible as such, and which therefore did not reduce the amount which mathematically seemed to be available for dividends. (See Ways and Means Committee Report No. 2333, p. 171.) So far as this record shows, there was no restriction upon this taxpayer, by reason of contract, statute or regulation, which required it to recoup the prior deficit out of the present earnings, or which otherwise prevented it from distributing the year's earnings in taxable dividends. Cf. (C. C. A., 6th Cir.); (C. C. A., 3d Cir.); 1943 U.S. Tax Ct. LEXIS 161">*170 (C. C. A., 6th Cir.); ; International Utilities Corporation, I. T. C. 128.

1943 U.S. Tax Ct. LEXIS 161">*171 Decision will be entered under Rule 50.