Opinion
No. J-82.
May 2, 1932.
Action by Jessie W. Donahue against the United States.
Decree dismissing the plaintiff's petition.
The plaintiff received, during the year 1917, four $10,000 dividends on common stock of the Woolworth Company of New York. The Commissioner of Internal Revenue held that each of the dividends were paid out of earnings of the company accumulated during the year 1917, and applied the 1917 tax rate.
The plaintiff contends the accumulated net earnings of the company, for the fractions of the year prior to the payments of the dividends, were not sufficient to pay the first 3 dividends in full, and that the excess of the first 3 dividends over the available current earnings to pay them were accumulated by the company during the year 1916, and should be taxed on the rates prevailing for that year.
This case, having been heard by the Court of Claims, the court, upon the report of a Commissioner, and the evidence, makes the following special findings of fact:
1. The plaintiff, Jessie W. Donahue, is and at all times hereinafter mentioned was a citizen of the United States of America and now resides in the borough of Manhattan, city of New York.
2. On or about the 4th day of March, 1918, plaintiff duly filed her federal income tax return for the taxable year ending December 31, 1917, which showed a tax due thereon of $708.79, which amount was paid by said plaintiff on or about June 15, 1918, to the collector of internal revenue of the Second district of New York.
3. In her said return for 1917 plaintiff reported that she had received dividends amounting to $40,000 during the year 1917 on common stock of the F.W. Woolworth Company held by her in 1917, which dividends were declared as dividends by said F.W. Woolworth Company and received by her on the following dates:
=============================================================== Declaration | Date of payment | Date of receipt | Amount of dividend | | by taxpayer | --------------|------------------|--------------------|-------- Jan. 10, 1917 | Mar. 1, 1917 .. | Mar. 2, 1917 .... | $10,000 Apr. 11, 1917 | June 1, 1917 .. | June 2, 1917 .... | 10,000 July 11, 1917 | Sept. 1, 1917 .. | Sept. 2, 1917 .... | 10,000 Oct. 1, 1917 | Dec. 1, 1917 .. | Dec. 2, 1917 .... | 10,000 ---------------------------------------------------------------
4. The dividends referred to in finding 3 above were declared and paid by F.W. Woolworth Company, a New York corporation, hereinafter referred to as the New York Woolworth Company.
5. Plaintiff reported in said return of income for 1917 that the two dividends of $10,000 each received by her on March 2, 1917, and June 2, 1917, were taxable at the 1916 tax rates, and that the remaining two dividends of $10,000 each were taxable at the 1917 tax rates. In computing tax due under said return plaintiff used and applied to $20,000 of said dividends the 1916 rates and $20,000 of said dividends the 1917 rates.
6. Thereafter an audit of the return of plaintiff for the taxable year 1917 was made by the Commissioner of Internal Revenue, and under date of February 19, 1923, a letter addressed to plaintiff was sent by the Commissioner of Internal Revenue notifying her of an additional assessment against her for the year 1917 of $1,402.95.
The said letter, among other things, informed the plaintiff that the dividends allocated upon the said return as $20,000 as out of the earnings of 1916 and $20,000 as out of the earnings of 1917 had been reallocated so as to charge dividends amounting to $40,000 as out of earnings of 1917, and the tax was recomputed on all of said dividends at the rates applicable to the year 1917.
7. On or about February 26, 1923, plaintiff received a notice and demand from said collector of internal revenue for additional assessment for income taxes for the year 1917 against plaintiff amounting to said sum of $1,402.95.
8. Said notice and demand required the tax to be paid on or before March 8, 1923, in order to avoid penalties and interest.
9. Thereupon, under protest and duress, plaintiff paid to the collector of internal revenue for the Second district of New York on March 7, 1923, the sum of $1,402.95.
10. On or about the 15th day of June, 1924, plaintiff duly filed with the collector of internal revenue for the Second district of New York a claim for refund of said additional income taxes for the year 1917 amounting to $1,402.95.
11. The Commissioner of Internal Revenue on October 23, 1924, rejected said claim for refund in full.
12. During the year 1917 the New York Woolworth Company paid the following dividends on its common stock:
========================================================= Declaration of | Date of payment | Amount dividends | | ---------------------|-----------------------|----------- Jan. 10, 1917 ...... | Mar. 1, 1917 ....... | $1,000,000 Apr. 11, 1917 ...... | June 1, 1917 ....... | 1,000,000 July 11, 1917 ...... | Sept. 1, 1917 ....... | 1,000,000 Oct. 1, 1917 ....... | Dec. 1, 1917 ....... | 1,000,000 | |----------- Total ........... | ..................... | 4,000,000 ---------------------------------------------------------
13. During the year 1917 the New York Woolworth Company paid the following dividends on its preferred stocks:
============================================= Date of payment | Amount -----------------------------------|--------- Jan. 2, 1917 ..................... | $227,500 Apr. 1, 1917 ..................... | 227,500 July 1, 1917 ..................... | 227,500 Oct. 1, 1917 ..................... | 218,750 ---------------------------------------------
14. During the year 1917, in addition to the New York Woolworth Company, there was also a Canadian corporation and a Pennsylvania corporation of the same name.
15. The New York Woolworth Company owned the entire capital stock of the Pennsylvania and the Canadian Woolworth Companies.
16. The books and records of the Woolworth Companies are kept in the stores, of which there are approximately 1,000, the district offices, and the executive offices of the companies. The control books are kept in the executive office in New York City. The accounts of the corporations are consolidated in these control books, and balance sheets are made up from such books. The control books are a recapitulation of the business done in the various stores operated by the Woolworth Companies. The federal income tax returns for said New York Woolworth Company are prepared from the control books, and in making examinations of these returns internal revenue agents have used only the control books in determining the correctness of the returns. This practice has been followed since 1913.
17. During 1917 a monthly summary report of sales was furnished to the executive office by each district office, and a similar report was furnished each month with respect to expenses of the various stores. These reports were summarized in the executive office.
18. The control books of the corporation and the various sales and expense reports mentioned above are the only records of the business of said New York Woolworth Company for the year 1917 which are now available.
19. The various Woolworth stores carry uniform lines of goods, and the selling prices in all cases are five, ten, and fifteen cents. The cost of these articles remains about the same throughout the year. The gross profit on sales varies with the different types or classes of goods sold and during the different months and seasons.
20. The gross sales of the Woolworth stores are not uniform throughout the year. Sales during the month in which Easter falls are much larger than in the months immediately preceding or following. During the summer, sales decrease in volume, but in November and December the sales are increased.
21. Because of the enormous stock of goods carried at all times by the said New York Woolworth Company and the small value of the articles, it was impracticable to take an inventory at more frequent intervals than once a year. A complete inventory was taken on December 31st of each year, and after that time the actual earnings or profits of the company for the year could be determined.
22. At the time of the payment of the 1917 dividends the earnings of said New York Woolworth Company for 1917 to the dates of such payments could not have been determined.
23. At the date on which the dividends here in question were declared, the directors of said New York Woolworth Company had no information from which it could be definitely determined what earnings or profits had accrued up to the time of said declarations. So far as the records of the corporation disclosed, there was no fund from which such dividends could be declared or paid other than the undivided profits and surplus carried over from December 31, 1916, amounting to $15,368,660.37.
24. It was the intention of the directors to determine and declare said dividends payable solely out of the surplus and undivided profits of the corporation as of December 31, 1916.
25. The net income of the Woolworth Company of New York for the year 1917, as finally determined by the Commissioner of Internal Revenue, was $7,505,062.32. The income did not accrue uniformly over the year, and the net earnings for the year did not accrue in the same ratio as the sales for any particular portion of the year to the total sales of the year.
The corporation closed its books only at the close of the year, and neither the control books of the corporation kept at its executive offices in New York, nor the books and records of the company kept at its various stores and district offices, contain complete records from which the monthly earnings of the company can be accurately determined.
26. The books and records of the Woolworth Company are in evidence. A compilation made from these records, allocating to specific months receipts and expenditures of the company where the dates of such receipts and expenditures are ascertainable from the books, and making a pro rata monthly apportionment of the receipts and expenditures of the company where the dates are not definitely fixed in the records, shows that the current earnings during the year 1917, for the fractional parts of the year preceding the payment of the dividends of March 1, June 1, and September 1, were not sufficient to pay these dividends in full.
This compilation shows that $1,305.27 of the dividend of March 1 was paid out of 1917 earnings, $6,057.40 of the dividend of June 1 was paid out of 1917 earnings, and that $6,441.02 of the dividend of September 1 was paid out of the 1917 earnings, and that the balance of each of the said dividends was paid out of the 1916 earnings of the company.
27. The actual monthly earnings of the Woolworth Company during the year 1917 are not shown. The actual earnings of the company for the fractional parts of the year preceding the payment of the various dividends are not shown.
Paul L. Peyton, of Bronxville, N.Y. (Breed, Abbott Morgan, Hugh S. Williamson, and Albert S. Rockwood, all of New York City, on the brief), for plaintiff.
Joseph H. Sheppard, of Washington, D.C., and Charles B. Rugg, Asst. Atty., Gen., for the United States.
Before BOOTH, Chief Justice, and WILLIAMS, WHALEY, LITTLETON, and GREEN, Judges.
This is a suit to recover income taxes paid for the year 1917 upon four dividends of $10,000 each received by the plaintiff in that year on the common stock of the F.W. Woolworth Company of New York, on March 1, June 1, September 1, and December 1, respectively.
Plaintiff, on March 4, 1918, filed her income tax return for the calendar year 1917, in which she reported the receipt of the aforesaid dividends on the dates stated. The dividends received on March 2 and June 2, 1917, were included in the return as taxable at the 1916 rates, and the dividends of September 2 and December 2, 1917, were included as taxable at 1917 rates. The tax liability as shown by the return was $708.79, which amount was paid on or about June 15, 1918.
Upon an audit of the return the Commissioner of Internal Revenue ruled that all four of the dividends received by the plaintiff during the year 1917 were taxable at the 1917 rates, and on February 19, 1923, advised the plaintiff of a deficiency in her tax for the year 1917 in the sum of $1,402.95, which amount was thereafter, on March 7, 1923, paid under a written protest.
On June 15, 1924, the plaintiff filed a claim for a refund of the amount of the additional tax, which claim was rejected in full by the Commissioner of Internal Revenue on October 23, 1924.
The applicable provisions of section 31(b) of Revenue Act Sept. 8, 1916, 39 Stat. 756, as added by section 1211 of the Revenue Act of 1917 ( 40 Stat. 300, 336) reads: "Sec. 31. * * * (b) Any distribution made to the shareholders or members of a corporation, joint-stock company, or association, or insurance company, in the year nineteen hundred and seventeen, or subsequent tax years, shall be deemed to have been made from the most recently accumulated undivided profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received, and shall be taxed to the distributee at the rates prescribed by law for the years in which such profits or surplus were accumulated by the corporation, joint-stock company, association, or insurance company. * * *"
The net earnings accumulated by the Woolworth Company of New York during the year 1917, as finally adjusted by the Commissioner of Internal Revenue in 1927, were $7,505,062.32. Dividends were paid by the company on its common and preferred stock during the year in the sum of $4,901,250. There was an excess of accumulated net earnings for the year over dividends paid of $2,603,812.32.
The Commissioner of Internal Revenue held that the four dividends received by plaintiff during the year 1917 were paid from the 1917 accumulated earnings and profits. He treated the pro rata share of the entire year's earnings as approximately the actual earnings of the company for the fractional periods of the year preceding the payment of the dividends. Computed on this basis the accumulated net profits of the company during the year 1917, prior to the payment of the dividends, were sufficient to pay each of them.
This method, in the absence of a showing that there were no actual earnings, or that the actual earnings accumulated during such fractional parts of the year were insufficient to pay the dividends, was proper and has been approved in Kirby v. United States, 62 Ct. Cl. 706, affirmed 276 U.S. 593, 48 S. Ct. 300, 72 L. Ed. 721; Edwards v. Douglas, 269 U.S. 204, 46 S. Ct. 85, 70 L. Ed. 235; Bemis, Trustee, v. United States, 64 Ct. Cl. 467; and Mason v. Routzahn, 275 U.S. 175, 48 S. Ct. 50, 72 L. Ed. 223. The amount available for the payment of dividends out of the current year's earnings prior to the date of the payment of dividends may always be shown, and, where it affirmatively appears the actual earnings prior to the payment of a dividend are insufficient to cover such dividend in full, only such part of the dividend as was accumulated during 1917 is, under the 1917 Revenue Act, subject to the tax at the 1917 rate.
The plaintiff has attempted to show the actual monthly earnings of the Woolworth Company during 1917, and to show that such earnings, prior to the dates on which the first 3 dividends were paid, were insufficient to pay either of such dividends in full. The plaintiff relies upon a compilation of the monthly net earnings of the company made by its assistant secretary and treasurer. In making this compilation, the receipts and expenditures of the company throughout the year are allocated to specific months, where the dates of such receipts and expenditures are ascertainable from the books and records, while other receipts and expenditures, where the dates are not definitely fixed in the records of the company, are apportioned throughout the year on a pro rata monthly basis.
The compilation being in part an approximation of the monthly earnings does not reflect the actual monthly earnings. It is not claimed the monthly earnings shown in the compilation are accurate, but it is contended the method of computation used meets the substantial requirements of the statute and establishes the fact that the current net earnings of the Woolworth Company during 1917 were not adequate to cover the full amount of the dividends of March 1, June 1, and September 1, of that year. The compilation does not show the actual earnings of the Woolworth Company during the year 1917, prior to the payments of the dividends, and manifestly the plaintiff cannot make such a showing, as the official of the company who made the compilation stated that the company had no complete records of any kind from which monthly earnings could be accurately calculated.
In the absence of a showing of the actual earnings of the company for the periods of the year 1917 involved, the court cannot say they were inadequate to cover the payment of the dividends, and the method followed by the Commissioner of Internal Revenue, in treating the pro rata share of the earnings for the year as approximately the actual earnings of the company for the fractional part of the year immediately preceding the payment of the dividends, must be sustained.
The petition will therefore be dismissed. It is so ordered.