United States v. Ogilvie Hardware Company/Dissent Frankfurter

by Hugo Black

United States Supreme Court

330 U.S. 709

United States  v.  Ogilvie Hardware Company

 Argued: March 5, 1947. --- Decided: April 7, 1947

Mr. Justice FRANKFURTER, with whom Mr. Justice REED joins, dissenting.

The Revenue Act of 1936 imposed a surtax on undistributed corporate profits. Section 26(c)(1) gave relief from this surtax under defined circumstances. ^[1] In Helvering v. Northwest Steel Mills, 311 U.S. 46, 61 S.Ct. 109, 85 L.Ed. 29, it was held that although a restriction on the distribution of corporate profits was imposed by State law, a credit for such withheld profits was not authorized by § 26(c)(1). In reaching this conclusion, the Court took into account that it 'has been said many times that provisions granting special tax exemptions are to be strictly construed.' Helvering v. Northwest Steel Mills, supra, 311 U.S. at page 49, 61 S.Ct. at page 111, 85 L.Ed. 29. By way of relaxing the restricted scope which this Court gave to exemption from the undistributed profits tax, Congress, by the Revenue Act of 1942, substituted a new subdivision (3) to § 26(c) of the Revenue Act of 1936. This section did nto undo the Northwest Steel Mills doctrine. It did not allow a deduction for profits forbidden to be distributed by State law, as it had in § 26(c)(1), allowed credit for profits undistributed because of a 'written contract.' Congress gave relief for earnings forbidden to be distributed by State law only 'In the case of a corporation having a deficit in accumulated earnings and profits as of the close of the preceding taxable year * * *.' ^[2]

This is tax language and should be read in its tax sense. We must not disregard the illumination of an authoritative tax lexicon in reading tax legislation. The language of the 1942 amendment carries with it tax usage, tax practice, and the gloss of authoritative legislative history. All combine to make the condition under which State law prohibiting distribution of profits comes into play, that which Congress in words of art said was the condition, namely, the existence of 'a deficit in accumlated earnings and profits.' Here there was no deficit in the controlling sense of the term. And nothing warrants the attribution of a non-technical meaning to so settled a technical term. Nothing, that is, except the suggestion that to give the 1942 amendment this established meaning might not afford the relief that, as a matter of abstract justice, should be afforded. But this is merely an attempt to invoke what has been called the 'equity' of a statute. I am no friend of artificial canons of construction, and I would not strain language in order to construe tax exemptions strictly. On the other hand, Revenue Acts are not the kind of legislation which should be loosely construed in order to grant exemptions.

The legislative history of this enactment and the administrative practice only reenforce what seems to me to be the compelling requirement, to render technical terms used by Congress with their technical meaning. If it be suggested that counsel for taxpayers at a Congressional hearing urged the fairness of the construction which the Court now places upon what Congress has expressed, it would not be the first time that the final legislation of Congress did not satisfy the desire of some of its proponents. In any event, I do not think the argument of counsel for a taxpayer urging relief should carry more we ght than the use by Congress of settled tax language, carrying a meaning which excludes that result, a meaning which is reenforced by the legislative, judicial and administrative history that led up to and followed the enactment. See Century Electric Co. v. Commissioner, 8 Cir., 144 F.2d 983, affirming the Tax Court, 3 T.C. 297; S.Rep.No. 1631, 77th Cong.2nd Sess., pp. 244-46; Treasury Regulations, 94 and 101, Art. 115-11; Treasury Regulations 103, § 19.115-11; Treasury Regulations 111, § 29.115-11. The short of the matter is, that even though corporate profits here were withheld because Louisiana forbade their distribution, there can be no credit allowed for a deficit because in a federal tax sense there was no deficit.

No doubt Congress, to some extent, desired to relieve from the undistributed profits tax corporations forbidden by State law from declaring dividends. But neither what Congress enacted nor its legislative history indicates a purpose to disregard the limiting provisions of § 115(h) of the Revenue Act of 1936. ^[3] This section, which embodies the analysis of Commissioner v. Sansome, 2 Cir., 60 F.2d 931, see S.Rep. 2156, 74th Cong., 2d Sess., p. 19, requires that, in respect to federal taxes, assets be treated as available for distribution as earnings regardless of stock dividends which capitalize earnings and profits. H.Rep.No.2894, 76th Cong., 3rd Sess., p. 41 cited in Commissioner v. Wheeler, 324 U.S. 542, 546, 65 S.Ct. 799, 802, 89 L.Ed. 1166. The specific example cited by the Senate Committee Report on § 501 of the Revenue Act of 1942 shows that Congress intended to limit the relief afforded by the amendment to cases where the deficit in question had not resulted from the capitalization of accumulated earnings and profits. ^[4] The majority finds a difference between capitalization of earnings in a non-taxable reorganization and capitalization of earnings by a simple stock dividend. The circumstances are different but the difference is not significant for the legal effect of the stock dividend on earnings and profits. The example given is concerned with the effect of capitalizing earnings and profits, not with the method. If Congress meant to relieve undistributed earnings and profits even though those earnings and profits were considered available under § 115(h), it should have said so.

We think the judgment of the Circuit Court of Appeals should be reversed.

Notes

1. 49 Stat. 1648, 1664.
2. Section 501(a)(2), Revenue Act of 1942, 56 Stat. 798, 954. '(3) Deficit corporations. In the case of a corporation having a deficit in accumulated earnings and profits as of the close of the preceding taxable year, the amount of such deficit, if the corporation is prohibited by a provision of a law or of an order of a public regulatory body from paying dividends during the existence of a deficit in accumulated earnings and profits, and if such provision was in effect prior to May 1, 1936.'
3. 49 Stat. 1648, 1688, 1689. § 115(h): 'Effect on Earnings and Profits of Distributions of Stock. The distribution (whether before January 1, 1936, or on or after such date) to a distributee by or on behalf of a corporation of its stock or securities or stock or securities in another corporation shall not be considered a distribution of earnings or profits of any corporation-
4. S.Rep.No.1631, 77th Cong., 2d Sess., pp. 245, 246:

'(1) The X corporation for the calendar year 1936 had an adjusted net income of $200,000 * * *

'(2) Assume in the above example that the deficit in accumulated earnings and profits is $20,000 for income tax purposes, but the deficit in accumulated earnings and profits on the corporation's books by reason of a prior capitalization of surplus in the course of a nontaxable reorganization amounts to $250,000. In this case, although the State law would probably prohibit payment of any dividends, the credit allowed under the amendment to section 26(c) is limited to $20,000, which is the deficit in accumulated earnings and profits for income tax purposes. X corporation, therefore, will be liable for undistribut d profits surtax on $180,000 of its adjusted net income.'