Assets, Current Account,-Senior Investment Corporation," hereinafter referred to as the Senior Corporation's current account. The entries appearing in petitioner's current account for the period August 28, 1933, to December 31, 1937, are as follows:

The Senior Corporation's current account contains the following entries for the month of January 1938:

In its personal holding company surtax return for 1937 the petitioner deducted from its undistributed adjusted net income the sum of $125,000 as an amount paid to retire indebtedness incurred prior to January 1, 1934. At the time when it prepared and filed its personal holding surtax returns for the years 1935 and 1936 the petitioner believed that deductions for such payments were limited to payments on debts evidenced by bonds and notes and for that reason it did not claim therein any deductions for amounts paid to the Senior Corporation in those years on the current account. The petitioner thereafter, in hearings before the respondent, claimed deductions for payments on indebtedness to the Senior Corporation in the amounts of $115,000 for the year 1935 and $390,000 for the year 1936. The claimed deductions of $125,000, $115,000, and $390,000 were disallowed by the respondent.

OPINION.

TYSON, Judge: One of the issues presented by the petition filed herein is whether, in computing surtax on undistributed profits for each of the years 1936 and 1937, the petitioner should be allowed for each of such years, under the provisions of section 26 (c) (1) of the Revenue Act of 1936, a credit of an amount equal to its entire adjusted net income. While the proceeding was under advisement, Congress amended section 26 (c), effective as of the date of the enactment of the Act of 1936, by adding paragraph (3) which authorizes a credit in the case of a deficit corporation. Sec. 501 (a) (2), Revenue Act of 1942. Section 26 (c), as thus amended is set forth in the margin.1

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) RESTRICTIONS ON 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.

(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

Because of the change in the applicable law, we entered an order on January 16, 1943, directing the parties to file supplemental briefs on the question of the effect of section 501 (a) (2) of the Act of 1942 upon the petitioner's claim for credit. Such supplemental briefs have been filed and the question for determination is whether a credit is allowable either under section 26 (c) (1) or section 26 (c) (3), supra. Is a credit allowable under section 26 (c) (1)? The facts reveal a prohibition against the payment of dividends contained in the charter of the petitioner as amended on August 29, 1933, and also in the amended stock certificates through the endorsement thereon of a reference to the changes effected by the charter amendment. That prohibition was effective until such time as the petitioner's earnings and profits to the extent of $6,444,239.86 should be transferred to capital or capital surplus or surplus, and, as the petitioner's earnings and profits up to the close of the year 1937 fell far short of that amount, the restriction upon the payment of dividends remained in force during the taxable years 1936 and 1937.

The petitioner contends that, under the authority of Lehigh Structural Steel Co. v. Commissioner, 127 Fed. (2d) 67, the charter amendment and the amended stock certificates must be considered "a written contract executed by the corporation" within the meaning of section 26 (c) (1). The Circuit Court of Appeals for the Third Circuit in that case held that stock certificates issued by a corporation meet the statutory test and it said that it found nothing in the opinion of the Supreme Court in Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46, which supports the argument that neither a charter nor a certificate of stock can ever be the kind of "written contract" which is meant by section 26 (c) (1). This interpretation of the statute and of the language used by the Supreme Court in the Northwest Steel Rolling Mills case has been rejected by the Circuit Court of Appeals for the Sixth Circuit, Warren Telephone Co. v. Commissioner, 128 Fed. (2d) 503; certiorari denied, 317 U. S. 697; Metal Specialty Co. v. Commissioner, 128 Fed. (2d) 259; Bishop & Babcock Manufacturing Co. v. Commissioner, 133 Fed. (2d) 199; and by the Circuit Courts of Appeals for the First and Seventh Circuits, Elliott Addressing Machine Co. v. Commissioner, 131 Fed. (2d) 700; Central West Coal Co. v. Commissioner, 132 Fed. (2d) 190; certiorari denied, 318 U. S. 778; and, upon the authority of those cases and our previous decisions in Lehigh Structural Steel Co., 44 B. T. A. 422; Bishop & Babcock Manufacturdeficit, 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 each provision was in effect prior to May 1, 1936.

(4) DOUBLE CREDIT NOT ALLOWED.-If more than one of the credits provided in the foregoing paragraphs (1), (2), and (3) apply, then the paragraph which allows the greatest credit shall be applied; and, if the credit allowable under each paragraph is the same, only one of such paragraphs shall be applied.

ing Co., 45 B. T. A. 776; Budd Wheel Co., 45 B. T. A. 963; and McLean County Service Co., 45 B. T. A. 1004, we hold that the petitioner is not entitled to credit under section 26 (c) (1).

However, the petitioner does not rely alone upon the provisions of the charter amendment and the stock certificates to bring its case within the requirements of section 26 (c) (1), supra. It argues that, independently of such documents or taken in connection therewith, the reorganization agreement executed by the petitioner, its stockholders, and the Senior Corporation on August 23, 1933, meets those requirements, and that we must look to all of the documents which were before the parties at the time of its execution and to those documents which were executed pursuant thereto-including the memorandum of counsel, the resolutions adopted by the directors and stockholders, the amendment to the petitioner's articles, and the certificate of incorporation of the Senior Corporation-in determining the whole contract executed by the petitioner, and that we must read the provisions of such documents as if they were set out in detail in the reorganization agreement itself. It is true that the reorganization agreement required the fixation of the rights, powers, privileges, limitations, and restrictions respecting each class of stock of the petitioner and the Senior Corporation so as not to affect the rights, powers, privileges, limitations, and restrictions which the holders of each class of stock in petitioner had in its assets before the consummation of the transaction; and it may also be true that because of such requirement the parties regarded it as essential to the effectuation of such purpose that restrictions be placed upon the power of each corporation to pay dividends until such time as the deficit allocated to each should have been restored from its earnings. Assuming that the reorganization agreement, under these circumstances, may be said to deal "expressly with the payment of dividends" (Gehring Publishing Co., 1 T. C. 345), it nevertheless did not operate as a contract restriction upon the dividend powers of the petitioner. The agreement merely required the adoption of charter provisions by petitioner defining the various rights of and restrictions upon each class of its stock. This is manifest from the memorandum of counsel which states that the amended charter of the petitioner should provide that the earnings be transferred to capital until the deficit of $6,444,239.86 had been restored and that no dividends might be paid on the class A stock until such sum had been restored to capital. Upon the filing of the amended articles of the petitioner and of the charter of the new corporation and the exchange of assets for stock the reorganization agreement was discharged by a performance in accordance with its terms. It is therefore clear that after full performance and discharge of the agreement the only contracts which remained in force and which could operate to restrict

*

the payment of dividends by petitioner were the petitioner's amended charter and its amended modified stock certificates, which had superseded the agreement in that respect, cf. Elliott Addressing Machine Co. v. Commissioner, supra; and, as we have held, the amended charter and the stock certificates are not such contracts as are within the intendment of section 26 (c) (1). The respondent's action in disallowing the credits claimed under that section is approved.

Is credit allowable under section 26 (c) (3)? The petitioner contends that at December 31, 1935, and at December 31, 1936, it had a deficit in accumulated earnings and profits in excess of its adjusted net income for the succeeding calendar year, and that, by provisions of the General Corporation Act of Michigan, hereinafter mentioned, it was prohibited from paying dividends during the existence of such deficit. The respondent's position is (1) that in reality the petitioner had no deficit in accumulated earnings and profits at those dates, and (2), assuming that it did, the petitioner was not prohibited by the Michigan law from distributing its net earnings of the taxable years.

On June 30, 1933, the petitioner had a deficit, as disclosed by its books, of $21,041,234.12, and in the reorganization $14,596,994.26 of this deficit was assumed by the Senior Corporation and $6,444,239.86 was retained by the petitioner. It is the rule that, where the assets of one corporation pass to a successor corporation in a tax-free reorganization, the accumulated earnings and profits of the old corporation pass to the successor with the same status and are available for the payment of dividends by the latter, Commissioner v. Sansome, 60 Fed. (2d) 931; certiorari denied, 287 U. S. 667; United States v. Kauffmann, 62 Fed. (2d) 1045; Reed Drug Co. v. Commissioner, 130 Fed. (2d) 288; Helen V. Crocker, 29 B. T. A. 773; and that, where only part of the assets are so transferred, it is proper to make an allocation of the earnings and profits between the two corporations in proportion to the assets transferred and the assets retained. Barnes v. United States, 22 Fed. Supp. 282; Estate of Howard H. McClintic, 47 B. T. A. 188, 202.

The respondent questions the petitioner's claim that it is a deficit corporation; but he makes no contention that the principles of the foregoing cases do not apply to the inheritance or absorption of a deficit. He questions the deficit only in two respects. His first objection relates to the method of dividing the deficit. At the time of the reorganization the assets transferred to the Senior Corporation consisted of the Fisher stock of the market value of $8,000,000 and other assets of the market value of $12,838,325.63. The remainder of the petitioner's assets which it retained had a market value of $5,667,827.19. The parties agreed to divide the deficit on the basis of the

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