This case requires us to construe § 26(c) of the undistributed profits tax law, 49 Stat. 1648, enacted by Congress in 1936, 26 U.S.C.A. Int.Rev.Acts, page 835. The undistributed profits tax, which was not continued by Congress after 1938, was a surtax at graduated rates upon corporate profits not distributed during the tax year by way of dividends. Section 26(c) allowed credits designed to afford relief where the payment of dividends is prevented by certain contract provisions. Subdivision (c)(1) of the section allowed such a credit where a distribution of earnings would violate a 'provision of a written contract executed by the corporation * * * which provision expressly deals with the payment of dividends.' (Italics supplied.) Subdivision (c)(2) allowed a credit where 'earnings and profits of the taxable year (are) required (by a provision of a written contract executed by the corporation * * *, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt.' (Italics supplied.) Petitioner claimed a credit under § 26(c)(1) but in assessing the deficiency for 1937 the Commissioner rejected this claim. The Tax Court sustained the Commissioner and its judgment was affirmed by the Circuit Court of Appeals. 5 Cir., 147 F.2d 972. We granted certiorari, 326 U.S. 701, 66 S.Ct. 23, because of conflicting determinations by the Circuit Courts as to the scope of these credit provisions.
Petitioner, a Delaware Corporation, admits liability as transferee of the assets of the Hercules Gasoline Company, Inc., a Louisiana Corporation, which was dissolved in 1939. Article V of the original charter of the transferor authorized the issuance of non-par common stock, and of preferred stock at $50 par value. The preferred stock was entitled 'to cumulative dividends at the rate of 8% per annum * * * in preference and priority to any payment of any dividend on the common stock for such year.' The charter further provided that 'there shall be no dividend on the common stock until all of the preferred stock has been retired, redeemed and discharged.' All certificates of preferred stock contained the following provision: 'For Rights and Voting Powers of Preferred Stock See Article V of Charter.' The petitioner contends that these preferred stock certificates constituted contracts executed by the corporation which expressly prohibited the payment of dividends while these shares were outstanding and that petitioner is therefore entitled to the credit allowed under Subdivision (c)(1).
We think that the preferred stock certificates are not the kind of contracts which entitle a corporation to allowance of credit under Subdivision (c)(1). In our view that Subdivision must be read in the light of § 26(c) and the Act as a whole, and when thus read, is confined to contracts made with creditors and does not extend to restrictions imposed within the body corporate. In Helvering v. Northwest Steel Rolling Mills, 311 U.S. 46, 61 S.Ct. 109, 85 L.Ed. 29, the question before us was whether § 26(c)(1) allows a credit where the payment of dividends is prohibited by statute. In construing § 26(c), we stated:
'That the language used in section 26(c)(1) does not authorize a credit for statutorily prohibited dividends is further supported by a consideration of section 26(c)(2). By this section, a credit is allowed to corporations contractually obligated to set earnings aside for the payment of debts. That this section referred to routine contracts dealing with ordinary debts and not to statutory obligations is obvious-yet the words used to indicate that the section had reference only to a 'written contract executed by the corporation' are identical with those used in section 26(c)(1). There is no reason to believe that Congress intended that a broader meaning be attached to these words as used in section 26(c)(1) than attached to them under the necessary limitations of 26(c)(2).' 311 U.S. 46, at pages 49, 50, 61 S.Ct. 109, at page 112, 85 L.Ed. 29. (Italics supplied.) We thus held that § 26(c)(1) is limited to contracts involving ordinary obligations to creditors and since preferred stockholders are not creditors, Warren v. King, 108 U.S. 389, 399, 2 S.Ct. 789, 798, 27 L.Ed. 769, § 26(c)(1) does not apply here.