Internal Revenue Service
Revenue Ruling
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smRev. Rul. 54-71
1954-1 C.B. 71
Sec. 562
IRS Headnote
A corporation, having a preexisting deficit, will be entitled to a dividends paid credit under section 27(g) of the Internal Revenue Code, only to the extent that distributions in complete or partial liquidation from current year's earnings exceed such preexisting deficit.
I.T. 3067, C.B. 1937-1, 91, revoked.
Full Text
Rev. Rul. 54-71
Further consideration has been given to I.T. 3067, C.B. 1937-1, 91, which involved the question whether a corporation upon its liquidation in 1936 is entitled to a dividends paid credit under section 27(f) of the Revenue Act of 1936 where its operating deficit at the beginning of the year 1936 exceeded its earnings and profits for that year to the date of liquidation. Section 27(f) of the 1936 act, which allowed a dividends paid credit against the undistributed profits surtax imposed by section 14 of the same act, provided as follows:
DISTRIBUTIONS IN LIQUIDATION.-In the case of amounts distributed in liquidation the part of such distribution which is properly chargeable to the earnings of profits accumulated after February 28, 1913, shall, for the purposes of computing the dividends paid credit under this section, be treated as a taxable dividend paid.
I.T. 3067, supra , held that the corporation was entitled to a dividends paid credit under section 27(f) of the 1936 act to the full extent of the earnings and profits for that year which were distributed, regardless of the fact that the corporation had an operating deficit at the beginning of the taxable year in excess of the earings and profits for that year.
A similar problem arises under section 27(g) of the Internal Revenue Code, which corresponds to section 27(f) of the Revenue Act of 1936, in connection with the surtax imposed by section 500 of the Code upon undistributed subchapter A net income computed under section 504 of the Code. Section 27(g) of the Internal Revenue Code provides as follows:
DISTRIBUTIONS IN LIQUIDATION.-In the case of amounts distributed in liquidation the part of such distribution which is properly chargeable to the earnings or profits accumulated after February 28, 1913, shall, for the purposes of computing the basic surtax credit under this section, be treated as a taxable dividend paid.
The question has been litigated with respect to section 27(f) of the 1936 act in Addressograph-Multigraph Corporation et al. , Tax Court Memorandum Opinion, dated February 5, 1945, and Shellabarger Grain Products Company v. Commissioner , 146 Fed.(2d) 177, affirming 2 T.C. 75, and opinions contrary to I.T. 3067, supra , were rendered. See also Foley Securities Corporation v. Commissioner , 38 B.T.A. 1036, affirmed 106 Fed.(2d) 731, Gaston & Company, Inc. , 39 B.T.A. 640, and Brooklyn National Corporation v. Commissioner , 157 Fed.(2d) 450, affirming 5 T.C. 893.
In view of the decisions in the Shellabarger and Addressograph cases, supra , it is concluded that a corporation, with impaired capital, should be allowed a dividends paid credit within the meaning of section 27(g) of the Internal Revenue Code only to the extent that distributions in complete or partial liquidation from current year's earnings exceed the existing deficit. I.T. 3067, supra , is hereby revoked.
Pursuant to the authority contained in section 3791(b) of the Internal Revenue Code, this ruling will be applied without retroactive effect to distributions in complete or partial liquidation made prior to March 1, 1954, except that no credit or refund will be allowed with respect to any such distribution.