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U.S. Supreme Court

Helvering v. Northwest Steel Rolling Mills, Inc., 311 U.S. 46 (1940)

Helvering v. Northwest Steel Rolling Mills, Inc.

No. 121

Argued October 23, 1940

Decided November 12, 1940

311 U.S. 46


1. Provisions of tax statutes granting exemptions are to be strictly construed. P. 311 U. S. 49.

2. Section 26(c)(1) of the Revenue Act of 1936 allows, in the computation of the tax imposed by § 14 on undistributed profits, a credit for such undistributed earnings as the corporation could not distribute without violating "a provision of a written contract executed by the corporation . . . which provision expressly deals with the payment of dividends." Held that, where the restriction on distribution by the corporation was the result of a prohibition by state law, the credit was not allowable. P. 311 U. S. 49.

3. The corporation's charter, taken together with the state law, does not in such case constitute, within the meaning of § 26(c)(1), chanroblesvirtualawlibrary

Page 311 U. S. 47

"a written contract executed by the corporation" which "expressly deals with the payment of dividends." P. 311 U. S. 51.

4. The conclusion that § 26(c)(1) does not authorize a credit when the distribution of profits is prohibited by state law is further supported by consideration of § 26(c)(2) of the Act and by the legislative history of the section. P. 311 U. S. 49.

5. As here construed and applied, the taxing Act does not violate the Fifth Amendment, (a) by discriminating, in the allowance of a credit, between corporations which are barred from distributing dividends by "written" contracts and those which are restrained by oral contracts or by state law; or (b) by imposing a tax on undistributed "income" of a corporation which has an existing deficit. P. 311 U. S. 52.

6. Nor does it violate the Tenth Amendment, since the reserved powers of the States over corporations -- to prescribe their powers and condition the exercise thereof -- are not infringed. P. 311 U. S. 53.

7. The tax is authorized by the Sixteenth Amendment. Although imposed on the income only if not distributed, the tax nevertheless is on income, and not on capital, it being imposed on profits earned during a definite period -- the tax year. P. 311 U. S. 53.

110 F.2d 286 reversed.

Certiorari, post, p. 629, to review the reversal of a decision of the Board of Tax Appeals which sustained the Commissioner's determination of a tax deficiency.

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