Corporations – Capital Reduction Surplus as a Source of Divided Payments

At the beginning of 1936, plaintiff, a Wisconsin corporation, had an earned surplus deficit of $106,134.89, and a surplus of $685,642.89 created by a reduction of capital stock. Net earnings for 1936 were $121,515.96, none of which were distributed as dividends. An undistributed profits surtax was assessed on the entire current net earnings. Plaintiff sued for a partial refund under an amendment providing retroactive relief for corporations which were prohibited by law from paying dividends during the existence of a deficit in accumulated earnings at the time when the tax was paid. The district court denied relief. On appeal, held, reversed. In Wisconsin, net profits exist only after the earned surplus deficit is eliminated, and the analysis of the lower court would not create the net profits necessary for a valid dividend under Wisconsin law. Hamilton Mfg. Co. v. United States, (7th Cir. 1954) 214 F. (2d) 644.