Kelham

During the years 1938 to 1940, both Grace PI. Kelham and the other respondents, who were stockholders in the J. D. and A. B. Spreckels Company, received distributions therefrom. The parties stipulated how much of the distributions were to be taxed as dividends for each year, presenting the solution varying upon the answer to three questions presented to the Tax Court. Other stipulations covered other problems.

This is a review of the decision of the Tax Court upon only one of these questions.

We must determine whether the operating deficits of wholly owned subsidiaries of Spreckels as of March 1, 1913, must be restored by subsequent earnings in determining the amount of profits available for dividends for tax purposes, where the distribution to the taxpayer was received in the years 1938, 1939 and 1940.

Section 115(a)(1), Internal Revenue Code, defines a taxable dividend as a distribution by a corporation out of its earnings or profits accumulated after February 28, 1913. Section 115(b) provides also that earnings and profits accumulated before March 1, 1913, may be distributed tax-free after the earnings and profits accumulated after that date have been distributed.

The…