Stuart

Appellant brought suit in the District Court against the appellee to recover income taxes paid for the years 1943 and 1944. The appeal followed a judgment adverse to appellant.

The facts are undisputed. Appellant is the successor in interest to the Arizona Power Corporation, referred to herein as the Prescott Company, pursuant to a consolidation effected in 1945. The Prescott Company was a public utility concern engaged in the sale of electric energy and gas at rates established or approved by the Corporation Commission of the State of Arizona.

In the year 1935 Prescott Company issued 12,037.5 shares of its preferred stock. These shares had no par value but they were entitled to $100 on an involuntary dissolution and $105 in the event of a voluntary dissolution. On both types of dissolution the holder could receive accumulated dividends.

Each share of preferred was entitled to an annual dividend of $6 before dividends could be paid on the common stock, but this dividend accumulated only if and to the extent that there were net earnings. When the dividend was earned but not declared or paid it persisted as a charge on the company’s earnings and assets senior to the common…