Cranson

The question here is whether the distribution of $450 to the taxpayer from the Honolulu Oil Corporation, Ltd., hereinafter referred to as Honolulu constituted a taxable dividend. The taxpayer is suing to recover income taxes paid on this distribution in 1936.

The facts are stipulated and were adopted by the court below as its findings of facts.

On August 31, 1936, Honolulu liquidated three wholly owned subsidiaries and took over their assets subject to their liabilities, in complete cancellation and redemption of all their issued and outstanding capital stock. When Honolulu took over these subsidiaries, they had- an aggregate operating deficit of $1,205,451.61.

In 1936, Honolulu paid cash distributions of $1 for each share of its capital stock. Honolulu’s earnings during 1936 amounted to $931,553.82 before deducting any portion of the above loss.

The appellant urges that the lower court erred in its judgment and contends that if the earnings are reduced by the operating deficits taken over from the liquidation of the subsidiaries, the distribution of $450 to the taxpayer was one of capital and not income. To support his position the taxpayer is relying on the doctrine of the…