Pacific Southwest Realty Co. v. McColgan

McCOMB, J. Prom a judgment in favor of defendant after trial before the court without a jury in consolidated actions for the recovery of corporation franchise taxes paid for the taxable years 1935 and 1936 upon the basis of its net income for the years 1934 and 1935, plaintiff appeals.

The undisputed facts are:

In the years 1923, 1924, and 1925 plaintiff issued securities which were designated as 6% per cent cumulative preferred serial stock. These securities were drawn in the usual form establishing a relationship between a stockholder and a corporation. They were required to be redeemed at the end of a fixed period of years for the par value of $100 and any unpaid accumulated dividends. They provided for a quarterly dividend payable out of profits in the aggregate annual amount of 6% per cent for one serial issue and 5% per cent for another. In the event profit was not made and the quarterly dividend not paid, the holders of the preferred shares who otherwise had no voting rights acquired all of the voting rights of the stockholders and could assume control of the corporation and through ordinary corporate processes compel declaration and payment of a dividend. The preferred stockholders had no power to pay the quarterly dividends otherwise than by the corporate process of declaration of dividends from profits then existing. This power was never invoked and all dividends paid in the years in question were declared paid by usual corporate procedure by action of the board of directors.

These are the questions presented for our determination:

First: Was the so-called preferred stock in fact not preferred stock but a mere evidence of indebtedness?

Second: Were the so-called dividends which had been paid on the preferred serial stock in fact not dividends but payments of interest on indebtedness?

Third: Was the discount at which the securities were sold a deductible expense?

Fourth: Was the expense of issuance of the securities a deductible expense?

Fifth: Was the expense of issuing appellant’s bonds and the discount at which said bonds were sold a deductible expense?

The first four questions must be answered in the negative. An examination of the facts surrounding the issuance [551]