The opinion
Murdock, J., 1 dissenting: Clearly the petitioner had $110,000 in a reserve which it could distribute to its stockholders by specific action without affecting its right to deductions for additions to its reserve for bad debts, but the report assumes, without proof, that the distributions in question were made from that $110,000. It has a finding that the corporation intended the dividends to be paid from the $110,000 but what does this mean ?
Section 115 (b) expressly provides that every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits and thereafter exempt earnings may be distributed. See also section 316(a) of the 1954 Code. The petitioner actually made distributions of dividends in the taxable years and they are deemed to have been made out of most recently accumulated earnings. It therefore seems wrong to me to hold that they have been paid out of the $110,000. The petitioner is claiming deductions for additions to the reserve from current earnings. The amount of current earnings credited to the reserves in each taxable year has been offset by a charge to dividends. It would seem to me that only the net difference between the new credit and the charge, if any, remaining in the reserve account, can be regarded as actually an amount of current earnings placed in the reserve and deductible. It cannot be assumed that the charges in these accounts reduced the $110,000.
This dissent was prepared during Judge Murdock’s incumbency.