PER CURIAM.

The sole issue on appeal concerns the tax treatment of ordinary distributions to corporate shareholders when a corporation with no accumulated earnings has current earnings and profits that are insufficient to cover both ordinary distributions and selective redemption distributions paid out during the fiscal year. The question of first impression to be decided here is whether either distribution is to be given priority as a charge against the current earnings and profits.

The district court held that ordinary dividends are to receive preferential treatment in reducing current earnings and profits. This court is in full agreement that the district court was correct in rejecting the taxpayers' argument that would result in a priority for redemption distributions in reducing current earnings and profits. Judges Gibson and Bright, for differing reasons, find that the Internal Revenue Code requires priority treatment be given ordinary distributions. Their separate opinions are appended. Judge Lay finds that neither distribution should be given a preference and that a pro rata reduction of the current earnings and profits account is required. The trial court is thus affirmed by a divided vote.

Taxpayers, husband and wife, reported as ordinary income the full amount of ordinary distributions ($4,025) with respect to their no par common stock received in January and May 1961 from Peter Kiewit Sons, Inc. The corporation subsequently notified shareholders that a portion of the fiscal 1961 ordinary distributions was from sources other than earnings and profits. After the government denied their claim for refund, plaintiffs instituted the present refund suit. The stipulated facts show that in fiscal 1961 Peter Kiewit Sons, Inc., redeemed part of its issued and outstanding no par common stock from certain shareholders (not including taxpayers) at a cost of $1,651,561.70. During fiscal 1961, Kiewit also distributed $1,880,179.75 cash to its shareholders as distributions with respect to stock. This sum included the distribution of $4,025 to plaintiffs. During 1961 the corporation had no accumulated earnings and had current earnings of only $1,553,636.34. It is stipulated that of the $1,651,561.70 paid out as redemptive distributions $157,002.57 is properly chargeable to Kiewit's capital account. The remainder, $1,494,550.13, was charged by Kiewit to its earnings and profits account. On this basis taxpayers urge that the balance of the earnings and profits account, i.e. $59,077.21, is all that remained available for the ordinary distribution since the redemption distributions had otherwise absorbed the earnings. Thus, it is urged the portion of their distribution which is taxable as ordinary income is limited to their share of that remainder. The government urges that the ordinary distributions ($1,880,179.75) must be given priority and charged first against the earnings and profits account ($1,553,636.34) leaving only the difference, if any, available for the redemption distributions. The district court, the Honorable Richard E. Robinson, affirmed the government's position and denied plaintiff's relief. D.C., 308 F. Supp. 1129. This appeal followed.

Taxpayers urge three basic arguments to support reversal of the district court: (1) that the court erred in its statutory construction of § 316(a)(2) I.R.C., (2) that the legislative history of § 316(a)(2) supports taxpayers' interpretation of the statute, and (3) that the government's theory of priority destroys the harmony between § 312(a) and (e) and § 316. We will discuss these arguments seriatim.

I. STATUTORY CONSTRUCTION

Section 316 reads:

"(a) General rule. — For purposes of this subtitle, the term `dividend' means any distribution of property made by a corporation to its shareholders —

"(1) out of its earnings and profits accumulated after February 28, 1913, or

"(2) out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made." (Emphasis added).

Taxpayers urge that the words "any distributions" as used in the parenthetical clause of § 316(a)(2) are limited to ordinary distributions and do not encompass redemptive distributions which allegedly reduce earnings and profits under § 312(a) on the date of distribution. Taxpayers urge that Hellmich v. Hellman, 276 U.S. 233, 48 S.Ct. 244, 72 L.Ed. 544 (1928), controls the present construction of § 316(a)(2), excluding redemptive distributions from the statutory language. It is urged that Hellmich found the words "any distribution" as used within the definition clause of the forerunner of § 316(a) do not include redemptive distributions. Consequently, the words cannot take on a broader and different meaning in the parenthetical clause of § 316(a) (2).

Prior to 1918 both ordinary distributions with respect to stock and liquidating or redemption distributions were included within the broad statutory definition of a "dividend" which encompassed "any distribution" from accumulated earnings and profits. The absence of any separate treatment of liquidating distributions resulted in the same tax treatment for all distributions from earnings.

In the Revenue Act of 1918 this situation was altered. While maintaining the same apparently all-inclusive definition of a dividend, Congress for the first time changed the statutory scheme by establishing a separate subsection which entitled a liquidating distribution to different tax treatment. At the same time, Congress altered the taxing provisions by imposing both a normal tax and a surtax on taxable income. However, a credit against the normal tax was provided for dividends received so that distributions qualifying as "dividends" would be subject only to the surtax. Thus, it was advantageous for taxpayers receiving liquidating distributions to claim that these distributions were entitled to the dividend received credit since they were clearly encompassed within the meaning of "any distribution" as used in the dividend definition.

In Hellmich v. Hellman, 276 U.S. 233, 48 S.Ct. 244, 72 L.Ed. 544 (1928), the Supreme Court was faced with the question of whether the dividend definition included liquidating distributions. The Court found that the existence of a separate section which dealt specifically with liquidating distributions removed this type of distribution from the broad general definition of a dividend. The language used by the Court is as follows:

"The controlling question is whether the amounts distributed to the stockholders out of the earnings and profits accumulated by the corporation since February 28, 1913, were to be treated under § 201(a) as `dividends,' which were exempt from the normal tax; or, under § 201(c) as payments made by the corporation in exchange for its stock, which were taxable `as other gains or profits.'

"It is true that if § 201(a) stood alone its broad definition of the term `dividend' would apparently include distributions made to stockholders in the liquidation of a corporation — although this term, as generally understood and used, refers to the recurrent return upon stock paid to stockholders by a going corporation in the ordinary course of business, which does not reduce their stock holdings and leaves them in a position to enjoy future returns upon the same stock. See Lynch v. Hornby, 247 U.S. 339, 344-346 [, 38 S.Ct. 543, 62 L.Ed. 1149]; and Langstaff v. Lucas (D.C.), 9 F.2d 691, 694.

"However, when § 201(a) and § 201(c) are read together, under the long-established rule that the intention of the lawmaker is to be deduced from a view of every material part of the statute, Kohlsaat v. Murphy, 96 U.S. 153, 159, [ 24 L.Ed. 844], we think it clear that the general definition of a dividend in § 201(a) was not intended to apply to distributions made to stockholders in the liquidation of a corporation, but that it was intended that such distributions should be governed by § 201(c), which, dealing specifically with such liquidation, provided that the amounts distributed should `be treated as payments in exchange for stock' and that any gain realized thereby should be taxed to the stockholders `as other gains or profits.' This brings the two sections into entire harmony, and gives to each its natural meaning and due effect." 276 U.S. at 236-237, 48 S.Ct. at 245 (emphasis added).

The taxpayers point out that the Hellmich reasoning is grounded on the fact that the existence of a specific section dealing with liquidating distributions removes these types of distributions from the scope of the general definition of a dividend. Thus, it is argued, when Congress in the Revenue Act of 1924 and in all subsequent acts, including the present Internal Revenue Code of 1954, set out a separate section dealing with redemption distributions, this type of distribution was not intended to fall within the meaning of a dividend as defined in the section dealing with that subject. We agree that the Hellmich decision must still be regarded as effective in compelling the conclusion that a redemption distribution is not within the meaning of a dividend. The cases following Hellmich bear out this conclusion. See Foster v. United States, 303 U.S. 118, 58 S.Ct. 424, 82 L.Ed. 700 (1938); Henry B. Babson, 27 BTA 859 (1933), aff'd, 70 F.2d 304 (7th Cir. 1934), cert. denied, Helvering v. Babson, 293 U.S. 571, 55 S.Ct. 107, 79 L.Ed. 669; Central Southwest Corp. v. Brown, 249 F. Supp. 787 (D.Del. 1965); Atlantic City Electric Co. v. United States, 161 F. Supp. 811, 142 Ct.Cl. 519, cert. denied, 358 U.S. 834, 79 S.Ct. 56, 3 L.Ed.2d 71 (1958); cf. Associated Tel. Tel. Co. v. United States, 306 F.2d 824, 832 (2d Cir. 1962), cert. denied, 371 U.S. 950, 83 S.Ct. 504, 9 L.Ed.2d 498 (1963); and Cummins Diesel Sales Corp. v. United States, 323 F. Supp. 1114, 1118 (S.D.Ind. 1971).

It is argued further, however, that when Hellmich determined that liquidating distributions were outside the dividend definition, the Court actually determined that the words "any distribution" as used in the dividend definition meant "any ordinary distribution." Carrying this argument one step further, the taxpayer claims that thereafter, in 1936, when Congress enacted the parenthetical clause of § 316(a)(2) as part of the same sentence using these same two words, the same meaning was intended. As a result, according to tax-payers, the proper meaning of the parenthetical clause is that in computing current earnings available for dividend distributions, the total earnings for the taxable year are to be considered without diminution by any ordinary distribution, but reductions for distributions which are not ordinary are to be taken into account.

We disagree that Hellmich is controlling authority for the issue confronting us. The Supreme Court in Hellmich did not give judicial construction to the generic term "distribution" within the Internal Revenue Code. The Court simply held that the definition of a dividend under the forerunner to § 316(a) did not include redemptive and liquidating distributions. The reason was plain enough: another special section governed their treatment. So it is here. Section 302 specifically governs the tax treatment of redemption distributions and removes these distributions from the definition of a dividend under § 316(a). However, it does not follow that this separate treatment gives a special meaning to the generic words "any distribution" used elsewhere in § 316(a) (2). First, and foremost, the words "any distribution" are plain and do not convey any technical meaning. It would be a strained rule of statutory construction to construe words of general meaning as specifying a particular meaning. The effect of such a construction would be to include language within the statute which Congress failed to insert in it. We literally would be amending the act and usurping the function of the legislature. It is axiomatic courts are not at liberty to modify plain words by judicial construction.

Furthermore, if we accept tax-payer's interpretation and read these words consistently throughout the entire section, the third sentence of § 316(a) would in effect negate the purpose of § 302(a). Section 302(a) accords "exchange" treatment to only those redemption distributions which meet certain qualifications. Section 302(d) subjects those redemptions which fail to qualify under (a) to § 301 treatment. The third sentence of § 316(a) extends dividend treatment to these non-qualifying redemptions by concluding: "To the extent that any distribution is, under any provision of this subchapter, treated as a distribution of property to which section 301 applies, such distribution shall be treated as a distribution of property for purposes of this subsection." (Emphasis added.) A redemption distribution, whether qualifying or non-qualifying, is not an ordinary distribution. Thus, non-qualifying redemptions are given ordinary dividend treatment only by reason of this sentence. If the above words "any distribution" were read to mean "any ordinary distribution," then the dividend treatment which is accorded to non-qualifying redemption distributions would be totally negated. As a result of the non-qualifying redemption would still be given § 301 treatment because of the dictates of § 302(d), but because dividend status is denied it must be accorded the treatment set out in § 301(c)(2) and (3) which is "exchange" treatment. Hence, the purpose of § 302(a) in extending "exchange" treatment to only those redemptions which meet certain qualifications would thereby be entirely frustrated.

This court has uniformly refused to interpret taxing statutes by finding they include language by implication. In Helvering v. Alworth Trust, 136 F.2d 812, 814 (8th Cir.), cert. denied, Alworth v. Commissioner of Internal Revenue, 320 U.S. 784, 64 S.Ct. 193, 88 L.Ed. 471 (1943), we stated:

"The taxpayer's theory grafts upon the statute a condition or limitation based upon the assumption that Congress in providing that a taxable dividend `means any distribution made by corporation to its shareholders * * * out of the earnings or profits of the taxable year' implied the condition: `if there are such earnings or profits remaining after deducting federal taxes for the taxable year.' To read into the statute such an implied condition is equivalent to amending it; and neither the Board nor this court can so amend the Act. Congress alone has power to do so."

See also, Foley Securities Corp. v. Commissioner of Internal Revenue, 106 F.2d 731, 734 (8th Cir. 1939).

We conclude that Congress intended all types of distributions to be included within the computation set forth in § 316(a)(2). We should be persuaded otherwise only if legislative history convinces us that the clause must be read with a more restricted meaning. Gellman v. United States, 235 F.2d 87 (8th Cir. 1956); Kelm v. Chicago, St. P., M. O. Ry. Co., 206 F.2d 831, 834 (8th Cir. 1953); Helvering v. Rebsamen Motors, Inc., 128 F.2d 584, 587 (8th Cir. 1942).

II. LEGISLATIVE HISTORY.

The forerunner of § 316(a)(2) was enacted as § 115(a)(2) in the Revenue Act of 1936. In that year Congress introduced the undistributed profits tax which was intended to assist the nation's economy by inducing the distribution of corporate earnings. The inducement was created by allowing a corporation to reduce the new tax on its profits by a credit for dividends paid throughout the taxable year. "Dividends," however, as formerly defined could only be distributed from accumulated earnings and profits. Earnings were not deemed to be "accumulated" until the impairment of capital caused by past operating losses had been restored by subsequent earnings. Hence, a corporation whose current earnings did not exceed its accumulated losses had no "accumulated earnings" and could not receive the dividends paid credit even though it may have distributed the whole of its current earnings. To prevent this inequity the 1936 Act enlarged the dividend definition to include distributions from current earnings without regard to the state of the past earnings account. This change enabled the deficit corporation to obtain the credit for ordinary distributions made from its current earnings despite the fact that its existing deficit exceeded the amount of those earnings thereby preventing the existence of "accumulated earnings."

The change, however, did not affect liquidating distributions since such distributions were not within the scope of the dividend section. Thus, in order for liquidating distributions to qualify for a dividends paid credit specific statutory authority was needed. Section 27(f) of the 1936 Act dealt specifically with this credit:

"In the case of amounts distributed in liquidation the part of such distribution which is properly chargeable to the earnings or profits accumulated after February 28, 1913, shall, for the purposes of computing the dividends paid credit under this section, be treated as a taxable dividend paid."

See Helvering v. Credit Alliance Co., 316 U.S. 107, 110-111, 62 S.Ct. 989, 86 L.Ed. 1307 (1941).

Thereafter a number of cases dealt with the question of whether a dividends paid credit under § 27(f) could be allowed for a liquidating distribution which was made in a year when a corporation had an accumulated deficit that was not absorbed by current earnings. Although some courts allowed the credit even though the deficit was not absorbed by current earnings, cf. Pembroke Realty Sec. Corp. v. Commissioner of Internal Revenue, 122 F.2d 252 (2d Cir. 1941), the vast majority of decisions agreed with the Internal Revenue's position that the portion of such distribution which qualified for the credit was limited to the amount by which current earnings exceeded the existing deficit. These excess earnings were the only earnings which qualified as "accumulated." See e. g., St. Louis Co. v. United States, 237 F.2d 151 (3d Cir. 1956), cert. denied, 352 U.S. 1001, 77 S.Ct. 558, 1 L.Ed.2d 546 (1957). See also, Van Norman Co. v. Welch, 141 F.2d 99 (1st Cir. 1944); Shellabarger Grain Products Co. v. Commissioner of Internal Revenue, 146 F.2d 177 (7th Cir. 1944).

Taxpayers rely upon this history to support their argument that the words "any distribution" under the parenthetical clause of § 316(a)(2) do not contemplate redemptive distributions. Taxpayers urge (1) the forerunner of § 316(a)(2) was enacted to enable deficit corporations to obtain the dividends paid credit by extending the definition of "dividend" to include distributions from current earnings and profits; (2) the method provided in this new section for computing current earnings required that the total earnings for the year be considered without diminution by "any distribution" made during the year; (3) the St. Louis case, supra, proves that a deficit corporation could never diminish current earnings by liquidating or redemption distributions since current earnings were "simply not available as a source" for such distributions; (4) therefore, since the only distributions which a deficit corporation could make from current earnings were ordinary distributions, Congress could not have been referring to liquidating distributions when it used the words "any distribution" in the parenthetical clause.

We disagree with this analysis. The very issue as stated in the St. Louis case was whether "a distribution out of such income [the deficit corporation's current earnings], * * * in complete liquidation" qualified for the credit. 237 F.2d at 152. The fact that the distribution was made out of current earnings was not denied; the Court's only concern was whether such a distribution met the express standards of § 27(f). It is clear that these cases do not hold that current earnings of a deficit corporation are unavailable for liquidating distributions, as the taxpayers claim. These cases only stand for the proposition that the requirements of § 27(f) are not met if the current earnings from which such a distribution may have been made do not exceed the deficit.

To say that current earnings cannot be utilized as a source of liquidating distributions when a corporation is in a deficit status ignores the fact that these earnings, while the deficit exists, are actually considered for all purposes except dividends to be capital and that a liquidating distribution must be charged to capital in an amount which is "properly chargeable to capital." (§ 312(e), formerly the third sentence of § 115(c) of the 1939 Code.) In Helvering v. Jarvis, 123 F.2d 742 (4th Cir. 1941), it was held that the amount "properly chargeable to capital" is the original amount received for the corporation's capital stock, comprising both par value and the paid-in surplus. When a corporation is in a deficit position, both the par value and the paid-in surplus are impaired by the accumulated losses. Thus, so long as current earnings are treated as restoring the impairment, they are actually serving as capital. Therefore when a liquidating distribution is made which must be allocated to capital, it is not at all improper for such a distribution to be charged against the current earnings in compliance with § 312(e). Cf. Shellabarger Grain Products Co. v. Commissioner of Internal Revenue, 2 T.C. 75, 82, aff'd, 146 F.2d 177 (7th Cir. 1944).

Considering taxpayers' argument in light of the above, it can only be concluded that in legislating the parenthetical clause of § 316(a)(2) Congress was fully aware that a redemption distribution could be charged to current earnings of a deficit corporation and thus, when it used the phrase "any distribution" Congress intended to prevent both liquidating distributions and ordinary distributions from diminishing current earnings in the year-end computation.

We also note that § 316(a)(2) clearly applies to all types of corporations, deficit and non-deficit. Thus, even if taxpayers were correct in their claim that a deficit corporation cannot make a liquidating distribution from current earnings, the meaning of the phrase "any distribution" must still be taken to embrace all those types of distributions which a non-deficit corporation may make from current earnings. To limit the interpretation of this phrase to only those types of distributions which a deficit corporation can make while at the same time recognizing that the entire clause has application to non-deficit corporations would place a strained construction upon the statute. Thus, since § 316(a)(2) applies to all types of corporations the only logical conclusion is that Congress intended the phrase to apply to all types of distributions.

The Senate report accompanying the enactment of the forerunner of § 316(a)(2) clearly states two purposes for enacting this particular clause: (1) to make available a new source for dividend distribution and (2) to simplify the computation of the available source. S.Rep. 2156, 74th Cong. 2d Sess., p. 18 (1936).

We conclude these two purposes can only be effectuated by reading § 316(a)(2) to mean that all distributions which diminish current earnings during the year are to be disregarded in computing the amount of earnings available for dividend distributions. As the district court observed, the computation would not be simple if redemption distributions are to be excluded from this computation. This is so since the portion of a redemptive distribution which would be allocated to earnings could only be known by making a preliminary determination of the portion of such distribution which under § 312(e) must first be charged to capital, and then prorating those earnings up to the dates of redemptive distributions. These additional calculations only serve to complicate the application of this section. We thus conclude that taxpayers' construction was not only not intended but would in fact frustrate this legislative purpose.

Having resolved that under § 316(a)(2) current earnings and profits are to be computed without diminution by reason of redemption distributions, we now face the question of whether the description of such a computation in the dividend section necessarily gives dividends a priority in the absorption of these earnings. The taxpayers argue that if such a priority is recognized, a disharmony will be created between § 316 and § 312(a) as it [§ 312(a)] applies to redemption distributions. The government, however, contends that once the above interpretation of the parenthetical clause has been accepted, a priority for dividends is the necessary consequence. This contention is correct if redemption distributions were not intended to play an equal role with dividends in reducing current earnings at the time of distribution.

As indicated, Judges Gibson and Bright with differing reasons, which will now be separately set forth, find that priority treatment is to be given ordinary distributions in reducing current earnings and profits. The judgment of the district court is therefore affirmed.

GIBSON, Circuit Judge.

That this case presents an extremely difficult issue is demonstrated by the fact that none of the six participants in this suit — taxpayers, the Government, the district court, and three Court of Appeals judges — can agree on an appropriate solution to the problems raised. The case vividly demonstrates the necessity for serious Congressional attention to the problem, and it is hoped that it may soon be forthcoming.

The difficulties of this case are compounded by the inadequacies of the stipulation upon which the case was tried. According to the stipulation, the corporation made total distributions — redemptive and ordinary — of more than $3,530,000. It had earnings and profits of only $1,553,000, and the distributions were "properly chargeable to capital" in only the amount of $157,000. Thus we are left to speculate as to the source of more than $1,820,000 used to make these distributions. Assuming that the corporation's directors were not unlawfully invading the capital of the corporation, it is clear that some funds were available for these distributions which are not revealed by the record. Thus both the taxpayer and the Government have put this Court in the position of deciding a question of considerable importance to the federal income tax program as a theoretical, abstract question. This question should not be decided in the absence of adequate knowledge of the facts of the transactions as they actually occurred; the proper solution to the problem depends at least in part on the realities of corporate financing and accounting. Nevertheless, feeling constrained by the stipulation agreed to by both the parties and the time already spent at both the trial and appellate level on this case, I turn to the merits as I perceive them on the basis of this record.

In analyzing this problem, the practical result of the taxpayer's position should be kept in mind. According to the taxpayer's analysis of these transactions, the redemptive distributions exhausted all but $59,000 of the corporation's earnings and profits. The redemptive distributions are admittedly taxable only at capital gains rates. Only $59,000 of the $1,880,000 ordinary distribution would be deemed to be out of earnings and profits, the rest being considered a return of capital, and thus 97 per cent of the ordinary distributions would escape any taxation whatsoever. I cannot ascribe to such an absurd result in the absence of any indication that Congress intended such a result. The result under Judge Lay's approach would be that roughly 50 per cent of the ordinary distributions would escape taxation, and I view this result as equally objectionable.

In my view, the principal difficulty in this case is caused by the attempt to transform what is essentially a capital transaction — i. e., the redemptive distributions — into an ordinary income transaction of the corporation. Under ordinarily accepted accounting procedures, a corporation's transactions in its own stock are not reflected in its income statement, which reflects the potential availability of dividends to stockholders. While admittedly the income statement as a matter of accepted corporate accounting does not correspond exactly to the earnings and profits account for purposes of tax accounting, the two are closely enough related that there should be some semblance of similarity in their treatment. Under this view, I cannot accept the proposition that redemptive distributions can be allowed to so exhaust the corporation's earnings and profits as to render subsequent dividend distributions nontaxable.

I find support for this general approach in the Supreme Court case of Foster v. United States, 303 U.S. 118, 58 S.Ct. 424, 82 L.Ed. 700 (1938), the most recent Supreme Court case to deal with any aspect of the problem before us. In that case, the taxpayers argued that redemptive distributions had exhausted post-1913 earnings and profits, so that subsequent dividend distributions must have been deemed to have come from pre-1913 earnings and profits, and thus were tax-free. The Supreme Court disposed of this argument with the following observation:

"We have previously said that subsections (a) and (b), supra, [§ 115(a) and (b) of the Revenue Act of 1928, now § 316(a) of the Internal Revenue Code] construed together, disclose legislative purpose that pre-1913 accumulations shall not be distributed `in such a fashion as to permit profits accumulated after that date to escape taxation.' Petitioners ask that we now construe these provisions in a way which would facilitate the escape of such profits from taxation and thereby defeat the undoubted purpose of Congress. We are urged so to expand and broaden an exemption granted by Congress as a `concession to the equity of stockholders' that such concession would in reality serve to nullify and defeat the tax on corporate profits earned after 1913. Courts should construe laws in harmony with the legislative intent and seek to carry out legislative purpose. With respect to the tax provisions under consideration, there is no uncertainty as to the legislative purpose to tax post-1913 corporate earnings. We must not give effect to any contrivance which would defeat a tax Congress plainly intended to impose. The use of bookkeeping terms and accounting forms and devices cannot be permitted to devitalize valid tax laws." 303 U.S. at 120-121, 58 S.Ct. at 425 (footnotes omitted) (emphasis added).

While the facts here are somewhat different, I find this language peculiarly appropriate to the instant case. Adopting the taxpayer's position would result in the use of bookkeeping terms and accounting forms and devices which would devitalize the tax laws and permit the escape of dividends from a tax Congress clearly intended to impose. With this in mind, I turn to the specific issues in the case.

The first question is the applicability of § 312(a). Both the taxpayer and the government have assumed that § 312(a) is applicable to redemption distributions and have presented various arguments relevant to its interpretation. The only reported case I have found to have considered this issue, Bennett v. United States, 427 F.2d 1202 (Ct.Cl. 1970), also assumed that § 312(a) was applicable to redemption distributions. However, that assumption was not necessary to the result in that case, for after application of the rule of Foster v. United States, 303 U.S. 118, 58 S.Ct. 424, 82 L.Ed. 700 (1938), there was no excess of the redemption distribution to be applied to earnings and profits. After consideration of the language of the section and its legislative history, I have concluded that § 312(a) applies only to ordinary distributions and not to redemptive distributions, and that only § 312(e) applies to the instant case.

The pertinent provisions of 26 U.S.C. § 312(a) are:

" General rule. — Except as otherwise provided in this section, on the distribution of property by a corporation with respect to its stock, the earnings and profits of the corporation (to the extent thereof) shall be decreased by the sum of —

"(1) the amount of money,

"(2) the principal amount of the obligations of such corporation, and

"(3) the adjusted basis of the other property, so distributed." (emphasis added.)

It is to be specifically noted that the section applies to a "distribution with respect to its stock." If this language is given its usual meaning, it applies only to ordinary or dividend distributions; a redemptive distribution is not usually referred to as a distribution with respect to stock. Actually, a redemptive liquidation is a repurchase of an equity interest and is in no sense a dividend.

The legislative history seems to bear out this interpretation of § 312(a) as applying only to ordinary distributions. While the section does refer to decreasing earnings and profits by the "amount of money * * * so distributed," it is clear from the congressional reports that the section was primarily aimed at defining the tax accounting consequences to be given to distributions of property as dividends. Thus, in explaining the effect of the new section, the House report gives examples of corporate distributions of property having a fair market value both above and below its adjusted basis in the hands of the corporation. The report then states:

"In either case, the determination of the amount of earnings and profits, for the purpose of ascertaining the extent to which such distribution would constitute a dividend * * * shall be made by reference to the fair market value of the property received by the shareholder and the earnings and profits of the corporation at the time of the distribution." 3 U.S. Code Cong. Admin.News, 83d Cong., 2d Sess., 1954, p. 4232 (emphasis added).

Furthermore, when the House proposed what has become § 312 of the Act, it included a specific section which was intended to prescribe the rules for corporate accounting in redemptive and liquidating distributions. This seems clearly to imply that since a special section was included for redemptive distributions, § 312(a) was not intended to apply to them. This section proposed by the House was rejected by the Senate in favor of what became § 312(e), which was merely a re-enactment of existing law, with the following comment:

"The House bill supplied an additional rule for the determination of the manner in which earnings and profits should be allocated where there was a partial liquidation, a corporate separation, or a redemption. Your committee strikes this rule since it is believed that existing administrative practice, making these determinations as the facts of each case may indicate, has been successful in achieving correct results." Id. at 4678.

This comment also seems to imply that the Senate did not assume that § 312(a) had application in determining the accounting results of a redemptive distribution.

The commentators also seem to agree that § 312(a) does not apply to liquidating distributions. Thus, Mertens, in discussing § 312 in general, points out that, "It should be noted that the various `earnings and profits' adjustments, indicated in Section 312, involve entirely unrelated items having in common the single factor that each may have special `earnings and profits' consequences." Mertens, Law of Federal Income Taxation, Code Commentary, Ch. 1, Subch. C — p. 95 (1968) (emphasis added). In discussing specifically § 312(a), Mertens notes:

"The 1954 Code introduced into the revenue laws detailed rules for adjustments to `earnings and profits' where there is a nonliquidating distribution of property by a corporation with respect to its stock." Id. at 96 (emphasis added).

An article which contains an exhaustive analysis of the impact of liquidating distributions on earnings and profits also suggests that only § 312(e) is applicable to the problem, and not § 312(a):

"Since the earnings and profits account serves as a determinant of the tax consequences arising upon receipt of a corporate distribution, it is logical to suppose that once this account has carried out its function of categorizing a particular distribution with the taint of `dividend,' it is to be reduced pro tanto. This is, in fact, the result prescribed by the general rule found in section 312(a).

"But what is the proper tax accounting to follow when by force of statutory exception the sting of dividend treatment has been removed from the receipt of a distribution on the aforementioned ground of its `terminal' character? * * *

"* * * If a terminal distribution were treated in its entirety as reducing earnings and profits, then to the extent of the reduction the remaining shareholders could thereafter bail out corporate earnings by way of non-terminal distributions without the imposition of a dividend tax. On the other hand, if a terminal distribution were treated as having no effect at all on earnings and profits, then to that extent it would enhance the likelihood of the remaining shareholders bearing a dividend tax on subsequent non-terminal distributions.

" The statutory solution to this problem is found in section 312(e) * * *." Edelstein Korbel, "The Impact of Redemption and Liquidation Distributions on Earnings and Profits: Tax Accounting Aberrations Under Section 312(e)," 20 Tax L.Rev. 479, 480-481 (1965) (footnotes omitted) (emphasis added).

I also note that Congress appears to have been consistent throughout the Revenue Act in referring to ordinary distributions as "distributions with respect to stock" — see, e. g., § 305(a) (stock dividends) — while referring to terminal distributions as distributions in liquidation, partial liquidation, or redemption — see, e.g., §§ 303, 304. On this point the legislative history of § 311(a) is interesting. Section 311(a) of the 1954 Act provided the long-standing rule that "no gain or loss shall be recognized to a corporation on the distribution, with respect to its stock" of its stock or property. In implementing this section, the Treasury provided in its regulations that, "The term `distributions with respect to its stock' includes distributions made in redemption of stock * * *." Regs., § 1.311-1(a). The very fact that the Treasury found it necessary to specify such a definition of the term suggests that that is not its ordinary meaning. Moreover, when the Treasury moved to implement its regulation, by Revenue Ruling 68-21 which provided that in a redemption of stock with appreciated property no gain or loss was recognized to the redeeming corporation, Congress moved promptly in 1969 to amend the statute and reverse the ruling, thus indicating congressional disapproval of that administrative interpretation. Also, I have serious doubts as to the correctness of this regulation, since it appears to be in clear conflict with the statutory language and it is a well-recognized principle that the Treasury's regulations cannot amend the statute. However, in any event, the regulation applies only to § 311(a) and has no applicability to § 312(a).

To summarize then, I conclude that § 312(a) has no application to the problem before us, and the case must be resolved on the basis of the interplay between § 316(a)(2) and § 312(e).

I now consider the legislative history of § 312(e). This section originated as the last sentence of § 201(c) of the Revenue Act of 1924; § 201(c) accorded exchange treatment to liquidating distributions, which previously had been given dividend treatment. The last sentence was a new provision which read in pertinent part as follows:

"In the case of amounts distributed in partial liquidation * * * the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subdivision (b) of this section [the presumption that every distribution is out of earnings and profits] for the purpose of determining the taxability of subsequent distributions by the corporation."

The committee reports accompanying this section provide an example of a corporation which has $100,000 of capital, represented by $50,000 of preferred stock and $50,000 of common stock, $25,000 of pre-1913 earnings and profits, and $50,000 of post-1913 earnings and profits. It retires its preferred stock of $50,000 at par and then distributes a dividend of $25,000. The committee report then notes:

"In the absence of an express statutory provision it could be contended that the distribution of $50,000 in retirement of the preferred stock constituted under the presumption contained in subdivision (b), a distribution of the most recently accumulated earnings and profits of the corporation, with the result that such earnings and profits accumulated since March 1, 1913, were all distributed. It could be argued that the subsequent distribution of $25,000 was out of earnings and profits accumulated prior to March 1, 1913, and therefore tax exempt. The provisions of the bill make it clear that the distribution of the $50,000 in retirement of the preferred stock constitutes a capital transaction and does not affect the earnings and profits of the corporation on hand for subsequent distribution."

This provision was re-enacted as § 115(c) of the Revenue Act of 1928 and continued unchanged in the revenue law until 1936. In the Revenue Act of 1936, the provision was again re-enacted as the last sentence of § 115(c), but the last half of the sentence was omitted, so that the new sentence read:

"In the case of amounts distributed * * * in partial liquidation * * the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits."

It is this language which was re-enacted as § 312(e) of the Revenue Act of 1954. There is no legislative history in connection with the 1936 Act which sheds any light on the reasons for this change in language. However, when this change is considered in connection with other changes made at the same time, the conclusion seems reasonable that ordinary distributions were intended to take priority over terminal distributions in the disposition of current earnings.

Prior to 1936 current earnings were prorated throughout the year in order to determine the amount of current earnings available on a particular date of distribution. Edwards v. Douglas, 269 U.S. 204, 46 S.Ct. 85, 70 L.Ed. 235 (1925); Mason v. Routzahn, 275 U.S. 175, 48 S.Ct. 50, 72 L.Ed. 223 (1927); Donahue v. United States, 58 F.2d 463, 74 Ct.Cl. 512 (1932). The earnings and profits were then reduced as of that date by the amount of the distribution. The result of this was that, for example, a corporation which made a dividend distribution in January 1917, and which had sufficient earnings and profits in 1917 to cover the distribution, was nevertheless deemed to have made the distribution out of its 1916 earnings and profits because the 1917 profits had not yet accumulated; thus the dividend tax was at the lower 1916 rates. Mason v. Routzahn, supra.

This accounting procedure was altered by the 1936 amendment to the dividend definition (now § 316(a)(2)) which provided that current earnings and profits were to be computed as of the end of the taxable year without diminution by reason of any distributions made during the year and without regard to the amount of earnings and profits at the time the distribution was made. Since, as demonstrated above, the new dividend definition meant that current earnings and profits were to be diminished by neither ordinary nor redemption distributions, the deletion of the language in what was then § 115(c) (now § 312(e)) becomes explainable. This provision, in contrast to the dividend definition, does not determine the tax treatment to be given to a redemption distribution, but merely determines the tax accounting consequences of a redemption distribution at the corporate level. Whereas, on the one hand, if an ordinary distribution is determined to be a dividend by virtue of the dividend definition, it is then automatically given ordinary income treatment at the distributee level, on the other hand, the tax treatment to be given a redemption distribution at the distributee level does not automatically follow its designation as a redemption, but depends on whether certain other conditions specified in the revenue act are met.

Moreover, the tax treatment of a § 302 redemption distribution is wholly independent of the earnings and profits account; it receives exchange treatment regardless of whether the source is earnings and profits or capital. Thus, since the purpose of the new dividend definition was to free current earnings and profits for availability as taxable dividends, this purpose could be easily met by providing that all current earnings and profits were to be applied first to ordinary distributions, as the new definition seems to imply.

Since the dates of all distributions became irrelevant in determining the extent of current earnings and profits available for use as dividend distributions, the language pertaining to the accounting treatment to be given liquidating distribution as affecting "the taxability of subsequent distributions" also became irrelevant. Current earnings and profits were to be computed at the end of the year without diminution by any distributions, ordinary or redemptive. Then to the extent of this source, all ordinary distributions were deemed dividends and taxed as such. The redemption distributions could not affect the taxability of subsequent distributions out of current earnings and profits, and thus the language was rendered superfluous.

The taxpayer makes two arguments relative to this analysis. First of all, it argues that Congress was utterly indifferent to the order in which redemptive and ordinary distributions were to be applied against current earnings, because a "dividends paid" credit was allowed under § 27(f) for redemptive distributions, and thus the most that can be concluded is that redemption and ordinary distributions reduce current earnings in a pro rata amount. Secondly, it argues that to conclude that ordinary distributions take priority out of current earnings is inconsistent with the admitted fact that they do not take priority out of accumulated earnings.

In considering both of these arguments, it is to be kept in mind that in enacting the new dividend definition, Congress did not merely intend to give relief to deficit corporations from the undivided profits tax. It could have accomplished this purpose rather simply by giving, in addition to the dividends paid credit, a credit for any other distributions up to the amount of the current earnings, regardless of the fact that they were not taxable dividends because of impaired capital. However, Congress did not take this approach, but instead mandated that the distribution of current earnings was a taxable dividend in the hands of the shareholder, regardless of impaired capital. Thus Congressional intent was not merely to give relief to deficit corporations, but to tax distributions of current earnings as dividends in the hands of shareholders. Effect should be given to this intent unless a contrary result is clearly manifested by another section of the statute.

As to the dividends paid credit of § 27(f) with respect t liquidating distributions, it is clear that that credit would not have been available in the instant case because this redemption was not pro rata among the shareholders as was required by § 27(g). See, in this regard, 118 Regs. § 39.27(h) — 1, preferential distributions, and Example (b) 2. (§ 27(g) became § 27(h) in the 1939 Code). Thus were the undistributed profits tax still in existence, the corporation would not be entitled to a dividends paid credit for the redemption in question. If we were to accept the taxpayers' alternative arguments that dividend and redemption distributions are to be allocated pro rata to current earnings and profits, the result in the instant case would be that slightly more than half of the earnings and profits would be allocated to the dividend distribution, with the remaining amount allocated to the redemption distribution. Since the redemption distribution would not be entitled to the dividends paid credit, its allocated share of the earnings and profits (almost half) would be subject to the undistributed profits tax. I do not think that this result would be in accordance with Congressional intent in imposing the undistributed profits tax, since the corporation in fact distributed an amount equal to its earnings and profits in ordinary distributions, and thus I must reject the taxpayers' suggestion that redemption and ordinary distributions are entitled to pro rata allocations of current earnings.

Moreover, even in the case where a liquidating distribution was made pro rata, and therefore theoretically available for the dividends paid credit, such a credit would not have been available to a deficit corporation whose deficit exceeded its current income. See, St. Louis Co., supra, and cases cited therein. And this result would not be altered even if we adopted the taxpayers' argument that current earnings are to be prorated between ordinary and liquidating distributions. Take for example the case of a corporation with a deficit of $150,000 and current earnings of $100,000 (an example given in the House reports in discussing the new dividend definition). Assume that it makes ordinary distributions of $100,000 and liquidating distributions of $50,000. Under the taxpayer's suggestion that these distributions should be prorated against current earnings and profits, the ordinary distributions would be credited with only $66,667 of the current earnings. Since there was no excess of current earnings over the existing deficit, no dividends paid credit would have been allowed for the liquidating distribution, and therefore the corporation would be liable for an undistributed profits surtax on the amount of $33,333. I simply refuse to believe that this was a result intended by Congress, and the only way to avoid it is to give the ordinary distributions a priority claim on the current earnings. I think this is the proper analysis of § 316(a)(2).

As to the argument that this results in dissimilar treatment being given to current earnings and accumulated earnings, because dividend distributions do not have a priority claim on accumulated earnings, I can only answer that this is a result of the Congressional scheme, I note, however, that this is not a new result under the existing statute, for even now current earnings and accumulated earnings do not receive the same treatment as to ordinary distributions. Whereas, current earnings are prorated over ordinary distributions of the current year, accumulated earnings are allocated to ordinary distributions on a first-in-time basis, that is, giving priority to those distributions in order of time paid. See, Regs., § 1.316 — 2(c). Thus, this result is not unique.

In conclusion, I recognize that under the present state of the statutes, a completely satisfactory answer to the problems of the claims of liquidating distributions on earnings and profits is not possible. This is clearly an area which is ripe for Congressional action. However, as to the issue before us, I think that the District Court correctly determined that ordinary distributions have a priority claim over liquidating distributions on current earnings and profits.