This section contains the nature of the case and procedural background.

CSW was the parent of a group of affiliated corporations. Consolidated returns were filed for CSW and the group for the fiscal years ended March 31, 1964 and 1965. This was advantageous tax-wise, for it enabled the income of Capital Wire & Cable Corporation (CW), one of the subsidiaries, to be offset against losses sustained by CSW. CW's board formally recognized a saving in tax of about $863,000 through the filing of consolidated returns for the two fiscal years. That board then distributed $ 1 million in March 1965, not solely to CSW, its principal shareholder, but ratably to all its shareholders. As a primary shareholder, CSW received $803,750 of that distribution. The IRS (D) determined that the consolidated returns for fiscal 1964 and 1965 did not accurately reflect the earnings of the group. The matter was settled in 1972 for approximately $900,000. Of this amount, about $755,000 was allocated to CW. P takes the position that CW's allocable share of the 1965 tax must be accrued to that fiscal year; that CW's 1965 payment to CSW was thus not a dividend entering into the determination of CSW's earnings and profits at all, but was a constructive payment of CW's share of the tax bill. CSW thus had no earnings and profits for 1965; and, as a consequence, CSW's 1965 distribution to P could only be a nontaxable return of capital and could not be a taxable dividend. The Tax Court, in a reviewed decision, with six judges dissenting, accepted this view. The Fifth Circuit reversed. P appealed.

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