Opinion
No. 42682.
February 8, 1937.
Briggs G. Simpich, of Washington, D.C., for plaintiff.
John W. Hussey, of Washington, D.C., and Robert H. Jackson, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Action by Joseph L. Baker against the United States.
Petition dismissed.
The court, upon the evidence adduced, makes the following special findings of fact:
1. Plaintiff duly filed his income tax returns for the calendar years 1924 and 1925, showing net income received from salary paid by Baker Ice Machine Company, Inc., of $10,000 per annum, and income from dividends on stock of domestic corporations in the amounts of $15,730.45 and $39,784.61, respectively. The returns did not include dividends credited to plaintiff's account by the Baker Ice Machine Company, Inc., in the years involved. The amounts of tax shown due on the returns were thereafter paid by the plaintiff and are not here in issue. On November 16, 1929, the Commissioner of Internal Revenue assessed additional taxes of $3,713.09 for 1924 and $4,367.42 for 1925, with interest assessments of $956.71 and $961.55, respectively. The deficiencies were based in part on the inclusion in plaintiff's income of dividends constructively received in those years from Baker Ice Machine Company, Inc. The additional assessments were paid as follows:
1924
February 3, 1930 ......................... $1,070.77 May 8, 1930 .............................. 1,674.00 June 2, 1930 ............................. 558.00 July 1, 1930 ............................. 558.00 July 31, 1930 ............................ 558.00 September 10, 1930 ....................... 251.03 _________ Total ................................. $4,669.80
1925
September 10, 1930 ....................... $ 306.97 November 5, 1930 ......................... 558.00 December 2, 1930 ......................... 558.00 December 9, 1930 ......................... 558.00 January 2, 1931 .......................... 558.00 January 6, 1931 .......................... 558.00 March 24, 1931 ........................... 558.00 April 7, 1931 ............................ 558.00 May 2, 1931 .............................. 558.00 May 28, 1931 ............................. 558.00 _________ Total ............................... $5,328.97
2. On February 16, 1932, plaintiff filed with the collector of internal revenue claims for refund of the additional assessments of $3,713.09 and $4,367.42, plus the interest paid thereon, stating as grounds thereof, for 1924, that the Commissioner had (1) erroneously increased the profit from the sale of certain stock, and (2) erroneously added to income the sum of $28,640 as dividends received from the Baker Ice Machine Company, Inc., and for 1925, that the Commissioner erroneously added to income the sum of $29,688 as dividends received from the same company.
The claims for refund were disallowed by the Commissioner July 2, 1932.
3. Baker Ice Machine Company, Inc., was organized and incorporated in 1919 under the laws of the state of Nebraska for the business of making and selling ice machines and refrigerating plants. The authorized capital stock was $2,000,000 divided into 20,000 shares of the par value of $100 each, of which 15,000 were preferred and 5,000 common. The holders of preferred stock were entitled to an annual cumulative dividend out of net earnings of 8 per cent. per annum prior to payment of dividends on common stock.
4. Upon its formation Baker Ice Machine Company, Inc., in exchange for shares of its own stock, acquired assets formerly belonging to another corporation valued at $373,855.82, and the personal demand notes of plaintiff for $626,144.18. The entire 5,000 shares of common stock, par value $500,000, were issued to the plaintiff, together with 3,300 shares of preferred, par value $330,000, and at his direction 1,500 shares of preferred, par value $150,000, to members of his family or trustees therefor, and 200 shares of preferred, par value $20,000, to two officers of the company.
No further shares of common stock other than the 5,000 issued to plaintiff were ever issued by the corporation. In order to raise additional working capital, an attempt was made to sell additional shares of preferred stock to the public; but due to the depression in business, only a few hundred shares were sold, and practically all of these to employees and customers of the company. During the years 1924 and 1925 there were a maximum of 554 of such shares outstanding, which were owned in amounts varying from 1 to 50 shares by sixty-one individuals, with the exception of one employee who owned 100 shares.
Plaintiff was president. Throughout the taxable periods here involved plaintiff's holdings of preferred stock were not less than 3,300 shares. He at all times was the majority stockholder and controlled the company.
5. In 1923 plaintiff's demand notes for $626,144.18 were canceled, notes receivable account was credited with that sum, and corresponding entries were made on the books of the company charging accounts as follows: Good will, $250,000; patents, $306,436.14; machinery and equipment, $42,260.54; patterns and drawings, $27,447.50. The cancellation of plaintiff's demand notes of $626,144.18 was without consideration.
6. Plaintiff was president of Baker Ice Machine Company, Inc., from the date of organization in 1919 to the time he retired from the company in 1932. During the years 1921-1925, inclusive, he received a salary of $10,000 per annum, which was paid in monthly installments of $833.33. A separate salary account for plaintiff was kept by the corporation.
Baker Ice Machine Company, Inc., declared semiannual dividends on its outstanding preferred stock from the date of organization of the company in 1919 up to and including the year 1925. No dividends were declared on the preferred stock subsequent to the year 1926, but credits were made to the account of plaintiff and members of his family representing March 1, 1926, dividends, which credits were reversed in October, 1926. No further credits for preferred stock dividends were made to the account of plaintiff. No dividends were ever declared on the 5,000 shares of common stock owned by plaintiff. The first year (1920) the preferred stock dividends were paid to all holders of preferred stock. Beginning with the year 1921 and through the year 1925, dividends were paid only to the minority stockholders who were principally customers or employees of the company. Beginning with the year 1921, dividends on the shares of preferred stock owned by plaintiff, the members of his family, or trustees therefor, were not paid to these stockholders, but such dividends were credited to their accounts on the books of the corporation.
7. On February 29, 1924, Baker Ice Machine Company, Inc., declared, as its ninth dividend, a dividend of 8 per cent. on all outstanding preferred stock effective March 1, 1924; and like dividends as follows: On August 30, 1924, as of September 1, 1924; on February 27, 1925, as of March 1, 1925; on August 29, 1925, as of September 1, 1925.
On June 30, 1924, Baker Ice Machine Company, Inc., credited to plaintiff's personal account the sum of $14,336, representing dividends declared on preferred stock as of March 1, 1924; on June 30, 1925, the company credited to plaintiff's account the sum of $14,304, representing dividends declared on preferred stock as of September 1, 1924, and on the same date credited to plaintiff's account $14,852, representing dividends declared on March 1, 1925; on June 30, 1926, the company credited to plaintiff's account the sum of $14,836, representing dividends declared on preferred stock as of September 1, 1925.
8. Plaintiff's personal account on the books of the corporation to which the foregoing dividends were credited reflected all transactions between the plaintiff and the corporation except $10,000 annual salary, which appeared in a separate account. The personal account carried credits to plaintiff on account of dividends declared, but left in the business, interest thereon, plaintiff's advances to the corporation, and expenditures on its behalf. It charged him with withdrawals and expenditures by the corporation on his behalf.
The dividends credited to plaintiff on the books of the corporation were at all times thereafter under plaintiff's sole dominion and control, and could be withdrawn by him at any time he desired to withdraw them without any restrictions whatever. The financial situation of the corporation was at all times sufficient to make payment of the dividends credited to plaintiff practicable without serious embarrassment to the corporation or the impairment of its financial situation.
9. None of the dividends credited to plaintiff for the years 1924 and 1925 were withdrawn by him from the account, and in the year 1926 the board of directors of the Baker Ice Machine Company, Inc., at the suggestion of the plaintiff, and with his consent, canceled all unpaid dividends and other items appearing in the plaintiff's personal account and credited the amount thus canceled to surplus.
10. The balance sheets of the Baker Ice Machine Company, Inc., for June 30, 1924, showed net assets of $1,659,018.60, including a surplus of $127,745.96 after deducting all previously declared dividends. Its net assets as of June 30, 1925, were $1,676,395.82, including surplus of $121,938.23 after deducting all previously declared dividends. The net income of the corporation for the years 1924 and 1925 was $93,834.33 and $92,882.21, respectively.
11. The monthly cash balances of Baker Ice Machine Company, Inc., during the years 1924 and 1925 as reflected by the books of the Omaha and Los Angeles offices were as follows:
OMAHA
Year 1924 Year 1925 Jan. 1 ............ $23,102.28 O.D. $ 4,279.46 O.D. Jan. 31 ........... 14,919.94 O.D. 7,047.01 O.D. Feb. 28 ........... 25,921.04 O.D. 543.31 O.D. Mar. 31 ........... 6,673.18 O.D. 5,588.89 Apr. 30 ........... 5,146.45 21,734.55 May 31 ............ 1,202.13 5,277.46 June 30 ........... 4,173.12 O.D. 4,325.58 O.D. July 31 ........... 13,894.54 11,380.60 Aug. 31 ........... 16,312.09 15,991.25 Sept. 30 .......... 2,851.96 3,287.48 Oct. 31 ........... 4,614.00 O.D. 8,763.44 Nov. 30 ........... 4,517.67 O.D. 10,759.92 O.D. Dec. 31 ........... 4,279.46 O.D. 5,465.91 O.D.
LOS ANGELES
Year 1924 Year 1925 Jan. 1 ........... $ 4,725.86 $ 6,834.03 Feb. 1 ........... 4,526.05 5,987.61 Mar. 1 ........... 7,160.05 2,167.26 Apr. 1 ........... 7,834.95 8,001.33 May 1 ............ 5,253.48 12,543.97 June 1 ........... 5,661.70 13,957.98 July 1 ........... 4,286.00 6,422.68 Aug. 1 ........... 954.94 9,695.69 Sept. 1 .......... 8,393.92 11,224.04 Oct. 1 ........... 7,520.03 22,128.85 Nov. 1 ........... 11,432.05 15,708.39 Dec. 1 ........... 7,045.37 12,284.38
The designation "O.D." in the foregoing schedule refers to overdraft.
The issue presented in this case is whether dividends in the respective amounts of $28,640 and $29,688 for the years 1924 and 1925, voted on shares of preferred stock in the Baker Ice Machine Company, Inc., owned by plaintiff, are properly includible in his gross income for those years.
The preferred stock of Baker Ice Machine Company, Inc., provided for an 8 per cent. annual dividend, to be paid at the rate of 4 per cent. semiannually, and such dividends were regularly declared from the date of the company's organization down to and through the years here involved. All the shares of preferred stock, of a par value of $1,500,000, with the exception of about 200 shares, were owned by plaintiff and members of his immediate family. It was the consistent practice of the corporation, when dividends on its preferred stock were voted, to pay the minority stockholders their dividends in cash and to credit dividends of plaintiff and members of his family to their personal accounts on the books of the corporation. This practice was followed in 1924 and 1925, and plaintiff was credited on his personal account with $28,640 for 1924 and $29,688 for 1925, the preferred stock dividends voted to him for those years. This account was an open one, containing many items in no way relating to dividends, upon which the plaintiff had the unrestricted right to draw at his pleasure. There was no limitation on his right to withdraw the dividends credited to him whenever he saw fit to do so. It appears, however, that no part of the dividends credited to plaintiff for the years 1924 and 1925 was withdrawn by him, and that on January 8, 1926, the board of directors of Baker Ice Machine Company, Inc., formally and with the plaintiff's consent canceled all unpaid dividends standing to plaintiff's credit ($135,911.83) and credited that amount back to surplus account.
Article 51 of Regulations 65, Revenue Act of 1924, provides:
"Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession."
And in Article 52 of the same Regulations it is stated: "Dividends on corporate stock are subject to tax when unqualifiedly made subject to the demand of the stockholder."
These provisions have been included in all Treasury regulations since 1918 and have been accepted and approved by Congress through subsequent re-enactment of the statute. Whether a stockholder actually withdraws from his account moneys representing dividends declared and entered in the account credited to him is not important. It is not necessary that dividends credited to his account be reduced to actual possession in order to make them taxable. They are taxable as income for the year in which they unqualifiedly become subject to the demand of the stockholder.
The plaintiff contends that the dividends in question were not unqualifiedly subject to plaintiff's demand by reason of the financial condition of Baker Ice Machine Company, Inc. It is contended that when the dividends were declared no financial statements were considered by the board of directors and that no attempt was made to determine whether any funds were available to pay them, as is the case when a common stock dividend is declared; it is further contended that it was never intended by the corporation that dividends be paid plaintiff, or that he should receive such dividends either actually or constructively; that the preferred dividends were declared so that funds could be available for payment of dividends to the minority stockholders, principally employees and customers of the company, in order to maintain the good will of the corporation.
The cash balances of the Baker Ice Machine Company, Inc., as shown by the books of its Omaha and Los Angeles offices, were not sufficient at all times during the years 1924 and 1925 to pay the dividends credited to plaintiff's account, but the cash position alone is not conclusive as to the ability of the company to pay. It is only one of the items going to make up its capital and surplus, Jacobus v. United States, 9 F. Supp. 41, 80 Ct.Cl. 357; A.D. Saenger, Inc., v. Commissioner (C.C.A.) 84 F.2d 23, and the fact that the cash balances may at times fall below the amount of dividends standing on the books to the credit of a stockholder does not of itself establish that the amounts so credited to the stockholder are not available to him. When we look to the financial situation of the Baker Machine Company, Inc., during the years 1924 and 1925, including the cash balances maintained by it, there can be no doubt, we think, that the corporation was at all times in a financial condition to pay the dividends credited to plaintiff. The net assets of the company on June 30, 1924, were $1,659,018.60, including a surplus of $127,745.96 after deducting all previously declared dividends, and its net income for the year was $93,834.33, while its net assets as of June 30, 1925, were $1,676,395.82, including surplus of $121,938.23 after deducting all previously declared dividends, and its net income for the fiscal year was $92,882.21. These figures, all of which are disclosed by the books of the Baker Ice Machine Company, Inc., show beyond question that the company was entirely solvent and a reasonably prosperous concern during the years 1924 and 1925. Even conceding that the assets of the company were carried on the books of the company at an inflated value, it had a net income for each of the years of more than $90,000. In view of all the facts and circumstances shown, the conclusion is not only justified but is inescapable that the company's financial condition was such that the dividends credited to plaintiff's account could have been and would have been paid without embarrassment to the company at any time the plaintiff might have seen fit to withdraw them.
Plaintiff's contention that dividends on the preferred stock of the Baker Ice Machine Company, Inc., were voted for the sole benefit of the minority stockholders, and that it was not intended to pay dividends to plaintiff is not supported by competent proof and is without merit. The policy of the company from its organization in 1919 down to the end of 1925, it is true, was to pay the minority stockholders their dividends in cash and to credit plaintiff's dividends to his personal account with the company. Why this policy was followed does not appear and is not important, as the policy, whatever the reason for it may have been, was dictated by plaintiff who owned all the common stock and was in complete control of the Baker Ice Machine Company, Inc. The important and controlling fact is that dividends voted in 1924 and 1925 on the preferred stock held by plaintiff in the Baker Ice Machine Company, Inc., were credited to his personal account with the company without any restrictions whatever on his right to withdraw them at will. They were unqualifiedly subject to his demand, and the withdrawal of them would not have seriously embarrassed the company or impaired its financial standing.
Plaintiff is not entitled to recover, and the petition is dismissed. It is so ordered.