Gooding Amusement Co.
v.
Comm'r Ofinternal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Nov 30, 1954
23 T.C. 408 (U.S.T.C. 1954)

Docket Nos. 40039-40042.

1954-11-30

GOODING AMUSEMENT COMPANY, INCORPORATED, PETITIONER, V. COMMISSIONER OFINTERNAL REVENUE, RESPONDENT. F. E. GOODING, PETITIONER, V. COMMISSIONER OFINTERNAL REVENUE, RESPONDENT. ELIZABETH GOODING (ALSO KNOWN AS ANNA ELIZABETHGOODING), PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. F. E. GOODING AND ELIZABETH GOODING (ALSO KNOWN AS ANNA ELIZABETH GOODING), PETITIONERS, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Roger K. Powell, Esq., for the petitioners. Robert E. Johnson, Esq., for the respondent.


Roger K. Powell, Esq., for the petitioners. Robert E. Johnson, Esq., for the respondent.

1. Accruals and payments on short-term notes issued by corporation to its three controlling stockholders, consisting of husband, wife, and infant daughter, held not interest on indebtedness under section 23(b), Internal Revenue Code, and, hence not deductible from the corporation's gross income.

2. Payments on the principal of the above mentioned notes, held, to constitute the distribution of taxable dividends under section 115(a), Internal Revenue Code.

3. Property obtained by petitioner corporation in exchange for its stock and the aforementioned notes, held, to have been acquired in transaction described in section 112(b)(5) wherein no gain or loss is recognized under the law applicable to the year in which the transfer was made. Held, further, the basis of such property is the same as it was in the hands of the transferors and may not be increased by the amount of gain which was in fact recognized through error and on which petitioners and their daughter paid capital gains tax.

Respondent determined income tax deficiencies against the below named petitioners in the amounts and for the years as follows:

+-------------------------------------------------------+ ¦Petitioner ¦Year¦Deficiency¦ +---------------------------------------+----+----------¦ ¦Gooding Amusement Company, Incorporated¦1947¦$9,337.59 ¦ +---------------------------------------+----+----------¦ ¦Gooding Amusement Company, Incorporated¦1948¦6,800.58 ¦ +---------------------------------------+----+----------¦ ¦Gooding Amusement Company, Incorporated¦1949¦11,785.94 ¦ +---------------------------------------+----+----------¦ ¦F. E. Gooding ¦1947¦19,307.82 ¦ +---------------------------------------+----+----------¦ ¦Elizabeth Gooding ¦1947¦2,449.02 ¦ +---------------------------------------+----+----------¦ ¦F. E. Gooding and Elizabeth Gooding ¦1948¦15,983.02 ¦ +-------------------------------------------------------+

The issues in these proceedings are (1) whether certain amounts accrued by the petitioner Gooding Amusement Company, Incorporated, during the years 1947, 1948, and 1949 represented interest on indebtedness within the meaning of section 23(b), Internal Revenue Code; (2) whether the payments on the principal amount of the notes issued to petitioners constituted a taxable dividend under section 115(a) or a redemption of stock essentially equivalent to a distribution of a taxable dividend under section 115(g); and (3) whether, for the purposes of determining depreciation expense and capital gains and losses, the basis of the assets acquired in 1946 by the petitioner corporation should be increased in the amount of gain recognized by the transferors, petitioners F. E. Gooding and Elizabeth Gooding and their 5-year-old daughter, upon the transfer.

Petitioner corporation contests only those of respondent's adjustments to depreciation and capital gains and losses which are attributable to his denial of an increase in the basis of the depreciable assets acquired by the corporation in 1946.

FINDINGS OF FACT.

Many of the facts were stipulated and are incorporated herein by reference.

Petitioner Gooding Amusement Company, Incorporated, hereinafter referred to as the corporation, is an Ohio corporation which filed income tax returns for the calendar years 1947, 1948, and 1949 with the collector of internal revenue for the eleventh district of Ohio. The corporation was organized August 24, 1946, and filed an income tax return for the latter part of the year 1946.

F. E. Gooding and Elizabeth Gooding, hereinafter sometimes referred to as petitioners, are husband and wife. During the years in question they were stockholders and officers in the corporation. They filed separate individual income tax returns for the year 1947 and a joint income tax return for the year 1948.

In about 1913, F. E. Gooding, hereinafter referred to as petitioner, went to work for his uncle, J. E. Gooding, who owned and operated an outdoor amusement business. The function of the business was to supply and operate portable equipment, such as merry-go-rounds and Ferris wheels, and other entertainment designed for use at fairs, parks, celebrations, church bazaars, and the like. J. E. Gooding had been engaged in the business for about 20 years and was operating under his own name when petitioner entered his employ. Several years later petitioner became an independent operator in the amusement business and continued as such until the year 1932, except for 2 years when he was in a partnership with his two brothers.

On December 29, 1932, petitioner organized F. E. Gooding Amusement Company, a corporation, with the stated purpose ‘to buy, sell and operate amusement devices and places of amusement; to lease and sublet amusement devices; to contract for sites and places of amusement, and to sublet the same.’ This corporation was the operator-lessee of the portable rides, i.e., merry-go-rounds, Ferris wheels, etc., which were owned by petitioner individually.

On April 17, 1934, a second corporation, Gooding Greater Shows, Inc., was organized with the following stated purpose:

To own, operate, buy, sell, lease and sublet amusement devices, riding devices, shows and other entertainment; to contract for sites and places of amusement and to sublet same; to acquire, lease own and maintain any and all real and personal property as may be necessary and proper for the objects and purposes aforesaid; to sublet, lease or rent the same; and to do all things necessary and incident thereto.

Gooding Greater Shows, Inc., was not, in fact, an operating company. It was dissolved on June 22, 1939. F. E. Gooding Amusement Company, the operating company, was dissolved on December 31, 1942.

In 1942 petitioner hired as a tax consultant a certified public accountant. The latter has been associated with petitioner's business ever since.

On January 1, 1943, F. E. Gooding Amusement Company (hereinafter referred to as the partnership), a partnership, was formed with F. E. Gooding, Elizabeth Gooding, and Joyce Ann Gooding, their 1-year-old daughter, having, respectively, four-sevenths, two-sevenths, and one-seventh interests therein. The Bureau of Internal Revenue determined that Joyce Ann Gooding was not a bona fide partner for income tax purposes, which determination was accepted by petitioners, and her one-seventh interest in the partnership was taxed to her father for the years 1943 to 1946, inclusive. Petitioner sold the amusement devices and portable rides to the partnership, which operated them without having to pay rent therefor .

The partnership obtained public liability insurance in the principal amount of approximately $50,000, which, in the opinion of petitioner, went a long way toward covering any liability that might arise from accidents involving the partnership's property. The largest accident claim ever paid on behalf of the amusement enterprises controlled by petitioner was in the amount of $18,000.

The net taxable income of the partnership was as follows for the years 1943, 1944, 1945, and 1946:

+---------------------+ ¦1943 ¦$158,254.49 ¦ +--------+------------¦ ¦1944 ¦151,007.58 ¦ +--------+------------¦ ¦1945 ¦257,437.33 ¦ +--------+------------¦ ¦1946 1 ¦153,661.58 ¦ +---------------------+

From 1932 to the years here involved the corporations and partnership in some cases executed ‘privilege’ contracts between 2 and 12 months in advance, which entitled them to the use of certain locations on which the amusement devices could be placed and operated.

At the close of business August 24, 1946, the partnership distributed to its three partners, assets consisting of advances to employees, accounts and notes receivable, land, buildings, cables, electrical equipment, office equipment, electrical towers, trucking equipment, canvas, mechanical rides, unexpired insurance, and advance payments on equipment. This distribution was made to the partners as tenants in common, with the result that F. E. Gooding, Elizabeth Gooding, and Joyce Ann Gooding owned, respectively, an undivided four-sevenths, two-sevenths, and one-seventh interest in all the assets distributed. The book value of the assets so distributed was $177,037.29, and the book value of the undistributed cash, investments, land, and accrued interest was $285,745.84. In connection with this distribution each partner assumed a joint and several obligation to pay certain notes payable of the partnership in the total amount of $13,969.25, such payment to be made in accordance with his respective undivided interest in the distributed assets. The capital account of each partner on the books of the partnership was proportionately reduced, so that the net total reduction in the capital account due to the distributions was $163,068.04, which was equivalent to the book value of the assets distributed, less notes payable assumed. The partnership continued in existence throughout the period here involved.

Included in the assets distributed to the partners were depreciable assets having a net book value on the books of the partnership of $152,764.55, of which $129,899.13 represented trucking equipment and mechanical rides. The privilege contracts referred to above were not carried at any value on the books of the partnership as of August 24, 1946.

On August 24, 1946, concurrently with the distribution of the partnership assets having a book value of $177,037.29, the partners made an offer to the newly formed corporation to exchange the aforesaid distributed assets at a value of $294,970.39. The difference between the depreciated book value of the distributed assets in the amount of $177,037.29 and the amount offered of $294,970.39, or $117,933.10, was the difference between the $129,899.13 book value of trucking equipment and mechanical rides on the books of the partnership, and the fair market value of these assets as appraised by petitioner with the help of Kathleen Holleran, the secretary of the corporation. In the process of making the new valuations, petitioner surveyed the equipment and rides in use on the various locations, checked the inventory records, and consulted his foremen from time to time with regard to the mechanical condition of the equipment and rides. The following table shows a comparison between the partnership book value of the trucking equipment and mechanical rides and the new values assigned to these assets by petitioner:

+-------------------------------------------------------------------+ ¦ ¦Book value per¦ ¦New value in ¦ +------------------+--------------+-----------+---------------------¦ ¦Asset ¦partnership ¦New value ¦excess of partnership¦ +------------------+--------------+-----------+---------------------¦ ¦ ¦books ¦ ¦book value ¦ +------------------+--------------+-----------+---------------------¦ ¦Trucking equipment¦$29,244.06 ¦$65,933.50 ¦$36,689.44 ¦ +------------------+--------------+-----------+---------------------¦ ¦Mechanical rides ¦100,655.07 ¦181,898.73 ¦81,243.66 ¦ +------------------+--------------+-----------+---------------------¦ ¦ ¦$129,899.13 ¦$247,832.23¦$117,933.10 ¦ +-------------------------------------------------------------------+

Pursuant to the above mentioned offer, the corporation accepted the following assets at the indicated valuations:

+-----------------------------------------+ ¦Accounts receivable ¦$2,097.49 ¦ +-----------------------------+-----------¦ ¦Notes receivable ¦3,643.91 ¦ +-----------------------------+-----------¦ ¦Advances to employees ¦1,010.35 ¦ +-----------------------------+-----------¦ ¦Depreciable assets (net) ¦270,697.65 ¦ +-----------------------------+-----------¦ ¦Land ¦4,500.00 ¦ +-----------------------------+-----------¦ ¦Unexpired insurance ¦10,020.99 ¦ +-----------------------------+-----------¦ ¦Advance payments on equipment¦3,000.00 ¦ +-----------------------------+-----------¦ ¦Total ¦$294,970.39¦ +-----------------------------------------+

The corporation also assumed the notes payable in the amount of $13,969.25 which had been assumed by the partners upon the distribution of partnership assets. In return for these assets in the net amount of $281,001.14, the partners received in proportion to their respective partnership interests the following:

+-----------------------------------------------------------------------------+ ¦Partner ¦Received ¦Amount ¦ +----------+------------------------------------------------------+-----------¦ ¦F. E. ¦140 shares of no-par common stock having stated value ¦$28,000.00 ¦ ¦Gooding ¦of ¦ ¦ +----------+------------------------------------------------------+-----------¦ ¦ ¦5 notes due in 5 succeeding years beginning in 1947 at¦132,572.08 ¦ ¦ ¦$26,514.42 (or $26,514.41) each ¦ ¦ +----------+------------------------------------------------------+-----------¦ ¦Elizabeth ¦70 shares of no-par common stock having stated value ¦14,000.00 ¦ ¦Gooding ¦of ¦ ¦ +----------+------------------------------------------------------+-----------¦ ¦ ¦5 notes due in 5 succeeding years beginning in 1947 at¦66,286.04 ¦ ¦ ¦$13,257.20 (or $13,257.21) each ¦ ¦ +----------+------------------------------------------------------+-----------¦ ¦Joyce Ann ¦35 shares of no-par common stock having stated value ¦7,000.00 ¦ ¦Gooding ¦of ¦ ¦ +----------+------------------------------------------------------+-----------¦ ¦ ¦5 notes 1 due in 5 succeeding years beginning in ¦33,143.02 ¦ ¦ ¦1947 at $6,628.60 (or $6,628.61) each ¦ ¦ +----------+------------------------------------------------------+-----------¦ ¦Total ¦ ¦$281,001.14¦ +----------+------------------------------------------------------+-----------¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+

By an agreement dated December 20, 1946, certain of the corporation's key employees, in consideration for shares of the corporation's stock theretofore or thereafter issued to them, gave the corporation an option to repurchase any of such issued shares at any time at progressively increasing prices, beginning with $220 per share in 1947 and ending with $400 per share in 1956. It was further agreed that the option should expire at the close of 1956 unless extended for a further period by mutual agreement.

By the end of 1947 employees of the corporation had acquired 24.39 per cent of its outstanding stock. Additional shares were issued to employees in 1948 although the percentage of the employees' holdings dropped to 22.3 per cent, where it remained throughout 1949.

In 1947 the corporation acquired new equipment and rides at a total cost of $306,894.27.

In connection with its operations, including the acquisition of additional equipment in 1947 and later years, the corporation obtained funds and credits, which were evidenced by notes, from banks, merchants, petitioner, Joyce Ann Gooding, and the partnership. These notes were recorded in the corporation's Miscellaneous Notes Payable account and totaled $138,572.08 in 1947, $186,018.92 in 1948, and $246,149.40 in 1949. Included in these notes were those issued to petitioner, his daughter, and the partnership, as follows:

+-------------------------------------------------------------------------------+ ¦ ¦Date of¦ ¦ ¦ ¦Unpaid ¦Unpaid ¦Unpaid ¦ +----------------------+-------+--------+-------+----+--------+--------+--------¦ ¦ ¦note ¦Due date¦Amount ¦Date¦at ¦at ¦at ¦ +----------------------+-------+--------+-------+----+--------+--------+--------¦ ¦ ¦ ¦ ¦ ¦paid¦12/31/47¦12/31/48¦12/31/49¦ +----------------------+-------+--------+-------+----+--------+--------+--------¦ ¦1947 ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +----------------------+-------+--------+-------+----+--------+--------+--------¦ ¦F. E. Gooding ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Amusement ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +----------------------+-------+--------+-------+----+--------+--------+--------¦ ¦Co. (Part.) ¦4/4/47 ¦Demand ¦$12,000¦ ¦$12,000 ¦$12,000 ¦$12,000 ¦ +-------------------------------------------------------------------------------+

1948 F. E. Gooding 4/3/48 10/3/48 7,000 9/30/48 F. E. Gooding 4/14/48 10/14/48 10,000 9/30/48 F. E. Gooding Amusement Co. (Part.) 4/14/48 9/14/48 2,500 9/14/49 2,500 F. E. Gooding Amusement Co. (Part.) 4/16/48 9/16/48 5,000 9/14/49 5,000

1949 F. E. Gooding Amusement Co. (Part.) 2/14/49 2/14/50 1,500 1,500 F. E. Gooding 4/6/49 10/6/49 10,000 10/4/49 (6/15/ ) 49 F. E. Gooding 3/30/49 9/30/49 8,430 (and ) (9/28/ ) 49 Joyce Ann Gooding 1/29/49 7/29/49 5,000 7/29/49 Joyce Ann Gooding 3/24/49 9/24/49 2,000 9/23/49 Joyce Ann Gooding 7/29/49 1/29/50 5,000 5,000 F. E. Gooding 12/31/ Demand 20,475 20,475 49 $88,905 $12,000 $19,500 $38,975

During 1947 the partnership and Joyce Ann Gooding advanced to the corporation an additional sum of $23,000, of which $17,000 was outstanding at the close of both 1947 and 1948 and $14,000 was outstanding at the close of 1949.

The following schedule shows the extent to which the corporation made payments in respect of the corporate notes issued August 24, 1946, to petitioners and their daughter:

+------------------------------------------------------------------+ ¦ ¦ ¦ ¦ ¦ ¦Unpaid as ¦ +-------------------+-------------+--------+-----------+-----------¦ ¦Payee ¦Amount ¦Due date¦Date paid ¦of 12/9/53 ¦ +-------------------+-------------+--------+-----------+-----------¦ ¦ ¦(¦$26,514.42 ¦8/24/47 ¦5/24/47 ¦ ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦ ¦(¦26,514.42 ¦8/24/48 ¦1948 ¦ ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦E. Gooding ¦(¦26,514.42 ¦8/24/49 ¦1950 ¦ ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦ ¦(¦26,514.41 ¦8/24/50 ¦ ¦$26,514.41 ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦ ¦(¦26,514.41 ¦8/24/51 ¦ ¦26,514.41 ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦ ¦(¦13,257.21 ¦8/24/47 ¦1 8/24/47¦8,257.21 ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦ ¦(¦13,257.21 ¦8/24/48 ¦ ¦13,257.21 ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦Mrs. F. E. Gooding ¦(¦13,257.21 ¦8/24/49 ¦ ¦13,257.22 ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦ ¦(¦13,257.21 ¦8/24/50 ¦ ¦13,257.20 ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦ ¦(¦13,257.20 ¦8/24/51 ¦ ¦13,257.61 ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦ ¦(¦6,628.61 ¦8/24/47 ¦ ¦6,628.61 ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦F. E. Gooding as ¦(¦6,628.61 ¦8/24/48 ¦ ¦6,628.60 ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦natural guardian of¦(¦6,628.60 ¦8/24/49 ¦ ¦6,628.60 ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦Joyce Ann Gooding ¦(¦6,628.60 ¦8/24/50 ¦ ¦6,628.60 ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦ ¦(¦6,628.60 ¦8/24/51 ¦ ¦6,628.88 ¦ +-------------------+-+-----------+--------+-----------+-----------¦ ¦Total ¦ ¦$232,001.14¦ ¦ ¦$147,457.11¦ +------------------------------------------------------------------+

WITHEY, J., concurs in the result.

January 1 to August 24.

For the taxable year 1946, each partner reported as a long-term capital gain his proportionate share of the difference between the depreciated cost of the transferred assets and the amount at which such assets were offered to and accepted by the corporation. On these gains the individual petitioners paid a total tax of $28,683.27. By a report dated March 29, 1948, respondent accepted petitioners' 1946 returns without eliminating therefrom the aforesaid capital gains.
In reporting in its income tax returns for the period August 24, 1946, to December 31, 1946, and the taxable years here involved depreciation expense and capital gains and losses attributable to the trucking equipment and mechanical rides acquired August 24, 1946, the corporation used as the unadjusted basis of such assets the increased valuation assigned to them by petitioner.
Between August 24, 1946, and December 31, 1952, the corporation sold 14.96 per cent of the trucking equipment and 56.85 per cent of the mechanical rides acquired on the former date. The following table indicates with respect to the above mentioned assets, the relationship of sale prices to appraised values:

1The payee of these notes was “F. E. Gooding as natural guardian of Joyce Ann Gooding.”

There was no identification of the portion of the assets contributed for the shares and the portion contributed for the notes. The corporate notes were ordinary negotiable judgment notes, each containing an unconditional promise to pay on a fixed date the principal thereof, together with interest at 5 per cent per annum.

The opening entries on the corporation's books dated August 25, 1946, were as follows:

+---------------------------------------------------------------------+ ¦ ¦Dr. ¦Cr. ¦ +------------------------------------------+--------------+-----------¦ ¦Advances to employees ¦$1,010.35 ¦ ¦ +------------------------------------------+--------------+-----------¦ ¦A/c receivable ¦2,096.49 ¦ ¦ +------------------------------------------+--------------+-----------¦ ¦Notes receivable ¦3,643.91 ¦ ¦ +------------------------------------------+--------------+-----------¦ ¦Unexpired insurance ¦10,020.99 ¦ ¦ +------------------------------------------+--------------+-----------¦ ¦Advance payments on equipment ¦3,000.00 ¦ ¦ +------------------------------------------+--------------+-----------¦ ¦Land--1300 Norton Ave., Columbus, Ohio ¦4,500.00 ¦ ¦ +------------------------------------------+--------------+-----------¦ ¦Building--1300 Norton Ave., Columbus, Ohio¦15,823.17 ¦ ¦ +------------------------------------------+--------------+-----------¦ ¦Cables ¦1,805.34 ¦ ¦ +------------------------------------------+--------------+-----------¦ ¦Electrical equipment ¦2,527.02 ¦ ¦ +------------------------------------------+--------------+-----------¦ ¦Office equipment ¦1,203.81 ¦ ¦ +------------------------------------------+--------------+-----------¦ ¦Electrical towers ¦316.15 ¦ ¦ +------------------------------------------+--------------+-----------¦ ¦Trucking equipment ¦1 65,933.50 ¦ ¦ +------------------------------------------+--------------+-----------¦ ¦Canvas ¦647.52 ¦ ¦ +------------------------------------------+--------------+-----------¦ ¦Mechanical rides ¦1 181,898.73¦ ¦ +------------------------------------------+--------------+-----------¦ ¦Maintenance equipment ¦542.41 ¦ ¦ +------------------------------------------+--------------+-----------¦ ¦Notes payable--various ¦ ¦$13,969.25 ¦ +------------------------------------------+--------------+-----------¦ ¦Notes payable--F. E. Gooding ¦ ¦132,572.08 ¦ +------------------------------------------+--------------+-----------¦ ¦Notes payable--Mrs. F. E. Gooding ¦ ¦66,286.04 ¦ +------------------------------------------+--------------+-----------¦ ¦Notes payable--Joyce Ann Gooding ¦ ¦33,143.02 ¦ +------------------------------------------+--------------+-----------¦ ¦Capital stock ¦ ¦49,000.00 ¦ +------------------------------------------+--------------+-----------¦ ¦ ¦$294,970.39 ¦$294,970.39¦ +---------------------------------------------------------------------+ 1These figures reflect the increased values determined by the petitioner prior to the exchange.

The privilege contracts of the partnership were not carried at any value on the books of the corporation as of August 25, 1946. The corporation performed the services required of the partnership under the contracts and in 1946 received income as a result thereof. The ‘Gooding’ name was well established in the outdoor amusement business and was of substantial value in the securing of such contracts. No value was ascribed to goodwill on the books of either the partnership or the corporation.

Of the nonoperating assets in the amount of $285,745.84 left in the partnership, the sum of $184,444.23 was cash. The corporation received no cash from the partnership and made no borrowings in 1946.

+-----------------------------------------------------------------------------+ ¦ ¦ ¦Cost per ¦ ¦ ¦ ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦ ¦Year¦appraised ¦Depreciation¦ ¦ ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦ ¦sold¦value, Aug.¦to date of ¦Sale price ¦Gain (loss)¦ ¦ ¦ ¦ ¦ ¦1 ¦ ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦ ¦ ¦24, 1946 ¦sale ¦ ¦ ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦Trucking equipment (in ¦ ¦ ¦ ¦ ¦ ¦ ¦units): ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦3 ¦1947¦$3,050.00 ¦$211.78 ¦$1,000.00 ¦($1,838.22)¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦1 ¦1948¦1,094.00 ¦119.16 ¦450.00 ¦(524.84) ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦2 2 ¦1949¦1,421.62 ¦376.72 ¦1,000.00 ¦(44.90) ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦3 ¦1950¦3,422.00 ¦1,261.21 ¦1,525.00 ¦(635.79) ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦2 ¦1952¦875.00 ¦528.55 ¦400.00 ¦53.55 ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦Totals ¦ ¦$9,862.62 ¦$2,497.42 ¦$4,375.00 ¦($2,990.20)¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦Mechanical rides (in ¦ ¦ ¦ ¦ ¦ ¦ ¦units): ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦6 ¦1946¦$15,803.82 ¦$378.97 ¦$18,592.10 ¦$3,167.25 ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦1 ¦1947¦3,375.00 ¦194.16 ¦7,500.00 ¦4,319.16 ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦1 ¦1948¦3,375.00 ¦977.57 ¦5,500.00 ¦3,102.57 ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦6 3 ¦1949¦21,379.93 ¦5,455.95 ¦22,000.00 ¦6,076.02 ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦8 ¦1950¦44,354.78 ¦17,310.66 ¦36,400.00 ¦9,355.88 ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦5 ¦1951¦10,612.44 ¦5,217,81 ¦11,700.00 ¦6,305.37 ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦1 ¦1952¦4,500.00 ¦2,525.40 ¦6,000.00 ¦4,025.40 ¦ +-----------------------+----+-----------+------------+-----------+-----------¦ ¦Totals ¦ ¦$103,400.97¦$32,060.52 ¦$107,692.10¦$36,351.65 ¦ +-----------------------------------------------------------------------------+ 1Trade-in values received are included.Includes one unit written off.

The principal of the notes issued to petitioner was paid back as set forth above for the reason that he, unlike his wife and daughter, needed the money for investment in some apartment houses. The principal amount of the other notes issued August 24, 1946, was not paid because the corporation was heavily indebted to outsiders and at no time during the period involved had a sufficient cash balance. Petitioner, who as president and majority stockholder controlled the corporation, subordinated the claims of himself and his family to those of banks and other third parties. Petitioner felt that such subordination was necessary in order to maintain the corporation's credit standing. Petitioner and his family at no time had any intention of enforcing their matured claims against the corporation.

Includes miscellaneous items written off.

After 1947 when it paid about one-fourth of the interest owing petitioner and made no interest payment to petitioner's wife and daughter, the corporation paid interest on the notes here involved as it fell due.
In its 1947, 1948, and 1949 income tax returns the corporation claimed as interest expense the amounts of $12,988.01, $13,879.25, and $13,345.15, respectively. Of these amounts, $10,277.34 in 1947, $9,568.99 in 1948, and $8,698.61 in 1949 represented claimed interest on the notes issued August 24, 1946. In the tax returns of petitioners and their daughter the above amounts were reported as interest income received from the corporation.
The income tax returns and books of the corporation indicated that as of the close of the years 1946 through 1949, inclusive, the stated value of the corporation's common stock, the number of such shares outstanding, the dividends paid thereon, and earned surplus after payment of dividends and taxes were, respectively, as follows:

1Only $5,000 was paid on the maturity date of this note.

+---------------------------------------------------------------------------+ ¦ ¦1946 ¦1947 ¦1948 ¦1949 ¦ +----------------------------+----------+-----------+-----------+-----------¦ ¦Stated value of common stock¦$64,800 ¦$76,000 ¦$76,000 ¦$76,600 ¦ +----------------------------+----------+-----------+-----------+-----------¦ ¦Number of shares outstanding¦324 ¦380 ¦380 ¦383 ¦ +----------------------------+----------+-----------+-----------+-----------¦ ¦Dividends paid ¦$648 ¦$7,600 ¦$7,600 ¦$3,830 ¦ +----------------------------+----------+-----------+-----------+-----------¦ ¦Earned surplus ¦$67,580.79¦$139,669.51¦$203,997.39¦$236,254.11¦ +---------------------------------------------------------------------------+

As a consequence of the issuance of the notes of August 24, 1946, there was not established between the corporation and the individual members of the Gooding family the relationship of debtor-creditor.

The payments made by the corporation to petitioners in 1947 and 1948 on the principal of their notes were in their entirety essentially equivalent to taxable dividends.

OPINION.

VAN FOSSAN, Judge: