United Mercantile Agencies, Inc.
v.
Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Mar 31, 1955
23 T.C. 1105 (U.S.T.C. 1955)

Docket Nos. 40028 40029 40030.

1955-03-31

UNITED MERCANTILE AGENCIES, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.F. W. DRYBROUGH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.L. N. SIMPSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Donald V. Hunter, Esq., for the petitioners. Lyman G. Friedman, Esq., and Melvin L. Sears, Esq., for the respondent.


Donald V. Hunter, Esq., for the petitioners. Lyman G. Friedman, Esq., and Melvin L. Sears, Esq., for the respondent.

1. The two principal officers of a corporation, who owned or controlled all of the outstanding capital stock, removed checks from the corporation's incoming mail basket, cashed the checks, and divided the proceeds in ratio to the amount of common stock owned or controlled. Held, the diverted funds are taxable as ordinary income to the corporation which is not entitled to an offsetting embezzlement loss under section 23(f) of the 1939 Code. Held, further, accrued but unpaid Federal taxes are not deductible in determining the amount of the earnings and profits of a cash basis corporation. Held, further, the diverted funds are taxable as dividends to the office-stockholders receiving them except that funds received by one office-stockholder on behalf of his wife and with respect to her stock were not taxable to him. Held, further, the corporation and the stockholders participating in the diversion of funds were liable for additions to tax because of fraud under section 293(b) of the 1939 Code.

2. The petitioner corporation purchased a mixed aggregate of claims from the liquidators of four insolvent banks. Allocation of the cost among the claims purchased from a particular liquidator was impractical. Held, no profit was realized on the claims purchased from a particular liquidator until the cost of those claims was recovered.

3. The petitioner corporation purchased cashier's checks in 1945 which it sent to its agent in Chicago to be used for the payment of real estate taxes. The checks were not turned over to the local tax officials, but were returned to the corporation in a subsequent year. Held, as a cash basis taxpayer, the corporation was not entitled to a deduction for taxes paid.

Respondent determined deficiencies in the tax of the petitioners and additions to tax as follows:

+------------------------------------------------+ ¦United Mercantile Agencies, Inc. ¦ +------------------------------------------------¦ ¦ ¦ ¦Addition to tax ¦ +------+-----------------------+-----------------¦ ¦Year ¦Income tax deficiency ¦Sec. 293 (b) ¦ +------+-----------------------+-----------------¦ ¦1942 ¦$1,532.60 ¦$807.69 ¦ +------+-----------------------+-----------------¦ ¦1943 ¦ ¦78.27 ¦ +------+-----------------------+-----------------¦ ¦1944 ¦ ¦628.08 ¦ +------+-----------------------+-----------------¦ ¦1945 ¦ ¦1,071.92 ¦ +------+-----------------------+-----------------¦ ¦1946 ¦9,522.39 ¦4,761.20 ¦ +------+-----------------------+-----------------¦ ¦ ¦ ¦ ¦ +------------------------------------------------+

Declared value excess-profits tax deficiency 1942 $4,395.83 2,197.92 1943 7,602.00 3,834.00 1944 8,776.92 4,592.25 1945 5,408.85 3,548.91 1946

Excess profits tax deficiency 1942 $33,157.82 16,578.91 1943 54,722.31 27,550.26 1944 59,340.55 32,093.55 1945 35,034.58 25,377.51 1946

F. W. Drybrough

Income tax deficiency 1942 $20,994.83 10,497.42 1943 17,194.94 8,004.57 1944 70,294.45 35,147.23 1945 38,287.68 19,143.84 1946 24,929.67 14,464.84

L. W. Simpson

Income tax deficiency 1942 $5,643.25 2,821.63 1943 13,557.09 6,472.94 1944 10,404.75 5,202.38 1945 8,544.95 4,272.48 1946 5,448.69 2,724.35

The foregoing amounts are those set forth in the statutory notices of deficiency. In addition thereto respondent by motion duly made and granted has made claim for increased deficiencies in the case of F. W. Drybrough, Docket No. 40029, and in the case of L. W. Simpson, Docket No. 40030.

The proceedings were consolidated for hearing and opinion. The issues in controversy are as follows:

1. Whether respondent correctly determined that funds taken from the incoming mail basket of the corporate petitioner by its principal stockholders and officers were income to the corporation and that the corporation is not entitled to an offsetting ‘embezzlement’ loss under section 23(f) of the 1939 Code;

2. Whether respondent correctly determined that the diverted funds were taxable as dividends to the officer-stockholders receiving them;

3. Whether a cash basis corporation may deduct accrued but unpaid Federal taxes in determining the amount of its earnings and profits;

4. Whether the respondent correctly determined that the corporate and individual petitioners were liable for additions to tax because of fraud under section 293(b) of the 1939 Code;

5. Whether as to any of the petitioners, any of the taxable years involved are barred by the statute of limitations;

6. Whether respondent was correct in increasing the corporate petitioner's taxable income because receipts from a mixed aggregate of claims purchased from the liquidators of insolvent banks were first applied to a recovery of cost before reporting any profit; and

7. Whether respondent correctly determined that the corporate petitioner was not entitled in 1945 to a deduction for real estate taxes not actually satisfied until 1947.

FINDINGS OF FACT.

The stipulated facts are so found. United Mercantile Agencies, Incorporated (hereinafter referred to as United), is a Kentucky corporation with its offices in Louisville, Kentucky. F. W. Drybrough (hereinafter referred to as Drybrough), and L. N. Simpson (hereinafter referred to as Simpson), are individuals residing in Louisville, Kentucky. All of the petitioners kept their books and filed their Federal tax returns on a cash receipts and disbursements basis. Their returns in each of the taxable years were filed with the collector of internal revenue for the district of Kentucky.

United was organized in 1917 by Drybrough to engage in the business of conducting a collection and mercantile agency. The entire capital contribution of $1,500 was made by Drybrough. Marion S. McHenry, who married Drybrough in 1919 and is hereinafter referred to as Drybrough's wife, was issued 5 per cent of the original stock. She was elected secretary of the corporation and has continuously held that office. Until 1933 she worked for United as a salaried officer, but thereafter she took no active interest in the management or affairs of the corporation.

During the taxable years involved Simpson, Drybrough, and the latter's wife were the directors of the corporation. The corporate officers were Drybrough, president, Simpson, vice president and treasurer, and Drybrough's wife, secretary. The common stock was held 55 per cent by Drybrough, 25 per cent by Simpson, and 20 per cent by Drybrough's wife. Simpson's stock had all been transferred to him by Drybrough at various times prior to 1941 in recognition of his services to the corporation or had been received as a stock dividend. The stock held by Drybrough's wife represented her original holding, stock received as a dividend, and shares which her husband had given her in 1935. There were also 222 shares of outstanding preferred stock. Drybrough owned 187 shares and Simpson owned 35 shares.

United declared and paid cash dividends on its common stock during the 1930's, but no dividend on common stock was formally declared subsequent to 1938. United paid a small dividend on its preferred stock in 1941 and 1942 and paid a 6 per cent dividend on its preferred stock in 1944, 1945, and 1946.

During the taxable years involved Drybrough managed and conducted all of his wife's business affairs. He had in his possession blank, signed, stock transfer forms which gave him the power to sell her corporate stock. Her corporate stock was kept in a safety-deposit box which was in their joint names. Drybrough collected all income on his wife's business properties. He could draw checks on her business bank account. She took no active part in the management of United and expected her husband to act on her behalf in all matters concerning the corporation. The stock in United owned by Drybrough's wife was controlled by Drybrough.

When mail was received by United in the years involved it was placed in the mail basket of the receptionist. Included among the mail would be checks payable on claims which the corporation had purchased and checks for fees on collections for others. In each of the taxable years Drybrough and Simpson from time to time removed checks from the mail basket, endorsed them or had them endorsed, and cashed the checks at the bank. Checks in excess of $500, which by custom were placed upon the desk of Simpson by the receptionist, were similarly endorsed and cashed. Checks taken by these officers for cashing in the manner stated above were not reflected in any manner upon the accounting records of United nor were they at any time on deposit in the bank to the credit of United. Generally the checks taken represented final collections on purchased assets. The proceeds of the cashed checks were divided in the ratio of 75 per cent to Drybrough and 25 per cent to Simpson.

The aggregate amounts in checks taken by Drybrough and Simpson, representing collections, fees, and miscellaneous items, were as follows:

As adjusted per stipulation of the parties and prior to inclusion of the sums diverted.

The stipulated amounts taken total $240,085.96. The parties have stipulated elsewhere that the two individual petitioners paid to United ‘sums equal to the aggregate of cash realized from checks taken to wit: By F. W. Drybrough, $172,416.15, and by L. N. Simpson, $57,472.04, a total of $229,888.19.’ The parties also stipulated that the amounts taken by Drybrough and Simpson were $176,819.70, and $57,472.05, respectively, or a total of $234,291.75. The reconciliation of these figures will be left to the recomputation of the tax under Rule 50.

+----------------------------------------+ ¦Year¦Collections¦Fees ¦Miscellaneous¦ +----+-----------+---------+-------------¦ ¦1942¦$32,232.78 ¦$5,085.80¦ ¦ +----+-----------+---------+-------------¦ ¦1943¦53,758.97 ¦10,164.52¦$3,034.37 ¦ +----+-----------+---------+-------------¦ ¦1944¦54,649.81 ¦21,114.36¦1,856.80 ¦ +----+-----------+---------+-------------¦ ¦1945¦26,097.74 ¦5,221.66 ¦1,532.59 ¦ +----+-----------+---------+-------------¦ ¦1946¦22,909.31 ¦2,427.25 ¦ ¦ +----------------------------------------+

Only Drybrough and Simpson knew of their practice of taking checks from the incoming mail basket and cashing them for their own use. The practice was discovered by an internal revenue agent in 1946. Drybrough's wife learned of what her husband and Simpson had done in the summer of 1947.

The proceeds of the checks were divided between Drybrough and Simpson on the basis of stock ownership. Drybrough received 20 per cent of the diverted funds on behalf of his wife and in respect to her stock. Although she did not know of the distributions, this was not unusual as she had little knowledge of the income she was receiving on her business properties. And the failure to consult her before making the distributions was not abnormal as she had not taken an active part or interest in the affairs of the business for many years and her positions as an officer and director were strictly nominal. Drybrough and Simpson did not intend to embezzle from United.

The accumulated earnings and profits of United at the end of each of the taxable years involved were as follows:

+------------------------------+ ¦December 31 ¦Per books 1 ¦ +-------------+----------------¦ ¦1942 ¦$29,557.97 ¦ +-------------+----------------¦ ¦1943 ¦43,939.69 ¦ +-------------+----------------¦ ¦1944 ¦58,991.90 ¦ +-------------+----------------¦ ¦1945 ¦70,349.25 ¦ +-------------+----------------¦ ¦1946 ¦139,235.59 ¦ +------------------------------+

United, Drybrough, and Simpson were indicted in the United States District Court for the Western District of Kentucky on March 13, 1950, and were jointly charged with knowingly and willfully attempting to defeat and evade income, declared value excess-profits, and excess profits taxes due and owing by the corporation to the United States for each of the years 1943 to 1946, inclusive, in violation of section 145(b) of the Internal Revenue Code of 1939. No indictments were sought against Drybrough and Simpson for evasion of their individual income tax obligations. Each of the defendants entered a plea of nolo contendere and each received a fine. Drybrough and Simpson were each also sentenced to a prison term of 1 year and a day, and were released on parole in November 1950.

In February 1951 Drybrough and Simpson returned to the corporation the full amount taken. At that time the internal revenue agent in charge was demanding from United taxes and addition to tax amounting in the aggregate to $342,614.32, exclusive of interest, and in respect to the years 1942 to 1946, inclusive. The taxes demanded in this connection were identical to those set forth in respondent's 90-day letter.

In February 1951, Simpson severed his connection with United and received for his stock in United shares in other corporations having a book value of $33,857.14.

The individual petitioners knew that if the diverted funds were included in the gross income of the corporation, the corporation would be liable for a tax of 95 per cent on those funds. They took the funds in order to evade the payment of this corporate tax. They also knew that to the extent of at least 5 per cent of the diverted funds they were taking money which would have been available for the payment of dividends. Each knew that at least part of the diverted funds received was taxable to him as income. In each of the taxable years involved at least part of the deficiency resulting from the failure to include the diverted funds on the respective tax returns of each of the petitioners was due to fraud with intent to evade tax.

In 1939 in order to supplement its income United began to purchase notes, claims, judgments, accounts, mortgages, and other indebtedness from the liquidators of insolvent commercial banks. Through its organization, which had been built up in its business as a collection agency, United was able to realize substantial amounts on the purchased claims. A number of years work was necessary, however, in order to collect to the extent possible. At the time the claims were purchased the extent of recovery was not known.

All of the sales were made under the supervision of the State court having charge of receivership proceedings where the assets of the bank were sold in bulk to the highest bidder. While the assets were sometimes offered individually or in small groups, United never purchased except in bulk. The assets or claims purchased in each instance consisted of hundreds or thousands of items. They were purchased at an aggregate or single price from the bank liquidator without any allocation of such price between the various items purchased or even between classes of items. Before making a purchase United would check to see whether the various debtors were listed in the telephone book, would go over a list of the items to be sold with the bank liquidator, and would have the benefit of competitive bids by others for individual items or groups of items. These and other considerations went into arriving at the top bid price which United was willing to offer.

In 1943 and subsequent years United purchased in bulk assets from the liquidators of the Irish-American Savings and Loan Association, Mechanics Savings and Loan Association, Commercial Trust Company of New Jersey, and East Rutherford Savings, Loan and Building Association. In 1943, 1944, and 1945 all recoveries on assets purchased from the liquidators of the aforementioned banks over and above expenses were applied first to the costs of the assets. Only after the cost of all assets or claims purchased from a particular liquidator had been recovered would United return any of the recoveries on those assets as profits. Respondent determined that all recoveries should be treated as partly a return of cost and partly profit. Accordingly, he determined that the profits on recoveries from the assets purchased from the liquidators of the aforementioned banks should be increased in the amounts of $1,000, $10,000, and $26,000 in 1943, 1944, and 1945, respectively.

United did not attempt to allocate its cost among the various items purchased from a particular liquidator. There was no proper. rational, or reasonably accurate basis for allocating the cost among the individual items purchased.

United received certain real estate in Illinois as one of the assets purchased from the liquidator of the Kimball Trust and Savings Bank. The property was subject to back taxes and United employed a real estate tax specialist, Simeon K. Markham, to clear its title to the land. At Markham's request United obtained from the National Bank of Louisville, Kentucky, cashier's checks in the amounts of $2,000, $2,175, and $375 for the purpose of paying the accrued taxes on the above described land. The checks were mailed to Markham by an official of United in December 1945. Delays were encountered by Markham in clearing the title and additional taxes accrued. In 1947 new checks were sent to Markham in the correct amounts and the original cashier's checks were returned to United. United surrendered the original cashier's checks and its account was credited in the amount of $4,550. United deducted the $4,550 as taxes paid on its 1945 return. Respondent disallowed the deduction.

Each of the petitioners filed the required tax returns for each of the taxable years involved within the time prescribed by law, and notice of deficiency was mailed to each of the petitioners on January 15, 1952. Drybrough signed waivers of the statute of limitations for the years 1943 to 1946, inclusive, and Simpson signed waivers of the statute of limitations for the years 1944 to 1946, inclusive, which were in effect on January 15, 1952. No waiver of the statute of limitations was signed by United.

OPINION.

BRUCE, Judge:

The two individual petitioners, Drybrough and Simpson, owned or controlled all of the outstanding stock of United, the corporate petitioner. During the taxable years involved the individual petitioners took more than $200,000 in checks from the corporation's incoming-mail basket. They cashed the checks and divided the proceeds in ratio to the amount of common stock owned or controlled by each. They thus caused the corporate income to be understated by the amount of the withdrawals, and no part of the amounts so received was reported on their individual income tax returns.

We have held time and again under circumstances similar to those here present that the diverted funds are taxable as income to the corporation and are taxable as dividends to the extent of earnings and profits to the officer-stockholders receiving them. Eugene Vassallo, 23 T.C. 656; Michael Potson, 22 T.C. 912; Bennett E. Meyers, 21 T.C. 331; Auerbach Shoe Co., 21 T.C. 191, affd. (C.A. 1) 216 F.2d 693; Jack M. Chesbro, 21 T.C. 129 (on appeal (C.A. 2). See also Currier v. United States, (C.A. 1) 166 F.2d 346. Petitioners argue that the above line of cases is distinguishable because there all of the stockholders participated in the withdrawal of funds from the corporation while here Drybrough's wife, who owned 20 per cent of the outstanding stock, was not even aware of the withdrawals until after the close of the taxable years involved. They argue that this converts the diversion of funds into a wrongful taking amounting to an embezzlement. United contends that, as the checks were taken by Drybrough and Simpson acting as embezzlers rather than as agents of the corporation, the checks were not ‘received’ by the corporation and, therefore, as a cash basis taxpayer, it did not realize any taxable income. In the alternative United contends that, if the checks were ‘received,‘ it sustained an offsetting ‘embezzlement’ loss deductible under section 23(f) of the 1939 Code, citing Summerill Tubing Co., 36 B.T.A. 347. The individual petitioners contend that they are not taxable on ‘embezzled’ funds, citing Commissioner v. Wilcox, 327 U.S. 404.

SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(f) LOSSES BY CORPORATIONS.— In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.

Petitioners' contentions are without merit. Under the circumstances present in the instant case, the ownership of stock by Drybrough's wife did not convert what would normally be considered a corporate distribution into an embezzlement of funds for tax purposes. The evidence establishes that Drybrough handled all of his wife's business affairs, including the collection of income on her business properties. He had in his possession blank, signed, stock transfer forms which gave him the power to sell her corporate stock. He could draw checks on her business bank account. Drybrough's wife took no active interest in the affairs of United and her positions as director and secretary of the corporation were strictly nominal. We are convinced that the individual petitioners were not in the habit of consulting Drybrough's wife concerning corporate affairs and that each was of the opinion that Drybrough had full power to act and receive income on his wife's behalf. It is also evident that a part of the distribution of diverted funds to Drybrough was made on his wife's stock and that neither of the individual petitioners thought that they were infringing upon her rights as a stockholder by making a distribution without her consent or knowledge. Practically speaking the transactions represented the receipt of checks by the corporation (cf. Auerbach Shoe Co., supra), the endorsement and cashing of the checks by the corporation's principal officers, and the distribution of the money to the stockholders in proportion to their stock holdings (cf. Jack M. Chesbro, supra).

Summerill Tubing Co., supra, is clearly distinguishable. There corporate funds were taken by the corporation's president to the exclusion of minority and preferred stockholders. Here United did not sustain a realized loss by the surreptitious, but pro rata, distribution of its corporate funds. Furthermore the individual petitioners certainly had sufficient ‘claim of right’ to their pro rata share of the diverted funds to be taxable thereon. W. L. Kann, 18 T.C. 1032, affd. (C.A. 3) 210 F.2d 247, certiorari denied 347 U.S. 967. Cf. Healy v. Commissioner, 345 U.S. 278; Currier v. United States, supra.

Bearing in mind the principles of corporate entity, the actions of the individual petitioners may possibly, under Kentucky statutes, have technically amounted to embezzlement. So also would the actions of a sole stockholder who pocketed corporate money without the formality of declaring dividends. To allow the corporation and its stockholders to escape taxation under such circumstances because the distributions are technically illegal would make a mockery of the internal revenue laws. Cf. George M. Still, Inc., 19 T.C. 1072, affd. (C.A. 2) 218 F.2d 639. Under petitioners' theory the stockholders could escape both corporate and individual taxes by the surreptitious diversion of corporate funds to their own use, and then, if discovered, by claiming embezzlement satisfy all civil liability for taxes by returning the funds to the corporation and including them in the income of the corporation in the year of discovery. To borrow the language of the Court of Appeals in W. L. Kann v. Commissioner, (C.A. 3) 210 F.2d 247, at p. 251: ‘Such local law concept of embezzlement, while it may be useful to deter those in control of a corporation from defrauding creditors and minority stockholders, should not, in our opinion, be used as a vehicle for tax avoidance, absent a clear mandate to the contrary.’

The individual petitioners contend that in any event, if we sustain the tax liabilities of United as determined by respondent, the distributions of the diverted funds were not dividends within the purview of section 115(a) of the 1939 Code. These tax liabilities, they argue, wipe out all accumulated and current earnings and profits in each of the taxable years involved. Relying on such cases as Wm. J. Lemp Brewing Co., 18 T.C. 586, holding that a cash basis personal holding company may deduct accrued taxes under section 505(a)(1) of the 1939 Code in computing its ‘Subchapter A Net Income,‘ and J. Warren Leach, 21 T.C. 70, holding that liability for taxes must be considered in determining insolvency in transferee cases, they assert that accrued but unpaid taxes should be deducted in determining the earnings and profits of a cash basis corporation.

SEC. 115. DISTRIBUTIONS BY CORPORATIONS.(a) DEFINITION OF DIVIDEND.— The term ‘dividend’ when used in this chapter * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or 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. * * *

A similar argument was rejected by this Court in Paulina Dupont Dean, 9 T.C. 256 (appeal dismissed (C.A. 3)). Following Helvering v. Alworth Trust, 136 F.2d 812, certiorari denied 320 U.S. 784, reversing 46 B.T.A. 1045, we held that accrued but unpaid Federal taxes for the current and past years should not be considered in the case of a cash basis corporation in determining the amount of earnings and profits available for the payment of dividends. We distinguished the personal holding company cases which are based upon the premise that section 505(a)(1) specifically allows the deduction of accrued taxes even by a cash basis taxpayer. Section 102 cases (cf. Harry M. Stevens, Inc. v. Johnson, 115 F.Supp. 310) are distinguishable for the same reason. Similarly, the fact that unpaid and even previously unknown tax liabilities are to be considered in determining insolvency in transferee cases, is no authority for considering such liabilities in determining the amount of earnings and profits available for the payment of dividends. Therefore, as unpaid taxes should be disregarded, both the accumulated and current earnings and profits of United exceeded the amount of the distributions in each of the taxable years involved. Hence, the full amounts of the distributions are taxable as dividends.

Drybrough and Simpson received 75 and 25 per cent of the diverted funds, respectively. Respondent determined that the full amount received by Drybrough was taxable as his dividend income. Drybrough contends that in no event should he be taxable on more than 55 per cent of diverted funds as that was the extent of his stock ownership. With the latter contention we agree. Normally a stockholder is taxable on the amount received regardless of whether the distribution is proportionate to his stock holding. Ben R. Meyer, 45 B.T.A. 228. But in the instant case Drybrough received 20 per cent of the diverted funds on behalf of his wife, and to that extent the amount he received was not his income. A. M. Johnson, 32 B.T.A. 156.

We have found that in each of the taxable years involved at least part of the deficiency of each of the petitioners was due to fraud with intent to evade tax. We think our finding is supported by clear and convincing evidence.

United does not contest its liability for additions to tax because of fraud in the event we hold that the failure to include the diverted funds in its reported gross income resulted in deficiencies. The individual petitioners contend, however, that even if we hold that the distributions were taxable to them as ‘constructive dividends,‘ they did not know they had received taxable income. They readily admit that they intended to evade corporate taxes and each entered a plea of nolo contendere when so charged in the prior criminal proceeding. It is their contention that they did not intend to evade their personal income taxes.

We need not decide whether a taxpayer is liable for additions to his individual tax where at least part of his personal deficiency is a result of his fraudulent scheme to evade corporate tax. Nor do we need to determine whether the individual petitioners were aware that the full amount of the distributions in question were taxable as dividends; although Simpson's testimony, that he did not report his share of the diverted funds because he did not wish to reveal the wrongful evasion of corporate tax, indicates that he, at least, knew that these funds were taxable to him.

Both of the individual petitioners testified that they did not think the diverted funds were taxable as dividends. The primary reason given was that, if the diverted funds had been included in the corporate income, the corporation would have paid 95 per cent of the funds to the Government in taxes, which would have prevented it from paying a dividend in the amount received. However, it is evident from the petitioners' testimony that, to the extent of at least 5 per cent of the diverted funds, they knew they were taking money which would have been available for the payment of dividends.

Petitioners argue that we cannot attribute to them knowledge of having received a dividend where no dividends were formally declared and when the declaration of a dividend would have endangered the necessary borrowing capacity of the corporation. We do not believe the individual petitioners were so naive as to think that taxability depends upon the wisdom of making the distribution or that stockholders can escape taxation on a corporate distribution by the simple expedient of failing to formally declare a dividend. Both were successful business men with many years experience. Despite their self-serving denials, we are convinced each knew that at least part of the distributions was taxable as income to him. In order to sustain the additions to tax only part of the deficiency must be due to fraud with intent to evade tax. Bennett E. Meyers, supra. Accordingly, the statute of limitations has not run as to any of the petitioners on any of the years involved, and respondent properly determined that each petitioner was liable for 50 per cent additions to tax under section 293(b) of the 1939 Code.

SEC. 293. ADDITIONS TO THE TAX IN CASE OF DEFICIENCY.(b) FRAUD.— If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3612(d)(2).

Petitioners have advanced a number of variations to the arguments set forth herein, with respect to their liability for tax on the diverted funds. In order not to unduly burden this opinion we think it is sufficient to say that these arguments have been carefully considered and in our opinion are without merit.

The next issue for decision is whether United properly reported the proceeds from collections on assets purchased from the liquidators of insolvent commercial banks. The assets in question were acquired in lump-sum purchases from the liquidators of four insolvent banks, and in each instance consisted of hundreds of items of various kinds such as notes, judgments, accounts, mortgages, and other evidences of debt. United did not attempt to allocate its cost among the various items. In each case receipts in excess of expenses were treated as a return of capital until the cost of all of the items purchased from a particular liquidator was recovered. Thereafter, receipts in excess of expenses were treated as profits. Respondent determined that all receipts should be treated as partly a return of cost and partly profit.

In William T. Piper, 5 T.C. 1104, 1109, we stated the established rule for determining profits in this type of situation. We there said: ‘where a mixed aggregate of assets is acquired in one transaction, the total purchase price shall be fairly apportioned between each class so as to determine profit or loss on subsequent sale of specific assets in the group. If such apportionment be impractical, no profit shall be realized until the cost shall have been recovered out of the proceeds of sales.’ Cf. Inaja Land Co., Ltd., 9 T.C. 727; Nathan Blum, 5 T.C. 702; Warren v. Commissioner, (C.A. 1) 193 F.2d 996, reversing on other grounds 16 T.C. 563.

In the instant case apportionment would be wholly impracticable. In each purchase United acquired hundreds of differing items, each having a highly speculative value of any value at all. Only years of attempting to collect on the various items would disclose which were worthless, the amount collectible on others, and whether the over-all purchase would result in a gain or loss.

Respondent argues that as United's bid was influenced by whether the individual debtors were listed in the telephone book, by competitive bids which were made either on individual items or groups of individual items, and by information furnished by the liquidator concerning various items, there was a practical basis for allocation. We disagree. While this information was useful in determining an aggregate bid price, where the number of items involved would tend to balance out errors in estimates, it would not constitute a proper, rational, or reasonably accurate basis for allocating to each individual item a part of the cost. Under the circumstances, we think United properly recovered its cost before reporting a profit. Webster Atwell, 17 T.C. 1374 (appeal dismissed (C.A. 5)); Inaja Land Co., Ltd., supra; William T. Piper, supra; John D. Fackler, 39 B.T.A. 395.

The final issue is whether United was entitled to a $4,550 deduction in 1945 for taxes paid. In December of that year United sent three cashier's checks totaling $4,550 to a real estate tax specialist, Markham, whom United had employed to clear its title to certain land in Illinois. The taxes were paid with other checks in 1947. The original cashier's checks were returned to United by Markham. They were surrendered at the bank on July 23, 1947, and United's account was credited in the amount of $4,550.

United as a cash basis taxpayer is entitled to deduct only taxes actually paid. Arthur T. Galt, 31 B.T.A. 930. Obtaining the cashier's checks did not constitute payment. Nor did United make payment by sending the checks to Markham, its agent. Arthur T. Galt, supra. Therefore, as Markham did not turn the checks over to the local tax officials (cf. Lillian Bacon Glassell, 12 T.C. 232), United is not entitled to the claimed deduction.

Decisions will be entered under Rule 50.

WHEREAS, in the event of the death of the said Lionel Weil, the other four general partners will have to arrange for the purchase of his interest in the partnership, as provided for in the partnership agreement and will desire to be able to do so without the necessity of liquidation, and

WHEREAS, said four general partners, Abram Weil, Henry Weil, Lionel S. Weil and G. Frank Seymour desire to be able at that time to pay at least a portion of the purchase price in cash, in lieu of having to give notes for the entire amount, and for that reason have obtained and are now carrying certain policies of insurance on the life of the said Lionel Weil * * *

3. The value of the interest of the said Lionel Weil in the partnership firm of H. WEIL AND BROTHERS, and the price to be paid therefor by said four other general partners shall be that as set forth in the Partnership Agreement in force between the partners at the time of his death and it is understood and agreed that no portion of his interest in said partnership other than in the ordinary conduct of the business shall be disposed of during the lifetime, except by mutual consent of all of the parties hereto.

4. The net proceeds of insurance on Lionel Weil's life, collected by the owners of the policies, shall be paid by them to the estate of Lionel Weil and credited on the price to be paid by the surviving partners for the said Lionel Weil's interest in the business. If such proceeds shall equal in amount the value of his interest in the business, then the amount received by the owners shall be paid to the estate of the said Lionel Weil as the value of such interest; if such proceeds exceed in amount the value of his interest in the business, then the owners shall pay unto his estate only the value of the deceased's interest; and if the proceeds of insurance shall be less than the value of of the said interest of the said Lionel Weil, then payment of the balance of said interest shall be effected in accordance with the terms of the Partnership Agreement in force at the time of the death of the said Lionel Weil.

6. In the event of the death of the said Lionel Weil, the aforesaid owners of the Insurance policies on his life (Abram Weil, Henry Weil, Lionel S. Weil and G. Frank Seymour), hereby mutually agree among themselves that Lionel S. Weil, if he elects to do so, may take as much as $100,000.00 in value, or any portion thereof, of the interest purchased by them from the Lionel Weil Estate and that G. Frank Seymour, if he elects to do so, may take as much as $25,000.00 in value, or any portion thereof, of said interest, provided the right to purchase is exercised within ninety days after the death of said Lionel Weil, and provided they arrange individually for the payment of the purchase price of the interest purchased by them or either of them.

It is further agreed by all of the parties hereto that in the event the said Lionel S. Weil and/or G. Frank Seymour, shall exercise said right to make said purchase, the estate of Lionel Weil shall accept unsecured notes of the said Lionel S. Weil and of the said G. Frank Seymour for any balance of the purchase price after applying all cash available to them at that time and give full credit on the purchase price for the amount evidenced by said notes. Any such notes so given shall be payable in equal annual installments over a period of ten years and shall bear interest in accordance with the rates set forth in the partnership agreement then in force; and Lionel Weil hereby agrees and binds himself, his heirs, executors and administrators to accept such notes as part payment on the purchase price of his interest in lieu of notes to that extent signed by the other surviving general partners.

7. Lionel Weil is a party to this agreement and executes it solely for the purpose of binding his heirs, executors and administrators to accept the notes provided for in the preceding paragraph as a part of the purchase price for his interest in the partnership of H. Weil & Brothers after his death and for the purpose of agreeing and assenting to the provisions contained in paragraph three of this agreement.

In the decedent's last will and testament a trust was created under Item IV. Lionel S. Weil, the decedent's son, received one equal share of the remainder of the corpus after the trustees had fulfilled certain other obligations. In paragraph 1 and 2 of Item VII, the trustees were instructed as to the manner in which the shares should be paid. However, it was provided in paragraph 3 of Item VII that:

If * * * my said son, Lionel S. Weil shall exercise his option of purchasing all or part of my interest owned by me at the time of my death, in the a partnership firm of H. Weil & Bros., (and it is my wish and hope that he will do so), then and in such event, my Executors hereinafter named are authorized, empowered and directed to accept his unsecured notes for such part of the purchase price as is not paid in cash * * *. In such event, no payments shall be made to my said son, Lionel S. Weil, either by my Executors or by the Trustees under this item of my will, but all sums accruing to him will be applied as credits on his said notes * * *.

On July 12, 1946, the decedent executed a codicil to his last will and testament. In the codicil, paragraph 3 of Item VII was revoked and in lieu thereof, it was provided.

If, however, my said son Lionel S. Weil shall purchase from the other surviving partners in the partnership firm of H. Weil & Brothers a portion of the interest that I own in said partnership at the time of my death (and it is my wish and hope that he will purchase up to $100,000.00 of said interest), then and in such event my Executors are authorized, empowered and directed to accept his unsecured notes for such part of the purchase price as is not paid in cash, said notes to be payable over a period of ten years and bear interest at such rate as is provided for by the terms of the partnership agreement in force at the time of my death. In such event, no payment shall be made to my said son, Lionel S. Weil, either by my Executors or the Trustees under this Item of my will, but all sums accruing to him will be applied as credits on his said notes until his said notes are paid in full. Furthermore, if at the time the Trust provided for in Item IV, sub-section (d) is set up by the Trustees, his indebtedness to my estate exceeds the amount to be set aside for him in trust, the Trustees in lieu of setting up a trust for him, are authorized and empowered to credit the last maturing notes, in their reverse order, with the amount which would be allotted to him as a portion of my estate, without setting up any trust for him; or if his said notes which are unpaid do not amount to his full part of my estate, such amount of said notes as may be unpaid, will be set up by the Trustees as a part of the trust fund provided for him.

Decedent's investment account on the books of the partnership as of December 31, 1947, reflected a balance of $172,209.90, which amount was returned by his executors as the value of decedent's interest in the partnership on the date of his death. The fair market value of the assets owned by the partnership on that date and on the date of decedent's death was $538,866.17 greater than the value reflected by the books of the partnership. The assets of the partnership were always carried on its books at cost, less accrued depreciation.

On December 31, 1947, and on the date of decedent's death, his investment account was 38.128 per cent of the total investment account of all the general partners. His interest in the profits of the business was 27 1/2 per cent.

After decedent's death, his estate received $172,209.90, plus the amount of his drawing account balance on the date of his death, from the surviving partners in cash or in notes payable over a period of 10 years. The notes issued to the estate aggregated $161,500.

Lionel S. Weil agreed to take over individually $50,000 of notes due to the estate of decedent and the remaining notes were apportioned among the general partners as additional capital contributions on the same partnership ratio basis as their investments.

Decedent was the senior member of a partnership conducting a general merchandising and farm supply business dating back to 1865. Through the years, there were some 11 changes in membership because of the death of a partner or the admission of a new member. From the year 1910, the date of the earliest partnership agreement known to have been in writing, there appears a consistent policy of fixing contractually the amount to be paid the estate of a deceased partner by the surviving members of the firm for the interest of that deceased partner.

The partnership agreement in effect at decedent's death on February 11, 1948, was executed July 29, 1943. Under its provisions and the provisions of the purchase agreement, the surviving partners paid to decedent's estate an amount based on the book value of his share of the assets of the partnership. The parties are agreed that the fair market value of the partnership assets was substantially in excess of the book value.

About 19 months before his death, decedent and his partners entered into a further agreement which provided, among other things, that decedent would not dispose of his partnership interest without the consent of the other members.

We are asked to decide whether the value of decedent's interest in the partnership for purposes of computing the gross estate is limited to the amount provided for and paid under the partnership and purchase agreements. We are of the opinion that under the circumstances here present the valuation was so limited and that respondent was not justified in including in the gross estate an amount based on the fair market value of the decedent's partnership interest, unencumbered by the agreements.

It now seems well established that the value of property may be limited for estate tax purposes by an enforceable agreement which fixes the price to be paid therefor, and where the seller if he desires to sell during his lifetime can receive only the price fixed by the contract and at his death his estate can receive only the price theretofore agreed on. Estate of Albert L. Salt, 17 T.C. 92; Lomb v. Sugden, 82 F.2d 166; Wilson v. Bowers, 57 F.2d 682.

On the other hand, it has been held where the agreement made by the decedent and the prospective purchaser of his property fixed the price to be received therefor by his estate at the time of his death, but carried no restriction on the decedent's right to dispose of his property at the best price he could get during his lifetime, the property owned by decedent at the time of his death would be included as a part of his estate at its then fair market value. City Bank Farmers Trust Co., Executor, 23 B.T.A. 663; Claire Giannini Hoffman, 2 T.C. 1160; Estate of George Marshall Trammell, 18 T.C. 662.

If the only agreements with which we are concerned were the partnership and purchase agreements which provided the manner and the price to be paid by the surviving partners for a deceased partner's interest at the time of his death and which agreements contained no restriction on the right of a partner to dispose of his interest in the partnership during his lifetime, it may well be that decedent's interest in this partnership would be includible in his estate at its full fair market value. But in this case we have a further contract, the so-called insurance contract, which must be read as supplemental to, and in connection with, the partnership and purchase agreements fixing the price to be paid to decedent's estate by the surviving partners. Under the partnership and purchase agreements, payment could be made therefor at the price fixed in unsecured notes extending over a period of 10 years. In the insurance agreement, it was provided that the net proceeds of the insurance on decedent's life collected by the other partners who were the owners of the policies were to be paid by them to the estate of the decedent and credited on the price to be paid by the surviving partners for the decedent's interest in the business. We thus have agreements whereby the surviving partners agreed to pay decedent's estate in a ‘medium’ different from that provided for in the partnership and purchase agreements (viz, partly in cash) as well as at an earlier date than required by the partnership and purchase agreements. We think that this promise to pay partly in cash instead of all in notes and at an earlier time constitutes a good and valuable consideration passing from the surviving partners to the decedent and is sufficient to support his promise not to sell during his lifetime his interest in the partnership. Williston on Contracts, revised edition, volume 1, section 121, states the rule as follows:

If a debtor does something more or different in character from that which he was legally bound to do, this is sufficient consideration for a promise. Accordingly if a debtor pays his debt or part of it before it is due, or in a medium of payment different from that for which he was bound, or at a different place, or to someone other than the creditor, the consideration is sufficient to support a promise by the creditor.

A long series of decisions has established the rule that a benefit to the promisor or a detriment to the promisee is a sufficient consideration for a contract and when a good or valid consideration for an agreement exists the law will not weigh the quantum thereof. ‘The immediate settlement of an obligation, the payment of which may be legally delayed for a considerable period of time, is a benefit to the claimant’ and constitutes a valuable consideration. Rusconi v. California Fruit Exchange, 100 Cal.App.Dec. 750, 281 Pac. 84. To constitute a sufficient consideration for a contract there need be no benefit to the promisor where there is detriment to the promisee. Petroleum Refractionating Corp. v. Kendrick Oil Co., 65 F.2d 997. The holdings of the Supreme Court of North Carolina are in harmony with this view of the law. Exum v. Lynch, 188 N.C. 392, 125 S.E. 15; Grubb v. Ford Motor Co., 209 N.C. 88, 182 S.E. 730.

The foregoing authorities, we think, are a sufficient answer to respondent's contention that the insurance agreement was not based on a good and valid consideration sufficient to support decedent's promise not to sell his interest in the partnership during his lifetime. We are satisfied that the restriction not to sell, when coupled with the agreement to buy decedent's interest set out in the partnership and purchase agreements, had the effect of limiting completely the value of decedent's interest in the partnership. Estate of Albert L. Salt, supra; Lomb v. Sugden, supra; Wilson v. Bowers, supra.

Respondent argues in the alternative that the full value of decedent's interest in the partnership is taxable to his estate under section 811(c) of the Internal Revenue Code of 1939 as a transfer made in contemplation of death, as a transfer in which the right to the income from the property has been retained for life, or as a transfer to take effect at or after death. Section 811(a) of the 1939 Code provides for the inclusion of property owned by decedent at the time of his death. Section 811(c) provides for the inclusion in the estate of property transferred by decedent in his lifetime under specified circumstances. But decedent did not transfer his interest in the partnership during his lifetime. An agreement to sell is not an agreement of sale, Lucas v. North Texas Lumber Co., 281 U.S. 11. At the time the agreements were made, it was entirely possible that decedent's interest in the partnership would never pass to the other partners. He might well have survived them and acquired their interests rather than his interest being disposed of to them. Nor do we find in this case any evidence of a tax avoidance scheme. Similar contracts among the partners had appeared as early as 1910. Absent a transfer by decedent in his lifetime, section 811(c) has no application and decedent's interest in the partnership at the time of his death is to be included in the estate under section 811(a). This we have so determined but, for the reasons heretofore given, only at the value that his estate may realize by reason of valid contracts entered into by decedent during his lifetime. Cf. May v. McGowan, 97 F.Supp. 326, affd. 194 F.2d 396.

Reviewed by the Court.

Decision will be entered under Rule 50.