Sebago Lumber Co. v. Commissioner

Sebago Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent Sebago Lumber Co. v. Commissioner Docket Nos. 49686, 53383 United States Tax Court 26 T.C. 1070; 1956 U.S. Tax Ct. LEXIS 90; September 19, 1956, Filed *90 Decisions will be entered under Rule 50. Petitioner was incorporated in 1913. During the taxable years 1947 through 1951 stock was outstanding, bylaws were in effect, directors held office, meetings were held and minutes kept, corporate records were maintained, and corporate income tax returns were filed. Robert R. Jordan owned 98 of its 100 shares of stock. Two shares were in the names of its other directors. Dividends were never formally declared, but Jordan distributed all petitioner's income to himself. Petitioner's income from 1947 through 1951 consisted solely of dividends, interest, rents, and capital gains. Jordan filed an individual income tax return for 1948 but not for the years prior to that and not for the 3 years subsequent to that. Held: (1) Petitioner is a corporation and is liable for corporation taxes. (2) Petitioner is a personal holding company. (3) Petitioner's distributions to Jordan constituted dividends and it is entitled to a dividends paid credit for such distributions. Armand O. LeBlanc, Esq., for the petitioner. Jack H. Calechman, Esq., for the respondent. Tietjens, Judge. TIETJENS *1070 The Commissioner determined deficiencies and an addition to tax in petitioner's income tax as follows: Personal Addition Year Income tax holding company to tax surtax — 1947 — $ 9,455.00 $ 2,363.75 — 1948 — $ 188.15 9,220.80 — 1949 — 225.22 11,164.82 — 1950 — 537.90 13,052.53 — 1951 — 741.29 14,410.96 The issues to be decided are: (1) Whether petitioner should be taxed as a corporation; (2) whether petitioner is a personal holding company; (3) whether petitioner was liable for personal holding company surtaxes in the years in question; and (4) whether the addition to tax for 1947 was proper. Petitioner filed its corporation tax returns for the years in question with the collector of internal revenue for the district of Maine. FINDINGS OF FACT. Some of the facts are stipulated. They are found as stipulated and are incorporated herein by this reference. Petitioner is *92 a corporation organized under the laws of the State of Maine in the year 1913. Its principal office is located in Scarborough, Maine. It has 100 shares of authorized common stock. Ever since its organization and during the years in question, Robert R. *1071 Jordan was the president and treasurer of petitioner corporation and was the owner of 98 shares of its common stock. The other 2 shares of stock were in the names of Roscoe T. Holt and Nunzi Napolitano for the sole purpose of qualifying them as directors pursuant to the State laws. These shares were endorsed in blank and were in the custody of Jordan. Holt, Napolitano, and Jordan were the corporation's three directors during the years in question. The corporation held meetings occasionally and minutes of them were kept. The corporation records were kept by Jordan, who exercised complete control over the corporation and treated and used its funds as his own. Although a graduate of Massachusetts Institute of Technology, Jordan has never made any effort to understand the Federal tax laws and has not sought advice with reference to them except when "in trouble" with the taxing authorities. Petitioner's income for the years*93 in question consisted solely of income from dividends, rents, interest, and capital gains. All of petitioner's income was received by Jordan as petitioner's president and treasurer and was turned over to Jordan in his capacity as a stockholder and individual without the formality of declaring dividends. Jordan maintained corporate records and prepared the corporate income tax returns for the years in question without assistance. He also prepared, without assistance, petitioner's personal holding company returns for 1949 and 1951. Income reported in the petitioner's corporation income tax returns included both the petitioner's income and the personal income of Jordan, which in part was derived from many stocks owned by Jordan and which were in his name. Jordan filed an individual Federal income tax return for the year 1948. He did not file individual income tax returns for any years prior to 1948 or for any of the years 1949, 1950, and 1951. Jordan filed a claim for refund of income tax paid for the year 1948, his reason being that "Dividends in the amount of $ 6,371.00 reported on Form 1040 filed for 1948 were reported in error as same were included within dividends reported*94 in the return of Sebago Lumber Company, a personal holding company, for the year 1948." Jordan was unable to dispose of stocks owned by petitioner without approval of petitioner's board of directors. In 1943 a special meeting was held to authorize Jordan to buy and sell securities for petitioner and to borrow money for it. No corporate meetings were ever held for the purpose of declaring dividends and none were ever formally declared. Petitioner did not have a bank account during the years in question. Its funds were deposited in a bank account under Jordan's name. Jordan withdrew money from his bank account to pay petitioner's *1072 expenses. Jordan received a salary of $ 600 per year from petitioner for the years 1947 through 1951. As a result of certain proceedings instituted in 1948, petitioner agreed on April 16, 1949, to a personal holding company surtax liability for the year 1945. The personal holding company return for 1945 was prepared for petitioner by an attorney. Petitioner was a personal holding company during the years 1947 through 1951. The distributions by petitioner of all of its income to Jordan during the years 1947 through 1951 were dividends. OPINION. *95 The petitioner's first contention is that although it is a corporation in form, in truth and in fact it is Robert R. Jordan, an individual, and therefore not liable for any corporation income taxes. This position is untenable. The petitioner has operated as a corporation at substantially all times. It was formally incorporated, stock was issued, bylaws were adopted, directors were elected, minutes of meetings were kept, corporate records were maintained, and corporation income tax returns were filed. A close relationship between a corporation and its sole stockholder standing alone is no reason for disregarding the separate entities. See Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943). In view of these facts, we hold that petitioner was a corporation during the years in issue. The petitioner has not introduced any evidence relating to the deficiencies in income tax as determined by the Commissioner for the years 1948 through 1951 and hence we sustain the Commissioner's determinations for those years. The petitioner's second contention, that it is not a personal holding company, is without merit. The foundation of its argument is*96 that it was not a corporation but was Robert R. Jordan, an individual, and thus could not be a personal holding company. Since we hold that the petitioner was a corporation during the years in issue, petitioner's argument collapses. Petitioner unmistakably comes within the express language of the statute 1 and hence is a personal holding company. See Coshocton Securities Co., 26 T. C. 935. *97 The petitioner's third contention is that it is not liable for personal holding company surtaxes in the years in question and with this we *1073 agree. The personal holding company surtax applies only to "the undistributed subchapter A net income" of personal holding companies. In computing the undistributed subchapter A net income, the amount of the dividends paid credit must be subtracted from the subchapter A net income. In this case, the amount of the dividends paid credit is equal at least to the subchapter A net income since petitioner's entire income was distributed in dividends to Robert R. Jordan and hence there is no undistributed subchapter A net income and no personal holding company surtax. The Commissioner argues that petitioner paid no dividends at all during the years in issue. He points out that petitioner's board of directors never formally declared any dividends, that in 1948 petitioner agreed to a personal holding company surtax for the year 1945, and since Jordan did not dissolve or declare dividends after that, then he must not have intended that any distributions be made. He further argues that in view of the fact that Jordan did not file individual*98 income tax returns in 1947, 1949, 1950, and 1951 and that in the one year he did file, 1948, he claimed a refund because he included in his individual return dividends which had also been included in petitioner's return, then it must have been Jordan's election to incur no personal income tax liability but to have only the petitioner pay taxes. Jordan testified that none of the directors ever objected to his taking all the income; that the bylaws allowed him to do it, and it was his money since he was the "whole cheese"; that other than himself, there was nobody who received any dividends or interest; that he never bothered to declare dividends, but just took the money and recorded it in the books; that no one else was entitled to dividends; that all income was deposited in his personal bank account every week since the corporation didn't have one; that he prepared the corporation income tax returns himself, without help; that he included his own income with that of the corporation in its returns; that the Government never sent him individual tax return forms, so he didn't file such returns except in 1948; that he was never advised to file individual returns; that he had trouble with*99 some 1945 corporation taxes in 1948 and that a lawyer prepared a 1948 individual income tax return for him; that the Government would not accept the check he enclosed with the 1948 individual return and it was returned to him and so he did not file any more individual returns; that he never agreed to pay a personal holding company surtax on the corporation in 1945 though he concedes he might have signed the return; that the reason for signing was that he followed the advice of counsel to prevent the sale of petitioner's property at a public auction; that *1074 he was "cloudy" about what a personal holding company return was and that he wasn't a tax specialist. In view of this testimony and the other evidence it is apparent that petitioner distributed all of its income to Jordan as it was received and that these distributions constituted dividends even though none were formally declared. Corporate earnings received by a stockholder may be dividends even though no formal declaration is made. Paramount-Richards Theatres v. Commissioner, 153 F. 2d 602, 604 (C. A. 5, 1946), affirming a Tax Court Memorandum Opinion. On the facts we hold petitioner*100 is entitled to a dividends paid credit for the amounts distributed in computing undistributed subchapter A net income. As pointed out above, this credit is equal at least to the subchapter A net income with the result that there is no personal holding company surtax due. Our conclusion that petitioner is not liable for personal holding company surtaxes for the years in question renders moot the question of whether its failure to file such returns for those years was due to reasonable cause and was not due to willful neglect. Decisions will be entered under Rule 50. Footnotes 1. I. R. C. 1939. SEC. 501. DEFINITION OF PERSONAL HOLDING COMPANY. (a) General Rule. -- For the purposes of this subchapter and chapter 1, the term "personal holding company" means any corporation if -- (1) Gross income requirement. -- At least 80 per centum of its gross income for the taxable year is personal holding company income as defined in section 502; * * * and (2) Stock ownership requirement. -- At any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals.↩