Gifford v. Commissioner

ALBERT J. GIFFORD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. WILLIAM H. LELAND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. SUBBO NIKOLOFF, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Gifford v. Commissioner Docket Nos. 28010, 28011, 31823, 31921, 39279. United States Board of Tax Appeals 18 B.T.A. 795; 1930 BTA LEXIS 2588; January 14, 1930, Promulgated *2588 Held, that under the provisions of section 201 of the Revenue Acts of 1921 and 1924, the distributions here involved were taxable to the recipients as dividends, to the extent that payment was made from earnings of the corporation after the date of its organization. Merrill S. June, Esq., for the petitioners. Harold Allen, Esq., and W. R. Lansford, Esq., for the respondent. LANSDON *795 The respondent has asserted deficiencies in income taxes for the years 1922 and 1924, against William H. Leland in the respective amounts of $7,890.67 and $46,050.02; Subbo Nikoloff, in the respective amounts of $733.98 and $5,211.16; Albert J. Gifford for the year 1924 in the amount of $46,011.31. The only issue involved is whether certain distributions made by the Leland-Gifford Co., a corporation, in the years 1922 and 1924, were taxable as dividends upon their receipt by these petitioners, who were all the stockholders of such corporation. FINDINGS OF FACT. For a number of years prior to 1921, the petitioners were engaged in the business of manufacturing and selling metal working machinery and conducting a machinery business at Worcester, *2589 Mass., as a partnership under the name and style of Leland-Gifford Co., *796 in which the respective interests of the several partners were Albert J. Gifford five-twelfths, William H. Leland five-twelfths and Subbo Nikoloff two-twelfths. The business operations of the partnership were successful and prior to December 31, 1920, a large capital and surplus had been accumulated. In all the years in which the partnership was in operation the several partners each reported his distributive share of the partnership profits in his individual income-tax returns for the several years and paid the taxes thereon, whether such profits were distributed or not. On or about January 1, 1921, the three partners, under the provisions of chapter 156 as amended, of the General Laws of Massachusetts, as relating to business corporation, organized a Massachusetts corporation under the name of Leland-Gifford Co., hereinafter designated as the corporation, with its principal place of business at Worcester, Mass., and with authorized capital stock in the amount of $500,000, divided into 5,000 shares of the par value of $100 each. The subscriptions to such stock were for 2,000 shares by Leland, *2590 2,000 shares by Gifford, and 800 shares by Nikoloff, and were in proportion to the interests of such individuals in the former partnership. Upon the organization of the corporation capital stock of the par value of $480,000 was issued and paid for as follows: for real estate which included two mill buildings with fixtures and about 2 1/4 acres of land, 1,750 shares; for the machinery and equipment, 3,050 shares. The payment of the 4,800 shares of stock so issued was evidenced by a conveyance of the real estate and machinery to the corporation by Leland, Gifford, and Nikoloff. Upon the organization of the corporation in January, 1921, the partnership was dissolved, and the corporation from that date operated the business under the same name. The books of the partnership were continued and extended by the corporation. A capital account of $480,000 was set up on such corporate books, representing real estate and machinery of that value which had been paid in for shares. The other assets of the former partnership, such as merchandise, cash, accounts receivable, securities and the like, of the value of $861,876.48, taken over by the corporation, were entered on its books and treated*2591 as paid-in surplus and when needed were used in the business during the period here involved. No bill of sale of other formal conveyance of the assets so taken into the accounts of the corporation was ever executed to the corporation by the former partners. No notes evidencing the loan of such assets were given by the corporation, nor were the accounts of the stockholders ratably credited with the value of the assets treated as paid-in surplus. *797 On December 28, 1922, the directors, by formal vote, unanimously authorized the payment of $120,000 by the corporation to the stockholders, said resolution reading as follows: It was voted to distribute the sum of $120,000 as a partial distribution of the paid-in surplus belonging to the company, which surplus was paid in by the original stockholders to the corporation immediately after said corporation was formed; said sum to be distributed among the stockholders in proportion to the number of shares held by them. On January 31, 1924, the directors authorized another payment to the several stockholders, in the total amount of $480,000, and the resolution then adopted reads as follows: It was voted to withdraw the sum*2592 of $480,000 as a partial distribution of paid-in surplus belonging to the company, which surplus was paid in by the original stockholders to the corporation immediately after said corporation was formed, said sum to be distributed among the stockholders in proportion to the number of shares held by them. The vote was unanimous. On the books of the corporation these distributions were charged to a so-called surplus account and credited to the stockholders' accounts. The entries were respectively, December 28, 1922, and December 31, 1924. Neither of the three stockholders returned any part of such credits or payments received on account thereof in his individual income-tax returns for 1922 and 1924. Upon the audit of the personal income-tax returns of the several petitioners, the Commissioner determined that the amounts distributed as above set forth were dividends, and to the extent that they were paid out of current earnings available for such purpose were taxable to the respective petitioners in the years in which received, and determined the deficiencies now in controversy. The parties agree that the corporation sustained a net loss in its operations in the year 1921 in*2593 the amount of $61,360.21, and that for the years 1922, 1923, and 1924 it realized operating profits in the respective amounts of $266,616.97, $210,287.37, and $19,785.86. At December 31, 1922, the current earnings of the corporation were in excess of the amount of $120,000 which was distributed to the stockholders on that date. On December 31, 1924, the earnings of the corporation available for distribution as dividends amounted to $315,329.99. During the years here involved the corporation used considerable amounts of its surplus and earnings in the expansion of its business and in so doing purchased the stock of two other corporations and a parcel of land, all at a cost of $208,000. OPINION. LANSDON: The only question to be determined here is whether the distributions to stockholders of the corporation, voted and made as *798 set forth in our findings of fact, were dividends declared and paid by the Leland-Gifford Co., and, to the extent to which such payments were made from earnings, taxable to the petitioners in the several amounts asserted by the respondent. The corporation was organized and property paid in for stock and paid-in surplus in the amounts which*2594 we have found in our findings of fact. The petitioners maintain that under the laws of Massachusetts, no section of which is cited by them, the corporation was entitled to distribute its paid-in surplus and retain for the expansion of its operations and other proper purposes all of its current earnings. Aside from the express provisions of the laws which apply to the situation here, it is obvious that if such procedure were permitted the stockholders of a corporation with a large paid-in surplus might receive income annually for many years without sustaining any liability for tax or surtax, on the theory that the moneys received were distributions of capital and not of current earnings. Congress in the Revenue Acts of 1921 and 1924, provided for this situation. The Act of 1921 provides, in section 201: That the term "dividend" when used in this title * * * means any distribution made by a corporation to its shareholders or members, whether in cash or in other property, out of its earnings or profits accumulated since February 28, 1913 * * *. (b) For the purpose of this Act every distribution is made out of earnings or profits, and from the most recently accumulated earnings*2595 or profits, to the extent of such earnings or profits accumulated since February 28, 1913; but any earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, may be distributed exempt from tax after the earnings and profits accumulated since february 28, 1913, have been distributed. * * * Relevant portions of section 201 of the Revenue Act of 1924 read as follows: (a) The term "dividend" when used in this title * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913. (b) For the purposes of this Act every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. Any earnings or profits accumulated, or increase in value of property accrued before Amrch 1, 1913, may be distributed exempt from tax, after the earnings and profits accumulated after February 28, 1913, have been distributed, but such tax-free distribution shall be applied against and reduce the basis of the stock provided in section 204. It is obvious that the purpose of Congress in*2596 enacting these provisions was to assure the taxation of the current earnings of a corporation distributed and made income to its stockholders. The language of the resolution providing for the distribution, although it states that the disbursements were to be made from paid-in surplus, can have no effect upon the plain intent of Congress, as set forth in *799 the statutory provisions above quoted. The petitioners suggest that the property taken into the assets of the corporation as paid-in surplus was in fact the property of the members of the former partnership and should be regarded as a temporary loan to the corporation. Nothing in the record supports this theory. The value of such assets was taken into the capital structure of the corporation as paid-in surplus and thereafter it was at risk in the business and subject to all the hazards and risks of paid-in capital. Clearly it was in no sense a loan and there is no evidence that it has ever been so regarded except for the purpose of contesting the deficiencies herein proposed by the respondent. It therefore follows that the determination of the Commissioner must be approved. In his computation of the deficiencies*2597 asserted against Gifford and Leland for the year 1924, the respondent failed to consider the net loss sustained by the corporation in 1921, in the amount of $61,361.21, and at the hearing his counsel confessed error in this particular and now concedes that the amount of corporation earnings available for distribution at December 31, 1924, was $315,329.99, instead of the larger amount which he had theretofore determined. As a further, or alternative issue, the petitioners contend that, even if the distributions made in 1924 are taxable to them, the amount of the net earnings available for such distribution on January 31, 1924, should be regarded as the basis, rather than the amount available at December 31 of that year. In , Justice Brandeis, speaking for the court, said: "We think it clear that for this purpose [whether distributions were taxable under 1916 or 1917 rates] the date of payment, not the date of the declaration of the dividend is the date of distribution." As the dividend here in question, declared on January 31, 1924, was not "distributed" until payment was made on December 31 of that year, at which date all the*2598 net earnings of the Leland-Gifford Co. for such year were available for distribution, it follows, therefore, that on this issue the determination of the respondent must be approved. Reviewed by the Board. Decision will be entered under Rule 50.