Roddy v. Commissioner

J. P. RODDY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. BEN A. MORTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Roddy v. Commissioner Docket Nos. 71403, 71405. United States Board of Tax Appeals 30 B.T.A. 5; 1934 BTA LEXIS 1387; March 6, 1934, Promulgated *1387 Dividends distributed pursuant to informal action of directors on December 31, 1930, the checks representing the same being received by petitioners as stockholders on January 2, 1931, are taxable in 1930. M. W. Egerton, Esq., for the petitioners. O. W. Swecker, Esq., for the respondent. TRAMMELL *6 These proceedings, consolidated for hearing, involve deficiencies in income tax for the calendar year 1930 as follows: J. P. Roddy, $417.66; Ben A. Morton, $493.75. The question involved is whether dividends paid by a corporation, of which the petitioners were stockholders, were constructively received in 1930. FINDINGS OF FACT. The above named petitioners are residents of Knoxville, Tennessee, which is approximately 150 miles from Johnson City, Tennessee. Each of the petitioners keeps his books and records and files his income tax returns on the cash receipts and disbursements basis. Each petitioner was a stockholder in the Johnson City Mills, a corporation with its principal office at Johnson City, Tennessee. Prior to 1930 the Johnson City Mills authorized and paid dividends in January and July of each year. In 1930 the January*1388 dividend was declared and paid. In July 1930 the corporation passed its usual dividend, with the oral understanding by the directors present at the meeting that a dividend would be paid in December 1930, if the company's financial condition warranted it. On or about December 30, 1930, the corporation's manager and treasurer, T. F. Dooley, took up with a majority of the directors of the corporation the matter of paying the 15 percent dividend, and secured their favorable approval. In most cases the action of Dooley in securing the approval of the directors was accomplished by long distance telephone. Acting upon this informal approval of a majority of the directors, the treasurer drew dividend checks and mailed them to the various stockholders on December 31, 1930. The following dividend checks were received by these petitioners on January 2, 1931: J. P. Roddy, $3,195; Ben A. Morton, $3,225. The books of the Johnson City Mills show that on December 31, 1930, the cash account was credited and surplus debited in the amount of $12,750, which represents a 15 percent dividend on its $85,000 outstanding capital stock. Information returns, From 1099, were prepared by the Johnson*1389 City Mills and filed with the Commissioner, showing that a 15 percent dividend was paid to the stockholders on December 31, 1930. The Forms 1099 are attached to the 1930 income tax returns filed by the petitioners. The dividends in question were paid out of earnings accumulated since March 1, 1913, and were in proportion to the stockholdings. While there was never any formal authorization of the dividend paid on December 31, 1930, the directors of the Johnson City Mills met and approved the payment on January 27, 1931. The following *7 is an excerpt taken from the minutes of the stockholders' meeting held on January 27, 1931: Next the president stated that the officers of the corporation had paid the cash dividend of 15% on December 31, 1930 since the condition of the corporation seemed to warrant such action. Upon Motion of Mr. G. H. Gallaher, seconded by Mr. J. P. Roddy and unanimously voted, the action of the officers in paying the above-mentioned dividend was approved. On December 31, 1930, the Johnson City Mills had sufficient cash to pay the said dividends. The respondent has included in the petitioners' 1930 gross income the dividends set forth above. *1390 OPINION. TRAMMELL: The petitioner takes the position that the facts in this case distinguish it from that line of cases which hold that the dividends declared on December 31 of one year and the checks then mailed but not received by the stockholder until the following year constitute taxable income in the year of distribution instead of in the year of receipt. See ; affirmed by the ; ; . The petitioner does not attack the soundness of our decisions in those cases. In this case, however, we are unable to draw the distinction contended for. It is not necessary that there be a formal declaration of dividends in order for a corporation to distribute its earnings. The distribution may be authorized by informal action and when so authorized and actually distributed the effect is the same as if the dividends had been declared and distributed as a result of formal action. The formal action of the directors at a meeting January 27, 1931, ratified the*1391 action taken in an informal way authorizing the distribution on December 31, 1930. However, the informal action was sufficient to authorize the distribution and the distribution was actually made and has never been attacked. The factors upon which the theory of constructive receipt is invoked existed at the end of 1930. We think therefore that the dividends should be taxable to the petitioner in 1930. Reviewed by the Board. Judgment will be entered under Rule 50. SMITH and SEAWELL dissent.