Crispin v. Commissioner

M. JACKSON CRISPIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Crispin v. Commissioner Docket No. 60817. United States Board of Tax Appeals 32 B.T.A. 151; 1935 BTA LEXIS 992; February 26, 1935, Promulgated *992 Certain withdrawals from a corporation in 1929 by its sole stockholder, without declaration of a dividend by the corporation, held taxable as dividends under the provisions of the Revenue Act of 1928, section 115(a). Christopher v. Burnet, 55 Fed.(2d) 527, affirming 13 B.T.A. 729, followed. Theodore L. Harrison, Esq., for the petitioner. Ralph E. Smith, Esq., for the respondent. LEECH *151 Respondent determined a deficiency in income taxes for the calendar year 1929 against petitioner in the sum of $74,622.41. Petitioner attacks this deficiency upon the ground that "the respondent erroneously included in gross income of the petitioner the sum of $388,637.85 as dividends." *152 FINDINGS OF FACT. The petitioner is an individual, with his place of business at 165 Broadway, New York City, New York. His business during the year 1929 and for some years prior thereto was the buying and selling of securities. On January 21, 1924, he caused the organization of the Crispin Investing Co., a corporation, under the laws of the State of New York. This company was organized for the purpose of buying and*993 selling securities, and had a paid-in capital of $500. Its total capital stock was owned by the petitioner. This corporation, during 1929 and before, maintained margin accounts with a number of brokers in its business of buying and selling securities. Petitioner advanced to the corporation the necessary moneys or collateral it required in its margin accounts. Moneys were withdrawn by petitioner from the corporation from time to time. Neither the corporation nor the petitioner paid any interest on their respective advances and withdrawals. No notes or evidences of indebtedness were executed in connection with these transactions by either the corporation or petitioner. The petitioner was treasurer and signed the checks of the corporation from the organization of the corporation through 1929 at least. No dividends were declared by the corporation. During 1926 petitioner took out two policies of life insurance upon his own life, each in the sum of $150,000, which were assigned on December 19, 1926, to the corporation. The corporation was the beneficiary in both policies. During the year 1930 the corporation borrowed $35,100 on these policies. The proceeds of these loans, *994 amounting to $21,118.78, were paid to and received by the corporation. The difference between that amount and the gross loan, representing the premiums and advance interest on the loans, was charged on the books of the corporation to the open account of the petitioner. The above transactions between the corporation and petitioner were not recorded on the ledger of the corporation as loans and repayments. The secretary of the corporation, who kept its books, opened and carried an open account therein with petitioner in which these advances and withdrawals were charged as follows: Balance Dec. 31 Year Total charges Total credits Difference Accounts payable Accounts receivable — 1924 — $40,685.37 $21,612.07 $19,073.30 $19,073.30 — 1925 — 108,577.43 217,254.72 108,677.29 $89,603.99 — 1926 — 136,053.52 40,460.08 95,593.44 5,989.45 — 1927 — 789,908.66 799,642.48 9,733.82 3,744.37 — 1928 — 581,391.46 692,334.25 110,942.79 114,687.16 — 1929 — 1,068,868.62 565,543.61 503,325.01 388,637.85 — 1930 — 59,189.51 196,027.79 136,838.28 251,799.57 *153 Petitioner did not testify, because of his alleged financial inability Respondent*995 increased petitioner's income for the year 1929 by the Respondent increased petitionerhs income for the year 1929 by the sum of $388,637.85 as a distribution of earnings by the corporation. This amount was less than the actual withdrawals by petitioner from the corporation in that year. Respondent included this sum of $388,637.85 in petitioner's income for the taxable year on the ground that it was a dividend under the provisions of the Revenue Act of 1928, section 115(a). OPINION. LEECH: Our present inquiry is limited to the propriety of the respondent's action in treating the sum of $388,637.85, actually received by petitioner from the corporation during the taxable year in excess of his then advances to the corporation, as dividends therefrom, and taxing it as such. The authority for this action, if any exists, is contained in the Revenue Act of 1928, section 115(a). 1 *996 The respondent's determination necessarily rests upon the fact that the corporation had sufficient "earnings or profits accumulated after February 28, 1913," to cover its questioned distributions when made to petitioner. This fact is not denied. Petitioner attacks that determination only upon the ground that the distributions supporting it were loans and not dividends. The question presented is entirely one of fact. Petitioner has the burden of showing by evidence that the disputed distributions of the corporation from its earnings or profits accumulated since February 28, 1913, were loans and not taxable dividends within the quoted statute. It is argued for petitioner that the course of dealing between him and the corporation, evidenced by the manner in which their respective advances and withdrawals were recorded on the books of the company, particularly the advance by petitioner to the corporation of $196,027.79 in 1930, and the charge to petitioner's open account of the premiums and advance interest on the loan on the policies of insurance taken out by petitioner in favor of the corporation, shows that the petitioner's credit balance with the corporation in his open account*997 with it, as of December 31, 1929, and actually received from the corporation during that year, was a loan by the corporation to him, and not a dividend. We are interested here directly in the taxable status of a particular receipt of money by petitioner from a corporation. That *154 course of dealing, however reasonably proximate in time and circumstances to the receipt of the questioned money, is not the subject of our inquiry. It may be some evidence of the taxable character of the money in question. But it is not conclusive. Whatever the weight of such evidence is in other circumstances, we think it is largely minimized here. Petitioner owned all the stock in the corporation. He did not move for a continuance of the hearing herein. Nor did he testify. The testimony indicates this was because of alleged financial difficulties preventing his return from his present European residence. However, there was a proper method for the introduction of his testimony under such circumstances. Rule 47, United States Board of Tax Appeals Rules of Practice. No such testimony appears in the record, nor was it offered. *998 Of course the sole ownership of the corporation stock by petitioner did not obscure that corporate identity. . True also, from the incorporation of petitioner's company, at least until sometime in 1930, there was carried on the books of that corporation an open account with petitioner in which his advances and withdrawals were debited and credited. But, such book entries are never more than evidentiary. . Their weight is diminished, if not entirely lost here. They stand alone, uncorroborated. And not only so, but, from the testimony of the secretary of the corporation under whose direction the books were kept, these accounts between petitioner and corporation are not disclosed to have reflected any other than the secretary's own personal idea of the actual character of the present disputed transactions there recorded. Against any weight which these book entries, and the unexplained insurance of the petitioner, for the benefit of the corporation, the assignment thereto of petitioner's interest therein, may have, the record discloses facts and circumstances*999 of impressive, and, we think, controlling significance. The corporation, in which petitioner owned all the stock, had a capital of only $500. Any additional moneys or credit it needed, petitioner furnished. Likewise, funds were withdrawn by petitioner, apparently, when available, and he desired them. But its business was that of buying and selling securities - not loaning money. See First National Bank in , affirming ; certiorari denied, ; . In fact this record indicates no corporate authority to loan even to petitioner. No notes or other evidence of indebtedness covering the transactions *155 between petitioner and the corporation were ever executed by either petitioner or the corporation. No interest was charged or paid. The fact that no dividends were formally declared is not necessary here to characterize the disputed receipts as dividends. *1000 , affirming . That case involved the same question we have here. The facts were substantially similar, except for the presence here of the policies of insurance and their assignment, the treatment on the corporation's books of the premiums and loans thereon, and the payment by petitioner to the corporation in 1930. In our judgment, these circumstances do not justify a different conclusion in this case. Any pertinent inferences to be drawn from the transactions connected with the insurance policies, depend upon the circumstances surrounding these transactions. Except for the bare facts of the issuance of such insurance, its assignment, and the corporation's loans thereon, all of little, if any, probative value alone, the books are the only evidence of the character of those transactions as well as the advances of petitioner to the corporation in 1930. These book entries, under the circumstances disclosed, are of no more weight in resolving the present issue upon these additional facts, than they had in reflecting the other transactions. If petitioner's withdrawals from the corporation in*1001 1929 to the extent of his credit balance were dividends, then his advances in 1930 were not payments upon nor security for loans. It is thus not inconsistent, as petitioner contends, to say that petitioner's advances to the corporation in 1930 were loans to the corporation. The cases cited by petitioner are distinguishable from the pending case upon their facts, converse presumptions or testimony corroborating book entries. They are not controlling here. The respondent has determined that the payment of $388,637.85 in 1929 by Crispin Investing Co., a corporation having a capital of $500, to petitioner, its sole stockholder, which amount was in excess of petitioner's advances to the corporation, was a dividend and taxable as such. Revenue Act of 1928, sec. 115(a). In the face of the present record and the presumption of correctness attaching to respondent's action, that determination will not be disturbed. Cf. ; ; affd., *1002 ; ; . Reviewed by the Board. Judgment will be entered for the respondent. Footnotes 1. SEC. 115. (a) Definition of dividend.↩ - The term "dividend" when used in this title (except in section 203(a)(4) and section 208(c)(1), relating to insurance companies) 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.