Marshall v. Commissioner

GEORGE P. MARSHALL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Marshall v. Commissioner Docket No. 75334. United States Board of Tax Appeals 32 B.T.A. 956; 1935 BTA LEXIS 863; July 17, 1935, Promulgated *863 Where the sole stockholder of a corporation withdrew its funds for his own use without formal declaration of a dividend and the withdrawals were charged to the stockholder on the books, but no interest was charged, paid, or contemplated, and the evidence indicates that he had no intention of repaying the amounts withdrawn, the Commissioner's action in treating the withdrawals as taxable dividends will be approved. Albert E. James, Esq., for the petitioner. W. Frank Gibbs, Esq., for the respondent. MURDOCK *957 The Commissioner determined a deficiency of $11,901.46 in the petitioner's income tax for the calendar year 1931. In doing so he added to income $51,167.31 as dividends from the Palace Laundry Dry Cleaning Co. The petitioner assigns this action of the Commissioner as error. FINDINGS OF FACT. The petitioner is an individual residing in Washington, D.C. His principal business was a laundry which he conducted under the name of Palace Laundry. He transferred all of the assets of that business to a corporation on or about June 15, 1931, in exchange for all of the capital stock of the corporation. Thereafter he retained all of the*864 stock of the corporation known as Palace Laundry Dry Cleaning Co. He became president, treasurer, and a director of the corporation. His salary as such was $20,000 per annum. Two other officers and directors held qualifying shares which belonged to the petitioner. The petitioner had been in the habit of withdrawing funds from his laundry business while he conducted it in his individual capacity. He continued this custom after the business was transferred to the corporation. During the period from June 15 to the end of the year 1931 he made many withdrawals from the corporation, which amounted in all to $49,812.57. The bookkeeper for the corporation received no instructions in regard to these withdrawals but opened an account on the books in the name of the petitioner and charged the withdrawals to that account. There is no evidence that the petitioner ever deposited any amount in this account or authorized any credit to it. Under date of January 2, 1932, the account shows a credit entry of $7,933.34, described elsewhere as a salary adjustment. There is a credit entry of $17.52 dated October 10, 1931, one of $4,947.10 dated December 31, 1931, and one of $2,903.14 undated, *865 which may represent an entry of 1931. These three entries seem to be for the purpose of reversing prior entries of like amounts. These credit entries are unexplained. There are no other credit entries of 1931. No interest was charged or paid on the withdrawals. The following summary shows the purposes for which the withdrawals were made: Mrs. Geo. P. Marshall (wife of petitioner) $6,416.69 Mrs. Blanche P. Marshall (mother of petitioner) 4,268.87 Rent - Shoreham Hotel 2,460.50 Household expenses 3,504.30 Cash 29,818.96 Insurance - U.S. Veterans' Administration 301.50 Automobile expense - personal 312.38 Telephone and telegraph 431.12 Personal property taxes - District of Columbia 34.00 Life insurance 2,264.25 Total 49,812.57 *958 The corporation declared a dividend on January 2, 1932, which was payable to the petitioner in the amount of $42,000. This amount was credited to his account by the bookkeeper without any instruction from anyone. The account then showed a credit balance of $120.77. There was no prior agreement that such a dividend would be declared. A resolution approving the "advances made" and authorizing the petitioner*866 to withdraw funds from the corporation was adopted on January 2, 1932. The three installments on the petitioner's income tax for 1930 which came due in 1931 after the organization of the corporation were paid by the corporation. These amounted to $8,797.34. Each payment was charged to the petitioner's account during 1931. These charges were reversed by auditors in 1932, who charged the payments to the purchase of the Palace Laundry business. The officers of the corporation never expressly authorized this change in the accounts. The petitioner received distributions from the earned surplus of the corporation during 1931 in the amount of $50,676.57. OPINION. MURDOCK: The Commissioner determined that the petitioner received $51,167.31 from the corporation during 1931 which was taxable to him as a dividend for 1931. His determination must be approved unless the presumption of its correctness has been overcome by proof. The Commissioner now concedes that the proof shows error on his part in including an item of $490.74 in the total. The petitioner contends that the remainder, consisting of $8,797.34 paid by the corporation on account of his income tax for 1930 and $41,879.23, *867 the net amount of his withdrawals after deducting a salary adjustment of $7,933.34, represents loans which the corporation made to him with the understanding that they would be repaid "in one way or another." The evidence fails to show that the amount now in controversy was not for all practical purposes and particularly for tax purposes a taxable dividend. No effort was made to show that the corporation had not accumulated sufficient earnings to pay dividends at the times and in the amounts withdrawn by or paid for the benefit of the petitioner. Therefore we must assume that sufficient earnings were available. The proof upon which the petitioner relies to show that the money was only loaned to him is weak and there is evidence to show that the transactions were not loans. The charges to the account of the petitioner on the books of the corporation were made by the bookkeeper on his own initiative. *959 He had to account for them in some way. These entries are of little, if any, benefit to the petitioner in his contention that the items were loans. No interest was charged, paid, or contemplated. The petitioner was the sole stockholder. He "was as completely and*868 unrestrictedly in control and management of the company as if it had been his individual business." ; affd., ; certiorari denied, . He made the withdrawals to suit his own convenience and consulted no one. He used the money for living and other personal expenses. He had no outside property or income from which to repay the amounts. The book charges could be and were balanced only by credit of the dividend later formally declared from the earnings of his own corporation. The taxability of these amounts as dividends need not await the formal declaration where, as here, the recipient was the sole stockholder using and enjoying the money as his own. ; ;; affd., ; . We conclude from all of the evidence, and particularly from the testimony of the petitioner, that he had no intention of repaying the amount in controversy. *869 His return for 1932 tends to confirm this conclusion. The Commissioner did not err in taxing the petitioner on $50,676.57 as a dividend for 1931. Cf. ; affd., ; ; ; . Decision will be entered under Rule 50.