Mellon v. Commissioner

JENNIE KING MELLON, RICHARD KING MELLON, SARAH MELLON SCAIFE AND THE UNION TRUST COMPANY OF PITTSBURGH, EXECUTORS OF THE ESTATE OF R. B. MELLON, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Mellon v. Commissioner Docket No. 74241. United States Board of Tax Appeals 38 B.T.A. 1259; 1938 BTA LEXIS 765; November 29, 1938, Promulgated *765 SECTION 104, REVENUE ACT OF 1928. - The sole stockholder of a corporation, not subject to tax under section 104, Revenue Act of 1928, was not entitled to include (at the time of filing his return) any portion of his distributive share of the undistributed net income of the corporation for the taxable year 1930, and where the stockholder erroneously so included in his gross income an amount less than his entire distributive share of such undistributed net income, respondent was without authority to include in the stockholder's gross income the remainder of the undistributed net income of the corporation in determining the income tax liability of the stockholder. W. A. Seifert, Esq., D. D. Shepard, Esq., Floyd F. Toomey, Esq., and William H. Quealy, Esq., for the petitioners. Arthur Carnduff, Esq., and Chester Guy, Esq., for the respondent. HILL *1260 This proceeding involves a deficiency in income tax liability of the decedent, R. B. Mellon, for the year 1930 in the amount of $18,951.27. The pleadings raised five issues, four of which the parties have settled by stipulation. The stipulation will be given effect in the final settlement*766 under Rule 50. The remaining issue submitted for decision is whethe respondent erroneously included in the net income of petitioners' decedent the sum of $142,964.70 representing the net income as determined by respondent of the Mellbank Corporation for the year 1930. FINDINGS OF FACT. R. B. Mellon was a resident of the city of Pittsburgh, Pennsylvania, throughout the calendar year 1930. On March 16, 1931, he filed his Federal income tax return with the collector of internal revenue at Pittsburgh, reporting a tax of $684,118.32, which amount was paid as follows: March 16, 1931, $171,029.58; June 15, 1931, $171,029.58; September 15, 1931, $171,029.58; and December 15, 1931, $171,029.58. R. B. Mellon died on December 1, 1933. The petitioners, Jennie King Mellon, Richard King Mellon, Sarah Mellon Scaife, and the Union Trust Co. of Pittsburgh, are the duly appointed, qualified, and acting executors of his estate. Throughout the calendar year 1930, R. B. Mellon owned all of the capital stock of the Mellbank Corporation, a domestic corporation engaged in operating and managing a group of banks in the city of Pittsburgh and immediate vicinity. That corporation did not declare*767 nor pay any dividends during the calendar year 1930. In his Federal income tax return for the calendar year 1930 R. B. Mellon reported dividends from domestic corporations in the total amount of $5,675,259.69. This amount included the sum of $37,705.09, which was the undistributed net income, including dividends, of the Mellbank Corporation for the calendar year 1930 as then shown by the books and records of the Mellbank Corporation. *1261 Thereafter the respondent determined, and it is agreed, that the undistributed net income, including dividends, of the Mellbank Corporation for the calendar year 1930 was $142,964.70. The additional income of the Mellbank Corporation, in the amount of $105,259.61, was included by the respondent in the taxable income of R. B. Mellon in determining the deficiency here in controversy. The additional income of $105,259.61 consisted of dividends received during the calendar year 1930 by the Mellbank Corporation from another domestic corporation. On January 31, 1933, R. B. Mellon filed a claim for refund of $25,000, or such greater amount as is refundable, of taxes paid for the calendar year 1930. This claim set forth that R. B. Mellon*768 had erroneously reported in his return for the year 1930 dividends received by the Mellbank Corporation in the amount of $37,705.09, and that the corporation was not organized nor availed of for the purpose of preventing the imposition of the surtax on its shareholders. The period of limitations within which the Commissioner was authorized to make an assessment of income taxes for the calendar year 1930 against the Mellbank Corporation was extended by appropriate waivers to September 30, 1933. The Mellbank Corporation was organized under the laws of Pennsylvania on December 12, 1929, with an authorized capital stock of 1,000 shares of no par value and a stated capital of $100,000. Its entire capital stock was issued to R. B. Mellon for $10,000 in cash and 1,631 shares of stock of the Latrobe Trust Co., which he had acquired at a cost of $642,614. This stock was entered on the books of the Mellbank Corporation at cost to Mellon, and $552,614 was credited to paid-in surplus. During the calendar year 1930 Mellon contributed to the paid-in surplus of the Mellbank Corporation bank stocks which were entered on the books of the corporation at an aggregate of $447,350. During the*769 same year Mellon contributed $3,890.639.17 in cash to paid-in surplus of the corporation, substantially all of which was used to purchase stocks of banks located in the vicinity of Pittsburgh. The Mellbank Corporation also borrowed $500,000 from the McClintic-Marshall Corporation on July 9, 1930, in order to purchase bank stocks. During the taxable year 1930 Mellon assumed or paid expenses of the Mellbank Corporation in the amount of $25,084.17, which amount is included in the total cash contribution to paid-in surplus, above mentioned. At the close of 1930 the total investments of the Mellbank Corporation in stocks of member banks aggregated $5,624,699. During the year 1930 the Mellbank Corporation derived total income of $183,306.15, consisting of interest in the amount of $3,773.65 *1262 and dividends of $179,532.50. The latter amount included dividends of $7,678.15 attributable to surplus accumulated prior to March 1, 1913. Its total expenses for 1930 amounted to $32,663.30, exclusive of organization expenses in the amount of $1,301.30. At the close of 1930 the corporation had earned surplus of $149,341.55, and its net income for the year was $142,964.70. The*770 Mellbank Corporation was not a mere holding or investment company. During 1930 it did not permit its gains and profits to accumulate beyond the reasonable needs of its business. The corporation was neither formed nor availed of during the taxable year 1930 for the purpose of preventing the imposition of the surtax upon its sole stockholder through the medium of permitting its gains and profits to accumulate instead of being divided or distributed. OPINION. HILL: The single issue submitted for decision in this case involves an interpretation of section 104 of the Revenue Act of 1928, which provides in subdivision (a) that, if any corporation is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof. In such case net income is increased by (1) the dividend deduction allowed under section 23(p), and (2) the amount of interest on certain obligations of the United States*771 which would be subject to tax in the hands of an individual owner. Subdivision (d) provides that the tax imposed by this section shall not apply if all the shareholders of the corporation include (at the time of filing their returns) in their gross income their entire distributive shares, whether distributed or not, of the net income of the corporation for such year. Throughout the taxable year 1930, R. B. Mellon, petitioners' decedent, owned all the capital stock of the Mellbank Corporation, a domestic corporation. In his original tax return for 1930 decedent included in the amount of dividends reported the sum of $37,705.09, which represented the undistributed net income of the Mellbank Corporation for the year 1930, as then shown by the books and records of the corporation. Thereafter, respondent determined, and it is now agreed, that the undistributed net income of the corporation, including dividends, for 1930 was $142,964.70, or $105,259.61 more than the amount reported by decedent in his return. In determining the deficiency in controversy, respondent included such additional amount in the taxable income of the decedent. *1263 Petitioners allege that the determination*772 of respondent is erroneous for the reason that the sole stockholder of a corporation is not taxable on any of the undistributed net income of the corporation which the shareholder does not voluntarily include in his gross income at the time of filing his original return. Petitioners further assert (a) that a shareholder including less than his entire distributive share of the net income of a corporation at the time of filing his return may recover the tax paid on the amount so included, and (b) that no part of the undistributed earnings of the Mellbank Corporation may be taxed to its sole shareholder because the corporation was not subject to the tax imposed by section 104(a), supra. Respondent contends (1) that the decedent taxpayer made a voluntary election to be taxed under section 104(d), supra, and that he, respondent, was without power to compel or deny the exercise of the election; (2) that decedent, having made a binding election, waived all other methods of taxation; and (3) that the failure to return all of the distributive share did not nullify the election, and respondent had the right to audit, adjust, or correct the amount reported by the taxpayer. We think*773 it is plain that subdivision (d) of section 104 is applicable only in a case involving a corporation subject to the tax imposed by subdivision (a) of that section. To hold otherwise would be to permit the shareholders of any corporation to choose the year in which they desire to be taxed upon their distributive shares of the corporate earnings, whether distributed or not. Such a rule would accord to taxpayers a right of election which is not authorized under the provisions of the income tax statutes. Hence, in the instant case, if the Mellbank Corporation was not subject to tax for the year 1930 under section 104(a), supra, its sole shareholder was not entitled to include in gross income reported in his individual return any portion of his distributive share of the undistributed net income of that corporation, and respondent was without authority to include the balance of the undistributed net income not so reported. In , we held that this corporation was not formed, nor availed of in the taxable year 1932, for the purpose prohibited in section 104 of the Revenue Act of 1932, which contains the same material provisions*774 as section 104 of the 1928 Act. Respondent does not contend here that the Mellbank-Corporation was availed of in 1930 for the purpose of preventing the imposition of the surtax upon its sole shareholder through accumulation of profits, and the evidence submitted in the instant proceeding is even more persuasive that such was not the case than was the evidence we considered in respect of the year 1932. We hold, *1264 therefore, that the Mellbank Corporation was neither formed nor availed of in 1930 for the purpose stated, and was not subject to tax under section 104(a), supra, for that year. The deficiency will be redetermined by eliminating from the decedent's gross income the amount of the undistributed net income of the Mellbank Corporation as computed and included therein by respondent. The conclusion reached disposes of the only issue submitted for decision, and renders it unnecessary to consider here other contentions of the respective parties referred to above. Reviewed by the Board. Judgment will be entered under Rule 50.