Lee Live Stock Com. Co. v. Commissioner , 23 B.T.A. 135 ( 1931 )

LEE LIVE STOCK COMMISSION COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Lee Live Stock Com. Co. v. Commissioner

Docket No. 33306.

United States Board of Tax Appeals

23 B.T.A. 135; 1931 BTA LEXIS 1919;

May 11, 1931, Promulgated

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Where the principal stockholder of a corporation transfers promissory notes to it without consideration which are taken into its assets accounts and increase the book surplus thereof, the interest on such notes is income to the corporation.

J. Walter Farrar, Esq., and O. C. Phillips, Esq., for the petitioner.

Frank B. Schlosser, Esq., for the respondent.

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LANSDON

The respondent asserts a deficiency and a penalty for negligence for the year 1923 in the respective amounts of $603.74 and $30.19. The petitioner alleges that the amount of $4,829.97 included in its income by the Commissioner was, in fact, the income of the principal stockholder, and, in the alternative, if the action of the Commissioner is sustained, claims the deduction from its income in the taxable year of certain amounts alleged to represent debts ascertained to be worthless and charged off in such year.

FINDINGS OF FACT.

The petitioner is a corporation with its principal office at Kansas City, Mo., where it is engaged in handling livestock on a commission basis and in financing livestock producers and shippers. Its authorized capital stock in the taxable year was $50,000, of which $25,000 had been paid in in cash. Thomas B. Lee owned substantially all its stock and at all times material here was a director and its president.

On January 2, 1922, Lee, without consideration, transferred certain real and personal property to the petitioner which were taken into its accounts as its own assets without any balancing liability entries. Included in this transfer were certain promissory notes which represented loans theretofore made from his own funds by Lee as an individual. Such notes were endorsed to the petitioner, and by it when discounted. The entry of these items in the petitioner's books increased its book surplus and enabled it to secure needed loans from the War Finance Corporation. The notes so received were discounted at banks and the proceeds thereof were deposited to the petitioner's bank account. The personal income and expenditures of Lee were entered on the books of the petitioner and its accounts and those of Lee were not kept separately. The income in controversy here represents interest on the notes transferred by Lee to the petitioner in 1922 and on similar notes accounted for in the same way.

The capital used in financing producers of livestock for the most part was advanced by Lee either from his personal funds or from the proceeds of notes discounted with his endorsement. The notes evidencing Lee's loans to producers and others were payable to the order of the petitioner and all the collections of interest and principal thereon were deposited in its own bank account. Lee, as an individual, maintained no personal bank account.

In the year 1923 the petitioner had a contract of employment with Geo. C. McMullen, under which McMullen was to act as its vice president and head cattle salesman and cooperate with Lee as his representative in its management for a term of 10 years. For such services McMullen was to receive a salary of $6,000 per annum and "share to the extent of 40 per cent of the net profits or losses from commissions earned at Kansas City Yards, but shall not profit or share in the risks or earnings from livestock loans made by the party of the first part." The party of the first part was Thomas B. Lee and the Lee Livestock Commission Company. McMullen held only a single share of the petitioner's stock which was issued to qualify him as a stockholder, director and vice president.

In his individual income-tax return for 1923, Thomas B. Lee deducted the amount of $2,923 from his gross income as debts ascertained to be worthless and charged off in the taxable year. The items which made up such total were an unpaid balance of $1,586 on notes due from J. Seger which resulted from a deal in sheep in which Lee and Seger were jointly interested and the money used was accounted for on the books of the petitioner, and loans to Dick Denham, L. L. Jones, J. Weller, and James Richmond in the respective amounts of $150, $237, 800, and $150, which were in the nature of advances to friends, employees, and a relative. In 1923 Seger was without resources and died shortly thereafter. His obligation was worthless in the taxable year.

OPINION.

LANSDON: The tax liability here in controversy is based on interest on the notes transferred to the petitioner at January 1, 1922, and on similar obligations. The record is clear that in 1923 all such notes were included in the assets of the petitioner and that their sum total in its surplus was the basis for credit in borrowing from the War Finance Corporation. Petitioner contends that all the loans evidenced by such notes were made individually by its principal stockholder from his own funds and that the interest therefrom was not its income.

The petitioner's authorized capital in the taxable year was $50,000, of which the amount of $25,000 had been paid in cash. Its balance sheet for the same year shows a surplus of $101,406.66. Included in such surplus were the values of various assets transferred to it by Lee at January 1, 1922, among which were notes of the value here in dispute. A corporation and its majority stockholder are separate entities. The fact here is that Lee transferred certain notes to the petitioner that represented loans made from his personal funds and that thereafter the petitioner was the owner thereof. It is not unusual for the principal stockholder of a corporation to pay in cash or property without consideration. Usually this is done, as in the present proceeding, for the purpose of increasing the surplus and strengthening the credit of the corporation. The assets so transferred become the property of the corporation and can be returned to the stockholder only through a corporate act of distribution. It follows, of course, that while such assets are the property of the corporation the income therefrom is its income. Since it appears that all interest in controversy accrued on notes that were the property of the petitioner, the action of the respondent in including such interest in its gross income in the taxable year must be approved.

As an alternative issue, the petitioner contends that certain debts alleged to have become worthless in the taxable year should be deducted from its gross income in such year. Petitioner adduced no evidence to show that such debts were due the corporation or that they were charged off its books in the taxable year. On this issue the respondent is affirmed.

Decision will be entered for the respondent.